** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

**FORM20-F**

 
| **o**                                             | ** ** | **REGISTRATION  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|---------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|
|                                              |
| **Or**                                            |
| ** **                                        |
| **x**                                             | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**            |
| ** **                                        |
| **For the fiscal year ended  September 30, 2010** |
|                                              |
| **Or**                                            |
| ** **                                        |
| **o**                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**       |
| ** **                                        |
| **Or**                                            |
|                                              |
| **o**                                             | ** ** | **SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**    |

 

**Commission File Number: 1-10167**

 

**WESTPACBANKING CORPORATION****Australian Business Number 33 007 457 141**(Exact name of Registrant as specified in its charter)

 

**New South Wales, Australia**(Jurisdiction of incorporation or organization)

 

**275 Kent Street, Sydney, NSW 2000, Australia**(Address of principal executive offices)

 

Securities registered or tobe registered pursuant to Section 12(b) of the Act:

 

| **Title of each class**                                                       | ** ** | **Name of each exchange on which registered**                                                                                                                                 |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Ordinary shares**                                                                          |       | Listed on the New York  Stock Exchange, not for trading, but only in connection with the registration  of related American Depositary Shares, pursuant to the requirements of the  New York Stock Exchange. |
| **American Depositary  Shares, each representing the right to receive five ordinary shares** |       | New York Stock Exchange                                                                                                                                                                                     |

 

Securities registered or to be registered pursuant toSection 12(g) of the Act:  **None**

 

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act: **2.25% Notes due November19, 2012, 2.10% Notes due August 2, 2013, 4.20% Notes due February 27, 2015,3.00% Notes due August 4, 2015, 4.625% Subordinated Notes due 2018 and 4.875%Notes due November 19, 2019**

 

Indicate the number of outstanding shares of each ofthe issuer’s classes of capital or common stock as of the close of the periodcovered by the annual report.

 

| **Ordinary shares** | ** ** | **2,989,207,519 fully paid** |
|---------------------|------------|------------------------------|

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.

Yes x    No o

 

If this report is an annual or transition report,indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o    No x

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days.

Yes x    No o

 

Indicate by check mark whether registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer x       AcceleratedFiler o       Non-acceleratedfiler o

 

Indicate by check mark which basis of accounting theregistrant has used to prepare the financial statements included in thisfiling:

U.S. GAAP o   International FinancialReporting Standards as issued by the International Accounting Standards Board x

Other o

 

If this is an annual report, indicate by check markwhether the registrant is a shell company.

Yes o    No x

 

 

 

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2010 Annual Report

 

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**The Westpac Group**

**Annual Report 2010**

 

Informationcontained in or accessible through the web sites mentioned in this AnnualReport does not form part of this report unless we specifically state that itis incorporated by reference and forms part of this report. All references inthis report to web sites are inactive textual references and are forinformation only.

 

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Table of contents

 
| **Annual  Report**                           |    |
|----------------------------------------------|---------|
| Form 20-F  cross-reference index        | 2       |
| Guide 3  cross-reference index               | 4       |
| **Section 1**                           | **5**   |
| Information on  Westpac                      | 6       |
| Business strategy                            | 6       |
| Managing sustainability                      | 8       |
| Outlook                                      | 11      |
| Significant developments                     | 11      |
| Corporate  governance                        | 18      |
| Directors’ report                       | 36      |
| **Section 2**                           | **75**  |
| Five year summary                            | 76      |
| Reading this  report                         | 77      |
| Review of Group  operations                  | 79      |
| Income statement review                      | 81      |
| Balance sheet review                         | 91      |
| Capital resources                            | 96      |
| Commitments                                  | 98      |
| Divisional  performance                      | 99      |
| Westpac Retail & Business Banking   | 102     |
| Westpac Institutional Bank                   | 104     |
| St.George Bank                               | 106     |
| BT Financial Group (Australia)               | 108     |
| New Zealand Banking                          | 110     |
| Other divisions                              | 112     |
| Risk and risk management                     | 118     |
| Other Westpac business information           | 127     |
| Additional  financial information            | 129     |
| **Section 3**                           | **133** |
| Financial  statements                        | 134     |
| Notes to the  financial statements           | 139     |
| Statutory  statements                        | 296     |
| **Section 4**                           | **303** |
| Shareholding  information                    | 304     |
| Additional  information                      | 314     |
| Information for  shareholders                | 319     |
| Glossary of  abbreviations and defined terms | 321     |

 

In this AnnualReport a reference to ‘Westpac’, ‘Group’, ‘The Westpac Group’, ‘we’,‘us’ and ‘our’ is to Westpac Banking CorporationABN 33 007 457 141 and its subsidiaries unless it clearlymeans just Westpac Banking Corporation.

 

For certaininformation about the basis of preparation of the financial information in thisAnnual Report see ‘Reading this report’ in Section 2. In addition, thisAnnual Report contains statements that constitute ‘forward-looking statements’within the meaning of section 21E of the US Securities Exchange Act of1934. For an explanation of forward-looking statements and the risks, uncertaintiesand assumptions to which they are subject, see ‘Reading this report’ inSection 2.

 

1

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Form 20-F cross-reference index

(for the purpose of filing with the United States Securities andExchange Commission)

 
| **20-F item number and description** | ** **                                                  | **Page**   |
|--------------------------------------|-------------------------------------------------------------|------------|
| ** **                           | ** **                                                  | ** ** | ** ** |
| **Part I**                      |                                                        |       |   |
| Item 1.                              | Identity of  directors, senior management and advisers      |       | Not  applicable |
| Item 2.                              | Offer statistics  and expected timetable                    |       | Not  applicable |
| Item 3.                              | Key information                                             |       |   |
|                                 | Selected financial data                                     |       | 76,  81, 91-92, 317 |
|                                 | Capitalisation and indebtedness                             |       | Not  applicable |
|                                 | Reasons for the offer and use of proceeds                   |       | Not  applicable |
|                                 | Risk factors                                                |       | 118-120 |
| Item 4.                              | Information on  Westpac                                     |       |   |
|                                 | History and development of Westpac                          |       | 6-7,  11-15 |
|                                 | Business overview                                           |       | 6-17 |
|                                 | Organisational structure                                    |       | 7,  277-281 |
|                                 | Property, plant and equipment                               |       | 128 |
| Item 4A.                             | Unresolved staff  comments                                  |       | 126 |
| Item 5.                              | Operating and  financial review and prospects               |       |   |
|                                 | Operating results                                           |       | 79-96,  99-117, 155-157 |
|                                 | Liquidity and capital resources                             |       | 96-97,  123, 125-126 |
|                                 | Research and development, patents, licences etc.            |       | Not  applicable |
|                                 | Trend information                                           |       | 81-96,  99-117 |
|                                 | Off-balance sheet arrangements                              |       | Not  applicable |
|                                 | Tabular disclosure of contractual obligations               |       | 98 |
|                                 | Safe harbor                                                 |       | 77 |
| Item 6.                              | Directors, senior  management and employees                 |       |   |
|                                 | Directors and senior management                             |       | 36-42,  44-45 |
|                                 | Compensation                                                |       | 48-71,  283-291 |
|                                 | Board practices                                             |       | 20-33,  36-39 |
|                                 | Employees                                                   |       | 127-128 |
|                                 | Share ownership                                             |       | 44-45,  283-291 |
| Item 7.                              | Major equity  holders and related party transactions        |       |   |
|                                 | Major equity holders                                        |       | 304-308 |
|                                 | Related party transactions                                  |       | 128,  283 |
|                                 | Interests of experts and counsel                            |       | Not  applicable |
| Item 8.                              | Financial  information                                      |       |   |
|                                 | Consolidated statements and other financial information     |       | 133-300 |
|                                 | Significant changes                                         |       | 11-15,  295 |
| Item 9.                              | The offer and  listing                                      |       | Not  applicable |
| Item 10.                             | Additional  information                                     |       |   |
|                                 | Share capital                                               |       | Not  applicable |
|                                 | Memorandum and articles of association                      |       | 314-316 |
|                                 | Material contracts                                          |       | 269-270 |
|                                 | Exchange controls                                           |       | 310-311 |
|                                 | Taxation                                                    |       | 311-313 |
|                                 | Dividends and paying agents                                 |       | Not  applicable |
|                                 | Statements by experts                                       |       | Not  applicable |
|                                 | Documents on display                                        |       | 316 |
|                                 | Subsidiary information                                      |       | Not  applicable |
| Item 11.                             | Quantitative and  qualitative disclosures about market risk |       | 121,  124, 241-245 |
| Item 12.                             | Description of  securities other than equity securities     |       | Not  applicable |

 

2

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| **Part II**                                                                                           |                                                                          |            |
|------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|-----------------|
| Item 13.                                                                                                   | Defaults, dividend  arrearages and delinquencies                              | Not  applicable |
| Item 14.                                                                                                   | Material  modifications to the rights of security holders and use of proceeds | Not  applicable |
| Item 15.                                                                                                   | Controls and  procedures                                                      | 126,  297, 300  |
| Item 16A.                                                                                                  | Audit committee  financial expert                                             | 27-28           |
| Item 16B.                                                                                                  | Code of ethics                                                                | 24-25           |
| Item 16C.                                                                                                  | Principal  accountant fees and services                                       | 28,  267-268    |
| Item 16D.                                                                                                  | Exemptions from  the Listing Standards for audit committees                   | Not  applicable |
| Item 16E.                                                                                                  | Purchases of  equity securities by the issuer and affiliated purchasers       | 97,  191, 203   |
| Item 16F.                                                                                                  | Changes in  Registrant’s certifying accountant                           | Not  applicable |
| Item 16G.                                                                                                  | Corporate  governance                                                         | 18              |
| **Part III**                                                                                          |                                                                          |            |
| Item 17 &  18                                                                                     | Financial  statements                                                         | 133-295         |
| Item 19.                                                                                                   | Exhibits                                                                      |            |
| Consolidated income statements for the years ended 30  September 2010, 2009 and 2008                  | 134                                                                           |
| Consolidated balance sheets as at 30 September 2010 and 2009                                          | 136                                                                           |
| Consolidated statements of comprehensive income for the years ended 30  September 2010, 2009 and 2008 | 135                                                                           |
| Consolidated statements of cash flows for the years ended 30  September 2010, 2009 and 2008           | 138                                                                           |
| Notes to the financial statements                                                                          | 139-295                                                                       |
| Management’s report on the internal control over financial reporting                                  | 297                                                                           |
| Report of independent registered public accounting firm                                                    | 298-300                                                                       |

 

3

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Guide 3 cross-referenceindex

 
| ** **                                                                                                                    | **Page**            |
|-------------------------------------------------------------------------------------------------------------------------------|---------------------|
| **Part I  Distribution of assets, liabilities and stockholders’ equity: interest rates  and interest differential** |                |
| Average balance  sheets                                                                                                       | 91,  204-207        |
| Analysis of net  interest earnings                                                                                            | 82-84,  88, 204-207 |
| Volume and rate  movement                                                                                                     | 82,  204-207        |
| **Part II  Investment portfolio**                                                                                        |                |
| Book value of  investments                                                                                                    | 166-167             |
| Maturity profile                                                                                                              | 167,  238-239       |
| Book value and  market value > 10% of shareholders                                                                         | 167                 |
| **Part III  Loan portfolio**                                                                                             |                |
| Types of loans                                                                                                                | 129,  168-169       |
| Maturities and  sensitivities of loans to changes in interest rates                                                           | 170-171             |
| Risk elements                                                                                                                 |                |
| Non-accrual, past due and restructured loans                                                                                  | 95-96,  230-231     |
| Potential problem loans                                                                                                       | 95-96               |
| Foreign outstandings                                                                                                          | 122                 |
| Loan concentrations                                                                                                           | Not  applicable     |
| Other interest  bearing assets                                                                                                | 166-167,  224       |
| **Part IV  Summary of loan loss experience**                                                                             |                |
| Analysis of the  allowance for loan losses                                                                                    | 130-131,  172-175   |
| Allocation of the  allowance for loan losses                                                                                  | 130-131,  172-175   |
| **Part V  Deposits**                                                                                                     | 182-183             |
| **Part VI  Return on equity and assets**                                                                                 | 76,  92             |
| **Part VII  Short-term borrowings**                                                                                      | 186-188             |

 

4

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SECTION 1

 

Informationon Westpac

Corporategovernance

Directors’report

 

5

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INFORMATION ON WESTPAC

 

Westpac is one ofthe four major banking organisations in Australia and, through our New Zealandoperations, we are also one of the largest banking organisations inNew Zealand. We provide a broad range of banking and financial services inthese markets, including retail, business and institutional banking and wealthmanagement services.

 

We have branches,affiliates and controlled entities(1) throughout Australia, New Zealandand the near Pacific region, and maintain offices in some of the key financialcentres around the world(2).

 

We were founded in1817 and were the first bank established in Australia. In 1850 we wereincorporated as the Bank of New South Wales by an Act of theNew South Wales Parliament. In 1982 we changed our name to WestpacBanking Corporation following our merger with the Commercial Bank of Australia.On 23 August 2002, we were registered as a public company limited byshares under the Australian *Corporations Act 2001*(Corporations Act).

 

As at30 September 2010, our market capitalisation was $69.5 billion(3) andwe had total assets of $618.3 billion.

 

**Business strategy**

 

Our ***vision*** is to be one of the world’sgreat companies, helping our customers, communities and people to prosper andgrow.

 

Our ***aspiration*** is to:

 

·         have a family of much loved financial services brands;

 

·         be recognised for enduring customer relationships;

 

·         be a place where the best people want to work;

 

·         be a leader in the community; and

 

·         be a great investment.

 

Our ***mission*** is to earnall of our customers’ business.

 

Our ***focus*** is on:

 

·         delighting our customers;

 

·         having the right people in the right roles; and

 

·         our reputation.

 

We have strong ***values***, which arewell embedded in our culture. We believe that the following values will help usdeliver our strategy:

 

·         working as one team;

 

·         delighting customers;

 

·         acting with integrity;

 

·         achievement; and

 

·         valuing each other.

 

**Strategic priorities**

 

By putting thecustomer at the centre of everything we do, engaging our customers through brandsthey know and trust, and focusing on the key elements of customer advocacy, webelieve we will realise our vision to be one of the world’s great companies,helping our customers, communities and people to prosper and grow.

 

Consistent with thatapproach, our strategic priorities are particularly centred on improving ourdistribution and customer offerings, specifically to:

 

***a)******   ******Focus on key customer segments, aiming to deepen relationships withcustomers, especially in savings and wealth management by***

 

·         putting the customer at the centre of everything we do;

 

·         establishing and driving high performing and locally empoweredbusinesses very close to the communities they serve;

 

·         developing and implementing compelling customer segment strategies,bringing banking and wealth management together for the customer; and

 

·         strengthening the skills and depth of our people.

 

***b)******   ******Become faster, simpler and easier to do business with***

 

·         by having processes and solutions designed from the customer’sperspective;

 

·         through a focus on convenience, simplicity and flexibility; and

 

·         by achieving integration across all channels.

 

***c)******    ******Realise our multi-brand advantage by***

 

·         having a clear, shared vision of success across the Group;

 

·         offering an even greater choice to customers; and

 

·         continuing to invest in and support the individual brands across TheWestpac Group.

 

***d)******   ******Make our people an important part of our advantage***

 

·         through appropriate recruitment and induction processes;

 

·         with a continuing focus on training and coaching; and

 

·         by having a flexible and diverse workforce.

 

***e)******    ******Invest in technology and operations to***

 

·         transform service delivery, redesign processes end-to-end from acustomer perspective; strengthen technology capabilities to increase thereliability and consistency of service;

 

·         focus on driving productivity and eliminating duplication to provideheadroom for additional investment; and

 

·         launch a multi-year technology transformation program to renew ouroverall technology base.

 

***f)******      ******Lead in reputational and sustainability matters***

 

·         by ensuring that each decision we make is consistent with ourcustomer-focused strategy, and by continuing to actively support thecommunities in which we operate;

 

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(1)               Refer to Note 38 to the financial statements for alist of our controlled entities as at 30 September 2010.

(2)               Contact details for our head office, major businessesand offshore locations can be found on the inside back cover.

(3)               Based on the closing share price of our ordinaryshares on the Australian Securities Exchange (ASX) as at30 September 2010.

 

6

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·         through further embedding sustainability concepts in all elements of ourbusinesses;

 

·         through ongoing joint endeavours with our not-for-profit partners; and

 

·         by continuing to develop strong risk management capabilities as acompetitive advantage.

 

**Organisational structure**

 

Our operationscomprise the following five key customer-facing business divisions operatingunder multiple brands, serving around 11.8 million customers(1):

 

·         Westpac Retail & Business Banking, which we refer to as WestpacRBB, is responsible for sales, marketing and customer service for all consumerand small-to-medium enterprise customers in Australia under the ‘Westpac’ and ‘RAMS’(2) brands;

 

·         Westpac Institutional Bank, which we refer to as WIB, delivers a broadrange of financial services to commercial, corporate, institutional andgovernment customers either based in, or with interests in, Australia and NewZealand. Customers are supported through Westpac branches and subsidiarieslocated in Australia, New Zealand, New York, London and Asia;

 

·         St.George Bank is responsible for sales, marketing and customer servicefor our consumer, business and corporate customers in Australia under theSt.George brand. It also includes the management and operation of Bank of SouthAustralia (BankSA);

 

·         BT Financial Group Australia, which we refer to as BTFG, is Westpac’swealth management business. BTFG designs, creates and distributes financialproducts that are designed to help our customers achieve their financial goalsby administering, managing and protecting their assets. BTFG includesoperations under the Asgard, Advance, Licensee Select, Magnitude, BankSA andSecuritor brands; and

 

·         New Zealand Banking, which provides a full range of retail andcommercial banking and wealth management products and services to consumer andbusiness customers throughout New Zealand. New Zealand Bankingoperates under the Westpac New Zealand, Westpac Life New Zealand andBT New Zealand brands.

 

Other businessdivisions in the Group include:

 

·         Pacific Banking, which provides banking servicesfor retail and business customers throughout near South Pacific IslandNations;

 

·         Product & Operations,******which is responsible forconsumer and business product development and operations;

 

·         Group Treasury, which is primarily focused on themanagement of the Group’s interest rate risk and funding requirements;

 

·         Technology, which is responsible for developing and maintainingreliable and flexible technology capabilities and technology strategies; and

 

·         Core Support, which comprises those functionsperformed centrally including finance, risk, legal and human resources.

 

Thesebusinesses are described in more detail in Section 2, including a summaryof net profit and total assets by business division and management’s discussionand analysis of business division performance.

 

***Structure chart of our businesses***

 

 

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(1)               All customers, primary and secondary, with an activerelationship (excludes channel only and potential relationships) as at30 September 2010.

(2)               RAMS Home Loans is our home loan franchisedistribution business.

 

7

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**Managing sustainability**

 

***Our sustainability approach***

 

We have a set ofgoals to make sustainability part of the way we do business including embeddingsustainability into our strategy, values, culture and processes includingsupply chain, risk management, and product development.

 

***Application of the AA1000 Principles***

 

Our approach tosustainability is aligned to the AA1000 AccountAbility Principles Standard(2008), a voluntary framework developed by the UK based AccountAbilityorganisation. The standard establishes a framework for the identification,management and communication of sustainability issues. Underpinning theframework are three key principles:

 

·         inclusivity;

 

·         sustainability materiality; and

 

·         responsiveness.

 

Utilising theseprinciples assists us to identify and respond to issues that matter to thelong-term prosperity of our business, our customers, our people and ourcommunities.

 

***Inclusivity***

 

Open dialogue with awide range of stakeholder groups is important to better understand how weimpact upon each other. Open dialogue also assists us to understand emergingtrends and issues so that we can best respond to these challenges.

 

Key changes in ourapproach to inclusivity during 2010 have included:

 

·         working to better understand and address customer concerns;

 

·         specific engagement with customers and non-government organisations ondeveloping credit policy statements;

 

·         the further rollout of Net Promoter Score (NPS) measures across theGroup;

 

·         more explicit monitoring of our reputation across a range ofstakeholders; and

 

·         a review of our main stakeholder consultation body, the CommunityConsultative Council (CCC), was undertaken and will continue in 2011.

 

We have increased our engagement with the localcommunity as well as maintained specific issue based engagements and our CCC.

 

***Sustainability materiality***

 

In addition to thestakeholder consultation approach described above, issues, risks andopportunities are also identified from a wide range of sources such asstrategic planning sessions, media coverage and government priorities.

 

We prioritise issuesaccording to their impact on our stakeholders, our business operations andfinancial outcomes. This year we applied a more prescriptive process tocategorise and weigh individual issues. Issues are reviewed internally andendorsed by the Board Sustainability Committee before being reviewed by ourexternal sustainability assurers, KPMG.

 

This year we sawfewer issues raised, but those raised were multifaceted and complex.Significant issues included: interest rates and fees, the impact of the globalfinancial crisis, customer service, regulation, diversity and flexibility,climate change, and responsible lending and investment.

 

***Responsiveness***

 

These issues feeddirectly into the development of our sustainability strategy and objectivessetting.

 

We set ourselves anumber of objectives for 2010 which were broadly achieved in most areas.Details of our performance are provided on the following pages.

 

Following feedbackfrom the CCC, and discussions with the Westpac Board, we have reviewed ourfive-year sustainability strategy to enhance the social dimensions of ourperformance objectives. This refresh will more closely align our 2011sustainability objectives to our sustainability and business activities.

 

8

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***The following table sets out our performance against 2010sustainability objectives***

 
| **Going mainstream**                                                                                                            | ** ** | ** **                                                                                                                                                                                                                                                     |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                                     |
| **Building  sustainability into our products and services to help customers become more  sustainable.**                         |
| ** **                                                                                                                      |
| Embed sustainability criteria into consumer  product design and decision making process across our retail brands in  Australia. | ü     | Product life cycle development documentation  aligns to sustainability strategy.                                                                                                                                                                               |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| Launch an energy efficiency loan product for  retail customers in Australia and New Zealand.                               | ü     | First major bank to participate in the Australian  Federal Government’s Green Loan program, and a participant in the New Zealand  Government’s ‘Warm Up New Zealand’ campaign to encourage the installation of  heat pumps and insulation. |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| Roll out St.George Bank employee green loan to  all Australian-based Westpac Group employees.                                   | ü     | $4,000 interest free green loan per employee was  made available to employees in February 2010.                                                                                                                                                           |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| Roll out an innovative savings product to assist  customers in savings and budget planning.                                     | ü     | In October 2009, St.George Bank and BankSA  launched SENSE, a savings product with tools to save and improve customers’  money management. Winner of a 2010 Canstar Cannex Innovation Excellence  Award.                                             |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| To be ranked as the top 1 and 2 for NPS scores in  Australia amongst the major banks and 4th in New Zealand.               | Í     | Whilst St.George Bank continues to lead NPS  scores amongst the major banks, the remainder of this objective has not yet  been reached.                                                                                                                        |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| **People  and places**                                                                                                          |
| ** **                                                                                                                      |
| **Social sustainability including  responsible banking and working on issues of concern to local communities**                  |
| ** **                                                                                                                      |
| Commence  measurement and reporting of customer feedback on Assist services and the  Financial Solutions Group.                 | ü     | NPS scores  specific to the Assist services have been tracked during the year                                                                                                                                                                                  |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| Complete roll out  of Westpac Local in Westpac RBB.                                                                        | ü     | The Westpac Local  model has been implemented across Westpac RBB and New Zealand  banking.                                                                                                                                                           |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| Provide  $1 million in financial and in-kind support for financial counselling  services.                                  | ü     | Over  $1 million in support was provided.                                                                                                                                                                                                                 |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| Continue to grow  the Organisational Mentoring Program.                                                                         | ü     | Number of  Organisational Mentoring partners has increased from 5 in 2009 to over 40 in  2010.                                                                                                                                                                 |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| Maintain a  Group-wide employee engagement score of 81%.                                                                        | Í     | Employee  engagement maintained at a high level, 80% (81% in 2009).                                                                                                                                                                                            |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| **Tread  lightly**                                                                                                              |       |                                                                                                                                                                                                                                                           |
| ** **                                                                                                                      |       |                                                                                                                                                                                                                                                           |
| **Managing our own environmental  footprint**                                                                                   |       |                                                                                                                                                                                                                                                           |
| ** **                                                                                                                      |       |                                                                                                                                                                                                                                                           |
| Reduce Scope 1 and  2(1) emissions by 12.5% on 2008 levels(2).                                                             | Í     | Total Scope 1 and  2 emissions reduced by 4% against the 2008 baseline.                                                                                                                                                                                        |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| Reduce paper  consumption by 7% on 2008 levels(2).                                                                              | ü     | Paper consumption  decreased by more than 24% against the 2008 baseline.                                                                                                                                                                                       |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| Reduce water  consumption by 6% in Australian corporate and contact centres on 2008 levels.                                     | n/a        | The published  target was established for Westpac. Comparable data is not available due to  the integration of Westpac and St.George.                                                                                                                          |
|                                                                                                                            |       |                                                                                                                                                                                                                                                           |
| Identify and  measure additional areas of Scope 3(3) (indirect emissions).                                                      | ü     | Additional areas  of Scope 3 emissions have been identified and have been incorporated into the  measurement and reporting framework.                                                                                                                          |

 

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(1)               Scope 1 emissions are all direct greenhouse gas (GHG)emissions generated by the organisation. Scope 2 emissions are GHG emissionsfrom energy (typically electricity) purchased by the organisation.

(2)               The 2008 baseline has been adjusted to includeSt.George on a pro forma basis.

(3)               Scope 3 emissions are GHG emissions from otherindirect sources (typically from purchased materials, products or services).

 

9

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| **Climate  change**                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                               |       |                                                                                                                                                                                                                                                                                                                                             |
| **Helping customers and employees  transition to a low-carbon economy**                                                                                                  |
| ** **                                                                                                                                                               |
| Implement New  Zealand carbon strategy.                                                                                                                                  | ü     | The New Zealand  carbon strategy has been implemented, including participation in  New Zealand Emissions Trading Scheme (NZ ETS).                                                                                                                                                                                                           |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| Launch carbon hedging  and risk management products in Australia and New Zealand.                                                                                        | ü     | First bank to  trade in the New Zealand Emissions Trading Scheme. Well positioned to deliver  products should market trading commence in Australia.                                                                                                                                                                                              |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| Incorporate carbon  considerations into credit and risk processes and sector strategies.                                                                                 | ü     | Carbon-related  regulatory risk has been incorporated into sector strategy and credit  submission templates. Carbon-related risk management strategies have been  incorporated into specific high risk transactions.                                                                                                                             |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| Continue to engage  with all significantly affected customers.                                                                                                           | ü     | Continued  engagement with customers in Australia and New Zealand likely to be impacted  by the measures to better understand the impacts and develop product  responses.                                                                                                                                                                        |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| **Speaking  out**                                                                                                                                                        |
| ** **                                                                                                                                                               |
| **Leading beyond the corporate  walls and speaking out in support of sustainable business practice**                                                                     |
| ** **                                                                                                                                                               |
| Advocate for  continued action on climate change.                                                                                                                        | ü     | Westpac  established as a Lead Partner with the Climate Institute, a local  not-for-profit organisation which promotes policy, market and business  solutions to climate change.

Founding partner  of the Advance Green Network linking Australians around the world involved in  sustainability. Events have been held in New York and London. |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| Continue to encourage  the adoption of sustainable business practices amongst small to medium  enterprises (SME) and within the community sector.                        | ü     | Involved in the  National SME Project and the launch of the Good Business Register for SME in  December 2009.                                                                                                                                                                                                                               |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| Encourage greater  use of Environmental, Social and Governance (ESG) factors in investment  decision-making.                                                             | ü     | Sustainability  performance integrated into the 2010 Annual Review and Annual Report. Hosted  an analyst briefing on sustainability in the finance sector.                                                                                                                                                                                       |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| Scope  opportunities to embed sustainability criteria into the category management  plans for priority areas of spend.                                                   | ü     | Sustainability  criteria has been embedded into category plans developed by our Group  procurement team. For selected suppliers, environmental reporting criteria  has also been embedded.                                                                                                                                                       |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| Have at least 5%  of employees registered as ‘Our Tomorrow Champions’ across the Group.                                                                        | ü     | More than 5%  (2,300 employees) have registered to be an ‘Our Tomorrow Champion’ across the  Group.                                                                                                                                                                                                                                    |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| **Solid  foundations**                                                                                                                                                   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                       |
| ** **                                                                                                                                                               | ** ** | ** **                                                                                                                                                                                                                                                                                                                                       |
| **Corporate governance, risk  management, values and ethics**                                                                                                            |
| ** **                                                                                                                                                               |
| Develop a  consistent framework for credit risk analysis across all business units.                                                                                      | ü     | An ESG Risk  Framework has been approved by the Board Risk Management Committee.                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| Establish a  governance process to implement the United Nations Principles for Responsible  Investment (UN PRI) across the merged BTFG funds management businesses. | Í     | Work to date on  implementing a governance process for the implementation of the UN PRI has  focused on the Advance business, including surveying of external fund  managers and the development of a draft framework.                                                                                                                           |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| Implement  Sustainable Supply Chain Management (SSCM) across all countries and brands.                                                                                   | ü     | The Sustainable  Supply Chain Management Policy applies across all countries and brands.  Implemented in all Australian brands and with high spend suppliers in Pacific  Banking. Detailed sustainability assessments are currently being carried out  with high-risk and high-spend suppliers in New Zealand.                              |
|                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                             |
| Explore  opportunities to align sourcing practices with our local community engagement  approach.                                                                        | ü     | In support of the  Westpac Local model our Print Management Services Agreement now supports  local printing of specialised marketing materials.                                                                                                                                                                                                  |

 

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INFORMATION ON WESTPAC

 

**Competition**

 

The financialservices markets are strongly competitive across the regions in which weoperate and are likely to become more so as the global economy recovers fromthe global financial crisis.

 

We service thefinancial and wealth needs of a broad set of customer segments, spanning fromsmall businesses to large corporate and institutional clients on the businessside and consumers to high net worth individuals on the retail side of ourbusiness. Our competitors vary across the range of products and services thatwe offer, from large global organisations with a broad offering to entitiesmore focused upon a specific region or product.

 

In Australia, thecompetition for deposits has intensified as banks and other financialinstitutions seek to reduce their reliance on wholesale funding and betterposition themselves for anticipated liquidity regulatory requirements.

 

We expectcompetition within the lending market to further intensify, in particular inbusiness lending, as business confidence improves and investment returns.Competition for mortgages is likely to intensify further if growth in thehousing market slows.

 

In the wealthbusiness we expect competition to increase as financial institutions andindustry funds move to capture a greater share of this fast growing market,particularly in superannuation (or pensions) and financial advice as the marketresponds to emerging regulatory changes.

 

The New Zealandeconomy, which suffered a more significant slowdown in economic activity thanAustralia during the global financial crisis, is showing some early signs ofimprovement. As a result, we would expect to see renewed competition forcustomers’ business as confidence improves, notwithstanding that a number ofsmaller non bank institutions have exited the New Zealand market.

 

**Outlook(1)**

 

The 2010 financialyear has been an important period for The Westpac Group. Having emerged fromthe global financial crisis in strong shape, the Group has focused on improvingthe sustainability of the business. This has included, continuing to expand thedistribution capability, building on the multi-brand strategy, implementingcomprehensive cuts to customer fees, reducing the Group’s reliance on thirdparty distribution, absorbing falls in markets related income, enhancing theGroup’s technology infrastructure and further strengthening capital andliquidity. Each of these factors has some impact on earnings and the effectswill continue into 2011.

 

In the period ahead,economic activity is expected to further improve as business investment picksup and global growth trends higher. Nevertheless we expect some of the legaciesof the global financial crisis to be with us for some time including cautionremaining in financial markets.

 

These trends areexpected to see wholesale funding costs continue to rise in the year ahead.

 

At the same time weexpect further clarity in the prudential and regulatory change agenda,particularly in finalising adjustments to capital and liquidity requirements. Thesechanges are likely to see Westpac further strengthen its balance sheet althoughthis is expected to be accomplished in a measured way.

 

Credit growth isexpected to improve in the year ahead with housing growth remaining aroundcurrent levels and business lending gradually improving after two years ofde-gearing.

 

In the period ahead,Westpac will continue to focus on: better meeting customer needs; capitalisingon our multi-brand approach and further strengthening the infrastructuresupporting our network. This includes increasing investment in our StrategicInvestment Priorities. At the same time, the Group will have a more targetedand selective approach to growth while appropriately managing all aspects ofthe balance sheet.

 

Having furtherstrengthened the franchise over 2010, The Westpac Group is in excellent shapeto continue supporting customers and improving returns to shareholders.

 

**Significant developments**

 

***Merger with St.George Bank Limited***

 

On 1 December 2008,Westpac completed its merger with St.George by way of a scheme of arrangement.The merger, originally announced on 13 May 2008, was approved byholders of St.George ordinary shares on 13 November 2008 andsubsequently approved by the Federal Court of Australia on 17 November 2008.Upon completion of the merger, St.George Bank Limited operated as a Westpacsubsidiary. A regulatory condition of the merger was that Westpac and St.Georgewould transition to a single authorised deposit-taking institution (ADI).

 

On 1 March 2010Westpac and St.George commenced operating as a single ADI. In conjunction, thelegal entity, St.George Bank Limited was deregistered and Westpac became itssuccessor in law. That transition resulted in all St.George assets andliabilities (including all deposits, contracts and debt securities previouslyissued by St.George Bank Limited) becoming Westpac assets and liabilities. Alldirectly owned subsidiaries of St.George Bank Limited are now directly owned byWestpac.

 

St.George and allits wholly owned Australian subsidiaries joined the Westpac tax consolidationgroup on 31 March 2009. As part of the tax consolidation process,Westpac was required to reset the tax value of certain St.George Bank assets tothe appropriate market value of those assets on 31 March 2009. A numberof St.George Bank derivative contracts were assessed as having a market value,at the time of tax consolidation, higher than their original value. Pending thedetermination of the tax consolidation outcome, Westpac’s accounting for thesecontracts had factored in tax on this increase in value.

 

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(1)               All data and opinions under ‘Outlook’ are generated byour internal economists and management.

 

11

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Tax consolidationrelating to the merger with St.George has been finalised for the 2009 and 2010financial years. With the tax consolidation impacts for the 2009 and 2010financial years now completed and the approach agreed with the AustralianTaxation Office (ATO), it has been determined that tax is not required to bepaid on the increase in the value of the derivative contracts that matured inthe 2009 and 2010 financial years. This value totalled $2,284 million, andaccordingly, our current tax liability and income tax expense have been reducedby $685 million. This will lead to a corresponding refund of 2009 tax paidand an adjustment to Westpac’s tax payable for 2010.

 

As additionalderivative contracts mature, there may be further material favourableadjustments. However, it is not possible to assess these adjustments until theinteraction of the new taxation of financial arrangements (TOFA) legislationand the tax consolidation rules is clarified. Additional adjustments totax payable or deferred balances will not be made until discussions clarifyingthe application of these rules have been finalised with the ATO.

 

***Strategic investment priorities***

 

Westpac hascommenced a significant investment in major strategic projects aimed atdelivering business and technology capabilities to improve the customer experience.That investment is taking place through 15 cross-divisional programs wecall our Strategic Investment Priorities (SIPs). The SIPS are a series ofprograms that implement the Group’s technology strategy and plan including:

 

·         addressing legacy technology issues;

 

·         transforming the Group’s technology infrastructure to support amulti-brand platform; and

 

·         supporting Westpac’s customer focused strategy.

 

The SIPs programconsolidates a significant proportion of Westpac’s project investment and is plannedto take place over five years with a forecast project investment of$2 billion.

 

***Liquidity***

 

On 17 December 2009,the Basel Committee on Banking Supervision (BCBS) released a consultativedocument titled *International framework for liquidity riskmeasurement, standards and monitoring*. The BCBS intends to releasefinal standards by December 2010.

 

Following anextensive consultation process and Quantitative Impact Study, the BCBScontinues to work on the quantification and determination of final standards.While some information has been released, the final package of reforms is notyet known. One unresolved issue of particular relevance to the Australianmarketplace is the qualification criteria for liquid assets in jurisdictionswhere there are insufficient government bonds available to meet the LiquidityCoverage Ratio. The BCBS has announced that the implementation of the proposedLiquidity Coverage Ratio and Net Stable Funding Ratio are to be delayed until2015 and 2018 respectively, pursuant to an observation period and furtheranalysis by the BCBS.

 

The AustralianPrudential Regulation Authority (APRA) has indicated that it will releaserevised Australian liquidity standards for consultation subsequent tofinalisation of the BCBS standards. It is expected that APRA will release draftstandards during 2011, and final standards during 2012.

 

Until there isgreater clarity regarding the new prudential requirements, the full extent ofthe impacts for Westpac is uncertain. Notwithstanding the uncertain requirements,Westpac expects to be required to increase its holding of liquid assets.

 

***Capital***

 

On 17 December 2009,the BCBS released a consultative document titled *Strengtheningthe resilience of the banking sector* which set out potential changesto the definition and quantum of capital required to be held by banks globally,including the introduction of certain capital buffers. On 26 July 2010,the Group of Governors and Heads of Supervision, the oversight body of theBCBS, announced that they had reached broad agreement on the overall design ofthe capital reform package. This includes transitional arrangements forintroduction of the proposed leverage ratio for final implementation by 2018.

 

On 12 September 2010,this Group of Governors also issued a further release announcing higher globalminimum capital standards, which included:

 

·         an increase in the minimum common equity requirement from 2% to 4.5%;

 

·         an increase in the minimum Tier 1 capital requirement from 4% to6%;

 

·         quantification of the capital conservation buffer at 2.5%, to be metwith common equity; and

 

·         quantification of a range for the countercyclical buffer of between 0% -2.5% of common equity or other fully loss absorbing capital.

 

The September 2010release also outlined that agreement has been reached on transitionalarrangements for implementing the new standards, with phase in arrangementsstarting from 1 January 2013 and some elements not becoming fullyeffective until 1 January 2019. The BCBS capital reforms are expectedto be finalised by the end of 2010, following which APRA is expected to consultwith industry in relation to prudential standards applicable for Australia.Until the full suite of capital reforms are finalised by the BCBS, and APRA’sprudential standards are issued, the full extent of the impacts for Westpac isuncertain.

 

In addition, the FinancialStability Board (FSB) working closely with the BCBS has finalised a policyframework, to be endorsed by the G20, that will apply to institutions deemed tobe systemically important financial institutions (SIFIs). The framework callson jurisdictions to put in place additional requirements for both national andglobal SIFIs. Details of the framework and the definition of a SIFI arecurrently unknown, and therefore the implications for Westpac cannot bedetermined at this stage.

 

12

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INFORMATIONON WESTPAC

 

***Derivatives Reform***

 

Globally regulatorsare transforming the ‘Over the Counter’ (OTC) derivatives market by mandatingcentral clearing for standardised OTC derivatives, encouraging exchange tradingwhere appropriate, imposing higher capital charges on non-cleared products, andrequiring all transactions to be reported to trade repositories. Westpac isclosely monitoring offshore developments and is actively engaging with bothlocal and international regulators, trade associations, banks, and clearinghouses. It is expected that the usage of clearing globally will expand rapidlyduring 2011 and Westpac will commence moving towards a cleared solutionfollowing an appropriate risk assessment, as and when clearing solutionsmeeting the needs of the Australian marketplace become available. These changeshave the potential to affect WIB’s Markets business.

 

***United States***

 

There are a numberof significant regulatory reforms currently occurring in the United States.These include:

 

*Dodd-Frank Wall Street Reform and ConsumerProtection Act (Dodd-Frank Act)*

 

In response to therecent financial crisis, new legislation designed to reform the system forsupervision and regulation of financial firms in the United States wassigned into law on 21 July 2010. The Dodd-Frank Act contains a widerange of provisions that will affect financial institutions operating in theUnited States, including foreign banks like Westpac. Included among itsprovisions are reforms designed to reduce systemic risk presented by very largefinancial firms, promote enhanced supervision, regulation, and prudentialstandards for financial firms, establish comprehensive supervision of financialmarkets, impose new limitations on permissible financial institution activitiesand investments, expand regulation of the derivatives markets, protectconsumers and investors from financial abuse, and provide the government withthe tools needed to manage a financial crisis. Many aspects of the legislationrequire rulemaking by US federal supervisory agencies for full implementation.Until there is greater clarity, it is not possible to assess the impact of thelegislation and the regulations on our operations.

 

*Foreign Account Taxation Compliance Act (FATCA)*

 

The FATCA provisionswere signed into law in the US on 18 March 2010. The legislationrequires foreign financial institutions (such as Westpac) to provide the USInternal Revenue Service (IRS) with information on accounts held by US persons.There are a number of significant Australian legal obstacles to compliance andthe final form of the rules is unknown. However, if implemented near toits current form it would require substantial investment in a compliance andreporting framework to meet the standards.

 

***Further regulatory developments***

 

The AustralianFederal Government has embarked on a program of regulatory reform, which willaffect Westpac. This includes:

 

·         Credit law reform - The *National Credit Code*has commenced, increasing the regulation of activities relating to theprovision of consumer credit. The Government has begun working on a secondphase of its credit law reforms, which is expected to extend the regulation ofcredit to cover small businesses;

 

·         Consumer law reform - The Government continues reforms to Australia’sconsumer laws. Regulators such as the Australian Competition and ConsumerCommission (ACCC) and Australian Securities and Investments Commission (ASIC)are assisting industry with the detail of the new regulatory framework, includingdeveloping guidance on the application of new laws relating to unfair terms inconsumer contracts;

 

·         Margin lending reform - Margin lending has been made a financial productsubject to the *Corporations Act* and this hascreated new conduct and disclosure requirements for issuers and advisers ofmargin lending facilities which will take effect from 1 January 2011;

 

·         Superannuation changes - On 5 July 2010, the Governmentreleased the final report of the Cooper Review on the governance, efficiency,structure and operation of Australia’s superannuation system. The report makesseveral recommendations, including the proposed introduction of a simple,low-cost ‘MySuper’ superannuation product and an initiative called SuperStreamto improve the efficiency of processing superannuation transactions through theuse of technology; and

 

·         The introduction of a new regulatory framework for personal propertysecurities - The Government has introduced a national personal propertysecurities regime involving a single register, replacing a wide range ofcomplex State and Territory based legislation and registers.

 

Westpac continues toreview these developments, engage with Government, regulators and industrybodies as appropriate, and amend its systems, processes and operations to alignwith regulatory changes as they occur.

 

13

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***Proposed transfer of additional banking operations to Westpac NewZealand***

 

It is a policy ofthe Reserve Bank of New Zealand (RBNZ) that all systemically important banksmust incorporate as local entities in New Zealand, rather than operatethrough branch structures.

 

Until 1 November 2006,Westpac conducted its banking operations within New Zealand in a branchstructure. On that date, and after extensive consultation with the RBNZ,Westpac adopted a dual registration operating model including a locallyincorporated subsidiary, Westpac New Zealand Limited (WNZL), to conduct itsretail and business banking activities in New Zealand, and a branch, Westpac’sNZ Branch (NZ Branch) to conduct its institutional and financialmarkets activities. The conditions of registration of each of WNZL andNZ Branch are consistent with these operating model arrangements.

 

In 2009, the RBNZasked Westpac to review the structure of its operating model in New Zealand toensure that it is able to sustain durable compliance with the RBNZ’s prudentialpolicies. Accordingly, it was agreed that an independent review would takeplace, with the terms of reference for the review established throughconsultation between the RBNZ, WNZL and Westpac. The RBNZ, WNZL and Westpachave reached high level agreement on changes to the operating model.

 

Under thatagreement, the NZ Branch will transfer the following additional businessactivities and associated employees to WNZL:

 

·         institutional customer deposits;

 

·         institutional customer transactional banking;

 

·         institutional customer lending;

 

·         debt capital markets (including customer loan syndication andsecuritisation arrangements, but excluding the debt securities team activities,such as arrangement of commercial paper and bond programmes); and

 

·         corporate advisory.

 

Details of thechanges are being worked through in consultation with the RBNZ as part of theimplementation program.

 

Under the proposedchanges to the operating model, the NZ Branch will retain its financialmarkets operations for external customers, including sales and trading ofcapital markets products and foreign exchange for corporate and institutionalcustomers, pricing and risk management for interest rate, foreign exchange andcommodity products for retail, business and institutional customers of WNZL,and trading of capital markets products and foreign exchange as principal. Inaddition, the NZ Branch will retain its global intra-group financingfunctions.

 

Implementation ofthe transfer is currently expected to be completed by the end of the 2011calendar year.

 

***Australian Government Guarantee Scheme***

 

On 31 March 2010,the Australian Government Guarantee Scheme for Large Deposits and WholesaleFunding (the Guarantee Scheme) closed to new liabilities. The Guarantee Scheme,originally announced in October 2008, provided a guarantee facility fordeposits of amounts over $1 million and wholesale funding of an eligibleADI, in return for a fee payable by the eligible ADI.

 

Deposit balancesabove $1 million covered by the Guarantee Scheme as at31 March 2010 will be covered until maturity (for term deposits), oruntil October 2015 (for at call deposits). For at call deposits, theamount covered will be capped at the closing guaranteed amount on31 March 2010. Deposits and interest payments after this date willonly be covered (up to the capped amount) if the guaranteed balance has fallenbelow the capped amount. For term deposits, interest due after31 March 2010 will be guaranteed to maturity. Statutory trustaccounts will be treated in the same way as other large deposits. Guaranteedwholesale liabilities as at 31 March 2010 will also be guaranteed tomaturity (which may be up to five years).

 

Guarantee Schemefees based on eligible ADIs’ long term credit rating, required to be paidmonthly, continue to apply throughout the period for which the guaranteeapplies to the relevant deposits. The monthly payment is calculated on thebasis of the funds to be guaranteed, multiplied by the Guarantee Scheme fee.The Guarantee Scheme fee applicable to Westpac is 70 basis points or(0.70%) per annum. The fee waiver for guaranteed amounts held in statutorytrust accounts continues to apply.

 

The closure of theGuarantee Scheme does not affect the Financial Claims Scheme (FCS),administered by APRA, which will continue to provide depositors a freeguarantee of deposits in eligible ADIs up to and including $1 million. TheFCS applies to an eligible ADI if APRA has applied for the winding up of theADI and the responsible Australian Government minister has declared that theFCS applies to that ADI. The Financial Claims Scheme (ADIs) Levy Act 2008provides for the imposition of a levy to fund the excess of certain of APRA’sfinancial claims scheme costs connected with that ADI. The levy would beimposed on liabilities of eligible ADIs to their depositors and cannot be morethan 0.5% of the amount of those liabilities. The $1 million FCS cap isscheduled to be reviewed by the Australian Government in or aroundOctober 2011.

 

***New Zealand Government Guarantee Scheme***

 

WNZL opted into theNew Zealand Retail Deposit Guarantee Scheme which the New ZealandGovernment originally announced on 12 October 2008. The scheme wasfor a two year period. WNZL entered into a Crown Deed of Guarantee on11 November 2008, which was amended by a Supplemental Deed dated24 November 2008. The Crown withdrew the original deed in respect ofindebtedness incurred on or after 1 January 2010 and entered into a reviseddeed of guarantee with WNZL dated 16 December 2009. The scheme expired on12 October 2010.

 

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INFORMATION ON WESTPAC

 

The New Zealanddeposit guarantee extended to debt securities issued by WNZL in any currency(which included deposits and other amounts lent to WNZL), other than debtsecurities issued to excluded creditors such as financial institutions andrelated parties of a participating entity. It did not extend to subordinateddebt obligations. The debt securities covered by the New Zealand depositguarantees were limited to an amount of NZ$1 million per creditor perapproved institution. Under the original New Zealand deposit guarantee, WNZLwas required to pay a fee of 10 basis points (or 0.1%) on the amountsowing to creditors covered by that guarantee to the extent that amount exceededNZ$5 billion as at 12 October 2008. A similar additional fee waspayable in respect of the balance as at 12 October 2009.

 

On 25 August 2009,the Crown announced an extension of the deposit guarantee scheme. The extensionscheme is effectively a new scheme that commenced on 12 October 2010and ends on 31 December 2011. Institutions had to re-apply to have aguarantee under the extension scheme. When releasing its Financial StabilityReport in May 2010, the RBNZ said that there was no need for banks toenter the extended scheme and WNZL and Westpac Banking Corporation’sNZ Branch did not apply for the extension scheme.

 

On1 November 2008, the New Zealand Government announced details of awholesale funding guarantee facility to investment-grade financial institutionsthat have substantial New Zealand borrowing and lending operations (theFacility). The Crown entered into a Crown Wholesale Funding Guarantee Facility Deedwith WNZL on 23 February 2009 and has provided a Crown WholesaleFunding Guarantee in respect of WNZL dated the same date. The Facility operatedon an opt-in basis, by institution and by instrument. Wholesale fundingliabilities of WNZL (which could include amounts guaranteed by WNZL) only havethe benefit of the Facility where a Guarantee Eligibility Certificate has beenissued in respect of those liabilities. Copies of the Guarantee EligibilityCertificates issued in respect of WNZL obligations are available on the NewZealand Treasury internet site. A guarantee fee was charged for each GuaranteeEligibility Certificate issued under the Facility, differentiated by the creditrating of the issuer of the relevant securities, the term of the security beingguaranteed and, in the case of issues with terms of more than one year, betweenNew Zealand dollar and non-New Zealand dollar issues. The maximum term ofsecurities guaranteed was five years. The NZ Branch did not participate in thescheme.

 

The Facility closedon 30 April 2010. From that time no new Guarantee EligibilityCertificates will be issued but existing guaranteed liabilities have not beenaffected.

 

***Tax developments***

 

The AustralianFederal Government commissioned Australia’s Future Tax System Review (the HenryReview) which is a comprehensive review of the Australian taxation system(except GST), chaired by the Secretary to the Treasurer,Dr Ken Henry AC.

 

On 2 May 2010,the Federal Government released the Henry Review and its initial response. Alarge proportion of the Henry Review’s 138 recommendations were not dealt within the Government’s initial response. Of the recommendations addressed in itsinitial response, the Government recommended reducing the company tax rate to29% for the 2013 - 2014 income year and to 28% from the 2014 - 2015 income year(28% for small business by 2012), and the gradual increase of the employerscompulsory superannuation guarantee from 9% to 12% by 2020. Detail of theseproposed reforms, and the Government’s response to the other recommendations,are expected to be released progressively. The Federal Government has made noannouncement concerning the Henry Review since the Australian Federal electionheld in September 2010, and it is not certain that all aspects of theGovernment’s response will remain unchanged in the new Parliament. Untilfurther detail is released, and any changes to the law finalised, any impact onWestpac cannot be determined.

 

The taxation offinancial arrangements rules contained in the Tax Laws Amendment (Taxationof Financial Arrangements) Act 2009 became law on 26 March 2009. TheTOFA rules will effectively result in a closer alignment of therecognition and measurement of many financial instruments between theAustralian accounting standards and taxation laws.

 

***Changes to accounting standards***

 

In further responseto the global financial crisis, governments, regulators and accounting standardsetters are working to revise certain accounting standards. The objective is toachieve convergence towards a single set of high-quality, global andindependent accounting standards. The specific areas that have been targetedinclude accounting for financial instruments, loan-loss provisioning,off-balance sheet exposures and the impairment and valuation of financialassets. The Group expects that there will be a number of new standards issuedin calendar years 2010 and 2011 that may require changes to our currentaccounting approaches.

 

***Litigation***

 

*New Zealand Commissioner of Inland Revenue*

 

On 23 December 2009,Westpac reached a settlement with the New Zealand Commissioner of InlandRevenue (CIR) of the previously reported proceedings relating to ninestructured finance transactions undertaken between 1998 and 2002. Under thesettlement, Westpac agreed to pay the CIR 80% of the full amount of primary taxand interest and with no imposition of penalties. All proceedings have beendiscontinued and the other terms of the settlement are subject toconfidentiality. Westpac provided in full for the primary tax and interestclaimed by the CIR as part of its 2009 result, and consequently there has beena write back through income tax expense in the year ended30 September 2010.

 

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**Supervision and regulation**

 

***Australia***

 

Within Australia weare subject to supervision and regulation by six principal agencies: APRA; theReserve Bank of Australia (RBA); the Australian Securities and InvestmentsCommission (ASIC); the Australian Securities Exchange (ASX); the Australian Competitionand Consumer Commission (ACCC); and the Australian Transaction Reports andAnalysis Centre (AUSTRAC).

 

APRA is responsiblefor the prudential supervision of banks, credit unions, building societies,life and general insurance companies, friendly societies and mostsuperannuation (pension) funds. APRA’s roles include the establishment andenforcement of prudential standards and practices designed to ensure that,under all reasonable circumstances, financial promises made to customers by theinstitutions it supervises are met.

 

As an ADI, we reportprudential information to APRA including in relation to capital adequacy, largeexposures, credit quality and liquidity. Our controlled entities in Australiathat are authorised insurers and trustees of superannuation funds are alsosubject to the regulatory regime of APRA. Reporting is supplemented byconsultations, on-site inspections and targeted reviews. Our external auditorsalso have an obligation to report on compliance with certain statutory and regulatorybanking requirements and on any matters that in their opinion may have thepotential to materially prejudice the interests of depositors and otherstakeholders.

 

Australia’srisk-based capital adequacy guidelines are generally consistent with theapproach agreed upon by the Basel Committee on Banking Supervision. Refer to ‘Capitalresources - Basel capital accord’ in Section 2.

 

The RBA isresponsible for monetary policy, maintaining financial system stability andpromoting the safety and efficiency of the payments system. The RBA is anactive participant in the financial markets, manages Australia’s foreignreserves, issues Australian currency notes and serves as banker to theAustralian Government.

 

ASIC is the nationalregulator of Australian companies. Its primary responsibility is for regulationand enforcement of company, financial markets and financial services laws thatprotect consumers, investors and creditors. With respect to financial services,it promotes honesty and fairness through the provision of consumer protection,using regulatory powers to enforce laws relating to deposit-taking activities,general insurance, life insurance, superannuation, retirement savings accounts,securities (such as shares, debentures and managed investments) and futurescontracts and financial advice. ASIC became the principal regulator of consumercredit providers in 2010 following the introduction of new national consumercredit regulation. Effective 1 October 2010, ASIC has taken over fromthe ASX responsibility for supervision of trading on Australia’s domesticlicensed markets and of trading participants. This supplements its pre-existingresponsibility for enforcement of the laws against misconduct on Australia’sfinancial markets.

 

The ASX operates Australia’sprimary national market for trading of securities issued by listed companies.Some of our securities (including our ordinary shares) are listed on the ASXand we therefore have obligations to comply with the ASX Listing Rules thathave statutory backing under the Corporations Act. The ASX has responsibilityfor the oversight of listed entities under the ASX Listing Rules and formonitoring and enforcement of compliance with the ASX Operating Rules bymarket, clearing and settlement participants.

 

The ACCC is anindependent statutory authority responsible for the regulation and prohibitionof anti-competitive and unfair market practices and mergers and acquisitions inAustralia. Its objectives are to ensure that corporations do not act in a waythat may have the effect of eliminating or reducing competition, and to overseeproduct safety and liability issues, pricing practices and third party accessto facilities of national significance. The ACCC’s role in consumer protectioncomplements that of Australian state and territory consumer affairs agenciesthat administer the unfair trading legislation of their jurisdictions.

 

The AustralianGovernment’s present policy, known as the ‘four pillars policy’, is that thereshould be no fewer than four major banks to maintain appropriate levels ofcompetition in the banking sector. Under the Financial Sector (Shareholding)Act, the Australian Government’s Treasurer must approve an entity acquiring astake in a financial sector company of more than 15%.

 

Proposals forforeign acquisitions of Australian banks are subject to approval by theAustralian Government under the Australian Foreign Acquisitions and TakeoversAct 1975.

 

AUSTRAC oversees thecompliance of Australian reporting entities including Westpac, with therequirements under the Anti-Money Laundering and Counter-Terrorism FinancingAct 2006 and the Financial Transaction Reports Act 1988.

 

These requirementsinclude:

 

·         implementing programs for identifying and monitoring customers, and formanaging the risks of money laundering and terrorism financing;

 

·         reporting suspicious matters, threshold transactions and internationalfunds transfer instructions; and

 

·         submitting an annual compliance report.

 

AUSTRAC providesfinancial information to state, territory and Australian federal lawenforcement, security, social justice and revenue agencies, and certaininternational counterparts.

 

***New Zealand***

 

RBNZ is responsiblefor the supervision of the New Zealand registered banks. The New Zealandprudential supervision regime requires that registered banks disclose, on aquarterly basis, information on financial performance and risk positions, andthat directors regularly attest to certain key matters.

 

16

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INFORMATIONON WESTPAC

 

***United States***

 

Our New York branchis a US federally licensed branch and, as such, is subject to supervision,examination and extensive regulation by the US Office of the Comptroller of theCurrency and the Board of Governors of the Federal Reserve System (the USFederal Reserve) under the US International Banking Act of 1978 (IBA) andrelated regulations. Under the IBA, we may not open any branch, agency orrepresentative office in the US or acquire more than 5% of the voting stock ofany US bank without the prior approval of the US Federal Reserve.

 

A US federal branchmust maintain, with a US Federal Reserve member bank, a capital equivalencydeposit as prescribed by the US Comptroller of the Currency in an amount whichis the greater of:

 

·         the amount of capital that would be required of anational bank organised at the same location; or

 

·         5% of the total liabilities (excluding, among otherthings, liabilities to affiliates and liabilities of any international bankingfacilities) of the US federal branch.

 

In addition, a USfederal branch is examined by the US Comptroller of the Currency at least onceeach calendar year and periodically by the US Federal Reserve. The examinationcovers risk management, operations, credit and asset quality and compliancewith the record-keeping and reporting requirements that apply to nationalbanks, including the maintenance of its accounts and records separate fromthose of the foreign bank and any additional requirements prescribed by the USComptroller of the Currency.

 

A US federal branchof a foreign bank is, by virtue of the IBA, subject to the receivership powersexercisable by the US Comptroller of the Currency.

 

At this time we havenot elected to become, and therefore we are not, a financial holding company asdefined in the Gramm-Leach-Bliley Act of 1999.

 

**Anti-money laundering regulation**

 

***Australia***

 

Westpac has aGroup-wide program to manage its obligations under the Anti-Money Launderingand Counter-Terrorism Financing Act 2006. We continue to actively consultwith the regulator AUSTRAC on our activities.

 

***United States***

 

The US Patriot Actrequires US financial institutions, including the US branches of foreign banks,to take certain steps to prevent, detect and report individuals and entitiesinvolved in international money laundering and the financing of terrorism. Therequired actions include verifying the identity of financial institutions,terminating correspondent accounts for foreign ‘shell banks’ and obtaininginformation about the owners of foreign bank clients and the identity of theforeign bank’s agent for service of process in the US. Many of the newanti-money laundering compliance requirements of the US Patriot Act areconsistent with the anti-money laundering compliance obligations previouslyimposed on US financial institutions, including the US branches of foreignbanks, under the Bank Secrecy Act and under regulations of the applicable USbank regulatory agency such as the US Comptroller of the Currency. Theseinclude requirements to adopt and implement an effective anti-money launderingprogram, report suspicious transactions or activities, and implement duediligence procedures for correspondent and other customer accounts. TheUS Patriot Act and other recent events have resulted in heightenedscrutiny of Bank Secrecy Act and anti-money laundering compliance programs byUS federal bank regulatory and law enforcement authorities.

 

**Outsourcing contracts**

 

Westpac’ssignificant long-term contracts are summarised in Note 34 to the financialstatements.

 

**Legal proceedings**

 

Our entities aredefendants from time-to-time in legal proceedings arising from the conduct ofour business and material legal proceedings, if any, are described inNote 36 to the financial statements. An assessment of likely losses ismade on a case-by-case basis for the purposes of the financial statements.

 

Westpac is awarefrom reports in the media and other public statements that class actionproceedings relating to exception fees have been commenced against one Australianbank, and may be commenced against other Australian banks. At this stage nosuch proceedings have been commenced against Westpac.

 

**Principal office**

 

Our principal officeis located at 275 Kent Street, Sydney, New South Wales, 2000,Australia. Our telephone number for calls within Australia is 132 032 andour international telephone number is (+61) 2 9293 9270.

 

17

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CORPORATE GOVERNANCE

 

**Introduction**

 

This statementdescribes our corporate governance framework, policies and practices as at3 November 2010.

 

**Framework and approach**

 

Our approach tocorporate governance is based on a set of values and behaviours that underpinday-to-day activities, provide transparency and fair dealing, and protectstakeholder interests.

 

This approachincludes a commitment to excellence in governance standards, which Westpac seesas fundamental to the sustainability of our business and our performance. Itincludes monitoring local and global developments in corporate governance andassessing their implications.

 

**Australia**

 

We take into accountthe *Corporations Act 2001* (Corporations Act)and the Corporate Governance Principles and Recommendations (ASXCGC’sRecommendations) published by the ASX Corporate Governance Council (ASXCGC). Asan ADI, we must also comply with governance requirements prescribed by APRAunder Prudential Standard APS 510 Governance.

 

This statementaddresses each of the eight ASXCGC’s Recommendations with an explanation of ourcorporate governance practices, demonstrating our compliance with eachRecommendation. A checklist summarising our compliance is included at the endof this statement.

 

Further detailsabout the ASXCGC’s Recommendations can be found on the ASX websitewww.asx.com.au.

 

**New Zealand**

 

Westpac also hasordinary shares quoted on the NZSX, which is the main board equity securitymarket operated by NZX Limited (NZX). As an overseas listed issuer inNew Zealand, we are deemed to satisfy and comply with the NZSX ListingRules, provided that we remain listed on the ASX and comply with the ASXListing Rules.

 

The ASX, through theASXCGC’s Recommendations, and NZX have adopted a similar ‘comply or explain’general approach to corporate governance. However, the ASXCGC’s Recommendationsmay materially differ from the corporate governance rules and theprinciples of NZX’s Corporate Governance Best Practice Code.

 

**United States**

 

Westpac has AmericanDepositary Shares (ADS) representing its ordinary shares quoted on the New YorkStock Exchange (NYSE). Under the NYSE listing rules, foreign private issuersare permitted to follow home country practice in respect of corporategovernance in lieu of the NYSE listing rules. However, we are still required tocomply with certain audit committee and additional notification requirements.

 

We comply in allmaterial respects with all NYSE listing rules applicable to us as aforeign private issuer.

 

Under the NYSElisting rules, foreign private issuers are required to disclose any significantways in which their corporate governance practices differ from those followedby domestic United States companies. We have compared our corporate governancepractices to the corporate governance requirements of the NYSE listing rules andnote the significant differences below.

 

The NYSE listing rules requirethat, subject to limited exceptions, shareholders be given the opportunity tovote on equity compensation plans and material revisions to those plans.

 

In Australia thereare no laws or securities exchange listing rules that require shareholderapproval of equity-based incentive plans or individual grants under those plans(other than for Directors, including the Chief Executive Officer (CEO)).

 

Westpac’s employeeequity plans have been disclosed in the Remuneration Report in Section 9of the 2010 Directors’ report, which is subject to a non-binding shareholdervote at the Annual General Meeting (AGM) and grants to our CEO are approved byshareholders at the AGM. The details of all grants under our equity-basedincentive plans have been disclosed in Note 25 of our financial statementsfor the year ended 30 September 2010.

 

The NYSE listing rules providethat the Nominations Committee’s responsibilities should include selecting, orrecommending that the Board select, the Director nominees for the next annualmeeting for shareholders.

 

Our constitutionstates that at each AGM one-third of our Directors (excluding the CEO and anyDirector appointed during the year to fill a casual vacancy) and any otherDirector who has held office for three or more years since their last election,must retire. In 2010, none of our Directors met this three-year threshold.Westpac considered that it was appropriate for the full Board, rather than theNominations Committee, to determine the Board candidates for retirement underthe rotation policy, and to review and recommend their re-election byshareholders at the 2010 AGM.

 

**Websites**

 

This statement and arange of documents referred to in it are available on our corporate governancewebsite at www.westpac.com.au/corpgov. This website is regularly updated andcontains copies and summaries of our charters, principles and policies.

 

These documents arealso available to our shareholders in print from our Investor Relationsdepartment.

 

18

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CORPORATE GOVERNANCE

 

Governance framework

 

 

From time to timethe Board may form other Committees or request Directors to undertake specificextra duties. During the year, the Board formed a new Committee to provide aspecific focus on Occupational Health and Safety (OHS) across the Group. Therole of that Committee, and Board-level oversight arrangements for OHS, will bereviewed in 2011.

 

The Executive Team,Disclosure Committee and Executive Risk Committees sit beneath the CEO and theBoard Committees to implement Board-approved strategies, policies andmanagement of risk across the Group.

 

19

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**Board, committees and oversight of management**

 

**Board of Directors**

 

***Roles and responsibilities***

 

The Board Charteroutlines the roles and responsibilities of the Board. Key responsibilities insummary are:

 

·         approving the strategic direction of The WestpacGroup;

 

·         evaluating Board performance and determining Boardsize and composition;

 

·         appointing and determining the duration,remuneration and other terms of appointment of the CEO and Chief FinancialOfficer (CFO), and ratifying the appointments of other senior executives;

 

·         evaluating the performance of the CEO and CFO, andmonitoring the performance of other senior executives;

 

·         succession planning for the Board, CEO and CFO;

 

·         approving the annual budget and financialstatements and monitoring performance against the approved budget;

 

·         determining our dividend policy;

 

·         determining our capital structure;

 

·         approving our risk management strategy andframeworks, and monitoring their effectiveness;

 

·         considering the social, ethical and environmentalimpact of our activities and monitoring compliance with our sustainabilitypolicies and practices;

 

·         maintaining a direct and ongoing dialogue withWestpac’s auditors and, where appropriate, principal regulators;

 

·         internal governance including delegatedauthorities, policies for appointments to our controlled entity Boards andmonitoring resources available to senior executives;

 

·         approving the Westpac Group’s RemunerationPolicy;

 

·         determining the size of bonus/incentive pools; and

 

·         monitoring OHS issues in The Westpac Group andconsidering appropriate OHS reports and information.

 

***Delegated authority***

 

The Constitution andthe Board Charter enable the Board to delegate to Committees and management.

 

The roles andresponsibilities delegated to the Board Committees are captured in the Chartersof each of the six established Committees, namely:

 

·         Audit;

 

·         Risk Management;

 

·         Nominations;

 

·         Remuneration;

 

·         Sustainability; and

 

·         Technology.

 

The Boardestablishes other Committees from time to time to consider matters of specialimportance or to exercise specific delegated authority from the Board.

 

The DelegatedAuthority Policy Framework outlines principles to govern decision-making withinthe Group including appropriate escalation and reporting to the Board. TheBoard has also delegated to the CEO, and through the CEO to other executives,responsibility for the day-to-day management of our business. The scope of, andlimitations to, management delegated authority is clearly documented and coversareas such as operating and capital expenditure, funding and securitisation,and lending. These delegations balance effective oversight with appropriateempowerment and accountability of management.

 

***Independence***

 

Together, the Boardmembers have a broad range of relevant financial and other skills and knowledgecombined with the extensive experience necessary to guide our business. Detailsare set out in Section 1 of the 2010 Directors’ report.

 

All of ourNon-executive Directors satisfy our criteria for independence, which areconsistent with those applied by the NYSE.

 

The Board assessesthe independence of our Directors on appointment and annually. Each Directorprovides an annual attestation of his or her interests and independence.

 

Directors areconsidered independent if they are independent of management and free from anybusiness or other relationship that could materially interfere with, orreasonably be perceived to materially interfere with, the exercise of theirunfettered and independent judgment. Materiality is assessed on a case-by-casebasis by reference to each Director’s individual circumstances rather than byapplying general materiality thresholds. The assessment has regard to thecriteria applied by the NYSE and US Securities and Exchange Commission (SEC).

 

Each Director isexpected to disclose any business or other relationship which he or she hasdirectly or as a partner, shareholder or officer of a company or other entitythat has an interest, or a business or other relationship, with Westpac or arelated entity. The Board considers information about any such interests orrelationships, including any related financial or other details, when itassesses the Director’s independence.

 

20

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CORPORATE GOVERNANCE

 

***Sizeand membership of Board Committees as at 30 September 2010***

 
| ** **           | ** ** | **Status**                                   | ** ** | **Board Audit  Committee** | ** ** | **Board Risk  Management  Committee** | ** ** | **Board  Nominations  Committee** | ** ** | **Board  Remuneration  Committee** | ** ** | **Board  Sustainability  Committee** | ** ** | **Board  Technology  Committee** | ** ** |
|----------------------|------------|----------------------------------------------|------------|---------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **           | ** ** | ** **                                   | ** ** | ** **                      | ** ** | ** **                                 | ** ** | ** **                        | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** **                       | ** ** |
| **Ted  Evans**       |       | Chairman,  Non-executive, Independent        |       | ü                          |       | ü                                     | ** ** | **Chair**ü                   | ** ** | ** **                         | ** ** | ** **                           |       | ü                           | ** ** |
| ** **           |       |                                         |       |                            |       |                                       | ** ** | ** **                        | ** ** | ** **                         | ** ** | ** **                           |       |                             | ** ** |
| **John  Curtis**     |       | Deputy Chairman,  Non-executive, Independent |       | ü                          |       | ü                                     |       | ü                            |       | ü                             | ** ** | ** **                           | ** ** | ** **                       | ** ** |
| ** **           |       |                                         |       |                            |       |                                       |       |                              |       |                               | ** ** | ** **                           | ** ** | ** **                       | ** ** |
| **Gail  Kelly**      |       | CEO, Executive                               | ** ** | ** **                      | ** ** | ** **                                 | ** ** | ** **                        | ** ** | ** **                         |       | ü                               |       | ü                           | ** ** |
| ** **           |       |                                         | ** ** | ** **                      | ** ** | ** **                                 | ** ** | ** **                        | ** ** | ** **                         |       |                                 |       |                             | ** ** |
| **Elizabeth  Bryan** |       | Non-executive, Independent                   |       | ü                          |       | ü                                     |       | ü                            | ** ** | ** **                         | ** ** | ** **                           | ** ** | **Chair**ü                  | ** ** |
| ** **           |       |                                         |       |                            |       |                                       |       |                              | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** **                       | ** ** |
| **Gordon  Cairns**   |       | Non-executive, Independent                   |       | ü                          |       | ü                                     |       | ü                            | ** ** | **Chair**ü                    | ** ** | ** **                           | ** ** | ** **                       | ** ** |
| ** **           |       |                                         |       |                            |       |                                       |       |                              | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** **                       | ** ** |
| **Peter  Hawkins**   |       | Non-executive, Independent                   |       | ü                          |       | ü                                     | ** ** | ** **                        | ** ** | ** **                         | ** ** | ** **                           |       | ü                           | ** ** |
| ** **           |       |                                         |       |                            |       |                                       | ** ** | ** **                        | ** ** | ** **                         | ** ** | ** **                           |       |                             | ** ** |
| **Carolyn  Hewson**  |       | Non-executive, Independent                   |       | ü                          | ** ** | **Chair**ü                            |       | ü                            |       | ü                             | ** ** | ** **                           | ** ** | ** **                       | ** ** |
| ** **           |       |                                         |       |                            | ** ** | ** **                                 |       |                              |       |                               | ** ** | ** **                           | ** ** | ** **                       | ** ** |
| **Lindsay  Maxsted** |       | Non-executive, Independent                   | ** ** | **Chair**ü                 |       | ü                                     |       | ü                            | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** **                       | ** ** |
| ** **           |       |                                         | ** ** | ** **                      |       |                                       |       |                              | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** **                       | ** ** |
| **Graham  Reaney**   |       | Non-executive, Independent                   |       | ü                          |       | ü                                     | ** ** | ** **                        | ** ** | ** **                         |       | ü                               | ** ** | ** **                       | ** ** |
| ** **           |       |                                         |       |                            |       |                                       | ** ** | ** **                        | ** ** | ** **                         |       |                                 | ** ** | ** **                       | ** ** |
| **Peter  Wilson**    |       | Non-executive, Independent                   |       | ü                          |       | ü                                     |       | ü                            | ** ** | ** **                         | ** ** | **Chair**ü                      | ** ** | ** **                       | ** ** |

 

This table showsmembership of standing Committees of the Board. From time to time the Board mayform other Committees or request Directors to undertake specific extra dutiessuch as the new Committee focusing on OHS established during the year.

 

The charts belowdemonstrate that our Board comprises a majority of independent Directors andthe tenure of our current Directors.

 
| ***Length  of tenure of Non-executive Directors*** | ***Balance  of Non-executive and executive Directors*** |
|----------------------------------------------------|---------------------------------------------------------|
| *** ***                                       | *** ***                                            |
|                                                    |                                                         |

 

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***The Chairman***

 

The Board elects oneof the independent Non-executive Directors as Chairman. Our Chairman is TedEvans. The Chairman’s role includes:

 

·         providing effective leadership to the Board in relation to all Boardmatters;

 

·         guiding the agenda and conducting all Board meetings;

 

·         in conjunction with the Company Secretary, arranging regular Boardmeetings throughout the year, confirming that minutes of meetings accuratelyrecord decisions taken and, where appropriate, the views of individualDirectors;

 

·         overseeing the process for appraising Directors and the Board as awhole;

 

·         overseeing Board succession;

 

·         acting as a conduit between management and Board, and being the primarypoint of communication between the Board and CEO;

 

·         representing the views of the Board to the public; and

 

·         taking a leading role in creating and maintaining an effective corporategovernance system.

 

***The Deputy Chairman***

 

Our Deputy Chairmanis John Curtis. The Deputy Chairman’s role includes:

 

·         chairing Board, Board Nominations Committee and shareholder meetingswhen the Chairman is unable to do so; and

 

·         undertaking additional matters on the Chairman’s behalf, as requested bythe Chairman.

 

***CEO***

 

Our CEO is GailKelly. The CEO’s role includes:

 

·         effective leadership of the management team;

 

·         the development of strategicobjectives for the business; and

 

·         the day-to-day management of the Group’soperations.

 

***Board meetings***

 

The Board has 10scheduled meetings each year, with additional meetings held as required. In July eachyear the Board discusses our strategic plan and approves our overall strategicdirection. The Board also conducts a half year review of our strategy. TheBoard conducts workshops on specific subjects relevant to our businessthroughout the year. Board meetings are characterised by robust exchanges ofviews, with Directors bringing their experience and independent judgment tobear on the issues and decisions at hand.

 

Non-executiveDirectors regularly meet without management present, so that they can discussissues appropriate to such a forum. In all other respects, senior executivesare invited to participate in Board meetings. They also are available to becontacted by Directors between meetings.

 

Meetings attended byDirectors for the 2010 financial year are reported in Section 8 of the2010 Directors’ report.

 

***Nomination and appointment***

 

The BoardNominations Committee is responsible for:

 

·         developing and reviewing policies on Board composition, strategicfunction and size;

 

·         evaluating annually the performance and effectiveness of the Board, itsCommittees and individual Directors;

 

·         planning succession of the Non-executive Directors;

 

·         developing and implementing induction programs for new Directors andongoing education for existing Directors;

 

·         developing eligibility criteria for the appointment of Directors;

 

·         recommending appointment of Directors to the Board; and

 

·         considering and recommending candidates for appointment to the Boards ofrelevant subsidiaries.

 

The BoardNominations Committee assesses nominations of new Directors against a range ofcriteria including the candidate’s background, experience, professional skills,personal qualities, whether their skills and experience will complement theexisting Board and their availability to commit themselves to the Board’sactivities. External consultants are used to access a wide base of potentialDirectors.

 

New Directors receivean induction pack which includes a letter of appointment that sets out theexpectations of the role, conditions of appointment including expected term ofappointment, and remuneration. This letter conforms to the ASXCGC’sRecommendations. New Directors are also offered an induction program, detailsof which are set out on the next page.

 

The attendance ofBoard Nominations Committee members at the Committee’s meetings is set out in Section 8of the 2010 Directors’ report.

 

***Term of office***

 

The Board may appointa new Director, either to fill a casual vacancy or as an addition to theexisting Directors, provided the total number of Directors does not exceed15 Non-executive Directors and three Executive Directors. Except for theManaging Director, a Director appointed by the Board holds office only untilthe close of the next AGM but is eligible for election by shareholders at thatmeeting.

 

Our constitutionstates that, at each AGM, one-third of our Directors, and any other Directorwho has held office for three or more years since their last election, mustretire. In determining the number of Directors to retire by rotation, noaccount is to be taken of Directors holding casual vacancy positions or of theCEO. The Directors to retire by rotation are those who have been the longest inoffice. A retiring Director holds office until the conclusion of the meeting atwhich he or she retires but is eligible for re-election by shareholders at thatmeeting.

 

The Board makesrecommendations concerning the election or re-election of any Director byshareholders. In considering whether to support a candidate, the Board takesinto account the results of the Board performance evaluation conducted duringthe year. In addition to the 

 

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CORPORATE GOVERNANCE

 

relevant informationon the candidates provided to shareholders in the Notice of Meeting, thecandidates are invited to give a short presentation at the AGM.

 

The Board has aTenure Policy, which limits the maximum tenure of office that any Non-executiveDirector other than the Chairman may serve to nine years, from the date offirst election by shareholders. The maximum tenure for the Chairman is twelveyears (inclusive of any term as a Director prior to being elected as Chairman),from the date of first election by shareholders. The Board, on its initiativeand on an exceptional basis, may exercise discretion to extend the maximumterms specified above where it considers that such an extension would benefitWestpac. Such discretion will be exercised on an annual basis and the Directorconcerned will be required to stand for re-election annually.

 

***Education***

 

On appointment, allDirectors are offered an induction program appropriate to their experience tofamiliarise them with our business, strategy and any current issues before theBoard. The induction program includes meetings with the Chairman, the CEO, theBoard Committee Chairs and each Group Executive.

 

The Board encouragesDirectors to continue their education by participating in workshops heldthroughout the year, attending relevant site visits and undertaking relevantexternal education.

 

***Access to information and advice***

 

All Directors haveunrestricted access to company records and information, and receive regular detailedfinancial and operational reports from executive management. Each Director alsoenters into an access and indemnity agreement which, amongst other things,provides for access to documents for up to seven years after his or herretirement as a Director.

 

The Chairman andother Non-executive Directors regularly consult with the CEO, CFO, and othersenior executives and may consult with, and request additional informationfrom, any of our employees.

 

All Directors haveaccess to advice from the Group Executive, Counsel & Secretariat.

 

In addition theBoard collectively, and all Directors individually, have the right to seekindependent professional advice, at our expense, to help them carry out theirresponsibilities. While the Chairman’s prior approval is needed, it may not beunreasonably withheld.

 

***Company Secretaries***

 

We have two CompanySecretaries appointed by the Board. The Group Executive, Counsel &Secretariat attends Board and Committee meetings and is responsible forproviding Directors with advice on legal and corporate governance issues. TheCompany Secretary is responsible for the operation of the secretariat function,including implementing our governance framework and, in conjunction withmanagement, giving practical effect to the Board’s decisions.

 

Profiles of ourCompany Secretaries are set out in Section 1 of the 2010 Directors’report.

 

**Committees**

 

***Composition and independence***

 

Committee membersare chosen for the skills and experience they can contribute to the respectiveCommittees. All of the Committees comprise independent Non-executive Directors.The CEO is also a member of the Board Sustainability and Board TechnologyCommittees.

 

***Operation and reporting***

 

Scheduled meetingsof the Board Committees occur quarterly, with the exception of the BoardSustainability and Board Technology Committees which have scheduled meetingsthree times a year. All Committees are able to meet more frequently asnecessary. Each Committee is entitled to the resources and information itrequires and has direct access to our employees and advisers. The CEO attendsall Committee meetings, except where she has a material personal interest in amatter being considered. Senior executives and other selected employees areinvited to attend Committee meetings as required. All Directors receive allCommittee papers and can attend any Committee meeting, provided there is noconflict of interest.

 

**Performance**

 

***Board, Committees and Directors***

 

The Board undertakesongoing self-assessment as well as commissioning an annual performance reviewby an independent consultant.

 

The performancereview process conducted in 2010 included interviews by an independent assessorwith Directors and all senior executives. The review was wide-ranging, withoutputs collected and analysed and presented to the Board. The Board discussedthe results and agreed follow-up action on matters relating to Boardcomposition, process and priorities.

 

The Chairman alsodiscussed individual results with each Director and Committee Chair. The fullBoard (excluding the Chairman) reviewed the results of the performance reviewof the Chairman. These results were then privately discussed between theChairman and Deputy Chairman.

 

***Management***

 

The Board, inconjunction with its Board Remuneration Committee, is responsible for approvingthe performance objectives and measures for the CEO and other senior executivesand providing input into the evaluation of performance against theseobjectives. The Board Risk Management Committee also refers to the Board RemunerationCommittee any matters that come to its attention that are relevant with respectto remuneration policy or practices.

 

Managementperformance evaluations for the 2010 financial year are conducted following theend of the 2010 financial year.

 

There is a furtherdiscussion on performance in the Remuneration Report in the 2010 Directors’report.

 

All new seniorexecutives are provided with extensive briefing on our strategies andoperations, and the respective roles and responsibilities of the Board and seniormanagement.

 

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**Advisory Boards**

 

The Westpac Groupoperates a multi-branding strategy with each brand having its own uniqueidentity and market position. Westpac maintains an Advisory Board for BankSAthat**assists in preserving the uniqueidentity of the BankSA brand within the overall multi-brand strategy of TheWestpac Group through oversight of management reports in relation to the brandhealth and positioning of the brand.

 

**Ethical and responsible decision-making**

 

**Code of Conduct and Principles forDoing Business**

 

Our ‘Code of Conduct’sets out seven values that we believe will maintain the trust and confidenceplaced in us by our customers, shareholders, suppliers and the community atlarge. We recognise that this trust can only be retained by acting ethicallyand responsibly in all our dealings and by seeking to continually improve inall that we do. The Code of Conduct applies to all of our employees andcontractors and is supported by the Board. The seven values are that:

 

·         we act with honesty and integrity;

 

·         we respect the law and act accordingly;

 

·         we respect confidentiality and do not misuse information;

 

·         we value and maintain our professionalism;

 

·         we work as a team;

 

·         we manage conflicts of interest responsibly; and

 

·         we strive to be a good corporate citizen and achieve community respect.

 

Our ‘Principles forDoing Business’ (the Principles) set out how we aim to conduct ourselves acrossour business in the areas of:

 

·         governance and ethical practices;

 

·         employees;

 

·         customers;

 

·         environment;

 

·         community; and

 

·         suppliers.

 

The Principles arealso aligned with significant global initiatives that promote responsiblebusiness practices. Our Principles apply to all Directors and employees. Wereport our performance against them annually.

 

We also have a rangeof internal guidelines, communications and training processes and tools,including an online learning module entitled ‘Doing the Right Thing’, whichapply to and support our Code of Conduct and Principles.

 

In addition to ourCode of Conduct and Principles, we have a number of key policies to manage ourcompliance and human resource requirements. We also voluntarily subscribe to arange of external industry codes, such as the Code of Banking Practice and theElectronic Funds Transfer Code of Conduct.

 

**Code of Ethics for Senior FinanceOfficers**

 

The Code ofAccounting Practice and Financial Reporting (the Code) complements our Code ofConduct. The Code is designed to assist the CEO, CFO and other principal financialofficers in applying the highest ethical standards to the performance of theirduties and responsibilities with respect to accounting practice and financialreporting. The Code requires that those officers:

 

·         act honestly and ethically, particularly with respect to conflicts ofinterest;

 

·         provide full, fair, accurate and timely disclosure in reporting andother communications;

 

·         comply with applicable laws, rules and regulations;

 

·         promptly report violations of the Code; and

 

·         be accountable for adherence to the Code.

 

**Conflicts of interest**

 

Westpac has aconflicts of interest framework, which includes a Group policy supported bymore specific policies and guidelines aimed at recognising and managing potentialconflicts.

 

***The Board***

 

All Directors arerequired to disclose any actual or potential conflict of interest uponappointment and are required to keep these disclosures to the Board up to date.

 

Any Director with amaterial personal interest in a matter being considered by the Board mustdeclare their interest and, unless the Board resolves otherwise, may not bepresent during the boardroom discussions or vote on the relevant matter.

 

***Our employees***

 

Our employees arenot permitted to participate in activities that involve a conflict with theirduties and responsibilities or which are prejudicial to our business. We expectour employees to:

 

·         avoid conflicts of interest;

 

·         obtain consent from senior management before accepting a directorship onthe board of a non-Westpac Group company;

 

·         disclose any material interests they have with our customers orsuppliers to their manager and not be involved with customer relationshipswhere they have such an interest;

 

·         not participate in business activities outside their employment with us(whether as a principal, partner, director, agent, guarantor, investor oremployee) without approval or when it could adversely affect their ability tocarry out their duties and responsibilities; and

 

·         not solicit, accept or offer money, gifts, favours or entertainmentwhich might influence, or might appear to influence, their business judgment.

 

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CORPORATE GOVERNANCE

 

**Fit and Proper Person assessments**

 

Our Fit and ProperPolicy complies with the related APRA Prudential Standards and ASIC Guidelines.In accordance with that policy, we assess the fitness and propriety of ourDirectors and also of employees who perform specified roles. The BoardNominations Committee and the Board are responsible for assessing the mainBoard Directors and Non-executive Directors on subsidiary Boards. The Chairmanhas delegated authority from the Board to make fit and proper assessments forsenior executives. An executive Fit and Proper Committee assesses otheremployees. In all cases the individual is asked to provide a detaileddeclaration and background checks are undertaken. Assessments are performedupon appointment to the relevant position and are re-assessed annually.

 

**Concern reporting and whistleblowing**

 

Under ourWhistleblower Protection Policy, our employees are encouraged to raise anyconcerns of activities or behaviour that may be unlawful or unethical witheither management, the human resources team, the compliance team or theFinancial Crime Management business unit. Concerns may include suspectedbreaches of the Code of Conduct, the Principles and any internal policy orregulatory requirement.

 

Employees can alsoraise possible wrongdoings on an anonymous basis through either of our internalor external whistleblower reporting mechanisms; logging their report onto aninternal reporting system (Concern Online); or by telephone or email to anexternal and independent professional services firm with employees who aretrained in confidential reporting and whistleblower protection (EmployeeConcern Hotline).

 

Employees may alsochoose to involve the Whistleblower Protection Officer, who is responsible forprotecting the employee against disadvantage.

 

We investigateconcerns raised in a manner that is fair, objective and affords natural justiceto all people involved. If the investigation shows that wrongdoing hasoccurred, we are committed to changing our processes and taking action inrelation to employees who have behaved incorrectly. Where illegal conduct hasoccurred, this may involve reporting the matter to relevant authorities.

 

The concernreporting system meets all relevant Australian and New Zealand legislativerequirements, including the Australian Standard AS8004-2003 (WhistleblowerProtection Programs for Entities), in addition to our obligations under theUnited States Sarbanes-Oxley Act of 2002. The system is monitored and reviewedannually and statistics about concerns raised are reported quarterly to boththe Board Risk Management Committee and The Westpac Group Operational Risk &Compliance Committee.

 

**Securities trading**

 

Westpac Directorsand all Westpac employees are restricted from dealing in our shares and certainother financial products if they possess inside information. They are alsoprohibited from passing on inside information to others who may use thatinformation to trade in securities. In addition, Directors and any employeeswho, because of their seniority or the nature of their position, may haveaccess to material non-public information about Westpac (Prescribed Employees),are subject to further restrictions, including only trading in permittedwindows following annual and half year profit announcements.

 

The mechanisms weuse to manage and monitor our obligations include:

 

·         the insider trading provisions of our policy, which prohibits anydealing in any securities where a Director or employee has access to insideinformation that may affect the price of those securities;

 

·         the new issues provisions of our policy, which place limitations uponDirectors and employees participating in a new product issue where theirposition puts them in a real or perceived position of conflict of interest;

 

·         restrictions limiting the periods in which the Directors and PrescribedEmployees can trade in our shares or other company securities (TradingWindows);

 

·         requiring Directors and Prescribed Employees to notify their intentionto trade during those Trading Windows and confirm that they have no insideinformation;

 

·         monitoring the trading of Westpac securities by Directors and PrescribedEmployees;

 

·         maintaining a register of Prescribed Employees, which is regularlyupdated;

 

·         trades by Directors of Westpac securities are notified to ASX withinfive business days as required under the ASX Listing Rules; and

 

·         employees are forbidden to enter into hedging arrangements in relationto their unvested employee shares or securities, whether directly orindirectly.

 

**Diversity**

 

The Westpac Grouphas recently refreshed its diversity strategy and framework for our ongoingprogram of diversity initiatives. This program will focus on achieving ourvision to be one of the world’s great companies for diversity and flexibilitywhich means:

 

·         having a workforce profile that delivers competitive advantage by moreclosely reflecting the customers and the community that we serve;

 

·         having a truly inclusive workplace where every individual can shineregardless of gender, cultural identity, age, work style or approach;

 

·         leveraging the value of diversity for all our stakeholders to deliverthe best customer experience, improved financial performance and a strongercorporate reputation; and

 

·         continuing to take a leadership position on diversity practices andsetting the agenda in the external community.

 

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The critical areasof focus are women in leadership, accessibility, Indigenous employment,age and cultural diversity — all supported by market leading flexibilitypolicies and practices. To deliver on these focus areas we:

 

·         will continue to increase the proportion of women in senior leadershiproles through strengthening the talent pipeline at critical points;

 

·         have set a measurable objective to increase the proportion of women insenior management roles (over 4,000 leaders from our executive team through toour bank managers) from 33% to 40% by 2014;

 

·         will continue to provide key leadership programs and mentoring andnetworking opportunities for women to prepare and support them in their careerprogression;

 

·         will continue to assess pay equity on an annual basis;

 

·         will continue to encourage and support the application of flexibilitypolicy into practice across the business;

 

·         will continue to deliver against our commitment to the AustralianEmployment Covenant to assist Indigenous Australians to access employmentacross our brands;

 

·         will continue to deliver against our Accessibility Action Plan foremployees and customers with a disability including providing employmentopportunities for people with disabilities;

 

·         will lodge a new Accessibility Action Plan with the Australian HumanRights Commission in calendar 2010; and

 

·         will continue to listen to the needs of our employees through our annualemployee survey and specific diversity focused surveys.

 

The diversitystrategy and program of initiatives is reviewed and assessed quarterly by theGroup Diversity Council chaired by the CEO and reported to the Board.

 

**Corporate responsibility and sustainability**

 

We view sustainableand responsible business practices as important for our business and to addshareholder value. This means conducting our business in a responsible,trustworthy and ethical manner, while accepting accountability for our impactson society and the environment.

 

We are committed totransparency and fair dealing, treating employees and customers responsibly andhaving solid links with the community.

 

**Reporting**

 

We report on oursocial, ethical and environmental performance as a part of the Annual Reviewand Sustainability Report, and Annual Report and provide additional detailed informationon our website. Where appropriate, we include what we believe are the mostmaterial environmental, social and governance metrics within our financialresults announcements.

 

Our management andour reporting of sustainability aim to address the issues that we believe arethe most material for our business and stakeholders. These issues are reflectedin our business strategies and specific sustainability priorities.

 

We follow the GlobalReporting Initiative reporting framework.

 

The sustainabilitycontent of the Annual Review and Sustainability Report and the additionalreporting on our website is independently assured against the AA1000 AssuranceStandard. This assurance process not only tests the integrity of the data, butalso tests the effectiveness of our underlying systems and processes, and theextent to which corporate responsibility and sustainability policies andprocesses are embedded across our organisation.

 

In addition, weactively participate in various independent external assessments byauthoritative sustainability and governance rating organisations benchmarkingus against the highest standards of governance.

 

**Board Sustainability Committee**

 

The BoardSustainability Committee oversees and provides guidance regarding ourcommitment to operate our business ethically, responsibly and sustainably,consistent with evolving community expectations.

 

The BoardSustainability Committee:

 

·         reviews the social, environmental and ethical impacts of our policiesand practices;

 

·         oversees initiatives to enhance our sustainability;

 

·         agrees standards for our corporate responsibility and sustainabilitypolicies and practices and monitors compliance with these policies andpractices;

 

·         reviews sustainability strategies, objectives and performance includingin-depth discussions with management on specific current and emerging issues;

 

·         monitors and oversees our environmental, social, governance and othermaterial business risks (along with the Board Risk Management Committee)including the strategic and operational response to climate change; and

 

·         reviews and approves the independent assurance of our annual sustainability reporting.

 

**Financial reporting**

 

**Approach to financial reporting**

 

Our approach tofinancial reporting reflects three core principles:

 

·         that our financial reports present a true and fair view;

 

·         that our accounting methods comply with applicable accounting rules andpolicies; and

 

·         that our external auditor is independent and serves securityholderinterests.

 

The Board, through theBoard Audit Committee, monitors Australian and international developmentsrelevant to these principles and reviews our practices accordingly.

 

The Board delegatesoversight responsibility for risk management between the Board Audit Committeeand the Board Risk Management Committee.

 

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**Board Audit Committee**

 

The Board AuditCommittee oversees all matters concerning:

 

·         the integrity of the financial statements and financial reportingsystems;

 

·         the external auditor’s qualifications, performance, independence andfees;

 

·         oversight and performance of the internal audit function;

 

·         compliance with financial reporting and related regulatory requirements(in conjunction with the Board Risk Management Committee; this includes anoversight of APRA and ASIC statutory reporting requirements); and

 

·         procedures for the receipt, retention and treatment of financialcomplaints, including accounting, internal accounting controls or auditingmatters and the confidential reporting by employees of concerns regardingaccounting or auditing matters.

 

The Board AuditCommittee reviews and assesses:

 

·         any significant estimates and judgments in financial reports, andmonitors the methods used to account for unusual transactions;

 

·         the processes used to monitor and comply with laws, regulations andother requirements relating to external reporting of financial andnon-financial information;

 

·         the major financial risk exposures; and

 

·         the process surrounding the disclosures made by the CEO and CFO inconnection with their personal certifications of the annual financialstatements.

 

The Board AuditCommittee conducts regular discussions with:

 

·         the Board Risk Management Committee, CFO, CRO, Group Assurance,management and the external auditor about our major financial risk exposuresand the steps management has taken to monitor and control such exposures;

 

·         the external auditor concerning their audit and any significantfindings, and the adequacy of management’s responses;

 

·         management and the external auditor concerning the half year and annualfinancial statements;

 

·         management and the external auditor regarding any correspondence withregulators or government agencies, and reports that raise issues of a materialnature; and

 

·         the Group Executive, Counsel & Secretariat regarding any legalmatters that may have a material impact on the financial statements and/or ourcompliance with financial reporting and related regulatory policies.

 

The Board AuditCommittee meets with the external auditor without management being present ateach meeting. Periodically the Board Audit Committee meets with the GeneralManager, Group Assurance (our internal audit function) without management.

 

**Financial knowledge**

 

The Board AuditCommittee comprises nine independent, Non-executive Directors.

 

All Board AuditCommittee members have appropriate financial experience, an understanding ofthe financial services industry and satisfy the independence requirements underthe ASXCGC’s Recommendations, the United States *SecuritiesExchange Act of 1934* (as amended) and its related rules, and the rules ofthe NYSE.

 

The Board hasdetermined that Lindsay Maxsted, Chair of the Board Audit Committee, is an ‘auditcommittee financial expert’ and independent in accordance with US securitieslaw.

 

The designation ofMr Maxsted as an audit committee financial expert does not impose duties,obligations or liability on Mr Maxsted that are greater than those imposed onhim as a Board Audit Committee member, and does not affect the duties,obligations or liability of any other Board Audit Committee member or Boardmember. Audit committee financial experts are not deemed as an ‘expert’ for anyother purpose.

 

The Board AuditCommittee’s membership is set out in the table titled ‘Size and membership ofBoard Committees as at 30 September 2010’ in this statement. The fullqualifications of the Audit Committee members and their attendance at BoardAudit Committee meetings are set out in Sections 1 and 8 of the 2010 Directors’report.

 

**External auditor**

 

The role of theexternal auditor is to provide an independent opinion that our financialreports are true and fair, and comply with applicable regulations.

 

Our external auditoris PricewaterhouseCoopers (PwC), appointed by shareholders at the 2002 AGM. Ourpresent PwC lead audit partner is Ian Hammond and the review audit partner isRob Ward. Mr Hammond and Mr Ward assumed responsibility for theseroles in 2008 and 2009, respectively.

 

The external auditorreceives all Board Audit Committee papers, attends all Board Audit Committeemeetings and is available to Board Audit Committee members at any time. Theexternal auditor also attends the AGM to answer questions from shareholdersregarding the conduct of PwC’s audit, the audit report and financial statementsand PwC’s independence.

 

As our externalauditor, PwC is required to confirm their independence and compliance withspecified independence standards on a quarterly basis.

 

The roles of leadaudit partner and review audit partner must be rotated every five years andcannot be resumed by the same person for a minimum of five years.

 

We strictly governour relationship with the external auditor, including restrictions onemployment, business relationships, financial interests and use of ourfinancial products by the external auditor.

 

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**Engagement of the external auditor**

 

To avoid possible independenceor conflict issues, the external auditor is not permitted to carry out certaintypes of non-audit services for Westpac and may be limited as to the extent towhich it can perform other non-audit services as specified in our ‘Pre-approvalof engagement of PwC for audit and non-audit services’ (the Guidelines). Use ofthe external audit firm for any non-audit services must be assessed andapproved in accordance with the pre-approval process determined by the BoardAudit Committee and set out in the Guidelines.

 

The breakdown of theaggregate fees billed by the external auditor in respect of each of the twomost recent financial years for audit, audit-related, tax and other services isprovided in Note 33 to our financial statements for the year ended30 September 2010. A declaration regarding the Board’s satisfactionthat the provision of non-audit services by PwC is compatible with the generalstandards of auditor independence is provided in Section 10 of the 2010Directors’ report.

 

**Group Assurance (internal audit)**

 

Group Assuranceincludes an independent and objective internal audit review function chargedwith evaluating, testing and reporting on the adequacy and effectiveness ofmanagement’s control of operational risk. Group Assurance has access to all ofour entities, and conducts audits and reviews following a risk-based planningapproach.

 

Group Assuranceprovides regular reports to the Board Audit Committee and, as deemedappropriate, the Board Risk Management Committee, and raises any significantissues with those Committees. The General Manager, Group Assurance has areporting line to the Chairman of the Board Audit Committee.

 

**Market disclosure**

 

We maintain a levelof disclosure that provides all investors with equal, timely, balanced and meaningfulinformation. Consistent with these standards the Board approved our MarketDisclosure Policy, which governs how we communicate with our shareholders andthe investment community.

 

The policy reflectsthe requirements of the ASX, NZX and other offshore stock exchanges where wehave disclosure obligations, as well as relevant securities and corporationslegislation. Under our policy, information that a reasonable person wouldexpect to have a material effect on the price or value of our securities mustbe disclosed unless an exception applies under regulatory requirements.

 

Our DisclosureCommittee is responsible for determining what information should be disclosedpublicly under the policy, and for assisting employees in understanding whatinformation may require disclosure to the market on the basis that it is pricesensitive. The Disclosure Committee is comprised of the CEO, senior executives,and the General Manager, Corporate Affairs and Sustainability.

 

The Group Executive,Counsel & Secretariat is the Disclosure Officer. The DisclosureOfficer is ultimately responsible for all communication with relevant stockexchanges and notifying regulators in any jurisdiction as a result of marketdisclosure.

 

To supplement theinformation already available to investors, we publish on our website investordiscussion packs, containing presentations on and explanations about ourfinancial results. We also publish on our website our Annual Review andSustainability Reports, Annual Reports, profit announcements, CEO and executivebriefings (including webcasts), notices of meetings, media releases andbriefing transcripts.

 

**Shareholder communication and participation**

 

We seek to keep ourshareholders fully informed utilising a variety of communication mediums. Theseare regularly reviewed to improve our communications, including using newtechnologies. These approaches include:

 

·         direct communications with shareholders via mail and email;

 

·         the publication of all relevant company information in the InvestorCentre section of our website; and

 

·         access to all major market briefings and shareholder meetings viawebcasting and podcasting facilities.

 

Shareholders areprovided with advance notice of all major market briefings and shareholdermeetings, through ASX announcements and the publication of an investor calendarof events on our website.

 

Shareholders aregiven the option to receive information in print or electronic format.

 

We regard the AGM asan important opportunity for engaging and communicating with shareholders.Shareholders are encouraged to attend and actively participate in our AGM, theproceedings of which are webcast and can also be viewed at a later time fromour website. Shareholders who are unable to attend the AGM are able to lodgetheir proxies through a number of channels, including electronically via theinternet. At the time of receipt of the Notice of Meeting, shareholders arealso invited to put forward questions that they would like addressed at theAGM.

 

**Risk management**

 

**Roles and responsibilities**

 

The Board isresponsible for reviewing and approving our overall risk management strategy,including determining our appetite for risk. The Board has delegated to theBoard Risk Management Committee responsibility for providing recommendations tothe Board on The Westpac Group’s risk-reward strategy, setting risk appetite,approving frameworks, policies and processes for managing risk, and determiningwhether to accept risks beyond management’s approval discretion.

 

The Board RiskManagement Committee monitors the alignment of our risk profile with our riskappetite, which is defined in the Board Statement of Risk Appetite, and withour current and future capital requirements. The Board Risk ManagementCommittee receives regular reports from management on the effectiveness of ourmanagement of Westpac’s material business risks. More detail about the role ofthe Board Risk Management 

 

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Committee is set outlater in this section under ‘Board Risk Management Committee’.

 

The CEO andexecutive management team are responsible for implementing our risk managementstrategy and frameworks, and for developing policies, controls, processes andprocedures for identifying and managing risk in all of Westpac’s activities.

 

Our approach to riskmanagement is that ‘risk is everyone’s business’ and that responsibility andaccountability for risk begins with the business units that originate the risk.

 

***The 1st Line of Defence — Risk identification, risk management andself-assurance***

 

Divisional businessunits are responsible for identifying, evaluating and managing the risks thatthey originate within approved risk appetite and policies. They are required toestablish and maintain appropriate risk management resources and self-assuranceprocesses.

 

***The 2nd Line of Defence — Establishment of risk management frameworksand policies and risk management oversight***

 

Our 2nd Line ofDefence has three layers:

 

·         Our executive risk committees lead the optimisation of risk-reward byoverseeing and advising on the development of risk appetite statements, riskmanagement frameworks, policies and risk concentration controls and monitoringbusinesses’ risk profiles for alignment with approved appetites and strategies.

 

·         Our Group Risk function is independent from the business divisions,reports to the Chief Risk Officer (CRO), and establishes and maintains theGroup-wide risk management frameworks, policies and concentration limits thatare approved by the Board Risk Management Committee. It also oversees theestablishment and maintenance of Group-wide risk estimates, risk capital modelsand the adequacy and quality of reporting of risk management activities andrelated controls to senior executives, the Board and relevant Board Committees.

 

·         Divisional risk areas are responsible for developing division-specificrisk appetite statements, policies, controls, procedures, monitoring andreporting capability, which align to the Board Statement of Risk Appetite andthe risk management frameworks approved by the Board Risk Management Committee.These risk areas are independent of the Divisions’ 1st Line businessareas, with the Risk General Managers in each Division having direct reportinglines to the CRO, as well as to their Division’s Group Executive.

 

***The 3rd Line of Defence — Independent assurance***

 

Our Group Assurancefunction independently evaluates the adequacy and effectiveness of the Group’soverall risk management framework and controls.

 

Our overall riskmanagement approach is summarised in the following diagram.

 

 

Our overall riskmanagement governance structure is set out in more detail in the table ‘RiskManagement Governance Structure’ in this statement.

 

**Risk management approach**

 

We regard managingthe risks that affect our business as a fundamental activity, as they influenceour performance, reputation and future success. Effective risk managementinvolves taking an integrated and balanced approach to risk and reward, andassists us in achieving our objectives of mitigating potential loss or damageand optimising financial growth opportunities. Mitigation and optimisationstrategies are of equal importance and need to be effectively aligned andintegrated.

 

We distinguish fourmain types of risk:

 

·         credit risk — the risk of financial loss where a customer or counterparty fails tomeet their financial obligations;

 

·         liquidity risk — the risk that we will be unable to fund our assets and meetobligations as they come due, without incurring unacceptable losses;

 

·         market risk — the risk of an adverse impact on earnings resulting from changes inmarket factors, such as foreign exchange rates, interest rates, commodityprices and equity prices. This includes interest rate risk in the banking book —the risk to interest income from a mismatch between the duration of assets andliabilities that arises in the normal course of business activities; and

 

·         operational risk — the risk that arises from inadequate or failed internal processes,people and systems or from external events. This includes compliance risk, therisk of legal or regulatory sanction, and the financial or reputation lossarising from our failure to abide by the standards required of us as afinancial services group.

 

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In addition to, andlinked to, these four main types of risk, we also manage the following risks:

 

·         business risk - the risk associated with the vulnerability of a line of business tochanges in the business environment;

 

·         environmental, social and governance risks — the risk that Westpac damages its reputation orfinancial performance due to failure to recognise or address material existingor emerging sustainability-related environmental, social or governance issues;

 

·         equity risk — the potential for financial loss arising from movements in the valueof our direct and indirect equity investments;

 

·         insurance risk — the risk of not being able to meet insurance claims (related toinsurance subsidiaries);

 

·         model risk — the risk of financial, reputation or operational losses arisingbecause of inadequacies of a model;

 

·         outsourcing risk — the risk of The Westpac Group being unable to carry on criticalbusiness activities as a result of the failure of an external supplier orservice provider, or that such failure in turn triggers material concerns inanother key risk area;

 

·         related entity (contagion) risk — the risk that problems arising in other WestpacGroup members compromise the financial and operational position of theauthorised deposit-taking institution in The Westpac Group; and

 

·         reputation risk — the risk to earnings or capital arising from negative public opinionresulting from the loss of reputation or public trust and standing.

 

In December 2007Westpac received advanced accreditation from APRA and the Reserve Bank ofNew Zealand under the Basel II capital framework. This allows us to usethe Advanced Internal Ratings Based (AIRB) approach for credit risk and theAdvanced Measurement Approach (AMA) for operational risk to determine ourregulatory capital position. We received accreditation for interest rate riskin the banking book capital calculation in July 2008, in accordance withAPRA’s implementation timetable. In May 2010, APRA extended theseapprovals to include the St.George portfolio, effective from30 June 2010.

 

**Board Risk Management Committee**

 

The Board RiskManagement Committee:

 

·         provides recommendations to the Board on TheWestpac Group’s risk-reward strategy;

 

·         sets risk appetite;

 

·         reviews and approves the frameworks for managingrisk, including credit, operational, market, liquidity, capital and reputationrisk;

 

·         reviews and approves the limits and conditions thatapply to the taking of risk, including the authority delegated by the Board tothe CEO, CFO and CRO;

 

·         monitors the risk profile, performance, capitallevels, exposures against limits and the management and control of our risks;

 

·         monitors changes anticipated in the economic andbusiness environment and other factors considered relevant to our risk profileand risk appetite;

 

·         oversees the development and ongoing review of keypolicies that support our frameworks for managing risk; and

 

·         may approve accepting risks beyond management’sapproval discretion.

 

From the perspectiveof specific types of risk, the Board Risk Management Committee’s role includes:

 

·         credit risk — approving key policies and limitssupporting the credit risk management framework; and monitoring the riskprofile, performance and management of our credit portfolio;

 

·         liquidity risk — approving the internal liquidityassessment process, key policies and limits supporting the liquidity riskmanagement framework including our funding strategy and liquidity requirements;and monitoring the liquidity risk profile;

 

·         market risk — approving key policies and limitssupporting the market risk management framework including the Value at Risk andNet Interest Income at Risk limits, and monitoring the market risk profile; and

 

·         operational risk — monitoring the operational riskprofile, the performance of operational risk management and controls, and thedevelopment and ongoing review of operational risk policies; reviewingcompliance risk processes and our compliance with applicable laws, regulationsand regulatory requirements; discussing with management and the externalauditor any material correspondence with regulators or government agencies andany published reports that raise material issues; and reviewing complaints andwhistleblower concerns.

 

The Board RiskManagement Committee also:

 

·         approves the internal capital adequacy assessmentprocess and in doing so reviews the outcomes of enterprise-wide stress testing;

 

·         monitors capital levels for consistency withThe Westpac Group’s risk appetite and sets the target capital ranges forregulatory capital having regard to internal economic capital measures;

 

·         provides relevant periodic assurances to and refersany relevant matters to the Board Audit Committee;

 

·         refers to the Board Remuneration Committeeany matters that come to its attention that are relevant with respect to riskand risk management which the Board Risk Management Committee considers arerelevant for consideration in respect of remuneration structure or remunerationoutcomes; and

 

·         refers to other Board Committees any mattersthat come to the attention of the Board Risk Management Committee that arerelevant for those respective Board Committees.

 

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**Managing compliance risk**

 

Westpac’sOperational Risk Management Framework incorporates our Managing Compliance RiskPolicy and reflects the following core principles and practices:

 

·         compliance is about our responsibilities as employees, our culture, andthe systems and processes we use every day;

 

·         complying with both the letter and spirit of regulatory standards is anessential part of our core values and is critical to our success as a leadingAustralian financial services organisation;

 

·         ensuring that the letter and spirit of regulatory standards are embeddedinto how we do business, how we conduct ourselves, how our systems andprocesses are designed and how they operate;

 

·         compliance with regulatory standards is the responsibility of everyonein every part of Westpac. Visibility and accountability of senior managementencourages a strong compliance culture;

 

·         the role of the compliance function is to guide the organisation inembedding compliance into how we do business; and

 

·         actively engaging with regulatory bodies and industry forums to maintainhigh standards across the industry.

 

Key components ofthe framework established to support these principles include:

 

·         governance environment — Board and management oversight and accountability,culture and independent review;

 

·         identification — identifying obligations, risks, developing and maintaining complianceplans and implementing change;

 

·         controls and documentation — policies, processes, procedures, communication,training and documentation; and

 

·         monitoring and reporting — monitoring, incident and breach escalation,reporting, issue management and managing regulatory relationships.

 

As with other formsof risk, business line management is primarily responsible for managingcompliance risk. Within each major business area there is a dedicatedoperational risk and compliance function designed to guide compliance withinthat business. Group management oversight is provided by the Group OperationalRisk and Compliance Committee, which establishes the compliance framework andpolicies, and oversees compliance effectiveness across the Group. GroupOperational Risk and Compliance is responsible for the administration of that framework.Within Group Operational Risk and Compliance a regulatory affairs functionexists which manages relationships with regulators as well as the framework forour response to new regulatory developments.

 

Our Compliancefunction provides the following support:

 

·         infrastructure to facilitate compliance planning and reporting;

 

·         specialist advice to divisions in implementing regulatory initiativesand policies, and establishing compliance programs;

 

·         analytical tools and advice for independent oversight of areas ofstrategic compliance risk; and

 

·         reports on potential weaknesses across the enterprise.

 

We measure theeffectiveness of our compliance program by the mechanisms set out in theOperational Risk Management Framework, including audit, file reviews, randomchecks, customer surveys and operational risk assessments.

 

Regular reports areprovided to the Board Risk Management Committee on the status of complianceacross the Group.

 

**CEO and CFO assurance**

 

The Board receivesregular reports from management about our financial condition and operationalresults, as well as that of our controlled entities. The CEO and the CFOannually provide formal statements to the Board, and have done so for the yearended 30 September 2010, that state in all material respects:

 

·         Westpac’s financial records for the financial year have been properlymaintained in that they:

 

·         correctly record and explain its transactions, andfinancial position and performance;

 

·         enable true and fair financial statements to beprepared and audited; and

 

·         are retained for seven years after the transactionscovered by the records are completed;

 

·         the financial statements and notes required by the accounting standardsfor the financial year comply with the accounting standards;

 

·         the financial statements and notes for the financial year give a trueand fair view of Westpac’s and its consolidated entities’ financial positionand of their performance;

 

·         any other matters that are prescribed by the Corporations Act andregulations as they relate to the financial statements and notes for thefinancial year are satisfied; and

 

·         the declarations provided in accordance with section 295A of theCorporations Act are founded on a sound system of risk management and internalcontrol, and that the system is operating effectively in all material respectsin relation to financial reporting risks.

 

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**Remuneration**

 

The BoardRemuneration Committee assists the Board by ensuring that Westpac has coherentremuneration policies and practices that fairly and responsibly rewardindividuals having regard to performance, Westpac’s risk management framework,the law and the highest standards of governance.

 

The BoardRemuneration Committee members are all independent Directors. All members ofthe Board Remuneration Committee are also members of the Board Risk ManagementCommittee, which assists in the integration of effective risk management intothe remuneration framework.

 

The BoardRemuneration Committee:

 

·         reviews and makes recommendations to the Board in relation to TheWestpac Group Remuneration Policy (Group Remuneration Policy) and assesses theGroup Remuneration Policy’s effectiveness and its compliance with prudentialstandards;

 

·         reviews and makes recommendations to the Board in relation to theindividual remuneration levels of the CEO, Non-executive Directors, GroupExecutives, other executives who report directly to the CEO, other personswhose activities in the Board’s opinion affect the financial soundness ofWestpac, any person specified by APRA, and any other person the Boarddetermines;

 

·         reviews and makes recommendations to the Board in relation to theremuneration structures for each category of persons covered by the GroupRemuneration Policy;

 

·         reviews and makes recommendations to the Board on corporate goals andobjectives relevant to the remuneration of the CEO, and the performance of theCEO in light of these objectives;

 

·         reviews and makes recommendations to the Board on the short-termincentive plans for Group Executives;

 

·         oversees succession planning for Group Executives and other seniorexecutives;

 

·         reviews and makes recommendations to the Board in relation to approvingany and all equity-based plans; and

 

·         oversees general remuneration practices across the Group.

 

The BoardRemuneration Committee reviews and recommends to the Board annually the size ofvariable reward pools based on consideration of pre-determined businessperformance indicators and the financial soundness of Westpac. The BoardRemuneration Committee also approves remuneration arrangements outside of the GroupRemuneration Policy relating to individuals or groups of individuals which aresignificant because of their sensitivity, precedent or disclosure implications.

 

In addition, theBoard Remuneration Committee considers and evaluates the performance of seniorexecutives when making remuneration determinations and otherwise as required.

 

Independentremuneration consultants are engaged by the Board Remuneration Committee toensure that our reward practices and levels are consistent with marketpractice.

 

The attendance ofBoard Remuneration Committee members at the Committee’s meetings is set out in Section 8of the 2010 Directors’ report.

 

Further details ofour remuneration framework are included in the Remuneration Report in Section 9of the 2010 Directors’ report.

 

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CORPORATE GOVERNANCE

 

**Risk Management GovernanceStructure**

 

Westpac’s riskmanagement governance structure is set out in the table below:

 
| **Board**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ·   reviews and approves our  overall risk management strategy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Board  Risk Management Committee (BRMC)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ·   provides recommendations  to the Board on The Westpac Group’s risk-reward strategy;

·   sets risk appetite;

·   approves frameworks and  key policies for managing risk;

·   monitors our risk  profile, performance, capital levels, exposures against limits and management  and control of our risks;

·   monitors changes  anticipated in the economic and business environment and other factors  relevant to our risk profile;

·   oversees the development  and ongoing review of key policies that support our frameworks for managing risk;  and

·   determines whether to  accept risks beyond the approval discretion provided to management.                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Other  Board Committees with a risk focus**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *Board Audit Committee*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | *Board Sustainability Committee* |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** |
| ·   oversees the integrity of  financial statements and financial reporting systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ·   oversees environmental,  social, governance and ethical performance and issues. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| *Board Technology Committee*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | *Board Remuneration Committee* |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** |
| ·   oversees information  technology strategy and implementation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ·   reviews any matters  raised by the BRMC with respect to   risk-adjusted remuneration. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| **Executive  Team**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ·   executes the  Board-approved strategy;

·   assists with the  development of the Board Statement of Risk Appetite;

·   delivers the Group’s  various strategic and performance goals within the approved risk appetite;  and

·   monitors key risks within  each business unit, capital adequacy and the Group’s reputation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Executive  risk committees**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *Westpac Group Credit Risk Committee (CREDCO)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | *Westpac Group Operational Risk & Compliance  Committee (OPCO)* |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** |
| ·   leads the optimisation of  credit risk-reward across the Group;

·   oversees the credit risk  management framework and key policies;

·   oversees our credit risk  profile; and

·   identifies emerging  credit risks and appropriate actions to address these.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ·   leads the optimisation of  operational risk-reward across the Group;

·   oversees the operational  risk management framework and key supporting policies;

·   oversees our operational  risk profile; and

·   identifies emerging  operational risks and appropriate actions to address these. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| *Westpac Group Asset & Liability  Committee (ALCO)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | *Westpac Group Market Risk Committee (MARCO)* |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** |
| ·   leads the optimisation of  funding and liquidity risk-reward across the Group;

·   oversees the liquidity  risk management framework and key policies;

·   oversees the funding and  liquidity risk profile; and

·   identifies emerging  funding & liquidity risks and appropriate actions to address these.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ·   leads the optimisation of  market risk-reward across the Group;

·   oversees the market risk  management framework and key policies;

·   oversees our market risk  profile; and

·   identifies emerging  market risks and appropriate actions to address these. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| *Westpac Group Remuneration Oversight Committee  (ROC)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | * * |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** |
| ·   leads the optimisation of  risk-adjusted remuneration across the Group;

·   oversees the Group  Remuneration Policy and provides assurance to the CEO and Board Remuneration  Committee that remuneration arrangements across the Group encourage behaviour  that supports Westpac’s long-term financial soundness and the risk management  framework;

·   oversees the remuneration  arrangements (other than for Group Executives) for Responsible Persons (as  defined in the Group’s Fit and Proper Policy), risk and financial control  personnel, and all other employees for whom a significant portion of total  remuneration is based on performance and whose activities, either  individually or collectively, may affect the financial soundness of Westpac;  and

·   oversees the criteria and  rationale for determining the total quantum of the Group variable reward  pool. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Group  and divisional risk management**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *Group  Risk*

 

·   develops the Group-level  risk management frameworks for approval by the BRMC;

·   directs the review and  development of key policies supporting the risk management frameworks;

·   establishes risk  concentration limits and monitors risk concentrations; and

·   monitors compliance,  regulatory obligations and emerging risk issues.

 

*Divisional  risk management*

 

·   develops  division-specific policies, controls, procedures, and monitoring and  reporting capability that align to the frameworks approved by the BRMC.                                                                                                                                                                                                                                                                                                        |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Independent  internal review**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *Group  Assurance*

 

·   reviews the adequacy and  effectiveness of management controls for risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

33

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**Checklist of Westpac’s compliancewith ASXCGC’s Recommendations**

 
| ** **        | ** ** | **ASXCGC’s Recommendations published in August 2007**                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Reference**     | ** ** | **Compliance** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **     |
| **Principle  1:** | ** ** | **Lay  solid foundations for management and oversight**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** **        | ** ** | ** **     |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **     |
| 1.1               |       | Establish the  functions reserved to the Board and those delegated to senior executives and  disclose those functions.                                                                                                                                                                                                                                                                                                                                                                                                                     |       | Page 20      |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 1.2               |       | Disclose the  process for evaluating the performance of senior executives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | Page 23      |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 1.3               |       | Provide the  information indicated in *Guide to reporting on  Principle 1*.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | Pages 20, 23 |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| **Principle  2:** | ** ** | **Structure  the Board to add value**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **        | ** ** | ** **     |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **     |
| 2.1               |       | A majority of the  Board should be independent Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | Pages 20, 21 |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 2.2               |       | The chair should  be an independent Director.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | Page 22      |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 2.3               |       | The roles of chair  and chief executive officer should not be exercised by the same individual.                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | Page 22      |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 2.4               |       | The Board should  establish a nomination committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | Page 22      |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 2.5               |       | Disclose the  process for evaluating the performance of the Board, its committees and  individual Directors.                                                                                                                                                                                                                                                                                                                                                                                                                               |       | Page 23      |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 2.6               |       | Provide the  information indicated in *Guide to reporting on  Principle 2*.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | Pages 20-23  |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| **Principle  3:** | ** ** | **Promote  ethical and responsible decision-making**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **        | ** ** | ** **     |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **     |
| 3.1               | ** ** | Establish a code  of conduct and disclose the code or a summary of the code as to:

 

3.1.1     the practices necessary to maintain  confidence in the company’s integrity

 

3.1.2     the practices necessary to take into  account their legal obligations and the reasonable expectations of their  stakeholders

 

3.1.3     the responsibility and accountability of  individuals for reporting and investigating reports of unethical practices. | ** ** | Page 24      | ** ** | Comply         |
|              | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** |              | ** ** |           |
| 3.2               |       | Establish a policy  concerning trading in company securities by Directors, senior executives and  employees, and disclose the policy or a summary of that policy.                                                                                                                                                                                                                                                                                                                                                                          |       | Page 25      |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 3.3               |       | Provide the  information indicated in *Guide to reporting on  Principle 3*.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | Pages 24-25  |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| **Principle  4:** | ** ** | **Safeguard  integrity in financial reporting**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **     |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **     |
| 4.1               |       | The Board should  establish an audit committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | Page 27      |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 4.2               |       | Structure the  audit committee so that it:

 

·    consists only of Non-executive Directors;

 

·    consists of a majority of independent  Directors;

 

·    is chaired by an independent chair, who is  not chair of the Board; and

 

·    has at least three members.                                                                                                                                                         |       | Pages 21, 27 |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 4.3               |       | The audit  committee should have a formal charter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | Page 27      |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 4.4               |       | Provide the  information indicated in *Guide to reporting on  Principle 4*.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | Pages 21, 27 |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| **Principle  5:** | ** ** | **Make  timely and balanced disclosure**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | ** **        | ** ** | ** **     |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **     |
| 5.1               |       | Establish written  policies designed to ensure compliance with ASX Listing Rule disclosure  requirements and to ensure accountability at a senior executive level for  that compliance and disclose those policies or a summary of those policies.                                                                                                                                                                                                                                                                                    |       | Page 28      |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |           |
| 5.2               |       | Provide the  information indicated in *Guide to reporting on  Principle 5*.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | Page 28      |       | Comply         |

 

34

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| ** **        | ** ** | **ASXCGC’s Recommendations published in August 2007**                                                                                                                                                                                                                                                                                                                                                           | ** ** | **Reference**          | ** ** | **Compliance** |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------|
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** **             | ** ** | ** **     |
| **Principle  6:** | ** ** | **Respect  the rights of shareholders**                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **             | ** ** | ** **     |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                   |       |           |
| 6.1               |       | Design a  communications policy for promoting effective communication with shareholders  and encouraging their participation at general meetings and disclose their  policy or a summary of that policy.                                                                                                                                                                                                                                      |       | Page 28           |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                   |       |           |
| 6.2               |       | Provide the  information indicated in *Guide to reporting on  Principle 6*.                                                                                                                                                                                                                                                                                                                                                                   |       | Page 28           |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                   |       |           |
| **Principle  7:** | ** ** | **Recognise  and manage risk**                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** **             | ** ** | ** **     |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** **             | ** ** | ** **     |
| 7.1               |       | Establish policies  for the oversight and management of material business risks and disclose a  summary of those policies.                                                                                                                                                                                                                                                                                                                    |       | Pages 28-31,  33  |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                   |       |           |
| 7.2               |       | The Board should  require management to design and implement the risk management and internal  control system to manage the company’s material business risks and report to  it on whether those risks are being managed effectively. The Board should  disclose that management has reported to it as to the effectiveness of the  company’s management of its material business risks.                                       |       | Pages 28-31,  33  |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                   |       |           |
| 7.3               |       | The Board should  disclose whether it has received assurance from the chief executive officer  (or equivalent) and the chief financial officer (or equivalent) that the  declaration provided in accordance with section 295A of the Corporations Act  is founded on a sound system of risk management and internal control and that  the system is operating effectively in all material respects in relation to  financial reporting risks. |       | Page 31           |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                   |       |           |
| 7.4               |       | Provide the  information indicated in *Guide to reporting on  Principle 7*.                                                                                                                                                                                                                                                                                                                                                                   |       | Pages 28-31,  33  |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                   |       |           |
| **Principle  8:** | ** ** | **Remunerate  fairly and responsibly**                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | ** **             | ** ** | ** **     |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** **             | ** ** | ** **     |
| 8.1               |       | Establish a  remuneration Committee.                                                                                                                                                                                                                                                                                                                                                                                                          |       | Page 32           |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                   |       |           |
| 8.2               |       | Clearly  distinguish the structure of Non-executive Directors’ remuneration from that  of executive Directors and senior executives.                                                                                                                                                                                                                                                                                                     |       | Page 32           |       | Comply         |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                   |       |           |
| 8.3               |       | Provide the  information indicated in *Guide to reporting on  Principle 8*.                                                                                                                                                                                                                                                                                                                                                                   |       | Pages 21, 25,  32 |       | Comply         |

 

35

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DIRECTORS’ REPORT

 

Our Directorspresent their report together with the financial statements of the Group forthe financial year ended 30 September 2010.

 

**1. Directors**

 

The names of thepersons who have been Directors, or appointed as Directors, during the periodsince 1 October 2009 and up to the date of this report are: Edward(Ted) Alfred Evans, Gail Patricia Kelly, John Simon Curtis, Elizabeth BlomfieldBryan, Gordon McKellar Cairns, Peter John Oswin Hawkins, Carolyn Judith Hewson,Lindsay Philip Maxsted, Graham John Reaney and Peter David Wilson.

 

Particulars of theskills, experience, expertise and responsibilities of the Directors at the dateof this report, including all directorships of other listed companies held by aDirector at any time in the past three years immediately before30 September 2010 and the period for which each Directorship has beenheld, are set out below.

 

 

**Name:******TedEvans AC,

BEcon (Hons.)

** **

**Age:** 69

** **

**Term of office:** Director since November 2001. Chairmansince April 2007.

** **

**Date of next scheduledre-election:**December 2012.

 

**Independent:**Yes.

 

**Current directorships of listed entities and datesof office:**Navitas Limited (since November 2004).

 

**Other principal directorships:**Nil.

 

**Other interests:**Member of the Asia Pacific Regional AdvisoryGroup of the International Monetary Fund.

 

**Other Westpac related entities directorships anddates of office:**Nil.

 

**Skills, experience and expertise:**Ted has extensiveexperience in the financial sector, having joined the Australian Treasury in 1969.From 1984 to 1989 he held the position of Deputy Secretary and was Secretary tothe Treasury from 1993 to 2001. From 1976 to 1979 he was a member of theAustralian Permanent Delegation to the OECD in Paris and, from 1989 to 1993,Executive Director on the Board of the International Monetary Fund,representing Australia and a number of other countries, mainly in the AsiaPacific region. He was a Director of the Reserve Bank of Australia from 1993 to2001 and the Commonwealth Bank of Australia from 1993 to 1996.

 

**Westpac Board Committee membership:**Chairman of the NominationsCommittee. Member of each of the Audit, Risk Management and TechnologyCommittees.

 

**Directorships of otherlisted entities over the past three years and dates of office:**Nil.

 

 

**Name:******GailKelly, 

HigherDipEd, BA, MBAwith Distinction, HonDBus

 

**Age:** 54

 

**Term of office:** Managing Director & Chief ExecutiveOfficer since February 2008.

 

**Date of next scheduledre-election:** Not applicable.

 

**Independent:******No.

 

**Current directorships of listed entities and datesof office:**Nil.

 

**Other principal directorships:** The Melbourne BusinessSchool Limited and the Financial Markets Foundation for Children.

 

**Other interests:**Member of the Financial Services AdvisoryCouncil and Director of the Australian Bankers’ Association.

 

**Other Westpac related entities directorships anddates of office:**Director of St.GeorgeBank Limited (December 2008 — March 2010). Director of Westpac NewZealand Limited (February 2008 — February 2010).

 

**Skills, experience and expertise:**Immediately prior to her appointment at Westpac, Gail served as ChiefExecutive Officer & Managing Director of St.George Bank Limited fromJanuary 2002 to August 2007. Between October 1997 andDecember 2001, Gail was employed at the Commonwealth Bank of Australia,firstly as General Manager, Strategic Marketing, and later as Head of CustomerService Division and a member of the bank’s Executive Committee. Gail began her career atNedcor Bank, one of the largest banks in South Africa, where she held variousGeneral Manager positions, including HR, cards and personal banking.

 

**Westpac Board Committee membership:**Member of each of theSustainability and Technology Committees.

 

**Directorships of otherlisted entities over the past three years and dates of office:** St.George Bank Limited(December 2008 - September 2009). St.George Bank Limited remained alisted entity when it became a subsidiary of Westpac in December 2008. Itwas delisted in September 2009.

 

36

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DIRECTORS’ REPORT

 

 

**Name:******JohnCurtis AM,

BA, LLB (Hons.)

 

**Age:** 60

 

**Term of office:** Director and Deputy Chairman sinceDecember 2008.

 

**Date of next scheduledre-election:**December 2011.

 

**Independent:**Yes.

 

**Current directorships of listed entities and datesof office:**Nil.

 

**Other principal directorships:**Chairman of each of AllianzAustralia Limited, Landis+Gyr Holdings AG and the University of TechnologySydney Faculty of Business Executive Council.

 

**Other interests:**Nil.

 

**Other Westpac related entities directorships:**Chairman of St.George Bank Limited (December 2008 — February 2010).

 

**Skills, experience and expertise:**For the past 23 years Johnhas been a professional company director and has been Chairman and Director ofa wide variety of public companies, government entities and foreigncorporations. In more recent times he has been largely involved in thefinancial services sector with his current appointments as set out above andformer appointments with Merrill Lynch, Perpetual Limited and First DataCorporation in Australia. Prior to 1987 John was a director of WormaldInternational Limited and was responsible for its operations in Australia,Europe, Asia and the Americas. During part of that time he was Chairman of theNational Building and Construction Council, the peak industry body.

 

**Westpac Board Committee membership:**Member of each of the Audit, Nominations, Risk Management andRemuneration Committees.

 

**Directorships of otherlisted entities over the past three years and dates of office:**St.George Bank Limited(October 1997 — September 2009).****St.George BankLimited remained a listed entity when it became a subsidiary of Westpac inDecember 2008. It was delisted in September 2009.

 

 

**Name:**Elizabeth Bryan,

BA (Econ.), MA(Econ.)

 

**Age:** 64

 

**Term of office:******Director since November 2006.

 

**Date of next scheduledre-election:**December 2010.

 

**Independent:******Yes.

 

**Current directorships of listed entities and datesof office:**Director of Caltex Australia Limited (since July 2002, Chairmansince October 2007).

 

**Other principal directorships:**Australian Institute ofCompany Directors and Chairman of UniSuper Limited.

 

**Other interests:**Nil.

 

**Other Westpac related entities directorships anddates of office:** Director of Westpac New Zealand Limited(March 2007 — October 2010).

 

**Skills, experience and expertise:**Elizabeth has over 30 yearsexperience in the financial services industry, government policy andadministration and on the boards of companies and statutory organisations.Prior to becoming a professional director she served for six years as ManagingDirector of Deutsche Asset Management and its predecessor organisation, NSWState Superannuation Investment and Management Corporation.

 

**Westpac Board Committee membership:** Chairman of the TechnologyCommittee. Member of each of the Audit, Risk Management and NominationsCommittees.

 

**Directorships of otherlisted entities over the past three years and dates of office:**Ridley Corporation Limited(September 2001 — October 2007).

 

 

**Name:** Gordon Cairns,

MA (Hons.)

 

**Age:** 60

 

**Term of office:******Director since July 2004.

 

**Date of next scheduledre-election:**December 2012.

 

**Independent:** Yes.

 

**Current directorships of listed entities and datesof office:**Origin Energy Limited (since June 2007).

 

**Other principal directorships:** Centre for IndependentStudies and World Education Australia Limited. Chairman of Rebel Sport Limitedand Director of Rebel Group Companies and Chairman of Origin Foundation.

 

**Other interests:** Senior Advisor to each ofMcKinsey & Company and Greenhill Caliburn.

 

**Other Westpac related entities directorships anddates of office:**Nil.

 

**Skills, experience and expertise:**Gordon has extensiveAustralian and international experience as a senior executive, most recently asCEO of Lion Nathan Limited. Gordon has also held a wide range of seniormanagement positions in marketing and finance with PepsiCo, Cadbury Schweppesand Nestlé (Spillers).

 

**Westpac Board Committee membership:** Chairman of theRemuneration Committee. Member of each of the Audit, Risk Management andNominations Committees.

 

**Directorships of otherlisted entities over the past three years and dates of office:** Nil

 

37

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**Name:******PeterHawkins, BCA (Hons.) SFFin, FAIM ACA (NZ), FAICD

 

**Age:** 56

 

**Term of office:** Director since December 2008.

 

**Date of next scheduledre-election:**December 2010.

 

**Independent:**Yes.

 

**Current directorships of listed entities and datesof office:**Mirvac Limited Group (since January 2006). Visa Inc. (sinceOctober 2007, listed in the US).

 

**Other principal directorships:**Liberty Financial PtyLimited, Treasury Corporation of Victoria, Murray Goulburn Co-operative Co.Limited, Clayton Utz and the Camberwell Grammar School.

 

**Other interests:**Nil.

 

**Other Westpac related entities directorships anddates of office:**Director of St.George Bank Limited(December 2008 — February 2010).

 

**Skills, experience and expertise:**Peter’s career in thebanking and financial services industry spans over 38 years in Australia andoverseas at both the highest levels of management and directorship of majororganisations. Peter has held various senior management and directorshippositions with Australia and New Zealand Banking Group Limited from 1971 to2005, and was also a Director of BHP (NZ) Steel Limited from 1990 to1991, ING Australia Limited from 2002 to 2005 and Esanda FinanceCorporation from 2002 to 2005.

 

**Westpac Board Committee membership:**Member of each of the Audit, Risk Management and Technology Committees.

 

**Directorships of otherlisted entities over the past three years and dates of office:**St.George Bank Limited.(April 2007 — September 2009). St.George Bank Limited remained alisted entity when it became a subsidiary of Westpac in December 2008. Itwas delisted in September 2009.

 

 

**Name:** Carolyn Hewson AO, BEc (Hons.), MA (Econ.)

 

**Age:** 55

 

**Term of office:**Director since February 2003.

 

**Date of next scheduledre-election:** December 2010.

 

**Independent:** Yes.

 

**Current directorships of listed entities and datesof office:**Stockland Corporation Limited (since March 2009). BHP BillitonLimited (since March 2010). BT Investment Management Limited (sinceSeptember 2007).

 

**Other principaldirectorships:**The Australian Charities Fund.

 

**Other interests:**Nil

 

**Other Westpac relatedentities directorships and dates of office:**Director of BT Investment Management Limited(since September 2007).

 

**Skills, experience and expertise:**Carolyn has over26 years’ experience in the finance sector and was an Executive Directorof Schroders Australia Limited between 1989 and 1995.

 

**Westpac Board Committee membership:** Chairman of the RiskManagement Committee. Member of each of the Audit, Nominations and RemunerationCommittees.

 

**Directorships of other listed entities over thepast three years and dates of office:** AGL Energy Limited (October 2006 —March 2009).

 

 

**Name:** Lindsay Maxsted, DipBus (Gordon), FCA

 

**Age:** 56

 

**Term of office:** Director sinceMarch 2008.

 

**Date of next scheduledre-election:** December 2011.

 

**Independent:** Yes.

 

**Current directorships oflisted entities and dates of office:** Director of Transurban Group (sinceMarch 2008, Chairman since August 2010).

 

**Other principaldirectorships:**Managing Director of Align Capital Pty Ltd andDirector of Baker IDI Heart & Diabetes Institute Holdings Limited.

 

**Otherinterests:**Nil.

 

**Other Westpac related entities directorships andperiod of office:**Director of St.George Bank Limited(December 2008 — February 2010).

 

**Skills,experience and expertise:**Lindsaywas the CEO of KPMG from January 2001 to December 2007 and was apartner of KPMG from July 1984 to February 2008. Lindsay’s principalarea of practice prior to his becoming CEO was in the Corporate Recovery fieldmanaging a number of Australia’s largest insolvency/ workout/turnaroundengagements. At the request of the Victorian State Government, Lindsay wasappointed to the Board of the Public Transport Corporation in December 1995 andwas Chairman from 1997 to 2001.

 

**Westpac Board Committee membership:**Chairman of the AuditCommittee. Member of each of the Risk Management and Nominations Committees.

 

**Directorships of other listed entities over thepast three years and dates of office:**St.George Bank Limited (December 2008 —September 2009). St.George Bank Limited remained a listed entity when itbecame a subsidiary of Westpac in December 2008. It was delisted inSeptember 2009.

 

38

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DIRECTORS’ REPORT

 

 

**Name:******GrahamReaney,

BComm, CPA

 

**Age:** 67

 

**Term of office:** Director since December 2008.

 

**Date of next scheduledre-election:**December 2011.

 

**Independent:**Yes.

 

**Current directorships of listed entities and datesof office:**Chairman of PMP Limited (since September 2002).

 

**Other principaldirectorships:**Holcim Finance (Australia) Pty Limited.

 

**Otherinterests:**Nil.

 

**Other Westpac related entities directorships anddates of office:**Member of the BankSAAdvisory Board (since December 2008).

 

**Skills,experience and expertise:**Graham’s business experience spans 31 years, duringwhich time he has held a number of senior corporate appointments, including asManaging Director of National Foods Limited. Other former positions includeManaging Director of Industrial Equity Limited. Graham has gained extensiveexperience both in Australia and overseas in a broad range of industries, includingmining and mining services, energy, food, rural, fast moving consumer goods andfinancial services.

 

**Westpac Board Committee membership:**Member of each of the Audit, Risk Management and SustainabilityCommittees.

 

**Directorships of other listed entities over thepast three years and dates of office:**St.George Bank Limited (November 1996 —November 2008). AGL Energy Limited (July 2006 — October 2009).

 

 

**Name:******PeterWilson, CA

 

**Term of office:**Director since October 2003.

 

**Age:** 69

 

**Date of next scheduledre-election:**December 2012.

 

**Independent:** Yes.

 

**Current directorships of listed entities and datesof office:**The Colonial Motor Company Limited (since July 1998, listed in NZ).Chairman of Kermadec Property Fund Limited (since October 2006, listed inNZ).

 

**Other principal directorships:**P F Olsen Limited andFarmlands Trading Society Limited.

 

**Other interests:**Member of the New Zealand MarketsDisciplinary Tribunal and Chairman of the Special Division of that Tribunal.

 

**Other Westpac related entities directorships anddates of office:** Director of Westpac New Zealand Limited(since September 2006, Chairman since January 2008).

 

**Skills,experience and expertise:**Peter is a chartered accountant and formerly apartner with Ernst & Young, with extensive experience in banking,business establishment, problem resolution, asset sale and management of changefunctions. Peter was a Director and (from 1991) Chairman of Trust Bank NewZealand Limited which Westpac acquired in 1996.

 

**Westpac Board Committee membership:**Chairman of theSustainability Committee. Member of each of the Audit, Risk Management andNominations Committees.

 

**Directorshipsof other listed entities over the past three years and dates of office:** Nil.

 

**Company Secretary**

 

Our CompanySecretaries as at 30 September 2010 were John Arthur and Rebecca Farrell.

 

John Arthur (LLB(Hons.)) was appointed to his role of Group Executive, Counsel &Secretariat and a Company Secretary of Westpac on 1 December 2008.Prior to the appointment, John was Managing Director & Chief Executiveof Investa Property Group until 2007. Previously, John has been a partnerat Freehills and Group General Counsel of Lend Lease Limited. He alsoserved as Chairman of legal firm Gilbert + Tobin and has had a distinguishedcareer as legal partner, corporate executive and Non-executive Director.

 

Rebecca Farrell (BA,LLB (Hons.)) joined Westpac in 2009. Rebecca started her career as atransactional lawyer at Mallesons Stephen Jaques and subsequently worked in NewYork for a number of years. Upon returning from the US, Rebecca joinedFreehills, where she provided advisory services to ASX listed companiesconcerning governance, board performance, capital management, executiveremuneration, and ASX Listing Rules and Corporations Act compliance. Mostrecently, Rebecca spent six months at the Future Fund where she advised theBoard of Governors on the establishment of their proxy voting system.

 

39

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**2. Executive Team**

 

As at 30 September 2010our Executive Team was:

 
| **Name**      | ** ** | **Position**                                                 | ** ** | **Year Joined Group** | ** ** | **Year Appointed to  Position** | ** ** |
|---------------|------------|--------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------------|------------|
| Gail Kelly    |       | Managing  Director & Chief Executive Officer        |       | 2008                            |       | 2008                                      |       |
| John Arthur   |       | Group Executive,  Counsel & Secretariat             |       | 2008                            |       | 2008                                      |       |
| Greg Bartlett |       | Chief Executive,  St.George Bank                             |       | 2008                            |       | 2008                                      |       |
| Peter Clare   |       | Group Executive,  Product & Operations              |       | 2008                            |       | 2008                                      |       |
| Philip Coffey |       | Chief Financial  Officer                                     |       | 1996                            |       | 2005                                      |       |
| Rob Coombe    |       | Group Executive,  Westpac Retail & Business Banking |       | 2002                            |       | 2010                                      |       |
| Brad Cooper   |       | Chief Executive  Officer, BT Financial Group                 |       | 2007                            |       | 2010                                      |       |
| George Frazis |       | Chief Executive  Officer, Westpac New Zealand Limited        |       | 2009                            |       | 2009                                      |       |
| Peter Hanlon  |       | Group Executive,  People & Transformation           |       | 1995                            |       | 2010                                      |       |
| Bob McKinnon  |       | Group Executive,  Technology                                 |       | 2008                            |       | 2008                                      |       |
| Jon Nicholson |       | Chief Strategy  Officer                                      |       | 2006                            |       | 2006                                      |       |
| Greg Targett  |       | Chief Risk Officer                                           |       | 2008                            |       | 2009                                      |       |
| Rob Whitfield |       | Group Executive,  Westpac Institutional Bank                 |       | 1986                            |       | 2009                                      |       |

 

There are no familyrelationships between or among any of our Directors or Executive Team members.

 

 

**GailKelly**HigherDipEd, BA, MBA with Distinction, HonDBus. Age 54 Managing Director & Chief Executive Officer

 

Gail was appointedManaging Director & Chief Executive Officer of Westpac on1 February 2008.

 

Immediately prior tothis, she served as Chief Executive Officer & Managing Director ofSt.George Bank Limited from January 2002 to August 2007. During thisperiod, St.George doubled its assets and net profit after tax. BetweenOctober 1997 and December 2001, Gail was employed at the CommonwealthBank of Australia as General Manager, Strategic Marketing, and later as Head ofCustomer Service Division and a member of the bank’s Executive Committee.

 

Gail began hercareer at Nedcor Bank, one of the largest banks in South Africa, where she heldvarious General Manager positions, including HR, cards and personal banking.

 

Gail is currently aDirector of the Australian Bankers’ Association, the Melbourne Business SchoolLimited and member of the Financial Services Advisory Council.

 

 

**JohnArthur**LLB(Hons.). Age 55 

Group Executive,Counsel & Secretariat

 

John was appointedGroup Executive, Counsel & Secretariat on 1 December 2008. Mostrecently, prior to the appointment, John was Managing Director & ChiefExecutive of Investa Property Group until 2007.

 

Previously, John hasbeen a partner at Freehills and Group General Counsel of Lend Lease Limited. Healso served as Chairman of legal firm Gilbert + Tobin and has had adistinguished career as a legal partner, corporate executive and Non-executiveDirector.

 

 

**GregBartlett**Age 58Chief Executive, St.George Bank

 

Greg was appointedChief Executive, St.George Bank in December 2008 at the time of the mergerof St.George with Westpac. He has over 36 years’ experience in the banking andfinance industry. Greg leads a team of over 5,000 people offering comprehensiveRetail and Corporate & Business Banking services to over2.6 million customers nationally under the St.George and BankSA brands.Previously with the Commercial Banking Company of Sydney Ltd, he has been withSt.George for nearly 30 years and was a member of St.George ExecutiveManagement Committee for over 18 years. Most recently he was Group Executive,St.George Institutional and Business Bank for nine years. Greg’s previous roles atSt.George include Group Treasurer and Chief General Manager, Group Treasury andCapital Markets.

 

After thisdistinguished career spanning nearly 30 years with St.George, Greg will beretiring as Chief Executive, St.George Bank effective 1December 2010. Rob Chapman, currently CEO of BankSA, will be appointedChief Executive, St.George Bank to take effect when Greg retires on1 December 2010.

 

40

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DIRECTORS’ REPORT

 

 

**PeterClare**BCom,****MBA. Age 47Group Executive, Product & Operations

 

Peter was appointedGroup Executive, Product & Operations on 17 July 2008, withresponsibility for all consumer and business product development, managementand operations. Peter joined Westpac as Group Executive, Consumer FinancialServices in March 2008, with responsibility for sales, service, thirdparty consumer product relationships and product development for Westpac’sconsumer customers across Australia. Prior to joining Westpac, Peter was GroupExecutive, Group Technology & Operations of St.George Bank Limitedfollowing five years as Group Executive, Strategy with St.George BankLimited. Prior to that Peter worked for the Commonwealth Bank of Australiabetween 1997 and 2002 in a range of senior roles, covering strategy, merger programs,operations and performance improvement. He has also worked in managementconsultancy and accountancy roles.

 

 

**PhilipCoffey**BEc(Hons.). Age 53Chief Financial Officer

 

Philip was appointedChief Financial Officer in December 2005, with responsibility forWestpac’s finance, tax, treasury and investor relations functions. He joinedWestpac in 1996, and was appointed Group Executive, Westpac Institutional Bankin 2002. He has extensive experience in financial markets, funds management andfinance, firstly with the Reserve Bank of Australia, then Citicorp and AIDCLtd. He has held roles in the UK and New Zealand. Philip has an honours degreein Economics and has completed the Executive Program at Stanford UniversityBusiness School.

 

 

**RobCoombe**LLB(Hons.). Age 47Group Executive, Westpac Retail & Business Banking

 

Rob was appointedGroup Executive Westpac Retail & Business Banking on 1February 2010, with responsibility for all Westpac’s retail,small-to-medium enterprises and commercial customers in Australia.

 

Rob was ChiefExecutive Officer, BT Financial Group from January 2005 until thisappointment. Rob joined Westpac with the acquisition of the BT Financial Groupin 2002 and has over 26 years’ experience in banking, finance and wealthmanagement. He started with BT in 1991 and has held a number of positions,including Senior Legal Counsel, Head of BT’s International Funds Management andCEO of BT’s Funds Management business in Malaysia. Rob is also a Director ofThe Australian Indigenous Education Foundation.

 

 

**BradCooper**DipBM, MBA, FAIM. Age 48Chief Executive Officer, BT Financial Group

 

Brad was appointedChief Executive Officer of BT Financial Group on 1 February 2010 and isfocused on helping Australians determine and achieve their financial aspirations.The BT Financial Group proudly offers products and services from some ofAustralia’s most trusted and respected wealth management brands acrossfinancial advice, private banking, investment, superannuation, insurance andretirement. Brad initially joined Westpac in April 2007 as ChiefExecutive, Westpac New Zealand Limited and after successfully leading achange program in that market moved to the role of Group Chief TransformationOfficer leading The Westpac Group’s St.George merger implementation. Prior tojoining Westpac, Brad was Chairman of GE Capital Bank and Chief ExecutiveOfficer of GE Consumer Finance UK & Ireland. He drove GE’s UK SixSigma program and was certified as a Quality Leader (Black Belt) inDecember 2002. He was promoted to Chief Executive Officer of GE ConsumerFinance UK in January 2003 and appointed Chairman of GE Capital Bank inApril 2004.

 

 

**GeorgeFrazis**BEng (Hons.), MBA (AGSM/Wharton). Age 46CEO, Westpac New Zealand Limited

 

George joinedWestpac New Zealand Limited in March 2009 as Chief Executive Officer,Westpac New Zealand Limited. George is highly experienced in the financialservices industry. He was formerly Group Executive General Manager at NationalAustralia Bank. Prior to that, George was a senior executive in CommonwealthBank of Australia’s Institutional Banking Division and has also been a partnerwith the Boston Consulting Group.

 

41

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**PeterHanlon**BA (Comms), C Tech (Aero Eng), AMP (Harvard). Age 55Group Executive, People & Transformation

 

Peter was appointedGroup Executive, People & Transformation on 1 February 2010,with responsibility for human resources strategy and management, includingreward and recognition, learning and development, careers and talent, employeerelations and employment policy. He is also responsible for the key customer,people and productivity elements of our Transformation program, and forCorporate Affairs & Sustainability.

 

Prior to thisappointment Peter held the role of Group Executive, Westpac Retail &Business Banking from July 2008. Prior to that, he was Westpac’s GroupExecutive, Business Financial Services, responsible for business banking sales,relationship management, customer service, and product and risk management inAustralia. Peter has held several other senior roles in Westpac includingGeneral Manager roles in Marketing, Branch Banking and Consumer Credit. Peterjoined Westpac in 1995 from BankSA where he was Chief Manager of Branch Salesand Service and Head of Strategic Marketing. Prior to his banking career, Peterserved in The Royal Australian Air Force.

 

 

**BobMcKinnon**BCom, ACA, MAICD. Age 57Group Executive, Technology

 

Bob was appointedGroup Executive, Technology on 17 July 2008. Prior to joining Westpac, Bobwas Joint Managing Director of Multiplex Limited and Multiplex Funds ManagementLimited. Bob has over 38 years of extensive financial and senior managementexperience, having held senior positions with Lend Lease Corporation, MLCGroup, State Street Australia and Commonwealth Bank of Australia. He is alsocurrently a Non-executive Director of Alesco Corporation Limited.

 

 

**JonNicholson**BA. Age 54Chief Strategy Officer

 

Jon wasappointed Chief Strategy Officer in February 2006, with responsibilityfor Westpac’s strategy, planning and M&A activities. He has deep experiencein financial services strategy, including considerable internationalexperience. Prior to joining Westpac, Jon was a senior partner with the BostonConsulting Group (BCG), where for many years he built and led BCG’s financialservices practice across Asia. Earlier in his career, Jon was Senior PrivateSecretary to the Prime Minister of Australia. He is also a Trustee of theWestpac Foundation.

** **

 

**GregTargett**BEc,DipEd, F Fin, CFTP. Age 53Chief Risk Officer

 

Greg Targett wasappointed Chief Risk Officer on 2 July 2009. Greg joined Westpac asDeputy Chief Risk Officer on 1 December 2008. Prior to themerger between Westpac and St.George Bank Limited, Greg was ChiefRisk Officer of St.George Bank Limited and was a member of the St.GeorgeExecutive Management Committee from 2006. He joined St.George Bank Limited inMay 2003 from National Australia Bank where he held the role of GeneralManager, Wholesale and Business Banking Credit. During his 22 year career withNAB, Greg had a variety of senior roles in Australia and overseas in VentureCapital, Planning and Strategy, Credit Risk, Corporate Banking and RetailBanking.

 

 

**RobWhitfield**BCom, GradDipBanking, GradDipFin, AMP (Harvard). Age 46Group Executive, Westpac Institutional Bank

 

Rob was appointedGroup Executive, Westpac Institutional Bank in July 2009. He hasresponsibility for Westpac’s global relationships with corporate, institutionaland government clients, and core product offerings across financial and capitalmarkets, transactional banking, and working capital and payments. In addition,Rob has responsibility for Hastings Funds Management and Westpac’s equities,structured finance, global treasury, Asian and Pacific Island businesses. Robjoined Westpac as a graduate in 1986, where he gained broad experience in thefinancial markets. He joined Treasury in 1993 and was appointed Group Treasurerin 2000. In 2004 he became Chief Risk Officer and joined the Executive Team inDecember 2005. From April 2007, Rob undertook advisory work as aGroup Executive for Westpac’s Chief Executive with responsibility for theoversight of the merger with St.George Bank Limited. He was appointedGroup Executive, Risk Management in November 2008 prior to assuminghis role.

 

42

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DIRECTORS’ REPORT

 

**3. Report on the business**

 

***a)******   ******Principalactivities***

 

The principalactivities of the Group during the financial year ended30 September 2010 were the provision of financial services includinglending, deposit taking, payments services, investment portfolio management andadvice, unit trust and superannuation fund management, insurance services,leasing, general finance, foreign exchange and money market services.

 

There have been nosignificant changes in the nature of the principal activities of the Groupduring 2010.

 

***b)******   ******Review of andresults of operations***

 

A review of theoperations of the Group and its divisions and their results for the financialyear ended 30 September 2010 is set out in Section 2 of theAnnual Report under the sections ‘Review of Group operations’ and ‘Divisionalperformance’, which form part of this report.

 

The net profitattributable to equity holders of Westpac for the financial year ended30 September 2010 was $6,346 million.

 

***c)******    ******Dividends***

 

Since30 September 2010, Westpac has announced a final dividend of 74 centsper ordinary share, totalling approximately $2,212 million for the yearended 30 September 2010 (2009 final dividend of 60 cents perWestpac ordinary share, totalling $1,765 million). The final dividend willbe fully franked and will be paid on 20 December 2010.

 

An interim dividendfor the current financial year of 65 cents per ordinary share, totalling$1,935 million, was paid as a fully franked dividend on2 July 2010 (2009 interim dividend of 56 cents per ordinaryshare, totalling $1,630 million).

 

***d)******   ******Significantchanges in state of affairs and events during and after the end of 2010financial year***

 

Significant changesin the state of affairs of the Group during 2010 were:

 

·         the commencement of Westpac and St.George operating as a single ADI, andthe finalisation of a component of tax consolidation related to Westpac’smerger with St.George;

 

·         the commencement of our Strategic Investment Priorities, which have aforecast project investment of $2 billion over five years;

 

·         ongoing regulatory response to the recent global financial crisis, whichhas included proposed changes to liquidity, capital, derivatives and otherregulatory requirements;

 

·         the Australian Government withdrawing the Australian GovernmentGuarantee Scheme for wholesale funding and large deposits from31 March 2010, and the New Zealand Government withdrawing itswholesale funding guarantee facility from 30 April 2010;

 

·         the Australian Government’s release and initial response to the HenryReview; and

 

·         the settlement of proceedings with the New Zealand Commissioner ofInland Revenue relating to nine structured finance transactions undertakenbetween 1998 and 2002.

 

For a discussion ofthese matters, please refer to ‘Significant developments’ in Section 1under ‘Information on Westpac’, which forms part of this report.

 

***e)******    ******Likelydevelopments and expected results***

 

Likely majordevelopments in the operations of the Group in future financial years and theexpected results of those operations are discussed in Section 1 under ‘Informationon Westpac’, including under ‘Significant developments’.

 

Further informationon likely developments in our operations and the expected results of operationshave not been included in this Directors’ report because the Directors believeit would be likely to result in unreasonable prejudice to us.

 

43

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**4. Directors’ interests**

 

***a)******   ******Directors’interests in securities***

 

The followingparticulars for each Director are set out in the Remuneration Report and Note41 of our consolidated financial statements for the year ended30 September 2010 and in the tables below:

 

·         their relevant interests in our shares or theshares of any of our related bodies corporate;

 

·         their relevant interests in debentures of, orinterests in, any registered managed investment scheme made available by us orany of our related bodies corporate;

 

·         their rights or options over shares in, debenturesof, or interests in, any registered managed investment scheme made available byus or any of our related bodies corporate; and

 

·         any contracts:

 

·         to which the Director is a party or under which theyare entitled to a benefit; and

 

·         that confer a right to call for or deliver sharesin, debentures of, or interests in, any registered managed investment schememade available by us or any of our related bodies corporate.

 

***Directors’ interests in Westpac and related bodies corporate as at 3 November 2010***

 
| ** **                                  | ** ** | **Number of Westpac  Ordinary Shares** | ** ** | **Number of Westpac  Share Options** | ** ** | **Number of Westpac  Share Rights** | ** ** | **Westpac  SPS** | ** ** | **Westpac  SPS II** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|------------------|------------|--------------------------|------------|
| **Westpac Banking Corporation  securities** | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** **       | ** ** | ** **               | ** ** |
| Ted Evans                                   |       | 19,673                                                |       | —                                              |       | —                                             |       | —           |       | —                   |       |
| Gail Kelly                                  |       | 1,319,509                                             | (1)        | 720,556                                             | (2)        | 368,023                                            | (3)        | —           |       | —                   |       |
| John Curtis                                 |       | 80,787                                                |       | —                                              |       | —                                             |       | —           |       | —                   |       |
| Elizabeth Bryan                             |       | 20,510                                                |       | —                                              |       | —                                             |       | —           |       | —                   |       |
| Gordon Cairns                               |       | 17,038                                                |       | —                                              |       | —                                             |       | —           |       | —                   |       |
| Peter Hawkins                               |       | 15,218                                                |       | —                                              |       | —                                             |       | —           |       | —                   |       |
| Carolyn Hewson                              |       | 16,348                                                |       | —                                              |       | —                                             |       | —           |       | —                   |       |
| Lindsay Maxsted                             |       | 10,310                                                |       | —                                              |       | —                                             |       | —           |       | —                   |       |
| Graham Reaney                               |       | 75,361                                                |       | —                                              |       | —                                             |       | —           |       | —                   |       |
| Peter Wilson                                |       | 14,343                                                |       | —                                              |       | —                                             |       | —           |       | —                   |       |

 
| ** **                                       | ** ** | **Number of BTIM  Ordinary Shares** |   |   |   |   |   |   |   |   |   |
|--------------------------------------------------|------------|----------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| **BT Investment Management Limited  securities** |       |                                               |   |   |   |   |   |   |   |   |   |
| Carolyn Hewson                                   |       | 15,385                                             |   |   |   |   |   |   |   |   |   |

 

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(1)          Westpac ordinary shares granted under the CEORestricted Share Plan in relation to the CEO’s sign-on arrangements.

(2)          Options issued under the Chief Executive OfficerPerformance Plan.

(3)          Share rights issued underthe Chief Executive Officer Performance Plan.

 

***b)******   ******Other relevantinterests as at 3 November 2010***

 

Certain subsidiariesof Westpac offer a range of registered schemes and infrastructure notes. TheDirectors from time to time invest in these schemes and notes and are requiredto provide a statement to the ASX when any of their interests in these schemesor notes change (except interests in a number of cash management trusts)(1).The level of interest held by Directors is set out below.

 

***The level of interests held directly and indirectly by Directors as at3 November 2010***

 
| ** **      | ** ** | **Relevant  Interests in  Infrastructure Notes** | ** ** | **Relevant Interests in  Cash Management Trusts  (Units)(1)** | ** ** | **Other Relevant Interests   in Registered Schemes   (Units)** | ** ** | **Date of Last  Notification to  the ASX** | ** ** |
|-----------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Elizabeth Bryan |       | 2,000                                                      |       | —                                                                            |       | —                                                                                       |       | 24  June 2010                                             |       |
| John Curtis     |       | 1,100                                                      |       | —                                                                            |       | —                                                                                       |       | 24  June 2010                                             |       |

 

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(1)          ASIC has exempted each Director from the obligation tonotify the ASX of a relevant interest in a security that is an interest inBT Cash Management Trust (ARSN 087 531 539), BT Premium Cash Fund(ARSN 089 299 730), Westpac Cash Management Trust(ARSN 088 187 928), BT Institutional Managed Cash Fund(ARSN 088 832 491) or BT Institutional Enhanced Cash Fund(ARSN 088 863 469).

 

44

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DIRECTORS’ REPORT

 

***c)******    ******Indemnities andinsurance***

 

Under ourconstitution, unless prohibited by statute, we must indemnify each of theDirectors and Company Secretaries of Westpac and of each of our related bodiescorporate (except related bodies corporate listed on a recognised stock exchange),each employee of Westpac or our subsidiaries (except subsidiaries listed on arecognised stock exchange), and each person acting as a responsible managerunder an Australian Financial Services licence of any of Westpac’s wholly-ownedsubsidiaries against every liability incurred by each such person in theircapacity as director, secretary, employee or responsible manager, as the casemay be; and all legal costs incurred in defending or resisting (or otherwise inconnection with) proceedings, whether civil or criminal or of an administrativeor investigatory nature, in which the person becomes involved because of thatcapacity.

 

Each of theDirectors named in this Directors’ report and each of the Company Secretariesof Westpac has the benefit of this indemnity.

 

Consistent withshareholder approval at the 2000 AGM, Westpac has entered into a Deed of Accessand Indemnity with each of the Directors, which includes indemnification inidentical terms to that provided in our constitution.

 

Westpac also executeda deed poll in September 2009 providing indemnification equivalent to thatprovided under the constitution as described above to individuals acting as:

 

·         statutory officers (other than as a director) ofWestpac;

 

·         directors and other statutory officers ofwholly-owned subsidiaries of Westpac; and

 

·         directors and statutory officers of other nominatedcompanies as approved by Westpac in accordance with the terms of the deed polland Westpac’s contractual indemnity policy.

 

Some employees ofrelated bodies corporate and responsible managers of Westpac and its relatedbodies corporate are also currently covered by a deed poll in similar termsthat was executed in November 2004.

 

Under the September 2009deed poll, Westpac also agrees to provide directors’ and officers’ insurance todirectors of Westpac and directors of Westpac’s wholly-owned subsidiaries.

 

As part of themerger with St.George Bank Limited, Westpac indemnified each member of theSt.George Group and certain of their representatives, including their directorsand officers, in respect of breaches of certain obligations and warrantiesprovided by Westpac in the Merger Implementation Agreement between Westpac andSt.George Bank Limited and also in respect of the inclusion or disclosure ofcertain types of information in disclosure or regulatory documents prepared byWestpac. Those indemnities continue to apply to those former St.George BankLimited directors, some of whom have subsequently been appointed as directorsof Westpac. The indemnity also applies to KPMG, as St.George Bank Limited’sauditor at the time of the merger.

 

St.George BankLimited agreed with Westpac to provide indemnities in corresponding terms underthe Merger Implementation Agreement, which also continue to apply and havenow been assumed by Westpac following the transition to a single ADI.

 

No amount has beenpaid under any of these indemnities during the financial year ended 30 September 2010or since that date.

 

Our constitutionpermits us, to the extent permitted by law, to pay or agree to pay premiums inrespect of any contract of insurance, which insures any person who is or hasbeen a Director or Company Secretary of Westpac or any of its related bodiescorporate against liability incurred by that person in that capacity, includinga liability for legal costs, unless:

 

·         we are forbidden by statute to pay or agree to paythe premium; or

 

·         the contract would, if we paid the premium, be madevoid by statute.

 

For the year ended30 September 2010 the Group has insurance cover in respect of theamounts which we may have to pay under the indemnities set out above. Thatcover is subject to the terms and conditions of the relevant insurance,including but not limited to the limit of indemnity provided by the insurance.The insurance policies prohibit disclosure of the premium payable and thenature of the liabilities covered.

 

***d)******   ******Options andshare rights outstanding***

 

As at the date ofthis report there are 12,330,887 share options outstanding and 2,930,926 sharerights outstanding in relation to Westpac ordinary shares. The expiry date ofthe share options range between 8 January 2011 and1 March 2019 and the weighted average exercise price is $21.83. Thelatest dates for exercise of the share rights range between20 January 2013 and 1 April 2020.

 

Holders of shareoptions outstanding in relation to Westpac ordinary shares do not have anyrights under the share options to participate in any share issue or interest ofWestpac or any other body corporate.

 

***e)******    ******Proceedings onbehalf of Westpac***

 

No person hasapplied to the Court under section 237 of the *CorporationsAct 2001* for leave to bring proceedings on behalf of Westpac, or tointervene in any proceedings to which Westpac is a party, for the purpose oftaking responsibility on behalf of Westpac for all or part of those proceedings.

 

No proceedings havebeen brought or intervened in on behalf of Westpac with leave of the Courtunder section 237 of the *Corporations Act 2001*.

 

45

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**5. Environmental disclosure**

 

The Westpac Group’senvironmental framework starts with ‘Our Principles for Doing Business’, whichoutline our broad environmental principles. This framework includes:

 

·         our environmental policy statement ‘Westpac and the Environment: OurEnvironmental Policy’, which has been in place since 1992;

 

·         an internally developed Sustainable Supply Chain Management framework;and

 

·         public reporting of our environmental performance. We also participatein a number of voluntary initiatives including the Carbon Disclosure Project,the Equator Principles and the United Nations Global Compact CEO Water Mandate.

 

In 2008, we launcheda five-year climate change strategy. The strategy outlines specific objectivesfor our direct environmental impacts, and continued engagement and advocacyalong our value chain with customers and suppliers. We expect that the cost ofimplementing this strategy will not have a material impact on the operatingexpenses of the Group.

 

The Group isrequired to comply with the NSW Energy Administration Amendment (Water &Savings) Act 2005 (EAA)*.* We complywith our obligations pursuant to the EAA as a designated energy user and adesignated water user through an:

 

·         Energy Savings Action Plan for Westpac’s North Ryde site which wasapproved by the NSW Government on 14 February 2008. The AnnualProgress Report for the North Ryde site was submitted for this year and is dueto be submitted by 30 September in each subsequent year. We complywith our obligations under the EAA and the Action Plan; and

 

·         Energy Savings Action Plan and a Water Savings Action Plan for theSt.George House Building at Kogarah. Both plans were approved by the NSWGovernment during 2006 and require Annual Progress Reports (submitted to theNSW Government on 29 December 2008 and 31 October 2008respectively). The Annual Progress Reports for each Action Plan are due in 2010and subsequent years by 31 December. We comply with our obligations underthe EAA and these Action Plans.

 

The NationalGreenhouse and Energy Reporting Act 2007 (Cth) (National Greenhouse Act) cameinto effect in July 2008. The Group has reported on greenhouse gasemissions, energy consumption and production under the National Greenhouse Actfor the period June 2008 through July 2009 (Year 1 Reporting period)and will continue to report annually. The Group complies with the NationalGreenhouse Act and submitted its first report to the Commonwealth Government inOctober 2009.

 

The Group is subjectto the reporting requirements of the Energy Efficiency Opportunities Act 2006(Cth) (EEO), which requires a report to be submitted to the CommonwealthGovernment identifying and evaluating cost effective energy savingsopportunities. The report is to be submitted by 31 December 2010. Wecomply with our obligations under the EEO.

 

Our operations arenot subject to any other particular and significant environmental regulationunder any law of the Commonwealth of Australia or of any State or Territory ofAustralia. We may, however, become subject to environmental regulation as aresult of our lending activities in the ordinary course of business and we havepolicies in place to ensure that this potential risk is addressed as part ofour normal processes.

 

We have not incurredany liability (including for rectification costs) under any environmental legislation.

 

Further details onour environmental performance, including progress against our climate changestrategy and details of our emissions profile are available on our website atwww.westpac.com.au/about-westpac/sustainability-and-community.

 

**6. Rounding of amounts**

 

Westpac is an entityto which ASIC Class Order 98/100 dated 10 July 1998, relating tothe rounding of amounts in Directors’ reports and financial reports, applies.Pursuant to this Class Order, amounts in this report and the accompanyingfinancial report have been rounded to the nearest million dollars, unlessindicated to the contrary.

 

**7. Political expenditure**

 

In line with Westpacpolicy, no cash donations were made to political parties during the financialyear ended 30 September 2010. The expenditure reflected in the tablebelow relates to payment for participation in legitimate political activitieswhere there was assessed to be of direct business benefit to Westpac. Suchactivities include business observer programmes attached to annual partyconferences, policy dialogue forums and other political functions such asspeeches and events with industry participants.

 

***Political expenditure, year ended 30 September 2010***

 

*Australia*

 
| ** **                  | ** ** | **Amount   $(1)** | ** ** |
|-----------------------------|------------|-------------------|------------|
| Australian Labor Party      |       | 83,632            |       |
| Liberal Party of Australia  |       | 69,990            |       |
| National Party of Australia |       | 5,549             |       |
| **Total**                   |       | 159,171           |       |

 

----

(1)          Represents aggregate amount at both Federal andState/Territory levels.

 

*New Zealand*

 

The totalexpenditure on political activities in New Zealand for the year ended30 September 2010 was NZ$25,100. In line with Westpac policy, nocash donations were made to political parties in New Zealand during the year.

 

46

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DIRECTORS’ REPORT

 

**8. Directors’ meetings**

 

Each Directorattended the following meetings of the Board and Committees of the Board duringthe financial year ended 30 September 2010:

 
| **Number of meetings**        | ** ** | ** ** | ** ** | **Board Meetings** | ** ** | **Audit  Committee** | ** ** | **Risk  Management  Committee** | ** ** | **Nominations  Committee** | ** ** | **Remuneration  Committee** | ** ** | **Sustainability  Committee** | ** ** | **Technology  Committee** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------|------------|----------------------|------------|---------------------------------|------------|----------------------------|------------|-----------------------------|------------|-------------------------------|------------|---------------------------|------------|
| **held during the year** | ** ** | ** ** | ** ** | **10**                  | ** ** | **4**                | ** ** | **4**                           | ** ** | **2**                      | ** ** | **9**                       | ** ** | **3**                         | ** ** | **3**                     | ** ** |
| **Director**                            | ** ** | **Notes**  | ** ** | **A**                   | ** ** | **B**                | ** ** | **A**                           | ** ** | **B**                      | ** ** | **A**                       | ** ** | **B**                         | ** ** | **A**                     | ** ** | **B** | ** ** | **A** | ** ** | **B** | ** ** | **A** | ** ** | **B** | ** ** | **A** | ** ** | **B** | ** ** |
| Ted Evans                               |       | 1          |       | 10                      |       | 10                   |       | 4                               |       | 4                          |       | 4                           |       | 4                             |       | 2                         |       | 2 |   | — |   | — |   | — |   | — |   | 3 |   | 3 |   |
| John Curtis                             |       | 2          |       | 10                      |       | 10                   |       | 4                               |       | 4                          |       | 4                           |       | 4                             |       | 2                         |       | 2 |   | 9 |   | 9 |   | — |   | — |   | — |   | — |   |
| Gail Kelly                              |       | 3          |       | 10                      |       | 10                   |       | —                          |       | —                     |       | —                      |       | —                        |       | —                    |       | — |   | — |   | — |   | 3 |   | 3 |   | 3 |   | 3 |   |
| Elizabeth Bryan                         |       | 4          |       | 10                      |       | 10                   |       | 4                               |       | 4                          |       | 4                           |       | 4                             |       | 2                         |       | 2 |   | — |   | — |   | — |   | — |   | 3 |   | 3 |   |
| Gordon Cairns                           |       | 5          |       | 10                      |       | 10                   |       | 4                               |       | 4                          |       | 4                           |       | 4                             |       | 2                         |       | 2 |   | 9 |   | 9 |   | — |   | — |   | — |   | — |   |
| Peter Hawkins                           |       | 6          |       | 10                      |       | 10                   |       | 4                               |       | 4                          |       | 4                           |       | 4                             |       | —                    |       | — |   | — |   | — |   | — |   | — |   | 3 |   | 3 |   |
| Carolyn Hewson                          |       | 7          |       | 10                      |       | 10                   |       | 4                               |       | 4                          |       | 4                           |       | 4                             |       | 2                         |       | 2 |   | 9 |   | 9 |   | — |   | — |   | — |   | — |   |
| Lindsay Maxsted                         |       | 8          |       | 10                      |       | 10                   |       | 4                               |       | 4                          |       | 4                           |       | 4                             |       | 2                         |       | 2 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Graham Reaney                           |       | 9          |       | 10                      |       | 10                   |       | 4                               |       | 4                          |       | 4                           |       | 4                             |       | —                    |       | — |   | — |   | — |   | 3 |   | 3 |   | — |   | — |   |
| Peter Wilson                            |       | 10         |       | 10                      |       | 10                   |       | 4                               |       | 4                          |       | 4                           |       | 4                             |       | 2                         |       | 2 |   | — |   | — |   | 3 |   | 3 |   | — |   | — |   |

 

----

Thistable shows membership of standing committees of the Board. From time to timethe Board may form other Committees or request Directors to undertake specificextra duties.

 
| A - Meetings  eligible to attend as a member | B - Meetings  attended as a member |
|----------------------------------------------|------------------------------------|

 

Unless otherwisestated, each Director has been a member, or the Chairman, of the relevantCommittee for the whole of the period from 1 October 2009.

 
| (1)  | Chairman of the Nominations Committee. He is  a member of the Audit Committee, Risk Management Committee and the Technology  Committee.                                   |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Member of the Audit Committee, Risk  Management Committee and Remuneration Committee. Since  3 November 2009 he has been a member of the Nominations Committee. |
| (3)  | Member of the Sustainability Committee and  Technology Committee.                                                                                                         |
| (4)  | Chairman of the Technology Committee. She is  a member of the Audit Committee, Risk Management Committee and Nominations  Committee.                                      |
| (5)  | Chairman of the Remuneration Committee. He is  a member of the Audit Committee, Risk Management Committee and Nominations  Committee.                                     |
| (6)  | Member of the Audit Committee, Risk  Management Committee and Technology Committee.                                                                                       |
| (7)  | Chairman of the Risk Management Committee.  She is a member of the Audit Committee, Nominations Committee and  Remuneration Committee.                                    |
| (8)  | Chairman of the Audit Committee. He is a  member of the Risk Management Committee and Nominations Committee.                                                              |
| (9)  | Member of the Audit Committee, Risk  Management Committee and Sustainability Committee.                                                                                   |
| (10) | Chairman of the Sustainability Committee. He  is a member of the Audit Committee, Risk Management Committee and Nominations  Committee.                                   |

 

All Directorsreceive the papers for all meetings of the Board and all Committee meetings andare invited to attend all Committee meetings (even where they are not membersof the relevant Committee). The above table only sets out attendance by membersof the relevant Committees. It does not reflect attendance at Committeemeetings by other Directors who were not members of the relevant Committee.

 

47

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**9. Remuneration report**

 

**Introduction from the Chairman ofthe Board Remuneration Committee**

 

Dear Shareholder,

 

Last year in ourRemuneration Report, we explained the principles behind our remunerationstrategy.

 

This year we thoughtit would be helpful to go further and explain how we, as a Board, decide on thequantum and structure of remuneration for our senior management group, our keymanagement personnel and for the members of the Board.

 

***Use of external consultants***

 

The RemunerationCommittee, following a competitive tender process, selected a specialistremuneration consultant, Ernst & Young and briefed and paid for them,independently of management. We judged them on the basis of their detailedknowledge of our competitors, their access to international data through theirnetwork and their deep understanding of the issues raised by the variousexternal agencies.

 

***Primary and secondary comparator groups***

 

After detaileddiscussion, we selected the primary group of companies we would benchmark ourremuneration against as the other three large Australian banks. We alsoselected a secondary group being the ASX top 10, excluding those banks. Theprimary purpose of the secondary group was to source comparisons wherecomparable positions didn’t exist in the primary group or the positions werenot directly related to Financial Services positions.

 

***Remuneration aggregates for key management personnel***

 

We primarily usedtotal target remuneration to assess whether our remuneration levels werecompetitive. We wanted to exclude the variability of target setting indifferent firms, and the impact of individual performance on actualremuneration.

 

***Relativities***

 

We decided that forall senior management roles external relativities would be the primary lens,taking into account any internal disparities that this might cause. Thisbalanced approach has served us well in the past.

 

***Structure of total target remuneration***

 

Our remuneration isdivided into three components: fixed remuneration, short term incentive (STI),and long term incentive (LTI), the latter two referred to as ‘at risk’ orvariable remuneration.

 

Our policy is forfixed remuneration to be around the median of our primary benchmark group andfor total target remuneration to deliver towards the top of our primary groupfor superior performance, recognising the difficulties arising from inexactrole matches.

 

Our STI is assessedannually against a scoreboard of financial and non financial measures; forfurther information on these measures, refer to Section 3.2 of the ‘Remunerationreport’. They are balanced to reward short term financial performance, withother metrics that drive long term value creation.

 

Of the STI, 60% isreceived as cash for the CEO, and the balance is deferred in shares. For herdirect reports, the percentage received in cash is currently 60% to 75%.

 

LTI is awarded basedon longer term and strategic contribution. It is subject to Total ShareholderReturn (TSR) performance relative to a basket of financial services companies.Awards vest over a period of up to five years with initial TSR performancetested on the third anniversary of the commencement of the performance period.Subsequent testing is possible on the fourth and fifth anniversaries.

 

In benchmarking ourstructure this year we asked four questions:

 

·         are we paying for performance in the balance between fixed and at riskremuneration?

 

·         are we managing for the long term in the balance between short and longterm remuneration?

 

·         should we include a second, externally verifiable metric in our LTI arrangementsto balance TSR?

 

·         should we continue to provide the opportunity for multiple performancetest dates over the life of our LTI awards?

 

Our summaryconclusions were as follows:

 

·         for the CEO and Group Executives, on average, we have the highest percentageof at-risk remuneration against our primary benchmarking group;

 

·         on the balance between short and long term remuneration we will increasethe proportion of STI deferred and the length of the deferral period for ourGroup Executives;

 

·         we believe having a second performance metric to vest our LTI awards isappropriate; and

 

·         we are not aligned to our peers in having multiple performance testopportunities for our LTI awards and should consider changing.

 

Changes to thebalance between short and long term remuneration will be implemented next year.The introduction of a second performance metric to vest our LTI awards andchanges to the multiple testing of LTI awards are envisioned for 2012, enablingus sufficient time for measured consideration of the detail of our proposals.

 

***Discretion***

 

In awarding our STI,the Board has 100% discretion with the scoreboard outcome for the CEO and 50%for the key management personnel and other members of senior management. Webelieve this discretion is vital to balance any overly mechanistic approach indetermining performance outcomes, to better reward the truly outstandingperformers and to enable previous decisions (either good or bad) to be takeninto account. We exercise this discretion both up and down.

 

48

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The criteria whichwe use as the basis for exercising this discretion is set out on Section 3.2.

 

For next year wehave decided that we should align the percentage of discretion that can beapplied for Group Executives and other members of senior management to that ofthe CEO.

 

***Risk adjusted remuneration***

 

We examined ourremuneration structure to ensure that it discourages excessive risk taking. Wewere satisfied by the following building blocks:

 

·         our overall funding pool for variable remuneration is managed to apercentage band of economic profit. Last year this pool fell in line withprofitability;

 

·         economic profit, a measure which reflects both profitability and therisk in our business, is our primary financial metric;

 

·         we exercise discretion over the STI outcome, with risk as a primarylens, both retrospectively and prospectively;

 

·         remuneration decisions for employees performing risk and financialcontrol functions are given additional specific focus under our governancearrangements; and

 

·         the Chief Risk Officer, who is the company’s top risk officer, attendsRemuneration Committee meetings.

 

***Remuneration for Non-executive Directors***

 

We reviewNon-executive Director fees periodically, benchmarking our relative positioningagainst the same peer grouping we use to assess key management personnelremuneration. Our two critical lenses were average actual fees, to account fordifferent board sizes, and actual fees per position. Non-executive Director feeswere last increased in 2007.

 

Followingbenchmarking work this year, we decided that no major changes were warrantedbut that it would be appropriate not to increase Committee fees and to increasebase fees only by 5% for 2011. This is less than inflation over the period andwill not necessitate an increase in the shareholder-approved fee pool fromwhich Non-executive Director payments are made.

 

In conclusion, wehope you, as shareholders, find this a useful explanation of our processes,thinking and actions. As ever, we welcome your feedback, as we strive to makethe report simpler and easier to understand.

 

 

**Gordon Cairns**

Chairman - BoardRemuneration Committee

 

49

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**1.****            ****Remuneration snapshot**

 

This sectionprovides an overview of the Group’s remuneration arrangements during 2010 andthose planned for 2011.

 

**1.1****      ****Significant factors impacting remuneration this year**

 

The externalenvironment has continued to change significantly during 2010. Economicconditions in Australia improved markedly, yet there is continued uncertaintyin the financial sector globally. Our ongoing ability to manage through the newoperating environment, leveraging all our brands, while continuing to deliverresults for our customers and shareholders is somethingthat we are very proud of.

 

Executiveremuneration has continued to be a focus for governments, regulators and otherstakeholders. We have assessed our executive remuneration frameworks and aresatisfied that we have a solid foundation for managing remuneration-relatedrisk for the long term.

 

***Remuneration levels***

 

In May 2009, weresponded to the lower earnings associated with the global financial crisis byleaving the fixed remuneration levels and variable reward targets for the CEOand Senior Executives(1) unchanged until the 2011 financial year.

 

More stable marketconditions and improving results have meant that remuneration reviews willre-commence from 1 October 2010.

 

Eligible employeesreceived a 2% pay increase in July 2010 following approval of the newWestpac Enterprise Agreement by Fair Work Australia. This did not include theCEO or Senior Executives.

 

Performance duringthe year and the associated remuneration are discussed in more detail in thenext section.

 

***Variable reward***

 

The remunerationframework provides for payment of variable rewards to employees so theirremuneration is broadly aligned with returns to shareholders.

 

Each year a variablereward pool is established from which short term incentives, which include cashand deferred share bonuses, and long term incentive awards are paid for allemployees, including Senior Executives.

 

The RemunerationCommittee assesses financial performance primarily using economic profit(2), afinancial measure that reflects both the profitability and the risk in ourbusiness. To supplement this measure, consideration is also given to othermeasures including cash earnings(3), cash earnings per share and dividendspayable to shareholders.

 

In 2010 the Boardconcluded that an increase in the Group’s overall variable reward fundingshould be broadly commensurate with our improved financial result and dividendgrowth.

 

***Regulatory changes***

 

In Australia andinternationally the uncertainty since 2009 regarding the regulation ofexecutive remuneration has begun to settle. This year we have managed newregulatory requirements across the many jurisdictions in which Westpacoperates.

 

The charters of theBoard and its Remuneration Committee and the Group Remuneration Policy reflectthe new APRA Prudential Standard on the governance of remuneration.

 

During 2010 theProductivity Commission released its report on Executive Remuneration inAustralia and the Government followed with its response. The Board generallysupports the recommendations and will continue to monitor developments.

 

***Changes to remuneration framework from 2011***

 

For the 2011financial year, the Board has adopted changes to the executive remunerationframework recommended by the Remuneration Committee to strengthen the alignmentof executive remuneration with the interests of our shareholders, regulatoryprinciples and market practices.

 

For 2011, theframework will retain the current structure of fixed remuneration, short termincentive (STI) and long term incentive (LTI), but with modifications to theSTI impacting:

 

·         the proportion that is granted as deferred equity (the cash portion willdecrease for most participants); and

 

·         the deferral period for deferred equity granted under the STI (broaderand longer for most participants).

 

Details of thesechanges are set out in Section 3.2.

 

Further changes tothe LTI proposed for the 2012 financial year, subject to detailed considerationby the Remuneration Committee and the Board, include:

 

·         removal of the re-testing of performance hurdles beyond the initial testdate; and

 

·         introduction of a second performance hurdle.

 

We will furtheraddress these matters in next year’s report.

 

The next sectiongives an overview of remuneration as it applies to three groups: the CEO andSenior Executives, other employees and Non-executive Directors.

 

----

| (1) | Senior Executives are named in Section 1.5 in  this Remuneration Report.                                                                                                                                                                                              |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Economic profit represents the excess of  adjusted cash earnings over a minimum required rate of return on equity  invested. For this purpose, adjusted cash earnings is defined as cash  earnings plus the estimated value of franking credits paid to shareholders. |
| (3) | Cash earnings is defined in Note 32 of the  Financial Statements.                                                                                                                                                                                                     |

 

50

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DIRECTORS’ REPORT

 

**1.2****      ****CEO and Senior Executives**

 

***Remuneration principles and strategy***

 

Our remunerationstrategy is designed around six principles:

 

·         talented employees;

 

·         pay for performance;

 

·         competitive and fair;

 

·         aligned with shareholders’ interests;

 

·         risk adjusted remuneration; and

 

·         simple, flexible and transparent.

 

Our strategy, basedon these principles, is to attract and retain talented employees by rewardingthem for achieving high performance and delivering superior long term resultsfor our customers and our shareholders. This strategy incorporates soundprinciples of risk management and governance.

 

***Executive remuneration framework***

 

The executiveremuneration framework for the CEO and Senior Executives has three components.

 

Fixed remuneration -takes into account the size and complexity of the role, individualresponsibilities, experience, skills and market-related pay levels. The fixedpackage is comprised of cash salary, salary sacrifice(1) items andsuperannuation.

 

Short term incentive(STI) - comprises cash and deferred shares. The level of payment is determinedbased on an STI target set using similar principles to those used for fixedremuneration and on individual, divisional and Group performance for the year.These are measured against risk-adjusted financial targets and non-financialtargets that support the Group’s short and long term strategy.

 

Long term incentive(LTI) - performance share rights which vest over a three to five-year period ifa performance hurdle is achieved. The award takes into account marketbenchmarks, individual performance over time, succession potential and keyskills.

 

**1.3****      ****Remuneration for other employees**

 

The remunerationstrategy for other employees is consistent with the executive remunerationframework described. In particular:

 

·         fixed remuneration is aligned to the market and is reviewed annually;

 

·         we provide superannuation for employees in Australia, New Zealand andsome other countries in which we operate;

 

·         employees have the opportunity to participate in an STI scheme designedto support the objectives of their division and the Group, including riskmanagement. In some cases a portion is deferred;

 

·         key employees may also receive an LTI award in the form of deferredshares; and

 

·         eligible employees may receive an annual award of Westpac ordinaryshares up to the value of $1,000 under the Employee Share Plan provided theGroup meets at least one of two hurdles: an increase in share price or incustomer advocacy.

 

**1.4****      ****Non-executive Directors**

 

The Board focuses onstrategic direction, long term corporate performance and the creation ofshareholder value. The remuneration strategy for Non-executive Directors is setso as to attract and retain experienced and qualified Board members andremunerate them appropriately for their time and expertise.

 

Non-executiveDirectors receive a base fee, a fee for chairing or participating in BoardCommittees and superannuation. Those who serve on subsidiary Boards receivefurther fees which are paid by the relevant subsidiary company.

 

During the year theBoard reviewed the fee framework for Non-executive Directors. Market data wasobtained from an independent remuneration consultant and based on this advicethe Board agreed to a 5% increase in base fees for 2011. There will be noincrease to Committee fees. Fees for Non-executive Directors were lastincreased in 2007.

 

***Fee pool***

 

At the 2008 AnnualGeneral Meeting the current fee pool of $4.5 million per annum wasapproved by shareholders. For the 2010 year, $3.5 million (78%) of thisfee pool was used.

 

----

| (1) | ‘Salary sacrifice’ means using fixed  remuneration on a pre-tax basis to receive certain benefits such as car  parking and child care, or to make additional superannuation contributions. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

51

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**1.5****      ****CEO and Senior Executives disclosed in this report**

 

***CEO and Senior Executives***

 

The table belowlists the key management personnel disclosed in the 2010 Remuneration Report.

 
| **Name**                     | ** ** | **Position**                                                                                                                                     |
|------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                   | ** ** | ** **                                                                                                                                       |
| Gail Kelly                   |       | Managing Director  & CEO                                                                                                                     |
|                         |       |                                                                                                                                             |
| **Group  Executives**        |       |                                                                                                                                             |
| ** **                   |       |                                                                                                                                             |
| John Arthur                  |       | Group Executive,  Counsel & Secretariat                                                                                                      |
|                         |       |                                                                                                                                             |
| Greg Bartlett                |       | Chief Executive,  St.George Bank                                                                                                                 |
|                         |       |                                                                                                                                             |
| Peter Clare                  |       | Group Executive,  Product & Operations                                                                                                       |
|                         |       |                                                                                                                                             |
| Philip Coffey                |       | Chief Financial  Officer                                                                                                                         |
|                         |       |                                                                                                                                             |
| Rob Coombe                   |       | Chief Executive  Officer, BT Financial Group (until 31 January 2010)Group  Executive, Westpac Retail & Business Bank (from 1 February 2010)  |
|                         |       |                                                                                                                                             |
| Brad Cooper                  |       | Group Chief  Transformation Officer (until 31 January 2010)  Chief Executive Officer, BT Financial Group (from 1 February 2010)                  |
|                         |       |                                                                                                                                             |
| George Frazis                |       | Chief Executive,  Westpac New Zealand Limited                                                                                                    |
|                         |       |                                                                                                                                             |
| Peter Hanlon                 |       | Group Executive,  Westpac Retail & Business Bank (until 31 January 2010)Group  Executive, People & Transformation (from 1 February 2010) |
|                         |       |                                                                                                                                             |
| Bob McKinnon                 |       | Group Executive, Technology                                                                                                                      |
|                         |       |                                                                                                                                             |
| Greg Targett                 |       | Chief Risk Officer                                                                                                                               |
|                         |       |                                                                                                                                             |
| Rob Whitfield                |       | Group Executive,  Westpac Institutional Bank                                                                                                     |
|                         |       |                                                                                                                                             |
| **Other  Senior Executives** |       |                                                                                                                                             |
| ** **                   |       |                                                                                                                                             |
| Curt Zuber                   |       | Group Treasurer                                                                                                                                  |
|                         |       |                                                                                                                                             |
| **Former  Group Executive**  |       |                                                                                                                                             |
| ** **                   |       |                                                                                                                                             |
| Ilana Atlas                  |       | Group Executive,  People (until 31 January 2010)                                                                                                 |

 

***Non-executive Directors***

 
| **Name**        | ** ** | **Position**    |
|-----------------|------------|-----------------|
| ** **      | ** ** | ** **      |
| Ted Evans       |       | Chairman        |
|            |       |            |
| John Curtis     |       | Deputy Chairman |
|            |       |            |
| Elizabeth Bryan |       | Director        |
|            |       |            |
| Gordon Cairns   |       | Director        |
|            |       |            |
| Peter Hawkins   |       | Director        |
|            |       |            |
| Carolyn Hewson  |       | Director        |
|            |       |            |
| Lindsay Maxsted |       | Director        |
|            |       |            |
| Graham Reaney   |       | Director        |
|            |       |            |
| Peter Wilson    |       | Director        |

 

52

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DIRECTORS’ REPORT

 

**2.****            ****Governance and risk management**

 

This section detailsthe Group’s approach to governance and risk management as they relate toremuneration.

 

**2.1****      ****Governance**

 

The Group’sremuneration policies and practices strive to fairly and responsibly rewardemployees, having regard to performance, Westpac’s risk management framework,the law and high standards of governance.

 

The role of theBoard generally is to provide strategic guidance for the Group and effectiveoversight of management. In this way the Board is accountable to shareholdersfor performance. As part of this role, the Board has overall responsibility forremuneration, which includes:

 

·         determining the goals and objectives relevant to the remuneration of theCEO and evaluating the performance of the CEO in light of these objectives;

 

·         reviewing succession plans for the CEO and Group Executives;

 

·         considering and approving the Group Remuneration Policy and remunerationstructures for each category of persons(1) covered by the Group RemunerationPolicy;

 

·         approving individual remuneration levels for the CEO, Non-executiveDirectors, executives who report directly to the CEO, other persons whoseactivities in the Board’s opinion affect the financial soundness of the Groupand any other person specified by APRA;

 

·         approving the appointment of Group Executives and the General ManagerGroup Assurance and monitoring the performance of senior management; and

 

·         determining the size of variable reward pools as part of the Group’sannual plan based on consideration of pre-determined business performanceindicators and the financial soundness of the Group.

 

The RemunerationCommittee supports the Board. Its primary function is to assist the Board infulfilling its responsibilities to shareholders with regard to remuneration.The Remuneration Committee monitors both the Group’s remuneration policies andpractices, external remuneration practices, market expectations and regulatoryrequirements in Australia and internationally. The Remuneration Committee:

 

·         reviews and makes recommendations to the Board in relation to the GroupRemuneration Policy and assesses the Policy’s effectiveness and compliance withPrudential Standards;

 

·         reviews and makes recommendations to the Board on remunerationstructures, including incentive plans, for each category of persons covered bythe Group Remuneration Policy;

 

·         reviews and makes recommendations to the Board on individualremuneration levels for the CEO, Non-executive Directors, executives who reportdirectly to the CEO, other persons whose activities in the Board’s opinionaffect the financial soundness of the Group and any other person specified byAPRA;

 

·         reviews and makes recommendations to the Board on the remunerationpolicies and fee levels for Non-executive Directors of subsidiary boards;

 

·         reviews and makes recommendations to the Board on objectives againstwhich the CEO’s performance is assessed and which are used as the basis fordetermining the CEO’s variable reward or remuneration;

 

·         reviews and makes recommendations to the Board on the size of variablereward pool, as outlined previously;

 

·         oversees succession planning for Group Executives and other seniorexecutives;

 

·         oversees general remuneration practices and reward expenditure acrossthe Group;

 

·         oversees the Group’s equity based plans, and makes recommendations tothe Board relating to new plans and changes to existing plans;

 

·         monitors performance against set hurdles under our LTI plans;

 

·         monitors and assesses the extent to which the Group’s remunerationpolicies achieve their aims within an appropriate risk management framework;and

 

·         approves remuneration arrangements outside of the Group RemunerationPolicy relating to those individuals or groups of individuals who aresignificant because of the sensitivity of their roles, precedent or disclosureimplications.

 

During 2010, theRemuneration Committee appointed Ernst & Young as its independentconsultant to provide specialist advice on executive remuneration and otherGroup remuneration matters. These services are provided directly to theRemuneration Committee and are independent of management. Further, the Boardmaintains a separate funding pool, independently overseen by the Chairman, topay for this advice.

 

***Members of the Remuneration Committee during 2010***

 

All members of theRemuneration Committee are independent Non-executive Directors. During 2010 themembers were:

 

·         Gordon Cairns (Chairman);

 

·         John Curtis; and

 

·         Carolyn Hewson.

 

----

| (1) | This includes persons whose activities in the  Remuneration Committee’s opinion may affect the financial soundness of  Westpac and any other person specified by APRA. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

53

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***Remuneration Committee Charter***

 

The role andresponsibilities of the Remuneration Committee are set out in the BoardRemuneration Committee Charter, which is available on the Group’s website atwww.westpac.com.au/corporateresponsibility.

 

All Board CommitteeCharters are reviewed annually. The Board Remuneration Committee Charter wasamended in 2010. Amendments reflected regulatory changes during the year,particularly the APRA Prudential Standard on the governance of remuneration.Further information about the Remuneration Committee is provided in theCorporate Governance Statement in this Annual Report.

 

The followingdiagram illustrates the roles and responsibilities of the Board with regard toremuneration issues and its Remuneration Committee.

 

 

***Other internal governance structures***

 

A number of newgovernance structures were established in 2010 to assist the Board and itsRemuneration Committee to fulfil their responsibilities to shareholdersregarding remuneration matters.

 

The role andresponsibilities of these internal groups and committees, comprised of Westpacexecutives, are outlined below.

 

·         Remuneration Oversight Committee — responsible for leading theoptimisation of risk-adjusted remuneration across the Group, overseeing theGroup Remuneration Policy, remuneration arrangements and the criteria andrationale for recommending the total quantum of the Group variable reward poolas approved by the Board;

 

·         Divisional Remuneration Oversight Committees — responsible for designingand proposing incentive plans and monitoring remuneration outcomes for therespective division; and

 

·         Functional Remuneration Oversight Committees — responsible for reviewingincentive plans and remuneration outcomes for the respective functions so thereis consistency and appropriateness across the Group. The Committee also reviewsthe remuneration structure for Risk and Financial Control employees so thattheir independence is not compromised.

 

54

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DIRECTORS’ REPORT

 

**2.2****      ****Risk management**

 

The Group’sremuneration strategy, executive remuneration framework, policies and practicesall reflect the sound risk management which is fundamental to the way weoperate. The performance of each division within the Group is reviewed andmeasured with reference to how risk is managed and this influences remunerationoutcomes.

 

The executiveremuneration framework specifically includes features to take account of risk.The framework is composed of a mix of fixed pay and variable reward, a portionof which is deferred. During 2010, Senior Executives received deferredcompensation in two forms: deferred shares as part of the STI, and an LTI awardof performance share rights which deliver value only if the Group meets orexceeds predetermined performance hurdles. These help to align the interests ofthe CEO and Senior Executives with those of shareholders.

 

Each year the Boarddetermines the size of the variable reward pool. This is based on an assessmentof how profit should be shared between employees, shareholders and ongoingcapital requirements. The primary financial indicator used is economic profitbut cash earnings, earnings per share and dividends are also taken intoaccount.

 

STI outcomes arebased on financial and non-financial measures which reflect risk management andthe Group’s corporate values and expected behaviours. Economic profit, whichmeasures profitability adjusted for risk in the business accounted for 40% ofthe CEO’s and Group Executives’ scoreboards for 2010. A performance measurerelated to the Board’s Risk Appetite Statement accounted for a further 10% ofthe CEO’s and Group Executives’ scoreboards. In addition, the CEO and eachGroup Executive is assessed on specific risk measures that may influence anydiscretionary adjustment to the scoreboard.

 

***Shareholding requirements***

 

To align theirrewards with shareholder returns, the CEO and those Senior Executives who areGroup Executives are expected to build and maintain a substantial Groupshareholding within five years of commencing a Group Executive role. Forthe CEO the value of that shareholding is expected to be no less than fivetimes her annual fixed package. For Group Executives the expected minimum is$1.2 million.

 

Participants arestrictly forbidden from entering either directly or indirectly into hedgingarrangements for those deferred shares in their STI and LTI equity awards whichare yet to be vested. No financial products of any kind may be used to mitigatethe risk associated with these equity instruments. Any attempt to hedge thesesecurities makes them liable for forfeiture.

 

***Approval of remuneration decisions***

 

We aim to integrateeffective risk management into the remuneration framework throughout theorganisation. The Chairman of the Board Risk Management Committee is a memberof the Remuneration Committee and members of the Remuneration Committee are alsomembers of the Risk Management Committee. Further, the Chief Risk Officerattends all Remuneration Committee meetings. In carrying out its duties, theRemuneration Committee can access personnel from risk and financial control andengages external advisors who are independent of management.

 

We follow a strictprocess of ‘two-up’ approval for all remuneration decisions. This means thatremuneration is approved by the next most senior person above the employee’smanager. This concept is also reflected in the following remunerationarrangements approved by the Board, based on recommendations from theRemuneration Committee:

 

·         performance outcomes and remuneration for the CEO and Group Executives;and

 

·         performance outcomes and remuneration for other executives who reportdirectly to the CEO, other persons whose activities in the Board’s opinionaffect the financial soundness of the Group and any other person specified byAPRA.

 

Performance andremuneration outcomes for all General Managers (who report to GroupExecutives) are approved by the CEO, on the recommendation of the GroupExecutives to whom they report.

 

Any significantremuneration arrangements which fall outside the Group Remuneration Policy arereferred to the Remuneration Committee for review and approval.

 

***Corporate values and culture***

 

We actively focus onour corporate values and seek to ensure a culture of risk management isembedded throughout our organisation. The Group’s corporate values are: beingpart of one team, delighting customers, recognising achievement, valuing eachother and acting with integrity. Our annual Staff Perspective Survey asksemployees what they value and consider the organisation’s top 10 values(1). In 2010,these included values consistent with a culture of risk management, ‘compliance’,‘accountability’ and ‘doing the right thing’.

 

----

(1)          Results of the Staff Perspectives Survey reported byBarrett Values Centre, September 2010.

 

55

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**3.****            ****The structure of remuneration and assessment of performance**

 

This sectiondescribes in more detail the three different components of remuneration and howperformance is assessed for the CEO and Senior Executives.

 

**3.1****      ****Fixed remuneration**

 

Fixed remunerationrefers to the fixed package - comprising cash salary and salary sacrifice items- and superannuation.

 

The Group providessuperannuation contributions of up to 9% of fixed package. During 2010, threeSenior Executives remained members of legacy defined benefit superannuationfunds (which are closed to new members).

 

**3.2****      ****Short term incentive (STI)**

 

***Performance objectives and performance achieved***

 

The RemunerationCommittee sets individual performance objectives for the CEO and each of theSenior Executives. These objectives are intended to provide a robust linkbetween remuneration and the key drivers of long term shareholder value. TheSTI performance objectives are set out in the form of a scoreboard. Theseinclude the financial and non-financial objectives below:

 
| **Category**            | ** ** | **Weighting for 2010** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| Shareholders/financials |       | 40                               | %          |
| Customers               |       | 30                               | %          |
| Shareholders/risk       |       | 10                               | %          |
| Shareholders/strategy   |       | 10                               | %          |
| People                  |       | 10                               | %          |

 

A description of theobjectives and the results are set out below:

 

***Shareholders/financials***

 

Our primaryfinancial measure is economic profit because the Board believes it is the bestmeasure of risk adjusted returns and of the value created for shareholders. In2010, economic profit increased by 58%, or by $1,263 million.

 

***Customers***

 

We assess thestrength of our relationships with our customers using a number of measures.

 

Net Promoter Score —For our retail, business banking and wealth customers we measure customeradvocacy. This is how willing our customers are to recommend us to others. In2010 St.George retail(1) and business(2) customers ranked us as their firstchoice of the major banks to recommend to others.

 

RelationshipStrength Index(3) — This measure combines a range of service quality factorsincluding customer advocacy and in 2010 for our large corporate customers wewere ranked equal first among our peer group.

 

Customers with fouror more products(4) — We want to earn all our customers’ business and wemeasure our progress against this objective by assessing how many customershave four or more products with us. In 2010 we increased the number of bothWestpac and St.George retail and business banking customers with four or moreproducts with us by more than 85%.

 

Technology — Much ofour customers’ experience depends on the stability of our technology platforms.We measure our success by looking at the number of critical incidents — thosethat directly impact our customers’ ability to do business with us. We havereduced the number of these events by over 50% in 2010.

 

***Shareholders/risk***

 

Our scoreboardmeasure for risk involves the Board’s assessment of our performance against theBoard Risk Appetite Statement. Highlights of our performance for 2010 include:

 

·         maintenance of our credit rating;

 

·         a strengthened Tier 1 capital position;

 

·         an increase in our stable funding ratio, with the key focus on customerdeposits and long term wholesale funds; and

 

·         active management and reduction in the level of impairment charges.

 

***Shareholders/strategy***

 

For 2010 ourscoreboard measure for strategy focused on the primary initiatives we have inplace to achieve our transformation objectives. These included:

 

Technology — We havemade significant progress towards our long term IT strategy, includingcommencing the implementation of our Strategic Technology Investment.

 

Funding — Weenhanced our funding profile over the year including lengthening the durationof our funding and increasing our holdings of liquid assets.

 

Active customercentric culture — Our culture program aims to strengthen the Group’s focus oncustomers. Our employees voted ‘delighting customers’ and ‘customersatisfaction’ as our top two corporate values in 2010(5). We are pleased with thestrong and healthy alignment between our employees and our strategy.

 

Multi-branding — Wehave deepened our capability and understanding of what it takes to leverage ourvery strong brands. We continue to realise significant benefits from the mergerwith St.George and we are concentrating on maintaining and further building thedistinctiveness of our brands. 

 

----

(1)          Roy Morgan Research, October 2010.

(2)          Taylor Nelson Sofres Research, Business Monitor,October 2010.

(3)          Peter Lee Associates Large Corporate &Institutional Relationship Banking Survey, Australia, 2010.

(4)          An internal measure of the number of productscustomers hold with the Group.

(5)          Results of the Staff Perspectives Survey reported byBarrett Values Centre, September 2010.

 

56

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PEOPLE

 

***People***

 

The People categoryfocuses on increasing employee engagement and employee advocacy for the Group’sproducts and services.

 

Whilst 2010 has beena challenging year our people have shown great resilience. The aftermath of theglobal financial crisis, our need to contain spending and its impact onremuneration levels, and the substantial change programs that have beenimplemented have all impacted our employees.

 

We had a 90%response rate to our employee engagement survey(1) this year. Despite thechallenges we maintained our employee engagement scores compared to 2009 andare ranked in the top quartile of companies globally. Our employee advocacyscores improved markedly this year, with many more of our employees willing torecommend us to their family and friends.

 

***Application of discretion***

 

The Board andRemuneration Committee recognises that the scoreboard approach, whilstembracing a number of complementary performance objectives, will never entirelyreflect performance as a whole. The Remuneration Committee may therefore makediscretionary adjustments to the scoreboard outcome of up to 100% for the CEO,and up to 50% for Senior Executives. The Remuneration Committee uses thefollowing criteria to apply discretionary adjustments:

 

·         matters not known or not relevant at the beginning of the financial yearwhich are relevant to the under or over performance of the Executive during thefinancial year;

 

·         personal measures established by the CEO for each Executive;

 

·         the degree of stretch implicit in the scoreboard measures and targetsthemselves and the context in which the targets were set;

 

·         whether the operating environment during the financial year has beenmaterially better or worse than forecast in the budget assumptions;

 

·         comparison with the performance of the Group’s principal competitors,particularly major shareholder and customer benchmarks;

 

·         any major positive or negative risk management or reputational issuewhich impacts the Group;

 

·         the quality of the financial result as shown by its composition andconsistency;

 

·         whether there have been major positive or negative aspects to thequality of leadership and key behaviours and our values; and

 

·         any other relevant over or under performance or other matter notcaptured.

 

At the end of theyear the Remuneration Committee reviews performance against objectives andapplies any adjustments it considers appropriate. The Remuneration Committeethen recommends STI outcomes for the CEO and each Senior Executive to the Boardfor approval.

 

The maximum STIoutcome is 200% of target.

 

For 2011, the Boardhas approved an increase in the level of discretion that can be applied tooutcomes, from 50% to 100%. Furthermore, the Board has absolute discretion toadjust STI outcomes downwards (to zero if appropriate) if such adjustments arenecessary to protect the financial soundness of the Group, or to respond tosignificant unexpected or unintended consequences.

 

***STI targets***

 

*CEO*

 

The CEO’s STI targetwas $3.5 million for 2010, unchanged from 2009.

 

*Senior Executives*

 

STI targets forSenior Executives are set by the Remuneration Committee at the beginning ofeach year based on market competitiveness and the nature of the role. Targetsin 2010 were unchanged from 2009. STI awards for Senior Executives are managedwithin the Group-wide variable reward pool.

 

***STI structure - a mix of cash and deferred shares***

 

For 2010, thedeferred portion of the STI was set as follows:

 

*STI deferral details — 2010*

 
| **Executive**      | ** ** | **Deferred  Portion** | ** ** | **Timing**                        | ** ** |
|--------------------|------------|-----------------------|------------|-----------------------------------|------------|
| CEO                |       | 40                    | %          | 50% for 1 year,  50% for 2 years  |       |
|               |       |                  |       |                              |       |
| Senior Executives  |       | 25                    | %          | 2 years                           |       |
|               |       |                  |       |                              |       |
| Chief Risk Officer |       | 40                    | %          | 50% for 2 years,  50% for 3 years |       |
|               |       |                  |       |                              |       |
| Group Treasurer    |       | 34                    | %          | 2 years                           |       |

 

Deferred STI awards granted to the CEO are madein Westpac ordinary shares under the CEO Restricted Share Plan. For SeniorExecutives based in Australia, the deferred portion is received as Westpacordinary shares under the Group’s general Restricted Share Plan. Shares grantedunder the CEO Restricted Share Plan and Restricted Share Plan rank equally withWestpac ordinary shares for dividends and voting rights from the date they aregranted. These shares are restricted for up to two years, except for the ChiefRisk Officer as shown in the table above.

 

For 2011 changes have been made to both thesize and length of this deferral as part of the review of the executiveremuneration framework. The new details are shown in the following table.

 

----

(1)          Results of the Staff Perspectives Survey conducted byTowers Watson, September 2010.

 

57

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*STI deferral details — 2011*

 
| **Executive**               | ** ** | **Deferred  Portion** | ** ** | **Timing**                             | ** ** |
|-----------------------------|------------|-----------------------|------------|----------------------------------------|------------|
| CEO                         |       | 40                    | %          | 3 equal tranches  for 1, 2 and 3 years |       |
|                        |       |                  |       |                                   |       |
| Senior Executives           |       | 40                    | %          | 3 equal tranches  for 1, 2 and 3 years |       |
|                        |       |                  |       |                                   |       |
| Group Executive, Technology |       | 25                    | %          | 1 year (as per  fixed term contract)   |       |

 

For SeniorExecutives outside Australia, the deferred component of the STI may instead bereceived as rights to ordinary shares (which entitle the holder to Westpacordinary shares at the time of vesting) under the Westpac Performance Plan.

 

By deferring aportion of the STI, incentive payments are better aligned with the interests ofshareholders. Changes in the business during the vesting period are reflectedin the share price at the end of the restriction period. Deferred STI alsosupports the retention of key talent, as generally it is forfeited if theholder resigns during the restriction period. Shares are also forfeited if theholder is dismissed for cause.

 

**3.3****      ****Long term incentive (LTI)**

 

***Performance objectives and performance achieved***

 

The CEO and SeniorExecutives are also eligible for an LTI award. LTI awards may vest over a threeto five-year period, subject to a performance hurdle based on the Group’s TotalShareholder Return (TSR) relative to its peers. TSR is a measure of grossreturn based on share price movement, dividends paid and returns of capital toshareholders.

 

The CEO and SeniorExecutives receive value from their LTI awards only if the Group’s TSR is at orhigher than the 50th percentile of a group of our peers as defined in Section6.7.

 

The table belowdetails the vesting scale for LTI awards:

 
| **Westpac’s relative TSR ranking** | ** ** | **Percentage of LTI  to vest** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------|------------|
| Below the 50th percentile                              |       | 0                                             | %          |
| At the 50th percentile                                 |       | 50                                            | %          |
| At the 60th percentile                                 |       | 70                                            | %          |
| At the 70th percentile                                 |       | 90                                            | %          |
| At or above the 75th percentile                        |       | 100                                           | %          |

 

TSR is measured overa period of three to five years from the beginning of the performance period.Each time TSR is measured, the share price is averaged over three months tosmooth the impact of short term fluctuations.

 

During the year,several LTI awards granted in previous years under the Westpac Performance Planwere tested against the relevant performance hurdles. Nineteen awards ofsecurities under the Westpac Performance Plan reached a performance test date.Performance for all these awards was above the 50th percentile, with the Group’srelative TSR ranking results ranging from the 74th percentile to the 100thpercentile. Where securities reached their first or second test dates andperformance was above the 50th percentile, most employees chose not to extendthe performance period. No awards under the CEO Performance Plan and WestpacReward Plan reached a scheduled test date during the reporting period.

 

***LTI structure***

 

The CEO receives anannual LTI award of performance share rights (rights to purchase ordinaryshares at zero exercise price at a pre-determined point in the future, subjectto certain performance criteria being met) under the CEO Performance RightsPlan. Senior Executives receive annual LTI awards of performance share rightsunder the Westpac Reward Plan.

 

In previous years,the CEO and Senior Executives were eligible for awards of performance optionsunder the Westpac Reward Plan. From July 2009, performance options werereplaced with performance share rights in response to changes to the taxationtreatment of options.

 

From time to timeSenior Executives may receive one-off LTI awards under the Restricted SharePlan or the Westpac Performance Plan.

 

The following tablesets out the key features of LTI awards to the CEO under the CEO PerformanceRights Plan (2010 grant) and to Senior Executives under the Westpac RewardPlan.

 

58

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DIRECTORS’ REPORT

 
| ** **                                                | ** ** | **CEO  Performance Rights Plan (2010 grant)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | **Westpac  Reward Plan** |
|-----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|
| ** **                                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** **               |
| **Instrument**                                            |       | Performance share  rights                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Determining  the number of securities**                 |       | The number of  performance share rights each individual receives is determined by dividing  the dollar value of the LTI award by the value of the performance share  rights at the beginning of the TSR assessment period (performance period).

 

The value of  performance share rights is determined using a Binomial/Monte Carlo  simulation pricing model which uses assumptions based on expected life,  volatility, risk free interest rate and dividend yield. The Binomial/Monte  Carlo simulation pricing model discounts the market price of Westpac shares  at grant to take into consideration these assumptions. This is calculated by  an independent valuer.                                                                                                                                                                                                                                                             |
| ** **                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Performance  hurdle is relative TSR**                   |       | The CEO and Senior  Executives receive value from their LTI awards only if Westpac’s TSR ranks at  or higher than the 50th percentile of a defined group of comparator companies  (the ‘ranking group’) over the performance period. This provides a link with  the creation of value for shareholders over the long term (up to five years).

 

Lists of companies  in the current ranking groups for the CEO Performance Rights Plan and the Westpac  Reward Plan are provided in Section 6.7.                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Vesting  framework focuses on longer-term performance** |       | Initial TSR  performance is tested at the third anniversary of the start of the  performance period with subsequent testing possible at the fourth and fifth  anniversaries. Full vesting occurs when Westpac’s TSR is at or exceeds the  75th percentile relative to the comparator group, scaling down to 50% vesting  for performance at the median (50th percentile). Below median performance,  securities do not vest. Unvested securities are re-tested at subsequent  performance test dates (where these exist) and further vesting occurs only if  TSR ranking is above the 50th percentile and has improved from previous test  dates.

 

The vesting  framework has been designed to strengthen the link with shareholder returns  over the longer term. Vesting results are locked in at each test date and any  securities that are not vested are subject to further performance hurdles  until the final test date. |
| ** **                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **External  consultants calculate TSR**                   |       | TSR results are  calculated by an independent external consultant and are provided to the  Board or its delegate to review and determine vesting outcomes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Early  vesting is possible in limited cases**           |       | For awards made  since 1 October 2009, unvested securities may vest prior to a test date  if the employee is no longer employed by the Group due to death or  disability. In general, any such vesting is not subject to performance  hurdles being met.For the CEO, all unvested  securities will vest if the CEO leaves the Group due to sickness or in  certain circumstances within 12 months of a change of control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Lapsing  of securities**                                |       | Any securities  remaining unvested at the final test date lapse immediately. Where the CEO or  Senior Executive leaves the Group due to resignation or dismissal for cause  before vesting occurs, securities will lapse unless the Board determines  otherwise.

 

Unexercised  performance share rights (whether vested or unvested) will lapse, unless the  Board determines otherwise, where the holder acts fraudulently or dishonestly  or is in material breach of his or her obligations under the CEO Performance  Plan and the Westpac Reward Plan or to the Group.                                                                                                                                                                                                                                                                                                                                                            |

 

59

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*** ***

***LTI award opportunities***

 

*CEO*

 

The CEO received anLTI award of $2.5 million for 2010. The award was received in the form ofperformance share rights under arrangements approved by shareholders at the2009 Annual General Meeting.

 

The CEO will receivea further equity-based LTI award of $2.7 million in December 2010 for2011, subject to shareholder approval at the 2010 Annual General Meeting.

 

*Senior Executives*

 

Senior Executives(except Bob McKinnon) receive annual LTI awards of performance share rightsunder the Westpac Reward Plan. At the beginning of each year, the Board,advised by the Remuneration Committee, sets the dollar value of the LTI awardtarget for each Senior Executive. These did not increase in 2010.

 

The actual LTI awardgranted to each Senior Executive is determined at the Board’s discretion. Thelevel of the award takes into account market benchmarks, individual performanceover time, succession potential and key skills.

 

*Bob McKinnon*

 

Due to the nature ofhis four year fixed term contract, Bob McKinnon has different LTI arrangements.He received an award of cash-settled performance share rights which vest overthe period of his contract provided he meets the performance hurdles set by theBoard. The performance hurdles are directly related to his individual long termperformance objectives.

 

**3.4****      ****Other long term awards**

 

The Restricted SharePlan and Westpac Performance Plan are also used from time to time for one-offawards to attract Senior Executives to the Group or for retention in specificcircumstances. Where awards are made on joining, these typically compensate forreal value forfeited on leaving the previous employer which might otherwisedeter that Executive from joining the Group.

 

LTI awards to keyemployees below senior management level may also be made under the RestrictedShare Plan and Westpac Performance Plan. Under these arrangements, employeesreceive awards of Westpac ordinary shares or share rights which are restrictedfor a period as determined by the Board. This allows the flexibility to tailorthe restriction period to the circumstances of the award.

 

**3.5****      ****Target remuneration mix of remuneration elements**

 

A targetremuneration mix is determined for each management level, with the proportionof performance-based rewards increasing with the level of responsibility andthe critical nature of the role.

 

The followingdiagram illustrates the proportions for target reward in 2010 for the CEO andthe average for Group Executives.

 
|        |                                        | **LTI  award of performance options**                               |
|--------|----------------------------------------|---------------------------------------------------------------------|
|   | ·                                 | 3 to 5 year  performance period                                     |
|   | ·                                 | value only  received if Westpac outperforms the median of its peers |
|   | **Deferred  STI of restricted shares** |
|   | ·                                 | restricted for up  to 3 years subject to service conditions         |
|   | **STI  paid as cash**                  |
|   | ·                                 | in  December 2010                                              |
|   |                                   |                                                                |
|        | **Fixed  remuneration**                |
|   | ·                                 | including cash,  salary sacrifice items and employer superannuation |

 

60

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DIRECTORS’ REPORT

 

**4.****            ****Remuneration outcomes forthe CEO and Senior Executives**

 

The table below provides the value the CEO andSenior Executives received from the various components of their remunerationduring 2010. Details in this table supplement the statutory requirements in Section 6.The valuation of equity based awards is calculated as in note 3 below. It isnot prepared in accordance with A-IFRS.

 
| ** **            | ** ** | ** **     | ** ** | **Short term payments**                    | ** ** | ** **                                 | ** ** | **Value of equity-based** | ** ** |
|-----------------------|------------|----------------|------------|------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | ** **     | ** ** | **Fixed remuneration  and superannuation** | ** ** | **Other payments  and benefits** | ** ** | **STI received  as cash** | ** ** | **Total short term  payments** | ** ** | **awards that vested  during the year** | ** ** |
| ** **            | ** ** | **Period**     | ** ** | **$’000**                                       | ** ** | **$’000(1)**                          | ** ** | **$’000(2)**                   | ** ** | **$’000** | ** ** | **$’000(3)** | ** ** |
|                  |       |           |       |                                                 |       |                                       |       |                                |       |   |   |   |   |
| **CEO**               |       |           |       |                                                 |       |                                       |       |                                |       |   |   |   |   |
| Gail Kelly            |       | Full  year     |       | 2,701                                                |       | —                                     |       | 2,835                               |       | 5,536 |   | 3,083 |   |
| **Senior Executives** | ** ** | **2010**       |       |                                                 |       |                                       |       |                                |       |   |   |   |   |
| John Arthur           |       | Full  year     |       | 771                                                  |       | —                                     |       | 975                                 |       | 1,746 |   | — |   |
| Greg Bartlett         |       | Full  year     |       | 954                                                  |       | 10                                         |       | 1,594                               |       | 2,558 |   | 465 |   |
| Peter Clare           |       | Full  year     |       | 960                                                  |       | —                                     |       | 1,238                               |       | 2,198 |   | — |   |
| Philip Coffey         |       | Full  year     |       | 1,100                                                |       | 1                                          |       | 1,800                               |       | 2,901 |   | 355 |   |
| Rob Coombe            |       | Full  year     |       | 960                                                  |       | 1                                          |       | 1,500                               |       | 2,461 |   | 514 |   |
| Brad Cooper           |       | Full  year     |       | 985                                                  |       | 154                                        |       | 1,500                               |       | 2,639 |   | 1,332 |   |
| George Frazis         |       | Full  year     |       | 982                                                  |       | 293                                        |       | 1,294                               |       | 2,569 |   | 1,517 |   |
| Peter Hanlon          |       | Full  year     |       | 1,084                                                |       | 100                                        |       | 1,238                               |       | 2,422 |   | 206 |   |
| Bob McKinnon          |       | Full  year     |       | 800                                                  |       | —                                     |       | 1,125                               |       | 1,925 |   | — |   |
| Greg Targett          |       | Full  year     |       | 1,081                                                |       | 1                                          |       | 702                                 |       | 1,784 |   | 239 |   |
| Rob Whitfield         |       | Full  year     |       | 1,800                                                |       | 251                                        |       | 1,560                               |       | 3,611 |   | 980 |   |
| Curt Zuber            |       | Full  year     |       | 571                                                  |       | 1                                          |       | 3,569                               |       | 4,141 |   | 746 |   |
|                  |       |           |       |                                                 |       |                                       |       |                                |       |   |   |   |   |
| **Former executive**  | ** ** | ** **     |       |                                                 |       |                                       |       |                                |       |   |   |   |   |
| Illana Atlas          |       | Part year |       | 257                                                  |       | 152                                        |       | 400                                 |       | 809 |   | 335 |   |

 

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| (1) | Includes annual health checks, relocation,  living away from home expenses, allowances and termination payments.                                                                                                                                                                  |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The CEO and Senior Executives receive part of  their annual STI as cash and part was required to be deferred for up to two  years (Greg Targett, as Chief Risk Officer, for up to three years). The  figure in this column represents the value of the 2010 STI received as cash. |
| (3) | The value in this column is calculated as the  number of securities that vested, multiplied by the Group’s share price at  the time they vested, less any exercise price payable.                                                                                            |

 

**5.****            ****Remuneration of Non-executive Directors**

 

***Remuneration policy and fee pool***

 

The Board’s focus ison strategic direction, long term corporate performance and the creation ofshareholder value. As a consequence, fees for Non-executive Directors are notdirectly related to the Group’s short term results and Non-executive Directorsdo not receive performance-based remuneration. The Board undertakes ongoingself-assessment and an external review of its performance and that of theChairman, each Director and Board Committees. This is detailed in the CorporateGovernance Statement in this Annual Report.

 

***Fee framework***

 

The Boardperiodically reviews the fee framework for Non-executive Directors. At eachreview the Board considers the performance of the Group and the advice ofindependent remuneration consultants to help ensure alignment with the market.The current fee framework was set in 2007 as part of a full fee frameworkreview; and reviewed again in 2010.

 

Under the currentframework, all Non-executive Directors receive a single base fee. Non-executiveDirectors, other than the Chairman, receive additional fees for membership orchairmanship of standing Board Committees (except the Nominations Committee),temporary committees (where appropriate) and subsidiary boards and advisoryboards.

 

61

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The following tabledetails the Board and standing Committee fees payable for 2010:

 
| ** **                    | ** ** | **Annual rate** | ** ** |
|-------------------------------|------------|----------------------|------------|
| **Base fee**             | ** ** | ** **           | ** ** | ** ** |
| Chairman                      |       | $                    | 700,000    |   |
| Deputy Chairman               |       | $                    | 250,000    |   |
| Non-executive Directors       |       | $                    | 200,000    |   |
| **Committee Chairman Fees**   |       |                 |       |
| Audit Committee               |       | $                    | 50,000     |   |
| Risk Management Committee     |       | $                    | 50,000     |   |
| Remuneration Committee        |       | $                    | 45,000     |   |
| Sustainability Committee      |       | $                    | 40,000     |   |
| Technology Committee          |       | $                    | 40,000     |   |
| **Committee Membership Fees** |       |                 |       |
| Audit Committee               |       | $                    | 25,000     |   |
| Risk Management Committee     |       | $                    | 25,000     |   |
| Remuneration Committee        |       | $                    | 20,000     |   |
| Sustainability Committee      |       | $                    | 20,000     |   |
| Technology Committee          |       | $                    | 20,000     |   |

 

For the 2011financial year, the Board has determined that the level of base fees will increaseby 5%. This change is effective from 1 October 2010. There is no change toany Committee fees.

 

A temporary OHSCommittee was established effective 1 May 2010 to assist with oversight ofOHS responsibilities for the Group. The function of, and continued need for, anOHS Committee will be reviewed in 2011.

 

In addition to theirDirectors’ fees, Ted Evans and Carolyn Hewson have retiring allowances thataccrued until they were frozen in 2005 and are now indexed in line with averageweekly earnings. The indexed amount is payable on retirement. These allowancesare detailed in Section 6.6.

 

Throughout thereporting period, additional fees for eight Non-executive Directors werepayable for membership of boards of subsidiaries, the OHS Committee or advisoryboards. These fees vary according to the position held, the size, level andnature of activity in the division and the time commitment required.

 

***Superannuation***

 

The Group payssuperannuation contributions to Non-executive Directors of up to 9% of their fees.These contributions are capped at the maximum compulsory superannuationcontributions base prescribed under Superannuation Guarantee legislation.Employer contributions are made to one of our staff superannuation funds or toan eligible superannuation fund of the Director’s choice.

 

***Equity participation***

 

Non-executiveDirectors have voluntarily resolved to build and maintain their individualholdings of Westpac ordinary shares to align their interests with the long terminterests of shareholders.

 

This table shows thefees received by each Non-executive Director and supplements the statutorydisclosure in Section 6.6.

 
| ** **                    | ** ** | ** **             | ** ** | **Main Board and  committee fees  received(1)** | ** ** | **Subsidiary Board  fees received** | ** ** | **Superannuation** | ** ** | **Total**      | ** ** |
|-------------------------------|------------|------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------|------------|----------------|------------|
| **Name**                      | ** ** | **Period served** | ** ** | **$’000**                                                 | ** ** | **$’000**                                | ** ** | **$’000**     | ** ** | **$’000** | ** ** |
| ** **                    | ** ** | ** **             | ** ** | ** **                                                     | ** ** | ** **                                    | ** ** | ** **         | ** ** | ** **     | ** ** |
| Ted Evans (Chairman)          |       | Full  year             |       | 700                                                            |       | —                                        |       | 15                 |       | 715            |       |
|                          |       |                   |       |                                                           |       |                                          |       |               |       |           |       |
| John Curtis (Deputy Chairman) |       | Full  year             |       | 336                                                            |       | 30                                            |       | 17                 |       | 383            |       |
|                          |       |                   |       |                                                           |       |                                          |       |               |       |           |       |
| Elizabeth Bryan               |       | Full  year             |       | 298                                                            |       | 48                                            |       | 15                 |       | 361            |       |
|                          |       |                   |       |                                                           |       |                                          |       |               |       |           |       |
| Gordon Cairns                 |       | Full  year             |       | 303                                                            |       | —                                        |       | 15                 |       | 318            |       |
|                          |       |                   |       |                                                           |       |                                          |       |               |       |           |       |
| Peter Hawkins                 |       | Full  year             |       | 270                                                            |       | 23                                            |       | 17                 |       | 310            |       |
|                          |       |                   |       |                                                           |       |                                          |       |               |       |           |       |
| Carolyn Hewson                |       | Full  year             |       | 295                                                            |       | 110                                           |       | 25                 |       | 430            |       |
|                          |       |                   |       |                                                           |       |                                          |       |               |       |           |       |
| Lindsay Maxsted               |       | Full  year             |       | 275                                                            |       | 23                                            |       | 17                 |       | 315            |       |
|                          |       |                   |       |                                                           |       |                                          |       |               |       |           |       |
| Graham Reaney                 |       | Full  year             |       | 279                                                            |       | 6                                             |       | 15                 |       | 300            |       |
|                          |       |                   |       |                                                           |       |                                          |       |               |       |           |       |
| Peter Wilson                  |       | Full  year             |       | 290                                                            |       | 95                                            |       | 15                 |       | 400            |       |

 

----

(1)          Includes fees for the temporary OHS Committee and theBankSA Advisory Board.

 

62

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DIRECTORS’ REPORT

 

**6.****            ****Remuneration details - key management personnel and other executives**

 

**6.1****      ****CEO and Senior Executive remuneration details for the 2010 year**

 

This section setsout details of remuneration for the CEO and Senior Executives for the 2010 financialyear, calculated in accordance with statutory accounting requirements.

 
| ** **        | ** ** | ** **            | ** ** | **Short term benefits** | ** ** | **Post  employment**   | ** ** | **Share-based payment**    | ** ** | ** **                           | ** ** |
|-------------------|------------|-----------------------|------------|-----------------------------------|------------|------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | ** **            | ** ** | **Fixed  remuneration(1)**        | ** ** | **STI (cash)(2)** | ** ** | **Non-  monetary  benefits(3)** | ** ** | **Other  short term  benefits** | ** ** | **Superannuation  benefits** | ** ** | **Restricted  shares(4)** | ** ** | **Options(5)** | ** ** | **Share  rights(5)** | ** ** | **Total(6)** | ** ** |
| **Name**          | ** ** | **Period**            | ** ** | **$**                             | ** ** | **$**                  | ** ** | **$**                           | ** ** | **$**                                | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Gail Kelly**    |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year(7)          |       | 2,685,837                         |       | 2,835,000              |       | —                          |       | —                               |       | 14,913 |   | 1,732,042 |   | 839,924 |   | 1,479,280 |   | 9,586,996 |   |
| 2009              |       | Full year(7)          |       | 2,686,255                         |       | 2,625,000              |       | 985                             |       | —                               |       | 14,021 |   | 3,737,721 |   | 777,035 |   | 783,895 |   | 10,624,912 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **John Arthur**   |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year             |       | 707,513                           |       | 975,000                |       | —                          |       | —                               |       | 63,578 |   | 92,935 |   | — |   | 97,757 |   | 1,936,783 |   |
| 2009              |       | Part year        |       | 590,840                           |       | 555,000                |       | 275                             |       | —                               |       | 53,103 |   | — |   | — |   | — |   | 1,199,218 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Greg Bartlett** |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year(3),(8)      |       | 747,622                           |       | 1,593,750              |       | 9,904                           |       | —                               |       | 206,000 |   | 283,754 |   | — |   | 210,640 |   | 3,051,670 |   |
| 2009              |       | Part year(3),(8) |       | 624,444                           |       | 712,500                |       | 15,843                          |       | —                               |       | 90,138 |   | 534,103 |   | — |   | 67,302 |   | 2,044,330 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Peter Clare**   |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year             |       | 880,734                           |       | 1,237,500              |       | —                          |       | —                               |       | 79,266 |   | 237,316 |   | 63,258 |   | 131,357 |   | 2,629,431 |   |
| 2009              |       | Full year             |       | 901,871                           |       | 862,500                |       | 1,012                           |       | —                               |       | 48,244 |   | 84,871 |   | 63,258 |   | — |   | 1,961,756 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Philip Coffey** |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year             |       | 1,009,174                         |       | 1,800,000              |       | 1,012                           |       | —                               |       | 90,826 |   | 660,898 |   | 247,162 |   | 183,292 |   | 3,992,364 |   |
| 2009              |       | Full year             |       | 998,714                           |       | 1,687,500              |       | 836                             |       | —                               |       | 72,290 |   | 518,336 |   | 391,111 |   | 45,407 |   | 3,714,194 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Rob Coombe**    |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year             |       | 880,734                           |       | 1,500,000              |       | 1,012                           |       | —                               |       | 79,265 |   | 403,230 |   | 253,101 |   | 171,076 |   | 3,288,418 |   |
| 2009              |       | Full year             |       | 889,332                           |       | 975,000                |       | 1,012                           |       | —                               |       | 47,440 |   | 469,313 |   | 373,561 |   | 40,444 |   | 2,796,102 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Brad Cooper**   |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year             |       | 903,670                           |       | 1,500,000              |       | 153,860                         |       | —                               |       | 81,330 |   | 879,125 |   | 197,113 |   | 261,788 |   | 3,976,886 |   |
| 2009              |       | Full year(9)          |       | 892,070                           |       | 1,012,500              |       | 635,210                         |       | 800,000                              |       | 80,286 |   | 511,948 |   | 197,113 |   | 173,776 |   | 4,302,903 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **George Frazis** |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year             |       | 967,330                           |       | 1,293,750              |       | 292,613                         |       | —                               |       | 14,586 |   | — |   | 399,634 |   | 1,418,395 |   | 4,386,308 |   |
| 2009              |       | Part year        |       | 588,635                           |       | 630,000                |       | 121,679                         |       | —                               |       | 8,384 |   | — |   | 234,306 |   | 1,043,149 |   | 2,626,153 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Peter Hanlon**  |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year(8)          |       | 880,734                           |       | 1,237,500              |       | 99,856                          |       | —                               |       | 203,508 |   | 362,815 |   | 153,735 |   | 131,357 |   | 3,069,505 |   |
| 2009              |       | Full year(8)          |       | 858,818                           |       | 975,000                |       | 1,012                           |       | —                               |       | 215,938 |   | 282,586 |   | 211,905 |   | 16,772 |   | 2,562,031 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Bob McKinnon**  |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year             |       | 733,945                           |       | 1,125,000              |       | —                          |       | —                               |       | 66,055 |   | 150,706 |   | — |   | 447,931 |   | 2,523,637 |   |
| 2009              |       | Full year             |       | 738,641                           |       | 900,000                |       | 1,012                           |       | —                               |       | 61,358 |   | — |   | — |   | 388,595 |   | 2,089,606 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Greg Targett**  |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year             |       | 991,917                           |       | 701,700                |       | 1,012                           |       | —                               |       | 89,174 |   | 161,950 |   | — |   | 174,912 |   | 2,120,665 |   |
| 2009              |       | Part year        |       | 614,474                           |       | 288,000                |       | 1,012                           |       | —                               |       | 51,703 |   | 239,581 |   | — |   | 23,553 |   | 1,218,323 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Rob Whitfield** |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year(10)         |       | 1,651,376                         |       | 1,560,000              |       | 251,389                         |       | —                               |       | 148,624 |   | 710,694 |   | 183,477 |   | 183,292 |   | 4,688,852 |   |
| 2009              |       | Full year(9)          |       | 1,500,228                         |       | 732,000                |       | 248,784                         |       | 2,000,000                            |       | 135,021 |   | 862,650 |   | 294,649 |   | 37,218 |   | 5,810,550 |   |
|              |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Curt Zuber**    |       |                  |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |
| 2010              |       | Full year(8)          |       | 482,742                           |       | 3,569,203              |       | 1,012                           |       | —                               |       | 88,443 |   | 1,020,156 |   | 168,807 |   | 85,841 |   | 5,416,204 |   |
| 2009              |       | Full year(8)          |       | 476,907                           |       | 3,395,000              |       | 1,012                           |       | —                               |       | 99,919 |   | 1,024,751 |   | 228,098 |   | 19,850 |   | 5,245,537 |   |

 

63

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| ** **                   | ** ** | **Short term benefits** | ** ** | **Post  employment**   | ** ** | **Share-based payment**    | ** ** | ** **                           | ** ** |
|------------------------------|------------|-----------------------------------|------------|------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| ** **                   | ** ** | **Fixed  remuneration(1)**        | ** ** | **STI (cash)(2)** | ** ** | **Non-  monetary  benefits(3)** | ** ** | **Other  short term  benefits** | ** ** | **Superannuation  benefits** | ** ** | **Restricted  shares(4)** | ** ** | **Options(5)** | ** ** | **Share  rights(5)** | ** ** | **Total(6)** | ** ** |
| **Name**** ****Period** | ** ** | **$**                             | ** ** | **$**                  | ** ** | **$**                           | ** ** | **$**                                | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| **Former executive**         |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Ilana Atlas**              |       |                              |       |                   |       |                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| 2010Part year(9)        |       | 235,474                           |       | 400,000                |       | —                          |       | 151,648                              |       | 21,193 |   | 195,075 |   | 231,602 |   | — |   | 1,234,992 |   |
| 2009Full year                |       | 694,285                           |       | 860,000                |       | 1,012                           |       | —                               |       | 62,486 |   | 309,061 |   | 258,834 |   | 30,269 |   | 2,215,947 |   |

 

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(1)          Fixed remuneration is the total cost of salary andsalary sacrificed benefits (including motor vehicles, parking, etc. andany associated fringe benefits tax).

(2)          2010 STI figures reflect annual cash performanceawards accrued but not yet paid in respect of the year ended30 September 2010.

(3)          Non-monetary benefits are determined on the basis ofthe cost to the Group (including associated fringe benefits tax, whereapplicable) and include annual health checks, relocation, living away from homeexpenses and allowances. The figure for Greg Bartlett includes a benefitrelating to an interest free loan.

(4)          The value of restricted shares is amortised over theapplicable vesting period, and the amount shown is the amortisation relating tothe 2010 reporting year (and 2009 year as comparison).

(5)          Equity-settled remuneration is based on theamortisation over the vesting period (normally two or three years) of the ‘fairvalue’ at grant date of hurdled and unhurdled options and share rights thatwere granted during the four years ended 30 September 2010. Assumptionsused in valuing securities granted in 2010 are summarised in the notes to thetable in Section 6.2. Details of prior years’ grants have been disclosedin previous Annual Reports. For Ilana Atlas the remaining adjusted unamortisedportion is shown. The amount shown for Bob McKinnon’s cash-settled performanceshare rights is based on the amortisation over the vesting period of the ‘fairvalue’ at 30 September 2010. Assumptions used in the valuation ofcash-settled performance share rights include risk free interest rates of 4.67%to 4.72%, a dividend yield on Westpac ordinary shares of 5% and volatility inthe Westpac share price of 30%.

(6)          The percentage of the CEO and each Senior Executive’s2010 remuneration delivered in the form of share rights and options was: Gail Kelly 24%, John Arthur 5%, Greg Bartlett 7%, Peter Clare 7%, Philip Coffey11%, Rob Coombe 13%, Brad Cooper 12%, George Frazis 41%, Peter Hanlon 9%,Bob McKinnon 18%, Greg Targett 8%, Rob Whitfield 8%, Curt Zuber 5%, and (formerexecutive) Ilana Atlas 19%.

(7)          $2,846,043 of the amortised value of Gail Kelly’s 2009restricted shares related to her sign-on arrangements. In 2010 $192,956 relatesto the value of her sign-on arrangements.

(8)          Greg Bartlett, Peter Hanlon and Curt Zuber are allmembers of legacy defined benefit superannuation funds. Superannuation benefitshave been calculated consistent with AASB 119. Under the terms of Greg Bartlett’sdefined benefit superannuation arrangements, 17.25% of his fixed remunerationis required to be contributed to his Plan account, which includes employercontributions.

(9)          The amount under ‘Other short term benefits’ for IlanaAtlas relates to payments made on termination of employment, including accruedannual leave. The amounts under ‘Other short term benefits’ in 2009 for RobWhitfield related to the merger with St.George, and for Brad Cooper related tohis sign-on arrangements.

(10)    The increase in Rob Whitfield’s fixed remunerationrelates to a change of role and responsibility effective from 1 December 2008.

 

**6.2****      ****Summary of LTI grants made during the year**

 

The table belowprovides a summary of the LTI awards granted at no consideration to the CEO andSenior Executives during 2010. The LTI grants will vest only on satisfaction ofperformance and/or service conditions tested in future financial years.

 
| **Equity instrument**                       | ** ** | **Granted to**                            | ** ** | **Grant Date**   | ** ** | **Commencement  date(1)** | ** ** | **First possible  vesting date** | ** ** | **Exercise  price** | ** ** | **Expiry**            | ** ** | **Fair  value(2) per  instrument** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|--------------------------------------------|------------|---------------------|------------|-----------------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | ** **                                     | ** ** | ** **            | ** ** | ** **                | ** ** | ** **                                 | ** ** | ** **          | ** ** | ** **            | ** ** | ** **                              | ** ** |
| CEO Performance  Plan  performance share rights  |       | Gail Kelly                                     |       | 21 December 2009 |       | 21 December 2009     |       | 21 December 2012                      |       | —              |       | 21 December 2019 |       | $                                       | 14.51      |   |
|                                             |       |                                           |       |                  |       |                      |       |                                       |       |                |       |                  |       |                                    |       |
| Westpac Reward Plan  performance share rights    |       | All Senior Executives except:  - Bob McKinnon; |       | 28 January 2010  |       | 1 October 2009       |       | 1 October 2012                        |       | —              |       | 1 October 2019   |       | $                                       | 15.31      |   |
|                                             |       |                                           |       |                  |       |                      |       |                                       |       |                |       |                  |       |                                    |       |
| Westpac Performance  Plan unhurdled share rights |       | George Frazis                                  |       | 28 January 2010  |       | 1 October 2009       |       | 1 October 2011                        |       | —              |       | 1 October 2019   |       | $                                       | 22.10      |   |

 

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(1)          The commencement date is the start of the performanceperiod in the case of performance share rights, or the start of the restrictionperiod in the case of unhurdled share rights. Awards to the CEO were approvedby shareholders at the Annual General Meeting on 16 December 2009.Subject to the approval of shareholders at the Annual General meeting on 15 December 2010of the CEO’s equity incentive arrangements for the 2011 financial year, thestart of the vesting period for the CEO’s LTI grants for the 2011 financialyear will be aligned with performance years so the commencement date for thoseawards will be 1 October 2010. This will result in the same performanceperiod for the CEO’s LTI awards as applies for other Senior Executives.

(2)          The fair value of share rights included in the tablesabove has been independently calculated at grant date using Binomial/MonteCarlo simulation pricing models. The assumptions included in the valuation ofthe 21 December 2009 awards to Gail Kelly include a risk freeinterest rate of 4.99%, a dividend yield on Westpac ordinary shares of 5% and avolatility in the Westpac ordinary share price of 30%. The assumptions includedin the valuation of awards under the Westpac Reward Plan include a risk freeinterest rate of 4.99%, a dividend yield on Westpac ordinary shares of 5% andvolatility in the Westpac share price of 30%. The assumptions included in thevaluation of awards under the Westpac Performance Plan include a risk freeinterest rate of 4.43%, a dividend yield on Westpac ordinary shares of 5% andvolatility in the Westpac share price of 30%. Other assumptions includevolatilities of, and correlation factors between, share price movements of theranking group members and Westpac, which are used to assess the impact ofperformance hurdles. Performance share rights have been valued assuming anexpected life after the vesting date of up to 1 year.

 

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DIRECTORS’ REPORT

 

**6.3****      ****Movement in equity-settled instruments during the year (number)**

 

This table showsdetails of movements in the number of equity instruments granted, vested andexercised for the CEO and Senior Executives under the relevant plans.

 
| **Name**             | ** ** | **Type of equity instrument** | ** ** | **Number granted(1)** | ** ** | **Number vested(2)** | ** ** | **Number exercised(2)** | ** ** |
|----------------------|------------|----------------------------------------------|------------|----------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **           | ** ** | ** **                                   | ** ** | ** **                 | ** ** | ** **                | ** ** | ** **                   | ** ** |
| Gail Kelly           |       | CEO Performance  share rights                |       | 166,002                    |       | —                    |       | —                       |       |
|                 |       | Shares under the  CEO Restricted Share Plan  |       | 74,626                     |       | 129,405                   |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| John Arthur          |       | Performance share  rights                    |       | 19,173                     |       | —                    |       | —                       |       |
|                 |       | Shares under  Restricted Share Plan          |       | 7,889                      |       | —                    |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| Greg Bartlett(3)     |       | Performance share  rights                    |       | 25,464                     |       | —                    |       | —                       |       |
|                 |       | Shares under  Restricted Share Plan          |       | 10,127                     |       | 18,470                    |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| Peter Clare          |       | Performance share  rights                    |       | 25,763                     |       | —                    |       | —                       |       |
|                 |       | Shares under  Restricted Share Plan          |       | 12,260                     |       | —                    |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| Philip Coffey        |       | Performance  options                         |       | —                     |       | 149,567                   |       | 353,213                      |       |
|                 |       | Performance share  rights                    |       | 35,949                     |       | —                    |       | —                       |       |
|                 |       | Shares under  Restricted Share Plan          |       | 23,987                     |       | 15,140                    |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| Rob Coombe           |       | Performance  options                         |       | —                     |       | 133,220                   |       | 319,803                      |       |
|                 |       | Performance share  rights                    |       | 33,553                     |       | —                    |       | —                       |       |
|                 |       | Shares under  Restricted Share Plan          |       | 13,859                     |       | 21,926                    |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| Brad Cooper          |       | Performance share  rights                    |       | 31,455                     |       | —                    |       | —                       |       |
|                 |       | Unhurdled share  rights                      |       | —                     |       | 22,045                    |       | —                       |       |
|                 |       | Shares under  Restricted Share Plan          |       | 34,742                     |       | 30,325                    |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| George Frazis(4)     |       | Performance share  rights                    |       | 29,958                     |       | —                    |       | —                       |       |
|                 |       | Unhurdled share  rights                      |       | 9,995                      |       | 58,177                    |       | 58,177                       |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| Peter Hanlon         |       | Performance  options                         |       | —                     |       | 55,249                    |       | 299,265                      |       |
|                 |       | Performance share  rights                    |       | 25,763                     |       | —                    |       | 11,214                       |       |
|                 |       | Shares under  Restricted Share Plan          |       | 13,859                     |       | 8,791                     |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| Bob McKinnon         |       | Shares under  Restricted Share Plan          |       | 12,793                     |       | —                    |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| Greg Targett(3)      |       | Performance share  rights                    |       | 28,759                     |       | —                    |       | —                       |       |
|                 |       | Shares under  Restricted Share Plan          |       | 6,204                      |       | 9,556                     |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| Rob Whitfield        |       | Performance  options                         |       | —                     |       | 122,596                   |       | —                       |       |
|                 |       | Performance share rights                     |       | 35,949                     |       | —                    |       | —                       |       |
|                 |       | Shares under  Restricted Share Plan          |       | 19,786                     |       | 41,254                    |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| Curt Zuber           |       | Performance  options                         |       | —                     |       | 65,384                    |       | 119,338                      |       |
|                 |       | Performance share  rights                    |       | 16,836                     |       | —                    |       | —                       |       |
|                 |       | Shares under  Restricted Share Plan          |       | 25,146                     |       | 31,856                    |       | n/a                          |       |
|                 |       |                                         |       |                       |       |                      |       |                         |       |
| **Former executive** |       |                                         |       |                       |       |                      |       |                         |       |
| Ilana Atlas(5)       |       | Performance  options                         |       | —                     |       | 235,068                   |       | 30,000                       |       |
|                 |       | Performance share  rights                    |       | —                     |       | —                    |       | 107,480                      |       |
|                 |       | Shares under  Restricted Share Plan          |       | —                     |       | 29,991                    |       | n/a                          |       |

 

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(1)          No performance options were granted in 2010.

(2)          For performance options granted in December 2006that vested during 2010, 50% of the award was assessed against a TSR rankinggroup of the top 10 largest Australian banking and financial sector companiesby market capitalisation at the time of grant (excluding Westpac). The other50% was assessed against a ranking group of the 50 largest companies on the ASXby market capitalisation at the time of grant (excluding Westpac, specifiedresource companies and the financial sector ranking group).

(3)          Vested options and share rights that were grantedprior to October 2009 can be exercised up to a maximum of 10 years fromtheir commencement date. For each option and share right exercised during theyear, the relevant executive received one fully paid Westpac ordinary share.The exercise price for share rights is nil. Five tranches of options wereexercised during the year with exercise prices of $13.59, $16.34, $18.98, $20.53and $20.53 respectively.

(4)          George Frazis received a deferred STI award ofunhurdled share rights, which vests after two years of service. Details of theaward are included in Section 6.2.

(5)          Performance options granted to Ilana Atlas from December 2006that vested during 2010 were assessed against a TSR ranking group of the top 10largest Australian banking and financial sector companies by marketcapitalisation at the time of grant (excluding Westpac).

 

65

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**6.4****      ****Movement in equity instruments during the year (value)**

 

This table showsdetails of movements in the value of equity instruments granted, vested andexercised for the CEO and Senior Executives under the relevant plans.

 
| ** **             | ** ** | ** **                                 | ** ** | **Value granted(1)** | ** ** | **Value exercised(2)** | ** ** | **Value forfeited or lapsed(3)** | ** ** |
|------------------------|------------|--------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|-------------------------------------------------|------------|
| **Name**               | ** ** | **Type of  equity instrument**             | ** ** | **$**                     | ** ** | **$**                       | ** ** | **$**                                           | ** ** |
| **Current executives** | ** ** | ** **                                 | ** ** | ** **                | ** ** | ** **                  | ** ** | ** **                                      | ** ** |
| Gail Kelly             |       | CEO Performance  share rights              |       | 2,408,689                 |       | —                      |       | —                                          |       |
|                   |       | Shares under the CEO Restricted Share Plan |       | 1,020,715                 |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| John Arthur            |       | Performance share  rights                  |       | 293,539                   |       | —                      |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | 92,935                    |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| Greg Bartlett          |       | Performance share  rights                  |       | 389,854                   |       | —                      |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | 119,300                   |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| Peter Clare            |       | Performance share  rights                  |       | 394,432                   |       | —                      |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | 144,427                   |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| Philip Coffey          |       | Performance  options                       |       | —                    |       | 2,457,943                   |       | —                                          |       |
|                   |       | Performance share rights                   |       | 550,379                   |       | —                      |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | 282,576                   |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| Rob Coombe             |       | Performance  options                       |       | —                    |       | 1,541,092                   |       | —                                          |       |
|                   |       | Performance share rights                   |       | 513,696                   |       | —                      |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | 163,264                   |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| Brad Cooper            |       | Performance share  rights                  |       | 481,576                   |       | —                      |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | 496,418                   |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| George Frazis          |       | Performance share  rights                  |       | 458,657                   |       | —                      |       | —                                          |       |
|                   |       | Unhurdled share rights                     |       | 220,890                   |       | 1,458,736                   |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| Peter Hanlon           |       | Performance  options                       |       | —                    |       | 2,172,664                   |       | —                                          |       |
|                   |       | Performance share rights                   |       | 394,432                   |       | 292,058                     |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | 163,264                   |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| Bob McKinnon           |       | Shares under  Restricted Share Plan        |       | 150,706                   |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| Greg Targett           |       | Performance share  rights                  |       | 440,300                   |       | —                      |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | 73,085                    |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| Rob Whitfield          |       | Performance share  rights                  |       | 550,379                   |       | —                      |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | 233,086                   |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| Curt Zuber             |       | Performance  options                       |       | —                    |       | 442,961                     |       | —                                          |       |
|                   |       | Performance share rights                   |       | 257,759                   |       | —                      |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | 296,229                   |       | n/a                         |       | —                                          |       |
|                   |       |                                       |       |                      |       |                        |       |                                            |       |
| **Former executive**   |       |                                       |       |                      |       |                        |       |                                            |       |
| Ilana Atlas            |       | Performance  options                       |       | —                    |       | 302,525                     |       | —                                          |       |
|                   |       | Performance share rights                   |       | —                    |       | 2,670,410                   |       | —                                          |       |
|                   |       | Shares under Restricted Share Plan         |       | —                    |       | n/a                         |       | —                                          |       |

 

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(1)          For options and share rights, the value grantedrepresents the number of securities granted multiplied by the fair value perinstrument as set out in the table in Section 6.2. For restricted shares,the value granted represents the number of ordinary shares granted multiplied bythe five day weighted average price of a Westpac ordinary share on the date theshares were granted. These values, which represent the full value of theequity-based awards made to disclosed executives in 2010, do not reconcile withthe amount shown in the table in Section 6.1, which shows amortised totalsof equity awards over their vesting period. The minimum total value of thegrants is nil and an estimate of the maximum possible total value is the fairvalue, as shown above.

(2)          The value of each option or share right exercised orlapsed is calculated based on the weighted average price of Westpac ordinaryshares on the ASX on the date of exercise, less the relevant exercise price (ifany). Where the exercise price is greater than the five day weighted averageprice of Westpac ordinary shares, the value has been calculated as $Nil.

(3)          No options, share rights or restricted shares lapsedor were forfeited in 2010.

 

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DIRECTORS’ REPORT

 

**6.5****      ****Employment agreements**

 

The remuneration andother terms of employment for the CEO and Senior Executives are formalised intheir employment agreements. Each of these employment agreements provide forthe payment of fixed and performance-based remuneration, superannuation andother benefits such as death and disablement insurance cover.

 

The material termsof these employment agreements are summarised below.

 
| **Term**                                                                                   | ** ** | **Who**                                                                                                                                                    | ** ** | **Conditions**                                                                                          |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| Duration of contract                                                                       |       | ·   CEO and Senior Executives                                                                                                               |       | ·   On-going until notice given by either party                                          |
|                                                                                       |       | ·   Bob McKinnon                                                                                                                            |       | ·   4 year fixed term contract                                                           |
|                                                                                       |       |                                                                                                                                                       |       |                                                                                                    |
| Notice to be provided by the executive or the  Group to terminate the employment agreement |       | ·   CEO, John Arthur, Philip Coffey, Rob  Coombe, Brad Cooper, George Frazis, Peter Hanlon, Greg Targett and Rob  Whitfield                 |       | ·   12 months                                                                            |
|                                                                                       |       | ·   Greg Bartlett and Peter Clare                                                                                                           |       | ·   6 months if Senior Executive gives notice,  12 months if the Group gives notice      |
|                                                                                       |       | ·   Bob McKinnon and Curt Zuber                                                                                                             |       | ·   6 months                                                                             |
|                                                                                       |       |                                                                                                                                                       |       |                                                                                                    |
| Termination payments to be made on  termination without cause                              |       | ·   CEO and all Senior Executives                                                                                                           |       | ·   Deferred STI and LTI awards vest according  to the applicable equity plan rules      |
|                                                                                       |       |                                                                                                                                                       |       |                                                                                                    |
| Termination for cause                                                                      |       | ·   CEO, John Arthur, Greg Bartlett, Greg  Targett, Rob Whitfield                                                                           |       | ·   Immediately for misconduct

·   3 months notice for poor performance  |
|                                                                                       |       | ·   All other Senior Executives                                                                                                             |       | ·   Immediately for misconduct, standard  contractual notice period for poor performance |
|                                                                                       |       |                                                                                                                                                       |       |                                                                                                    |
| Post-employment restraints                                                                 |       | ·   CEO, John Arthur, Greg Bartlett, Peter  Clare, Philip Coffey, Brad Cooper, George Frazis, Peter Hanlon, Greg Targett  and Rob Whitfield |       | ·   12 month non-solicitation restraint                                                  |
|                                                                                       |       | ·   Rob Coombe, Bob McKinnon and Curt Zuber                                                                                                 |       | ·   6 month non-solicitation restraint                                                   |

 

Certain individualshave provisions in their contracts for different terms due to grandfatheredcontractual benefits or individual circumstances:

 

·         Gail Kelly — The restricted period on all unvested restricted shares(deferred STI) will continue to the full term when Gail Kelly ceasesemployment with Westpac, except for death, sickness or disability or in certaincircumstances within 12 months of change of control of Westpac. In thesecircumstances all unvested restricted shares will vest. On immediatetermination for misconduct, all restricted shares will be forfeited. When GailKelly ceases employment with Westpac, all unvested performance share rights(LTI) will lapse at the Board’s discretion, except for under circumstances ofdeath, sickness or disability and in certain circumstances within12 months of change of control of Westpac. In these circumstances allunvested performance share rights will vest. On termination immediatetermination for misconduct, all unvested performance share rights will lapse;

 

·         Rob Coombe — Payment in lieu of notice is based on 1.5 times fixed remunerationpackage, in the event of termination of employment without cause up to sixmonths after change of control of the Group;

 

·         Brad Cooper — Provisions relating to relocation from Auckland to Sydney,including accommodation and housing payments, relocation payments, motorvehicle, car parking, additional travel between Australia and New Zealandand taxation services. With the exception of taxation services, the relocationis now complete;

 

·         George Frazis — Provisions relating to relocation from Sydney toAuckland including relocation payments, accommodation payments and travelbetween Australia and New Zealand;

 

·         Peter Hanlon — Provisions relating to accommodation in Sydney and travelbetween Adelaide and Sydney;

 

·         Bob McKinnon — Cash settled LTI based on role-specific four yearobjectives; and

 

·         John Arthur and Greg Bartlett — STI pro-rated for the performance yearworked is payable for termination without cause.

 

67

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**6.6****      ****Details of Non-executive Director remuneration**

 

Details of thenature and amount of each element of the remuneration of our Non-executiveDirectors for the year ended 30 September 2010 are as follows:

 
| ** **                     | ** ** | ** **                            | ** ** | ** ** | ** ** | **Short term  employment  benefits** | ** ** | **Post  employment**              | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|------------|------------|-------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------|------------|------------|------------|
| ** **                     | ** ** | **The Board the**           | ** ** | ** ** | ** ** | **Fees**                                  | ** ** | **Superannuation guarantee** | ** ** | **Retiring  allowance  accrued during  the year(1)** | ** ** | **Total**  | ** ** | **Total retiring  allowance  accrued** | ** ** |
| **Name**                       | ** ** | **Non-executive served on** | ** ** | **Notes**  | ** ** | **$**                                     | ** ** | **$**                             | ** ** | **$**                                                          | ** ** | **$**      | ** ** | **$** | ** ** |
| **2010**                       |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |   |   |
| Ted Evans  (Chairman)          |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation           |       | 2          |       | 700,000                                   |       | 14,660                            |       | 21,749                                                         |       | 736,409    |       | 466,624 |   |
|                           |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |   |   |
| John Curtis (Deputy  Chairman) |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation           |       | 3,4        |       | 336,000                                   |       | 14,660                            |       | —                                                         |       | 350,660    |       | — |   |
|                           |       | St.George Bank Limited                |       | 5          |       | 30,374                                    |       | 2,736                             |       | —                                                         |       | 33,110     |       | — |   |
|                           |       | Total                                 |       |       |       | 366,374                                   |       | 17,396                            | ** ** | **—**                                                     |       | 383,770    | ** ** | **—** | ** ** |
|                           |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |   |   |
| Elizabeth Bryan                |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation           |       | 3,4        |       | 298,000                                   |       | 14,660                            |       | —                                                         |       | 312,660    |       | — |   |
|                           |       | Westpac New Zealand Limited           |       |       |       | 47,966                                    |       | —                            |       | —                                                         |       | 47,966     |       | — |   |
|                           |       | Total                                 |       |       |       | 345,966                                   |       | 14,660                            |       | —                                                         |       | 360,626    |       | — |   |
|                           |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |   |   |
| Gordon Cairns                  |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation           |       | 3,4        |       | 303,000                                   |       | 14,660                            | ** ** | **—**                                                     |       | 317,660    |       | — |   |
|                           |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |   |   |
| Peter Hawkins                  |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation           |       | 3          |       | 270,000                                   |       | 14,660                            |       | —                                                         |       | 284,660    |       | — |   |
|                           |       | St.George Bank Limited                |       | 5          |       | 23,350                                    |       | 2,101                             |       | —                                                         |       | 25,451     |       | — |   |
|                           |       | Total                                 |       |       |       | 293,350                                   |       | 16,761                            | ** ** | **—**                                                     |       | 310,111    | ** ** | **—** | ** ** |
|                           |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |   |   |
| Carolyn Hewson                 |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation           |       | 2,3        |       | 295,000                                   |       | 14,660                            |       | 15,287                                                         |       | 324,947    |       | 324,567 |   |
|                           |       | BT Investment Management Limited      |       |       |       | 109,867                                   |       | 9,888                             |       | —                                                         |       | 119,755    |       | — |   |
|                           |       | Total                                 |       | 3,4        |       | 404,867                                   |       | 24,548                            |       | 15,287                                                         |       | 444,702    |       | 324,567 |   |
|                           |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |   |   |
| Lindsay Maxsted                |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation           |       | 3          |       | 275,000                                   |       | 14,660                            |       | —                                                         |       | 289,660    |       | — |   |
|                           |       | St.George Bank Limited                |       | 5          |       | 23,342                                    |       | 2,101                             |       | —                                                         |       | 25,443     |       | — |   |
|                           |       | Total                                 |       |       |       | 298,342                                   |       | 16,761                            | ** ** | **—**                                                     |       | 315,103    | ** ** | **—** | ** ** |
|                           |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |   |   |
| Graham Reaney                  |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation           |       | 3,6        |       | 278,647                                   |       | 14,660                            |       | —                                                         |       | 293,307    |       | — |   |
|                           |       | St.George Bank Limited                |       | 5,6        |       | 5,630                                     |       | 524                               |       | —                                                         |       | 6,154      |       | — |   |
|                           |       | Total                                 |       |       |       | 284,277                                   |       | 15,184                            | ** ** | **—**                                                     |       | 299,461    | ** ** | **—** | ** ** |
|                           |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |   |   |
| Peter Wilson                   |       |                                  |       |       |       |                                      |       |                              |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation           |       | 3          |       | 290,000                                   |       | 14,660                            |       | —                                                         |       | 304,660    |       | — |   |
|                           |       | Westpac New Zealand Limited           |       |       |       | 95,170                                    |       | —                            |       | —                                                         |       | 95,170     |       | — |   |
|                           |       | Total                                 |       |       |       | 385,170                                   |       | 14,660                            | ** ** | **—**                                                     |       | 399,830    | ** ** | **—** | ** ** |
| **Total 2010**                 |       |                                  |       | 3,381,346  |       | 149,290                                   |       | 37,036                            |       | 3,567,672                                                      |       | 791,191    |       |

 

----

(1)          Retiring allowances are not included in calculationsfor the Non-executive Director fee pool. Retiring allowances were frozen forindividual Non-executive Directors between December 2005 and February 2006.Accruals shown for 2010 include indexation in line with average weekly earningsfollowing the freezing of the retiring allowances.

(2)          Entitled to retiring allowance.

(3)          Includes fees paid to Chairmen and members of BoardCommittees.

(4)          Includes fees paid for serving on the temporary OHSCommittee, from 1 May 2010.

(5)          Fees paid by St.George Bank Limited ceased whenWestpac and St.George became a single Authorised Deposit-taking Institution on1 March 2010.

(6)          Fees paid for services on the BankSA advisory board.

 

68

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DIRECTORS’ REPORT

 
| ** **                     | ** ** | ** **                               | ** ** | ** ** | ** ** | **Short term  employment  benefits** | ** ** | **Post employment**      | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|------------|------------|-------------------------------------------|------------|-------------------------------|------------|----------------------------------------------------------------|------------|------------|------------|
| ** **                     | ** ** | **The Board the**              | ** ** | ** ** | ** ** | **Fees**                                  | ** ** | **Superannuation  guarantee** | ** ** | **Retiring  allowance  accrued during  the year(2)** | ** ** | **Total**  | ** ** | **Total retiring  allowance  accrued** | ** ** |
| **Name**                       | ** ** | **Non-executive served on(1)** | ** ** | **Notes**  | ** ** | **$**                                     | ** ** | **$**                         | ** ** | **$**                                                          | ** ** | **$**      | ** ** | **$** | ** ** |
| **2009**                       |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |
| Ted Evans  (Chairman)          |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation              |       | 3          |       | 700,000                                   |       | 13,899                        |       | 23,878                                                         |       | 737,777    |       | 444,876 |   |
|                           |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |   |   |
| John Curtis (Deputy  Chairman) |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation              |       |       |       | 262,376                                   |       | 11,477                        |       | —                                                         |       | 273,853    |       | — |   |
|                           |       | St.George Bank Limited                   |       |       |       | 63,490                                    |       | 5,714                         |       | —                                                         |       | 69,204     |       | — |   |
|                           |       | Total                                    |       | 4          |       | 325,866                                   |       | 17,191                        |       | —                                                         |       | 343,057    |       | — |   |
|                           |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |   |   |
| Elizabeth Bryan                |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation              |       |       |       | 286,259                                   |       | 13,899                        |       | —                                                         |       | 300,158    |       | — |   |
|                           |       | Westpac New Zealand Limited              |       |       |       | 48,708                                    |       | —                        |       | —                                                         |       | 48,708     |       | — |   |
|                           |       | Total                                    |       | 4          |       | 334,967                                   |       | 13,899                        |       | —                                                         |       | 348,866    |       | — |   |
|                           |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |   |   |
| Gordon Cairns                  |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation              |       | 4          |       | 295,000                                   |       | 13,899                        |       | —                                                         |       | 308,899    |       | — |   |
|                           |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |   |   |
| Peter Hawkins                  |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation              |       |       |       | 221,111                                   |       | 11,476                        |       | —                                                         |       | 232,587    |       | — |   |
|                           |       | St.George Bank Limited                   |       |       |       | 48,744                                    |       | 4,387                         |       | —                                                         |       | 53,131     |       | — |   |
|                           |       | Total                                    |       | 3,4        |       | 269,855                                   |       | 15,863                        |       | —                                                         |       | 285,718    |       | — |   |
|                           |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |   |   |
| Carolyn Hewson                 |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation              |       |       |       | 295,000                                   |       | 13,899                        |       | 17,463                                                         |       | 326,362    |       | 309,279 |   |
|                           |       | BT Investment Management                 |       |       |       | 110,000                                   |       | 9,900                         |       | —                                                         |       | 119,900    |       | — |   |
|                           |       | Total                                    |       | 3,4        |       | 405,000                                   |       | 23,799                        |       | 17,463                                                         |       | 446,262    |       | 309,279 |   |
|                           |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |   |   |
| Lindsay Maxsted                |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation              |       | 4          |       | 275,000                                   |       | 13,899                        |       | —                                                         |       | 288,899    |       | — |   |
|                           |       | St.George Bank Limited                   |       | 4          |       | 48,744                                    |       | 4,387                         |       | —                                                         |       | 53,131     |       | — |   |
|                           |       | Total                                    |       | 3,4        |       | 323,744                                   |       | 18,286                        |       | —                                                         |       | 342,030    |       | — |   |
|                           |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |   |   |
| Graham Reaney                  |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation              |       | 4          |       | 221,111                                   |       | 11,477                        |       | —                                                         |       | 232,588    |       | — |   |
|                           |       | St.George Bank Limited                   |       | 5          |       | 11,274                                    |       | 1,015                         |       | —                                                         |       | 12,289     |       | — |   |
|                           |       | Total                                    |       |       |       | 232,385                                   |       | 12,492                        |       | —                                                         |       | 244,877    |       | — |   |
|                           |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |   |   |
| Peter Wilson                   |       |                                     |       |       |       |                                      |       |                          |       |                                                           |       |       |       |
|                           |       | Westpac Banking Corporation              |       |       |       | 290,000                                   |       | 13,899                        |       | —                                                         |       | 303,899    |       | — |   |
|                           |       | Westpac New Zealand Limited              |       |       |       | 97,415                                    |       | —                        |       | —                                                         |       | 97,415     |       | — |   |
|                           |       | Total                                    |       | 4          |       | 387,415                                   |       | 13,899                        |       | —                                                         |       | 401,314    |       | — |   |
| **Total 2009**                 |       |                                     |       | 3,274,232  |       | 143,227                                   |       | 41,341                        |       | 3,458,800                                                      |       | 754,155    |       |

 

----

(1)          Fees paid by St.George Bank Limited and BankSA relateonly to the period following the merger with Westpac.

(2)          Retiring allowances are not included in calculationsfor the Non-executive Director fee pool. Retiring allowances were frozen forindividual Non-executive Directors between December 2005 and February 2006.Accruals shown for 2009 include indexation in line with average weekly earningsfollowing the freezing of the retiring allowances.

(3)          Entitled to retiring allowance.

(4)          Includes fees paid to Chairpersons and members ofBoard Committees.

(5)          Fees paid for services on the BankSA advisory board.

 

69

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**6.7****      ****Further information about our equity plans**

 

Our broad-based andspecialised employee equity plans.

 

***Deferral Share Plan***

 

The Deferral SharePlan was suspended during 2009 following changes to the taxation treatment ofemployee equity awards announced by the Federal Government. No new awards weremade after 30 June 2009.

 

Before the plan wassuspended, employees could elect to receive any prospective cash STI as Westpacordinary shares under the Deferral Share Plan. Australian-based Non-executiveDirectors were also able to elect to receive a percentage of their fees inWestpac ordinary shares under the Deferral Share Plan.

 

***Employee Share Plan***

 

Under the EmployeeShare Plan, employees in Australia can receive up to $1,000 of Westpac ordinaryshares at the end of each financial year to recognise their contribution to ourperformance. For 2010 the size of the award depended on both share price andour Net Promoter Score, which measures customer advocacy. The CEO, Directorsand any employees who received an STI award deferred into equity or an LTIaward during the year are not eligible to receive an Employee Share Plan awardfor that year.

 

***Other plans***

 

We also provideseparate reward plans for small, specialised parts of the business. Paymentsunder these plans are directly linked to growth of that part of the businessand are capped at an appropriate proportion of the value and/or profitabilityof the relevant part of the business. These plans are designed to providemarket-competitive remuneration for the relevant employees. Westpac also has ‘grandfathered’plans, under which no further awards are made and performance or vestingperiods have passed. These vested securities continue to run their course.

 

**Comparator companies used in ourLTI performance hurdles**

 

This sectiondescribes the comparator companies for each of the different Plans.

 

***Chief Executive Officer Performance Plan***

 

The Chief ExecutiveOfficer Performance Plan ranking group is comprised of the top 10 selectedAustralian banking and financial sector companies by market capitalisationlisted on the ASX with which Westpac competes for customers. As at30 September 2010 the most recently determined ranking groupconsisted of:

 

·         AMP Limited;

 

·         ASX Limited;

 

·         Australia and New Zealand Banking Group Limited;

 

·         AXA Asia Pacific Holdings Limited;

 

·         Commonwealth Bank of Australia;

 

·         Insurance Australia Group Limited;

 

·         Lend Lease Group;

 

·         Macquarie Group Limited;

 

·         National Australia Bank Limited; and

 

·         Suncorp-Metway Limited.

 

***Westpac Reward Plan***

 

The Westpac RewardPlan ranking group is comprised of the top 10 selected Australian banking andfinancial sector companies by market capitalisation. As at30 September 2010 the most recently determined peer group under theWestpac Reward Plan consisted of:

 

·         AMP Limited;

 

·         AXA Asia Pacific Holdings Limited;

 

·         Australia and New Zealand Banking Group Limited;

 

·         ASX Limited;

 

·         Commonwealth Bank of Australia;

 

·         Insurance Australia Group Limited;

 

·         Lend Lease Group;

 

·         Macquarie Group Limited;

 

·         National Australia Bank Limited; and

 

·         Suncorp-Metway Limited.

 

***Westpac Performance Plan***

 

Financial rankinggroup - The top 10 selected Australian banking and financial sector companies,by market capitalisation, at the time of grant. As at 30 September 2010,the most recently determined ranking group consisted of:

 

·         AMP Limited;

 

·         AXA Asia Pacific Holdings Limited;

 

·         Australia and New Zealand Banking Group Limited;

 

·         Bank of Queensland Limited;

 

·         Bendigo and Adelaide Bank Limited;

 

·         Commonwealth Bank of Australia;

 

·         Insurance Australia Group Limited;

 

·         Macquarie Group Limited;

 

·         National Australia Bank Limited; and

 

·         Suncorp-Metway Limited.

 

General rankinggroup - The largest 50 Australian listed companies at time of grant, excludingproperty trusts, specified resources companies and those in the financial peergroup. As at 30 September 2010, the most recently determined rankinggroup consisted of:

 

·         AGL Energy Limited;

 

·         Amcor Limited;

 

·         Ansell Limited;

 

·         Aristocrat Leisure Limited;

 

·         APN News & Media Limited;

 

·         ASX Limited;

 

·         Billabong International Limited;

 

·         Boral Limited;

 

·         Brambles Limited;

 

·         Challenger Financial Services Group Limited;

 

·         Coca-Cola Amatil Limited;

 

·         Cochlear Limited;

 

70

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DIRECTORS’ REPORT

 

·         Computershare Limited;

 

·         Connecteast Group;

 

·         CSL Limited;

 

·         CSR Limited;

 

·         David Jones Limited;

 

·         Downer EDI Limited;

 

·         Elders Limited;

 

·         Fairfax Media Limited;

 

·         Foster’s Group Limited;

 

·         Goodman Fielder Limited;

 

·         Harvey Norman Holdings Limited;

 

·         Incitec Pivot Limited;

 

·         Intoll Group;

 

·         James Hardie Industries SE;

 

·         Leighton Holdings Limited;

 

·         Lend Lease Group;

 

·         Map Group;

 

·         Metcash Limited;

 

·         Orica Limited;

 

·         Pacific Brands Limited;

 

·         Paperlinx Limited;

 

·         Perpetual Limited;

 

·         Qantas Airways Limited;

 

·         QBE Insurance Group Limited;

 

·         Resmed Inc;

 

·         Sigma Pharmaceuticals Ltd;

 

·         Sonic Healthcare Limited;

 

·         SP Ausnet;

 

·         Tatts Group Limited;

 

·         Tabcorp Holdings Limited;

 

·         Telecom Corporation of New Zealand Limited;

 

·         Telstra Corporation Limited;

 

·         Toll Holdings Limited;

 

·         Transurban Group;

 

·         Wesfarmers Limited;

 

·         West Australian Newspapers Holdings Limited;

 

·         Woolworths Limited; and

 

·         UGL Limited.

 

71

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**10. Auditor**

 

***a)******   ******Auditor’sindependence declaration***

 

A copy of theauditor’s independence declaration as required under section 307C of the *Corporations Act 2001(Cth)* is below.

 

 
| **Auditor’s Independence Declaration**                                                                                                                                                       |   | **PricewaterhouseCoopers**                                                                                                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                              |   | **ABN  52 780 433 757**                                                                                                                                                           |
| As lead auditor  for the audit of Westpac Banking Corporation for the year ended  30 September 2010, I declare that to the best of my knowledge  and belief, there have been: |   | ** **                                                                                                                                                                        |
|                                                                                                                                                                                              |   | Darling Park Tower  2

201 Sussex Street

GPO BOX 2650

SYDNEY NSW 1171

DX 77 Sydney

Australia

Telephone +61 2 8266 0000

Facsimile  +61 2 8266 9999

www.pwc.com/au |
| a.     no contraventions of the  auditor independence requirements of the *Corporations Act 2001*  in relation to the audit; and                                              |   |
|                                                                                                                                                                                              |   |
| b.     no contraventions of any  applicable code of professional conduct in relation to the audit.                                                                            |   |
|                                                                                                                                                                                              |   |
| This declaration  is in respect of Westpac Banking Corporation and the entities it controlled  during the year.                                                                                   |   |
|                                                                                                                                                                                              |   |

 

 
| Ian Hammond  Partner  PricewaterhouseCoopers | Sydney  3 November 2010 |
|----------------------------------------------|------------------------------|

 

***b)******   ******Non-auditservices***

 

We may decide toengage PricewaterhouseCoopers on assignments additional to their statutoryaudit duties where their expertise or experience with Westpac or a controlledentity is important.

 

Details of thenon-audit service amounts paid or payable to PricewaterhouseCoopers fornon-audit services provided during the 2009 and 2010 financial years are setout in Note 33 to our financial statements.

 

Our externalauditor, PricewaterhouseCoopers, also provides audit and non-audit services tonon-consolidated entities including non-consolidated securitisation vehiclessponsored by the Group, non-consolidated trusts of which a Westpac Group entityis trustee, manager or responsible entity and non-consolidated superannuationfunds or pension funds. The fees in respect of these services wereapproximately $8.6 million in total (2009 $6.3 million).PricewaterhouseCoopers may also provide audit and non-audit services to otherentities in which Westpac holds a minority interest and which are not consolidated.Westpac is not aware of the amount of any fees paid by those entities.

 

Westpac has a policyon engaging PricewaterhouseCoopers, details of which are set out in the ‘Corporategovernance’ section, including the subsection entitled ‘Engagement of theexternal auditor’, which forms part of this report.

 

The Board hasconsidered the position and, in accordance with the advice received from theAudit Committee, is satisfied that the provision of the non-audit servicesduring 2010 by PricewaterhouseCoopers is compatible with the general standardof independence for auditors imposed by the *Corporations Act 2001*.The Directors are satisfied that the provision of non-audit services byPricewaterhouseCoopers, as set out above, did not compromise the auditorindependence requirements of the *Corporations Act 2001*for the following reasons:

 

·         all non-audit services have been reviewed by theAudit Committee to ensure they do not impact the impartiality and objectivityof the auditor; and

 

·                  none of the services undermine the general principlesrelating to auditor independence as set out in APES 110 *Code of Ethics for Professional Accounts*.     

 

72

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Signed in accordancewith a resolution of the Board.

 
|                                              |                                                                                        |
|----------------------------------------------|----------------------------------------------------------------------------------------|
| Ted Evans AC  Chairman  3 November 2010 | Gail Kelly  Managing Director & Chief Executive Officer  3 November 2010 |

 

73

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**This page has beenintentionally left blank**

 

74

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SECTION 2

 

Fiveyear summary

Readingthis report

Reviewof Group operations

Divisionalperformance

Riskand risk management

OtherWestpac business information

Additional financialinformation

 

 

75

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FIVE YEAR SUMMARY(1)

 
| **(in $millions unless otherwise indicated)**                                      | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **Income statement year ended 30  September(2)**                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Net interest income                                                                                    |       | 11,842   |       | 11,646   |       | 7,222    |       | 6,313    |       | 5,642    |       |
| Non-interest income                                                                                    |       | 5,068    |       | 4,859    |       | 4,383    |       | 4,006    |       | 3,693    |       |
| Net operating income before operating expenses and impairment charges  on loans                        |       | 16,910   |       | 16,505   |       | 11,605   |       | 10,319   |       | 9,335    |       |
| Operating expenses                                                                                     |       | (7,416   | )          | (7,171   | )          | (5,455   | )          | (4,689   | )          | (4,413   | )          |
| Impairment charges on loans                                                                            |       | (1,456   | )          | (3,238   | )          | (931     | )          | (482     | )          | (375     | )          |
| Profit before income tax expense                                                                       |       | 8,038    |       | 6,096    |       | 5,219    |       | 5,148    |       | 4,547    |       |
| Income tax expense                                                                                     |       | (1,626   | )          | (2,579   | )          | (1,287   | )          | (1,630   | )          | (1,422   | )          |
| Net profit attributable to non-controlling interests                                                   |       | (66      | )          | (71      | )          | (73      | )          | (67      | )          | (54      | )          |
| **Net profit attributable to equity  holders**                                                         |       | 6,346    |       | 3,446    |       | 3,859    |       | 3,451    |       | 3,071    |       |
| **Balance sheet at 30 September(2)**                                                                   |       |     |       |     |       |     |       |     |       |     |       |
| Loans                                                                                                  |       | 477,655  |       | 463,459  |       | 313,545  |       | 275,377  |       | 236,380  |       |
| Other assets                                                                                           |       | 140,622  |       | 126,128  |       | 126,131  |       | 102,243  |       | 65,081   |       |
| **Total assets**                                                                                       |       | 618,277  |       | 589,587  |       | 439,676  |       | 377,620  |       | 301,461  |       |
| Deposits                                                                                               |       | 337,385  |       | 329,456  |       | 233,730  |       | 202,054  |       | 169,637  |       |
| Debt issues and acceptances                                                                            |       | 150,971  |       | 133,024  |       | 100,369  |       | 87,126   |       | 66,080   |       |
| Loan capital                                                                                           |       | 9,632    |       | 11,138   |       | 8,718    |       | 7,704    |       | 5,957    |       |
| Other liabilities                                                                                      |       | 80,171   |       | 79,398   |       | 77,388   |       | 62,828   |       | 43,661   |       |
| **Total liabilities**                                                                                  |       | 578,159  |       | 553,016  |       | 420,205  |       | 359,712  |       | 285,335  |       |
| **Shareholders’ equity and  non-controlling interest**                                            |       | 40,118   |       | 36,571   |       | 19,471   |       | 17,908   |       | 16,126   |       |
|                                                                                                   |       |     |       |     |       |     |       |     |       |     |       |
| **Key financial ratios**                                                                               |       |     |       |     |       |     |       |     |       |     |       |
| **Shareholder value**                                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Dividends per ordinary share (cents)                                                                   |       | 139      |       | 116      |       | 142      |       | 131      |       | 116      |       |
| Dividend payout ratio (%)                                                                              |       | 64.9     |       | 92.6     |       | 68.9     |       | 70.1     |       | 69.4     |       |
| Return on average ordinary equity (%)                                                                  |       | 17.4     |       | 10.8     |       | 23.1     |       | 23.5     |       | 23.0     |       |
| Basic earnings per share (cents)                                                                       |       | 214.2    |       | 125.3    |       | 206.0    |       | 186.9    |       | 167.2    |       |
| Net tangible assets per ordinary share ($)(3)                                                          |       | 8.96     |       | 7.89     |       | 7.71     |       | 7.00     |       | 6.14     |       |
| Share price ($):                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| High                                                                                                   |       | 28.43    |       | 26.74    |       | 31.32    |       | 28.69    |       | 25.35    |       |
| Low                                                                                                    |       | 20.56    |       | 14.40    |       | 18.36    |       | 22.53    |       | 21.31    |       |
| Close                                                                                                  |       | 23.24    |       | 26.25    |       | 21.48    |       | 28.50    |       | 22.71    |       |
|                                                                                                   |       |     |       |     |       |     |       |     |       |     |       |
| **Business performance**                                                                               |       |     |       |     |       |     |       |     |       |     |       |
| Operating expenses to operating income ratio (%)                                                       |       | 43.9     |       | 43.4     |       | 47.0     |       | 45.4     |       | 47.3     |       |
| Net interest margin                                                                                    |       | 2.21     |       | 2.38     |       | 2.07     |       | 2.19     |       | 2.29     |       |
| **Capital adequacy**                                                                                   |       |     |       |     |       |     |       |     |       |     |       |
| Total equity to total assets (%)                                                                       |       | 6.5      |       | 6.2      |       | 4.4      |       | 4.7      |       | 5.3      |       |
| Total equity to total average assets (%)                                                               |       | 6.6      |       | 6.3      |       | 4.8      |       | 5.4      |       | 5.7      |       |
| Tier 1 ratio (%)(4)                                                                                    |       | 9.1      |       | 8.1      |       | 7.8      |       | 6.5      |       | 6.9      |       |
| Total capital ratio (%)(4)                                                                             |       | 11.0     |       | 10.8     |       | 10.8     |       | 9.5      |       | 9.6      |       |
| **Credit quality**                                                                                     |       |     |       |     |       |     |       |     |       |     |       |
| Net impaired assets to equity and collectively assessed provisions (%)                                 |       | 6.2      |       | 5.7      |       | 3.0      |       | 1.4      |       | 1.5      |       |
| Total provisions(5) for impairment on loans and credit  commitments to total loans (basis points) |       | 104.9    |       | 101.2    |       | 68.9     |       | 56.3     |       | 57.2     |       |
| **Other information**                                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Core full time equivalent staff (number at financial year end)(6)                                      |       | 35,055   |       | 34,189   |       | 26,717   |       | 25,903   |       | 25,363   |       |

 

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(1)          This five year summary is prepared in accordance withA-IFRS. Where accounting classifications have changed or where changes inaccounting policy are adopted retrospectively, comparatives have been revisedand may differ from results previously reported.

(2)          The above income statement extracts for 2010, 2009 and2008 and balance sheet extracts for 2010, 2009 and 2008 are derived from theconsolidated financial statements included in this Annual Report and prioryears are derived from financial statements previously published.

(3)          Shareholders’ equity and non-controlling interests,after deducting non-controlling interests, preference equity and goodwill andother intangible assets divided by the number of ordinary shares outstanding,less treasury shares held.

(4)          For details on the calculation of this ratio, pleaserefer to Note 30 to the financial statements.

(5)          In previous years this ratio has included, ifapplicable, the APRA required capital deduction (above A-IFRS provisioninglevels) which formed part of the APRA termed General Reserve for Credit Losses.This ratio has been revised and is now based only on A-IFRS provisioninglevels. The ratio at 30 September 2009 was not impacted, the ratio at 30 September 2008was revised from 69.0 bps to 68.9 bps, the ratio at 30 September 2007was revised from 61.6 bps to 56.3 bps and the ratio at 30 September 2006was revised from 63.0 bps to 57.2 bps.

(6)          Core full-time equivalent staff includes overtime andpro-rata part time staff. It excludes staff on unpaid absences (e.g. unpaidmaternity leave), temporary and contract staff.

 

76

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READING THISREPORT

 

**Disclosure regardingforward-looking statements**

 

This Annual Reportcontains statements that constitute ‘forward-looking statements’ within themeaning of Section 21E of the US Securities Exchange Act of 1934.

 

Forward-lookingstatements are statements about matters that are not historical facts.Forward-looking statements appear in a number of places in this Annual Reportand include statements regarding our intent, belief or current expectationswith respect to our business and operations, market conditions, results ofoperations and financial condition, including, without limitation, future loanloss provisions and financial support to certain borrowers. We use words suchas ‘will’, ‘may’, ‘expect’, ‘intend’, ‘seek’, ‘would’, ‘should’, ‘could’, ‘continue’,‘plan’, ‘estimate’, ‘anticipate’, ‘believe’, ‘probability’, ‘risk’ or othersimilar words to identify forward-looking statements. These forward-lookingstatements reflect our current views with respect to future events and aresubject to change, certain risks, uncertainties and assumptions which are, inmany instances, beyond our control, and have been made based upon management’sexpectations and beliefs concerning future developments and their potentialeffect upon us. There can be no assurance that future developments will be inaccordance with our expectations or that the effect of future developments onus will be those anticipated. Actual results could differ materially from thosewhich we expect, depending on the outcome of various factors, including, butnot limited to:

 

·         the effect of, and changes in, laws, regulations, taxation or accountingstandards or practices and government policy, particularly changes toliquidity, leverage and capital requirements arising in response to the globalfinancial crisis;

 

·         continuing impacts and consequences of the global financial crisis,including uncertain conditions in funding, equity and asset markets;

 

·         adverse asset, credit or capital market conditions;

 

·         changes to our credit ratings;

 

·         inflation, interest rate, exchange rate, market and monetaryfluctuations;

 

·         market liquidity and investor confidence;

 

·         changes in consumer spending, saving and borrowing habits in Australia,New Zealand and in other countries in which Westpac conducts its operations;

 

·         the effects of competition in the geographic and business areas in whichWestpac conducts its operations;

 

·         the ability to maintain or to increase market share and controlexpenses;

 

·         the timely development of and acceptance of new products and servicesand the perceived overall value of these products and services by users;

 

·         technological changes and risks associated with changes to ourtechnology systems;

 

·         operational risks or environmental factors;

 

·         adverse impacts on our reputation;

 

·         demographic changes and changes in political, social or economicconditions in any of the major markets in which Westpac operates;

 

·         stability of Australian and international financial systems anddisruptions to financial markets and any losses Westpac may experience as aresult; and

 

·         various other factors beyond Westpac’s control.

 

The above list isnot exhaustive. For certain other factors that may impact on forward-lookingstatements made by us, refer to ‘Risk factors’ under the section ‘Risk and riskmanagement’ in this Annual Report. When relying on forward-looking statementsto make decisions with respect to us, investors and others should carefullyconsider the foregoing factors and other uncertainties and events.

 

We are under noobligation, and do not intend, to update any forward-looking statementscontained in this Annual Report, whether as a result of new information, futureevents or otherwise, after the date of this Annual Report.

 

**Significant developments**

 

For a discussion ofsignificant developments impacting the Group, refer to ‘Significantdevelopments’ under ‘Information on Westpac’ in Section 1 of thisAnnual Report.

 

**Currency of presentation, exchangerates and certain definitions**

 

In this AnnualReport, ‘financial statements’ means our audited consolidated balance sheet asat 30 September 2010, 30 September 2009 and 30 September 2008and consolidated income statement, cash flows and recognised income and expensefor each of the years ended 30 September 2010, 2009 and 2008 together withaccompanying notes which are included in this Annual Report.

 

Our financial yearends on 30 September. As used throughout this Annual Report, the financial yearended 30 September 2010 is referred to as 2010 and other financialyears are referred to in a corresponding manner.

 

We publish ourconsolidated financial statements in Australian dollars. In this Annual Report,unless otherwise stated or the context otherwise requires, references to ‘dollars’,‘dollar amounts’, ‘$’, ‘AUD’ or ‘A$’ are to Australian dollars, references to ‘US$’,‘USD’ or ‘US dollars’ are to United States dollars and references to ‘NZ$’, ‘NZD’or ‘NZ dollars’ are to New Zealand dollars. Solely for the convenience of thereader, certain Australian dollar amounts have been translated into US dollarsat specified rates. These translations should not be construed as representationsthat the Australian dollar amounts actually represent such US dollaramounts or have been or could be converted into US dollars at the rateindicated. Unless otherwise stated, the translations of Australian dollars intoUS dollars have been made at the rate of A$1.00 = US$0.9640 (2009 US$0.8824),the noon buying rate in New York City for cable transfers in Australian dollarsas certified for customs purposes by the Federal Reserve Bank of New York (the ‘noonbuying rate’) as of 30 September 2010. Unless otherwise stated, thetranslation of Australian dollars into NZ dollars has been made at the rate ofA$1.00 = NZ$1.3145 

 

77

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(2009 NZ$1.2196),being the closing spot exchange rate on 30 September 2010 used in thefinancial statements. Refer to ‘Exchange rates’ in Section 4 forinformation regarding the rates of exchange between the Australian dollar andthe US dollar for the financial years ended 30 September 2006 to30 September 2010.

 

Any discrepancies betweentotals and sums of components in tables contained in this Annual Report are dueto rounding.

 

***Additional financial information***

 

In a separatesection of this Annual Report under the heading ‘Additional financialinformation’, we have included selected consolidated financial and operatingdata on loans and provisions for impairment charges on loans by industryclassifications for the financial years ended 30 September 2007 and2006 on the basis of presentation used in the Annual Report for the year ended30 September 2007. We have presented this information separately becauseit is not directly comparable to the presentation of Notes 11 and 12 to thefinancial statements for the year ended 30 September 2010 included inSection 3 of this Annual Report. With effect from the financial year ended30 September 2008, we modified the presentation of loans andprovisions for impairment charges by industry to align external reporting withthe basis of presentation for internal reporting. We revised the presentationfor the year ended 30 September 2007, but it was impractical torevise the disclosure for the financial year ended 30 September 2006.

 

***St.George Bank Limited merger***

 

For accountingpurposes the merger with St.George Bank Limited took effect from close ofbusiness on 17 November 2008 and the net profit of St.George Bank wasincluded in the 2009 financial year with effect from 18 November 2008 to30 September 2009. Our financial results for the 2010 financial year aretherefore not directly comparable to our results for the 2009 financial yeardue to the additional six weeks of earnings of St.George Bank being included in2010. The impact of this is highlighted in relevant sections of the Review ofGroup Operations. When comparing the results for 2009 with the results for 2008we refer to the financial performance of Westpac ‘excluding the impact ofSt.George’, by which we mean the financial performance of The Westpac Group for2009 less the contribution from St.George Bank Limited and itssubsidiaries from 18 November 2008 to 30 September 2009(including the impact of the acquisition accounting entries related tothe merger). References to ‘excludes the impact of St.George’ have anequivalent meaning.

 

78

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REVIEW OF GROUP OPERATIONS

 

**Selected consolidated financialand operating data**

 

We have derived thefollowing selected financial information as of, and for the financial yearsended, 30 September 2010, 2009, 2008, 2007 and 2006 from our auditedconsolidated financial statements and related notes.

 

This informationshould be read together with our audited consolidated financial statements andthe accompanying notes included elsewhere in this Annual Report.

 

**Accounting standards**

 

The financialstatements and other financial information included elsewhere in this AnnualReport, unless otherwise indicated, have been prepared and presented inaccordance with Australian Accounting Standards, which include the Australianequivalents to International Financial Reporting Standards (A-IFRS). They alsocomply with International Financial Reporting Standards (IFRS) as issued by theInternational Accounting Standards Board (IASB).

 

The financialstatements have been prepared in accordance with the accounting policiesdescribed in Note 1 to the financial statements.

 

***Recent accounting developments***

 

For a discussion ofrecent accounting developments refer to Note 1 to the financial statements.

 

***Critical accounting estimates***

 

Our reported resultsare sensitive to the accounting policies, assumptions and estimates thatunderlie the preparation of the income statement and the balance sheet. Ourprincipal accounting policies are disclosed in Note 1 to the financialstatements. Note 1 also includes a description of our critical accountingassumptions and estimates. We have discussed the development and selection ofthe critical accounting estimates with our Board Audit Committee (BAC). Thefollowing is a summary of the areas we consider involve our most criticalaccounting estimates (for more detail refer to Note 1 to the financialstatements).

 

*Fair value of financial instruments*

 

Financialinstruments classified as held-for-trading, designated at fair value throughprofit or loss and financial assets classified as available-for-sale arerecognised in the financial statements at fair value. All derivatives aremeasured and recognised at fair value. As far as possible, financialinstruments are valued with reference to quoted, observable market prices or byusing models which employ observable valuation parameters. Where valuationmodels rely on parameters for which inputs are not observable, judgments andestimation may be required.

 

As at 30 September 2010,the fair value of trading securities, financial assets designated at fair valuethrough profit and loss, available-for-sale securities and life insuranceassets was $67,493 million (2009 $59,836 million). The fair value oftrading liabilities and financial liabilities designated at fair value throughprofit and loss, deposits at fair value and debt issues at fair value was$91,426 million (2009 $103,747 million). The fair value ofoutstanding derivatives was $7,937 million (2009 $3,291 million) netliability. The fair value of life insurance assets of $12,310 million(2009 $12,384 million) was substantially based on quoted market prices.The fair value of financial assets determined by valuation models that did notuse observable market prices was $757 million and $153 million forfinancial liabilities. The fair value of other financial assets and financialliabilities, including derivatives, is largely determined based on valuationmodels using observable market prices and rates. Where observable market inputsare not available, day one profits or losses are not recognised.

 

We believe that thejudgments and estimates used are reasonable in the current market. However, achange in these judgments and estimates would lead to different results asfuture market conditions can vary from those expected.

 

*Provisions for impairment charges on loans*

 

Provisions for loanimpairment charges represent management’s best estimate of the losses incurredin the loan portfolios as at the balance date. There are two components of ourloan impairment provisions: individually assessed provisions (IAPs) and collectivelyassessed provisions (CAPs).

 

In determining IAPconsiderations that have a bearing on the expected future cash flows are takeninto account, for example, the business prospects of the customer, therealisable value of collateral, our position relative to other claimants, thereliability of customer information and the likely cost and duration of thework-out process. These judgments and estimates can change with time as newinformation becomes available or as work-out strategies evolve, resulting inrevisions to the impairment provision as individual decisions are made.

 

The collectivelyassessed provisions are established on a portfolio basis taking into accountthe level of arrears, collateral and security, past loss experience andexpected defaults based on portfolio trends. The most significant factors inestablishing these provisions are estimated loss rates and related emergenceperiods. The future credit quality of these portfolios is subject touncertainties that could cause actual credit losses to differ from reportedloan impairment provisions. These uncertainties include the economicenvironment, notably interest rates, unemployment levels, payment behaviour andbankruptcy rates.

 

As at 30 September 2010,gross loans to customers were $482,366 million and the provision for impairmenton loans was $4,711 million.

 

*Goodwill and intangible assets*

 

Goodwill representsthe excess of purchase consideration, the amount of any non-controllinginterest in the acquiree and the acquisition date fair value of any previousequity interest in the acquiree, over the fair value of the identifiable netassets of acquired businesses. The determination of the fair value of theassets and liabilities of acquired businesses requires the exercise of managementjudgment. Different fair values would result in changes to the goodwill and tothe post-acquisition performance of the acquisitions.

 

79

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Goodwill is testedfor impairment annually by determining if the carrying value of the cashgenerating unit (CGU) that it has been allocated to is recoverable. Therecoverable amount is the higher of the CGU’s fair value and its value in use.Determination of appropriate cash flows and discount rates for the calculationof the value in use is subjective. As at 30 September 2010, thecarrying value of goodwill was $8,569 million.

 

*Superannuation obligations*

 

The actuarialvaluation of our defined benefit plan obligations are dependant upon a seriesof assumptions, the key ones being price inflation, earnings growth, mortality,morbidity and investment returns assumptions. Different assumptions couldsignificantly alter the amount of the difference between plan assets anddefined benefit obligations and the amount recognised directly in retainedearnings.

 

The superannuationdeficit across all our plans as at 30 September 2010 was $425 million(2009 $388 million deficit).

 

*Provisions (other than loan impairment charges)*

 

Provisions are heldin respect of a range of obligations such as employee entitlements,restructuring costs, litigation provisions and non-lending losses, impairmentcharges on credit commitments, and surplus lease space. Some of the provisionsinvolve significant judgment about the likely outcome of various events andestimated future cash flows.

 

*Income taxes*

 

The Group is subjectto income taxes in Australia and jurisdictions where it has foreign operations.Significant judgment is required in determining the worldwide provision forincome taxes. There are many transactions and calculations undertaken duringthe ordinary course of business for which the ultimate tax determination isuncertain. The Group estimates its tax liabilities based on the Group’sunderstanding of the tax law. Where the final outcome of these matters isdifferent from the amounts that were initially recorded, such differences willimpact the current and deferred tax provisions in the period where suchdetermination is made.

 

Provisions fortaxation held in respect of uncertain tax positions represent the tax benefitsat risk. The assessment of the amount of tax benefits at risk involves theexercise of management judgments about the ultimate outcomes of thetransactions. Payments which are expected to be incurred later than one yearare discounted at a rate which reflects both current interest rates and therisks specific to that provision.

 

*St.George Bank Limited merger*

 

The merger withSt.George was accounted for using the purchase method of accounting. All theidentifiable assets and liabilities of St.George were initially recognised bythe Group at their fair value on the date of the merger. This involvedadditional critical accounting assumptions, judgments and estimates that mayhave a material impact on the Group’s financial statements. The assets andliabilities recognised by the Group following the merger with St.George are setout in Note 43.

 

·         intangible assets

 

Identifiableintangible assets that are not normally recognised are required to beidentified and measured at their fair value as a result of the purchase priceaccounting requirements of AASB 3 Business Combinations (AASB 3). This involvesthe use of judgments, estimates and assumptions about how customers may act andhow products will perform in the future, based largely on past experience andfuture contractual arrangements.

 

The followingmaterial identifiable intangible assets were recognised as a result of themerger:

 

·         core deposit intangibles;

 

·         brand names;

 

·         financial planner distribution relationships; and

 

·         credit card customer relationships.

 

·         financial assets and liabilities

 

The fair value ofall of St.George’s financial assets and financial liabilities were determinedat the merger date. Many of these assets and liabilities are not normallytraded in active markets. The global credit and capital market conditions thatincluded extreme volatility, disruption and decreased liquidity increased thelevel of management judgment required in determining the fair value ofSt.George’s financial assets and financial liabilities.

 

·         tax consolidation

 

Following theredemption of St.George’s hybrid instruments on 31 March 2009, St.Georgeand all its wholly owned Australian subsidiaries joined the Westpac taxconsolidated group. Westpac was required to reset the tax value of certain St.Georgeassets to the appropriate market value of those assets.

 

In order todetermine the impact of St.George joining the Westpac tax consolidation group,the fair value of St.George and the fair value of its identifiable assets andliabilities needed to be determined as at 31 March 2009. Thisrequires management to make similar critical assumptions, judgments andestimates that were involved in determining the fair value of identifiableassets and liabilities on the date of the acquisition.

 

Refer to Note 5 forassessment of the current impact of St.George joining the Westpac taxconsolidated group.

 

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REVIEW OF GROUP OPERATIONS

 

**Income statement review**

 

**Consolidated income statement(1)**

 
| ** **                                                                      | ** ** | **Year Ended 30 September** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                      | ** ** | **2010**                                   | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(in $millions unless otherwise indicated)**               | ** ** | **US$(2)**                                 | ** ** | **A$** | ** ** | **A$** | ** ** | **A$** | ** ** | **A$** | ** ** | **A$** | ** ** |
| **Amounts in accordance with  A-IFRS**                                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                                                                 |       | 32,922                                     |       | 34,151 |   | 30,446 |   | 29,081 |   | 22,075 |   | 18,091 |   |
| Interest expense                                                                |       | (21,506                                    | )          | (22,309 | ) | (18,800 | ) | (21,859 | ) | (15,762 | ) | (12,449 | ) |
| Net interest income                                                             |       | 11,416                                     |       | 11,842 |   | 11,646 |   | 7,222 |   | 6,313 |   | 5,642 |   |
| Non-interest income                                                             |       | 4,886                                      |       | 5,068 |   | 4,859 |   | 4,383 |   | 4,006 |   | 3,693 |   |
| Net operating income before operating expenses and impairment charges  on loans |       | 16,302                                     |       | 16,910 |   | 16,505 |   | 11,605 |   | 10,319 |   | 9,335 |   |
| Operating expenses                                                              |       | (7,149                                     | )          | (7,416 | ) | (7,171 | ) | (5,455 | ) | (4,689 | ) | (4,413 | ) |
| Impairment charges on loans                                                     |       | (1,404                                     | )          | (1,456 | ) | (3,238 | ) | (931 | ) | (482 | ) | (375 | ) |
| **Profit before income tax**                                                    |       | 7,749                                      |       | 8,038 |   | 6,096 |   | 5,219 |   | 5,148 |   | 4,547 |   |
| Income tax expense                                                              |       | (1,567                                     | )          | (1,626 | ) | (2,579 | ) | (1,287 | ) | (1,630 | ) | (1,422 | ) |
| **Net profit for the year**                                                     |       | 6,182                                      |       | 6,412 |   | 3,517 |   | 3,932 |   | 3,518 |   | 3,125 |   |
| Net profit attributable to non-controlling interests                            |       | (64                                        | )          | (66 | ) | (71 | ) | (73 | ) | (67 | ) | (54 | ) |
| **Net profit attributable to  equity holders of Westpac**                       |       | 6,118                                      |       | 6,346 |   | 3,446 |   | 3,859 |   | 3,451 |   | 3,071 |   |
| Weighted average number of ordinary shares (millions)                           |       | 2,960                                      |       | 2,960 |   | 2,747 |   | 1,871 |   | 1,846 |   | 1,837 |   |
| Basic earnings per ordinary share (cents)                                       |       | 206.5                                      |       | 214.2 |   | 125.3 |   | 206.0 |   | 186.9 |   | 167.2 |   |
| Diluted earnings per share (cents)(3)                                           |       | 199.6                                      |       | 207.1 |   | 123.2 |   | 200.1 |   | 185.3 |   | 165.7 |   |
| Dividends per ordinary share (cents)                                            |       | 134                                        |       | 139 |   | 116 |   | 142 |   | 131 |   | 116 |   |
| Dividend payout ratio (%)(4)                                                    |       | 64.9                                       |       | 64.9 |   | 92.6 |   | 68.9 |   | 70.1 |   | 69.4 |   |

 

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(1)          Where accounting classifications have changed or wherechanges in accounting policy are adopted retrospectively, comparatives havebeen revised and may differ from results previously reported.

(2)          Australian dollar amounts have been translated into USdollars solely for the convenience of the reader at the rate of A$1.00 =US$0.9640, the noon buying rate on 30 September 2010. Amounts or ratiosare in accordance with this conversion rate.

(3)          Based on basic earnings per share, with the weightedaverage number of fully paid ordinary shares outstanding adjusted for theconversion of dilutive potential ordinary shares, issued for no consideration,and after adjusting earnings for distributions on dilutive potential ordinaryshares.

(4)          Calculated by dividing the dividends per ordinaryshare by the basic earnings per ordinary share.

 

**Overview of performance — 2010 v2009**

 

Net profitattributable to equity holders for 2010 was $6,346 million, an increase of$2,900 million or 84% compared to $3,446 million in 2009. The result wascharacterised by modest growth of $405 million or 2% in net operating incomebefore operating expenses and impairment charges on loans (hereafter referredto as net operating income), operating expense growth of $245 million or3%, a significant reduction of $1,782 million or 55% in impairment charges onloans and a lower effective tax rate. The significant reduction in impairmentcharges on loans reflected the improved performance of the Australian and New Zealandeconomies.

 

The increase in netprofit attributable to equity holders from 2009 to 2010 was also assisted bythe merger with St.George Bank Limited. On 1 December 2008, WestpacBanking Corporation completed its merger with St.George Bank Limited. Foraccounting purposes, St.George was consolidated on 17 November 2008 andSt.George’s net profit was included in the 2009 results from 18 November 2008to 30 September 2009. This meant that The Westpac Group 2010 resultsincluded a full 52 weeks of St.George Bank Limited’s operations whereas theGroup’s 2009 results included approximately 46 weeks. The followingdiscussion and Review of Group operations and the discussion of Divisionalperformance will identify the impact that the additional six weeks had on ouryear on year performance.

 

Net profit grew inthe majority of our divisions. WIB, St.George Bank, BTFG, New Zealand and Otherdivisions net profit increased by $1,175 million, $95 million,$109 million, $64 million and $1,609 million respectively, whileWestpac RBB net profit decreased by $152 million.

 

Net interest incomewas $11,842 million in 2010, an increase of $196 million or 2% compared to2009. Excluding the impact of the additional six weeks of St.George’soperations, net interest income was flat. A decline in net interest margin wasonly partially offset by growth in average interest earnings assets,particularly in Australian housing loans. The decline in net interest marginswas the result of increases in asset repricing being insufficient to offsetsignificant increases in funding costs and lower treasury earnings. Higherfunding costs were the result of continued increases in wholesale funding costsand competition, driving up the price of deposits.

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Non-interest incomewas $5,068 million in 2010, an increase of $209 million or 4% compared to 2009.The inclusion of the additional six weeks of St.George’s operations in 2010drove the majority of the growth. Excluding this impact, non-interest income wasrelatively flat with growth in wealth management income, primarily due tostrong net flows and strong asset markets, and other income, offset by lowertrading income and lower fees and commission income. Fees and commissions wereimpacted by the Group’s decision to lower certain customer fees from 1 October 2009.Following this decision, fees and commissions reduced by $298 millionin 2010.

 

Operating expenseswere $7,416 million in 2010, an increase of $245 million or 3% compared to2009. Most of this increase was attributable to the inclusion of the St.Georgeexpense base for the full year. Excluding the impact of an additional six weeksof St.George operations in 2010, the increase in operating expenses was mainlydriven by continued investment in customer facing employees, investment in ourbranch network and increased spend on technology projects, offset by costsavings related to merger synergies and lower spend on the St.Georgeintegration project.

 

Impairment chargeson loans were $1,456 million in 2010, a decrease of $1,782 million or 55%compared to $3,238 million in 2009. The impact of including St.Georgeimpairments for the full year was not significant. Lower Institutional Bank andNew Zealand impairments were the primary driver of the reduction.

 

The effective taxrate decreased from 42% in 2009 to 20% in 2010.This was driven by two factors:

 

·         the Group finalised a component of tax consolidation related to themerger with St.George. This led to a reduction of $685 million to theGroup’s tax expense for 2010; and

 

·         tax provisioning for New Zealand structured finance transactions enteredinto between 1998 and 2002, significantly impacted the tax rate in each year.In 2009 a provision of $703 million was raised. Following a settlement with theCIR, $106 million was released from the provision in 2010.

 

2010 earnings pershare was 214.2 cents per share compared to 125.3 cents per share in 2009.There were no major capital transactions during 2010. The increase in thenumber of shares on issue in 2010 was primarily due to shares issued under theDividend Reinvestment Plan (DRP).

 

Given the improvedearnings during 2010, a final dividend of 74 cents per share has been declaredby the Board, taking the full year dividend for 2010 to 139 cents per share.The dividend is fully franked. This full year dividend represents an increaseof 20% over the dividends declared in 2009 and a pay-out ratio of 64.9%.

 

**Income statement review — 2010 v2009**

 

***Net interest income — 2010 v 2009***

 
| ** **                                      | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                      | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Interest income                                 |       | 34,151   |       | 30,446   |       | 29,081   |       |
| Interest expense                                |       | (22,309  | )          | (18,800  | )          | (21,859  | )          |
| **Net interest income**                         |       | 11,842   |       | 11,646   |       | 7,222    |       |
| **Increase/(decrease) in net  interest income** |       |     |       |     |       |     |       |
| Due to change in volume                         |       | 1,444    |       | 2,643    |       | 812      |       |
| Due to change in rate                           |       | (1,248   | )          | 1,781    |       | 97       |       |
| **Change in net interest income**               |       | 196      |       | 4,424    |       | 909      |       |

 

Net interest incomewas $11,842 million in 2010, an increase of $196 million or 2% compared to2009. Excluding the impact of the additional six weeks of St.George’soperations in 2010, net interest income was flat.

 

Net interest marginsdecreased in 2010 by 17 basis points compared to 2009. Loan repricing wasinsufficient to offset the significant increases in funding costs. Averagewholesale funding costs continued to rise as more expensive wholesale fundingwas used to replace maturing less expensive wholesale funding and to fundincreases in assets. The cost of customer deposits also rose as competitionincreased in these markets. Revenue generated from Group Treasury and WIBMarkets also decreased, impacting net interest margins.

 

Loan growth(1) in2010 was 3% compared to 2009, with the key feature being the 12% growth inAustralian housing loans. The Group grew ahead of system in both Australia andNew Zealand. Strong growth in Australian housing lending was offset byreductions in business lending.

 

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(1)          For the purposes of this discussion on net interestincome, loan and deposit growth has been determined by comparing balances at30 September 2010 to balances at 30 September 2009.

 

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REVIEW OF GROUP OPERATIONS

 

Loan growth had thefollowing specific components:

 

·         Australian housing lending increased 12% or $30.2 billion compared to2009. Australian housing credit growth was 1.2 times banking system(1).Initial solid growth in the First Home Buyer segment slowed through the year asGovernment First Home Buyer incentives were reduced. The Investor segment hasreturned to partially offset the slower growth in the Owner Occupier segment;

 

·         Australian business lending declined 8% or $11.1 billion compared to2009. Slightly over half of the decline was the result of contraction in thecommercial property lending portfolio, as runoff exceeded new lending. Theremainder of the decline was the result of low demand and the Institutionalportfolio being impacted by large customers deleveraging;

 

·         housing lending in New Zealand grew ahead of system(2) at 6% orNZ$1.8 billion; and

 

·         New Zealand business lending (including Institutional lending)contracted 2% or NZ$0.5 billion, largely following declines in demand.

 

Total deposits(3) at30 September 2010 increased 2% or $7.9 billion compared to 2009 witha 5% or $12.9 billion increase in customer deposits. Growth in non-interestbearing accounts was also strong, predominantly as a result of mortgage offsetaccount growth. The contribution from Treasury deposits reduced, following thedecision to replace short-term wholesale funding with longer term wholesalefunding. This resulted in Treasury deposits contracting by $4.9 billionor 8%.

 

The Group grewcustomer deposits market share in Australia and New Zealand. In Australia growthin household deposits was 1.1 times banking system(2).

 

Deposit growth hadthe following specific components:

 

·         Australian customer deposits increased 5% or $12.4 billion. This growthwas driven by increases in term deposits of 12% or $9.5 billion, which sawparticularly strong growth in the first half of 2010, and in the second half of2010 by increases in at call accounts reflecting changing customer preferences;

 

·         Australian non-interest bearing deposits increased 19% or $1.9 billion,primarily in mortgage off-set accounts;

 

·         New Zealand term deposits increased 16% or NZ$2.8 billion; and

 

·         the certificate of deposit portfolio, which provides the Group withshort-term wholesale funding, was reduced as the Group continued tolengthen the duration of wholesale funding. Within this portfolio there wasalso a reduction in Australian certificates of deposit as they were replacedwith longer term certificates of deposit issued in the United States.

 

----

(1) APRA system growth, 12 months to 30 September 2010.

 

(2) Reserve Bank of New Zealand (RBNZ), 12 months to 30 September 2010.

 

(3)  For thepurposes of this discussion on net interest income, loanand deposit growth has been determined by comparing balances at30 September 2010 to balances at 30 September 2009.

 

83

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***Interest spread and margin — 2010 v 2009***

 
| ** **                                                    | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                    | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| **Group**                                                     |       |     |       |     |       |     |       |
| Net interest income                                           |       | 11,842   |       | 11,646   |       | 7,222    |       |
| Tax equivalent gross up(1)                                    |       | —   |       | 45       |       | 72       |       |
| Net interest income (including gross up)                      |       | 11,842   |       | 11,691   |       | 7,294    |       |
| Average interest earning assets                               |       | 534,991  |       | 490,669  |       | 351,657  |       |
| Average interest bearing liabilities                          |       | 501,968  |       | 465,842  |       | 334,865  |       |
| Average net non-interest bearing liabilities and equity       |       | 33,023   |       | 24,827   |       | 16,792   |       |
| Interest spread(2)                                            |       | 1.94     | %          | 2.18     | %          | 1.76     | %          |
| Benefit of net non-interest bearing liabilities and equity(3) |       | 0.27     | %          | 0.20     | %          | 0.31     | %          |
| Net interest margin(4)                                        |       | 2.21     | %          | 2.38     | %          | 2.07     | %          |

 

----

(1)          We entered into various tax effective financingtransactions that derive income that is subject to a reduced rate of incometax. The impact of this is reflected in lower income tax expense and interestincome. In order to improve comparability, this income is presented on a taxequivalent basis using the applicable tax rate of the geography in which thetransaction is booked. The tax equivalent gross-up was discontinued in 2010,reflecting the immaterial nature of the balance as the Group continued torun-down the related assets.

(2)          Interest spread is the difference between the averageyield (including tax equivalent gross up) on all interest earning assets andthe average rate paid on all interest bearing liabilities.

(3)          The benefit of net non-interest bearing liabilitiesand equity is determined by applying the average rate of interest paid on allinterest bearing liabilities to the average level of net non-interest bearingfunds as a percentage of average interest earning assets.

(4)          Net interest margin is calculated by dividing netinterest income (including tax equivalent gross up) by average interest earningassets.

 

Net interest marginwas 2.21% for 2010, a decline of 17 basis points compared to 2009. Excludingthe impact of the additional six weeks of St.George’s operations, net interestmargin declined 15 basis points compared to 2009. Key drivers of the margindecrease were a:

 

·         26 basis point decline from higher retail and wholesale funding costsdue to a:

 

·         15 basis point decline from customer deposits, asthe cost of raising retail funds increased. At the same time most growth overthe period was in products with higher rates including term deposits, on-lineand savings accounts; and

 

·         11 basis point decline from higher wholesalefunding costs, arising as relatively low cost funding was replaced by highercost funding post the global financial crisis.

 

·         21 basis point increase on assets, substantially allfrom repricing, which occurred predominately in mortgages;

 

·         3 basis point decline from a decrease in earnings on physical capitaland the amortisation of fair value adjustments on financial instrumentsrelating to the merger with St.George; and

 

·         7 basis point decline reflecting a reduction in Treasury and Marketsincome following strong revenues in 2009.

 

***Non-interest income — 2010 v 2009***

 
| ** **                             | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                             | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Total fees and commissions             |       | 2,433    |       | 2,637    |       | 2,060    |       |
| Wealth management and insurance income |       | 1,596    |       | 1,368    |       | 1,042    |       |
| Trading income                         |       | 797      |       | 901      |       | 732      |       |
| Other income                           |       | 242      |       | (47      | )          | 549      |       |
| **Total non-interest income**          |       | 5,068    |       | 4,859    |       | 4,383    |       |

 

Non-interest incomewas $5,068 million in 2010, an increase of $209 million or 4% compared to 2009.The inclusion of the additional six weeks of St.George’s operations wasresponsible for the majority of the growth.

 

Fees and commissionsincome was $2,433 million in 2010, a decrease of $204 million or 8% compared to2009. The additional six weeks of St.George’s operations increased fees and commissionby approximately 3%. Excluding this impact, fees and commissions declined, withcustomer fees decreasing $298 million following the reduction in customerfees, lower account keeping and transaction fee income, reduced automaticteller machine (ATM) fee income and lower credit card loyalty fee income. Thisreduction was partially offset by an increase in banking and credit relatedfees of $115 million, primarily due to the repricing of undrawn line feesfrom corporate and business facilities.

 

84

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REVIEW OF GROUP OPERATIONS

 

Wealth managementand insurance income was $1,596 million in 2010, an increase of $228 million or17% compared to 2009. The additional six weeks of St.George’s operationsincreased wealth management and insurance income by approximately 2%. Theincreased wealth management income was also driven by improvements ininvestment markets, growth in Funds under Management (FUM) and Funds underAdministration (FUA) and associated revenue. Insurance earnings improved due topremium growth, including the benefit of cross selling across the Group.

 

Trading income was$797 million in 2010, a decrease of $104 million or 12% compared to 2009. Theadditional six weeks of St.George’s operations increased trading income byapproximately 13%. Excluding this, trading income declined, primarily driven bylower Foreign Exchange revenue, offset by stronger Debt Markets earnings. Theexceptional 2009 trading results were not repeated in 2010 due to increasedcompetition and lower market volatility, reducing market spreads and volumes.

 

Other income was$242 million in 2010, an increase of $289 million compared to 2009. Thisincrease was primarily driven by impairment and mark-to-market losses in 2009that did not reoccur in 2010. 2009 included asset write downs and losses onfinancial assets held at fair value in relation to foundation investments inproperty and other transactions in the wholesale business. Other income in 2010included $46 million of gains on sale of investments in the Institutional bank,including the sale of investments in Queensland airports, Westpac Office Trustand other property investments.

 

***Operating expenses — 2010 v 2009***

 
| ** **                                             | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                             | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Salaries and other staff expenses                      |       | 3,990    |       | 3,806    |       | 2,915    |       |
| Equipment and occupancy expenses                       |       | 1,082    |       | 926      |       | 895      |       |
| Other expenses                                         |       | 2,344    |       | 2,439    |       | 1,645    |       |
| **Total operating expenses**                           |       | 7,416    |       | 7,171    |       | 5,455    |       |
| Total operating expenses to net operating income ratio |       | 43.9     | %          | 43.4     | %          | 47.0     | %          |

 

Operating expenseswere $7,416 million in 2010, an increase of $245 million or 3% compared to2009. The expense to income ratio was 43.9% in 2010, an increase of 50 basispoints compared to 2009.

 

Salaries and otherstaff expenses were $3,990 million in 2010, an increase of $184 million or 5%compared to 2009. Excluding the additional six weeks of St.George’s operations,salaries and other staff expenses increased by 1%. This increase was driven by:

 

·         increased salary costs from increased full time equivalent (FTE) staff,particularly associated with additional customer facing employees andadditional employees to support technology projects;

 

·         increased bonuses and incentives in line with improved financialperformance; and

 

·         increased superannuation costs and additional equity based compensationcharges.

 

Equipment andoccupancy expenses were $1,082 million, an increase of $156 million or 17%compared to 2009. Excluding the additional six weeks of the St.George’soperations, equipment and occupancy expenses increased by 13%. The increasedexpense was driven by:

 

·         increased operating lease rentals and outgoings from market repricingand additional costs associated with increasing the number of branches and ATMsduring the year; and

 

·         increased depreciation, in line with an increase in branchrefurbishments and the expanded branch network; and

 

·         increased software amortisation and impairment, as old software wasimpaired when new systems moved into production.

 

Other expenses were$2,344 million in 2010, a decrease of $95 million or 4% compared to 2009.Excluding the additional six weeks of St.George’s operations, other expensesdecreased by 6%. This decrease was driven mainly by:

 

·         a reduction in non-lending losses primarily from a one-off provisionraised in 2009 with respect to a long standing legal proceeding, where judgmentwas received in that year;

 

·         lower costs incurred from the redemption of credit card loyalty points;and

 

·         cost savings associated with merger synergies and other discretionaryexpense reductions.

 

The decrease waspartially offset by a one off contribution to the Westpac Foundation of$20 million, an increase in purchased services, particularly intechnology, information services and other professional services, due to theimplementation of technology projects.

 

85

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***Impairment charges on loans — 2010 v 2009***

 
| ** **                                                        | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                        | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Impairment charges on loans                                       |       | 1,456    |       | 3,238    |       | 931      |       |
| Impairment charges on loans to average gross loans (basis points) |       | 30       |       | 75       |       | 32       |       |

 

Impairment chargeson loans were $1,456 million in 2010, a decrease of $1,782 million or 55%compared to 2009. Impairment charges on loans represented 30 basis points ofaverage gross loans for 2010, a decrease of 45 basis points compared to 30 September 2009.Excluding the impact of the additional six weeks of St.George’s operations,impairment charges on loans decreased by approximately 57% compared to 2009.This represented 29 basis points of average gross loans in 2010, a decrease of46 basis points compared to 2009. The following commentary relates to this 57%movement, excluding the impact of St.George.

 

Impairment chargesmore than halved during 2010, as the operating environment continued to improveand the stress directly associated with the global financial crisis abated.Around two thirds of the reduction was due to lower provisions associated withlarger institutionals and corporates. These customers felt the impact of thefinancial crisis early, but with conditions stabilising, new provisions havedeclined materially. The other major contributors to the decline were NewZealand, as that economy emerged from recession, and a small release in theeconomic overlay in contrast to the increase in 2009, supported by theimproving environment.

 

New IAPs declined by$614 million as fewer large companies became impaired. Nevertheless, IAPsremain high principally from companies already identified as stressed beingdowngraded.

 

Within new CAPs,write-offs were largely unchanged, mostly relating to higher consumer stressfrom the lagged impact of slowing economic growth in 2009 and rising interestrates. Other changes in CAPs were materially lower, driven byfive factors:

 

·         a lower incidence of new stress in the business segments;

 

·         the transfer of some collective provisions to IAPs as companies weredowngraded;

 

·         company upgrades and reductions in exposures that allowed somecollective provisions to be released;

 

·         a positive contribution to collective provisions from factor changes;and

 

·         a small reduction in the economic overlay.

 

The economic overlaywas $49 million lower compared to 30 September 2009. The improvedoperating environment has reduced the probability of severe stress emerging inthe construction sector and this has warranted some release in associatedeconomic overlay provisions. Partially offsetting this decline was an $8million addition to the overlay to support possible unidentified lossesfollowing the earthquake in Canterbury in New Zealand. Given uncertaintyremains around the globe and emerging signs of global recovery are fragile,Westpac feels it is still prudent to maintain an economic overlay of $453million at 30 September 2010.

 

Key movements inimpairment charges on loans were:

 

·         new IAPs decreased by $614 million, principally due to:

 

·         new IAPs in WIB of $573 million were $540million lower compared to 2009, principally from significant reductions in newlarge corporate problem facilities and no repeat of the margin lending lossesrecorded in 2009;

 

·         new IAPs in Westpac RBB of $247 million were $33million higher compared to 2009, principally from the lagged effect of thesofter economic environment on small and medium businesses;

 

·         new IAPs in St.George of $420 million were $15million higher compared to 2009, as the commercial property sector and the needfor new individual provisions stabilised; and

 

·         new IAPs in New Zealand were $113 million lowercompared to 2009, as the need for new IAPs declined as the economic environmentimproved. In 2009 IAPs were also adversely impacted by two large corporateexposures.

 

The Group benefitedfrom higher write-backs and recoveries, principally from a positivereassessment of security values, primarily for large corporates, from theimproving operating environment.

 

·         new CAPs decreased by $919 million compared to 2009, principally due to:

 

·         a positive collective provision contribution fromWIB in 2010 of $240 million which was $696 million lower than 2009. Thepositive contribution was due to a reduction in lending as corporates continuedto deleverage, a few companies moving from watchlist back to performing gradesfollowing equity raisings, and some companies being downgraded to impaired;

 

·         higher interest rates and the lagged effect ofslowing growth in 2009 has seen a small rise in business stress and higherconsumer delinquencies in Westpac RBB. This has contributed to a $25 millionrise in collective provision charges in 2010;

 

86

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REVIEW OF GROUP OPERATIONS

 

·         new collectively assessed provisions in St.Georgewere $1 million lower in 2010. While small business and consumer stress hasmoderately increased, corporate stress has declined, particularly in thecommercial property portfolio and this led to the modest reduction in CAPcharges;

 

·         new CAPs in New Zealand were $54 million lower assome companies moved into impaired and new companies entering stressedcategories declined; and

 

·         a reduction in the economic overlay.

 

***Income tax expense — 2010 v 2009***

 
| ** **                                                                              | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                              | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Income tax expense                                                                      |       | 1,626    |       | 2,579    |       | 1,287    |       |
| Tax as a percentage of profit from ordinary activities before tax  (effective tax rate) |       | 20.2     | %          | 42.3     | %          | 24.7     | %          |

 

Income tax expensewas $1,626 million in 2010, a decrease of $953 million or 37% compared to 2009.The effective tax rate decreased to 20% in 2010, from 42% in 2009. Finalisationof a component of tax consolidation related to the merger with St.George gaverise to an income tax expense adjustment of $685 million for 2010. The taxconsolidation process required Westpac to reset the tax value of certainSt.George assets to the appropriate market value of those assets as at the timeof tax consolidation (31 March 2009). Also, changes in tax provisioningfor New Zealand structured finance transactions entered into between 1998 and2002, significantly impacted the tax rate in each year. In 2009, a provision of$703 million was raised following a decision by the New Zealand High Court inproceedings relating to those transactions, while $106 million was releasedfrom the provision in 2010 following a settlement with the CIR. Excluding theseimpacts, the effective tax rate in 2010 and 2009 would have been 30% and 31%respectively.

 

**Overview of performance — 2009 v2008**

 

Our financialperformance for 2009 was significantly impacted by the global financial crisis,and the merger with St.George Bank Limited. The merger with St.George BankLimited was completed on 1 December 2008, substantially increasing thesize of the Group. For accounting purposes, St.George was consolidated in ourfinancial statements from 18 November 2008, which makes it difficult tocompare the results for 2009 with our results for prior periods. Accordingly,the following discussion and review of Group operations, and the discussion ofbusiness division performance, focus primarily on the key factors affectingperformance in 2009 compared to 2008, excluding the impact of St.George.

 

Net profitattributable to equity holders of Westpac was $3,446 million in 2009, adecrease of $413 million or 11% compared to 2008. Net profit attributable toequity holders of Westpac excluding the impact of St.George was $2,475 millionin 2009, a decrease of $1,384 million or 36% compared to 2008.

 

The decrease wasprimarily due to significant increases in impairment charges on loans andincome tax expense. Impairment charges on loans excluding the impact ofSt.George increased by $1,622 million reflecting significant deterioration inasset quality due to the impact of the global financial crisis and subsequenteconomic slowdown. Income tax expense included an additional $703 million taxcharge related to the New Zealand High Court ruling on amended tax assessmentsissued by the CIR, in relation to Structured Finance transactions entered intobetween 1998 and 2002. Expense growth excluding the impact of St.George was 4%.These factors were partially offset by strong net operating income growth of$1,315 million.

 

Divisional resultsexcluding the impact of St.George were mixed. Westpac RBB net profit increasedby $156 million, while net profit for each of WIB, New Zealand Banking, BTFGand Other divisions decreased $446 million, $201 million, $55 million and $838million respectively. The additional tax charge referred to above was incurredwithin Other divisions.

 

Net interest incomewas $11,646 million in 2009, an increase of $4,424 million or 61% compared to2008. Net interest income excluding the impact of St.George was $8,822 millionin 2009, an increase of $1,600 million or 22% compared to 2008. The 22% growthreflects volume growth in consumer and business loans and deposits in Australiaand New Zealand, with a 7% increase in loans and a 13% increase in deposits,and a 26 basis point expansion in net interest margin.

 

Non-interest incomewas $4,859 million in 2009, an increase of $476 million or 11% compared to2008. Non-interest income excluding the impact of St.George was $4,098 millionin 2009, a decrease of $285 million or 7% compared to 2008. The 7% decreasereflected a $600 million decrease in other income, partially offset byincreases in trading income, wealth management and insurance income, and feesand commissions of $188 million, $82 million and $45 million respectively.Other income was also lower as 2008 included large one-off gains of $436million in relation to the IPO and partial sale of BT Investment ManagementLimited (BTIM) and the sale of Visa Inc. shares. 2009 included $155 million inasset write downs relating to foundation investments in property and othertransactions in the Specialised Capital Group (SCG).

 

Operating expenseswere $7,171 million in 2009, an increase of $1,716 million or 31% compared to2008. Operating expenses excluding the impact of St.George were $5,664 millionin 2009, an increase of $209 million or 4% compared to 2008. This was largelydriven by a 3% increase in salaries and other staff expenses and increasedequipment and occupancy expenses. Expense savings as a result of the mergerwith St.George totalled $143 million for 2009.

 

87

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Impairment chargeson loans were $3,238 million in 2009, an increase of $2,307 million or 248%compared to 2008. Impairment charges on loans excluding the impact of St.Georgewere $2,553 million in 2009, an increase of $1,622 million or 174% compared to2008. This increase was primarily due to the impact of the global financialcrisis and the associated decline in economic activity in Australia and NewZealand. This was particularly impacted the business sectors in Australia andNew Zealand. These dynamics increased IAPs by $1,243 million and collectivelyassessed provisions by $391 million, partially offset by $12 million inwritebacks and recoveries.

 

St.George and itsconsolidated subsidiaries (including the impact of the acquisition accountingentries related to the merger) contributed a net profit of $971 million for theperiod from 18 November 2008 to 30 September 2009. Revenue fromincreased balance sheet growth was partially offset by the costs associatedwith reinvestment in the business coupled with impairment charges on loansarising from the deteriorating economic conditions.

 

**Income statement review — 2009 v2008**

 

***Net Interest income — 2009 v 2008***

 

Net interest incomewas $11,646 million in 2009, an increase of $4,424 million or 61% compared to2008. Net interest income excluding the impact of St.George was $8,822 millionin 2009, an increase of $1,600 million or 22% compared to 2008. The commentarybelow relates to this 22% movement, which excludes the impact of St.George.

 

The key drivers ofthe 22% growth were an 8% increase in average interest earning assets and a 26basis point increase in interest margins as compared to the prior year.

 

Growth in net loansover the year was 7%. In Australia, net loan growth was $22 billion or 8% overthe prior year. In New Zealand, net loan growth was flat in NZ$ terms anddecreased by 3% in A$ terms.

 

Loan growth arosedue to the following specific components:

 

·         Australian housing lending increased $27.5 billionor 19% as historically low interest rates and the Australian Government’s firsthomebuyer grant provided stimulus to the mortgage market. The increase was alsoassisted by the inclusion of a full year of operation of the RAMS franchisedistribution business which was purchased in January 2008;

 

·         Australian business and corporate lending decreased$5.6 billion or 5%. The decrease was driven by decreased demand from largecustomers who utilised equity raisings to reduce gearing. Lending to small andmedium size business showed only a small decrease in line with the slowereconomy; and

 

·         New Zealand housing lending increased NZ$1.2billion or 4%. Weaker demand reflected lower property prices and slower economicactivity.

 

Total depositsincluding treasury deposits increased $30 billion or 13% since 30 September 2008.Excluding treasury deposits, deposits increased $35.1 billion or 21%. InAustralia, strong growth in consumer and business customer deposits of $35.2billion or 26%, was partially offset by a decline in treasury deposits, mostlycertificates of deposit. The key driver of deposit growth was a change incustomer preferences. Customers moved investments into bank deposits and out ofthe other forms of cash investments and asset classes (such as equities andmortgage trusts).

 

In New Zealand, atcall and term deposits increased 2% (NZ$ terms), with growth particularlyoccurring in term deposits.

 

Net interest marginincluding St.George was 2.38% for 2009, an increase of 31 basis points comparedto 2008. Net interest margin excluding the impact of St.George was 2.33% for2009, an increase of 26 basis points compared to the equivalent margin for2008. Key drivers of the margin increase, excluding the impact of St.George,were:

 

·         an increase of 4 basis points from consumer andbusiness customers in Australia and New Zealand. This represented the repricingof loans for higher risk premiums and higher funding costs. The increase alsopartially reflected the timing effect of higher funding costs in 2008 beingpassed through to customers in 2009;

 

·         an increase of 13 basis points reflected strongGroup Treasury revenues; and

 

·         an increase of 9 basis points from Institutionallending, Markets and Other divisions due to:

 

·         improved Institutional spreads as loans wereprogressively re-priced over the period and changes in Markets income recordedas interest income; and

 

·         returns on capital falling as interest ratesreduced, which was more than offset by mix benefits, as relatively higherspread consumer and business assets grew faster than Institutional assets.

 

***Non-interest income — 2009 v 2008***

 

Non-interest incomewas $4,859 million in 2009, an increase of $476 million or 11% compared to2008. Non-interest income excluding the impact of St.George was $4,098 millionin 2009, a decrease of $285 million or 7% compared to 2008. The commentarybelow relates to this 7% movement, which excludes the impact of St.George.

 

The key driver ofthe 7% decrease was a $600 million reduction in Other income, partially offsetby increases in trading income, wealth management and insurance income and feesand commissions.

 

Other incomedecreased as 2008 included $436 million of one-off gains that were not repeatedin 2009. 2009 included asset write downs of $155 million in relation tofoundation investments in property and other transactions in SCG.

 

88

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REVIEW OF GROUP OPERATIONS

 

The 2008 resultincluded:

 

·         a net gain of $141 million received from thepartial sale of BTIM; and

 

·         a gain of $172 million from the redemption of 56%of Westpac’s equity interest in Visa Inc. as part of an Initial Public Offering(IPO) in 2008. In addition, an unrealised gain of $123 million was recognisedto reflect Westpac’s initial measurement of the residual value of its Visa Inc.holding.

 

Trading income was$920 million in 2009, an increase of $188 million or 26% compared to 2008. Thiswas primarily driven by increases in foreign exchange income, with the ForeignExchange and Debt Markets business taking advantage of increased customeractivity and market volatility during the year.

 

Wealth managementand insurance income was $1,124 million in 2009, an increase of $82 million or8% compared to 2008. This was driven by the gross up of income (and taxexpense) on earnings applicable to holders of our life policies (policyholdertax recoveries), partially offset by adverse equity market movements thatreduced FUM/FUA, especially in the first six months, which in turn contributedto lower wealth management revenue for 2009.

 

Fees and commissionswere $2,105 million in 2009, an increase of $45 million or 2% compared to 2008,with growth resulting from increased credit line fees on corporate and businessfacilities and higher arrangement fees within WIB. This was partially offset byreduced transaction fees, with foreign ATM fees lower as a result of ATMreforms in Australia this year, combined with lower interchange fees, higherscheme costs and the impact of providing customers fee-free access to bothWestpac and St.George Bank ATM networks. Fees were also lower in New Zealand asa result of customers switching to fee-free accounts and reduced merchantactivity.

 

***Operating expenses — 2009 v 2008***

 

Operating expenseswere $7,171 million in 2009, an increase of $1,716 million or 31% compared to2008. Operating expenses excluding the impact of St.George were $5,664 millionin 2009, an increase of $209 million or 4% compared to 2008.

 

The expense toincome ratio decreased 360 basis points to 43.4%. The expense to income ratioexcluding the impact of St.George was 43.8%, a decrease of 320 basis points.

 

The followingcommentary relates to the 4% increase, excluding the impact of St.George.

 

Salaries and otherstaff expenses were $3,004 million in 2009, an increase of $89 million or 3%compared to 2008, due to:

 

·         general fixed salary increases and other marketrelated compensation increases;

 

·         the Group’s increased superannuation costs,increased BTIM share based payments and the impact of the reversal of longservice leave provisions in 2008, which was not repeated in 2009; and

 

·         additional customer facing employees in WestpacRBB.

 

The above increaseswere partially offset by merger synergies, predominantly in support and headoffice functions and lower employee performance bonus accruals given reductionsin year on year profitability.

 

Equipment andoccupancy expenses were $714 million in 2009, a decrease of $181 million or 20%compared to 2008, primarily due to lower software amortisation and write downs.A $157 million write-down in software assets occurred during 2008 following acomprehensive review across the business, which was not repeated in 2009.

 

Other expenses were$1,946 million in 2009, an increase of $301 million or 18% compared to 2008,due to:

 

·         a provision raised with respect to long standinglegal proceedings where a judgment was received during 2009($121 million);

 

·         additional expenditure on technology platforms toimprove reliability, capacity and customer service; and

 

·         increased costs associated with a spike in creditcard reward redemptions ($25 million).

 

***Impairment charges on loans — 2009 v 2008***

 

Impairment chargeson loans were $3,238 million in 2009, an increase of $2,307 million or 248%compared to 2008. Impairment charges on loans represented 75 basis points ofaverage gross loans in 2009, an increase of 43 basis points compared to 2008.Impairment charges on loans excluding the impact of St.George were $2,553million in 2009, an increase of $1,622 million or 174% compared to 2008. Thisrepresented 78 basis points of average gross loans in 2009, an increase of 46basis points compared to 2008. The following commentary relates to this 174%movement, excluding the impact of St.George.

 

Impairment chargeson loans increased significantly over the 2009 financial year driven by theimpacts of the global financial crisis and the associated decline in economicactivity. The most significant effect of the global financial crisis onimpairment charges on loans was a small number of large corporate exposures($408 million) and a small number of concentrated Margin Lending portfolios($183 million), mainly in the first half of the year.

 

89

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More generally, theincrease in impairment charges on loans was due to the broad slowing ineconomic activity that has led to increased customer financial stress, andlower security values. Most of this impact has been felt in the commercialbusiness segment (customers with facilities generally in the range of $10million to $100 million) although later in the year small businesses began tobe impacted. The commercial property sector (mostly development properties) wasparticularly impacted by these trends with other sectors showing stressincluding pubs and clubs, manufacturing, wholesale trade and retail. Thesetrends saw an increase in both individually assessed and collectivelyassessed provisions.

 

In New Zealand, theeconomy has been in a more prolonged recession and this saw the sources ofstress more broadly spread across businesses and consumers. In business,commercial property was the sector most impacted, particularly propertydevelopments with no established income streams. In the consumer segment,higher delinquencies can primarily be traced back to customers relying onbusiness income or where gearing was higher. At the same time, the predominanceof fixed rate lending meant that consumers only gradually benefited from lowerinterest rates. In addition, given the deteriorating operating environment, theGroup felt it prudent to further increase its economic overlay in the firsthalf of 2009.

 

Key movements inimpairment charges on loans were:

 

·         new IAPs increased by $1,243 million, principallydue to:

 

·         WIB ($828 million increase) predominantly fromthree large corporate exposures ($490 million), increases in stress in thePremium Business Group ($186 million) and higher Margin Lending provisions($115 million);

 

·         New Zealand ($283 million increase) predominantlybusiness related ($258 million) including IAPs for two large exposures ($174million); and

 

·         Westpac RBB ($127 million increase) as slowingbusiness and retail growth has affected smaller businesses.

 

·         new collectively assessed provisions increased by$391 million, principally due to:

 

·         write-offs increasing by $97 million compared to2008. Most of the write-offs were in the Australian cards and personal loanportfolios. Some of the increase reflected lower prices available for the saleof consumer debt to third parties;

 

·         Australian divisions incurring an increase in newcollectively assessed provisions of $221 million, as a result of increasedstress in the commercial business sector, which was reflected in WIB and thesmall and medium sized business customers within Westpac RBB. Despite this,Australian consumer losses remained relatively low; and

 

·         New Zealand where collectively assessed provisionsincreased by $24 million compared to 2008, as the depressed economy impactedboth businesses and consumers.

 

·         writebacks and recoveries contributed $12 million(credit) to impairment charges on loans.

 

St.George BankLimited and its consolidated subsidiaries (including the impact of theacquisition accounting entries related to the merger) incurred impairmentcharges on loans of $685 million for the period from 18 November 2008 to30 September 2009. The majority of the impairment charges on loanswere due to the broad slowing in economic activity that led to increasedcustomer financial stress and lower security values. Most of this impact wasfelt in the commercial business segment although later in 2009 some smallbusinesses were also impacted. The commercial property sector (mostlydevelopment properties) was particularly impacted by these trends with othersectors including pubs and accommodation also showing some stress. Australianconsumer losses remained relatively low during 2009.

 

***Income tax expense — 2009 v 2008***

 

Income tax expensewas $2,579 million in 2009, an increase of $1,292 million or 100% compared to2008. Income tax expense excluding the impact of St.George was $2,157 millionin 2009, an increase of $870 million or 68% compared to 2008. The $870 millionmovement was primarily driven by a $703 million tax charge related to the NewZealand High Court ruling on amended tax assessments issued by the CIR, inrelation to Structured Finance transactions entered into between 1998 and 2002.

 

The effective taxrate was 42.3% in 2009, an increase of 17.6% compared to 2008. Excluding theimpact of St.George, the effective tax rate was 45.9% in 2009, an increase of21.2% compared to 2008. Excluding the $703 million one-off tax expensesmentioned above, the effective tax rate excluding the impact of St.George was30.9% in 2009, an increase of 6.2% compared to 2008. This variance was drivenprimarily by two items that lowered the effective tax rate in 2008. The 2008tax expense included, firstly, a $198 million recovery for policy holder taxrecoveries (due to weaker market performance of investments in property trusts,Australian Equities and Overseas Equities), and secondly, a non-taxable netgain of $141 million from the partial sale of BTIM.

 

90

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REVIEW OF GROUP OPERATIONS

 

**Balancesheet review**

 

**Selected consolidated balance sheet data(1)**

 

The detailedcomponents of the balance sheet are set out in the notes to the financialstatements.

 
| ** **                                                                    | ** ** | **Year Ended 30 September** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                    | ** ** | **2010**                                   | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                    | ** ** | **US$m(2)**                                | ** ** | **A$m** | ** ** | **A$m** | ** ** | **A$m** | ** ** | **A$m** | ** ** | **A$m** | ** ** |
| **Amounts in accordance with  A-IFRS Year end balances**                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Cash and balances with central banks                                          |       | 4,303                                      |       | 4,464 |   | 3,272 |   | 4,809 |   | 2,243 |   | 3,132 |   |
| Receivables due from other financial institutions                             |       | 12,135                                     |       | 12,588 |   | 9,974 |   | 10,434 |   | 13,290 |   | 9,801 |   |
| Derivative financial instruments                                              |       | 34,802                                     |       | 36,102 |   | 33,187 |   | 34,810 |   | 24,308 |   | 10,311 |   |
| Trading securities, other financial assets and available-for-sale             |       | 53,597                                     |       | 55,599 |   | 47,807 |   | 54,605 |   | 39,594 |   | 20,221 |   |
| Loans                                                                         |       | 460,459                                    |       | 477,655 |   | 463,459 |   | 313,545 |   | 275,377 |   | 236,380 |   |
| Life insurance assets                                                         |       | 11,867                                     |       | 12,310 |   | 12,384 |   | 12,547 |   | 15,456 |   | 14,281 |   |
| All other assets                                                              |       | 18,855                                     |       | 19,559 |   | 19,504 |   | 8,926 |   | 7,352 |   | 7,335 |   |
| **Total assets**                                                              |       | 596,018                                    |       | 618,277 |   | 589,587 |   | 439,676 |   | 377,620 |   | 301,461 |   |
| Payables due to other financial institutions                                  |       | 8,578                                      |       | 8,898 |   | 9,235 |   | 15,861 |   | 9,133 |   | 12,051 |   |
| Deposits                                                                      |       | 325,239                                    |       | 337,385 |   | 329,456 |   | 233,730 |   | 202,054 |   | 169,637 |   |
| Derivative financial instruments                                              |       | 42,454                                     |       | 44,039 |   | 36,478 |   | 24,970 |   | 25,192 |   | 9,342 |   |
| Trading liabilities and other financial liabilities designated at fair  value |       | 4,675                                      |       | 4,850 |   | 10,848 |   | 16,689 |   | 8,223 |   | 2,893 |   |
| Debt issues and acceptances                                                   |       | 145,536                                    |       | 150,971 |   | 133,024 |   | 100,369 |   | 87,126 |   | 66,080 |   |
| Life insurance liabilities                                                    |       | 11,144                                     |       | 11,560 |   | 11,737 |   | 11,953 |   | 14,392 |   | 13,476 |   |
| All other liabilities                                                         |       | 10,434                                     |       | 10,824 |   | 11,100 |   | 7,915 |   | 5,888 |   | 5,899 |   |
| Total liabilities excluding loan capital                                      |       | 548,060                                    |       | 568,527 |   | 541,878 |   | 411,487 |   | 352,008 |   | 279,378 |   |
| Total loan capital(3)                                                         |       | 9,285                                      |       | 9,632 |   | 11,138 |   | 8,718 |   | 7,704 |   | 5,957 |   |
| **Total liabilities**                                                         |       | 557,345                                    |       | 578,159 |   | 553,016 |   | 420,205 |   | 359,712 |   | 285,335 |   |
| **Net assets**                                                                |       | 38,673                                     |       | 40,118 |   | 36,571 |   | 19,471 |   | 17,908 |   | 16,126 |   |
| Total equity attributable to equity holders of Westpac                        |       | 36,813                                     |       | 38,189 |   | 34,637 |   | 17,547 |   | 15,996 |   | 14,214 |   |
| Non-controlling interests                                                     |       | 1,860                                      |       | 1,929 |   | 1,934 |   | 1,924 |   | 1,912 |   | 1,912 |   |
| **Total shareholders’ equity and  non-controlling interest**             |       | 38,673                                     |       | 40,118 |   | 36,571 |   | 19,471 |   | 17,908 |   | 16,126 |   |
| **Average balances**                                                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                                  |       | 585,801                                    |       | 607,677 |   | 577,831 |   | 401,468 |   | 332,512 |   | 283,663 |   |
| Loans and other receivables                                                   |       | 453,079                                    |       | 469,999 |   | 426,845 |   | 294,672 |   | 257,896 |   | 220,407 |   |
| Shareholders’ equity                                                     |       | 35,122                                     |       | 36,434 |   | 32,008 |   | 16,699 |   | 14,708 |   | 13,369 |   |
| Non-controlling interests                                                     |       | 1,845                                      |       | 1,914 |   | 1,915 |   | 1,918 |   | 1,911 |   | 1,473 |   |

 

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(1)          Where accounting classifications have changed or wherechanges in accounting policy are adopted retrospectively, comparatives havebeen revised and may differ from results previously reported.

(2)          Australian dollar amounts have been translated into USdollars solely for the convenience of the reader at the rate of A$1.00 =US$0.9640, the noon buying rate on 30 September 2010.

(3)          This includes Westpac Stapled Preferred Securities(SPS), Westpac Stapled Preferred Securities II (SPS II) and 2004 TrustPreferred Securities (TPS 2004) in 2010 and 2009, Westpac SPS and TPS 2004in 2008, TPS 2004 and Fixed Interest Resettable Securities (FIRsTS) in 2007 and2006.

 

91

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**Summary of consolidated ratios**

 
| ** **                                                                        | ** ** | **Year Ended 30 September** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                        | ** ** | **2010**                                   | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(in $millions unless otherwise indicated)**                 | ** ** | **US$(1)**                                 | ** ** | **A$** | ** ** | **A$** | ** ** | **A$** | ** ** | **A$** | ** ** | **A$** | ** ** |
| **Ratios in accordance with A-IFRS**                                              |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **Profitability ratios (%)**                                                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net interest margin(2)                                                            |       | 2.21                                       |       | 2.21 |   | 2.38 |   | 2.07 |   | 2.19 |   | 2.29 |   |
| Return on average assets(3)                                                       |       | 1.04                                       |       | 1.04 |   | 0.60 |   | 0.96 |   | 1.04 |   | 1.08 |   |
| Return on average ordinary equity(4)                                              |       | 17.4                                       |       | 17.4 |   | 10.8 |   | 23.1 |   | 23.5 |   | 23.0 |   |
| Return on average total equity(5)                                                 |       | 16.5                                       |       | 16.5 |   | 10.2 |   | 20.7 |   | 20.8 |   | 20.7 |   |
| **Capital ratio (%)**                                                             |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Average total equity to average total assets                                      |       | 6.3                                        |       | 6.3 |   | 5.9 |   | 4.6 |   | 5.0 |   | 5.2 |   |
| Tier 1 ratio (%)(6)                                                               |       | 9.1                                        |       | 9.1 |   | 8.1 |   | 7.8 |   | 6.5 |   | 6.9 |   |
| Total capital ratio(6)                                                            |       | 11.0                                       |       | 11.0 |   | 10.8 |   | 10.8 |   | 9.5 |   | 9.6 |   |
| **Earnings ratios**                                                               |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Basic earnings per ordinary share (cents)(7)                                      |       | 206.5                                      |       | 214.2 |   | 125.3 |   | 206.0 |   | 186.9 |   | 167.2 |   |
| Diluted earnings per ordinary share (cents)(8)                                    |       | 199.6                                      |       | 207.1 |   | 123.2 |   | 200.1 |   | 185.3 |   | 165.7 |   |
| Dividends per ordinary share (cents)                                              |       | 134                                        |       | 139 |   | 116 |   | 142 |   | 131 |   | 116 |   |
| Dividend payout ratio (%)(9)                                                      |       | 64.9                                       |       | 64.9 |   | 92.6 |   | 68.9 |   | 70.1 |   | 69.4 |   |
| **Credit quality ratios**                                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Impairment charges on loans written off (net of recoveries)                       |       | 1,253                                      |       | 1,300 |   | 1,874 |   | 439 |   | 349 |   | 270 |   |
| Impairment charges on loans written off (net of recoveries) to average  loans (%) |       | 0.27                                       |       | 0.27 |   | 0.43 |   | 0.15 |   | 0.14 |   | 0.12 |   |

 

----

(1)          Australian dollar amounts have been translated into USdollars solely for the convenience of the reader at the rate of A$1.00 =US$0.9640, the noon buying rate on 30 September 2010.

(2)          Calculated by dividing net interest income (includingtax equivalent gross up) by average interest earning assets.

(3)          Calculated by dividing net profit attributable to ourequity holders by average total assets.

(4)          Calculated by dividing net profit attributable to ourequity holders by average ordinary equity.

(5)          Calculated by dividing net profit attributable to ourequity holders by average ordinary equity and non-controlling interests.

(6)          For details on the calculations of this ratio refer toNote 30 to the financial statements.

(7)          Based on the weighted number of fully paid ordinaryshares.

(8)          Based on basic earnings per share, with the weightedaverage number of fully paid ordinary shares outstanding adjusted for theconversion of dilutive potential ordinary shares, issued for no consideration,and after adjusting earnings for distributions on dilutive potential ordinaryshares.

(9)          Calculated by dividing the dividends per ordinaryshare by the basic earnings per ordinary share.

 

**Balance sheet review**

 

Total assets as at30 September 2010 were $618.3 billion, an increase of $28.7 billion or 5%compared to 30 September 2009. This growth was the result of 3% loangrowth and holding higher levels of liquid assets. Total liabilities as at 30 September 2010were $578.2 billion, an increase of $25.1 billion or 5% compared to30 September 2009. Growth in total liabilities was driven byincreased long term wholesale debt issues and customer deposits, partiallyoffset by a decline in securities sold under agreements to repurchase. The keybalance sheet movements can be attributed to:

 

·         growth of 3% in loans, predominantly in Australianhousing loans;

 

·         an increase in liquid assets of $8 billion,predominantly reflected in increased available-for-sale securities;

 

·         increased term debt issues as we lengthened ourwholesale funding profile; and

 

·         growth of 2% in deposits, primarily due toincreases in customer term deposits.

 

***Assets — 2010 v 2009***

 

The key movements inassets are outlined below.

 

*Receivables due from other financial institutions(up $3 billion)*

 

The increase wasprimarily due to an increase in collateral pledged, related to derivativecontracts, where valuation was affected by movements in the Australian dollaragainst the US dollar.

 

*Derivative financial instruments (assets) (up $3billion)*

 

The increase inderivative financial instruments was primarily due to changes in the contractvaluation related to foreign exchange rate movements.

 

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REVIEW OF GROUP OPERATIONS

 

*Trading securities, other financial assets andavailable-for-sale securities (up $8 billion)*

 

The primary driverof the increase was liquid assets. This included a significant rise in holdingsof State Government securities in the Group’s liquidity portfolio.

 

*Loans (up $14 billion)*

 

The growth in loanswas principally due to an increase of $30.2 billion or 12% in Australianhousing loans. This increase was partially offset by a decrease in Australianbusiness lending of $11 billion or 8%. The remainder of the decrease arosein other overseas locations.

 

***Liabilities and equity — 2010 v 2009***

 

The key movements inliabilities and equity are outlined below.

 

*Deposits (up $8 billion)*

 

Deposits increasedprimarily as a result of an increase in term deposits across the Group. Totalterm deposits increased 11% or $11 billion, as customers were attracted to thehigh relative interest rates on these products early in 2010 and consumer atcall accounts increased by $2 billion. This increase was partially offsetby a decrease in short-term wholesale funding certificates of deposit of 8% or$5 billion.

 

*Derivative financial instruments (liabilities) (up$8 billion)*

 

The increase inderivative financial instruments was primarily due to changes in contractvaluations related to foreign exchange rate movements.

 

*Trading liabilities and other financial liabilitiesdesignated at fair value (down $6 billion)*

 

The decrease wasprimarily due to securities sold under agreements to repurchase decliningduring the year as this funding source was replaced by other funding sources.This occurred primarily in the first half of 2010.

 

*Debt issues and acceptances (up $18 billion)*

 

Debt issuesincreased significantly as the Group continued to focus on lengthening the termwholesale funding portfolio. Senior unsecured long-term debt increased $23billion, which was partially offset by run-off in securitisation of $3 billionover the year.

 

*Loan capital (down $2 billion)*

 

The decrease wasprimarily attributable to the redemption of subordinated notes.

 

*Equity attributable to equity holders of WBC (up $4billion)*

 

The increase inequity was due to increased retained profits ($3 billion) and the issuance ofshares to satisfy the DRP ($1 billion).

 

***Assets — 2009 v 2008***

 

The merger withSt.George Bank Limited resulted in the assets and liabilities of St.Georgebeing consolidated from 18 November 2008. Excluding the impact ofSt.George, total assets as at 30 September 2009 were $496.0 billion, whichwas an increase of $56.3 billion or 13% from $439.7 billion at 30 September 2008.

 

The key drivers ofthe 13% growth were:

 

·         loans increasing by $22.0 billion or 7.0%, drivenby a $27.6 billion increase in housing loans in Australia partially offset by areduction of $4.8 billion in non-housing loans, while New Zealand and overseasloans remained relatively flat;

 

·         trading securities, other financial assetsdesignated at fair value through profit or loss and available-for-salesecurities decreasing by $5.9 billion as the Group held lower levels ofoutright trading securities; and

 

·         derivative financial instruments (assets)decreasing by $3.6 billion or 10.2% in 2009. The decrease in derivativefinancial instruments was primarily due to changes in exchange rates impactingthe value of derivative contracts and reductions in interest rates.

 

93

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***Liabilities and equity — 2009 v 2008***

 

Excluding the impactof St.George, total liabilities as at 30 September 2009 were $460.4billion which was an increase of $40.2 billion or 10% compared to 30 September 2008.The key movements in liabilities are outlined below.

 

·         Deposits in 2009 increased by $30.0 billion or12.8% compared with 2008. The increase was due to growth in customer andbusiness deposits, particularly in term deposits and online savings accounts;

 

·         Derivative financial instruments (liabilities)increased by $8.6 billion or 34.2%. Compared to 2008, the growth in derivativefinancial instruments reflected the impact of movements in the A$ (primarilyagainst the US$) impacting the value of cross-currency swaps that hedgeoffshore borrowings. This impact offset a reduction in gross customerderivatives outstandings;

 

·         Other trading liabilities reduced by $5.9 billionas lower levels of repurchase transactions were undertaken; and

 

·         Debt issues increased by $12.5 billion or 12.4%.This reflected a focus on raising long term wholesale funding to fund assetgrowth.

 

Equity was $34.6billion at 30 September 2009, an increase of $17.1 billion or 97.4%compared to 30 September 2008. The movement in equity was primarilyattributable to:

 

·         the issue of Westpac ordinary shares on 1 December 2008of $12.1 billion to facilitate the merger with St.George;

 

·         an ordinary share placement and share purchase planof $2.5 billion and $0.4 billion respectively;

 

·         ordinary shares issued under the DRP andunderwriting of the DRP in respect of the 2008 full year dividend of$1.9 billion; and

 

·         retained profits (net of dividends), whichincreased by $0.5 billion.

 

***Loan quality***

 
| ** **                            | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **As at 30 September** | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| **Total gross loans(1)**              |       | 482,366  |       | 467,843  |       | 315,490  |       |
| **Average gross loans**               |       |     |       |     |       |     |       |
| Australia                             |       | 428,861  |       | 381,858  |       | 243,797  |       |
| New Zealand                           |       | 45,171   |       | 45,832   |       | 44,383   |       |
| Other overseas                        |       | 5,428    |       | 6,529    |       | 5,227    |       |
| **Total average gross loans**         |       | 479,460  |       | 434,219  |       | 293,407  |       |

 

----

(1)          Gross loans are stated before related provisions forimpairment.

 

Total gross loansrepresented 78% of the total assets of the Group as at 30 September 2010,compared to 79% in 2009.

 

Our lending isfocused on our core geographic markets in Australia and New Zealand. Australiaand New Zealand average loans were $474.0 billion in 2010, increasing by $46.3billion or 11% from $427.7 billion in 2009. This increase was predominantly dueto growth in mortgage lending.

 

Other overseasaverage loans were $5.4 billion in 2010, a decrease of $1.1 billion or 17% from$6.5 billion in 2009.

 

Approximately 24% ofthe loans at 30 September 2010 mature within one year and 20% maturebetween one year and five years. Retail lending comprises the bulk of the loanportfolio maturing after five years.

 

94

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REVIEW OF GROUP OPERATIONS

 
| ** **                                                                               | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **As at 30 September**                                                    | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| **Impaired loans**                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Non-performing loans(1):                                                                 |       |     |       |     |       |     |       |     |       |     |       |
| Gross                                                                                    |       | 4,240    |       | 3,526    |       | 1,059    |       | 423      |       | 411      |       |
| Impairment provisions                                                                    |       | (1,677   | )          | (1,308   | )          | (438     | )          | (159     | )          | (167     | )          |
| Net                                                                                      |       | 2,563    |       | 2,218    |       | 621      |       | 264      |       | 244      |       |
| Restructured loans:                                                                      |       |     |       |     |       |     |       |     |       |     |       |
| Gross                                                                                    |       | 132      |       | 71       |       | 6        |       | 4        |       | 22       |       |
| Impairment provisions                                                                    |       | (32      | )          | (26      | )          | —   |       | —   |       | (10      | )          |
| Net                                                                                      |       | 100      |       | 45       |       | 6        |       | 4        |       | 12       |       |
| Overdrafts, personal loans and revolving credit greater than 90 days  past due:          |       |     |       |     |       |     |       |     |       |     |       |
| Gross                                                                                    |       | 213      |       | 173      |       | 112      |       | 113      |       | 88       |       |
| Impairment provisions                                                                    |       | (155     | )          | (148     | )          | (97      | )          | (107     | )          | (80      | )          |
| Net                                                                                      |       | 58       |       | 25       |       | 15       |       | 6        |       | 8        |       |
| **Net impaired loans**                                                                   |       | 2,721    |       | 2,288    |       | 642      |       | 274      |       | 264      |       |
| **Provisions for impairment on  loans and credit commitments**                           |       |     |       |     |       |     |       |     |       |     |       |
| Individually assessed provisions                                                         |       | 1,622    |       | 1,228    |       | 413      |       | 148      |       | 164      |       |
| Collectively assessed provisions                                                         |       | 3,439    |       | 3,506    |       | 1,761    |       | 1,410    |       | 1,194    |       |
| **Total provisions for impairment  on loans and credit commitments**                     |       | 5,061    |       | 4,734    |       | 2,174    |       | 1,558    |       | 1,358    |       |
| **Loan quality**                                                                         |       |     |       |     |       |     |       |     |       |     |       |
| Total impairment provisions for impaired loans to total impaired  loans(2)               |       | 40.7     | %          | 39.3     | %          | 45.4     | %          | 49.2     | %          | 49.3     | %          |
| Total impaired loans to total loans                                                      |       | 0.95     | %          | 0.81     | %          | 0.37     | %          | 0.20     | %          | 0.22     | %          |
| Total provisions for impairment on loans and credit commitments to  total loans(3)       |       | 1.05     | %          | 1.01     | %          | 0.69     | %          | 0.56     | %          | 0.57     | %          |
| Total provisions for impairment on loans and credit commitments to  total impaired loans |       | 110.4    | %          | 125.6    | %          | 184.8    | %          | 288.5    | %          | 260.7    | %          |
| Collectively assessed provisions to non-housing performing loans                         |       | 2.0      | %          | 1.8      | %          | 1.1      | %          | 1.1      | %          | 1.1      | %          |

 

----

(1)          Non-performing loans are loans with an impairedinternal risk grade, excluding restructured assets.

(2)          Impairment provisions relating to impaired loansincludes individually assessed provisions plus the proportion of thecollectively assessed provisions that relate to impaired loans. The proportionof the collectively assessed provisions that relate to impaired loans was$244 million as at 30 September 2010 (2009 $254 million, 2008$121 million, 2007 $118 million, 2006 $93 million). This sum is compared to thetotal gross impaired loans to determine this ratio.

(3)          In previous years this ratio has included, ifapplicable, the APRA required capital deduction (above A-IFRS provisioninglevels) which formed part of the APRA termed General Reserve for Credit Losses.This ratio has been revised and is now based only on A-IFRS provisioninglevels. The ratios at 30 September 2009 and 30 September 2008 werenot impacted, the ratio at 30 September 2007 was revised from 0.61% to0.56% and the ratio at 30 September 2006 was revised from 0.63% to 0.57%.

 

The quality of ourloan portfolio as at 30 September 2010 remains relatively stable, with 74%of our exposure to either investment grade or secured consumer mortgages (200972%, 2008 75%) and 99% of our exposure in our core markets of Australia, NewZealand and Pacific Banking (2009 99%, 2008 98%).

 

Potential problemloans(1) as at 30 September 2010 amounted to $3,852 million, anincrease of 23%, up from $3,130 million at 30 September 2009.

 

At 30 September 2010,total impaired loans as a percentage of total gross loans were 0.95%, anincrease from 0.81% at 30 September 2009.

 

At 30 September 2010,we had 11 impaired counterparties with exposure greater than $50 million,collectively accounting for 20% of total impaired loans. This compares to 14impaired counterparties with exposure greater than $50 million in 2009accounting for 28% of total impaired loans. There were a further 96 impairedexposures at 30 September 2010 that were less than $50 million and greaterthan $10 million (2009 56 impaired exposures).

 

----

(1)          Potential problem loans are facilities that areperforming and no loss is expected, but the customer demonstrates significantweakness in debt servicing or security cover that could jeopardise repayment ofdebt on current terms if not rectified.

 

95

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We believe thatWestpac remains appropriately provisioned with total impairment provisions forimpaired loans to total impaired loans coverage at 40.7% at30 September 2010. Total provisions for impairment in loans andcredit commitments represented 110.4% of total impaired loans as at 30 September 2010,down from 125.6% at 30 September 2009. The decrease was primarilydriven by higher impaired assets. Total provisions for impairments on loans andcredit commitments to total loans were 1.05% at 30 September 2010, up from1.01% at 30 September 2009 (2008 0.69%).

 

Consumer mortgageloans 90 days past due at 30 September 2010 were 0.47% of outstandings, anincrease of 10 basis points compared to 30 September 2009 (2008 0.39%).

 

Other consumer loandelinquencies (including credit card and personal loan products) were 1.25% ofoutstandings as at 30 September 2010, an increase of 21 basis points from1.04% of outstandings as at 30 September 2009 (2008 1.00%).

 

**Capital resources**

 

**Capital management strategy**

 

Westpac’s approachseeks to balance the fact that capital is an expensive form of funding with theneed to be adequately capitalised as an ADI. Westpac considers the need tobalance efficiency, flexibility and adequacy when determining sufficiency ofcapital and when developing capital management plans.

 

Westpac evaluatesthese considerations through an Internal Capital Adequacy Assessment Process(ICAAP), the key features of which include:

 

·         the development of a capital management strategyincluding target capital ratios, capital buffers and contingency plans whichguide the development of specific capital plans;

 

·         consideration of both economic and regulatorycapital driven requirements;

 

·         a process which challenges the capital measures,coverage and requirements, which incorporates a comparison of economic andregulatory requirements and the use of the Quantitative Scenario Analysis(stress testing) framework that considers, amongst other things, the impact ofadverse economic scenarios that threaten the achievement ofplanned outcomes; and

 

·         consideration of the perspectives of externalstakeholders such as regulators, rating agencies and equity investors.

 

Westpac’s capitalratios are in compliance with APRA minimum capital adequacy requirements.

 

**Basel capital accord**

 

The regulatorylimits applied to our capital ratios are consistent with the InternationalConvergence of Capital Measurement and Capital Standards: A Revised Framework,also known as Basel II, issued by the Bank of International Settlements. Thisframework reflects the advanced risk management practices that underpin thecalculation of regulatory capital through a broad array of risk classes andadvanced measurement processes.

 

As provided for inthe Basel II accord, APRA has exercised a number of discretions to make theframework more relevant in the Australian market, and in particular hasrequired that Australian banks using the most sophisticated models for creditand operational risk will also be required to hold regulatory capital for theinterest rate risk taken in the banking book. The models used to quantify thisrisk are similar to the models used for traded market risk. In addition APRAhas applied discretion in the calculation of the components of regulatorycapital.

 

Westpac isaccredited by APRA to use the AIRB approach for credit risk, the AMA foroperational risk and the internal model approach for Interest Rate Risk in theBanking Book (IRRBB). Accreditation to use AIRB and AMA was effective from1 January 2008, and IRRBB from 1 July 2008. We believe thatusing the advanced approaches for risk monitoring and measurement is in theinterests of all our stakeholders. Effective risk management is regarded as akey activity performed at all levels of the Group. Achieving advancedaccreditation from APRA has resulted in a broad array of changes to riskmanagement practices that have been implemented across all risk classes. Werecognise that embedding these principles and practices into day-to-dayactivities of the divisions to achieve the full benefits of these changes is anongoing facet of risk management.

 

APRA approved theuse of the AIRB approach for credit risk and the AMA approach for operationalrisk for portfolios originated by the former St.George Bank Limited, from 30 June 2010onwards. There is now also a requirement to hold regulatory capital for IRRBB.Market risk and equity risk regulatory capital from the former St.George BankLimited are now measured on the same basis as the rest of the Group.

 

APRA has appliedtransitional floors in the calculation of regulatory capital minimums, limitinginitial regulatory capital relief to a maximum of 10% of the capitalrequirements under the Basel I approach. It is unclear how long thesetransitional arrangements will be maintained.

 

Refer to Significantdevelopments in Section 1 for a discussion on future regulatorydevelopments that may impact upon capital requirements.

 

96

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REVIEW OF GROUP OPERATIONS

 

**Purchases of equity securities**

 
| ** **            | ** ** | **Total Number of   Ordinary Shares   Purchased** | ** ** | **Average Price Paid  per Ordinary Share  $** | ** ** | **Total Number of Ordinary  Shares Purchased as Part of a  Publicly Announced Program** | ** ** | **Maximum Number  (or Approximate $ Value) of Ordinary  Shares that may yet be Purchased  Under the Plans or Programs** | ** ** |
|-----------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Month**             |       |                                                             |       |                                                              |       |                                                                                                                                      |       |                                                                                                                                                                                               |       |
| October (2009)   |       | 82,805                                                           |       | 26.12                                                             |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| November (2009)  |       | 3,047                                                            |       | 24.25                                                             |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| December (2009)  |       | —                                                           |       | —                                                            |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| January (2010)   |       | —                                                           |       | —                                                            |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| February (2010)  |       | 113,058                                                          |       | 23.61                                                             |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| March (2010)     |       | 240,099                                                          |       | 27.37                                                             |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| April (2010)     |       | —                                                           |       | —                                                            |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| May (2010)       |       | —                                                           |       | —                                                            |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| June (2010)      |       | 193,191                                                          |       | 23.19                                                             |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| July (2010)      |       | 30,961                                                           |       | 21.58                                                             |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| August (2010)    |       | 6,515                                                            |       | 22.13                                                             |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| September (2010) |       | —                                                           |       | —                                                            |       | —                                                                                                                                    |       | n/a                                                                                                                                                                                                |       |
| **Total**             |       | 669,676                                                          |       | 25.04                                                             |       | —                                                                                                                                    |       | —                                                                                                                                                                                             |       |

 

Purchases of ordinary shares during the year were made on market and relate to the following:

 

·         to deliver to employees upon the exercise ofoptions and performance share rights: 181,667 ordinary shares; and

 

·         treasury shares held by statutory life funds andmanaged investment schemes and ordinary shares held by Westpac in respect ofequity derivatives sold to customers: 488,009 ordinary shares.

 

Refer to Note 24 tothe financial statements for a discussion of treasury share purchases.

 

97

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**Commitments**

 

**Contractual obligations andcommitments**

 

In connection withour operating activities we enter into certain contractual obligations andcommitments. The following table shows our significant contractual cashobligations as at 30 September 2010:

 
| ** **                              | ** ** | **Less Than  1 Year** | ** ** | **Between 1  and 3 Years** | ** ** | **Between 3  and 5 Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                              | ** ** | **$m**                          | ** ** | **$m**                                    | ** ** | **$m**                                    | ** ** | **$m**                 | ** ** | **$m**    | ** ** |
| On balance sheet long term debt(1)      |       | 22,656                          |       | 44,019                                    |       | 35,255                                    |       | 14,009                 |       | 115,939   |       |
| Operating leases(2)                     |       | 413                             |       | 680                                       |       | 483                                       |       | 695                    |       | 2,271     |       |
| Other commitments(2)                    |       | 480                             |       | 318                                       |       | 126                                       |       | 126                    |       | 1,050     |       |
| **Total contractual cash  obligations** |       | 23,549                          |       | 45,017                                    |       | 35,864                                    |       | 14,830                 |       | 119,260   |       |

 

----

(1)          Refer to Note 22 to the financial statements fordetails of on balance sheet long-term debt.

(2)          Refer to Note 34 to the financial statements fordetails of expenditure commitments.

 

The above tableexcludes deposits and other liabilities taken in the normal course of bankingbusiness and short-term and undated liabilities.

 

**Commercial commitments(1)**

 

The following tableshows our significant commercial commitments as at 30 September 2010:

 
| ** **                                         | ** ** | **Less Than  1 Year** | ** ** | **Between 1  and 3 Years** | ** ** | **Between 3  and 5 Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                         | ** ** | **$m**                          | ** ** | **$m**                                    | ** ** | **$m**                                    | ** ** | **$m**                 | ** ** | **$m**    | ** ** |
| Standby letters of credit and financial guarantees |       | 1,142                           |       | 1,126                                     |       | 102                                       |       | 2,072                  |       | 4,442     |       |
| Trade letters of credit                            |       | 1,014                           |       | —                                    |       | —                                    |       | —                 |       | 1,014     |       |
| Non-financial guarantees                           |       | 253                             |       | 3,212                                     |       | 397                                       |       | 3,368                  |       | 7,230     |       |
| Undrawn loan commitments                           |       | 21,269                          |       | 43,660                                    |       | 5,204                                     |       | 70,088                 |       | 140,221   |       |
| Other commitments                                  |       | 243                             |       | —                                    |       | 12                                        |       | 96                     |       | 351       |       |
| **Total commercial commitments**                   |       | 23,921                          |       | 47,998                                    |       | 5,715                                     |       | 75,624                 |       | 153,258   |       |

 

----

(1)          The numbers in this table are notional amounts (referto Note 36 to the financial statements).

 

98

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DIVISIONAL PERFORMANCE

 

**Divisional performance — 2010 v 2009**

 

Our operationscomprise five primary customer-facing business divisions:

 

·         Westpac Retail & Business Banking, which we refer to as WestpacRBB;

 

·         Westpac Institutional Bank, which we refer to as WIB;

 

·         St.George Bank;

 

·         BT Financial Group (Australia), which we refer to as BTFG; and

 

·         New Zealand Banking.

 

Our Other divisionincludes Product & Operations, Technology, Group Treasury, PacificBanking and Core Support.

 

During 2010, theaccounting standard AASB 8 *Operating Segments*was applied for the first time. This standard requires segment results to bepresented on a basis that is consistent with information provided internally toWestpac’s key decision makers. In assessing the financial performance of ourdivisions internally, we use a measure of performance we refer to as ‘CashEarnings’. To calculate Cash Earnings we adjust the statutory results for theitems outlined below. We believe Cash Earnings allows us to more effectivelyassess performance for the current period against prior periods and to compareperformance across business divisions and across peer companies. Areconciliation of Cash Earnings to net profit attributable to equity owners foreach business division is set forth in Note 32. A more detailed explanation ofCash Earnings adjustments is set out below. Three categories of adjustments aremade to statutory results to determine Cash Earnings:

 

·         material items that key decision makers of Westpac believe do notreflect ongoing operations;

 

·         items that are not considered when dividends are recommended, such asthe amortisation of intangibles and economic hedging impacts; and

 

·         accounting reclassifications between individual line items that do notimpact statutory results, such as policy holder tax recoveries.

 

The discussion ofour Divisional performance in this section is presented on a Cash Earningsbasis, unless otherwise stated. Cash Earnings is not directly comparable tostatutory results presented in other parts of this Annual Report.

 

Cash Earningsadjustments include the following:

 

1.        The Life Insurancestandard AASB 1038 requires the grossing up of tax expense and income for thetax on earnings applicable to holders of our life policies (policy holders taxrecoveries). Our Cash Earnings adjustment reverses the impact of this gross upto provide comparability across reporting periods.

 

2.        Trust PreferredSecurities (TPS) revaluations — Adjustment for economic hedges, includingassociated tax effects impacting the foreign currency translation reserve,relating to hybrid instruments classified as non-controlling interests. Thehybrid instrument is not fair valued, however, the hedge is fair valued andtherefore there is a mismatch in the timing of income recognition in thestatutory results. The mismatch is added back in deriving Cash Earnings as itdoes not affect the Group’s profits over time.

 

3.        Treasury Shares —Under A-IFRS, Westpac shares held by the Group in managed funds and lifebusiness are deemed to be treasury shares and the results of holding theseshares are not permitted to be recognised as income. In deriving Cash Earnings,these results are included to ensure there is no asymmetrical impact on theGroup’s profits because the treasury shares support policyholder liabilitiesand equity derivative transactions which are re-valued in deriving income.

 

4.        Ineffective hedges —The gain/(loss) on ineffective hedges is reversed in deriving Cash Earnings forthe period because the gain/(loss) arising from the fair value movement inthese hedges reverses over time and does not affect the Group’s profits overtime.

 

5.        As part of the mergerwith St.George, transaction and integration expenses incurred over three yearsare being treated as a Cash Earnings adjustments as they do not impact theearnings expected from St.George following the integration period.

 

99

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6.        Fair valuegain/(loss) on other economic hedges (which do not qualify for hedge accountingunder A-IFRS) comprise:

 

·         the unrealised fair value gain/(loss) on foreign exchange hedges offuture New Zealand earnings impacting non-interest income is reversed inderiving Cash Earnings in the current period as it may potentially create amaterial timing difference on reported earnings. The Cash Earnings adjustmentensures that this does not affect the Group’s Cash Earnings during the life ofthe hedge;

 

·         the unrealised fair value gain/(loss) on foreign exchange hedges of feespayable for the use of the government guarantee on foreign denominatedwholesale funding is reversed in deriving Cash Earnings in the current periodas it may potentially create a material timing difference on reported earnings.The Cash Earnings adjustment ensures that this does not affect the Group’s CashEarnings during the life of the hedge; and

 

·         the unrealised fair value gains/(losses) on hedges of accrual accountedterm funding transactions are reversed in deriving Cash Earnings in the currentperiod as it may potentially create a material timing difference on reportedearnings but does not affect the Group’s Cash Earnings during the life of thehedge.

 

7.        The merger withSt.George resulted in the recognition of core deposit intangibles and customerrelationship intangible assets that are amortised over their useful lives,ranging between five and nine years. The amortisation of intangible assets(excluding software) is a Cash Earnings adjustment because it is a non-cashflow item and does not affect cash distributions available to shareholders.

 

8.        In year ended 30 September 2009,the Group increased tax provisioning by $703 million for New Zealand structuredfinance transactions entered into between 1998 and 2002. The increase in theprovision followed the High Court in New Zealand finding in favour of the CIRin proceedings where Westpac challenged amended tax assessments in relation tothese transactions. Due to the significant size and historical nature of theissue, the provision was treated as a Cash Earnings adjustment. In the yearended 30 September 2010, the Group reached a settlement with the CIR byagreeing to pay 80% of the full amount of primary tax and interest. Theassociated reversal of tax provisions of $106 million in the year ended 30September 2010 has also been treated as a Cash Earnings adjustment.

 

9.        The accounting forthe merger with St.George resulted in the recognition of fair value adjustmentson the St.George retail bank loans, deposits, wholesale funding and associatedhedges, with these fair value adjustments being amortised over the life of theunderlying transactions. The amortisation of these adjustments is considered tobe a timing difference relating to non-cash flow items that do not affect cashdistributions available to shareholders.

 

10.  Finalisation of a component of tax consolidationrelated to the merger with St.George gave rise to an income tax expenseadjustment of $685 million for the year ended 30 September 2010. The taxconsolidation process required Westpac to reset the tax value of certainSt.George assets to the appropriate market value of those assets as at the timeof tax consolidation (31 March 2009). This has been treated as a CashEarnings adjustment due to its size and it does not reflect ongoing operations.

 

11.  In the year ended 30 September 2008, the gainsassociated with the initial public offering (IPO) of BT Investment ManagementLimited (BTIM) ($136 million, $86 million after tax), the IPO of Visa Inc.($295 million, $205 million after tax) and merger transaction expenses andrelated integration expenses were treated as cash earnings adjustments as theywere non-recurring and did not reflect the ongoing operations of the Group.

 

12.  Other non-statutory adjustments comprise:

 

·         in the year ended 30 September 2009, a provision of $121million ($85 million after tax) with respect to long-standing legalproceedings, where a judgment was received in the full year ended 30 September 2009.This was treated as a Cash Earnings adjustment due to its size and historicalnature; and

 

·         in the year ended 30 September 2008, one-off expenses relatedto efficiency initiatives and capitalised expense reviews were treated as CashEarnings adjustments, as these were deemed to be material items that did notreflect on-going operations.

 

All Cash Earningsadjustments other than item 7 above impact Other divisions. Item 7 impactsSt.George Bank and BT Financial Group (Australia), the divisions that holdthe underlying intangible assets.

 

100

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DIVISIONALPERFORMANCE

 

**Cash Earnings and assets bydivision**

 

The following tablespresent, for each of the key divisions of our business, the Cash Earnings andtotal assets at the end of the financial years ended 30 September 2010,2009 and 2008. Refer to Note 32 to the financial statements for the disclosureof our geographic and business segments and the reconciliation to net profitattributable to equity holders.

 

***Cash Earnings by business division***

 
| ** **                                  | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Years ended 30 September** | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Westpac Retail & Business Banking  |       | 1,756    |       | 1,908    |       | 1,752    |       |
| Westpac Institutional Bank                  |       | 1,514    |       | 339      |       | 796      |       |
| St.George Bank                              |       | 1,041    |       | 930      |       | —   |       |
| BT Financial Group (Australia)              |       | 595      |       | 484      |       | 399      |       |
| New Zealand Banking                         |       | 258      |       | 194      |       | 395      |       |
| Other divisions(1)                          |       | 715      |       | 657      |       | 384      |       |
| **Total Cash Earnings**                     |       | 5,879    |       | 4,512    |       | 3,726    |       |

 

----

| (1) | Other divisions include the results of  Product & Operations, Technology, Group Treasury, Pacific Banking  and Core Support. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------|

 

***Total assets by business division***

 
| ** **                                 | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **As at 30 September**      | ** ** | **$bn**  | ** ** | **$bn**  | ** ** | **$bn**  | ** ** |
| Westpac Retail & Business Banking |       | 244      |       | 220      |       | 194      |       |
| Westpac Institutional Bank                 |       | 99       |       | 115      |       | 119      |       |
| St.George Bank                             |       | 134      |       | 128      |       | —   |       |
| BT Financial Group (Australia)             |       | 28       |       | 26       |       | 23       |       |
| New Zealand Banking                        |       | 39       |       | 40       |       | 40       |       |
| Other divisions(1)                         |       | 74       |       | 61       |       | 64       |       |
| **Total assets**                           |       | 618      |       | 590      |       | 440      |       |

 

----

| (1) | Other divisions includes Product &  Operations, Technology, Group Treasury, Pacific Banking and Core Support. |
|-----|------------------------------------------------------------------------------------------------------------------------|

 

In presentingdivisional results on a management reporting basis, internal charges andtransfer pricing adjustments are included in the performance of each businessreflecting our management structure rather than a legal one (these resultscannot be compared to results for individual legal entities). Where managementreporting structures or accounting classifications have changed, comparativeshave been revised and may differ from results previously reported.

 

Our internaltransfer-pricing framework attributes value between divisions. Its primaryattributes are:

 

·         Treasury funding — product balances aretransfer-priced at inter-bank rates according to the tenor of theunderlying transactions;

 

·         overhead costs are allocated to revenue generatingbusinesses; and

 

·         capital charges are allocated to business groups basedupon designated risk factors.

 

101

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**Westpac Retail & Business Banking**

 

Westpac Retail &Business Banking (Westpac RBB) is responsible for sales and service for ourconsumer, small to medium enterprise customers and commercial customers(typically with turnover up to $50 million) in Australia under the Westpac andRAMS brands. Activities are conducted through our nationwide network ofbranches and business banking centres, home finance managers (HFMs) and specialisedconsumer and business relationship managers, with the support of cash flow,financial markets and wealth specialists, customer service centres, ATMs andinternet channels.

 

***Performance of Westpac RBB***

 
| ** **                                                                      | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                      | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Net interest income                                                             |       | 5,132    |       | 4,943    |       | 4,287    |       |
| Non-interest income                                                             |       | 1,014    |       | 1,274    |       | 1,356    |       |
| Net operating income before operating expenses and impairment charges  on loans |       | 6,146    |       | 6,217    |       | 5,643    |       |
| Operating expenses                                                              |       | (3,045   | )          | (2,943   | )          | (2,787   | )          |
| Profit before impairment charges on loans and income tax expense                |       | 3,101    |       | 3,274    |       | 2,856    |       |
| Impairment charges on loans                                                     |       | (589     | )          | (551     | )          | (352     | )          |
| Profit before income tax                                                        |       | 2,512    |       | 2,723    |       | 2,504    |       |
| Income tax expense                                                              |       | (756     | )          | (815     | )          | (752     | )          |
| **Cash Earnings**                                                               |       | 1,756    |       | 1,908    |       | 1,752    |       |
| Cash Earnings adjustments                                                       |       | —   |       | —   |       | —   |       |
| **Net profit attributable to  equity holders of Westpac**                       |       | 1,756    |       | 1,908    |       | 1,752    |       |
|                                                                            |       |     |       |     |       |     |       |
| ** **                                                                      | ** ** | **$bn**  | ** ** | **$bn**  | ** ** | **$bn**  | ** ** |
| Deposits                                                                        |       | 114.5    |       | 103.8    |       | 86.9     |       |
| Loans                                                                           |       | 239.1    |       | 215.6    |       | 189.0    |       |
| Total assets                                                                    |       | 243.7    |       | 219.6    |       | 193.9    |       |
| **Total operating expenses to net  operating income ratio**                     |       | 49.5     | %          | 47.3     | %          | 49.4     | %          |

 

***2010 v 2009***

 

Westpac RBB CashEarnings were $1,756 million in 2010, a decrease of $152 million or 8% comparedto 2009.

 

In 2010, thedivision’s Cash Earnings were impacted by two factors. The first was areduction in customer fees which led to a reduction in non-interest income by$182 million and Cash Earnings by $127 million following the decision toreduce fee rates from 1 October 2009. Secondly, in 2009 changes to creditcard loyalty points impacted both revenue and expense, with Cash Earningsincreasing by $22 million in that year. Excluding these factors, between 2009and 2010 net operating income increased 4% while operating expenses increased7%.

 

In 2010, netinterest income was $5,132 million, an increase of $189 million or 4%compared to 2009. This was driven by solid balance sheet growth, partiallyoffset by higher retail and wholesale funding costs. The majority of growth inlending in 2010 was in mortgages, up 14% and around 1.4 times system growth.Mortgage growth eased through the year with the Group’s focus on existingcustomers and higher returning businesses leading to:

 

·         an increase in mortgages written through proprietary channels to 64% in2010 from 56% in 2009; and

 

·         strong customer retention, with the division retaining its significantmarket share gain of over 2% since the beginning of 2009.

 

Credit card andother personal lending decreased 1% in 2010 compared to 2009, as consumercustomers chose to reduce their gearing over the year. Business lendingincreased 2% in 2010 compared to 2009, as small and medium businesses remainedcautious. Around half the growth in business lending was due to businesstransferred from the Institutional Bank over the year reflecting segmentationof business customers. While the pipeline of business lending substantiallyimproved during the year, this has not yet translated to increased drawdowns.

 

Deposits increased10% in 2010 compared to 2009, driven by a 23% increase in term deposits (mostlyin the first half of 2010), assisted by December 2009 promotions.

 

The Westpac Localbusiness model, providing local Bank Managers with the authority and resourcesto meet the needs of their local markets, combined with further increases inthe skill base of relationship roles has:

 

·         contributed to customers with four or more products increasing from28.5% in 2009 to 30.3% in 2010; and

 

·         supported the strong cross-sell of insurance and superannuation. Ahighlight of the year was our branch network helping BT Super for Life FUMexceed $1 billion.

 

102

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DIVISIONALPERFORMANCE

 

Net-interest marginsdeclined 19 basis points over the year, principally driven by higher retail andwholesale funding costs and a shift in the portfolio to lower spread products,including mortgages, as well as term and online deposits. Partially offsettingthis decline was some repricing of the portfolio. Most of the decline inmargins over the year was in the second quarter of the year with the trendeasing slightly since then.

 

Non-interest incomewas $1,014 million in 2010, a decrease of $260 million or 20%compared to 2009. Items contributing to the decrease included:

 

·         reduced customer fees ($182 million) following the decision to reducefee rates from 1 October 2009;

 

·         lower redemption of credit card loyalty points ($125 million); and

 

·         a reduction in foreign ATM fees ($21 million) following the move todirect charging in 2009.

 

Partially offsettingthese declines was an improvement in business line fees and higher cardinterchange fees compared to 2009.

 

Operating expenseswere $3,045 million in 2010, an increase of $102 million or 3% compared to2009. This modest rate of growth was helped by efficiency improvements insupport areas and lower credit card loyalty point redemption costs of $94million. The rise in expenses reflected:

 

·         additional front line investment, enhancing the skill base ofrelationship roles, opening nine additional branches and one additionalbusiness banking centre, and installing an additional 59 ATMs; and

 

·         higher expenses associated with technology projects.

 

Impairment chargeswere $589 million in 2010, an increase of $38 million or 7% compared to 2009,as the lagged impact of slower growth combined with higher interest rates ledto an increase in consumer impairment charges. Business impairment charges were$19 million lower than 2009, reflecting a slowdown in the emergence of newstressed exposures.

 

The credit qualityof the consumer portfolio remains sound, although there has been some rise indelinquencies through the year:

 

·         90 day delinquencies in the mortgage portfolio increased 15 basis pointsto 0.46% at 30 September 2010. Most of the rise can be traced back tolending in Western Australia and Queensland, with both markets experiencingsignificant increases in delinquencies compared to 2009; and

 

·         90 day delinquencies in credit cards increased 28 basis points to 1.12%at 30 September 2010. Much of the increase was recorded in the firsthalf of the year, with delinquencies easing since then.

 

Income tax expensewas $756 million in 2010, a decrease of $59 million or 7% compared to 2009.This equated to an effective tax rate of 30.1% in 2010 compared to 29.9% in2009.

 

For a discussion ofthe results of Westpac RBB for 2009 v 2008, refer to ‘Divisional performance —2009 v 2008’ in this Annual Report.

 

103

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**Westpac Institutional Bank**

 

WestpacInstitutional Bank (WIB) delivers a broad range of financial services tocommercial, corporate, institutional and government customers either based in,or with interests in, Australia and New Zealand.

 

WIB operates throughdedicated sales industry teams, supported by specialist knowledge in financialand debt capital markets, transactional banking, specialised capital, marginlending, broking and alternative investment solutions.

 

Customers aresupported through branches and subsidiaries located in Australia, New Zealand,New York, London and Asia.

 

The merger between Westpac and St.George BankLimited was deemed to have occurred, for accounting purposes, on17 November 2008. Cash Earnings of St.George institutional businessesare included in the WIB results for the period from 18 November 2008 to30 September 2009. The 2010 Cash Earnings are not directly comparableto 2009 due to the additional six weeks of the St.George institutionalbusinesses included in 2010.

 

***Performance of WIB***

 
| ** **                                                                      | ** ** | **2010**   | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                                                      | ** ** | **$m**     | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Net interest income                                                             |       | 1,776      |       | 1,761    |       | 1,248    |       |
| Non-interest income                                                             |       | 1,519      |       | 1,249    |       | 1,110    |       |
| Net operating income before operating expenses and impairment charges  on loans |       | 3,295      |       | 3,010    |       | 2,358    |       |
| Operating expenses                                                              |       | (1,038     | )          | (1,011   | )          | (902     | )          |
| Profit before impairment charges on loans and income tax expense                |       | 2,257      |       | 1,999    |       | 1,456    |       |
| Impairment charges on loans                                                     |       | (123       | )          | (1,516   | )          | (341     | )          |
| Profit before income tax                                                        |       | 2,134      |       | 483      |       | 1,115    |       |
| Income tax expense                                                              |       | (620       | )          | (144     | )          | (319     | )          |
| **Cash Earnings**                                                               |       | 1,514      |       | 339      |       | 796      |       |
| Cash Earnings adjustments                                                       |       | —     |       | —   |       | —   |       |
| **Net profit attributable to  equity holders of Westpac**                       |       | 1,514      |       | 339      |       | 796      |       |
|                                                                            | ** ** | ** ** |       |     |       |     |       |
| ** **                                                                      | ** ** | **$bn**    | ** ** | **$bn**  | ** ** | **$bn**  | ** ** |
| Deposits                                                                        |       | 47.8       |       | 51.0     |       | 36.9     |       |
| Loans                                                                           |       | 61.5       |       | 75.3     |       | 75.9     |       |
| Total assets                                                                    |       | 99.2       |       | 114.6    |       | 119.0    |       |
| Total operating expenses to net operating income ratio                          |       | 31.5       | %          | 33.6     | %          | 38.3     | %          |

 

***2010 v 2009***

 

WIB Cash Earningswere $1,514 million in 2010, an increase of $1,175 million or 347% compared to2009. The improved performance was primarily due to an increase of $285 millionin net operating income and a decrease of $1,393 million inimpairment charges.

 

Net interest incomewas $1,776 million in 2010, an increase of $15 million or 1% compared to 2009.Excluding the impact of the additional six weeks of St.George’s operations, netinterest income was flat.

 

The operatingenvironment has undergone change during 2010 as markets emerged from the globalfinancial crisis. This included corporate clients remaining cautious andcontinuing to deleverage, and financial markets exhibitinglower volatility.

 

The focus ondeleveraging saw lending steadily decline, falling 18% over 2010, with much ofthe reduction recorded in the commercial property, financial institution,industrials and materials sectors. Partially offsetting the impact of lowervolumes were higher net interest margins from the repricing of facilities tobetter reflect increased pricing for risk, improved line fees and higherestablishment fees associated with the early repayment of debt. Improvedreturns from the Transaction and Client Services deposit business alsosupported net interest income.

 

Non-interest incomewas $1,519 million in 2010, an increase of $270 million or 22% compared to2009. The additional six weeks of St.George’s operations contributed 3% growth.Excluding the impact of St.George, non-interest income reflected the following:

 

·         a $130 million increase in fees associated with unused lines of credit,repriced to better reflect the capital cost of these commitments;

 

·         the Hastings business recording much improved income in 2010, assistedby $35 million of gains from asset sales; and

 

·         higher revenue in the Equities business, up $55 million compared to2009, as the repositioning of this business and more favourable equity marketsled to strong results from the Structured Products business.

 

104

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DIVISIONALPERFORMANCE

 

Partially offsettingthe rise in non-interest income was a decline in markets-related income in bothForeign Exchange and Debt Markets. Foreign Exchange earnings decreased $256million over 2010 after a strong performance in 2009. The decline reflectedlower volatility and market spread retraction, which reduced revenueopportunities. Debt Markets non-interest income was also lower from reducedmarket volatility, although the business benefited from improved credit spreadsin the first half of 2010.

 

Operating expenseswere $1,038 million in 2010, an increase of $27 million or 3% compared to 2009.The inclusion of St.George’s operations for an additional six weeks in 2010increased operating expenses by 2%. The remaining increase was mainly due toincreases in performance-related pay, consistent with the improved CashEarnings. Partially offsetting this rise was the translation benefit of $12million on offshore expenses due to the higher Australian dollar.

 

Impairment chargeson loans were $123 million in 2010, a decrease of $1.4 billion or 92% comparedto 2009. The impact of including St.George impairment charges for the full yearwas not significant. Impairment charges on loans were materially lower in 2010due to:

 

·         a decline in the number of new single name impaired assets;

 

·         the improved operating environment seeing a reduction in new stressedassets, reducing CAPs;

 

·         the fall in lending, reducing associated CAPs;

 

·         the margin lending portfolio having net write-backs during the year; and

 

·         updates to provisioning factor changes, reducing CAPs by $124 million.

 

Income tax expensewas $620 million in 2010, an increase of $476 million or 331% compared to 2009,primarily due to increased profit before income tax. This equated to aneffective tax rate of 29.1% for 2010 compared to 29.8% in 2009.

 

For a discussion ofthe results of WIB for 2009 v 2008, refer to ‘Divisional performance — 2009 v2008’ in this Annual Report.

 

105

----

 

**St.George Bank**

 

St.George Bank isresponsible for sales and service for our consumer, business and corporatecustomers in Australia under the St.George and BankSA brands.

 

Consumer activitiesare conducted through a network of branches, third party distributors, callcentres, ATMs, Electronic Funds Transfer Point of Sale (EFTPOS) terminals andinternet banking services. Business and corporate customers (businesses withfacilities typically up to $150 million) are provided with a wide range ofbanking and financial products and services, including specialist advice forcash flow finance, trade finance, automotive and equipment finance, propertyfinance, transaction banking and treasury services. Sales and serviceactivities for business and corporate customers are conducted by relationshipmanagers via business banking centres, internet and customer service centrechannels.

 

The merger betweenWestpac and St.George Bank Limited was deemed to have occurred for accountingpurposes on 17 November 2008. Cash Earnings of St.George Bank areincluded in the 2009 consolidated results for the period from 18 November 2008to 30 September 2009. The 2010 Cash Earnings are not directly comparableto 2009 due to the additional six weeks of St.George Bank’s operations includedin 2010.

 

***Performanceof St.George Bank***

 
| ** **                                                                      | ** ** | **2010**   | ** ** | **2009** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| ** **                                                                      | ** ** | **$m**     | ** ** | **$m**   | ** ** |
| Net interest income                                                             |       | 2,668      |       | 2,313    |       |
| Non-interest income                                                             |       | 572        |       | 589      |       |
| Net operating income before operating expenses and impairment charges  on loans |       | 3,240      |       | 2,902    |       |
| Operating expenses                                                              |       | (1,242     | )          | (1,027   | )          |
| Profit before impairment charges on loans and income tax expense                |       | 1,998      |       | 1,875    |       |
| Impairment charges on loans                                                     |       | (511       | )          | (547     | )          |
| Profit before income tax                                                        |       | 1,487      |       | 1,328    |       |
| Income tax expense                                                              |       | (446       | )          | (398     | )          |
| **Cash Earnings**                                                               |       | 1,041      |       | 930      |       |
| Cash Earnings adjustments                                                       |       | (129       | )          | (113     | )          |
| **Net profit attributable to  equity holders of Westpac**                       |       | 912        |       | 817      |       |
|                                                                            | ** ** | ** ** |       |     |       |
| ** **                                                                      | ** ** | **$bn**    | ** ** | **$bn**  | ** ** |
| Deposits                                                                        |       | 65.6       |       | 61.1     |       |
| Loans                                                                           |       | 126.8      |       | 121.2    |       |
| Total assets                                                                    |       | 134.0      |       | 127.6    |       |
| Total operating expenses to net operating income ratio                          |       | 38.3       | %          | 35.4     | %          |

 

***2010 v 2009***

 

St.George Bank CashEarnings were $1,041 million in 2010, an increase of $111 million or 12%compared to 2009.

 

Net interest incomeincreased $355 million or 15% in 2010 compared to 2009. Excluding the impact ofthe additional six weeks of St.George’s operations, net-interest incomeincreased 2%. This was driven by balance sheet growth, partially offset bylower margins from higher retail and wholesale funding costs. The discussionthat follows excludes the impact of the additional six weeks of St.Georgenet-interest income.

 

The majority ofgrowth in lending compared to 2009 was in mortgages, which increased 8% ataround 0.8 times banking system(1). The division sought to rebalance growthover the year focusing on proprietary channels and reducing up-front discountrate offers. As a result, proprietary channels increased to 62% of inflows, anincrease from 50% in 2009.

 

Credit card andother personal lending grew 10% compared to 2009, assisted by the launch of anew rewards-based card in April 2010 called Amplify. Development of theAmplify card leveraged off the broader experience of the Group and allowedSt.George to introduce a new offer into its product suite. Business lendingdecreased 5% compared to 2009, as businesses continued to reduce gearing,particularly in the commercial property portfolio. The division continued toadjust its portfolio mix, increasing the proportion of non-property lending to59% from 55% at 30 September 2009, with particularly good growth inthe auto, trade and hospitality sectors.

 

Deposits increased7% in 2010 compared to 2009, with good growth in transactions, savings andterm deposits.

 

Excluding the impactof the additional six weeks of St.George, net interest margins declined 13basis points compared to 2009, to 1.91% for 2010, due to higher wholesaleand retail funding costs and a change in the mix of the portfolio towards lowerspread products, including mortgages and term deposits. The majority of themargin decline occurred in the first half of 2010.

 

----

(1) APRA system growth, 12 months to 30 September 2010.

 

106

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DIVISIONALPERFORMANCE

 

Non-interest incomedecreased $17 million or 3% in 2010 compared to 2009. The additional six weeksof St.George non-interest income contributed 15% to the year on year movement.Excluding the impact of the additional six weeks of St.George’s operations theunderlying decrease arose due to:

 

·         the decision to reduce certain customer fees;

 

·         the full period impact of the move to direct charging for ATM fees; and

 

·         lower sales from financial markets products.

 

St.George Bank alsobenefited from the improved cross-sell of key Group products, including Superfor Life (with almost 20,000 sales) and home and contents insurance.

 

Operating expensesincreased $215 million or 21% in 2010 compared to 2009. Excluding the impact ofthe additional six weeks of St.George expenses, operating expenses increased4%. This growth in expenses was driven by technology projects and furtherinvestment in the front line, with an additional nine branches and 14 ATMsopened during the year.

 

Impairment chargeson loans decreased $36 million or 7% or in 2010 compared to 2009. Excluding theimpact of the additional six weeks of St.George impairments, the decline was14%. This arose as business impairment charges eased and property marketsstabilised, offsetting some increase in consumer-related impairment charges.

 

New IAPs increased$15 million in 2010 compared to 2009 due to continuing stress in the commercialproperty sector.

 

New CAPs decreased$1 million in 2010 compared to 2009. The fall was primarily due to a decline innew corporate stress.

 

The credit qualityof the consumer portfolio continues to remain sound:

 

·         90 day delinquencies in the mortgage portfolio increased 1 basis pointto 0.36% at 30 September 2010; and

 

·         90 day delinquencies in other consumer loans increased 6 basis points to1.03% at 30 September 2010.

 

Income tax expensewas $446 million in 2010, an increase of $48 million or 12% compared to 2009.The impact of including St.George tax for the full year in 2010 was notsignificant. This equated to an effective tax rate of 30.0% in 2010 compared to30.0% in 2009.

 

For a discussion ofthe results of St.George Bank for 2009 v 2008, refer to ‘Divisional performance— 2009 v 2008’ in this Annual Report.

 

107

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**BT Financial Group (Australia)**

 

BT Financial Group(Australia) (BTFG) is the wealth management arm of the Group which, followingthe merger with St.George Bank Limited, also includes the wealth division ofSt.George.

 

Funds Managementoperations include:

 

·         the manufacturing and distribution of investment, superannuation andretirement products;

 

·         investment platforms such as Wrap and Master Trusts; and

 

·         private banking and financial planning.

 

Insurance solutionscover the manufacturing and distribution of life, general and lenders mortgageinsurance and deposit bonds.

 

BTFG’s brandsinclude Advance Asset Management, Asgard, BT, BT Investment Management (60%owned by the Group and consolidated in BTFG’s Funds Management business),Licensee Select, Magnitude, Ascalon, Securitor, and the advice, private bankingand insurance operations of BankSA, St.George and Westpac RBB.

 

The merger between Westpac and St.George BankLimited was deemed to have occurred, for accounting purposes, on17 November 2008. Accordingly the Cash Earnings of St.George wealthbusinesses are included in the BTFG results for the period from18 November 2008 to 30 September 2009. The 2010 CashEarnings are not directly comparable to 2009 due to the additional six weeks ofthe St.George wealth businesses included in 2010.

 

***Performance of BTFG***

 
| ** **                                                                      | ** ** | **2010**   | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                                                      | ** ** | **$m**     | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Net interest income                                                             |       | 257        |       | 263      |       | 111      |       |
| Non-interest income                                                             |       | 1,475      |       | 1,284    |       | 1,096    |       |
| Net operating income before operating expenses and impairment charges  on loans |       | 1,732      |       | 1,547    |       | 1,207    |       |
| Operating expenses                                                              |       | (866       | )          | (829     | )          | (645     | )          |
| Profit before impairment charges on loans and income tax expense                |       | 866        |       | 718      |       | 562      |       |
| Impairment charges on loans                                                     |       | (12        | )          | (17      | )          | (4       | )          |
| Profit before income tax                                                        |       | 854        |       | 701      |       | 558      |       |
| Income tax expense                                                              |       | (251       | )          | (213     | )          | (155     | )          |
| Non-controlling interests                                                       |       | (8         | )          | (4       | )          | (4       | )          |
| **Cash Earnings**                                                               |       | 595        |       | 484      |       | 399      |       |
| Cash Earnings adjustments                                                       |       | (17        | )          | (15      | )          | —   |       |
| **Net profit attributable to  equity holders of Westpac**                       |       | 578        |       | 469      |       | 399      |       |
|                                                                            | ** ** | ** ** |       |     |       |     |       |
| ** **                                                                      | ** ** | **$bn**    | ** ** | **$bn**  | ** ** | **$bn**  | ** ** |
| Deposits                                                                        |       | 16.0       |       | 13.2     |       | 10.6     |       |
| Loans                                                                           |       | 11.2       |       | 9.5      |       | 7.8      |       |
| Total assets                                                                    |       | 27.5       |       | 26.1     |       | 22.7     |       |
| Funds under management                                                          |       | 42.5       |       | 41.9     |       | 32.3     |       |
| Funds under administration                                                      |       | 79.9       |       | 76.7     |       | 41.6     |       |
| Total operating expenses to net operating income ratio                          |       | 50.0       | %          | 53.6     | %          | 53.4     | %          |

 

108

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DIVISIONALPERFORMANCE

 

***2010 v 2009***

 

BTFG Cash Earningswere $595 million in 2010, an increase of $111 million or 23% compared to 2009.Excluding the impact of the additional six weeks of St.George’s operations,Cash Earnings increased 21%. The increase was primarily due to a strongcontribution from Funds Management, driven by improved asset markets and strongnet inflows.

 

Net interest incomedecreased $6 million or 2% in 2010 compared to 2009. Excluding the impact ofthe additional six weeks of St.George’s operations, net-interest incomedecreased 5%. The primary driver of this decrease was the reclassification ofincome, from net-interest income to non-interest income, to align the accountingtreatment of Asgard with the approach applied to similar BT Wrap income. Thisdecrease was offset by good deposit growth in the Private Bank during theyear.

 

Non-interest incomeincreased $191 million or 15% in 2010 compared to 2009. Excluding the impact ofthe additional six weeks of St.George’s operations, non-interest incomeincreased 12%. The increase was primarily driven by higher fees generated fromFUM and FUA balances. Other factors driving this 12% increase are discussedbelow.

 

FUM was $42.5 billionat 30 September 2010, an increase of $0.6 billion or 1% compared to 30 September 2009,principally driven by net inflows during the year as market sentiment improved.FUM margins were down slightly over the year. Super for Life, now beingdistributed through St.George, Bank SA and Westpac, continued to generate verystrong growth with over 200,000 customers registered and FUM doubling to over$1 billion at 30 September 2010.

 

FUA was $79.9billion at 30 September 2010, an increase of $3.2 billion or 4% comparedto 30 September 2009, primarily due to positive net inflows (principallyon the BT Wrap platform). FUA margins were down over the year, as investorsmoved to lower margin equity products.

 

The Insurancebusiness generated non-interest income after commission expenses of$377 million in 2010. The impact of the additional six weeks of St.George’soperations was not significant. The Life Insurance business experienced growthdue to strong premium growth, with much of this arising from life policies onthe Wrap platform. This was partially offset by a decline in General Insurance;while premium income was higher and cross sell continues to improve, higherclaims offset growth. Lenders Mortgage Insurance was down as a result ofslightly higher claims and the decision to refer mortgage insurance to a thirdparty for all mortgages with a loan to value ratio (LVR) > 90%.

 

The Capital andother segment of BTFG also contributed to the improvement from 2009, with mostof this due to higher interest rates boosting the return on invested capital.BTFG continues to invest its capital conservatively.

 

Operating expenseswere $866 million in 2010, an increase of $37 million or 4% compared to 2009.Excluding the impact of the additional six weeks of St.George’s operations,operating expenses increased 1%. This increase was primarily driven by theincreased number of employees in Private Bank and Advice, along with highervolume related expenses and increased advertising spend during the year. Thisincrease was offset by improved GST recoveries, lower non-lending losses andmerger synergies.

 

Impairment chargeson loans were $12 million in 2010, a decrease of $5 million or 29% compared to2009. The decrease, excluding the impact of the additional six weeks ofSt.George, was due to lower IAPs during the year.

 

Income tax expensewas $251 million in 2010, an increase of $38 million or 18% compared to 2009.The impact of including St.George for the full year in 2010 was notsignificant. This equated to an effective tax rate of 29.4% for 2010 comparedto 30.4% in 2009.

 

For a discussion ofthe results of BTFG for 2009 v 2008, refer to ‘Divisional performance — 2009 v2008’ in this Annual Report.

 

109

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**New Zealand Banking**

 

The Group conductsits New Zealand banking business through two banks in New Zealand: Westpac NewZealand Limited (WNZL), which is incorporated in New Zealand and providesconsumer and business banking operations; and Westpac Banking Corporation (NZDivision), a branch of Westpac Banking Corporation, which is incorporated inAustralia and forms part of WIB.

 

New Zealand Bankingis responsible for sales and service of banking, wealth and insurance productsfor consumers and small to medium business customers in New Zealand. Thedivision operates via an extensive network of branches and ATMs across both theNorth and South Islands. Institutional customers are supported by the NewZealand Institutional Bank, the results of which appear in WIB.

 

***Performance of New Zealand Banking***

 
| ** **                                                                      | ** ** | **2010**   | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                                                      | ** ** | **A$m**    | ** ** | **A$m**  | ** ** | **A$m**  | ** ** |
| Net interest income                                                             |       | 957        |       | 1,007    |       | 970      |       |
| Non-interest income                                                             |       | 277        |       | 332      |       | 355      |       |
| Net operating income before operating expenses and impairment charges  on loans |       | 1,234      |       | 1,339    |       | 1,325    |       |
| Operating expenses                                                              |       | (592       | )          | (604     | )          | (599     | )          |
| Profit before impairment charges on loans and income tax expense                |       | 642        |       | 735      |       | 726      |       |
| Impairment charges on loans                                                     |       | (276       | )          | (466     | )          | (143     | )          |
| Profit before income tax                                                        |       | 366        |       | 269      |       | 583      |       |
| Income tax expense                                                              |       | (106       | )          | (73      | )          | (185     | )          |
| Non-controlling interests                                                       |       | (2         | )          | (2       | )          | (3       | )          |
| **Cash Earnings**                                                               |       | 258        |       | 194      |       | 395      |       |
| Cash Earnings adjustments                                                       |       | —     |       | —   |       | —   |       |
| **Net profit attributable to  equity holders of Westpac**                       |       | 258        |       | 194      |       | 395      |       |
|                                                                            | ** ** | ** ** |       |     |       |     |       |
| ** **                                                                      | ** ** | **A$bn**   | ** ** | **A$bn** | ** ** | **A$bn** | ** ** |
| Deposits                                                                        |       | 23.2       |       | 23.6     |       | 22.8     |       |
| Loans                                                                           |       | 37.9       |       | 39.1     |       | 39.0     |       |
| Total assets                                                                    |       | 39.0       |       | 40.1     |       | 39.9     |       |
| Funds under management                                                          |       | 1.7        |       | 1.7      |       | 1.7      |       |
| Total operating expenses to net operating income ratio                          |       | 48.0       | %          | 45.1     | %          | 45.3     | %          |

 

***2010 v 2009***

 

New Zealand BankingCash Earnings were A$258 million in 2010, an increase of A$64 million or 33%compared to 2009. We believe this was a good result given the slow economicrecovery in New Zealand. Contributing to the improved performance was asubstantial improvement in growth of loans and deposits relative to system, anda significant reduction in impairment charges from the peak in 2009. Thesepositives were offset by the reduction in certain customer fees from October 2009,higher funding costs and additional expenses associated with the aftermath ofthe Canterbury earthquake. Exchange rate movements had an A$4 millionnegative impact on earnings.

 

Net interest incomewas A$957 million in 2010, a decrease of A$50 million or 5% compared to 2009.Net interest income declined by 3% in NZ$ terms. The decrease was due to lowermargins from higher funding costs, partially offset by growth in loans.

 

Loans and deposits(1) grewby 4% and 6% respectively (in NZ$ terms) compared to30 September 2009 due to the following:

 

·         mortgage growth of 6% was achieved over the year, at 2.4 times system(2).Third party originations accounted for 30% of new mortgage lending in 2010,down from 32% in 2009;

 

·         other consumer lending was down 6% primarily due to slowing consumerspending and the impact of higher interest rates;

 

·         business lending recorded a modest increase, up 2% over the year,particularly in Agribusiness, Corporate Banking and the Northern Regions —while system business growth declined; and

 

·         deposit growth of NZ$1.7 billion funded 81% of loan growth driven bystrong growth in term deposits.

 

Net interest marginsdeclined 13 basis points in NZ$ terms compared to 2009, primarily due to higherretail and wholesale funding costs. Margins improved in the second half of 2010as the mix of new business favoured higher margin products, and products wererepriced more appropriately for risk and funding costs.

 

----

| (1) | Loans and deposits growth has been determined  on a spot basis, comparing balances at 30 September 2010 to balances  at 30 September 2009. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Reserve Bank of New Zealand (RBNZ), 12 months  to 30 September 2010.                                                                                      |

 

110

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DIVISIONALPERFORMANCE

 

Non-interest incomewas A$277 million in 2010, a decrease of A$55 million or 17% compared to 2009.This was impacted by the change in customer fee structures introduced in October 2009,which reduced fee income by NZ$57 million over the year. Lower fee income waspartially offset by improved wealth fees and higher insurance premium income.

 

Operating expenseswere A$592 million in 2010, a decrease of A$12 million or 2% compared to 2009.In NZ$ terms, operating expenses increased by NZ$5 million or 1% compared to2009. The bulk of the increase in expenses was due to NZ$3.5million of expensesassociated with the September 2010 Canterbury earthquake.

 

Investment in thefront line included the opening of eight branches and a further investment incapability, including additional training in credit and customer sales systemsand processes. Of the eight branches opened (six in the Auckland market), sevenwere community branches, which are outlets with a smaller footprint andincreased self serve options.

 

Impairment chargeson loans were A$276 million in 2010, a decrease of A$190 million or 41%compared to 2009. In NZ$ terms, impairment charges decreased by NZ$225 millionor 39% compared to 2009. The reduction from the 2009 peak was due to a smallernumber of large problem exposures not recurring during 2010. The improving NewZealand economy supported a stabilisation in housing delinquencies (in 2010, 90day delinquencies were flat at 0.75%) and business lending stressed assets (in2010 15.57% compared to 16.24% in 2009) as well as an improvement in otherconsumer lending delinquencies. Credit card delinquencies decreased to 0.97% in2010, from 1.18% in 2009. Impaired assets as a percentage of Total CommittedExposures (TCE) rose early in the year to 1.27%, but have been relativelystable since then.

 

The division hadtotal provisions to gross loans at 30 September 2010 of 1.49%, upfrom 1.15% at 30 September 2009.

 

Income tax expensewas A$106 million in 2010, an increase of A$33 million or 45% compared to 2009.This equated to an effective tax rate of 29.0% for 2010 compared to 27.1% in2009.

 

For a discussion ofthe results of New Zealand Banking for 2009 v 2008, refer to ‘Divisionalperformance — 2009 v 2008’ in this Annual Report.

 

111

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**Other divisions**

 

Other divisionscomprise:

 

***Product & Operations***

 

Product &Operations is responsible for Australian consumer and business banking productdevelopment, management and operations.

 

***Pacific Banking***

 

Pacific Bankingprovides banking services for retail and business customers throughout theSouth Pacific Island Nations. Branches, ATMs, telephone banking and internetbanking channels are used to deliver our core business activities in Fiji,Papua New Guinea, Vanuatu, Cook Islands, Tonga, Solomon Islands and Samoa.Pacific Banking’s financial products include personal savings, businesstransactional accounts, personal and business lending products, businessservices and a range of international products.

 

***Group Treasury***

 

Group Treasury isprimarily focused on the management of the Group’s interest rate risk andfunding requirements by managing the mismatch between the Group’s assets andliabilities. Group Treasury’s earnings are primarily impacted by the hedgingdecisions taken on behalf of the Group to manage net interest income outcomesand assist net interest income growth. It also includes Structured Finance,which continues to be wound down. Structured Finance transactions weretypically high yielding asset transactions or liability transactions, whichraised low cost funds on the Group’s behalf.

 

***Technology***

 

Technology isresponsible for developing and maintaining reliable and flexible technologycapabilities and technology strategies. It provides functional infrastructuresupport and software systems enhancement services to frontline businesses.

 

***Core Support***

 

Core Supportcomprises those functions performed centrally including finance, risk, legaland human resources, with expenses incurred charged back to divisions.

 

Core Supportearnings include earnings on capital not allocated to other divisions, accountingentries for certain intra-group transactions that facilitate the presentationof the performance of our operating segments (such as hedge results associatedwith hedging our New Zealand earnings), earnings from property sales andcertain other head office items such as centrally raised provisions.

 

112

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DIVISIONALPERFORMANCE

 

***Performance of Other divisions***

 
| ** **                                                                      | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                      | ** ** | **$m**   | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Net interest income                                                             |       | 1,065    |       | 1,214    |       | 607      |       |
| Non-interest income                                                             |       | 198      |       | 104      |       | 162      |       |
| Net operating income before operating expenses and impairment charges  on loans |       | 1,263    |       | 1,318    |       | 769      |       |
| Operating expenses                                                              |       | (189     | )          | (120     | )          | (128     | )          |
| Profit before impairment charges on loans and income tax expense                |       | 1,074    |       | 1,198    |       | 641      |       |
| Impairment charges on loans                                                     |       | 55       |       | (141     | )          | (91      | )          |
| Profit before income tax                                                        |       | 1,129    |       | 1,057    |       | 550      |       |
| Income tax expense                                                              |       | (358     | )          | (335     | )          | (100     | )          |
| Non-controlling interests                                                       |       | (56      | )          | (65      | )          | (66      | )          |
| **Cash Earnings**                                                               |       | 715      |       | 657      |       | 384      |       |
| Cash Earnings adjustments                                                       |       | 613      |       | (938     | )          | 133      |       |
| **Net profit attributable to  equity holders of Westpac**                       |       | 1,328    |       | (281     | )          | 517      |       |

 

***2010 v 2009***

 

Cash Earnings in2010 were $715 million, an increase of $58 million or 9% compared to 2009.Excluding the impact of the additional six weeks of St.George’s operations,Cash Earnings increased by 6%. This increase was primarily the result of lowerimpairment charges offset by lower net operating income.

 

Net interest incomein 2010 was $1,065 million, a decrease of $149 million or 12% compared to 2009.The decrease was primarily driven by lower contributions from Group Treasury,compared to the exceptional gains recognised by this business in 2009, andtranslation impacts of the higher Australian dollar on earnings from thePacific operations. This was partly offset by higher returns on capital.

 

Non-interest incomewas $198 million in 2010, an increase of $94 million or 90% compared to 2009.Excluding the impact of the additional six weeks of St.George’s operations,non-interest income increased by 50%. This increase was mainly a result ofhigher earnings from capital deals, reflecting favourable basis spreads,particularly in the first half of 2010.

 

Operating expenseswere $189 million in 2010, an increase of $69 million or 58% compared to 2009. Theincrease in expenses was primarily related to additional technology projectspend, higher employee incentive and shared-based payment charges and a one-off$20 million contribution to the Westpac Foundation in 2010.

 

Impairment chargeson loans were a $55 million write-back in 2010, a decrease of $196 millioncompared to 2009. The impact of including St.George’s operations for the fullyear was insignificant. Impairment charges on loans were lower with$57 million released from the economic overlay provision (related to theconstruction sector) in 2010, compared to an increase of $112 million to thisprovision in 2009.

 

Income tax expensewas $358 million in 2010, an increase of $23 million or 7% compared to 2009.The impact of including St.George tax for the full year was not significant.This equated to an effective tax rate of 31.7% for 2010 compared to 31.7% in2009.

 

Minority interestswere $56 million in 2010, a decrease of $9 million, or 14% compared to 2009.Minority interests represent distributions on our hybrid equity instruments TPS2003 and TPS 2006, as well as other minority interests in subsidiary entities.

 

For a discussion ofthe results of this division for 2009 v 2008, refer to ‘Divisional performance —2009 v 2008’ in this Annual Report.

 

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**Divisional performance — 2009 v 2008**

 

**Westpac Retail & BusinessBanking**

 

***2009 v 2008***

 

Westpac RBB’s CashEarnings was $1,908 million in 2009, an increase of $156 million or 9%compared to 2008.

 

Net interest incomewas $4,943 million in 2009, an increase of $656 million or 15% compared to2008. The increase in net interest income was due to the combined impact ofgrowth in lending of 14% and deposits of 19% and a 9 basis pointimprovement in margins. The primary driver of the improvement in margin was therepricing of loans for higher risk premiums, partially offset by increasedfunding costs.

 

Non-interest incomewas $1,274 million in 2009, a decrease of $82 million or 6% compared to 2008,due to lower fees on credit cards and the impact of changes to exception feesand ATM fees following financial system reforms introduced over the year. Thesedeclines were partially offset by higher income from our cards reward program(Altitude) resulting in a one-off increase in points redeemed into the Qantasfrequent flyer program (with a related offset in expenses).

 

Operating expenseswere $2,943 million in 2009, an increase of $156 million or 6% compared to2008. This was largely driven by:

 

·         an increase in average FTE employees by 355;

 

·         general pay rises processed over the year of 4%;

 

·         a $20 million increase in expenses associated with the opening of eightnew branches and four new business banking centres along with the refurbishmentof 113 branches, including lease costs and fitout expenses; and

 

·         higher costs associated with an increase in credit card loyalty pointsredeemed over the year (see comment in non-interest income above).

 

Impairment chargeson loans were $551 million in 2009, an increase of $199 million or 57% comparedto 2008. Most of the rise was associated with increased impairments in smalland medium sized business customers. Australian consumer losses have remainedrelatively low.

 

New IAPs increasedby $127 million in 2009, with most of the increase due to higher impairedassets in the business portfolio. The increase in impaired assets was evenlyspread across industries and sectors. Writebacks and recoveries were $5 millionhigher than 2008.

 

Business impairedassets to total committed exposure increased from 0.31% at 30 September 2008to 0.79% as at 30 September 2009.

 

Collectivelyassessed provisions increased by $77 million over the year, with most of thechange due to business products with higher direct write-offs and somedowngrades in the portfolio.

 

Consumer 90 daydelinquencies increased in the first half of the 2009 but eased in the secondhalf of 2009. As a result, compared to 2008, 90 day delinquencies in themortgage portfolio decreased 7 basis points to 0.31% at30 September 2009 while 90 day delinquencies in other consumerproducts increased 8 basis points to 0.99%. The moderation in mortgagedelinquencies through the year reflects the health of the consumer segmentalong with increased collection efforts and customers paying down debt wherethey had capacity to do so. Actual losses on the mortgage portfolio were$22 million.

 

Income tax expensewas $815 million in 2009, an increase of $63 million or 8% compared to 2008.This equates to an effective tax rate of 29.9% in 2009 compared to 30.0% in2008.

 

**Westpac Institutional Bank**

 

***2009 v 2008***

 

WIB’s Cash Earningswas $339 million in 2009, a decrease of $457 million or 57% compared to2008. Net profit excluding the impact of St.George amounted to $350 million in2009, a decrease of $446 million or 56% compared to 2008, primarily due toa substantial increase in impairment charges on loans.

 

Net interest incomewas $1,761 million in 2009, an increase of $513 million or 41% compared to2008. Net interest income excluding the impact of St.George was $1,547 millionin 2009, an increase of $299 million or 24% compared to 2008. This increase,excluding the impact of St.George, was largely driven by the Debt Marketsbusiness as a result of higher margins as the portfolio was progressivelyrepriced for the higher cost of funds, together with strong deposit growth andincreased interest rate product volumes in the markets business. This waspartly offset by a lower contribution from our Equities business, mainly due toa decline in margin loan balances. Net Financing loans declined 13% compared to2008.

 

Non-interest incomewas $1,249 million in 2009, an increase of $139 million or 13% compared to2008. Non-interest income excluding the impact of St.George was $1,299 millionin 2009, an increase of $189 million or 17% compared to 2008. This increase wasprimarily driven by increased fee income from our Financing and Originationsbusinesses combined with an improved markets performance which benefited fromhigher sales, mark-to-market gains on the credit trading portfolio andeffective risk management in a volatile interest rate market.

 

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DIVISIONALPERFORMANCE

 

SCG revenuedecreased $184 million following the write down in the value of assets andinvestments held of $155 million. The residual value of assets written down was$438 million and included assets held for ultimate placement into funds, directequity investments and strategic holdings in funds.

 

Operating expenseswere $1,011 million in 2009, an increase of $109 million or 12% compared to2008. Operating expenses excluding the impact of St.George were $960 million in2009, an increase of $58 million or 6% compared to 2008. This was mainly due tohigher personnel costs, restructuring costs and higher offshore expenses giventhe average A$ exchange rate was lower than the prior year.

 

Impairment chargeson loans were $1,516 million in 2009, an increase of $1,175 million or 345%compared to 2008. Impairment charges on loans excluding the impact of St.Georgewere $1,386 million in 2009, an increase of $1,045 million or 306% compared to2008. Impairment charges on loans were impacted by three large corporateexposures that were a direct result of the global financial crisis. Together,these facilities contributed just over $400 million to impairment charges onloans for the year. Impairment charges on loans were also impacted by adeterioration in commercial facilities (typically those with a facility in the$10 million to $100 million range).

 

Within the Equitiesbusiness, impairment charges on loans increased mainly due to three MarginLending portfolio exposures and additional collectively assessed provisions.While the majority of the Margin Lending portfolio involves diversifiedportfolios of liquid stocks, the three troubled facilities were in concentratedportfolios supported by single stocks or managed funds that were illiquid orwhere redemptions were frozen. As a result, when markets declined sharply anorderly exit of these portfolios was not achieved.

 

Income tax expensewas $144 million in 2009, a decrease of $175 million or 55% compared to 2008.Income tax expense excluding the impact of St.George was $150 million, adecrease of $169 million or 53% compared to 2008. This equates to an effectivetax rate of 29.8% in 2009, compared to 28.6% in 2008.

 

**St.George Bank**

 

***2009***

 

St.George Bankcontributed Cash Earnings of $930 million for 2009. Revenue from increasedbalance sheet growth was partially offset by the costs associated withreinvestment in the business coupled with impairment charges on loans resultingfrom the deteriorating economic conditions.

 

Net interest incomeof $2,313 million for 2009 reflected the combined impact of both lending anddeposit growth and improvements in net interest margin. Deposit growth wasprimarily driven by term deposits, particularly from consumers. Thiseffectively offset the impact of higher funding costs and decreased retaildeposit spreads due to strong competition for term deposits.

 

Non-interest incomeof $589 million for 2009 primarily consisted of deposit and lending fees.

 

Operating expensesof $1,027 million for 2009 represented the costs of maintaining the St.Georgeand BankSA distribution channels and brands, together with their associatedtechnology, operations and administrative costs.

 

Impairment chargeson loans of $547 million for 2009 primarily related to IAPs in the businessportfolio. Commercial facilities including commercial property account for mostof the charge. Much of the stress in this portfolio was in property developmentprojects, typically outside major central business districts in Australia.These properties have limited income to service debt, and easing propertyprices has reduced the collateral on these loans.

 

Other stresses inthe commercial sector were evenly spread across industries. Australian consumerlosses remained relatively low.

 

**BT Financial Group (Australia)**

 

***2009 v 2008***

 

BT Financial Group(Australia) Cash Earnings was $484 million in 2009, an increase of$85 million or 21% compared to 2008. Net profit excluding the impact ofSt.George was $344 million in 2009, a decrease of $55 million or 14% comparedto 2008. The 14% decrease was driven by weaker global investment markets andlower average FUM and FUA throughout the year.

 

FUM was $41.9billion as at 30 September 2009, an increase of $9.6 billion or 30%compared to 30 September 2008. This result reflected the impact ofSt.George adding $10.2 billion of FUM, partially offset by the impact of lowerinvestment markets during 2009.

 

FUA was $76.7billion as at 30 September 2009, an increase of $35.1 billion or 84%compared to 30 September 2008. This result reflected the impact ofSt.George adding $31.4 billion of FUA, in addition to $4.4 billion positive netflows and positive other movements, including the re-invested distributions of$0.3 billion, partially offset by a $1.0 billion decrease due to lowerinvestment markets during 2009.

 

Net operating incomewas $1,547 million in 2009, an increase of $340 million or 28% compared to2008. Excluding the impact of St.George this was $1,195 million in 2009, adecrease of $12 million or 1% compared to 2008. This 1% decrease was driven bythe impact of lower FUM and FUA related revenues, partially offset by volumegrowth within the Private Bank business and better FUM and FUA margins, offsetby lower average balances.

 

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Operating expenseswere $829 million in 2009, an increase of $184 million or 29% compared to 2008.Operating expenses excluding the impact of St.George were $680 million in 2009,an increase of $35 million or 5% compared to 2008. The 5% increase wasdriven by a one-off payment to AIA Australia to terminate a contract todistribute certain insurance products, and increased expenses relating to BTIMshare based payments, offset by lower volume-based expenses.

 

Impairment chargeson loans were $17 million in 2009, an increase of $13 million or 325% comparedto 2008. Impairment charges on loans excluding the impact of St.George was $14million in 2009, an increase of $10 million or 250%, reflecting deterioratedeconomic conditions.

 

Income tax expensewas $213 million in 2009, an increase of $58 million or 37% compared to 2008.Income tax expense excluding the impact of St.George was $153 million in 2009,a decrease of $2 million or 1%. This equates to an effective tax rate of 30.5%for 2009, compared to 27.8% in 2008.

 

**New Zealand Banking**

 

***2009 v 2008***

 

New Zealand BankingCash Earnings was $194 million in 2009, a decrease of $201 million or 51%compared to 2008. Exchange rate movements had a $4 million negative impact onearnings.

 

Net interest incomewas $1,007 million in 2009, an increase of $37 million or 4% compared to 2008.The increase in net interest income was the result of a 3% increase in lendingin NZ$ terms and a 6% increase in deposits in NZ$ terms. Lending spreadsimproved by 36 basis points due to the repricing of business facilities toreflect higher risk premiums and mix benefits from a shift to floating ratemortgages from fixed rate. This was offset by a 55 basis point reduction indeposit spreads due to the migration to lower spread products (mostly termdeposits) and intense competition for deposits. Exchange rate movements had a$27 million negative impact on net interest income.

 

Non-interest incomewas $332 million in 2009, a decrease of $23 million or 6% compared to 2008.This was primarily due to lower transaction fees given reduced customer andmerchant activity. Non-interest income from mortgage funds was also lower,primarily reflecting unusually high levels in 2008. Exchange rate movements hada $9 million negative impact on non-interest income.

 

Operating expenseswere $604 million in 2009, an increase of $5 million or 1% compared to 2008.Employee expenses rose 2% with general wage rises partially offset by a fall intemporary employees. Other contributors to expense growth over the year werehigher lease costs from the transition into a new head office and continuedexpenditure on online and self-service customer solutions. Exchange ratemovements had a $17 million positive impact on operating expenses.

 

Impairment chargeson loans were $466 million in 2009, an increase of $323 million or 226%compared to 2008. The large rise in impairments reflect two large impairedassets and a general deterioration in asset quality in both the business andconsumer portfolios. The two large names accounted for $162 million inimpairment charges on loans.

 

Other impairmentcharges on loans in the business portfolio increased by $127 million comparedto 2008. Most of the increase relates to the stressed commercial propertymarket, particularly apartment development properties where falling assetprices placed pressure on pre-sale contracts and softer asset prices impacteddevelopers’ cash flows.

 

Business impairedassets to total committed exposure increased from 0.15% at 30 September 2008to 0.42% as at 30 September 2009.

 

In the consumerportfolio impairment charges on loans increased by $38 million compared to2008. The major movements were:

 

·         $10 million increase in other consumer lending impairment charges; and

 

·         $27 million increase in mortgage impairment charges, driven mainly bycustomers that rely on business earnings to service their mortgage.

 

Delinquenciesgreater than 90 days rose by 28 basis points for mortgages and 3 basis pointsfor other consumer lending compared to 30 September 2008. Most of the risein delinquencies emerged during the first half of the year. This was consistentwith the unemployment profile in New Zealand where the unemployment rateincreased to 6%, but did not materially deteriorate in the later part of theyear.

 

Income tax expensewas $73 million in 2009, a decrease of $112 million or 61% compared to 2008.This equates to an effective tax rate of 27.1% in 2009 compared with 31.7% in2008, due to a change in corporate tax rate from 33% to 30% in October 2008.

 

**Other divisions**

 

***2009 v 2008***

 

Other divisions CashEarnings was $657 million in 2009, an increase of $273 million or 71% comparedto 2008. Cash Earnings excluding the impact of St.George was $722 million in2009, an increase of $338 million or 88% compared to 2008.

 

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DIVISIONALPERFORMANCE

 

Net interest incomewas $1,214 million in 2009, an increase of $607 million or 100% compared to2008. Net interest income excluding the impact of St.George was $1,175 millionin 2009, an increase of $568 million or 94% compared to 2008. This was mainlydriven by an uplift in Group Treasury’s net interest income as a result ofexceptional gains in three areas. Firstly, gains emerged from the revaluationof liquid securities driven by credit spreads narrowing as credit marketconfidence improved. Secondly, gains from the management of basis risksincluding the bills/libor spread, with this spread also reverting to long runlevels in 2009 following a significant widening in 2008 in response to globalfinancial crisis uncertainties. Finally, early repayment fees from customersexiting fixed rate loans were also significantly higher this year. Offsettingthis was lower earnings from Structured Finance.

 

Non-interest incomewas $104 million in 2009, a decrease of $58 million or 36% compared to 2008.Non-interest income excluding the impact of St.George was $128 million in 2009,a decrease of $34 million or 21% compared to 2008. This was due to large one-offitems in 2008, including property sales, upfront benefits on new insurancecontracts and expense provision releases.

 

Operating expenseswere $120 million in 2009, a decrease of $8 million or 6% compared to 2008.Operating expenses excluding the impact of St.George were $107 million in 2009,a decrease of $21 million or 16% compared to 2008. The movement in operatingexpenses was impacted by increased salaries and technology expenses, partiallyoffset by improved productivity in Technology and merger synergies in CoreSupport.

 

Impairment chargeson loans were $141 million in 2009, an increase of $50 million or 55% comparedto 2008. Impairment charges on loans excluding the impact of St.George were$136 million in 2009, an increase of $45 million or 49% compared to 2008. Thiswas due to increased impairment charges on loans within Pacific Banking due toportfolio growth and credit downgrades, and the impact of additional collectiveprovisions, which reflected the assessed impact of continuing market dislocation.

 

Income tax expensewas $335 million in 2009, an increase of $235 million or 235% compared to 2008.Income tax expense excluding the impact of St.George was $332 million in 2009,an increase of $232 million or 232% compared to 2008. This equated to aneffective tax rate of 31.7% in 2009 compared to 18.2% in 2008, due to one-offtax benefits arising in 2008.

 

Non-controllinginterests were $65 million in 2009, a decrease of $1 million or 2% compared to2008. The non-controlling interests represent distributions our hybrid equityinstruments, TPS 2003 and TPS 2006, as well as othernon-controlling interests.

 

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RISK AND RISK MANAGEMENT

 

**Risk factors**

 

Our business issubject to risks that can adversely impact our business, results of operations,financial condition and future performance. If any of the following risksoccur, our business, results of operations or financial condition could bematerially adversely affected, with the result that the trading price of oursecurities could decline and you could lose all, or part, of your investment.You should carefully consider the risks and the other information in thisAnnual Report before investing in our securities. The risks and uncertaintiesdescribed below are not the only ones we may face. Additional risks anduncertainties that we are unaware of, or that we currently deem to beimmaterial, may also become important factors that affect us.

 

**Risks relating to our business**

 

***Our businesses are highly regulated and we could be adversely affectedby changes in regulations and regulatory policy***

 

Compliance riskarises from the regulatory standards that apply to us as a financialinstitution. All of our businesses are highly regulated in the jurisdictions inwhich we do business. We are responsible for ensuring that we comply with allapplicable legal and regulatory requirements (including accounting standards)and industry codes of practice, as well as meeting our ethical standards. Thenature and impact of future changes in such policies are not predictable andare beyond our control.

 

Following the recentglobal financial crisis, significant regulatory change for financialinstitutions is occurring in most markets in which we operate. These changeswill include changes in funding, liquidity, capital adequacy and otherprudential requirements. Details of these changes and the timing of theirintroduction are currently uncertain and we currently manage our business inthe context of regulatory uncertainty.

 

Other areas ofpotential regulatory change may include accounting and reporting requirements,tax legislation, regulation relating to remuneration and consumer protectionlegislation. In addition, other changes may occur in other areas driven bypolicy, prudential or political factors.

 

Some areas ofpotential regulatory change involve multiple jurisdictions seeking to adopt acoordinated approach to these issues. Such an approach may not appropriatelyrespond to the specific requirements of the jurisdictions in which we operateand, in addition, such changes may be inconsistently introduced acrossjurisdictions.

 

Changes may alsooccur in the oversight approach of regulators. It is also possible thatgovernments in jurisdictions in which we do business or obtain funding mightrevise their application of existing regulatory policies that apply to, orimpact, Westpac’s business, including for reasons relating to national andsystemic stability.

 

Changes in law,regulations or regulatory policy could adversely affect one or more of ourbusinesses, including limiting our ability to do business or restrictingflexibility, and could require us to incur substantial costs to comply orimpact our capital, funding and liquidity requirements. The failure to complywith applicable regulations could result in fines and penalties or limitationson our ability to do business. These costs, expenses and limitations could havea material adverse effect on our business, financial performance or financialcondition.

 

For furtherinformation refer to ‘Significant developments’ in Section 1 and thesections ‘Adoption of new and revised accounting policies’, ‘Criticalaccounting assumptions and estimates’ and ‘Future accounting developments’ inNote 1 to the financial statements.

 

***Adversecredit and capital market conditions may significantly affect our ability tomeet funding and liquidity needs and may increase our cost of funding***

 

Global credit andcapital markets have experienced extreme volatility, disruption and decreasedliquidity in recent years. While some stability has returned to the markets,the environment remains volatile. We rely on credit and capital markets to fundour business and as a source of liquidity. As of 30 September 2010,approximately 41% of our total net funding originated from domestic andinternational wholesale markets, particularly markets outside Australia and NewZealand.

 

A shift ininvestment preferences of businesses and consumers away from bank depositstoward other asset or investment classes would increase our need for fundingfrom wholesale markets.

 

As a result of therecent adverse global capital market conditions and competition for funding ourfunding costs from both wholesale markets and bank deposits have increased. Ifmarket conditions deteriorate due to economic, financial, political or otherreasons, our funding costs may be further adversely affected.

 

The AustralianGovernment withdrew its guarantee scheme for wholesale funding from31 March 2010 and the New Zealand Government withdrew its wholesalefunding guarantee facility from 30 April 2010. Although Westpac had notutilised either guarantee for new long term funding since early 2010, ourcontinued access to the unguaranteed market is dependent on investor appetite.

 

If our currentsources of funding prove to be insufficient, we may be forced to seekalternative financing. The availability of such alternative financing, and theterms on which it may be available, will depend on a variety of factors,including prevailing market conditions, the availability of credit, our creditratings and credit market capacity. Even if available, the cost of thesealternatives may be more expensive or on unfavourable terms, which couldadversely affect our results of operations, liquidity, capital resources andfinancial condition. There is no assurance that we will be able to obtainfunding at acceptable prices.

 

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If Westpac is unableto source appropriate funding, we may be forced to reduce our lending or beginto sell liquid securities. Such actions may adversely impact our business,results of operations, liquidity, capital resources and financial condition.

 

For a more detaileddescription of liquidity risk, refer to the section ‘Liquidity Risk’ in thissection and Note 27 to the financial statements.

 

***Failure to maintain credit ratings could adversely affect our cost offunds, liquidity, competitive position and access to capital markets***

 

The credit ratingsassigned to us by rating agencies are based on an evaluation of a number offactors, including our financial strength. A credit rating downgrade could bedriven by the occurrence of one or more of the other risks identified in thissection or by other events.

 

If we fail tomaintain our current credit ratings, this would adversely affect our cost offunds and related margins, liquidity, competitive position and our access tocapital markets.

 

***A systemic shock in relation to the Australian, New Zealand or otherfinancial systems could have adverse consequences for Westpac that would bedifficult to predict and respond to***

 

In the currentglobal economic environment, there is a risk that another major systemic shockcould occur that causes a further adverse impact on the Australian, New Zealandor other financial systems. Such an event could have a material adverse effecton financial institutions such as Westpac, including the undermining ofconfidence in the financial system, reducing liquidity and impairing access tofunding and impairing our customers and counterparties. The nature andconsequences of any such event are difficult to predict and there can be noguarantee that we could respond effectively to any such event.

 

***Declines in asset markets could adversely affect our operations orprofitability***

 

Declines inAustralian, New Zealand or other asset markets, including equity, property andother asset markets, could adversely affect our operations and profitability.

 

Declining assetprices impact our wealth management business and other asset holdings. Earningsin our wealth management business are, in part, dependent on asset values, suchas the value of securities held or managed. A decline in asset prices couldnegatively impact the earnings of the division.

 

Declining assetprices could also impact customers and counterparties and the value of securitywe hold against loans and derivatives which may impact our ability to recoveramounts owing to us if customers or counterparties were to default. It alsoaffects our level of provisioning which in turn impacts profitability.

 

***Our business is substantially dependent on the Australian and NewZealand economies***

 

Our revenues andearnings are dependent on economic activity and the level of financial servicesour customers require. In particular, lending is dependent on various factorsincluding economic growth, business investment, levels of employment, interestrates and trade flows in the countries in which we operate.

 

We currently conductthe majority of our business in Australia and New Zealand and, consequently,our performance is influenced by the level and cyclical nature of business andhome lending in these countries. These factors are in turn impacted by bothdomestic and international economic and political events. The global financialcrisis adversely impacted global economic activity which, in turn, impacted theAustralian and New Zealand economies. This led to a slowdown in credit growthand an increase in impaired assets. While activity has improved, there is therisk of further declines in economic activity in international economies whichcould lead to a similar effect in Australia and New Zealand. Should this occur,our results of operations, liquidity, capital resources and financial conditioncould be adversely affected.

 

***An increase in defaults in credit exposures could adversely affect ourresults of operations, liquidity, capital resources and financial condition***

 

Credit risk is asignificant risk and arises primarily from our lending activities. Credit riskalso arises from certain derivatives contracts we enter into. The risk arisesfrom the likelihood that some customers and counterparties will be unable tohonour their obligations to us, including the repayment of loans and interest.Credit exposures also include our dealings with, and holdings of, debtsecurities issued by other banks, financial institutions, companies,governments and government bodies whose financial conditions may be impacted tovarying degrees by economic conditions in global financial markets.

 

We hold collectiveand individually assessed provisions for our credit exposures. If economicconditions deteriorate, some customers could experience higher levels offinancial stress and we may experience a significant increase in defaults andwrite-offs, and be required to increase our provisioning. Such events woulddiminish available capital and would adversely affect our operating results,liquidity, capital resources and financial condition.

 

For a discussion onour risk management procedures, including the management of credit risk, referto the section ‘Risk management’ in this section and Note 27 to the financialstatements.

 

***Thenon-renewal of financial stimulus measures implemented by the Australian, NewZealand, United States and other governments to stabilise financial marketscould have an impact on economic activity which may adversely affect ourbusiness***

 

In response to theglobal financial crisis, stabilising actions were taken by governments whichincluded financial stimulus measures in Australia, New Zealand, the UnitedStates and other jurisdictions. Many of these measures are of a non-

 

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recurring nature.There can be no assurance as to what effect the non-renewal of these measureswill have on economic activity, consumer and investor confidence, or the levelsof volatility in financial markets. Any adverse changes in these areas couldadversely affect our business, financial condition and results of operations.

 

***We face intense competition in all aspects of our business***

 

We compete, bothdomestically and internationally, with asset managers, retail and commercialbanks, investment banking firms, brokerage firms, and other financial servicefirms. In addition, the trend toward consolidation in the global financialservices industry is creating competitors with broader ranges of product andservice offerings, increased access to capital, and greater efficiency andpricing power.

 

If we are unable tocompete effectively in our various businesses and markets, our business,results of operations and financial condition would be adversely affected.

 

For more detail onhow we address competitive pressures refer to the section ‘Competition’ in Section 1.

 

***We could suffer losses due to market volatility***

 

We are exposed tomarket risk as a consequence of our trading activities in financial markets andthrough the asset and liability management of our financial position. In ourfinancial markets trading business, we are exposed to losses arising fromadverse movements in levels and volatility of interest rates, foreign exchangerates, commodity prices, credit prices and equity prices. If we were to suffersubstantial losses due to any market volatility it may adversely affect ourresults of operations, liquidity, capital resources and financial condition.

 

For a discussion ofour risk management procedures, including the management of market risk, referto the section ‘Risk management’ in this section.

 

***We could suffer losses due to operational risks or environmentalfactors***

 

As a financialservices organisation we are exposed to a variety of other risks includingthose resulting from process error, fraud, information technology instabilityand failure, system failure, security and physical protection, customerservices, staff competence, external events (including fire, flood, earthquakeor pandemic) that cause material damage, impact on our operations or adverselyaffect demand for our products and services. Operational risks can directlyimpact our reputation and result in financial losses which would adverselyaffect our financial performance or financial condition.

 

In addition we andour customers operate businesses and hold assets in a diverse range ofgeographical locations. Any significant environmental change in any of theselocations has the potential to disrupt business activities or affect the valueof assets held in the affected locations.

 

For a discussion ofour risk management procedures, including the management of operational risk,refer to the section ‘Risk management’ in this section.

 

***Technology***

 

Our ability todevelop and deliver products and services to our customers is dependent upontechnology that requires periodic renewal. We are constantly managingtechnology projects including projects to consolidate duplicate technologyplatforms, simplify and enhance our technology and operations environment,improve productivity and provide for a better customer experience. Thisincludes our current SIPs program. Failure to implement these projectseffectively could result in cost overruns, a failure to achieve anticipatedproductivity, operational instability, reputational damage or operatingtechnology that could place us at a competitive disadvantage and may adverselyaffect our results of operations.

 

***Reputational damage could harm our business and prospects***

 

Various issues maygive rise to reputational risk and cause harm to our business and ourprospects. These issues include appropriately dealing with potential conflictsof interest, pricing policies, legal and regulatory requirements, ethicalissues, money laundering laws, trade sanctions legislation, privacy laws,information security policies, sales and trading practices, personnel andsupplier policies and conduct by companies in which we hold strategicinvestments. Failure to address these issues appropriately could also impactthe regulatory change agenda, give rise to additional legal risk, subject us toregulatory enforcement actions, fines and penalties, or harm our reputationamong our customers, investors and the marketplace.

 

***We could suffer losses if we fail to syndicate or sell downunderwritten securities***

 

As a financial intermediarywe underwrite listed and unlisted equity securities. Underwriting activitiesinclude the development of solutions for corporate and institutional customerswho need capital and investor customers who have an appetite for certaininvestment products. We may guarantee the pricing and placement of thesefacilities. We could suffer losses if we fail to syndicate or sell down ourrisk to other market participants.

 

***Other risks***

 

Other risks that canadversely impact our performance and our financial position include insurancerisk, model risk, business risk, outsourcing risk and related entity(contagion) risk. Refer to ‘Corporate governance’ in Section 1 and Note 27to the financial statements for more information on these risks.

 

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**Riskmanagement**

 

Our vision is to beone of the world’s great companies, helping our customers, communities andpeople to prosper and grow.

 

Along withmaintaining a clear customer-centric focus, effective risk management is key toachieving this goal. It is a key component of our ‘one team’ environment andinfluences our customer experiences and public perceptions, our financialperformance, reputation and shareholder expectations, and thus our futuresuccess. We regard managing risk to be a fundamental activity, performed at alllevels of the Group.

 

Our risk managementstrategy is approved by our Board and implemented through the CEO and theexecutive management team.

 

The BRMC has beendelegated responsibility for approving and maintaining an effective riskmanagement framework. For further information regarding the role andresponsibilities of the BRMC and other Board committees in managing risk, referto ‘Corporate governance — Risk management’ in Section 1.

 

The CEO andexecutive management team are responsible for implementing the risk managementframeworks approved by the BRMC and developing policies, controls, processesand procedures for identifying and managing risk that arises from our activities.

 

We have adopted a ‘ThreeLines of Defence’ approach to managing risk. As outlined in the ‘Corporategovernance’ section our approach to managing risk is that ‘risk is everyone’sbusiness’ and the responsibility and accountability for risk begins with thebusiness units that originate the risk.

 

For a comprehensivediscussion of the risks to which Westpac is exposed, and its policies to managethese risks, refer to ‘Corporate governance — Risk management’ in Section 1and Note 27 to the financial statements.

 

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**Credit risk**

 

Credit risk is therisk of financial loss where a customer or counterparty fails to meet theirfinancial obligations.

 

Refer to Note 27 tothe financial statements for details of our credit risk management policies.

 

**Provisions for impairment chargeson loans**

 

For information onthe basis for determining the provision for impairment charges on loans referto ‘Critical accounting assumptions and estimates’ in Note 1 to thefinancial statements.

 

***Credit risk concentrations***

 

We monitor ourcredit portfolio to manage risk concentrations. At 30 September 2010, ourexposure to consumers comprised 69% (2009 64%, 2008 59%) of our on-balancesheet loans and 57% (2009 54%, 2008 46%) of total credit commitments. At30 September 2010, 89% (2009 89%, 2008 86%) of our exposure toconsumers was supported by residential real estate mortgages. The consumercategory also includes investment property loans to individuals, credit cards,personal loans, overdrafts and lines of credit. Our consumer credit risks arediversified, with substantial consumer market share in every state andterritory in Australia, New Zealand and the Pacific region. Moreover, thesecustomers service their debts with incomes derived from a wide range ofoccupations, in city as well as country areas.

 

Exposures tobusinesses, government and other financial institutions are classified into anumber of industry clusters based on groupings of related Australian andNew Zealand Standard Industrial Classification (ANZSIC) codes and aremonitored against industry risk limits. The level of industry risk is measuredand monitored on a dynamic basis. Exposures are actively managed from aportfolio perspective, with risk mitigation techniques used to regularlyre-balance the portfolio.

 

**Cross-border outstandings**

 

Cross-borderoutstandings are loans, placements with banks, interest earning investments andmonetary assets denominated in currencies other than the borrower’s localcurrency. They are grouped on the basis of the country of domicile of theborrower or the ultimate guarantor of the risk. The table below excludesirrevocable letters of credit, amounts of which are immaterial. The relevantforeign denominated currencies have been converted at the closing spot exchangerate used in the financial statements.

 

Our cross-borderoutstandings to borrowers in countries that individually represented in excessof 0.75% of Group total assets as at 30 September in each of the pastthree years were as follows:

 
| **(in $millions unless otherwise indicated)** | ** ** | **Governments  and Official  Institutions** | ** ** | **Banks and  Other  Financial  Institutions** | ** ** | **Other  (Primarily  Commercial  and Industrial)** | ** ** | **Total** | ** ** | **%  of Total  Assets** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------------|------------|-----------|------------|------------------------------|------------|
| **2010**                                                          |       |                                             |       |                                               |       |                                                    |       |      |       |                         |       |
| Australia                                                         |       | 7                                                |       | 5,353                                              |       | 3,172                                                   |       | 8,532     |       | 1.4                          | %          |
| 2009                                                              |       |                                             |       |                                               |       |                                                    |       |      |       |                         |       |
| United States                                                     |       | —                                           |       | 2,030                                              |       | 2,637                                                   |       | 4,667     |       | 0.8                          | %          |
| Australia                                                         |       | 1                                                |       | 1,613                                              |       | 4,866                                                   |       | 6,480     |       | 1.1                          | %          |
| United Kingdom                                                    |       | —                                           |       | 4,092                                              |       | 590                                                     |       | 4,682     |       | 0.8                          | %          |
| 2008                                                              |       |                                             |       |                                               |       |                                                    |       |      |       |                         |       |
| United States                                                     |       | —                                           |       | 3,702                                              |       | 1,501                                                   |       | 5,203     |       | 1.2                          | %          |
| Australia                                                         |       | 1                                                |       | 3,795                                              |       | 3,871                                                   |       | 7,667     |       | 1.7                          | %          |
| United Kingdom                                                    |       | 2                                                |       | 7,144                                              |       | 395                                                     |       | 7,541     |       | 1.7                          | %          |
| Netherlands                                                       |       | —                                           |       | 3,758                                              |       | 171                                                     |       | 3,929     |       | 0.9                          | %          |

 

Impaired assetsamong the cross-border outstandings were $136 million as at 30 September 2010(2009 $6 million, 2008 $6 million).

 

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RISKAND RISK MANAGEMENT

 

**Liquidity risk**

 

Liquidity risk isthe potential inability to meet our payment obligations, as they become due,without incurring unacceptable losses, which could potentially arise as aresult of mismatched cash flows generated by our business. This risk is managedthrough our BRMC-approved liquidity framework.

 

Refer to Note 27 tothe financial statements for a more detailed discussion of our liquidity riskmanagement policies.

 

**Westpac debt programs and issuingshelves**

 

Access in a timelyand flexible manner to a diverse range of debt markets and investors isprovided by the following programs and issuing shelves as at 30 September 2010:

 
| **Program Limit** | ** ** | **Issuer(s)**   | ** ** | **Program/Issuing Shelf Type**                        |
|------------------------|------------|-----------------|------------|-----------------------------------------------------------------|
| **Australia**          | ** ** | ** **      | ** ** | ** **                                                      |
| No limit               |       | WBC             |       | Debt Issuance  Program                                          |
| **Euro  Market**       | ** ** | ** **      | ** ** | ** **                                                      |
| USD 2.5 billion        |       | WBC             |       | Euro Transferable  Certificate of Deposit Program               |
| USD 20 billion         |       | WBC/WSNZL(1)    |       | Euro Commercial  Paper and Certificate of Deposit Program       |
| USD 50 billion         |       | WBC             |       | Program for the  Issuance of Debt Instruments                   |
| USD 7.5 billion        |       | WSNZL(1)        |       | Program for the  Issuance of Debt Instruments                   |
| **Japan**              | ** ** | ** **      | ** ** | ** **                                                      |
| JPY 750 billion        |       | WBC             |       | Samurai shelf                                                   |
| JPY 750 billion        |       | WBC             |       | Uridashi shelf                                                  |
| **United  States**     | ** ** | ** **      | ** ** | ** **                                                      |
| USD 35 billion         |       | WBC             |       | Section 4(2) US  Commercial Paper Program             |
| USD 10 billion         |       | WSNZL(1)        |       | Section 4(2) US  Commercial Paper Program             |
| USD 35 billion         |       | WBC             |       | US MTN Program                                                  |
| USD 10 billion         |       | WSNZL(1)        |       | US MTN Program                                                  |
| USD 15 billion         |       | WBC (NY Branch) |       | Medium Term  Deposit Notes                                      |
| No limit               |       | WBC             |       | US Securities and  Exchange Commission registered shelf(2)      |
| **New  Zealand**       | ** ** | ** **      | ** ** | ** **                                                      |
| No limit               |       | WNZL            |       | Medium Term Note  and Registered Certificate of Deposit Program |

 

----

(1)               Notes issued under this program by Westpac SecuritiesNZ Limited are guaranteed by Westpac New Zealand Limited, its parent company.

(2)               Replaced previous USD 6 billion registered shelf.

 

A more detailedanalysis of our borrowings and outstandings from existing debt programs andissuing shelves can be found in the notes to the financial statements includingNote 17, Note 18, Note 22 and Note 23.

 

123

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**Market risk**

 

Market risk is thepotential for loss arising from adverse movements in the level and volatilityof market factors such as foreign exchange rates, interest rates, commodityprices and equity prices.

 

Our Tradingactivities are conducted in our Financial Markets and Group Treasurybusinesses. Financial Market’s trading book activity represents dealings thatencompass book running and distribution activity. Group Treasury’s tradingactivity represents dealings that include the management of interest rate,foreign exchange and credit spread risk associated with wholesale funding,liquid asset portfolios and foreign exchange repatriations.

 

Refer to Note 27 tothe financial statements for a more detailed discussion of our market riskmanagement policies.

 

The table belowprovides a summary of Trading VaR, by risk type, for the six months ended 30 September 2010,31 March 2010 and 30 September 2009:

 
| ** **                     | ** ** | **30 September 2010** | ** ** | **31 March 2010** | ** ** | **30 September 2009** | ** ** |
|--------------------------------|------------|---------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **High**                        | ** ** | **Low**                     | ** ** | **Average**                     | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** |
| **Six months ended** | ** ** | **$m**                          | ** ** | **$m**                      | ** ** | **$m**                          | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Interest rate risk             |       | 25.6                            |       | 11.2                        |       | 18.0                            |       | 50.8 |   | 13.3 |   | 28.5 |   | 59.9 |   | 24.2 |   | 37.7 |   |
| Foreign exchange risk          |       | 5.0                             |       | 1.0                         |       | 2.5                             |       | 8.0 |   | 0.6 |   | 3.1 |   | 10.8 |   | 1.2 |   | 5.4 |   |
| Equity risk                    |       | 0.9                             |       | 0.3                         |       | 0.5                             |       | 1.6 |   | 0.4 |   | 0.9 |   | 2.0 |   | 1.0 |   | 1.4 |   |
| Commodity risk(1)              |       | 3.3                             |       | 1.3                         |       | 1.9                             |       | 1.9 |   | 0.5 |   | 1.1 |   | 6.4 |   | 1.0 |   | 3.6 |   |
| Other market risks(2)          |       | 27.5                            |       | 15.8                        |       | 19.3                            |       | 18.3 |   | 11.7 |   | 14.3 |   | 26.0 |   | 17.7 |   | 21.4 |   |
| Diversification effect         |       | n/a                             |       | n/a                         |       | (17.0                           | )          | n/a |   | n/a |   | (17.6 | ) | n/a |   | n/a |   | (29.7 | ) |
| Net market risk                |       | 35.9                            |       | 17.1                        |       | 25.2                            |       | 51.1 |   | 18.3 |   | 30.3 |   | 54.5 |   | 23.7 |   | 39.8 |   |

 

----

(1)               Includes electricity risk.

(2)               Includes prepayment risk and credit spread risk(exposure to movements is generic credit rating bands).

 

Prior to 1 October 2009St.George trading positions were included on an additive basis. From 1 October 2009,these positions were integrated into Westpac’s risk system and VaR numbers havebeen calculated on a diversified basis. The impact of this inclusion on theoverall VaR is small, with St.George risk typically being less than 5% of thetotal.

 

The graph belowcompares the actual profit and loss from trading activities on a daily basis toVaR over the reporting period:

 

 

Each point on thegraph represents one day’s profit or loss from trading activities. The resultis placed on the graph relative to the associated VaR utilisation. The downwardsloping line represents the point where a loss is equal to VaR utilisation.Therefore any point below the line represents a back-test exception (i.e. wherethe loss is greater than VaR).

 

124

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RISKAND RISK MANAGEMENT

 

**Operational risk**

 

Operational riskarises from inadequate or failed internal processes, people and systems or fromexternal events. The way operational risk is managed has the potential topositively or negatively impact our customers, our financial performance andour reputation.

 

The Group’sOperational Risk Management Framework assists all divisions to achieve theirobjectives through the effective identification, measurement, management andmonitoring of their operational risks. The Framework defines the principles,policies andprocesses, systems, and roles and responsibilities that we use to meet ourobligations under the law, based on the letter and spirit of the regulatorystandards that apply to the Group. The Framework is underpinned by a culture ofindividual accountability and responsibility, based on a Three Lines of Defencemodel. This is discussed in further detail in Note 27 to the financialstatements.

 

**Compliance risk**

 

Compliance risk isthe risk of legal or regulatory sanction, financial or reputation loss arisingfrom our failure to abide by the regulatory standards required of us as afinancial services group.

 

Refer to theCorporate Governance Report in Section 1 for information on our managementof Compliance risk.

 

Other risks

 

**Business risk**

 

The risk associatedwith the vulnerability of a line of business to changes in the businessenvironment.

 

**Environmental, social andgovernance risks**

 

The risk thatWestpac damages its reputation or financial performance due to failure torecognise or address material existing or emerging sustainability-relatedenvironmental, social or governance issues.

 

**Equity risk**

 

The potential forfinancial loss arising from movements in the value of our direct and indirectequity investments.

 

**Insurance risk**

 

The risk of notbeing able to meet insurance claims (related to insurance subsidiaries).

 

**Model risk**

 

The risk of lossesarising because of errors in, or inadequacies of a model, or in the control ofa model.

 

**Outsourcing risk**

 

The risk of TheWestpac Group being unable to carry on critical business activities as a resultof the failure of an external supplier or service provider, or that suchfailure in turn triggers material concerns in another key risk area.

 

**Related entity (contagion) risk**

 

The risk thatproblems arising in other Westpac Group members compromise the financial andoperational position of the authorised deposit-taking institution in TheWestpac Group.

 

**Reputation risk**

 

The risk to earningsor capital arising from negative public opinion resulting from the loss ofreputation or public trust and standing.

 

**Special purpose entities**

 

We are associatedwith a number of special purpose entities (also known as special purposevehicles or SPVs) in the ordinary course of business, primarily to providefunding and financial services products to our customers.

 

SPVs are typicallyset up for a single, pre-defined purpose, have a limited life and generally arenot operating entities nor do they have employees. The most common form of SPVstructure involves the acquisition of financial assets by the SPV that arefunded by the issuance of securities to external investors (securitisation).Repayment of the securities is determined by the performance of the assetsacquired by the SPV.

 

Under A-IFRS, an SPVis consolidated and reported as part of The Westpac Group if it is controlledby the parent entity in line with AASB 127 *Consolidated and SeparateFinancial Statements* or deemed to be controlled in applying UIGInterpretation 112 *Consolidation — SpecialPurpose Entities*. The definition of control is based on thesubstance rather than the legal form. Refer to Note 1 to the financialstatements for a description of how we apply the requirements to evaluatewhether to consolidate SPVs.

 

In the ordinarycourse of business, we have established or sponsored the establishment of SPVsin relation to securitisation, as detailed below. Capital is held, asappropriate, against all SPV-related transactions and exposures.

 

**Asset securitisation**

 

Through our loansecuritisation programs we package equitable interests in loans (principallyhousing mortgage loans) as securities which are sold to investors. We providearm’s length interest rate swaps and liquidity facilities to the programs

 

125

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in accordance withrelevant prudential guidelines. We have no obligation to repurchase anysecuritisation securities, other than in certain circumstances (excluding loanimpairment) where there is a breach of representation or warranty within 120days of the initial sale (except in respect of our program in New Zealand whichimposes no such time limitation). We may remove loans from the program wherethey cease to conform with the terms and conditions of the securitisationprograms or through a program’s clean-up features.

 

As at 30 September 2010,own assets securitised through a combination of privately or publicly placedissues to Australian, New Zealand, European and United States investors was$12.0 billion (2009 $14.3 billion).

 

Under A-IFRS themajority of the SPVs involved in our loan securitisation programs areconsolidated by the Group.

 

Refer to Note 31 tothe financial statements for further details.

 

**Customer funding conduits**

 

We arrange financingfor certain customer transactions through a commercial paper conduit thatprovides customers with access to the commercial paper market. As at 30 September 2010,we administered one significant conduit (2009 one), that was created prior to 1February 2003, with commercial paper outstanding of $2.4 billion (2009$2.4 billion). We provide a letter of credit facility as credit support to thecommercial paper issued by the conduit. This facility is a variable interest inthe conduit that we administer and represents a maximum exposure to loss of$244 million as at 30 September 2010 (2009 $244 million). Theconduit is consolidated by the Group.

 

Refer to Note 31 tothe financial statements for further details.

 

**Structured finance transactions**

 

We are involved withSPVs to provide financing to customers or to provide financing to the Group.Any financing arrangements to customers are entered into under normal lendingcriteria and are subject to our normal credit approval processes. The assetsarising from these financing activities are generally included in receivablesdue from other financial institutions or available-for-sale securities. Theliabilities arising from these financing activities are generally included inpayables due to other financial institutions, debt issues or financialliabilities designated at fair value. Exposures in the form of guarantees orundrawn credit lines are included within contingent liabilities andcredit-related commitments.

 

**Off-balance sheet arrangements**

 

**Wealth management activity**

 

Refer to Note 37 tothe financial statements for details of our wealth management activities.

 

**Other off-balance sheetarrangements**

 

Refer to Note 35 tothe financial statements for details of our superannuation plans.

 

**Financial reporting**

 

**Internal control over financialreporting**

 

The US Congress passedthe Public Company Accounting Reform and Investor Protection Act in July 2002,which is commonly known as the Sarbanes Oxley Act 2002 (SOX). SOX is a wideranging piece of US legislation concerned largely with financial reporting andcorporate governance. We are obligated to comply with SOX by virtue of being aforeign registrant with the SEC and we have established procedures designed toensure compliance with all applicable requirements of SOX.

 

**Disclosure controls and procedures**

 

Our management, withthe participation of our CEO and CFO, evaluated the effectiveness of the designand operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe US Securities Exchange Act of 1934) as of 30 September 2010.

 

Based upon thisevaluation, our CEO and CFO have concluded that the design and operation of ourdisclosure controls and procedures were effective as of30 September 2010.

 

**Internal control over financialreporting**

 

Rule 13a-15(a) underthe US Securities Exchange Act of 1934 requires us to maintain an effectivesystem of internal control over financial reporting. Please refer to thesections headed ‘Management’s report on internal control over financialreporting’ and ‘Report of independent registered public accounting firm’ in Section 3for those reports.

 

**Changes in our internal controlover financial reporting**

 

There has been nochange in our internal control over financial reporting (as defined in Rule 13a-15(f) ofthe US Securities Exchange Act of 1934) for the year ended 30 September 2010that has been identified that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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OTHER WESTPAC BUSINESS INFORMATION

 

**Employees**

 

The number ofemployees in each area of business as at 30 September(1):

 
| ** **          | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| Westpac RBB         |       | 11,663   |       | 11,751   |       | 11,365   |       |
| WIB                 |       | 3,139    |       | 3,065    |       | 2,878    |       |
| St.George Bank      |       | 5,518    |       | 5,227    |       | —   |       |
| BTFG                |       | 4,316    |       | 3,949    |       | 2,872    |       |
| New Zealand Banking |       | 4,698    |       | 4,510    |       | 4,674    |       |
| Other               |       | 9,628    |       | 8,530    |       | 6,513    |       |
| **Total employees** |       | 38,962   |       | 37,032   |       | 28,302   |       |

 

----

(1)               The number of employees includes core and implied FTEstaff (including FTE working on merger integration projects). Core FTE includesfull time and pro-rata part time staff. Implied FTE includes overtime,temporary and contract staff.

 

**2010 v 2009**

 

Total FTE increasedby 1,930 compared to 30 September 2009. This increase is primarily drivenby Westpac’s investment in technology and other projects.

 

Specifically, themovement comprised:

 

·         a reduction of 88 FTE in Westpac RBB, mainly driven by productivityinitiatives implemented during the year to reduce FTE within Retail, Regionaland Commercial Banking, combined with a reduction in Customer Service Centres;

 

·         an additional 74 FTE in WIB, driven by an increase in the number oftechnology and other projects. There was also a slight decrease in core FTE dueto restructuring initiatives in various business areas within WIB;

 

·         an additional 291 FTE in St.George Bank, mainly driven by the SGBRe-engineering project and an increase in call centre staff to improve customerresponse times and minimise waiting times;

 

·         an additional 367 FTE in BTFG, the majority of this increase resultedfrom technology and other projects. Other major drivers included enhanced riskmanagement resources; the recruitment of additional financial planners andassistants to support revenue growth and productivity increases; and theestablishment of new roles to enhance the multi-brand strategy;

 

·         an additional 188 FTE in New Zealand, primarily driven by recruitmentinitiatives to place new bankers in vacant roles across Agri, LBMs and SMEs andMid-Market businesses. Other increases occurred in Retail due to the roll outof the Local Branch Operating Model and the setup of eight new branches. Therewere also increases in Risk; and

 

·         an additional 1,098 FTE in Technology and Product & Operations,driven by increases in project staff to support technology projects (1,036 FTE)and increased support staff for other strategy projects.

 

**2009 v 2008**

 

Total FTE increasedby 8,730 compared to 30 September 2008. This was primarily as a result ofthe merger with St.George and associated merger integration projects.

 

Specifically, themovement comprised:

 

·         an additional 386 FTE in Westpac RBB, associatedwith the investment in distribution, including the increase in specialistrelationship bankers and customer serving employees;

 

·         an additional 187 FTE in WIB. FTE increased by 219as a result of the merger with St.George and 49 additional FTE related tointegration projects, with the residual decrease of 81 FTE the result of mergerefficiencies;

 

·         an additional 5,227 FTE in St.George Bank followingthe merger with St.George;

 

·         an additional 1,077 FTE in BTFG. FTE increased by982 as a result of the merger with St.George and 193 additional FTE related tointegration projects, with the residual decrease of 98 FTE driven by efficiencyand merger initiatives;

 

·         a reduction of 164 FTE in New Zealand as a resultof lower business activity; and

 

·         an additional 2,017 FTE in Core Support. FTEincreased by 1,787 as a result of the merger with St.George and 552 additionalFTE related to integration projects. The residual decrease of 328 FTE was as aresult of FTE reductions through merger synergies, partially offset by anincrease in Westpac Assist and collections FTE to accommodate higher activityin these areas.

 

This year Westpacnegotiated a new Group Enterprise Agreement with the Finance Sector Unioncovering approximately 26,500 of our employees. The Agreement providessignificant improvements in flexibility and productivity that will enable us tobetter serve our customers. It also delivers key benefits for our people,including performance based pay increases and an increase in paid parentalleave to 13 weeks, the highest amongst the major Australian banks. The newAgreement was supported by over 90% of covered employees who cast a vote in theballot to endorse the Agreement. The Agreement came into effect on 24 September 2010and its nominal term continues through to the end of 2012, although it willcontinue in force after that date unless it is replaced or terminated.

 

Negotiations withthe Finance Sector Union regarding a new Enterprise Agreement to cover ourSt.George division employees have also been successfully concluded. A ballot ofemployees covered by the Agreement will be completed in November 2010.

 

In New Zealand,there are Individual Employment Agreements (IEAs) with employees who are notunion members and also a Collective Employment Agreement (CEA) with the Financeand Insurance Sector Union (Finsec). The current CEA was ratified with a voteof more than 77% in favour and came into effect on 1 August 2010 withexpiry on 31 November 2011. The current CEA covers approximately 50% ofour employees within the Retail and Customer & Technology Servicesbusiness units.

 

There was noindustrial action in our businesses in Australia and New Zealand in thefinancial year ended 30 September 2010. We continue to have aconstructive

 

127

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and professionalrelationship with the Finance Sector Union in Australia and Finsec in NewZealand.

 

Property

 

We occupy premisesprimarily in Australia, New Zealand and the Pacific Islands including 1,517branches, (2009 1,491) as at 30 September 2010. As at 30 September 2010,we owned approximately 4% of the premises we occupied in Australia, none in NewZealand and 50% in the Pacific Islands. The remainder of premises are heldunder commercial lease with the terms generally averaging five years. As at 30 September 2010,the carrying value of our directly owned premises and sites was approximately$210 million.

 

Westpac Place inSydney CBD is the Group’s head office and has a 6,066 seat capacity. In 2006 wesigned a 12 year lease, which commenced in November 2006 and containsthree six-year options to extend.

 

We have retained acorporate presence in Kogarah, in the Sydney Metro area, which is a keycorporate office of St.George. The Kogarah head office has a 2,297 seatcapacity. A lease commitment at this site extends to 2021 with five five-yearoptions to extend.

 

On 27 July 2010,Westpac entered into a lease and services agreement for a purpose built datacentre in Western Sydney. This agreement relates to the design, constructionand operation of the data centre and is for a period of 15 years with twofurther five year option periods.

 

**Westpac New Zealand Head Office**

 

Construction of WNZL’snew Head Office premises is nearing completion. On 4 October 2006 weexecuted Agreements to build and lease with members of the Britomart Group ofCompanies in respect of approximately 24,000m2 ofoffice space across two buildings to be developed at the Eastern end ofBritomart Precinct near Customs Street in Auckland, New Zealand. The projectinvolves the fitout of the building and relocation of approximately 1,500 staffto the new site, which has been named ‘Westpac on Takutai Square’.

 

Constructioncommenced in July 2008 and is scheduled for completion in early 2011, withmigration of staff commencing April 2011. Building fitout works for thesecond stage have been completely integrated into the base build as part ofWestpac’s focus on cost effectiveness and environmental sustainability.Construction is on budget and forecast to meet or exceed timelines at overallcompletion.

 

**Significant long-term contracts**

 

Westpac’ssignificant long-term contracts are summarised in Note 34 to the financialstatements.

 

**Related party disclosures**

 

Details of ourrelated party disclosures are set out in Note 40 to the financialstatements and details of Directors’ interests in securities are set out inNote 41 to the financial statements. The related party disclosures relateprincipally to transactions with our Directors and Director-related parties aswe do not have individually significant shareholders and our transactions withother related parties are not significant.

 

Other than asdisclosed in Note 40 and Note 41 to the financial statements, if applicable,loans made to parties related to Directors and other key management personnelof Westpac are made in the ordinary course of business on normal terms andconditions (including interest rates and collateral). Loans are made on thesame terms and conditions (including interest rates and collateral) as apply toother employees and certain customers in accordance with established policy.These loans do not involve more than the normal risk of collectability orpresent any other unfavourable features.

 

**Auditor’s remuneration**

 

Auditor’sremuneration, including goods and services tax, to the external auditor for theyears ended 30 September 2010 and 2009 is provided in Note 33 to thefinancial statements.

 

**Audit related services**

 

Westpac GroupSecretariat continually monitors the application of the pre-approval process inrespect of audit, audit-related and non-audit services provided byPricewaterhouseCoopers (PwC) and promptly brings to the attention of the BoardAudit Committee any exceptions that need to be approved pursuant to paragraph(c)(7)(i)(C) of Rule 2-01 of Regulation S-X. Westpac Group Secretariatensures the pre-approval guidelines are communicated to Westpac’s divisionsthrough publication on the Westpac intranet.

 

During the yearended 30 September 2010, there were no fees paid by Westpac to PwCthat required approval by the Board Audit Committee pursuant to paragraph(c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

 

128

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ADDITIONAL FINANCIALINFORMATION

 

**Selected consolidated financialand operating data**

 

Under applicable USdisclosure requirements, we are required to include in this Annual Reportcertain financial and operating data covering a period of five years. In our2008 Annual Report we modified the presentation of loans and provisions forimpairment charges on loans by industry to align external reporting with thebasis of presentation for internal reporting. We revised the presentation forthe year ended 30 September 2007, but it was impractical to revise thedisclosures for the financial year ended 30 September 2006.

 

The operating dataset forth below is derived from our audited financial statements (andaccompanying notes) as of and for the financial years ended 30 September 2007and 2006. In our 2008 Annual Report, loan products that have both a mortgageand deposit facility were presented on a gross basis in the balance sheet. Thisrepresented a change in presentation from that adopted in previous years andresulted in an increase in Australian real estate mortgage loans by $2.8billion at 30 September 2007 and $1.9 billion at 30 September 2006.To review all five years of historical data on a consistent basis, refer to the2007 Annual Report on our website at www.westpac.com.au or on the websitemaintained by the SEC at www.sec.gov.

 

**Loans**

 
| ** **                                  | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|------------------|------------|
| ** **                                  | ** ** | **2007**         | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **$m**           | ** ** | **$m** | ** ** |
| **Loans by type of customer**               |       |             |       |   |   |
| **Australia**                               |       |             |       |   |   |
| Government and other public authorities     |       | 415              |       | 278 |   |
| Agriculture, forestry and fishing           |       | 3,775            |       | 2,954 |   |
| Commercial and financial                    |       | 80,009           |       | 65,244 |   |
| Real estate – construction             |       | 2,458            |       | 2,734 |   |
| Real estate – mortgage                 |       | 113,396          |       | 98,352 |   |
| Instalment loans and other personal lending |       | 24,633           |       | 23,777 |   |
|                                        |       | 224,686          |       | 193,339 |   |
| Lease financing                             |       | 4,345            |       | 4,216 |   |
| **Total loans - Australia**                 |       | 229,031          |       | 197,555 |   |
| **Overseas**                                |       |             |       |   |   |
| Government and other public authorities     |       | 535              |       | 387 |   |
| Agriculture, forestry and fishing           |       | 4,037            |       | 3,449 |   |
| Commercial and financial                    |       | 14,522           |       | 11,567 |   |
| Real estate – construction             |       | 427              |       | 445 |   |
| Real estate – mortgage                 |       | 25,522           |       | 22,013 |   |
| Instalment loans and other personal lending |       | 2,645            |       | 2,145 |   |
|                                        |       | 47,688           |       | 40,006 |   |
| Lease financing                             |       | 27               |       | 19 |   |
| **Total overseas**                          |       | 47,715           |       | 40,025 |   |
| **Total loans**                             |       | 276,746          |       | 237,580 |   |
| Provisions on loans                         |       | (1,369           | )          | (1,200 | ) |
| **Total net loans**                         |       | 275,377          |       | 236,380 |   |

 

129

----

 

**Provisions for impairment chargeson loans**

 
| ** **                                                                   | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **2007**         | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | **$m**           | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** |
| **Individually assessed provision  by type of customer**                     |       |             |       |   |   |   |   |   |   |
| **Australia**                                                                |       |             |       |   |   |   |   |   |   |
| Agriculture, forestry and fishing                                            |       | 3                |       | 0.2 |   | 5 |   | 0.4 |   |
| Commercial and financial                                                     |       | 82               |       | 5.3 |   | 109 |   | 8.0 |   |
| Real estate – construction                                              |       | 1                |       | 0.1 |   | 1 |   | 0.1 |   |
| Real estate – mortgage                                                  |       | 3                |       | 0.2 |   | 6 |   | 0.4 |   |
| Instalment loans and personal lending                                        |       | 1                |       | 0.1 |   | 2 |   | 0.1 |   |
| **Total Australia**                                                          |       | 90               |       | 5.9 |   | 123 |   | 9.0 |   |
| **New Zealand**                                                              |       |             |       |   |   |   |   |   |   |
| Agriculture, forestry and fishing                                            |       | 1                |       | 0.1 |   | — |   | — |   |
| Commercial and financial                                                     |       | 12               |       | 0.8 |   | 9 |   | 0.7 |   |
| Real estate – mortgage                                                  |       | 3                |       | 0.2 |   | 2 |   | 0.1 |   |
| Instalment loans and other personal lending                                  |       | 6                |       | 0.4 |   | 3 |   | 0.2 |   |
| **Total New Zealand**                                                        |       | 22               |       | 1.5 |   | 14 |   | 1.0 |   |
| **Other overseas**                                                           |       |             |       |   |   |   |   |   |   |
| Agriculture, forestry and fishing                                            |       | —           |       | — |   | — |   | — |   |
| Commercial and financial                                                     |       | 36               |       | 2.3 |   | 21 |   | 1.5 |   |
| Instalment loans and personal lending                                        |       | —           |       | — |   | 6 |   | 0.4 |   |
| **Total other overseas**                                                     |       | 36               |       | 2.3 |   | 27 |   | 1.9 |   |
| **Total overseas**                                                           |       | 58               |       | 3.8 |   | 41 |   | 2.9 |   |
| **Total individually assessed  provisions**                                  |       | 148              |       | 9.7 |   | 164 |   | 11.9 |   |
| **Total collectively assessed  provisions**                                  |       | 1,410            |       | 90.3 |   | 1,194 |   | 88.1 |   |
| **Total provisions for impairment  charges on loans and credit commitments** |       | 1,558            |       | 100.0 |   | 1,358 |   | 100.0 |   |

 

130

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ADDITIONAL FINANCIAL INFORMATION

 

**Provisions for impairment chargeson loans (continued)**

 
| ** **                                                                       | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **2007**         | ** ** | **2006** | ** ** |
| ** **                                                                       | ** ** | **$m**           | ** ** | **$m** | ** ** |
| **Balance of provisions for  impairment charges on loans**                       |       |             | ** ** | ** ** | ** ** |
| **(Individually and collectively  assessed) as at beginning of the year**        |       | 1,358            |       | 1,184 |   |
| Write-offs                                                                       |       | (371             | )          | (295 | ) |
| Recoveries                                                                       |       | 22               |       | 25 |   |
| Charge to income statement                                                       |       | 482              |       | 375 |   |
| Discount unwind                                                                  |       | 115              |       | 94 |   |
| Exchange rate and other adjustments                                              |       | (48              | )          | (25 | ) |
| **Balance of provisions for  impairment charges on loans as at end of the year** |       | 1,558            |       | 1,358 |   |
| **Write-offs and recoveries**                                                    |       |             |       |   |   |
| **Write-offs**                                                                   |       |             |       |   |   |
| **Australia**                                                                    |       |             |       |   |   |
| Agriculture, forestry and fishing                                                |       | (5               | )          | (7 | ) |
| Commercial and financial(1)                                                      |       | (84              | )          | (82 | ) |
| Real estate – construction                                                  |       | (2               | )          | (1 | ) |
| Real estate – mortgage                                                      |       | (12              | )          | (6 | ) |
| Instalment loans and other personal lending                                      |       | (252             | )          | (192 | ) |
| **Total Australia**                                                              |       | (355             | )          | (288 | ) |
| **New Zealand**                                                                  |       |             |       |   |   |
| Commercial and financial(1)                                                      |       | (3               | )          | (4 | ) |
| Real estate – construction                                                  |       | —           |       | — |   |
| Instalment loans and other personal lending                                      |       | (3               | )          | (2 | ) |
| **Total New Zealand**                                                            |       | (6               | )          | (6 | ) |
| **Total other overseas**                                                         |       | (10              | )          | (1 | ) |
| **Total write-offs**                                                             |       | (371             | )          | (295 | ) |
| **Recoveries**                                                                   |       |             |       |   |   |
| **Australia**                                                                    |       |             |       |   |   |
| Commercial and financial(1)                                                      |       | 6                |       | 10 |   |
| Instalment loans and other personal lending                                      |       | 16               |       | 11 |   |
| **Australia**                                                                    |       | 22               |       | 21 |   |
| **New Zealand**                                                                  |       | —           |       | 3 |   |
| **Other overseas**                                                               |       | —           |       | 1 |   |
| **Total recoveries**                                                             |       | 22               |       | 25 |   |
| **Net write-offs and recoveries**                                                |       | (349             | )          | (270 | ) |

 

----

(1)               Lease finance write-offs and recoveries, which are notsignificant, were included in the ‘Commercial and financial’ category.

 

131

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**This page has beenintentionally left blank.**

 

132

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SECTION 3

 

Financial report for theyear ended 30 September 2010

 
| **Contents**                                                          |                                                                                                  |
|-----------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
|                                                                  |                                                                                                  |
| **Financial statements**                                              |
| Income statements                                                     |
| Statements of comprehensive income                                    |
| Balance sheets                                                        |
| Statements of changes in equity                                       |
| Cash flow statements                                                  |
| **Notes to the financial statements**                                 |
| Note 1                                                                | Summary of  significant accounting policies                                                           |
| Note 2                                                                | Net interest  income                                                                                  |
| Note 3                                                                | Non-interest  income                                                                                  |
| Note 4                                                                | Operating expenses                                                                                    |
| Note 5                                                                | Income tax                                                                                            |
| Note 6                                                                | Dividends                                                                                             |
| Note 7                                                                | Earnings per share                                                                                    |
| Note 8                                                                | Receivables due  from other financial institutions                                                    |
| Note 9                                                                | Trading securities  and other financial assets designated at fair value                               |
| Note 10                                                               | Available-for-sale  securities                                                                        |
| Note 11                                                               | Loans                                                                                                 |
| Note 12                                                               | Provisions for  impairment charges                                                                    |
| Note 13                                                               | Goodwill and other  intangible assets                                                                 |
| Note 14                                                               | Property, plant and  equipment                                                                        |
| Note 15                                                               | Deferred tax  assets and deferred tax liabilities                                                     |
| Note 16                                                               | Other assets                                                                                          |
| Note 17                                                               | Payables due to  other financial institutions                                                         |
| Note 18                                                               | Deposits                                                                                              |
| Note 19                                                               | Trading  liabilities and other financial liabilities designated at fair value                         |
| Note 20                                                               | Provisions                                                                                            |
| Note 21                                                               | Other liabilities                                                                                     |
| Note 22                                                               | Debt issues                                                                                           |
| Note 23                                                               | Loan capital                                                                                          |
| Note 24                                                               | Shareholder equity  and non-controlling interest                                                      |
| Note 25                                                               | Share-based  payments                                                                                 |
| Note 26                                                               | Average balances  and related interest                                                                |
| Note 27                                                               | Financial risk                                                                                        |
| Note 27.1 Approach to risk management                                 |
| Note 27.2 Credit risk management                                      |
| Note 27.3 Funding and liquidity risk management                       |
| Note 27.4 Market risk                                                 |
| Note 28                                                               | Fair values of  financial assets and liabilities                                                      |
| Note 29                                                               | Derivative  financial instruments                                                                     |
| Note 30                                                               | Capital adequacy                                                                                      |
| Note 31                                                               | Securitisation                                                                                        |
| Note 32                                                               | Group segment  information                                                                            |
| Note 33                                                               | Auditor’s  remuneration                                                                          |
| Note 34                                                               | Expenditure  commitments                                                                              |
| Note 35                                                               | Superannuation  commitments                                                                           |
| Note 36                                                               | Contingent  liabilities, contingent assets and credit commitments                                     |
| Note 37                                                               | Fund management  activities                                                                           |
| Note 38                                                               | Group entities                                                                                        |
| Note 39                                                               | Other group  investments                                                                              |
| Note 40                                                               | Related party  disclosures                                                                            |
| Note 41                                                               | Director and other  key management personnel disclosures                                              |
| Note 42                                                               | Notes to the cash  flow statements                                                                    |
| Note 43                                                               | Merger with  St.George Bank Limited and transition to a single authorised deposit-taking  institution |
| Note 44                                                               | Subsequent events                                                                                     |
| **Statutory statements**                                              |
| Directors’ declaration                                           |
| Management’s report on internal control over financial reporting |
| Independent Auditor’s report                                     |
| Report of independent registered public accounting firm               |
|                                                                       |                                                                                                       |  |

 

133

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FINANCIAL STATEMENTS

 

**Income statements** for the years ended 30 September

Westpac BankingCorporation

 
| ** **                                                                      | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | ** ** | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                      | ** ** | **Note**   | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Interest income                                                                 |       | 2          |       | 34,151           |       | 30,446                 |       | 29,081 |   | 29,799 |   | 22,009 |   |
| Interest expense                                                                |       | 2          |       | (22,309          | )          | (18,800                | )          | (21,859 | ) | (20,786 | ) | (14,460 | ) |
| Net interest income                                                             |       |       |       | 11,842           |       | 11,646                 |       | 7,222 |   | 9,013 |   | 7,549 |   |
| Non-interest income                                                             |       | 3          |       | 5,068            |       | 4,859                  |       | 4,383 |   | 4,603 |   | 2,734 |   |
| Net operating income before operating expenses and impairment charges  on loans |       |       |       | 16,910           |       | 16,505                 |       | 11,605 |   | 13,616 |   | 10,283 |   |
| Operating expenses                                                              |       | 4          |       | (7,416           | )          | (7,171                 | )          | (5,455 | ) | (5,540 | ) | (4,524 | ) |
| Impairment charges on loans                                                     |       | 12         |       | (1,456           | )          | (3,238                 | )          | (931 | ) | (958 | ) | (2,018 | ) |
| **Profit before income tax**                                                    |       |       |       | 8,038            |       | 6,096                  |       | 5,219 |   | 7,118 |   | 3,741 |   |
| Income tax expense                                                              |       | 5          |       | (1,626           | )          | (2,579                 | )          | (1,287 | ) | (958 | ) | (1,704 | ) |
| **Net profit for the year**                                                     |       |       |       | 6,412            |       | 3,517                  |       | 3,932 |   | 6,160 |   | 2,037 |   |
| Profit attributable to non-controlling interests                                |       |       |       | (66              | )          | (71                    | )          | (73 | ) | — |   | — |   |
| **Net profit attributable to  owners of Westpac Banking Corporation**           |       |       |       | 6,346            |       | 3,446                  |       | 3,859 |   | 6,160 |   | 2,037 |   |
| **Earnings per share**                                                          |       |       | ** ** | ** **       |       |                   |       |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic (cents)                                                                   |       | 7          |       | 214.2            |       | 125.3                  |       | 206.0 | ** ** | ** ** |   |   |   |
| Diluted (cents)                                                                 |       | 7          |       | 207.1            |       | 123.2                  |       | 200.1 | ** ** | ** ** |   |   |   |

 

The above incomestatements should be read in conjunction with the accompanying notes.

 

134

----

 

FINANCIAL STATEMENTS

 

**Statements of comprehensive income** for the years ended 30 September

Westpac BankingCorporation

 
| ** **                                                                             | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                             | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Net profit for the year**                                                            |       | 6,412            |       | 3,517                  |       | 3,932 |   | 6,160 |   | 2,037 |   |
| **Other comprehensive income:**                                                        |       |             |       |                   | ** ** | ** ** |   |   |   |   |   |
| Gains/(losses) on available-for-sale securities:                                       |       |             |       |                   | ** ** | ** ** |   |   |   |   |   |
| Recognised in equity                                                                   |       | 92               |       | 33                     |       | 33 |   | 33 |   | (5 | ) |
| Transferred to income statement                                                        |       | (1               | )          | 18                     |       | 3 |   | 8 |   | 13 |   |
| Gains/(losses) on cash flow hedging instruments:                                       |       |             |       |                   |       |   |   |   |   |   |   |
| Recognised in equity                                                                   |       | (104             | )          | (435                   | )          | (220 | ) | (155 | ) | (348 | ) |
| Transferred to income statement                                                        |       | (2               | )          | (11                    | )          | (5 | ) | (5 | ) | (4 | ) |
| Defined benefit obligation actuarial gains/(losses) recognised in  equity (net of tax) |       | (99              | )          | 41                     |       | (378 | ) | (85 | ) | 34 |   |
| Exchange differences on translation of foreign operations                              |       | (122             | )          | (121                   | )          | 86 |   | 87 |   | (152 | ) |
| Income tax on items taken directly to or transferred directly from  equity:            |       |             |       |                   |       |   |   |   |   |   |   |
| Available-for-sale securities reserve                                                  |       | (28              | )          | (15                    | )          | (21 | ) | (11 | ) | (4 | ) |
| Cash flow hedging reserve                                                              |       | 36               |       | 136                    |       | 67 |   | 48 |   | 105 |   |
| Foreign currency translation reserve                                                   |       | 6                |       | 7                      |       | 17 |   | (21 | ) | 30 |   |
| **Other comprehensive income for  the year (net of tax)**                              |       | (222             | )          | (347                   | )          | (418 | ) | (101 | ) | (331 | ) |
| **Total comprehensive income for  the year**                                           |       | 6,190            |       | 3,170                  |       | 3,514 |   | 6,059 |   | 1,706 |   |
| Attributable to:                                                                       |       |             |       |                   |       |   |   |   |   |   |   |
| Owners of Westpac Banking Corporation                                                  |       | 6,124            |       | 3,099                  |       | 3,441 |   | 6,059 |   | 1,706 |   |
| Non-controlling interests                                                              |       | 66               |       | 71                     |       | 73 |   | — |   | — |   |
| **Total net income recognised for  the year**                                          |       | 6,190            |       | 3,170                  |       | 3,514 |   | 6,059 |   | 1,706 |   |

 

The above statementsof comprehensive income should be read in conjunction with the accompanyingnotes.

 

135

----

 

**Balance sheets** as at 30 September

Westpac BankingCorporation

 
| ** **                                                                    | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | ** ** | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                    | ** ** | **Note**   | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Assets**                                                                    |       |       | ** ** | ** **       |       |                   |       |   | ** ** | ** ** |   |   |   |   |   |
| Cash and balances with central banks                                          |       | 42         |       | 4,464            |       | 3,272                  |       | 4,809 |   | 3,693 |   | 2,578 |   | 4,502 |   |
| Receivables due from other financial institutions                             |       | 8          |       | 12,588           |       | 9,974                  |       | 10,434 |   | 10,047 |   | 6,868 |   | 5,408 |   |
| Derivative financial instruments                                              |       | 29         |       | 36,102           |       | 33,187                 |       | 34,810 |   | 35,908 |   | 30,852 |   | 34,654 |   |
| Trading securities                                                            |       | 9          |       | 40,011           |       | 43,114                 |       | 50,445 |   | 37,821 |   | 35,404 |   | 47,249 |   |
| Other financial assets designated at fair value                               |       | 9          |       | 3,464            |       | 3,063                  |       | 2,547 |   | 1,324 |   | 1,411 |   | 1,480 |   |
| Available-for-sale securities                                                 |       | 10         |       | 12,124           |       | 1,630                  |       | 1,613 |   | 10,932 |   | 462 |   | 540 |   |
| Loans — housing and personal                                             |       | 11         |       | 333,971          |       | 300,249                |       | 187,245 |   | 303,749 |   | 181,091 |   | 159,080 |   |
| Loans — business                                                         |       | 11         |       | 143,684          |       | 163,210                |       | 126,300 |   | 127,418 |   | 112,600 |   | 113,717 |   |
| Life insurance assets                                                         |       |       |       | 12,310           |       | 12,384                 |       | 12,547 |   | — |   | — |   | — |   |
| Regulatory deposits with central banks overseas                               |       |       |       | 1,322            |       | 766                    |       | 927 |   | 1,288 |   | 737 |   | 885 |   |
| Due from subsidiaries                                                         |       |       |       | —           |       | —                 |       | — |   | 58,295 |   | 83,228 |   | 22,789 |   |
| Current tax assets                                                            |       |       |       | —           |       | —                 |       | 77 |   | — |   | — |   | 161 |   |
| Deferred tax assets                                                           |       | 15         |       | 2,290            |       | 1,985                  |       | 756 |   | 1,938 |   | 1,700 |   | 432 |   |
| Investments in subsidiaries                                                   |       |       |       | —           |       | —                 |       | — |   | 5,005 |   | 18,751 |   | 4,258 |   |
| Goodwill and other intangible assets                                          |       | 13         |       | 11,504           |       | 11,541                 |       | 2,989 |   | 9,381 |   | 1,213 |   | 1,117 |   |
| Property, plant and equipment                                                 |       | 14         |       | 1,010            |       | 888                    |       | 505 |   | 852 |   | 464 |   | 396 |   |
| Other assets                                                                  |       | 16         |       | 3,433            |       | 4,324                  |       | 3,672 |   | 2,645 |   | 2,413 |   | 2,916 |   |
| **Total assets**                                                              |       |       |       | 618,277          |       | 589,587                |       | 439,676 |   | 610,296 |   | 479,772 |   | 399,584 |   |
| **Liabilities**                                                               |       |       |       |             |       |                   |       |   |   |   |   |   |   |   |   |
| Payable due to other financial institutions                                   |       | 17         |       | 8,898            |       | 9,235                  |       | 15,861 |   | 8,887 |   | 8,368 |   | 14,880 |   |
| Deposits at fair value                                                        |       | 18         |       | 53,249           |       | 58,491                 |       | 60,011 |   | 51,802 |   | 55,632 |   | 56,523 |   |
| Deposits at amortised cost                                                    |       | 18         |       | 284,136          |       | 270,965                |       | 173,719 |   | 259,760 |   | 180,581 |   | 149,069 |   |
| Derivative financial instruments                                              |       | 29         |       | 44,039           |       | 36,478                 |       | 24,970 |   | 42,977 |   | 33,354 |   | 24,980 |   |
| Trading liabilities and other financial liabilities designated at fair  value |       | 19         |       | 4,850            |       | 10,848                 |       | 16,689 |   | 4,850 |   | 9,082 |   | 16,628 |   |
| Debt issues                                                                   |       | 22         |       | 150,336          |       | 131,353                |       | 96,398 |   | 124,647 |   | 96,770 |   | 77,747 |   |
| Acceptances                                                                   |       |       |       | 635              |       | 1,671                  |       | 3,971 |   | 635 |   | 1,392 |   | 3,971 |   |
| Current tax liabilities                                                       |       |       |       | 302              |       | 1,932                  |       | — |   | 282 |   | 1,878 |   | — |   |
| Deferred tax liabilities                                                      |       | 15         |       | 24               |       | 35                     |       | — |   | 1 |   | 26 |   | — |   |
| Life insurance liabilities                                                    |       |       |       | 11,560           |       | 11,737                 |       | 11,953 |   | — |   | — |   | — |   |
| Due to subsidiaries                                                           |       |       |       | —           |       | —                 |       | — |   | 62,463 |   | 45,224 |   | 24,255 |   |
| Provisions                                                                    |       | 20         |       | 1,726            |       | 1,628                  |       | 1,106 |   | 1,526 |   | 1,120 |   | 956 |   |
| Other liabilities                                                             |       | 21         |       | 8,772            |       | 7,505                  |       | 6,809 |   | 6,988 |   | 5,091 |   | 5,066 |   |
| **Total liabilities excluding loan  capital**                                 |       |       |       | 568,527          |       | 541,878                |       | 411,487 |   | 564,818 |   | 438,518 |   | 374,075 |   |
| **Loan capital**                                                              |       |       |       |             |       |                   |       |   |   |   |   |   |   |   |   |
| Subordinated bonds, notes and debentures                                      |       | 23         |       | 6,679            |       | 8,127                  |       | 6,545 |   | 6,679 |   | 5,821 |   | 6,545 |   |
| Subordinated perpetual notes                                                  |       | 23         |       | 404              |       | 443                    |       | 486 |   | 404 |   | 443 |   | 486 |   |
| Convertible debentures and Trust preferred securities                         |       | 23         |       | 624              |       | 647                    |       | 666 |   | 624 |   | 647 |   | 666 |   |
| Stapled preferred securities                                                  |       | 23         |       | 1,925            |       | 1,921                  |       | 1,021 |   | 1,925 |   | 1,921 |   | 1,021 |   |
| **Total loan capital**                                                        |       |       |       | 9,632            |       | 11,138                 |       | 8,718 |   | 9,632 |   | 8,832 |   | 8,718 |   |
| **Total liabilities**                                                         |       |       |       | 578,159          |       | 553,016                |       | 420,205 |   | 574,450 |   | 447,350 |   | 382,793 |   |
| **Net assets**                                                                |       |       |       | 40,118           |       | 36,571                 |       | 19,471 |   | 35,846 |   | 32,422 |   | 16,791 |   |
| **Shareholders’ equity**                                                 |       |       |       |             |       |                   |       |   |   |   |   |   |   |   |   |
| Share capital:                                                                |       |       |       |             |       |                   |       |   |   |   |   |   |   |   |   |
| Ordinary share capital                                                        |       | 24         |       | 24,686           |       | 23,684                 |       | 6,744 |   | 24,686 |   | 23,684 |   | 6,744 |   |
| Treasury shares and RSP treasury shares                                       |       | 24         |       | (190             | )          | (188                   | )          | (151 | ) | (118 | ) | (117 | ) | (99 | ) |
| Reserves                                                                      |       |       |       | (57              | )          | (56                    | )          | 256 |   | (7 | ) | (110 | ) | 194 |   |
| Retained profits                                                              |       |       |       | 13,750           |       | 11,197                 |       | 10,698 |   | 9,393 |   | 7,073 |   | 8,060 |   |
| Convertible debentures                                                        |       | 24         |       | —           |       | —                 |       | — |   | 1,892 |   | 1,892 |   | 1,892 |   |
| **Total equity attributable to  owners of Westpac Banking Corporation**       |       |       |       | 38,189           |       | 34,637                 |       | 17,547 |   | 35,846 |   | 32,422 |   | 16,791 |   |
| Non-controlling interests                                                     |       | 24         |       | 1,929            |       | 1,934                  |       | 1,924 |   | — |   | — |   | — |   |
| **Total shareholders’ equity and  non-controlling interests**            |       |       |       | 40,118           |       | 36,571                 |       | 19,471 |   | 35,846 |   | 32,422 |   | 16,791 |   |
| Contingent liabilities, contingent assets and credit commitments              |       | 36         |       |             |       |                   |       |   |   |   |   |   |   |   |   |

 

The above balancesheets should be read in conjunction with the accompanying notes.

 

136

----

 

FINANCIAL STATEMENTS

 

**Statements of changes in equity** as at 30 September

Westpac BankingCorporation

 
| ** **                                                                            | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                            | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                            | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Share  capital**                                                                    |       |             |       |                   |       |   |   |   |   |   |   |
| Balance as at  beginning of the year                                                  |       | 23,496           |       | 6,593                  |       | 6,011 |   | 23,567 |   | 6,645 |   |
| Shares issued:                                                                        |       |             |       |                   |       |   |   |   |   |   |   |
| Under dividend  reinvestment plan                                                     |       | 961              |       | 1,015                  |       | 704 |   | 961 |   | 1,015 |   |
| DRP underwriting  agreement                                                           |       | —           |       | 887                    |       | — |   | — |   | 887 |   |
| Under option and  share rights schemes                                                |       | 44               |       | 10                     |       | 30 |   | 44 |   | 10 |   |
| St.George merger                                                                      |       | —           |       | 12,123                 |       | — |   | — |   | 12,123 |   |
| Institutional  placement                                                              |       | —           |       | 2,465                  |       | — |   | — |   | 2,465 |   |
| Share purchase  plan                                                                  |       | —           |       | 440                    |       | — |   | — |   | 440 |   |
| Final settlement  of Hastings Funds Management Limited acquisition                    |       | —           |       | 9                      |       | — |   | — |   | 9 |   |
| Shares purchased  for delivery upon exercise of options and share rights (net of tax) |       | (3               | )          | (9                     | )          | (115 | ) | (3 | ) | (9 | ) |
| (Acquisition)/disposal  of treasury shares                                            |       | (2               | )          | (26                    | )          | 20 |   | (1 | ) | (7 | ) |
| Acquisition of RSP  treasury shares                                                   |       | —           |       | (11                    | )          | (57 | ) | — |   | (11 | ) |
| **Balance  as at end of the year**                                                    |       | 24,496           |       | 23,496                 |       | 6,593 |   | 24,568 |   | 23,567 |   |
| **Available-for-sale  securities reserve**                                            |       |             |       |                   |       |   |   |   |   |   |   |
| Balance as at  beginning of the year                                                  |       | 66               |       | 28                     |       | (2 | ) | 29 |   | 25 |   |
| Additions through  merger                                                             |       | —           |       | —                 |       | — |   | (2 | ) | — |   |
| Current period  movement due to changes in other comprehensive income:                |       |             |       |                   |       |   |   |   |   |   |   |
| Net gains/(losses)  from changes in fair value                                        |       | 92               |       | 33                     |       | 33 |   | 33 |   | (5 | ) |
| Exchange  differences                                                                 |       | 2                |       | 2                      |       | 15 |   | 2 |   | — |   |
| Income tax effect                                                                     |       | (31              | )          | (10                    | )          | (21 | ) | (12 | ) | — |   |
| Transferred to  income statements                                                     |       | (1               | )          | 18                     |       | 3 |   | 8 |   | 13 |   |
| Income tax effect                                                                     |       | 3                |       | (5                     | )          | — |   | 1 |   | (4 | ) |
| **Balance  as at end of the year**                                                    |       | 131              |       | 66                     |       | 28 |   | 59 |   | 29 |   |
| **Share-based  payment reserve**                                                      |       |             |       |                   |       |   |   |   |   |   |   |
| Balance as at  beginning of the year                                                  |       | 420              |       | 346                    |       | 257 |   | 388 |   | 327 |   |
| Current period  movement due to transactions with employees                           |       | 120              |       | 74                     |       | 89 |   | 111 |   | 61 |   |
| **Balance  as at end of the year**                                                    |       | 540              |       | 420                    |       | 346 |   | 499 |   | 388 |   |
| **Cash  flow hedging reserve**                                                        |       |             |       |                   |       |   |   |   |   |   |   |
| Balance as at  beginning of the year                                                  |       | (371             | )          | (61                    | )          | 97 |   | (234 | ) | 13 |   |
| Additions through  merger                                                             |       | —           |       | —                 |       | — |   | (33 | ) | — |   |
| Current period  movement due to changes in other comprehensive income:                |       |             |       |                   |       |   |   |   |   |   |   |
| Net gains/(losses)  from changes in fair value                                        |       | (104             | )          | (435                   | )          | (220 | ) | (155 | ) | (348 | ) |
| Income tax effect                                                                     |       | 35               |       | 134                    |       | 65 |   | 47 |   | 104 |   |
| Transferred to  income statements                                                     |       | (2               | )          | (11                    | )          | (5 | ) | (5 | ) | (4 | ) |
| Income tax effect                                                                     |       | 1                |       | 2                      |       | 2 |   | 1 |   | 1 |   |
| **Balance  as at end of the year**                                                    |       | (441             | )          | (371                   | )          | (61 | ) | (379 | ) | (234 | ) |
| **Foreign  currency translation reserve**                                             |       |             |       |                   |       |   |   |   |   |   |   |
| Balance as at  beginning of the year                                                  |       | (171             | )          | (57                    | )          | (160 | ) | (293 | ) | (171 | ) |
| Current period movement  due to changes in other comprehensive income:                |       |             |       |                   |       |   |   |   |   |   |   |
| Foreign currency  translation adjustment                                              |       | (122             | )          | (121                   | )          | 86 |   | 87 |   | (152 | ) |
| Tax on foreign  currency translation adjustment                                       |       | 6                |       | 7                      |       | 17 |   | (21 | ) | 30 |   |
| **Balance  as at end of the year**                                                    |       | (287             | )          | (171                   | )          | (57 | ) | (227 | ) | (293 | ) |
| **Common  control reserve**                                                           |       |             |       |                   |       |   |   |   |   |   |   |
| Balance as at  beginning of the year                                                  |       | —           |       | —                 |       | — |   | — |   | — |   |
| Additions through  merger                                                             |       | —           |       | —                 |       | — |   | 41 |   | — |   |
| **Balance  as at end of the year**                                                    |       | —           |       | —                 |       | — |   | 41 |   | — |   |
| **Total  reserves**                                                                   |       | (57              | )          | (56                    | )          | 256 |   | (7 | ) | (110 | ) |
| **Movements  in retained profits were as follows**                                    |       |             |       |                   |       |   |   |   |   |   |   |
| Balance as at  beginning of the year                                                  |       | 11,197           |       | 10,698                 |       | 9,793 |   | 7,073 |   | 8,060 |   |
| Current period  movement due to changes in other comprehensive income:                |       |             |       |                   |       |   |   |   |   |   |   |
| Actuarial  gains/(losses) on defined benefit obligations (net of tax)                 |       | (99              | )          | 41                     |       | (378 | ) | (85 | ) | 34 |   |
| Profit  attributable to owners of Westpac Banking Corporation                         |       | 6,346            |       | 3,446                  |       | 3,859 |   | 6,160 |   | 2,037 |   |
| Transaction with  owners:                                                             |       |             |       |                   |       |   |   |   |   |   |   |
| Ordinary dividends  paid                                                              |       | (3,694           | )          | (2,988                 | )          | (2,576 | ) | (3,700 | ) | (2,994 | ) |
| Distributions on  convertible debentures                                              |       | —           |       | —                 |       | — |   | (55 | ) | (64 | ) |
| **Balance  as at end of the year**                                                    |       | 13,750           |       | 11,197                 |       | 10,698 |   | 9,393 |   | 7,073 |   |
| **Total  comprehensive income attributable to non-controlling interests**             |       | 66               |       | 71                     |       | 73 |   | — |   | — |   |
| **Total  comprehensive income attributable to owners of Westpac Banking Corporation** |       | 6,124            |       | 3,099                  |       | 3,441 |   | 6,059 |   | 1,706 |   |
| **Total  comprehensive income for the period**                                        |       | 6,190            |       | 3,170                  |       | 3,514 |   | 6,059 |   | 1,706 |   |

 

The above statementsof changes in equity should be read in conjunction with the accompanying notes.

 

137

----

 

**Cash flow statements** for the years ended 30September

Westpac BankingCorporation

 
| ** **                                                                           | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                           | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                           | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Cash flows from operating  activities**                                            | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** |   |   |   |   |   |
| Interest received                                                                    |       | 33,225           |       | 30,762                 |       | 28,765 |   | 29,042 |   | 22,259 |   |
| Interest paid                                                                        |       | (20,854          | )          | (19,149                | )          | (21,389 | ) | (19,643 | ) | (14,827 | ) |
| Dividends received excluding life business                                           |       | 25               |       | 21                     |       | 15 |   | 217 |   | 46 |   |
| Other non-interest income received                                                   |       | 3,785            |       | 3,575                  |       | 3,139 |   | 1,586 |   | 1,929 |   |
| Operating expenses paid                                                              |       | (6,036           | )          | (5,250                 | )          | (4,244 | ) | (4,084 | ) | (3,641 | ) |
| Net decrease/(increase) in trading and fair value assets                             |       | 1,819            |       | 12,428                 |       | (13,819 | ) | 2,932 |   | 11,924 |   |
| Net (decrease)/increase in trading and fair value liabilities                        |       | (5,936           | )          | (13,104                | )          | 8,470 |   | (4,205 | ) | (8,266 | ) |
| Net decrease/(increase) in derivative financial instruments                          |       | (2,418           | )          | 15,000                 |       | (6,214 | ) | (2,499 | ) | 10,162 |   |
| Income tax paid excluding life business                                              |       | (3,537           | )          | (1,346                 | )          | (1,574 | ) | (3,471 | ) | (840 | ) |
| Life business:                                                                       |       |             |       |                   |       |   |   |   |   |   |   |
| Receipts from policyholders and customers                                            |       | 2,463            |       | 2,679                  |       | 2,646 |   | — |   | — |   |
| Interest and other items of similar nature                                           |       | 24               |       | 29                     |       | 36 |   | — |   | — |   |
| Dividends received                                                                   |       | 449              |       | 489                    |       | 848 |   | — |   | — |   |
| Payments to policyholders and suppliers                                              |       | (2,475           | )          | (2,732                 | )          | (3,148 | ) | — |   | — |   |
| Income tax paid                                                                      |       | (66              | )          | (65                    | )          | (80 | ) | — |   | — |   |
| **Net cash provided by/(used in)  operating activities**                             |       | 468              |       | 23,337                 |       | (6,549 | ) | (125 | ) | 18,746 |   |
| **Cash flows from investing  activities**                                            |       |             |       |                   |       |   |   |   |   |   |   |
| Proceeds from sale of available-for-sale securities                                  |       | 3,080            |       | 5,417                  |       | 4,514 |   | 719 |   | 679 |   |
| Purchase of available-for-sale securities                                            |       | (12,962          | )          | (3,271                 | )          | (4,875 | ) | (10,439 | ) | (647 | ) |
| Net (increase)/decrease in:                                                          |       |             |       |                   |       |   |   |   |   |   |   |
| Due from other financial institutions                                                |       | (3,330           | )          | 2,576                  |       | 3,198 |   | (2,218 | ) | (2,812 | ) |
| Loans                                                                                |       | (19,683          | )          | (35,345                | )          | (39,198 | ) | (15,396 | ) | (23,852 | ) |
| Life insurance assets                                                                |       | (367             | )          | (33                    | )          | 467 |   | — |   | — |   |
| Regulatory deposits with central banks overseas                                      |       | (685             | )          | 30                     |       | (81 | ) | (679 | ) | 22 |   |
| Other assets                                                                         |       | 530              |       | (3,747                 | )          | 3,308 |   | 711 |   | (2,425 | ) |
| Due from controlled entities                                                         |       | —           |       | —                 |       | — |   | (1,311 | ) | (48,308 | ) |
| Investments in controlled entities                                                   |       | —           |       | —                 |       | — |   | 383 |   | (14,493 | ) |
| Purchase of computer software                                                        |       | (508             | )          | (295                   | )          | (313 | ) | (438 | ) | (224 | ) |
| Purchase of property, plant and equipment                                            |       | (366             | )          | (285                   | )          | (195 | ) | (308 | ) | (186 | ) |
| Proceeds from disposal of property, plant and equipment                              |       | 33               |       | 19                     |       | 64 |   | 19 |   | 9 |   |
| Controlled entities and businesses disposed, net of cash held and  transaction costs |       | —           |       | —                 |       | 70 |   | — |   | — |   |
| Partial disposal of controlled entities                                              |       | —           |       | —                 |       | 229 |   | — |   | — |   |
| Controlled entities and businesses acquired, net of cash held                        |       | —           |       | —                 |       | (137 | ) | — |   | — |   |
| Merger with St.George, net of transaction costs                                      |       | —           |       | 374                    |       | — |   | 214 |   | — |   |
| **Net cash used in investing  activities**                                           |       | (34,258          | )          | (34,560                | )          | (32,949 | ) | (28,743 | ) | (92,237 | ) |
| **Cash flows from financing  activities**                                            |       |             |       |                   |       |   |   |   |   |   |   |
| Issue of loan capital (net of issue costs)                                           |       | —           |       | 897                    |       | 476 |   | — |   | 897 |   |
| Redemption of loan capital                                                           |       | (1,225           | )          | (1,869                 | )          | — |   | (1,225 | ) | (850 | ) |
| Proceeds from share placement and share purchase plan                                |       | —           |       | 2,890                  |       | — |   | — |   | 2,890 |   |
| Proceeds from exercise of employee options                                           |       | 48               |       | 10                     |       | 29 |   | 48 |   | 10 |   |
| Purchase of shares on exercise of employee options and rights                        |       | (5               | )          | (10                    | )          | (132 | ) | (5 | ) | (10 | ) |
| Net increase/(decrease) in:                                                          |       |             |       |                   |       |   |   |   |   |   |   |
| Due to other financial institutions                                                  |       | (406             | )          | (12,562                | )          | 5,762 |   | (511 | ) | (7,147 | ) |
| Deposits                                                                             |       | 12,379           |       | 20,427                 |       | 30,344 |   | 7,808 |   | 32,438 |   |
| Debt issues and acceptances                                                          |       | 27,666           |       | 3,327                  |       | 6,817 |   | 30,109 |   | 23,457 |   |
| Other liabilities                                                                    |       | (531             | )          | (1,468                 | )          | 710 |   | (1,443 | ) | 77 |   |
| Due to controlled entities                                                           |       | —           |       | —                 |       | — |   | (1,906 | ) | 20,969 |   |
| Purchase of treasury shares                                                          |       | (13              | )          | (41                    | )          | (57 | ) | (8 | ) | (18 | ) |
| Sale of treasury shares                                                              |       | 7                |       | 7                      |       | 20 |   | 7 |   | — |   |
| Payment of dividends                                                                 |       | (2,733           | )          | (1,973                 | )          | (1,872 | ) | (2,794 | ) | (2,043 | ) |
| Proceeds from DRP underwriting agreement                                             |       | —           |       | 887                    |       | — |   | — |   | 887 |   |
| Payment of dividends - former St.George shareholders                                 |       | —           |       | (708                   | )          | — |   | — |   | — |   |
| Payment of dividends to non-controlling interests                                    |       | (76              | )          | (71                    | )          | (73 | ) | — |   | — |   |
| **Net cash provided by financing  activities**                                       |       | 35,111           |       | 9,743                  |       | 42,024 |   | 30,080 |   | 71,557 |   |
| Net increase/(decrease) in cash and cash equivalents                                 |       | 1,321            |       | (1,480                 | )          | 2,526 |   | 1,212 |   | (1,934 | ) |
| Effect of exchange rate changes on cash and cash equivalents                         |       | (129             | )          | (57                    | )          | 40 |   | (97 | ) | 10 |   |
| Cash and cash equivalents as at the beginning of the year                            |       | 3,272            |       | 4,809                  |       | 2,243 |   | 2,578 |   | 4,502 |   |
| **Cash and cash equivalents as at  the end of the year**                             |       | 4,464            |       | 3,272                  |       | 4,809 |   | 3,693 |   | 2,578 |   |

 

The above cash flowstatements should be read in conjunction with the accompanying notes.

 

Details of thereconciliation of net cash provided by operating activities to net profitattributable to owners of Westpac Banking Corporation are provided in Note 42.

 

138

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NOTES TO THE FINANCIALSTATEMENTS

 

**Note 1. Summary of significantaccounting policies**

 

**a.       Basis of accounting**

 

***(i)******                 ******General***

 

This general purposefinancial report has been prepared in accordance with the requirements for anauthorised deposit-taking institution under the *Banking Act1959* (as amended), Australian Accounting Standards, which includethe Australian equivalents to International Financial Reporting Standards(A-IFRS), other authoritative pronouncements of the Australian AccountingStandards Board (AASB), Urgent Issues Group Interpretations and the *Corporations Act 2001*.

 

The principalaccounting policies adopted in the preparation of the financial report are setout below. These policies have been consistently applied to all the periodspresented, unless otherwise stated.

 

This financialreport also complies with International Financial Reporting Standards (IFRS) asissued by the IASB.

 

Where necessary,comparative figures have been adjusted to conform with changes in presentationin the current year.

 

This financialreport also includes additional disclosures required for foreign registrants bythe United States Securities and Exchange Commission. References to standardsand interpretations under A-IFRS in this financial report have similar referencesin the standards and interpretations of IFRS as issued by the IASB.

 

This financialreport of Westpac Banking Corporation (the Parent Entity), together with itscontrolled entities (the Group or Westpac), for the year ended 30 September2010 was authorised for issue by the Board of Directors on 3 November 2010.

 

***(ii)******             ******Comparative revisions***

 

Comparativeinformation has been revised where appropriate to enhance comparability. Thechanges outlined below have had no impact on total assets, total liabilitiesand net profit. Comparative revisions made in the financial report include:

 

·         the new accounting standard AASB 8 was adopted witheffect from 1 October 2009. Comparative information has been revised asrequired by the new standard (Note 32); and

 

·         the reclassification of other bank issuedcertificates of deposits between Receivables due from other financialinstitutions (Note 8) and Trading securities (Note 9). The revisions madeto the comparative period balance sheets are presented in the table below.Associated changes have been made to the income statements, within interest income;cash flow statements and notes to the cash flow statements (Note 42); Averagebalances and related interest (Note 26); Financial risk disclosures (Note 27)and Fair values of financial assets and liabilities (Note 28).

 
| ** **                                        | ** ** | **30 September 2009** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **Consolidated**                | ** ** | **Parent Entity** | ** ** |
| ** **                                        | ** ** | **Previously  Reported**        | ** ** | **Increase/  (Decreased)** | ** ** | **Revised** | ** ** | **Previously  Reported** | ** ** | **Increase/  (Decreased)** | ** ** | **Revised** | ** ** |
| ** **                                        | ** ** | **$m**                          | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Receivables due from other financial institutions |       | 18,309                          |       | (8,335 | ) | 9,974 |   | 12,366 |   | (5,498 | ) | 6,868 |   |
| Trading securities                                |       | 34,779                          |       | 8,335 |   | 43,114 |   | 29,906 |   | 5,498 |   | 35,404 |   |

 
| ** **                                        | ** ** | **30 September 2008** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **Consolidated**                | ** ** | **Parent Entity** | ** ** |
| ** **                                        | ** ** | **Previously  Reported**        | ** ** | **Increase/  (Decreased)** | ** ** | **Revised** | ** ** | **Previously  Reported** | ** ** | **Increase/  (Decreased)** | ** ** | **Revised** | ** ** |
| ** **                                        | ** ** | **$m**                          | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Receivables due from other financial institutions |       | 21,345                          |       | (10,911 | ) | 10,434 |   | 16,319 |   | (10,911 | ) | 5,408 |   |
| Trading securities                                |       | 39,534                          |       | 10,911 |   | 50,445 |   | 36,338 |   | 10,911 |   | 47,249 |   |

 

139

----

 

**Note 1. Summary of significantaccounting policies (continued)**

 

***(iii)******         ******Changes in accounting policies***

 

As a result of thenew and revised accounting standards, which became operative for the annualreporting period commencing 1 October 2009, the following standards, interpretationsand amendments have been adopted in the 2010 financial year:

 

The revised AASB 3 *Business Combinations* (AASB 3), amended AASB 127 *Consolidated and Separate Financial Statements*(AASB 127) and AASB 2008-3 *Amendments to AustralianAccounting Standards arising from AASB 3 and AASB 127 — March 2008*were adopted with effect from 1 October 2009 and therefore were not applicablein accounting for the merger with St.George. The revisions to the standardsapply prospectively to business combinations. The main changes under thestandards are that:

 

·         acquisition related costs are recognised as anexpense in the income statement in the period they are incurred;

 

·         earn-outs and contingent considerations will bemeasured at fair value at the acquisition date. Subsequent remeasurement (whererelevant) that relates to a post-acquisition event or that occurs outside themeasurement period is recognised in the income statement;

 

·         step acquisitions, impacting equity interests heldprior to control being obtained, are remeasured to fair value, with gains andlosses being recognised in the income statement. Similarly where control islost, any difference between the fair value of the residual holding and itscarrying value is recognised in the income statement; and

 

·         while control is retained, transactions withnon-controlling interests would be treated as equity transactions.

 

The revised AASB 101*Presentation of Financial Statements*(AASB 101), AASB 2007-8 *Amendments to AustralianAccounting Standards arising from AASB 101 — September 2007* and AASB2007-10 *Further Amendments to Australian AccountingStandards arising from AASB 101* were adopted with effect from 1October 2009. The amendments affect the presentation of owner changes in equityand of comprehensive income. They do not change the recognition, measurement ordisclosure of specific transactions and events required by other standards.Comparative information in these new disclosures has been presented so that itis also in conformity with the revised standard.

 

AASB 8 *Operating Segments* and AASB 2007-3 *Amendments to Australian Accounting Standards* arising fromAASB 8 were adopted with effect from 1 October 2009. The standards replacedAASB 114 and aligns external operating segment reporting with internal reportingto key management personnel.

 

AASB 2009-2 *Amendments to Australian Accounting Standards*—*Improving Disclosures about FinancialInstruments* was issued in April 2009, and adopted with effect from 1October 2009.The amendments enhanced disclosures for financial instrumentsregarding fair value measurement and liquidity risk.

 

The followingstandards are applicable to the Group and have been assessed as not having amaterial impact on the Group:

 

AASB 2008-1 *Amendments to Australian Accounting Standards*— *Share based Payments*: *Vesting Conditions and Cancellations* wasadopted with effect from 1 October 2009. It clarifies that vesting conditionsfor share-based payments include only service conditions and performanceconditions. It also amends the definition of performance conditions to requirethe completion of a service period in addition to specified performance targetsand to specify that all cancellations, whether by the entity or by otherparties, should receive the same accounting treatment.

 

AASB 2008-7 *Amendments to Australian Accounting Standards — Cost of an Investmentin a Subsidiary, Jointly Controlled Entity or Associate — July 2008*was adopted with effect from 1 October 2009 and removes the definition of thecost method from AASB 127. All dividends received from investments in asubsidiary, jointly controlled entity or associate will be recognised as incomein the separate financial statements of the investor even if they are paid outof pre-acquisition profits. It also amends AASB 136 *Impairmentof Assets* to include the recognition of a dividend from a subsidiaryentity as a potential indication of impairment.

 

AASB 2008-8 *Amendments to Australian Accounting Standards —Eligible Hedged Items — August 2008* was adopted with effect from 1October 2009 and provides clarification on the application of hedge accountingin certain circumstances.

 

***(iv)******           ******Historical cost convention***

 

The financial reporthas been prepared under the historical cost convention, as modified by applyingfair value accounting to available-for-sale financial assets and financialassets and liabilities (including derivative instruments) at fair value throughprofit or loss.

 

***(v)******               ******Principles of consolidation***

 

The consolidatedfinancial statements incorporate the assets and liabilities of all subsidiaries(including special purpose entities) controlled by the Parent Entity and theresults of all subsidiaries. The effects of all transactions between entitiesin the Group are eliminated. Control exists when the Parent Entity has thepower, directly or indirectly, to govern the financial and operating policiesof an entity so as to obtain benefits from its activities. The definition ofcontrol is based on the substance rather than the legal form of an arrangement.In assessing control, potential voting rights that are presently exercisable orconvertible are taken into account.

 

140

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 1. Summary of significantaccounting policies (continued)**

 

Subsidiaries are fullyconsolidated from the date on which control commences and they arede-consolidated from the date that control ceases.

 

The purchase methodof accounting is used to account for the acquisition of subsidiaries (refer toNote 1(e)).

 

Changes in the Group’sownership interest in a subsidiary after control is obtained that do not resultin a loss of control are accounted for as transactions with equity holders intheir capacity as equity holders. Any difference between the amount by whichthe non-controlling interest is adjusted and the fair value of theconsideration paid or received is recognised directly in equity.

 

If the Group losescontrol of a subsidiary it recognises any resulting gain or loss in the incomestatement.

 

The interest ofnon-controlling shareholders is stated at their proportion of the net profitand net assets of a subsidiary attributable to equity interests that are notowned, directly or indirectly, by Westpac.

 

***(vi)******           ******Foreign currency translation***

 

a.              Functional and presentationcurrency

 

Items included inthe financial statements of each of the Group’s entities are measured using thecurrency of the primary economic environment in which the entity operates (thefunctional currency). The financial statements are presented in Australian dollars.All amounts are expressed in Australian dollars except where otherwiseindicated.

 

b.             Group companies

 

Assets andliabilities of overseas branches and subsidiaries that have a functionalcurrency other than the Australian dollar are translated at exchange ratesprevailing on the balance date. Income and expenses are translated at averageexchange rates prevailing during the period. Other equity balances aretranslated at historical exchange rates. Exchange differences that have arisensince 1 October 2004, the date of transition to A-IFRS, are recognised throughthe Statement of comprehensive income in the foreign currency translationreserve.

 

On consolidation,exchange differences arising from the translation of borrowings and othercurrency instruments designated as hedges of the net investment in overseasbranches and subsidiaries are reflected in the foreign currency translationreserve. When all or part of a foreign operation is sold or borrowings that arepart of the net investments are repaid, a proportionate share of such exchangedifferences are recognised in the income statement as part of the gain or losson sale or repayment of borrowing.

 

Goodwill and fairvalue adjustments arising on the acquisition of a foreign entity are treated asassets and liabilities of the foreign entity and translated at the closingexchange rate.

 

**b.****                    ****Revenue recognition**

 

***(i)******                 ******Interest income***

 

Interest income forall interest earning financial assets including those at fair value isrecognised in the income statement using the effective interestrate method.

 

The effectiveinterest method is a method of calculating the amortised cost of a financialasset or a financial liability and of allocating the interest income orinterest expense over the relevant period. The effective interest rate is therate that exactly discounts estimated future cash payments or receipts throughthe expected life of the financial instrument to the net carrying amount of thefinancial asset or financial liability. When calculating the effective interestrate, cash flows are estimated based upon all contractual terms of thefinancial instrument (for example, prepayment options) but do not considerfuture credit losses. The calculation includes all fees and other amounts paidor received between parties to the contract that are an integral part of theeffective interest rate, transaction costs and all other premiums or discounts.

 

Interest relating toimpaired loans is recognised using the loan’s original effective interest ratebased on the net carrying value of the impaired loan after giving effect toimpairment charges. This rate is also used to discount the future cash flowsfor the purpose of measuring impairment charges. For loans that have beenimpaired this method results in cash receipts being apportioned betweeninterest and principal.

 

***(ii)******             ******Dividends on redeemable preference share finance***

 

Dividend income onredeemable preference share finance is included as part of interest income andis recorded in the income statement on an effective interest basis.

 

***(iii)******         ******Leasing***

 

Finance leases areaccounted for under the net investment method whereby income recognition isbased on a pattern reflecting a constant periodic rate of return on the netinvestment in the finance lease and is included as part ofinterest income.

 

141

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**Note 1. Summary of significantaccounting policies (continued)**

 

***(iv)******           ******Fee income***

 

Fees and commissionsare generally recognised on an accrual basis over the period during which theservice is performed. All fees relating to the successful origination orsettlement of a loan (together with the related direct costs) are deferred andrecognised as an adjustment to the effective interest rate on the loan.Portfolio and other management advisory and service fees are recognised basedon the applicable service contracts, usually on a time proportionate basis.Asset management fees related to investment funds are recognised over theperiod the service is provided. The same principle is applied for wealthmanagement, financial planning and custody services that are continuouslyprovided over an extended period of time.

 

***(v)******               ******Net trading income***

 

Realised gains orlosses, and unrealised gains or losses arising from changes in the fair valueof the trading assets and liabilities are recognised as trading income in theincome statement in the period in which they arise except for recognition ofday one profits or losses which are deferred where certain valuation inputs areunobservable. Dividend income on the trading portfolio is also recorded as partof non-interest income. Interest income or expense on the trading portfolio isrecognised as part of net-interest income.

 

***(vi)******           ******Other dividend income***

 

Dividends on quotedshares are recognised on the ex-dividend date. Dividends on unquoted shares arerecognised when the company’s right to receive payment is established.

 

***(vii)******       ******Gain or loss on sale of property, plant and equipment***

 

The gain or lossarising on the disposal or retirement of an asset is determined as thedifference between the sale proceeds less costs of disposal, and the carryingamount of the asset, and is recognised as non-interest income.

 

**c.****                    ****Expense recognition**

 

***(i)******                 ******Interest expense***

 

Interest expense,including premiums or discounts and associated expenses incurred on the issueof financial liabilities, is recognised in the income statement using theeffective interest method (refer to Note 1(b)(i)).

 

***(ii)******             ******Impairment on loans and receivables carried at amortised cost***

 

The charge recognisedin the income statement for impairment on loans and receivables carried atamortised cost reflects the net movement in the provisions for individuallyassessed and collectively assessed loans, write-offs and recoveries ofimpairments previously written-off.

 

***(iii)******         ******Leasing***

 

Operating leasepayments are recognised in the income statement as an expense on astraight-line basis over the lease term unless another systematic basis is morerepresentative of the time pattern of the benefit received. Incentives receivedon entering into operating leases are recorded as liabilities and amortised asa reduction of rental expense on a straight-line basis over the lease term.

 

***(iv)******           ******Commissions and other fees***

 

External commissionsand other costs paid to acquire loans are capitalised and amortised using theeffective interest method (refer to Note 1(b)(i)). All other fees andcommissions are recognised in the income statement over the period which therelated service is received.

 

***(v)******               ******Wealth management acquisition costs***

 

Acquisition costsare the variable costs of acquiring new business principally in relation to theGroup’s life insurance and retail funds management business.

 

*Managed investment acquisition costs*

 

Deferred acquisitioncosts associated with the retail funds management business are costs that aredirectly related to and incremental to the acquisition of new business. Thesecosts are recorded as an asset and are amortised in the income statement on thesame basis as the recognition of related revenue.

 

*Life insurance acquisition costs*

 

Deferred acquisitioncosts associated with the life insurance business are costs that areincremental to the acquisition of new business. These costs are recorded as anasset and are amortised in the income statement on the same basis as therecognition of related revenue.

 

***(vi)******           ******Share-based payment***

 

Certain employeesare entitled to participate in option and share ownership schemes.

 

*Options and share rights*

 

The fair value ofoptions and share rights provided to employees as share-based payments isrecognised as an expense with a corresponding increase in equity. The fairvalue is measured at grant date and is recognised over the period the servicesare received which is the expected vesting period during which the employees wouldbecome entitled to exercise the option or share right.

 

142

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 1. Summary of significantaccounting policies (continued)**

 

The fair value ofoptions and share rights is estimated at grant date using a Binomial/MonteCarlo simulation pricing model incorporating the vesting and hurdle features ofthe grants. The fair value of the options and share rights excludes the impactof any non-market vesting conditions such as participants’ continued employmentby the Group. The non-market vesting conditions are included in assumptionsused when determining the number of options and share rights expected to becomeexercisable for which an expense is recognised. At each reporting date theseassumptions are revised and the expense recognised each year takes into accountthe most recent estimates.

 

*Employee share plan (ESP)*

 

The value of sharesexpected to be issued to employees for no consideration under the ESP isrecognised as an expense over the financial year and accrued in otherliabilities. The fair value of any ordinary shares issued to satisfy theobligation to employees is recognised within equity, or if purchased on market,the obligation to employees is satisfied by delivering shares that have beenpurchased on market.

 

*Restricted share plan (RSP)*

 

The fair value ofshares allocated to employees for no consideration under the RSP is recognisedas an expense over the vesting period. The fair value of ordinary shares issuedto satisfy the obligation to employees is measured at grant date and isrecognised as a separate component of equity.

 

Westpac has formed atrust to hold any shares forfeited by employees until they are reallocated toemployees in subsequent grants in the Group’s restricted share plan. Sharesallocated to employees under the RSP, which have not yet vested, are treated astreasury shares and deducted from shareholders’ equity.

 

**d.****                    ****Income tax**

 

Income tax expenseon the profit for the year comprises current tax and the movement in deferredtax balances.

 

Current tax is theexpected tax payable on the taxable income for the financial year using taxrates that have been enacted or substantively enacted for each jurisdiction atthe balance date, and any adjustment to tax payable in respect of previousyears.

 

Deferred tax isaccounted for using the balance sheet method, providing for temporarydifferences between the carrying amounts of assets and liabilities in thefinancial statements and the corresponding amounts used for taxation purposes.Deferred tax assets and liabilities are not recognised if the temporarydifference arises from goodwill or other intangible assets with indefiniteexpected life, the initial recognition of assets and liabilities that affect neitheraccounting nor taxable profit (other than in a business combination), ordifferences relating to investments in subsidiaries to the extent that theywill probably not reverse in the foreseeable future. The amount of deferred taxprovided is based on the expected manner of realisation or settlement of thecarrying amount of assets and liabilities, using tax rates that have beenenacted or substantively enacted for each jurisdiction at the balance date thatare expected to apply when the liability is settled or the asset is realised.

 

Current and deferredtax attributable to amounts recognised in other comprehensive income are alsorecognised in other comprehensive income.

 

Except as notedabove, deferred tax liabilities are recognised for all taxable temporarydifferences and deferred tax assets are recognised to the extent that it isprobable that future taxable profits will be available against which the assetcan be utilised. For presentation purposes deferred tax assets and deferred taxliabilities have been offset where they relate to income taxes levied by thesame taxation authority on the same taxable entity or group of entities in theGroup.

 

For members ofWestpac’s Australian tax consolidated group, tax expense/income, deferred taxliabilities and assets arising from temporary differences are recognised in theseparate financial statements of the members of the tax-consolidated groupusing a ‘group allocation basis’ that removes the tax impact of certaintransactions between members of the tax-consolidated group. Deferred taxliabilities and assets are recognised by reference to the carrying amounts inthe separate financial statements of each entity and the tax values applyingunder tax consolidation. Current tax liabilities and assets and deferred taxassets arising from unused tax losses and relevant tax credits of the membersof the tax-consolidated group are recognised by the Parent Entity (as headentity in the tax-consolidated group).

 

143

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**Note 1. Summary of significantaccounting policies (continued)**

 

**e.****                    ****Acquisitions of assets**

 

***(i)******                 ******External acquisitions***

 

The purchase methodof accounting is used to account for all acquisitions of assets (includingbusiness combinations) regardless of whether equity instruments or other assetsare acquired. Cost is measured as the fair value of the assets given, equityinstruments issued or liabilities incurred or assumed at the date of exchange.Acquisition-related costs are expensed as incurred. Where equity instrumentsare issued in an acquisition, the value of the instruments is their publishedmarket price as at the date of exchange. Transaction costs arising on the issueof equity instruments are recognised directly in equity.

 

Identifiable assetsacquired and liabilities and contingent liabilities assumed in a businesscombination are measured initially at their fair value at the acquisition date.For each business combination, the non-controlling interest is measured eitherat fair value or at the proportionate share of the acquiree’s identifiable netassets. The excess of the cost of acquisition, the amount of anynon-controlling interest in the acquiree and the acquisition date fair value ofany previous equity interest in the acquiree, over the fair value of the Group’sshare of the identifiable net assets acquired, is recorded as goodwill.

 

Where settlement ofany part of cash consideration is deferred, amounts payable in the future arediscounted to their present value as at the date of exchange. The discount rateused is the Group’s incremental borrowing rate.

 

***(ii)******             ******Common control transactions***

 

The predecessormethod of accounting is used to account for business combinations betweenentities in the Group.

 

Assets acquired andliabilities assumed in a common control transaction are measured initially atthe acquisition date at the carrying value from the Group’s perspective. Theexcess of the cost of acquisition over the initial carrying values of theEntity’s share of the net assets acquired is recorded as part of a commoncontrol reserve.

 

Where relevant, inthe financial report the phrase ‘additions through merger’ includes bothbalances acquired through external acquisitions and through common controltransactions.

 

**f.****                      ****Assets**

 

***(i)******                 ******Financial assets***

 

The Group classifiesits financial assets in the following categories: financial assets at fairvalue through profit or loss, loans and receivables, held-to-maturityinvestments and available-for-sale securities. Management determines theclassification of its financial assets at initial recognition.

 

·         Financial assets at fair value through profit orlossThis category has two sub-categories: firstly financial assets held for tradingand secondly those designated at fair value through profit or loss atinception. A financial asset is classified in this category if acquiredprincipally for the purpose of selling it in the near term, if it is part of aportfolio of financial instruments that are managed together and for whichthere is evidence of a recent pattern of short-term profit taking, if it is a derivativethat is not a designated hedging instrument, or if so designated on acquisitionby management, in accordance with conditions set out inNote 1 (f)(i)(e).

 

·         Loans and receivablesLoans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market.

 

·         Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financial assets with fixed ordeterminable payments and fixed maturity that the Group’s management has thepositive intention and ability to hold to maturity.

 

·         Available-for-sale securitiesAvailable-for-sale securities are those debt or equity securities that aredesignated as available-for-sale or that are not classified as financial assetsat fair value through profit or loss, loans and receivables or held-to-maturityinvestments.

 

Other investments,which comprise of unlisted equity securities that do not have a quoted price inan active market and where fair value cannot be estimated within a reasonablerange of probable outcomes, are carried at cost.

 

*Recognition of financial assets*

 

Purchases and salesof financial assets at fair value through profit or loss, held-to-maturity andavailable-for-sale are recognised on trade-date, the date on which the Groupcommits to purchase or sell the asset. Loans are recognised when cash isadvanced to the borrowers. Financial assets at fair value through profit orloss are recognised initially at fair value. All other financial assets arerecognised initially at fair value plus directly attributable transactioncosts. Financial assets are derecognised when the rights to receive cash flowsfrom the financial assets have expired or where the Group has transferredsubstantially all the risks and rewards of ownership.

 

144

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 1. Summary of significantaccounting policies (continued)**

 

Available-for-salefinancial assets and financial assets recognised at fair value through profitor loss are subsequently carried at fair value. Loans and receivables andheld-to-maturity investments are subsequently carried at amortised cost usingthe effective interest method. Realised and unrealised gains or losses arisingfrom changes in the fair value of financial assets at fair value through profitor loss are included in the income statement in the period in which they arise.Gains and losses arising from changes in the fair value of available-for-salefinancial assets are recognised in other comprehensive income, until thefinancial asset is derecognised or impaired at which time the cumulative gainor loss previously recognised in other comprehensive income are recognised inthe income statement. Dividends on available-for-sale equity instruments arerecognised in the income statement when the right to receive payment isestablished. Foreign exchange gains or losses and interest, calculated usingthe effective interest method, on available-for-sale debt instruments are alsorecognised in the income statement.

 

The fair values ofquoted investments in active markets are based on current bid prices. If themarket for a financial asset is not active, the Group establishes fair valueusing valuation techniques. These include the use of recent arm’s lengthtransactions, discounted cash flow analysis, option pricing models and othervaluation techniques commonly used by market participants.

 

a.              Cash and balances withcentral banks

 

Cash and balanceswith central banks includes cash at branches, Reserve Bank settlement accountbalances and nostro balances. They are brought to account at the face value orthe gross value of the outstanding balance, where appropriate. These balanceshave a maturity of less than three months.

 

b.             Receivables due from otherfinancial institutions

 

Receivables fromother financial institutions include conduit assets, collateral placed andinterbank lending. They are accounted for as loans and receivables andsubsequently measured at amortised cost using the effective interestrate method.

 

c.              Derivative financialinstruments

 

Derivative financialinstruments including forwards, futures, swaps and options are recognised inthe balance sheet at fair value. Fair value is obtained from quoted marketprices, independent dealer price quotations, discounted cash flow models andoption pricing models, which incorporate current market and contractual pricesfor the underlying instrument, time to expiry, yield curves and volatility ofthe underlying. Also included in the determination of the fair value ofderivatives is a credit valuation adjustment. Where the derivative has apositive fair value (asset), this credit adjustment is to reflect the creditworthiness of the counterparty. Where the derivative has a negative fair value(liability), this credit adjustment reflects the Group’s own credit risk. Thesecredit adjustments are taken into account after considering any relevantcollateral or master netting agreements.

 

d.             Trading securities

 

Trading securitiesinclude debt and equity instruments which are actively traded and securitiespurchased under agreement to resell. They are accounted for as financial assetsat fair value through profit or loss.

 

e.              Other financial assetsdesignated at fair value

 

Certain non-tradingbonds, notes and commercial bills are designated as fair value through profitor loss. This designation is only made if the financial asset contains anembedded derivative, it is managed on a fair value basis in accordance with adocumented strategy, or if designating it at fair value reduces an accountingmismatch.

 

f.                Available-for-salesecurities

 

Available-for-salesecurities are public and other debt and equity securities that are not classifiedas fair value through profit or loss, loans and receivables or asheld-to-maturity investments. The accounting policy for available-for-salesecurities is set out in Note 1(f)(i).

 

g.             Loans

 

Loans includesadvances, overdrafts, home loans, credit card and other personal lending, termloans, leasing receivables, bill financing, redeemable preference sharefinancing and acceptances. The accounting policy for loans and receivables isin Note 1(f)(i).

 

Security is obtainedif, based on an evaluation of the customer’s credit worthiness, it isconsidered necessary for the customer’s overall borrowing facility. Securitywould normally consist of assets such as cash deposits, receivables, inventory,plant and equipment, real estate or investments.

 

Loan products thathave both a mortgage and deposit facility are presented on a gross basis in thebalance sheet, segregating the loan and deposit component into the respectivebalance sheet line items. Interest earned on this product is presented on a netbasis in the income statement as this reflects how the customer is charged.

 

145

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**Note 1. Summary of significantaccounting policies (continued)**

 

h.             Regulatory deposits withcentral banks overseas

 

In several countriesin which the Group operates, the law requires that regulatory deposits belodged with the local central bank at a rate of interest generally below thatprevailing in the market. The amount of the deposit and the interest ratereceivable is determined in accordance with the requirements of the localcentral bank. They are measured at amortised cost using the effective interestrate method.

 

i.                 Life insurance assets

 

Assets held by thelife insurance companies, including investments in funds managed by the Group,are designated at fair value through profit or loss as required by AASB 1038.Changes in fair value are included in the income statement. Most assets areheld in the life insurance statutory funds and can only be used within therestrictions imposed under the *Life Insurance Act 1995*.The main restrictions are that the assets in a fund can only be used to meetthe liabilities and expenses of that fund, to acquire investments to furtherthe business of the fund or as distribution when solvency and capital adequacyrequirements are met. Therefore they are not as liquid as other financialassets.

 

j.                 Derecognition of financialassets

 

A financial asset(or, where applicable, a part of a financial asset or part of a group ofsimilar financial assets) is derecognised where:

 

·         the rights to receive cash flows from the assethave expired; or

 

·         the entity has transferred its rights to receivecash flows from the asset or has assumed an obligation to pay the received cashflows in full without material delay to a third party under a ‘pass-through’arrangement and cannot sell or repledge the asset other than to the transferee;and

 

·         either the Group has transferred substantially allthe risks and rewards of the asset, or the Group has neither transferred nor retainedsubstantially all the risks and rewards of the asset, but has transferredcontrol of the asset.

 

A situation mayarise where the Group transfers its right to receive cashflows from an asset orhas entered into a pass-through arrangement. In some cases the Group would haveneither transferred nor retained substantially all the risks and rewards of theasset nor transferred control of these assets. Should this occur to the extentthat the Group has continuing involvement in the asset, the asset continues tobe recognised on the balance sheet.

 

***Impairment of financial assets***

 

*Assets carried at amortised cost*

 

The Group assessesat each balance date whether there is objective evidence that a financial assetor group of financial assets is impaired. A financial asset or a group offinancial assets is impaired and impairment charges are recognised if there isobjective evidence of impairment as a result of one or more events thatoccurred after the initial recognition of the asset (a ‘loss event’) and that lossevent (or events) has an impact on the estimated future cash flows of thefinancial asset or group of financial assets that can be reliably estimated.Objective evidence that a financial asset or group of assets is impairedincludes observable data that comes to the attention of the Group about thefollowing loss events:

 

(i)            significant financialdifficulty of the issuer or obligor;

 

(ii)         a breach of contract, suchas a default or delinquency in interest or principal payments;

 

(iii)      the Group granting to theborrower, for economic or legal reasons relating to the borrower’s financialdifficulty, a concession that the Group would not otherwise consider;

 

(iv)     it becoming probable thatthe borrower will enter bankruptcy or other financial reorganisation;

 

(v)        the disappearance of anactive market for that financial asset because of financial difficulties; or

 

(vi)     observable data indicatingthat there is a measurable decrease in the estimated future cash flows from agroup of financial assets since the initial recognition of those assets,although the decrease cannot yet be identified with the individual financialassets in the Group, including:

 

·         adverse changes in the payment status of borrowersin the Group; or

 

·         national or local economic conditions thatcorrelate with defaults on the assets in the Group.

 

The Group firstassesses whether objective evidence of impairment exists individually forfinancial assets that are individually significant, and individually orcollectively for financial assets that are not individually significant. If theGroup determines that no objective evidence of impairment exists for anindividually assessed financial asset, whether significant or not, it includesthe asset in a group of financial assets with similar credit riskcharacteristics and collectively assesses them for impairment. Assets that areindividually assessed for impairment and for which an impairment is, orcontinues to be, recognised are not included in a collective assessment ofimpairment.

 

146

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 1. Summary of significantaccounting policies (continued)**

 

If there isobjective evidence that an impairment on loans and receivables orheld-to-maturity investments has been incurred, the amount of the charge ismeasured as the difference between the asset’s carrying amount and the presentvalue of estimated future cash flows (excluding future credit losses that havenot been incurred) discounted at the financial asset’s original effectiveinterest rate. The carrying amount of the asset is reduced through the use of aprovision account and the amount of the loss is recognised in the incomestatement. If a loan or held-to-maturity investment has a variable interestrate, the discount rate for measuring any impairment is the current effectiveinterest rate determined under the contract.

 

The calculation ofthe present value of the estimated future cash flows of a collateralisedfinancial asset reflects the cash flows that may result from foreclosure lesscosts for obtaining and selling the collateral, whether or not foreclosure isprobable. For the purposes of a collective evaluation of impairment, financialassets are grouped on the basis of similar credit risk characteristics (i.e. onthe basis of the Group’s grading process that considers asset type, industry,geographical location, collateral type, past-due status and other relevantfactors). Those characteristics are relevant to the estimation of future cashflows for groups of such assets by being indicative of the debtors’ ability topay all amounts due according to the contractual terms of the assets beingevaluated. Future cash flows for a group of financial assets that arecollectively evaluated for impairment are estimated on the basis of thecontractual cash flows of the assets in the group and historical lossexperience for assets with credit risk characteristics similar to those in thegroup. Historical loss experience is adjusted on the basis of currentobservable data to reflect the effects of current conditions that did notaffect the period on which the historical loss experience is based and toremove the effects of conditions in the historical period that do not existcurrently.

 

Estimates of changesin future cash flows for groups of assets reflect, and are directionallyconsistent with, changes in related observable data from period to period (forexample, changes in unemployment rates, property prices, payment status, orother factors indicative of changes in the probability of losses in the groupand their magnitude). The methodology and assumptions used for estimatingfuture cash flows are reviewed regularly by the Group to reduce any differencesbetween loss estimates and actual loss experience. When a loan is uncollectable,it is written off against the related provision for loan impairment. Such loansare written off after all the necessary procedures have been completed and theamount of the loss has been determined. Subsequent recoveries of amountspreviously written off decrease the amount of the charge for loan impairment inthe income statement. If, in a subsequent period, the amount of the impairmentcharge decreases and the decrease can be related objectively to an eventoccurring after the impairment was recognised (such as an improvement in thedebtor’s credit rating), the previously recognised impairment charge isreversed by adjusting the provision account. The amount of the reversal isrecognised in the income statement.

 

*Available-for-sale*

 

The Group assessesat each reporting date whether there is objective evidence that a financialasset or a group of financial assets is impaired. For equity investmentsclassified as available-for-sale, a significant or prolonged decline in thefair value of the security below its cost is considered in determining whetherthe assets are impaired. If any such evidence exists for available-for-salefinancial assets, the cumulative loss — measured as the difference between theacquisition cost and the current fair value, less any impairment charge on thatfinancial asset previously recognised in profit or loss — is removed from othercomprehensive income and recognised in the income statement. If, in asubsequent period, the fair value of a debt instrument classified asavailable-for-sale increases and the increase can be objectively related to anevent occurring after the impairment charge was recognised in the incomestatement, the impairment charge is reversed through the income statement.Subsequent reversal of impairment charges on equity instruments are notrecognised in the income statement.

 

***(ii)******             ******Non-financial assets***

 

a.              Property, plant andequipment

 

Property, plant andequipment is carried at cost less accumulated depreciation and impairment. Costis the fair value of the consideration provided plus incidental costs directlyattributable to the acquisition. Other subsequent expenditure is capitalisedonly when it increases the future economic benefits embodied in the item ofproperty, plant and equipment. All other expenditure is recognised in theincome statement as an expense as incurred. Impairment is recognised as a partof operating expenses in the income statement.

 

Computer software iscapitalised at cost and classified as property, plant and equipment where it isintegral to the operation of associated hardware.

 

Depreciation iscalculated using the straight-line method to allocate the cost of assets lessany residual value over their estimated useful lives, as follows:

 
| ·         Premises and sites      | Up to 50 years |
|--------------------------------------------------------------------------------|----------------|
|                                                                           |           |
| ·         Leasehold improvements  | Up to 10 years |
|                                                                           |           |
| ·         Furniture and equipment | 3 to 15 years  |

 

Gains and losses onthe disposal of property, plant and equipment are determined as the differencebetween the consideration received (less costs to sell) and the carrying valueand are included in the income statement.

 

147

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**Note 1. Summary of significantaccounting policies (continued)**

 

b.             Intangible assets

 

*Goodwill*

 

Goodwill representsamounts arising on the acquisition of businesses. Prior to the revised AASB 3,goodwill represented the excess of purchase consideration, including directlyattributable expenses associated with the acquisition, over the fair value ofthe Group’s share of the identifiable net assets of the acquired business.Goodwill arising on the acquisition of a business subsequent to the adoption ofthe revised AASB 3 represents the excess of the purchase consideration, theamount of any non-controlling interest in the acquiree and the acquisition datefair value of any previous equity interest in the acquiree, over the fair valueof the Group’s share of net identifiable assets acquired.

 

All goodwill isconsidered to have an indefinite life.

 

Goodwill is testedfor impairment annually and whenever there is an indication that it may beimpaired, and is carried at cost or deemed cost less accumulated impairment.Gains or losses on the disposal of an entity include the carrying amount ofgoodwill relating to the entity sold.

 

Goodwill isallocated to cash-generating units based on management’s analysis of where thesynergies resulting from an acquisition are expected to arise.

 

Goodwill was testedfor impairment at 30 September 2010 and no impairment has been recognisedin the income statement.

 

·         Brands

 

Brand intangibleassets are recognised on the acquisition of businesses and represent the valueattributed to brand names associated with businesses acquired. The useful lifeof brands recognised is estimated to be indefinite as there is no foreseeablelimit to the period over which the brand name is expected to generate net cashflows. Brands are not amortised but tested for impairment annually or morefrequently when indicators of impairment are identified.

 

·         Core deposit intangibles

 

Core depositintangibles were recognised due to the merger with St.George and represent thevalue, or avoided cost, of having a deposit base from consumer and businesstransaction accounts, savings accounts, term deposits and other money marketand cash management accounts that provide a cheaper source of funding thanalternative sources of funding such as in the wholesale and securitisationmarkets.

 

Core depositintangibles are amortised using the straight-line method over a period of nineyears and are stated at cost less accumulated amortisation and impairment. Coredeposit intangibles are assessed for any indication of impairment at eachreporting date and whenever there is an indicator that these may be impaired.

 

*Other intangibles*

 

Other intangiblesare stated at cost less accumulated amortisation (where relevant) andimpairment. Other intangibles consist of distribution relationships, customerrelationships, computer software, value of in-force business and servicecontracts. For significant other intangibles, the accounting policies are asfollows:

 

·         Financial Planner distribution relationships

 

Distributionrelationship intangibles were recognised due to the merger with St.George andrepresent the value attributable to financial planner relationships. These assetsare amortised using the straight-line method to allocate the cost of the assetsover their estimated useful lives of eight years.

 

·         Credit card customer relationships

 

The credit cardcustomer relationship intangibles were recognised due to the merger withSt.George and represent the value attributable to the future fee and interestrevenue from credit card relationships. These assets are amortised using thestraight-line method to allocate the cost of the assets over their estimateduseful lives of five years.

 

·         Computer software

 

Internal andexternal costs directly incurred in the purchase or development of computersoftware, including subsequent upgrades and enhancements are recognised asintangible assets when it is probable that they will generate future economicbenefits attributable to the Group. These assets are amortised using thestraight-line method to allocate the cost of the asset less any residual valueover their estimated useful lives of between three and five years.

 

***(iii)******         ******Investments in controlled entities***

 

Investments incontrolled entities are initially recorded by Westpac at cost. Investments incontrolled entities are subsequently held at the lower of cost and recoverableamount.

 

148

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 1. Summary of significantaccounting policies (continued)**

 

***(iv)******           ******Impairment of non-financial assets***

 

The carrying amountof the Group’s non-financial assets, other than deferred tax assets and assetsarising from employee benefits, are reviewed at each balance date to determinewhether there is any indication of impairment. If such an indication exists,the asset’s recoverable amount is estimated. An impairment charge is recognisedwhenever the carrying amount of an asset or the cash-generating unit to whichit is allocated exceeds its recoverable amount. With the exception of goodwillfor which impairment charges are not reversed, where an impairment chargesubsequently reverses, the carrying amount of the asset (or cash-generatingunit) is increased to the revised estimate of its recoverable amount, such thatthe increased carrying amount does not exceed the carrying amount that wouldhave been determined had no impairment charge been recognised for the asset (orcash-generating unit) in prior years. Impairment charges and reversals ofimpairment charges are recognised in the income statement.

 

As detailed above,goodwill and indefinite life intangibles are tested for impairment annually,and whenever there is an indication that they may be impaired.

 

The recoverableamount of an asset is the greater of its fair value less cost to sell andvalue-in-use. In assessing value-in-use, estimated future cash flows arediscounted to their present value using a pre-tax discount rate that reflectscurrent market assessments of the time value of money and the risks specific tothe asset. For an asset that does not generate largely independent cashinflows, the recoverable amount is determined for the cash-generating unit towhich the asset belongs.

 

**g.****                   ****Liabilities**

 

***(i)******                 ******Financial liabilities***

 

Financialliabilities are initially recognised at fair value less transaction costsexcept where they are designated at fair value, in which case transaction costsare expensed as incurred. They are subsequently measured at amortised costexcept for derivatives and liabilities at fair value, which are held at fairvalue through profit or loss. Financial liabilities are recognised when anobligation arises and derecognised when it is discharged.

 

a.              Payables due to otherfinancial institutions

 

Payables due toother financial institutions includes deposits, vostro balances, collateralreceived and settlement account balances due to other financial institutions.They are measured at amortised cost.

 

b.             Deposits at fair value

 

Deposits at fairvalue include certificates of deposit and interest bearing deposits. They areclassified at fair value through profit or loss as they are managed as part ofa trading portfolio.

 

c.              Deposits at amortised cost

 

Deposits atamortised cost include non-interest bearing deposits repayable at call,certificates of deposit and interest bearing deposits. They are measured atamortised cost.

 

d.             Derivative financialinstruments

 

Derivative financialinstruments including forwards, futures, swaps and options are recognised inthe balance sheet at fair value. Fair values are obtained from quoted marketprices, independent dealer price quotations, discounted cash flow models andoption pricing models, which incorporate current market and contractual pricesfor the underlying instrument, time to expiry, yield curves and volatility ofthe underlying. Also included in the determination of the fair value ofderivatives is a credit valuation adjustment. Where the derivative has a positivefair value (asset), this credit adjustment reflects the credit worthiness ofthe counterparty. Where the derivative has a negative fair value (liability),this credit adjustment reflects the Group’s own credit risk. These creditadjustments are taken into account after considering any relevant collateral ormaster netting agreements.

 

e.              Trading liabilities andother financial liabilities designated at fair value

 

Securities soldunder repurchase agreements and securities sold short are classified as tradingliabilities. They are accounted for as financial liabilities at fair valuethrough profit or loss.

 

f.                Debt issues

 

These are bonds,notes, commercial paper and debentures that have been issued by entities in theWestpac Group. Debt issues are measured either at fair value through profit orloss or at amortised cost using the effective interest method. Debt issues aremeasured at fair value through profit or loss to reduce an accounting mismatch,which arises from associated derivatives executed for risk management purposes.

 

149

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**Note 1. Summary of significantaccounting policies (continued)**

 

g.             Acceptances

 

These are bills ofexchange initially accepted and discounted by Westpac that have been subsequentlyrediscounted into the market. They are measured at amortised cost. Billfinancing provided to customers by the acceptance and discount of bills ofexchange is reported as part of loans. Acceptances have been reportedseparately from debt issues, on the face of the balance sheet, as these arepredominately rediscounted to retail investors.

 

h.             Loan capital

 

Loan capitalincludes TPS 2004 and Westpac SPS and SPS II that qualify as Tier 1 capital andsubordinated bonds, notes and debentures that qualify as Tier 2 capital asdefined by APRA for capital adequacy purposes. Loan capital is measured atamortised cost using the effective interest method.

 

i.                 Financial guarantees

 

Financial guaranteecontracts are recognised as financial liabilities at the time the guarantee isissued. The liability is initially measured at fair value and subsequently atthe higher of the amount determined in accordance with AASB 137 *Provisions, Contingent Liabilities and Contingent Assets* andthe amount initially recognised less cumulative amortisation, whereappropriate.

 

The fair value of afinancial guarantee contract is determined as the present value of thedifference in net cash flows between the contractual payments under the debtinstrument and the payments that would be required without the guarantee, orthe estimated amount that would be payable to a third party for assuming theobligation.

 

Where guarantees inrelation to loans or other payables of subsidiaries or associates are providedfor no compensation, the fair value is accounted for as a contribution and isrecognised as part of the cost of the investment.

 

j.                 Derecognition of financialliabilities

 

A financialliability is derecognised when the obligation under the liability is dischargedor cancelled or expires. Where an existing financial liability is replaced byanother from the same lender on substantially different terms, or the terms ofan existing liability are substantially modified, such an exchange ormodification is treated as a derecognition of the original liability and therecognition of a new liability, and the difference in the respective carryingamounts is recognised in profit or loss.

 

***(ii)******             ******Life insurance liabilities***

 

Life insuranceliabilities consist of life insurance contract liabilities, life investmentcontract liabilities and external liabilities of managed investment schemescontrolled by statutory life funds.

 

*Life insurance contract liabilities*

 

The value of lifeinsurance contract liabilities is calculated using the margin on services methodology.The methodology takes into account the risks and uncertainties of theparticular classes of the life insurance business written. Deferred policyacquisition costs are included in the measurement basis of life insurancecontract liabilities and are therefore equally sensitive to the factors thatare considered in the liabilities measurement. This methodology is inaccordance with Actuarial Standard 1.04 ‘Valuation of Policy Liabilities’issued by the Life Insurance Actuarial Standard Board (LIASB) under the *Life Insurance Act 1995*.

 

Under thismethodology, planned profit margins and an estimate of future liabilities arecalculated separately for each related product group using applied assumptionsat each reporting date. Profit margins are released over each reporting periodin line with the service that has been provided. The balance of the plannedprofit is deferred by including them in the value of policy liabilities.

 

The key factors thataffect the estimation of these liabilities and related assets are:

 

·         the cost of providing benefits and administratingthe contracts;

 

·         mortality and morbidity experience, includingenhancements to policyholder benefits;

 

·         discontinuance experience, which affects the Group’sability to recover the cost of acquiring new business over the life of thecontracts; and

 

·         the rate at which projected future cash flows arediscounted.

 

In addition, factorssuch as regulation, competition, interest rates, taxes, securities marketconditions and general economic conditions affect the level of theseliabilities. In some contracts, the Group shares experience on investmentresults with its customers, which can offset the impacts of these factors onthe profitability of these products.

 

*Life investment contract liabilities*

 

Life investmentcontract liabilities are designated at fair value through profit or loss. Fairvalue is based on the higher of the valuation of linked assets, or the minimumcurrent surrender value.

 

150

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 1. Summary of significantaccounting policies (continued)**

 

*External liabilities of managed investment schemescontrolled by statutory life funds*

 

External liabilitiesof managed investment schemes controlled by statutory life funds are designatedat fair value through profit or loss.

 

***(iii)******         ******Provisions***

 

a.              Employee entitlements

 

*Wages and salaries, annual leave and sick leave*

 

Liabilities forwages and salaries, including non-monetary benefits, annual leave andaccumulating sick leave expected to be settled within 12 months of the balancedate are recognised in provisions in respect of employees’ services up to thebalance date and are measured at the amounts expected to be paid when theliabilities are settled.

 

No provision is madefor non-vesting sick leave as the pattern of sick leave taken indicates that noadditional liability will arise for non-vesting sick leave.

 

*Long service leave*

 

Liabilities for longservice leave expected to be settled within 12 months of the balance date arerecognised in the provision for long service leave and are measured at theamounts expected to be paid when the liabilities are settled.

 

Liabilities for longservice leave and other deferred employee benefits expected to be settled morethan 12 months from the balance date are recognised in the provision for longservice leave and are measured at the present value of future payments expectedto be made in respect of services provided by employees up to the balance date.Consideration is given to expected future wage and salary levels, experience ofemployee departure and periods of service. Expected future payments arediscounted to their net present value using market yields at the balance dateon government bonds with terms that match as closely as possible the estimatedtiming of future cash flows.

 

*Employee benefit on-costs*

 

A liability is alsocarried for on-costs, including payroll tax, in respect of provisions forcertain employee benefits which attract such costs.

 

*Termination benefits*

 

Liabilities fortermination benefits are recognised when a detailed plan for the terminationshas been developed and a valid expectation has been raised in those employeesaffected that the terminations will be carried out. Liabilities for terminationbenefits are recognised within other liabilities unless the timing or amount isuncertain, in which case they are recognised as provisions.

 

Liabilities fortermination benefits expected to be settled within 12 months are measured atamounts expected to be paid when they are settled. Amounts expected to besettled more than 12 months from the balance date are measured at the estimatedcash outflows, discounted using market yields at the balance date on governmentbonds with terms to maturity and currency that match, as closely as possible,the estimated future payments, where the effect of discounting is material.

 

b.             Provision for leaseholdpremises

 

The provision forleasehold premises covers net outgoings on certain unoccupied leased premisesor sub-let premises where projected rental income falls short of rentalexpense. The liability is determined on the basis of the present value of netfuture cash flows.

 

c.              Provision for restructuring

 

A provision forrestructuring is recognised where there is a demonstrable commitment and adetailed plan such that there is little or no discretion to avoid payments toother parties and the amount can be reliably estimated.

 

d.             Provision for dividends

 

A liability fordividends is recognised when dividends are declared, determined or publiclyrecommended by the Directors but not distributed as at the balance date.

 

e.              Provision for litigationand non-lending losses

 

A provision forlitigation is recognised where it is probable that there will be an outflow ofeconomic resources. Non-lending losses are any losses that have not arisen as aconsequence of an impaired credit decision. Those provisions include litigationand associated costs, frauds and the correction of operational issues.

 

**h.****                   ****Equity**

 

***(i)******                 ******Ordinary shares***

 

Ordinary shares arerecognised at the amount paid up per ordinary share net of directlyattributable issue costs.

 

151

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**Note 1. Summary of significantaccounting policies (continued)**

 

***(ii)******             ******Treasury shares***

 

Where the ParentEntity or other members of the consolidated Group purchases shares in theParent Entity, the consideration paid is deducted from total shareholders’equity and the shares are treated as treasury shares until they aresubsequently sold, reissued or cancelled. Where such shares are sold orreissued, any consideration received is included in shareholders’ equity.

 

***(iii)******         ******Non-controlling interests***

 

Non-controllinginterests represents the share in the net assets of subsidiaries attributableto equity interests that are not owned directly or indirectly by the ParentEntity. The Group also has on issue the following hybrid instruments; TrustPreferred Securities 2003 (TPS 2003) and Trust Preferred Securities 2006(TPS 2006) that are hybrid instruments and are classified as non-controllinginterests.

 

***(iv)******           ******Reserves***

 

*Foreign currency translation reserve*

 

As noted in Note1(a)(vi), exchange differences arising on translation of the assets andliabilities of overseas branches and subsidiaries are reflected in the foreigncurrency translation reserve. Any offsetting gains or losses on hedging thesebalances, together with any tax effect are also reflected in this reserve,which may be either a debit or credit balance. Any credit balance in thisreserve would not normally be regarded as being available for payment ofdividends until such gains are realised.

 

*Available-for-sale securities reserve*

 

This comprises thechanges in the fair value of available-for-sale financial securities, net oftax. These changes are transferred to the income statement in non-interestincome when the asset is either derecognised or impaired.

 

*Cash flow hedging reserve*

 

This comprises thefair value gains and losses associated with the effective portion of designatedcash flow hedging instruments.

 

*Share-based payment reserve*

 

This comprises thefair value of share-based payments recognised as an expense.

 

**i.****                      ****Other accounting principles and policies**

 

***(i)******                 ******Hedging***

 

The Group usesderivative instruments as part of its asset and liability management activitiesto manage exposures to interest rates and foreign currency, including exposuresarising from forecast transactions. The method of recognising the fair valuegain or loss of derivatives depends on the nature of the hedging relationship.Hedging relationships are of three types:

 

·         fair value hedge: a hedge of the change in fairvalue of recognised assets or liabilities or unrecognised firm commitments;

 

·         cash flow hedge: a hedge of variability in highlyprobable future cash flows attributable to a recognised asset or liability, ora forecasted transaction; and

 

·         hedge of a net investment in a foreign operation: ahedge of the amount of the Group’s interest in the net assets of a foreignoperation.

 

The Group uses hedgeaccounting for derivatives designated in this way when certain criteria aremet. At the time a financial instrument is designated as a hedge, the Groupformally documents the relationship between the hedging instrument and hedgeditem, together with the methods that will be used to assess the effectivenessof the hedging relationship. The Group formally assesses, both at the inceptionof the hedge and on an ongoing basis, whether the hedging derivatives have beenhighly effective in offsetting changes in the fair value or cash flows of thehedged items.

 

A hedge is regardedas highly effective if, at inception and throughout its life, the Group canexpect changes in the fair value or cash flows of the hedged item to be almostfully offset by the changes in the fair value or cash flows of the hedginginstrument, and actual results of the hedge are within a range of 80% to 125%of these changes. Hedge ineffectiveness represents the amount by which thechanges in the fair value of the hedging derivative differ from changes in thefair value of the hedged item or the amount by which changes in the cash flowof the hedging derivative differ from changes (or expected changes) in thepresent value of the cash flows of the hedged item.

 

a.              Fair value hedge

 

Changes in the fairvalue of derivatives that are designated and qualify as fair value hedges arerecorded in the income statement, together with any changes in the fair valueof the hedged asset or liability that are attributed to the hedged risk.

 

If the hedge nolonger meets the criteria for hedge accounting, any previous adjustment to thecarrying amount of a hedged item recognised at amortised cost, is amortised tothe income statement over the period to maturity.

 

152

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 1. Summary of significantaccounting policies (continued)**

 

b.             Cash flow hedge

 

The effectiveportion of changes in the fair value of derivatives that are designated andqualify as cash flow hedges are recognised in other comprehensive income. Thegain or loss relating to any ineffective portion is recognised immediately inthe income statement.

 

Amounts accumulatedin other comprehensive income are transferred to the income statement in theperiods in which the hedged item affects profit or loss.

 

When a hedginginstrument expires or is sold, terminated or exercised or when the hedge nolonger meets the criteria for hedge accounting, any cumulative gain or lossexisting in other comprehensive income at that time remains in other comprehensiveincome and is recognised in the period in which the hedge item affects profitor loss. When a forecast transaction is no longer expected to occur, thecumulative gain or loss that was reported in other comprehensive income isimmediately transferred to the income statement.

 

c.              Hedge of a net investmentin a foreign operation

 

Hedges of netinvestments in overseas branches and subsidiaries are accounted for in a mannersimilar to cash flow hedges. Any gain or loss on the hedging instrumentrelating to the effective portion of the hedge is recognised in the foreigncurrency translation reserve in other comprehensive income and the gain or lossrelating to the ineffective portion is recognised immediately in the incomestatement. Gains and losses accumulated in other comprehensive income areincluded in the income statement when the overseas branch or subsidiary isdisposed.

 

***(ii)******             ******Embedded derivatives***

 

In certain instancesa derivative may be embedded in a host contract. If the host contract is notcarried at fair value through profit or loss, the embedded derivative isseparated from the host contract and accounted for as a standalone derivativeinstrument at fair value where the economic characteristics and risks of theembedded derivative are not closely related to the economic characteristics andrisks of the host contract.

 

***(iii)******         ******Recognition of deferred day one profit or loss***

 

The best evidence offair value at initial recognition is the transaction price, unless the fairvalue of that instrument is evidenced by comparison with other observablecurrent market transactions in the same instrument, or based on a valuationtechnique whose variables include only data from observable markets.

 

Westpac has enteredinto transactions where fair value is determined using valuation models forwhich not all inputs are market observable prices or rates. Such a financialinstrument is initially recognised at the transaction price which is the bestindicator of fair value, although the value obtained from the relevant valuationmodel may differ. The difference between the transaction price and the modelvalue, commonly referred to as ‘day one profit or loss’, is not recognisedimmediately in profit or loss.

 

The timing ofrecognition of deferred day one profit or loss is determined individually. Itis either amortised over the life of the transaction, deferred until theinstrument’s fair value can be determined using market observable inputs, orrealised through settlement. The financial instrument is subsequently measuredat fair value, adjusted for the deferred day one profit or loss. Subsequentchanges in fair value are recognised immediately in the income statementwithout reversal of deferred day one profits or losses.

 

***(iv)******           ******Loan securitisation***

 

The Group, throughits loan securitisation program, packages and sells loans (principally housingmortgage loans) as securities to investors. The program includes thesecuritisation of the Group’s own assets as well as assets from customerfunding conduits. In such transactions, the Group provides an equitableinterest in the loans to investors who provide funding to the Group.Securitised loans that do not qualify for derecognition and associated fundingare included in loans and debt issues respectively.

 

***(v)******               ******Funds management activities***

 

Certain controlledentities within the Group conduct investment management and other fiduciaryactivities as responsible entity or manager on behalf of individuals, trusts,retirement benefit plans and other institutions. These activities involve themanagement of assets in investment schemes and superannuation funds, and theholding or placing of assets on behalf of third parties.

 

Where controlledentities, as responsible entities, incur liabilities in respect of theseactivities, a right of indemnity exists against the assets of the applicabletrusts. As these assets are sufficient to cover liabilities, and it is notprobable that the controlled entities will be required to settle them, theliabilities are not included in the consolidated financial statements.

 

The Group alsomanages life insurance statutory fund assets that are included in theconsolidated financial statements (refer to Note 1(f)(iii)).

 

153

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**Note 1. Summary of significantaccounting policies (continued)**

 

***(vi)******           ******Offsetting***

 

Financial assets andliabilities are offset and the net amount reported in the balance sheet whenthere is a legally enforceable right to set off the recognised amounts andthere is an intention to settle on a net basis, or to realise the asset andsettle the liability simultaneously.

 

***(vii)******       ******Securities borrowed or lent and repurchase or reverse repurchaseagreements***

 

As part of itstrading activities, Westpac lends and borrows securities on a collateralisedbasis. The securities subject to the borrowing or lending are not derecognisedfrom the balance sheet, as the risks and rewards of ownership remain with theinitial holder. Where cash is provided as collateral, the cash paid to thirdparties on securities borrowed is recorded as a receivable, while cash receivedfrom third parties on securities lent is recorded as a borrowing. Repurchasetransactions, where Westpac sells securities under an agreement to repurchase,and reverse repurchase transactions, where Westpac purchases securities underan agreement to resell, are conducted on a collateralised basis. Certificatesof deposit sold, but subject to repurchase agreements that are due fromfinancial institutions are disclosed as part of trading liabilities and otherfinancial assets designated at fair value. Fees and interest relating to stockborrowing or lending and repurchase or reverse repurchase agreements arerecognised in interest income and interest expense in the income statement,using the effective interest rate method, over the expected life of theagreements. Westpac continually reviews the fair value of the underlyingsecurities and, where appropriate, requests or provides additional collateralto support the transactions.

 

***(viii)******   ******Superannuation obligations***

 

Obligations forcontributions to the defined contribution superannuation plan are recognised asan expense in the income statement as incurred.

 

The asset orliability recognised in the balance sheet in respect of the defined benefitsuperannuation plan is the present value of the defined benefit obligation asat the reporting date less the fair value of the plan’s assets. The presentvalue of the defined benefit obligation is determined by discounting theestimated future cash flows using interest rates of government bonds that haveterms to maturity approximating to the terms of the related superannuationliability. The calculation is performed at least annually by an independentqualified actuary using the projected unit credit method.

 

The actuarialvaluation of plan obligations is dependent upon a series of assumptions, thekey ones being price inflation, earnings growth, mortality, morbidity andinvestment returns assumptions. Different assumptions could significantly alterthe amount of difference between plan assets and obligations, and thesuperannuation cost charged to the income statement.

 

Actuarial gains andlosses related to the defined benefit superannuation plan are recorded directlyin retained earnings. The net surplus or deficit that arises within the plan isrecognised and disclosed separately in other assets and other liabilitiesrespectively.

 

***(ix)******          ******Earnings per share***

 

Basic earnings pershare (EPS) is determined by dividing net profit after tax attributable toequity holders of Westpac, excluding costs of servicing other equityinstruments, by the weighted average number of ordinary shares outstandingduring the financial year.

 

Diluted EPS iscalculated by adjusting the earnings and number of shares used in thedetermination of the basic EPS for the effects of dilutive options and otherdilutive potential ordinary shares.

 

In relation tooptions, share rights and restricted shares the weighted average number ofshares is adjusted to take into account the weighted average number of sharesassumed to have been issued for no consideration in relation to dilutivepotential ordinary shares. The number of ordinary shares assumed to be issuedfor no consideration represents the difference between the number that wouldhave been issued at the exercise price and the number that would have beenissued at the average market price over the reporting period.

 

In relation toinstruments convertible into ordinary shares under certain conditions, theweighted average number of shares is adjusted to determine the number ofordinary shares that may arise on conversion, by dividing the face value of theinstruments by the average market price over the reporting period, taking intoaccount any applicable discount on conversion weighted by the number of instrumentson issue.

 

***(x)******              ******Leases***

 

Leases areclassified as either finance leases or operating leases. Under a finance lease,substantially all the risks and rewards incidental to legal ownership aretransferred to the lessee. In contrast, an operating lease exists where theleased assets are allocated to the lessor.

 

In its capacity as alessor, the Group primarily offers finance leases. The Group recognises theassets held under finance lease in the balance sheet as loans at an amountequal to the net investment in the lease. The recognition of finance income isbased on a pattern reflecting a constant periodic return on the Group’s netinvestment in the finance lease. Finance lease income is included withininterest income in the income statement refer to Note 1(b)(iii).

 

154

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 1. Summary of significantaccounting policies (continued)**

 

In its capacity as alessee, the Group mainly uses property and equipment under operating leases.Payments due to the lessor under operating leases are charged to equipment andoccupancy expense on a straight-line basis over the term of the lease (refer toNote 1(c)(iii)).

 

***(xi)******          ******Segment reporting***

 

Operating segmentsare presented on a basis that is consistent with information providedinternally to Westpac’s key decision makers. In assessing the financialperformance of its divisions internally, Westpac uses a measure of performanceit refers to as ‘Cash Earnings’. To calculate Cash Earnings, Westpac adjuststhe statutory result for material items that key decision makers believe do notreflect ongoing operations, items that are not considered when dividends arerecommended and accounting reclassifications between individual line items thatdo not impact statutory results, such as policy holder tax recoveries.

 

***(xii)******      ******Rounding of amounts***

 

In accordance withASIC Class Order 98/100, all amounts have been rounded to the nearestmillion dollars unless otherwise stated.

 

**j.****                      ****Critical accounting assumptions and estimates**

 

***(i)******                 ******Critical accounting estimates***

 

The application ofthe Group’s accounting policies necessarily requires the use of judgment,estimates and assumptions. Should different assumptions or estimates beapplied, the resulting values would change, impacting the net assets and incomeof the Group.

 

Management hasdiscussed the accounting policies which are sensitive to the use of judgment,estimates and assumptions with the Board Audit Committee.

 

The nature ofassumptions and estimates used and the value of the resulting asset andliability balances are included in the policies below.

 

***(ii)******             ******Fair value of financial instruments***

 

Financialinstruments classified as held-for-trading or designated at fair value throughprofit or loss and financial assets classified as available-for-sale arerecognised in the financial statements at fair value. All derivatives aremeasured and recognised at fair value.

 

The fair value of afinancial instrument is the amount at which the instrument could be exchanged ina current transaction between willing parties, other than in a forced orliquidation sale.

 

Financialinstruments are either priced with reference to a quoted market price for thatinstrument or by using a valuation model. Where the fair value is calculatedusing financial market pricing models, the methodology used is to calculate theexpected cash flows under the terms of each specific contract and then discountthese values back to the present value. These models use as their basisindependently sourced market parameters including, for example, interest rateyield curves, equities and commodities prices, option volatilities and currencyrates. Most market parameters are either directly observable or are impliedfrom instrument prices; however, profits or losses are recognised upon initialrecognition only when such profits can be measured solely by reference toobservable current market transactions or valuation techniques based solely onobservable market inputs.

 

The calculation offair value for any financial instrument may also require adjustment of thequoted price or model value to reflect the cost of credit risk (where notembedded in underlying models or prices used). The process of calculating fairvalue on illiquid instruments or from a valuation model may require estimationof certain pricing parameters, assumptions or model characteristics.

 

These estimates arecalibrated against industry standards, economic models and observed transactionprices.

 

The fair value offinancial instruments is provided in Note 28 as well as the mechanism by whichfair value has been derived.

 

The majority of theGroup’s derivatives are valued using valuation techniques that utiliseobservable market inputs. The fair value of substantially all securitiespositions carried at fair value is determined directly from quoted prices orfrom market observable inputs applied in valuation models. The Group hasfinancial assets measured at fair value of $103,595 million (2009 $93,023million). $757 million of this is measured at fair value based onsignificant non-observable market inputs (2009 $798 million). The Group hasfinancial liabilities measured at fair value of $135,465 million(2009 $140,225 million). $153 million of these is measured at fair valuebased on significant non-observable market inputs (2009 $210 million).Sensitivities to reasonably possible changes in non-market observable valuationassumptions would not have a material impact on the Group or the Parent Entity’sreported results.

 

155

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**Note 1. Summary of significantaccounting policies (continued)**

 

***(iii)******         ******Provisions for impairment charges***

 

The Group’s loanimpairment provisions are established to recognise incurred impairment in itsportfolio of loans. A loan is impaired when there is objective evidence thatevents occurring since the loan was recognised have affected expected cashflows from the loan. The impairment charge is the difference between thecarrying value of the loan and the present value of estimated future cash flowscalculated at the loan’s original effective interest rate for fixed rate loansand the loan’s current effective interest rate for variable rate loans.Provisions for loan impairment represent management’s estimate of theimpairment charges incurred in the loan portfolios as at the balance date.Changes to the provisions for loan impairment and changes to the provisions forundrawn contractually committed facilities and guarantees provided are reportedin the income statement as part of impairment charges on loans.

 

At 30 September 2010,gross loans to customers totalled $482,366 million (2009 $467,843 million) andthe provision for loan impairment was $4,711 million (2009 $4,384 million).There are two components to the Group’s loan impairment provisions, individualand collective.

 

*Individual component*

 

All impaired loansthat exceed specified thresholds are individually assessed for impairment.Individually assessed loans principally comprise the Group’s portfolio ofcommercial loans to medium and large businesses. Impairment is recognised asthe difference between the carrying value of the loan and the discounted valueof management’s best estimate of future cash repayments and proceeds from anysecurity held (discounted at the loan’s original effective interest rate forfixed rate loans and the loan’s current effective interest rate for variablerate loans). Relevant considerations that have a bearing on the expected futurecash flows are taken into account, including the business prospects for thecustomer, the realisable value of collateral, the Group’s position relative toother claimants, the reliability of customer information and the likely costand duration of the work-out process. Subjective judgments are made in thisprocess. Furthermore, judgments can change with time as new information becomesavailable or as work-out strategies evolve, resulting in revisions to theimpairment provision as individual decisions are taken.

 

*Collective component*

 

This is made up oftwo elements: loan impairment provisions for impaired loans that are belowindividual assessment thresholds (collective impaired loan provisions) and forloan impairments that have been incurred but have not been separatelyidentified at the balance sheet date (incurred but not reported provisions).These are established on a portfolio basis taking into account the level ofarrears, collateral, past loss experience and defaults based on portfoliotrends. The most significant factors in establishing these provisions are theestimated loss rates and the related emergence periods. The emergence periodfor each loan product type is determined through detailed studies of lossemergence patterns. Loan files where losses have emerged are reviewed toidentify the average time period between observable loss indicator events andthe loss becoming identifiable. These portfolios include credit cardreceivables and other personal advances including mortgages. The future creditquality of these portfolios is subject to uncertainties that could cause actualcredit losses to differ materially from reported loan impairment provisions.These uncertainties include the economic environment, notably interest ratesand their effect on customer spending, unemployment levels, payment behaviour andbankruptcy rates.

 

The impairmentcharge reflected in the income statement is $1,456 million and the provisionbalance at 30 September 2010 of $4,711 million represents 0.98%of loans.

 

Provisions forcredit commitments are calculated using the same methodology as describedabove. The provision for credit commitments was $350 million (2009 $350million) and was disclosed as part of Note 20.

 

***(iv)******           ******Goodwill***

 

As stated in Note1(f)(ii)(b), goodwill represents the excess of purchase consideration, theamount of any non-controlling interest in the acquiree and the acquisition datefair value of any previous equity interest in the acquiree, over the fair valueof the Group’s share of the identified net assets of acquired businesses.Goodwill is tested for impairment at least annually. The carrying value ofgoodwill as at 30 September 2010 was $8,569 million (2009$8,597 million).

 

The determination ofthe fair value of assets and liabilities of the acquired businesses requiresthe exercise of management judgment. Different fair values would result inchanges to the goodwill balance and to the post-acquisition performance ofthe acquisition.

 

To determine ifgoodwill is impaired the carrying value of the identified CGU to which thegoodwill is allocated, including the allocated goodwill, is compared to itsrecoverable amount. Recoverable amount is the higher of the CGU’s fair valueless costs to sell and its value in use. Value in use is the present value ofexpected future cash flows from the CGU. Determination of appropriate cashflows and discount rates for the calculation of value in use is subjective.Fair value is the amount obtainable for the sale of the CGU in an arm’s lengthtransaction between knowledgeable, willing parties. The assumptions applied todetermine if any impairment exists are outlined in Note 13.

 

Goodwill impairmenttesting resulted in an impairment of goodwill of nil (2009 $2 million).

 

156

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 1. Summary of significantaccounting policies (continued)**

 

***(v)******               ******Superannuation obligations***

 

The Group operates anumber of defined benefit plans as described in Note 35. For each of theseplans, actuarial valuations of the plan’s obligations and the fair valuemeasurements of the plan’s assets are performed at least annually in accordancewith the requirements of AASB 119.

 

The actuarialvaluation of plan obligations is dependent upon a series of assumptions, thekey ones being price inflation, earnings growth, mortality, morbidity andinvestment returns assumptions. Different assumptions could significantly alterthe amount of the difference between plan assets and obligations, and thesuperannuation cost charged to the income statement.

 

Refer to Note 35 fordetails of the Group’s defined benefit deficit balances.

 

***(vi)******           ******Provisions (other than loan impairment)***

 

Provisions are heldin respect of a range of obligations such as employee entitlements,restructuring costs, litigation provisions and non-lending losses and onerouscontracts (for example leases with surplus space). Provisions carried for longservice leave are supported by an independent actuarial report. Some of theprovisions involve significant judgment about the likely outcome of variousevents and estimated future cash flows. The deferral of these benefits involvesthe exercise of management judgments about the ultimate outcomes of thetransactions. Payments that are expected to be incurred after more than oneyear are discounted at a rate which reflects both current interest rates andthe risks specific to that provision.

 

***(vii)******       ******Income taxes***

 

The Group is subjectto income taxes in Australia and jurisdictions where it has foreign operations.Significant judgment is required in determining the worldwide provision forincome taxes. There are many transactions and calculations undertaken duringthe ordinary course of business for which the ultimate tax outcome is unclear.Provisions for tax are held to reflect these tax uncertainties. The Groupestimates its tax liabilities based on the Group’s understanding of the taxlaw. Where the final outcome of these matters is different from the amountsthat were initially recorded, such differences will impact the current anddeferred tax provisions in the period where such determination is made.

 

Refer to Note 15 fordetails of the Group’s deferred tax balances.

 

***(viii)******   ******St.George Bank Limited merger***

 

The merger withSt.George was accounted for using the purchase method of accounting. All theidentifiable assets and liabilities of St.George were required to be initiallyrecognised by the Group at their fair value on the date of the merger. Thisinvolved additional critical accounting assumptions, judgments and estimatesthat may have a material impact on the Group’s financial statements. The assetsand liabilities recognised by the Group following the merger with St.George areset out in Note 43.

 

*Intangible assets*

 

Identifiableintangible assets that are not normally recognised are required to beidentified and measured at their fair value as a result of the purchase priceaccounting requirements of AASB 3. This involves the use of judgments,estimates and assumptions about how customers may act and how products will performin the future, based largely on past experience and future contractualarrangements.

 

The followingmaterial identifiable intangible assets have been recognised:

 

·         core deposit intangibles;

 

·         brand names;

 

·         financial planner distribution relationships; and

 

·         credit card customer relationships.

 

*Financial assets and liabilities*

 

The fair value ofall of St.George’s financial assets and financial liabilities were determinedat the merger date. Many of these assets and liabilities were not normallytraded in active markets. The global credit and capital market conditions thathad included extreme volatility, disruption and decreased liquidity hadincreased the level of management judgment required in determining the fairvalue of St.George’s financial assets and financial liabilities.

 

*Tax consolidation*

 

Following theredemption of St.George’s hybrid instruments on 31 March 2009, St.Georgeand all its wholly owned Australian subsidiaries joined the Westpac taxconsolidated group. Westpac was required to reset the tax value of certainSt.George assets to the appropriate market value of those assets.

 

In order todetermine the impact of St.George joining the Westpac tax consolidation group,the fair value of St.George and the fair value of its identifiable assets andliabilities needed to be determined as at 31 March 2009. This requiresmanagement to make similar critical assumptions, judgments and estimates thatwere involved in determining the fair value of identifiable assets andliabilities on the date of the acquisition.

 

Refer to Note 5 forassessment of the current impact of St.George joining the Westpac taxconsolidated group.

 

157

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**Note 1. Summary of significantaccounting policies (continued)**

 

**k.****                  ****Future developments in accounting policies**

 

The following newstandards and interpretations which may have a material impact on the Grouphave been issued, but are not yet effective and have not been early adopted bythe Group:

 

AASB 9 *Financial Instruments**(Part 1:Classification and Measurement)* was issued by the AustralianAccounting Standards Board in December 2009. If the standard is not earlyadopted it will be effective for the 30 September 2014 financial year end.The major changes under the standard are:

 

·         AASB 9 replaces the multiple classification andmeasurement models in AASB 139 *Financial Instruments:Recognition and Measurement* with a single model that has twoclassification categories: amortised cost and fair value;

 

·         a financial asset is measured at amortised cost iftwo criteria are met: a) the objective of the business model is to hold thefinancial asset for the collection of the contractual cash flows, and b) thecontractual cash flows under the instrument solely represent the payment ofprincipal and interest;

 

·         if a financial asset is eligible for amortised costmeasurement, an entity can elect to measure it at fair value if it eliminatesor significantly reduces an accounting mismatch;

 

·         there will be no separation of an embeddedderivative where the host is a financial asset;

 

·         equity instruments must be measured at fair valuehowever, an entity can elect on initial recognition to present the fair valuechanges on an equity investment directly in other comprehensive income. Thereis no subsequent recycling of fair value gains and losses to profit or loss;however dividends from such investments will continue to be recognised inprofit or loss; and

 

·         if an entity holds a tranche in a waterfallstructure it must determine the classification of that tranche by lookingthrough to the assets ultimately underlying that portfolio and assess thecredit quality of that tranche compared with the underlying portfolio. If an entityis unable to look through, then the tranche must be measured at fair value.

 

The standard willimpact the classification and measurement of the Group’s financial assets.

 

AASB 2009-11 *Amendments to Australian Accounting Standards arising from AASB 9 — December 2009*was issued in December 2009 and will be applicable when AASB 9 is adoptedby the Group. This Accounting Standard gives effect to consequential changesarising from the issuance of AASB 9 on a number of Australian AccountingStandards and Interpretation 12 *Service ConcessionArrangements*. The adoption of AASB 9 will impact the classificationand measurement of the Group financial instruments.

 

AASB Interpretation19 *Extinguishing Financial Liabilities with EquityInstruments* was issued in December 2009 and will be applicableto the 30 September 2011 financial year. The interpretation addresses theaccounting by an entity when the terms of a financial liability arerenegotiated and result in the entity issuing equity instruments to a creditorof the entity to extinguish all or part of the financial liability.

 

158

----

 

NOTES TO THE FINANCIALSTATEMENTS

 

**Note 2. Net interest income**

 
| ** **                                                 | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                 | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Interest income**                                        | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans                                                      |       | 31,377           |       | 27,772                 |       | 24,998 |   | 24,422 |   | 17,602 |   |
| Receivables due from other financial institutions(1)       |       | 234              |       | 194                    |       | 672 |   | 79 |   | 67 |   |
| Available-for-sale securities                              |       | 368              |       | 118                    |       | 114 |   | 290 |   | 9 |   |
| Regulatory deposits with central banks overseas            |       | 4                |       | 17                     |       | 31 |   | 4 |   | 17 |   |
| Subsidiaries                                               |       | —           |       | —                 |       | — |   | 3,013 |   | 2,321 |   |
| Trading securities(1)                                      |       | 2,035            |       | 2,228                  |       | 2,864 |   | 1,873 |   | 1,901 |   |
| Net ineffectiveness on qualifying hedges                   |       | 1                |       | (9                     | )          | 1 |   | (3 | ) | (3 | ) |
| Other financial assets designated at fair value            |       | 64               |       | 43                     |       | 92 |   | 59 |   | 38 |   |
| Other                                                      |       | 68               |       | 83                     |       | 309 |   | 62 |   | 57 |   |
| **Total interest income(2)**                               |       | 34,151           |       | 30,446                 |       | 29,081 |   | 29,799 |   | 22,009 |   |
| **Interest expense**                                       |       |             |       |                   |       |   |   |   |   |   |   |
| Current and term deposits                                  |       | (10,718          | )          | (9,293                 | )          | (9,075 | ) | (8,848 | ) | (6,118 | ) |
| Payables due to other financial institutions               |       | (151             | )          | (365                   | )          | (449 | ) | (150 | ) | (272 | ) |
| Debt issues                                                |       | (4,063           | )          | (3,712                 | )          | (4,480 | ) | (3,264 | ) | (2,368 | ) |
| Loan capital                                               |       | (545             | )          | (582                   | )          | (484 | ) | (436 | ) | (368 | ) |
| Subsidiaries                                               |       | —           |       | —                 |       | — |   | (2,222 | ) | (1,464 | ) |
| Trading liabilities                                        |       | (3,177           | )          | (725                   | )          | (1,911 | ) | (2,851 | ) | (227 | ) |
| Deposits at fair value                                     |       | (1,832           | )          | (2,089                 | )          | (4,286 | ) | (1,768 | ) | (2,106 | ) |
| Other                                                      |       | (1,823           | )          | (2,034                 | )          | (1,174 | ) | (1,247 | ) | (1,537 | ) |
| **Total interest expense(3)**                              |       | (22,309          | )          | (18,800                | )          | (21,859 | ) | (20,786 | ) | (14,460 | ) |
| **Net interest income**                                    |       | 11,842           |       | 11,646                 |       | 7,222 |   | 9,013 |   | 7,549 |   |
| Impairment charges on loans                                |       | (1,456           | )          | (3,238                 | )          | (931 | ) | (958 | ) | (2,018 | ) |
| **Net interest income after  impairment charges on loans** |       | 10,386           |       | 8,408                  |       | 6,291 |   | 8,055 |   | 5,531 |   |

 

----

| (1) | In the current year we have revised our  presentation and reclassified other bank issued certificates of deposit from  receivables due from other financial institutions to trading securities. To  improve presentation we have revised comparative periods. Refer to Note  1(a)(ii) for more details. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Total interest income for financial assets  that are not at fair value through profit or loss is $32,051 million  (2009 $28,184 million, 2008 $26,124 million) for the Group and  $27,870 million (2009 $20,073 million) for the Parent Entity.                                     |
| (3) | Total interest expense for financial  liabilities that are not at fair value through profit or loss is $17,300  million (2009 $15,986 million, 2008 $15,662 million) for the  Group and $16,167 million (2009 $12,127 million) for the Parent  Entity.                              |

 

159

----

 

**Note 3. Non-interest income**

 
| ** **                                                                                              | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                                              | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                              | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Fees and commissions**                                                                                | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Banking and credit related fees                                                                         |       | 919              |       | 804                    |       | 553 |   | 751 |   | 562 |   |
| Transaction fees and commissions received(1)                                                            |       | 1,272            |       | 1,600                  |       | 1,318 |   | 1,025 |   | 1,054 |   |
| Service and management fees                                                                             |       | 12               |       | 5                      |       | 5 |   | 2 |   | 2 |   |
| Other non-risk fee income(1)                                                                            |       | 230              |       | 228                    |       | 184 |   | 367 |   | 324 |   |
| **Total fees and commissions**                                                                          |       | 2,433            |       | 2,637                  |       | 2,060 |   | 2,145 |   | 1,942 |   |
| **Wealth management and insurance  income(2)**                                                          |       |             |       |                   |       |   |   |   |   |   |   |
| Life insurance and funds management net operating income                                                |       | 1,430            |       | 1,216                  |       | 932 |   | 6 |   | — |   |
| General insurance and lenders mortgage insurance premiums less claims  incurred                         |       | 166              |       | 152                    |       | 110 |   | 5 |   | — |   |
| **Total wealth management and  insurance income**                                                       |       | 1,596            |       | 1,368                  |       | 1,042 |   | 11 |   | — |   |
| **Trading income**                                                                                      |       |             |       |                   |       |   |   |   |   |   |   |
| Foreign exchange income                                                                                 |       | 462              |       | 707                    |       | 514 |   | 427 |   | 618 |   |
| Other trading securities                                                                                |       | 335              |       | 194                    |       | 218 |   | 249 |   | 154 |   |
| **Total trading income**                                                                                |       | 797              |       | 901                    |       | 732 |   | 676 |   | 772 |   |
| **Other income**                                                                                        |       |             |       |                   |       |   |   |   |   |   |   |
| Dividends received from subsidiaries                                                                    |       | —           |       | —                 |       | — |   | 1,586 |   | 27 |   |
| Dividends received from other entities                                                                  |       | 25               |       | 21                     |       | 15 |   | 21 |   | 19 |   |
| Rental income                                                                                           |       | 6                |       | 5                      |       | 1 |   | 3 |   | — |   |
| Gain/(loss) on disposal of assets:                                                                      |       |             |       |                   |       |   |   |   |   |   |   |
| Net gain/(loss) from available-for-sale securities                                                      |       | 1                |       | (2                     | )          | (3 | ) | 13 |   | 1 |   |
| Other net gain/(loss) on disposal of assets                                                             |       | 45               |       | (6                     | )          | 460 |   | 11 |   | — |   |
| Net gain/(loss) on ineffective hedges                                                                   |       | 10               |       | 3                      |       | 3 |   | 10 |   | 3 |   |
| Hedging overseas operations                                                                             |       | 29               |       | 20                     |       | (57 | ) | 61 |   | 87 |   |
| Net gain/(loss) on derivatives held for risk management purposes(3)                                     |       | 27               |       | 54                     |       | 86 |   | 29 |   | 52 |   |
| Net gain/(loss) on financial instruments designated at fair value                                       |       | 41               |       | —                 |       | (1 | ) | 17 |   | 19 |   |
| Other                                                                                                   |       | 58               |       | (142                   | )          | 45 |   | 20 |   | (188 | ) |
| **Total other income**                                                                                  |       | 242              |       | (47                    | )          | 549 |   | 1,771 |   | 20 |   |
| **Total non-interest income**                                                                           |       | 5,068            |       | 4,859                  |       | 4,383 |   | 4,603 |   | 2,734 |   |
| **Wealth management and insurance  income comprised(2)**                                                |       |             |       |                   |       |   |   |   |   |   |   |
| Funds management income                                                                                 |       | 896              |       | 716                    |       | 630 |   | 3 |   | — |   |
| Life insurance premium income                                                                           |       | 501              |       | 470                    |       | 390 |   | — |   | — |   |
| Life insurance commissions, investment income/(expense) and other  income/(expense)                     |       | 479              |       | 432                    |       | (1,864 | ) | 3 |   | — |   |
| Life insurance claims and changes in life insurance liabilities                                         |       | (446             | )          | (402                   | )          | 1,776 |   | — |   | — |   |
| General insurance and lenders mortgage insurance premiums earned                                        |       | 341              |       | 319                    |       | 218 |   | — |   | — |   |
| General insurance and lenders mortgage insurance commissions,  investment and other income              |       | 15               |       | (22                    | )          | 2 |   | 5 |   | — |   |
| General insurance and lenders mortgage insurance claims incurred,  underwriting and commission expenses |       | (190             | )          | (145                   | )          | (110 | ) | — |   | — |   |
| **Total wealth management and  insurance income**                                                       |       | 1,596            |       | 1,368                  |       | 1,042 |   | 11 |   | — |   |

 

----

| (1) | In the current year we have revised our  presentation of fees and commissions, and to improve presentation we have  revised comparatives for 2009. No adjustments were required for 2008.                                                                                         |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | In the current year we have revised our  presentation of wealth management and insurance income to more accurately reflect  the general and life insurance businesses, and to improve presentation we  have revised comparatives for 2009. No adjustments were required for 2008. |
| (3) | Income from derivatives held for risk  management purposes primarily comprises net gains or losses on realised and  unrealised hedges on New Zealand future retail earnings and net gains or  losses on the hedge of our 2003 Trust Preferred Securities.                    |

 

160

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NOTES TO THE FINANCIALSTATEMENTS

 

**Note 4. Operating expenses**

 
| ** **                                   | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|----------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Salaries and other staff  expenses**       | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Salaries and wages(1)                        |       | 3,052            |       | 2,856                  |       | 2,207 |   | 2,171 |   | 1,716 |   |
| Employee entitlements                        |       | 258              |       | 245                    |       | 162 |   | 197 |   | 171 |   |
| Employee related taxes                       |       | 177              |       | 190                    |       | 172 |   | 135 |   | 122 |   |
| Superannuation costs:                        |       |             |       |                   |       |   |   |   |   |   |   |
| Defined contribution plans                   |       | 212              |       | 171                    |       | 133 |   | 161 |   | 125 |   |
| Defined benefit plans (Note 35)              |       | 39               |       | 37                     |       | 6 |   | 39 |   | 34 |   |
| Equity based compensation                    |       | 125              |       | 104                    |       | 92 |   | 102 |   | 71 |   |
| Restructuring costs                          |       | 56               |       | 116                    |       | 124 |   | 46 |   | 53 |   |
| Other(1)                                     |       | 71               |       | 87                     |       | 19 |   | 33 |   | 27 |   |
| **Total salaries and other staff  expenses** |       | 3,990            |       | 3,806                  |       | 2,915 |   | 2,884 |   | 2,319 |   |
| **Equipment and occupancy expenses**         |       |             |       |                   |       |   |   |   |   |   |   |
| Operating lease rentals(2)                   |       | 482              |       | 435                    |       | 298 |   | 322 |   | 236 |   |
| Depreciation, amortisation and impairment:   |       |             |       |                   |       |   |   |   |   |   |   |
| Premises                                     |       | 17               |       | 18                     |       | 1 |   | 17 |   | 1 |   |
| Leasehold improvements                       |       | 62               |       | 52                     |       | 43 |   | 50 |   | 42 |   |
| Furniture and equipment                      |       | 61               |       | 62                     |       | 37 |   | 50 |   | 36 |   |
| Technology                                   |       | 66               |       | 63                     |       | 90 |   | 43 |   | 33 |   |
| Software                                     |       | 300              |       | 206                    |       | 351 |   | 227 |   | 118 |   |
| Equipment repairs and maintenance            |       | 75               |       | 74                     |       | 39 |   | 54 |   | 44 |   |
| Electricity, water and rates                 |       | 11               |       | 11                     |       | 7 |   | 8 |   | 6 |   |
| Land tax                                     |       | 5                |       | 5                      |       | 2 |   | 5 |   | 2 |   |
| Other(2)                                     |       | 3                |       | —                 |       | 27 |   | — |   | — |   |
| **Total equipment and occupancy  expenses**  |       | 1,082            |       | 926                    |       | 895 |   | 776 |   | 518 |   |
| **Other expenses**                           |       |             |       |                   |       |   |   |   |   |   |   |
| Amortisation of deferred expenditure         |       | 6                |       | 12                     |       | 4 |   | 18 |   | 24 |   |
| Amortisation of intangible assets            |       | 208              |       | 182                    |       | — |   | 121 |   | — |   |
| Impairment charges — goodwill           |       | —           |       | 2                      |       | 18 |   | — |   | — |   |
| Non-lending losses                           |       | 38               |       | 182                    |       | 53 |   | 24 |   | 172 |   |
| Purchased services:                          |       |             |       |                   |       |   |   |   |   |   |   |
| Technology and information services          |       | 280              |       | 249                    |       | 158 |   | 187 |   | 138 |   |
| Legal                                        |       | 33               |       | 41                     |       | 27 |   | 20 |   | 21 |   |
| Other professional services                  |       | 465              |       | 409                    |       | 298 |   | 407 |   | 316 |   |
| Credit card loyalty programs                 |       | 117              |       | 210                    |       | 185 |   | 117 |   | 210 |   |
| Stationery                                   |       | 83               |       | 80                     |       | 51 |   | 51 |   | 33 |   |
| Postage and freight                          |       | 139              |       | 123                    |       | 103 |   | 103 |   | 78 |   |
| Outsourcing costs                            |       | 526              |       | 514                    |       | 486 |   | 431 |   | 416 |   |
| Insurance                                    |       | 21               |       | 19                     |       | 11 |   | 14 |   | 10 |   |
| Advertising                                  |       | 162              |       | 155                    |       | 99 |   | 88 |   | 62 |   |
| Training                                     |       | 29               |       | 22                     |       | 17 |   | 18 |   | 9 |   |
| Travel                                       |       | 73               |       | 63                     |       | 59 |   | 53 |   | 41 |   |
| Other expenses                               |       | 164              |       | 176                    |       | 76 |   | 228 |   | 157 |   |
| **Total other expenses**                     |       | 2,344            |       | 2,439                  |       | 1,645 |   | 1,880 |   | 1,687 |   |
| **Operating expenses**                       |       | 7,416            |       | 7,171                  |       | 5,455 |   | 5,540 |   | 4,524 |   |

 

----

| (1) | In the current year we have revised our  presentation of salaries and wages and other staff expenses, and to improve  presentation we have revised comparatives for 2009. No adjustments were  required for 2008. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | In the current year we have revised our  presentation of equipment and occupancy expenses, and to improve presentation  we have revised comparatives for 2009. No adjustments were required for 2008.             |

 

161

----

 

**Note 5. Income tax**

 
| ** **                                                                                        | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                                        | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                        | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **The income tax expense for the  year is reconciled to the profit before income tax as follows** | ** ** | ** **       |       |                   |       |   | ** ** | ** ** |   |   |   |
| **Profit before income tax expense**                                                              |       | 8,038            |       | 6,096                  |       | 5,219 |   | 7,118 |   | 3,741 |   |
| Prima facie income tax based on the Australian company tax rate of 30%                            |       | 2,411            |       | 1,829                  |       | 1,566 |   | 2,135 |   | 1,122 |   |
| **The effect of amounts which are  not deductible (assessable) in calculating taxable income**    | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Change in tax rate(1)                                                                             |       | 6                |       | —                 |       | 4 |   | 1 |   | — |   |
| Rebatable and exempt dividends                                                                    |       | (5               | )          | (19                    | )          | (33 | ) | (509 | ) | (24 | ) |
| Tax losses not previously recognised now brought to account                                       |       | —           |       | (5                     | )          | (5 | ) | — |   | (2 | ) |
| Life insurance:                                                                                   |       |             |       |                   |       |   |   |   |   |   |   |
| Tax adjustment on policy holders’ earnings(2)                                                |       | (8               | )          | 5                      |       | (138 | ) | — |   | — |   |
| Adjustment for life business tax rates                                                            |       | (9               | )          | (1                     | )          | (12 | ) | — |   | — |   |
| Other non-assessable items                                                                        |       | (26              | )          | (24                    | )          | (79 | ) | (19 | ) | (7 | ) |
| Other non-deductible items                                                                        |       | 36               |       | 68                     |       | 54 |   | 87 |   | 78 |   |
| Adjustment for overseas tax rates                                                                 |       | 1                |       | (16                    | )          | 6 |   | — |   | (14 | ) |
| Income tax (over)/under provided in prior years                                                   |       | (4               | )          | 19                     |       | (26 | ) | (3 | ) | 20 |   |
| St.George tax consolidation adjustment                                                            |       | (685             | )          | —                 |       | — |   | (685 | ) | — |   |
| Other items(3)                                                                                    |       | (91              | )          | 723                    |       | (50 | ) | (49 | ) | 531 |   |
| **Total income tax expense in the  income statement**                                             |       | 1,626            |       | 2,579                  |       | 1,287 |   | 958 |   | 1,704 |   |
| **Income tax analysis**                                                                           |       |             |       |                   |       |   |   |   |   |   |   |
| Income tax expense attributable to profit from ordinary activities  comprised:                    |       |             |       |                   |       |   |   |   |   |   |   |
| Current income tax:                                                                               |       |             |       |                   |       |   |   |   |   |   |   |
| Australia                                                                                         |       | 1,705            |       | 2,741                  |       | 1,108 |   | 1,133 |   | 2,096 |   |
| Overseas                                                                                          |       | 184              |       | 1,038                  |       | 255 |   | 84 |   | 743 |   |
|                                                                                              |       | 1,889            |       | 3,779                  |       | 1,363 |   | 1,217 |   | 2,839 |   |
| Deferred income tax:                                                                              |       |             |       |                   |       |   |   |   |   |   |   |
| Australia                                                                                         |       | (224             | )          | (1,187                 | )          | (38 | ) | (255 | ) | (1,178 | ) |
| Overseas                                                                                          |       | (35              | )          | (32                    | )          | (12 | ) | (1 | ) | 23 |   |
|                                                                                              |       | (259             | )          | (1,219                 | )          | (50 | ) | (256 | ) | (1,155 | ) |
| Under/(over) provision in prior years:                                                            |       |             |       |                   |       |   |   |   |   |   |   |
| Australia                                                                                         |       | (3               | )          | 21                     |       | (15 | ) | 1 |   | 15 |   |
| Overseas                                                                                          |       | (1               | )          | (2                     | )          | (11 | ) | (4 | ) | 5 |   |
|                                                                                              |       | (4               | )          | 19                     |       | (26 | ) | (3 | ) | 20 |   |
| Total Australia                                                                                   |       | 1,478            |       | 1,575                  |       | 1,055 |   | 879 |   | 933 |   |
| Total Overseas                                                                                    |       | 148              |       | 1,004                  |       | 232 |   | 79 |   | 771 |   |
| **Total income tax expense  attributable to profit from ordinary activities**                     |       | 1,626            |       | 2,579                  |       | 1,287 |   | 958 |   | 1,704 |   |

 

----

| (1) | The company tax rate in New Zealand will  reduce from 30% to 28% for the Group from 1 October 2011. The impact of  the change in the income tax rate has been taken into account in the  measurement of deferred tax at the end of the reporting period.                                                                                                                                                                                |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | In accordance with the requirements of AASB  1038, tax expense for 2010 includes a $12 million tax credit on  policyholders’ investment earnings (2009 $7 million tax charge, 2008 $198  million tax credit) of which $4 million is prima facie a tax benefit (2009 $2  million tax expense, 2008 $60 million tax benefit) and the balance  of $8 million (2009 $5 million, 2008 $138 million) is shown  here. |
| (3) | This includes the provision raised and  settlement in relation to Structured Finance transactions. For further detail  refer to Note 36.                                                                                                                                                                                                                                                                                                |

 

***St.George tax consolidation adjustment***

 

Following theredemption of St.George’s hybrid instruments on 31 March 2009, St.Georgeand all its wholly owned Australian subsidiaries joined the Westpac taxconsolidated group. Westpac was required to reset the tax value of certainSt.George assets to the appropriate market value of those assets. Given thecomplexity of this process, the assessed tax treatment for the 2009 and 2010financial years has only recently been finalised and the approach agreed withthe ATO.

 

162

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 5. Income tax (continued)**

 

A number ofSt.George Bank derivative contracts were assessed as having a market value, atthe time of tax consolidation, higher than their original value. Pending thedetermination of the tax consolidation outcome, Westpac’s accounting for thesecontracts had factored in tax on this increase in value. With the taxconsolidation impacts for the 2009 and 2010 financial years now completed, ithas been determined that tax is not required to be paid on the increase in thevalue of derivative contracts that matured in the 2009 and 2010 financialyears. This value totalled $2,284 million, and accordingly current taxliability and income tax expense have been reduced by $685 million.

 

As additionalderivative contracts mature, there may be further material favourableadjustments required. However, it is not possible to assess these adjustmentsuntil the interaction of the new taxation of financial arrangements (TOFA)legislation and the tax consolidation rules is clarified. Additionaladjustments to tax payable or deferred balances will not be made untildiscussions clarifying the application of these rules have been finalisedwith the ATO.

 

***Tax consolidation***

 

The Parent Entityand its wholly owned, Australian-controlled entities implemented the taxconsolidation legislation as of 1 October 2002. All entities in thetax consolidated group have entered into a tax sharing agreement which, in theopinion of the Directors, limits the joint and several liabilities of thewholly owned entities in the case of a default by the head entity, Westpac.

 

The entities havealso entered into a tax funding agreement under which the wholly owned entitiesfully compensate the Parent Entity for any current tax payable assumed and arecompensated by the Parent Entity for any current tax receivable and deferredtax assets relating to unused tax losses or unused tax credits that aretransferred to the Parent Entity under the tax consolidation legislation. Thefunding amounts are determined by reference to the amounts recognised in thewholly owned entities’ financial statements.

 

The amountsreceivable/payable under the tax funding agreement are settled on a quarterlybasis in line with the Parent Entity’s obligations to pay tax instalments. Anyunpaid amounts at balance date are recognised as current intercompanyreceivables or payables.

 

***Taxation of financial arrangements***

 

TOFA applies to allentities in the Australian tax consolidation group from 1 October 2010.Subject to certain elections being made, TOFA improves the alignment of the taxtreatment of gains and losses from financial arrangements with the accountingtreatment adopted in the financial statements. Other than the potential impactof outstanding tax consolidation matters related to the St.George merger, it isnot expected that TOFA will significantly impact the Group, due to thetransitional rules. These require existing deferred tax balances impacted byTOFA to be amortised to taxable income over an estimated four year period.

 

**Note 6. Dividends**

 
| ** **                                                                                                                 | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                                                                 | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                                                 | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Recognised amounts**                                                                                                     | ** ** | ** **       |       |                   |       |   | ** ** | ** ** |   |   |   |
| **Ordinary dividends**                                                                                                     | ** ** | ** **       |       |                   |       |   | ** ** | ** ** |   |   |   |
| 2009 final dividend paid 60 cents per share (2008 72 cents per share,  2007 68 cents per share) all fully franked at 30%   |       | 1,762            |       | 1,362                  |       | 1,265 |   | 1,765 |   | 1,364 |   |
| 2010 interim dividend paid 65 cents per share (2009 56 cents per  share, 2008 70 cents per share) all fully franked at 30% |       | 1,932            |       | 1,626                  |       | 1,311 |   | 1,935 |   | 1,630 |   |
| **Total ordinary dividends**                                                                                               |       | 3,694            |       | 2,988                  |       | 2,576 |   | 3,700 |   | 2,994 |   |
| **Distributions on other equity  instruments**                                                                             |       |             |       |                   |       |   |   |   |   |   |   |
| Convertible debentures                                                                                                     |       | —           |       | —                 |       | — |   | 55 |   | 64 |   |
| **Total distributions on other  equity instruments**                                                                       |       | —           |       | —                 |       | — |   | 55 |   | 64 |   |
| **Dividends not recognised at year  end**                                                                                  |       |             |       |                   |       |   |   |   |   |   |   |
| Since year end the Directors have recommended the payment of the  following final ordinary dividend:                       |       |             |       |                   |       |   |   |   |   |   |   |
| Ordinary shares 74 cents per share (2009 60 cents per share, 2008 72  cents per share) all fully franked at 30%            |       | 2,207            |       | 1,762                  |       | 1,362 |   | 2,212 |   | 1,765 |   |

 

163

----

 

**Note 6. Dividends (continued)**

 

The amount disclosedas recognised for ordinary dividends is the final dividend paid in respect ofthe prior financial year and the interim dividend paid in respect of thecurrent financial year.

 

The Board hasdetermined to satisfy the DRP for the 2010 final dividend by issuing Westpacordinary shares.

 
| ** **                                                                  | ** ** | **Parent Entity** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **2010**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                  | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Franking account balance**                                                | ** ** | ** **             |       |   |   |   |   |
| Franking account balance as at year end                                     |       | 2,595                  |       | 1,265 |   | 923 |   |
| Franking credits that will arise from payment of current income tax         |       | (31                    | )          | 1,412 |   | (214 | ) |
| Adjusted franking account balance after payment of current income tax       |       | 2,564                  |       | 2,677 |   | 709 |   |
| Franking credits to be utilised for payment of unrecognised final  dividend |       | (956                   | )          | (763 | ) | (597 | ) |
| **Adjusted franking account  balance**                                      |       | 1,608                  |       | 1,914 |   | 112 |   |

 

**Note 7. Earnings per share**

 

Basic earnings pershare is calculated by dividing the net profit attributable to equity holdersof Westpac by the weighted averaged number of ordinary shares on issue during theyear, excluding the number of ordinary shares purchased by the Group and heldas Treasury shares. Diluted earnings per share is calculated by adjusting theweighted average number of ordinary shares outstanding to assume conversion ofall dilutive potential ordinary shares.

 
| ** **                                                                                  | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                  | ** ** | **2010**         | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                  | ** ** | **Basic**        | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| **Reconciliation of earnings used  in the calculation of earnings per ordinary share ($m)** | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Net profit                                                                                  |       | 6,412            |       | 6,412 |   | 3,517 |   | 3,517 |   | 3,932 |   | 3,932 |   |
| Net profit attributable to minority interest                                                |       | (66              | )          | (66 | ) | (71 | ) | (71 | ) | (73 | ) | (73 | ) |
| Distribution on RSP treasury shares(1)                                                      |       | (6               | )          | — |   | (5 | ) | — |   | (4 | ) | — |   |
| FIRsTS distributions                                                                        |       | —           |       | — |   | — |   | — |   | — |   | 7 |   |
| 2004 TPS distributions                                                                      |       | —           |       | 20 |   | — |   | 22 |   | — |   | 23 |   |
| 2007 convertible notes                                                                      |       | —           |       | 27 |   | — |   | 30 |   | — |   | 39 |   |
| Westpac SPS                                                                                 |       | —           |       | 33 |   | — |   | 34 |   | — |   | 8 |   |
| Westpac SPS II                                                                              |       | —           |       | 36 |   | — |   | 16 |   |   |   |   |   |
| **Earnings**                                                                                |       | 6,340            |       | 6,462 |   | 3,441 |   | 3,548 |   | 3,855 |   | 3,936 |   |
|                                                                                        |       |             |       |   |   |   |   |   |   |   |   |   |   |
| **Weighted average number of  ordinary shares (millions)**                                  | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Weighted average number of ordinary shares                                                  |       | 2,972            |       | 2,972 |   | 2,758 |   | 2,758 |   | 1,879 |   | 1,879 |   |
| Effect of own shares held                                                                   |       | (12              | )          | (12 | ) | (11 | ) | (11 | ) | (8 | ) | (8 | ) |
| Potential dilutive adjustment:                                                              |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Exercise of options and share rights and vesting of restricted shares                       |       | —           |       | 9 |   | — |   | 7 |   | — |   | 10 |   |
| Conversion of 2004 TPS                                                                      |       | —           |       | 23 |   | — |   | 24 |   | — |   | 28 |   |
| Conversion of FIRsTS                                                                        |       | —           |       | — |   | — |   | — |   | — |   | 7 |   |
| 2007 convertible notes                                                                      |       | —           |       | 44 |   | — |   | 41 |   | — |   | 43 |   |
| Westpac SPS                                                                                 |       | —           |       | 45 |   | — |   | 42 |   | — |   | 8 |   |
| Westpac SPS II                                                                              |       | —           |       | 39 |   | — |   | 18 |   |   |   |   |   |
| **Total weighted average number of  ordinary shares**                                       |       | 2,960            |       | 3,120 |   | 2,747 |   | 2,879 |   | 1,871 |   | 1,967 |   |
| **Earnings per ordinary share  (cents)**                                                    |       | 214.2            |       | 207.1 |   | 125.3 |   | 123.2 |   | 206.0 |   | 200.1 |   |

 

----

| (1) | While the equity granted to employees remains  unvested, Restricted Share Plan (RSP) treasury shares are deducted from  ordinary shares on issue in arriving at the weighted average number of  ordinary shares outstanding. Despite the shares being unvested, employees are  entitled to dividends and to voting rights on the shares. Consequently, a  portion of the profit for the period is allocated to RSP treasury shares to  arrive at earnings attributed to ordinary shareholders. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

164

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 7. Earnings per share (continued)**

 

**Information concerning theclassification of securities**

 

***Options and share rights***

 

During the year3,823,525 (2009  2,324,314, 2008  5,429,056) options and performance sharerights were converted to ordinary shares. The diluted earnings per sharecalculation includes that portion of these options assumed to be issued for nilconsideration, weighted with reference to the date of conversion.

 

The exercise pricesof all options are included in Note 25. In determining diluted earnings pershare, options with an exercise price (including grant date fair value thatwill be expensed in future periods) greater than the average Westpac shareprice over the year have not been included, as these are not considereddilutive. Performance options and performance share rights are only included indetermining diluted earnings per share to the extent that they are dilutive andmarket related performance hurdles are met at year end.

 

Subsequent to 30 September 2010:

 

·         no share rights were granted to employees (2009  nil share rights) under the WestpacPerformance Plan;

 

·         76,000 ordinary shares were issued to employees dueto the exercise of options (2009 279,069); and

 

·         126,106 ordinary shares were issued to employeesdue to the exercise of performance share rights (2009  57,400).

 

Options and sharerights granted to employees prior to 30 September 2010 under the WestpacPerformance Plan, Chief Executive Share Option Agreement, Chief ExecutiveSecurities Agreement, General Management Share Option Plan and Senior Officers’Share Purchase Scheme are considered to be potentially ordinary shares and havebeen included in the determination of diluted earnings per share. The optionsand share rights have not been included in the determination of basic earningsper share. Details relating to options and share rights are set out in Note 25.

 

***Restricted Share Plan***

 

Under the RestrictedShare Plan (RSP), Westpac ordinary shares are allocated to eligible employeesfor nil consideration. Full entitlement to these shares does not vest until aservice period has been completed. RSP shares have not been included indetermining basic earnings per share. For further details, refer to Note 25.

 

***2004 TPS***

 

As 2004 TPS can beexchanged for ordinary shares in certain circumstances, any dilutive impactmust be considered. For the 2010 financial year, 2004 TPS were dilutive (2009dilutive, 2008 dilutive) and have been included in the determination of dilutedearnings per share. 2004 TPS have not been included in the determination ofbasic earnings per share.

 

***2007 convertible notes***

 

The 2007 convertiblenotes are unsecured, unsubordinated, redeemable, convertible notes that wereissued by Westpac in a private placement on 19 April 2007. As they can beexchanged into ordinary shares at the discretion of Westpac upon certainconditions being satisfied, any dilutive impact must be considered. For theyear ended 30 September 2010, the 2007 convertible notes were dilutive(2009 dilutive, 2008 dilutive) and have been included in the determination ofdiluted earnings per share.

 

***Westpac Stapled Preferred Securities (Westpac SPS and Westpac SPS II)***

 

Westpac SPS aresecurities, each consisting of a perpetual, unsecured, non-cumulativesubordinated note issued by Westpac’s New York branch, stapled to apreference share issued by Westpac. Westpac SPS were issued on 30 July 2008and Westpac SPS II were issued on 31 March 2009. As the SPS can beexchanged for ordinary shares in certain circumstances, any dilutive impactmust be considered. For the year ended 30 September 2010, the WestpacSPS and Westpac SPS II were dilutive (2009 SPS dilutive) and have been includedin the determination of diluted earnings per share. During the year of issueWestpac SPS (2008) and Westpac SPS II (2009) have been weighted for theproportion of the year the instrument was on issue.

 

The terms andconditions associated with 2004 TPS, Westpac SPS and Westpac SPS II arediscussed in more detail in Note 23.

 

165

----

 

**Note 8. Receivables due from otherfinancial institutions**

 
| ** **                                                      | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                      | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Conduit assets                                                  |       | 2,382            |       | 2,358                  |       | — |   | — |   |
| Cash collateral                                                 |       | 7,839            |       | 5,082                  |       | 7,707 |   | 4,375 |   |
| Inter-bank lending                                              |       | 2,367            |       | 2,534                  |       | 2,340 |   | 2,493 |   |
| **Total receivables due from other  financial institutions(1)** |       | 12,588           |       | 9,974                  |       | 10,047 |   | 6,868 |   |

 

Amounts due fromother financial institutions based on location and nature are outlined below:

 
| ** **                                       | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                       | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Australia**                                    |       |             |       |                   |       |   |   |   |   |
| Interest earning(1)                              |       | 3,084            |       | 3,165                  |       | 701 |   | 189 |   |
| Non-interest earning                             |       | 525              |       | 32                     |       | 525 |   | — |   |
| **Total Australia**                              |       | 3,609            |       | 3,197                  |       | 1,226 |   | 189 |   |
| **Overseas**                                     |       |             |       |                   |       |   |   |   |   |
| Interest earning                                 |       | 8,904            |       | 6,495                  |       | 8,748 |   | 6,399 |   |
| Non-interest earning                             |       | 75               |       | 282                    |       | 73 |   | 280 |   |
| **Total overseas**                               |       | 8,979            |       | 6,777                  |       | 8,821 |   | 6,679 |   |
| **Total due from other financial  institutions** |       | 12,588           |       | 9,974                  |       | 10,047 |   | 6,868 |   |

 

----

| (1) | In the current year we have revised our  presentation and reclassified other bank issued certificates of deposit from  receivables due from other financial institutions to trading securities (Note  9). To improve presentation we have revised comparatives periods. Refer to  Note 1(a)(ii) for more details. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Note 9. Trading securities andother financial assets designated at fair value**

 
| ** **                                                                        | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                        | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Securities(1)                                                                     |       | 37,749           |       | 40,304                 |       | 46,893 |   | 35,559 |   | 32,594 |   |
| Securities purchased under agreement to resell                                    |       | 2,262            |       | 2,810                  |       | 3,552 |   | 2,262 |   | 2,810 |   |
| **Total trading securities**                                                      |       | 40,011           |       | 43,114                 |       | 50,445 |   | 37,821 |   | 35,404 |   |
| Other financial assets designated at fair value                                   |       | 3,464            |       | 3,063                  |       | 2,547 |   | 1,324 |   | 1,411 |   |
| **Total trading securities and  other financial assets designated at fair value** |       | 43,475           |       | 46,177                 |       | 52,992 |   | 39,145 |   | 36,815 |   |

 

Trading securitiesincludes the following:

 
| ** **                                     | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Australian public securities:                  | ** ** | ** **       |       |                   |       |   | ** ** | ** ** |   |   |   |
| Commonwealth securities                        |       | 928              |       | 653                    |       | 290 |   | 926 |   | 653 |   |
| State Government securities                    |       | 4,387            |       | 5,164                  |       | 5,064 |   | 4,387 |   | 4,167 |   |
| Australian equity securities                   |       | 102              |       | 67                     |       | 203 |   | 102 |   | 55 |   |
| Australian debt securities(1)                  |       | 27,936           |       | 29,828                 |       | 38,200 |   | 26,799 |   | 25,072 |   |
| Overseas public securities                     |       | 1,489            |       | 2,238                  |       | 130 |   | 438 |   | 295 |   |
| Overseas debt securities                       |       | 2,893            |       | 2,343                  |       | 3,006 |   | 2,893 |   | 2,341 |   |
| Other securities                               |       | 14               |       | 11                     |       | — |   | 14 |   | 11 |   |
| **Total securities**                           |       | 37,749           |       | 40,304                 |       | 46,893 |   | 35,559 |   | 32,594 |   |
| Securities purchased under agreement to resell |       | 2,262            |       | 2,810                  |       | 3,552 |   | 2,262 |   | 2,810 |   |
| **Total trading securities**                   |       | 40,011           |       | 43,114                 |       | 50,445 |   | 37,821 |   | 35,404 |   |

 

----

| (1) | In  the current year we have revised our presentation and reclassified other bank  issued certificates of deposit from receivables due from other financial  institutions (Note 8) to trading securities. To improve presentation we have  revised comparative periods. Refer to Note 1(a)(ii) for  more details. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

166

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 9. Trading securities andother financial assets designated at fair value (continued)**

 

Other financialassets designated at fair value include:

 
| ** **                                                 | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                 | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Australian debt securities                                 |       | 3,060            |       | 2,558                  |       | 1,672 |   | 1,031 |   | 988 |   |
| Overseas debt securities                                   |       | 404              |       | 505                    |       | 875 |   | 293 |   | 423 |   |
| **Total other financial assets  designated at fair value** |       | 3,464            |       | 3,063                  |       | 2,547 |   | 1,324 |   | 1,411 |   |

 

The Group has totalholdings of debt securities from three Australian financial institutions andtwo Australian State-Government Institutions, the aggregate book and marketvalue of each of which exceeded 10% of the Group total shareholders’ equity at30 September 2010.

 

The Group holds$330 million of US Government bonds recognised in the categories tradingsecurities, other financial assets designated at fair value oravailable-for-sale securities (Note 10) at 30 September 2010 (2009$266 million, 2008 nil).

 

**Note 10. Available-for-salesecurities**

 
| ** **                                                 | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                 | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Available-for-sale securities —  at fair value**    |       |             |       |                   |       |   |   |   |   |   |   |
| Australian public securities (State Government securities) |       | 9,996            |       | —                 |       | — |   | 9,996 |   | — |   |
| Australian debt securities                                 |       | 523              |       | 725                    |       | 291 |   | 237 |   | 138 |   |
| Overseas public securities                                 |       | 78               |       | 76                     |       | 404 |   | 78 |   | 76 |   |
| Overseas debt securities                                   |       | 684              |       | 129                    |       | 203 |   | 311 |   | 13 |   |
| Australian equity securities                               |       | 147              |       | 84                     |       | 10 |   | 71 |   | 52 |   |
| Overseas equity securities                                 |       | 280              |       | 261                    |       | 201 |   | 210 |   | 168 |   |
|                                                       |       | 11,708           |       | 1,275                  |       | 1,109 |   | 10,903 |   | 447 |   |
| **Available-for-sale securities —  at cost(1)**       |       |             |       |                   |       |   |   |   |   |   |   |
| Unlisted securities                                        |       | 416              |       | 355                    |       | 504 |   | 29 |   | 15 |   |
| **Total available-for-sale  securities**                   |       | 12,124           |       | 1,630                  |       | 1,613 |   | 10,932 |   | 462 |   |

 

----

| (1) | Investments in certain unlisted securities  are measured at cost because the fair value cannot be reliably measured.  These investments represent government securities held, which have been  issued by countries where markets are highly illiquid, or non-controlling  interests in companies for which active markets do not exist and quoted  prices are not available. Unlisted securities carried at cost at 30  September 2008 of $494 million for the Group and $30 million for  the Parent Entity were reclassified from overseas public securities to  unlisted securities at cost to align with the presentation applied at  30 September 2009 and 30 September 2010. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Available-for-salesecurities change in fair value resulted in a gain of $92 million (2009 $33million gain) and a gain of $33 million for the Parent Entity (2009 $5million loss) being recognised in other comprehensive income (refer toStatements of changes in equity).

 

The following tableshows the maturities of the Group’s available-for-sale securities and theirweighted-average yield as at 30 September 2010. There are no tax-exemptsecurities.

 
| ** **                    | ** ** | **2010**            | ** ** |
|-------------------------------|------------|---------------------|------------|
| ** **                    | ** ** | **Within**          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **No Specific** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                    | ** ** | **1 ****Year** | ** ** | **1 to 5 Years** | ** ** | **5 to 10 Years** | ** ** | **10 Years** | ** ** | **Maturity** | ** ** | **Total** | ** ** | **Average** | ** ** |
| ** **                    | ** ** | **$m**              | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** |
| **Carrying amount**           |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australian public  securities |       | —              |       | — |   | 1,489 |   | 5.5 |   | 6,446 |   | 5.7 |   | 2,061 |   | 5.5 |   | — |   | — |   | 9,996 |   | 5.7 |   |
| Australian debt  securities   |       | 48                  |       | 7.8 |   | 219 |   | 12.1 |   | 256 |   | 11.7 |   | — |   | — |   | — |   | — |   | 523 |   | 11.5 |   |
| Overseas public  securities   |       | 78                  |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 78 |   | — |   |
| Overseas debt  securities     |       | 345                 |       | 2.5 |   | 87 |   | 1.1 |   | — |   | — |   | 252 |   | — |   | — |   | — |   | 684 |   | 2.2 |   |
| Australian equity  securities |       | —              |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 147 |   | — |   | 147 |   | — |   |
| Overseas equity  securities   |       | —              |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 280 |   | — |   | 280 |   | — |   |
| Unlisted securities  at cost  |       | 403                 |       | 6.2 |   | 3 |   | — |   | 1 |   | — |   | — |   | — |   | 9 |   | — |   | 416 |   | 6.1 |   |
| **Total by maturity**         |       | 874                 |       |   |   | 1,798 |   |   |   | 6,703 |   |   |   | 2,313 |   |   |   | 436 |   |   |   | 12,124 |   |   |   |

 

The maturity profileis determined based upon contractual terms for available-for-sale instruments.

 

167

----

 

**Note 11. Loans**

 

The following tableshows loans disaggregated by type of product. Loans are classified based on thelocation of the lending office:

 
| ** **                               | ** ** | **Consolidated** | ** ** | **Parent ****Entity** | ** ** |
|------------------------------------------|------------|------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **2010**         | ** ** | **2009**                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                               | ** ** | **$m**           | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Australia**                            | ** ** | ** **       |       |                       | ** ** | ** ** |   |   |   |
| Overdrafts                               |       | 3,550            |       | 3,880                      |       | 3,550 |   | 2,459 |   |
| Credit card outstandings                 |       | 9,596            |       | 9,429                      |       | 9,596 |   | 7,511 |   |
| Overnight and at call money market loans |       | 223              |       | 231                        |       | 223 |   | 231 |   |
| Acceptance of finance                    |       | 43,672           |       | 49,103                     |       | 43,672 |   | 25,212 |   |
| Term loans(1):                           |       |             |       |                       |       |   |   |   |   |
| Housing                                  |       | 251,954          |       | 221,902                    |       | 251,709 |   | 159,975 |   |
| Housing — line of credit            |       | 35,844           |       | 35,699                     |       | 35,844 |   | 12,797 |   |
| Non-housing                              |       | 78,278           |       | 81,552                     |       | 72,124 |   | 67,250 |   |
| Finance leases                           |       | 5,029            |       | 5,468                      |       | 4,027 |   | 4,594 |   |
| Margin lending                           |       | 3,521            |       | 3,900                      |       | 3,521 |   | 2,619 |   |
| Other                                    |       | 2,287            |       | 4,907                      |       | 2,287 |   | 3,205 |   |
| **Total Australia**                      |       | 433,954          |       | 416,071                    |       | 426,553 |   | 285,853 |   |
| **New Zealand**                          | ** ** | ** **       |       |                       | ** ** | ** ** |   |   |   |
| Overdrafts                               |       | 926              |       | 1,122                      |       | 163 |   | 256 |   |
| Credit card outstandings                 |       | 951              |       | 969                        |       | — |   | — |   |
| Overnight and at call money market loans |       | 1,175            |       | 1,356                      |       | 541 |   | 666 |   |
| Term loans:                              |       |             |       |                       |       |   |   |   |   |
| Housing                                  |       | 25,999           |       | 26,536                     |       | — |   | — |   |
| Non-housing                              |       | 14,398           |       | 15,771                     |       | 4,254 |   | 5,126 |   |
| Other                                    |       | 336              |       | 326                        |       | 214 |   | 245 |   |
| **Total New Zealand**                    |       | 43,785           |       | 46,080                     |       | 5,172 |   | 6,293 |   |
| **Total other overseas**                 |       | 4,627            |       | 5,692                      |       | 3,454 |   | 4,173 |   |
| **Total loans**                          |       | 482,366          |       | 467,843                    |       | 435,179 |   | 296,319 |   |
| Provisions on loans (refer to Note 12)   |       | (4,711           | )          | (4,384                     | )          | (4,012 | ) | (2,628 | ) |
| **Total net loans**                      |       | 477,655          |       | 463,459                    |       | 431,167 |   | 293,691 |   |
| **Net loans classification(2)**          |       |             |       |                       |       |   |   |   |   |
| Loans — housing and personal        |       | 333,971          |       | 300,249                    |       | 303,749 |   | 181,091 |   |
| Loans — business                    |       | 143,684          |       | 163,210                    |       | 127,418 |   | 112,600 |   |
| **Total net loans**                      |       | 477,655          |       | 463,459                    |       | 431,167 |   | 293,691 |   |

 

----

| (1) | Securitised loans are included in total net  loans above. Further detail on securitised assets is disclosed in Note 31.                                                                                                                                 |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Loans — housing and personal include products  of a retail nature including mortgages, personal loans, credit cards and  customer overdrafts. 

Loans — business include corporate funding,  working capital, trade and overdraft facilities. |

 

168

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 11. Loans (continued)**

 

The following tableshows loans presented based on their industry classification.

 
| ** **                              | ** ** | **Consolidated** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| ** **                              | ** ** | **2010**         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **$m**           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Australia**                           |       |             |       |   |   |   |   |   |   |
| Accommodation, cafes and restaurants    |       | 7,195            |       | 7,174 |   | 3,862 |   | 3,285 |   |
| Agriculture, forestry and fishing       |       | 7,797            |       | 7,795 |   | 5,625 |   | 4,835 |   |
| Construction                            |       | 5,968            |       | 6,511 |   | 4,201 |   | 3,541 |   |
| Finance and insurance                   |       | 13,643           |       | 19,388 |   | 18,570 |   | 12,333 |   |
| Government, administration and defence  |       | 806              |       | 563 |   | 451 |   | 564 |   |
| Manufacturing                           |       | 10,958           |       | 12,287 |   | 10,223 |   | 8,954 |   |
| Mining                                  |       | 1,337            |       | 1,883 |   | 1,864 |   | 1,124 |   |
| Property                                |       | 39,217           |       | 45,242 |   | 29,194 |   | 22,975 |   |
| Property services and business services |       | 9,181            |       | 8,824 |   | 6,781 |   | 5,158 |   |
| Services(1)                             |       | 9,408            |       | 10,163 |   | 6,853 |   | 6,410 |   |
| Trade(2)                                |       | 16,240           |       | 15,683 |   | 10,768 |   | 8,740 |   |
| Transport and storage                   |       | 7,351            |       | 8,039 |   | 5,485 |   | 4,020 |   |
| Utilities(3)                            |       | 2,421            |       | 2,640 |   | 2,347 |   | 2,070 |   |
| Retail lending                          |       | 301,150          |       | 267,490 |   | 154,985 |   | 139,202 |   |
| Other                                   |       | 1,282            |       | 2,389 |   | 1,663 |   | 5,820 |   |
| **Total Australia**                     |       | 433,954          |       | 416,071 |   | 262,872 |   | 229,031 |   |
| **Overseas**                            |       |             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accommodation, cafes and restaurants    |       | 570              |       | 691 |   | 649 |   | 1,305 |   |
| Agriculture, forestry and fishing       |       | 4,699            |       | 4,903 |   | 4,739 |   | 4,214 |   |
| Construction                            |       | 1,180            |       | 1,242 |   | 1,225 |   | 1,049 |   |
| Finance and insurance                   |       | 1,886            |       | 2,699 |   | 2,904 |   | 3,106 |   |
| Government, administration and defence  |       | 474              |       | 450 |   | 339 |   | 220 |   |
| Manufacturing                           |       | 2,143            |       | 2,607 |   | 3,063 |   | 2,216 |   |
| Mining                                  |       | 363              |       | 291 |   | 301 |   | 266 |   |
| Property                                |       | 7,439            |       | 8,194 |   | 8,225 |   | 8,647 |   |
| Property services and business services |       | 1,717            |       | 1,650 |   | 1,888 |   | 1,741 |   |
| Services(1)                             |       | 2,026            |       | 2,392 |   | 2,751 |   | 2,789 |   |
| Trade(2)                                |       | 3,289            |       | 2,976 |   | 3,499 |   | 3,411 |   |
| Transport and storage                   |       | 1,800            |       | 1,976 |   | 1,683 |   | 1,070 |   |
| Utilities(3)                            |       | 1,104            |       | 1,340 |   | 1,199 |   | 977 |   |
| Retail lending                          |       | 19,574           |       | 19,103 |   | 18,703 |   | 16,101 |   |
| Other                                   |       | 148              |       | 1,258 |   | 1,450 |   | 603 |   |
| **Total overseas**                      |       | 48,412           |       | 51,772 |   | 52,618 |   | 47,715 |   |
| **Total loans**                         |       | 482,366          |       | 467,843 |   | 315,490 |   | 276,746 |   |
| Provisions on loans                     |       | (4,711           | )          | (4,384 | ) | (1,945 | ) | (1,369 | ) |
| **Total net loans**                     |       | 477,655          |       | 463,459 |   | 313,545 |   | 275,377 |   |

 

----

| (1) | Services includes education, health and  community services, cultural and recreational services and personal and other  services. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------|
| (2) | Trade includes wholesale trade and retail  trade.                                                                                 |
| (3) | Utilities includes electricity, gas and water  and communication services.                                                        |

 

169

----

 

**Note 11. Loans (continued)**

 

The following tableshows the consolidated contractual maturity distribution of all loans by typeof customer as at 30 September 2010:

 
| ** **                                  | ** ** | **2010**                    | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **Up to  1 Year** | ** ** | **1 to  5 Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **$m**                      | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Loans by type of customer in  Australia** |       |                        |       |   |   |   |   |   |   |
| Accommodation, cafes and restaurants        |       | 2,415                       |       | 3,618 |   | 1,162 |   | 7,195 |   |
| Agriculture, forestry and fishing           |       | 2,962                       |       | 2,920 |   | 1,915 |   | 7,797 |   |
| Construction                                |       | 1,362                       |       | 3,380 |   | 1,226 |   | 5,968 |   |
| Finance and insurance                       |       | 6,570                       |       | 4,195 |   | 2,878 |   | 13,643 |   |
| Government, administration and defence      |       | 62                          |       | 200 |   | 544 |   | 806 |   |
| Manufacturing                               |       | 4,380                       |       | 5,120 |   | 1,458 |   | 10,958 |   |
| Mining                                      |       | 316                         |       | 885 |   | 136 |   | 1,337 |   |
| Property                                    |       | 17,256                      |       | 16,903 |   | 5,058 |   | 39,217 |   |
| Property services and business services     |       | 2,299                       |       | 4,782 |   | 2,100 |   | 9,181 |   |
| Services                                    |       | 2,754                       |       | 4,718 |   | 1,936 |   | 9,408 |   |
| Trade                                       |       | 7,494                       |       | 5,618 |   | 3,128 |   | 16,240 |   |
| Transport and storage                       |       | 1,838                       |       | 4,620 |   | 893 |   | 7,351 |   |
| Utilities                                   |       | 728                         |       | 1,246 |   | 447 |   | 2,421 |   |
| Retail lending                              |       | 53,799                      |       | 30,987 |   | 216,364 |   | 301,150 |   |
| Other                                       |       | 637                         |       | 337 |   | 308 |   | 1,282 |   |
| **Total Australia**                         |       | 104,872                     |       | 89,529 |   | 239,553 |   | 433,954 |   |
| **Total overseas**                          |       | 12,353                      |       | 7,632 |   | 28,427 |   | 48,412 |   |
| **Total loans**                             |       | 117,225                     |       | 97,161 |   | 267,980 |   | 482,366 |   |

 

The following tableshows the consolidated contractual maturity distribution of all loans by typeof customer as at 30 September 2009:

 
| ** **                                  | ** ** | **2009**                    | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **Up to  1 Year** | ** ** | **1 to  5 Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **$m**                      | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Loans by type of customer in  Australia** |       |                        |       |   |   |   |   |   |   |
| Accommodation, cafes and restaurants        |       | 2,154                       |       | 3,827 |   | 1,193 |   | 7,174 |   |
| Agriculture, forestry and fishing           |       | 2,608                       |       | 2,905 |   | 2,282 |   | 7,795 |   |
| Construction                                |       | 1,980                       |       | 3,308 |   | 1,223 |   | 6,511 |   |
| Finance and insurance                       |       | 10,157                      |       | 6,952 |   | 2,279 |   | 19,388 |   |
| Government, administration and defence      |       | 65                          |       | 132 |   | 366 |   | 563 |   |
| Manufacturing                               |       | 4,363                       |       | 6,291 |   | 1,633 |   | 12,287 |   |
| Mining                                      |       | 314                         |       | 1,409 |   | 160 |   | 1,883 |   |
| Property                                    |       | 20,500                      |       | 20,030 |   | 4,712 |   | 45,242 |   |
| Property services and business services     |       | 2,216                       |       | 4,673 |   | 1,935 |   | 8,824 |   |
| Services                                    |       | 3,264                       |       | 4,752 |   | 2,147 |   | 10,163 |   |
| Trade                                       |       | 6,294                       |       | 5,769 |   | 3,620 |   | 15,683 |   |
| Transport and storage                       |       | 1,834                       |       | 5,337 |   | 868 |   | 8,039 |   |
| Utilities                                   |       | 415                         |       | 1,799 |   | 426 |   | 2,640 |   |
| Retail lending                              |       | 46,688                      |       | 27,229 |   | 193,573 |   | 267,490 |   |
| Other                                       |       | 926                         |       | 1,033 |   | 430 |   | 2,389 |   |
| **Total Australia**                         |       | 103,778                     |       | 95,446 |   | 216,847 |   | 416,071 |   |
| **Total overseas**                          |       | 13,987                      |       | 8,565 |   | 29,220 |   | 51,772 |   |
| **Total loans**                             |       | 117,765                     |       | 104,011 |   | 246,067 |   | 467,843 |   |

 

170

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 11. Loans (continued)**

 
| ** **                                                             | ** ** | **Consolidated**  | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                             | ** ** | **2010**          | ** ** | **2009** | ** ** |
| ** **                                                             | ** ** | **Loans at** | ** ** | **Loans at** | ** ** | ** ** | ** ** | **Loans at** | ** ** | **Loans at** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Variable**      | ** ** | **Fixed** | ** ** | ** ** | ** ** | **Variable** | ** ** | **Fixed** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Interest**      | ** ** | **Interest** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Rates**         | ** ** | **Rates** | ** ** | **Total** | ** ** | **Rates** | ** ** | **Rates** | ** ** | **Total** | ** ** |
| ** **                                                             | ** ** | **$m**            | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Interest rate segmentation of  Group loans maturing after one year** | ** ** | ** **        |       |   |   |   |   |   |   |   |   |   |   |
| By offices in Australia                                                |       | 267,353           |       | 61,729 |   | 329,082 |   | 244,410 |   | 67,883 |   | 312,293 |   |
| By offices overseas                                                    |       | 12,532            |       | 23,527 |   | 36,059 |   | 10,900 |   | 26,885 |   | 37,785 |   |
| **Total loans maturing after one  year**                               |       | 279,885           |       | 85,256 |   | 365,141 |   | 255,310 |   | 94,768 |   | 350,078 |   |

 

Loans include thefollowing finance receivables:

 
| ** **                                                        | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                        | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                        | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Gross investment in finance leases, receivable:                   | ** ** | ** **       |       |                   | ** ** | ** ** |   |   |   |
| Due within one year                                               |       | 617              |       | 779                    |       | 470 |   | 671 |   |
| Due after one year but not later than five years                  |       | 4,700            |       | 4,962                  |       | 3,773 |   | 4,176 |   |
| Due after five years                                              |       | 749              |       | 790                    |       | 472 |   | 572 |   |
| Unearned future finance income on finance leases                  |       | (877             | )          | (935                   | )          | (636 | ) | (768 | ) |
| **Net investment in finance leases**                              |       | 5,189            |       | 5,596                  |       | 4,079 |   | 4,651 |   |
| Accumulated allowance for uncollectible minimum lease payments    |       | (55              | )          | (11                    | )          | (55 | ) | (11 | ) |
| **Net investment in finance leases  after accumulated allowance** |       | 5,134            |       | 5,585                  |       | 4,024 |   | 4,640 |   |
| The net investment in finance leases may be analysed as follows:  |       |             |       |                   |       |   |   |   |   |
| Due within one year                                               |       | 595              |       | 724                    |       | 456 |   | 621 |   |
| Due after one year but not later than five years                  |       | 4,060            |       | 4,273                  |       | 3,280 |   | 3,597 |   |
| Due after five years                                              |       | 534              |       | 599                    |       | 343 |   | 433 |   |
| **Total net investment in finance  leases**                       |       | 5,189            |       | 5,596                  |       | 4,079 |   | 4,651 |   |

 

171

----

 

**Note 12. Provisions for impairmentcharges**

 
| ** **                                                     | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                     | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                     | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Collectively assessed provisions**                           |       |             |       |                   |       |   |   |   |   |   |   |
| Balance as at beginning of the year                            |       | 3,506            |       | 1,761                  |       | 1,410 |   | 2,078 |   | 1,533 |   |
| Additions through merger                                       |       | —           |       | 893                    |       | — |   | 1,041 |   | — |   |
| New provisions raised                                          |       | 363              |       | 1,282                  |       | 606 |   | 164 |   | 805 |   |
| Write-offs                                                     |       | (667             | )          | (632                   | )          | (378 | ) | (512 | ) | (389 | ) |
| Discount unwind                                                |       | 276              |       | 230                    |       | 130 |   | 206 |   | 146 |   |
| Exchange rate adjustments                                      |       | (39              | )          | (28                    | )          | (7 | ) | — |   | (17 | ) |
| **Balance as at end of the year**                              |       | 3,439            |       | 3,506                  |       | 1,761 |   | 2,977 |   | 2,078 |   |
| **Individually assessed provisions**                           |       |             |       |                   |       |   |   |   |   |   |   |
| Balance as at beginning of the year                            |       | 1,228            |       | 413                    |       | 148 |   | 773 |   | 346 |   |
| Additions through merger                                       |       | —           |       | 120                    |       | — |   | 388 |   | — |   |
| New individually assessed provisions                           |       | 1,497            |       | 2,111                  |       | 447 |   | 1,138 |   | 1,322 |   |
| Write-backs                                                    |       | (353             | )          | (106                   | )          | (90 | ) | (312 | ) | (83 | ) |
| Write-offs                                                     |       | (684             | )          | (1,291                 | )          | (93 | ) | (588 | ) | (791 | ) |
| Discount unwind                                                |       | (43              | )          | (11                    | )          | (6 | ) | (36 | ) | (19 | ) |
| Exchange rate adjustments                                      |       | (23              | )          | (8                     | )          | 7 |   | (3 | ) | (2 | ) |
| **Balance as at end of the year**                              |       | 1,622            |       | 1,228                  |       | 413 |   | 1,360 |   | 773 |   |
| Total provisions for impairment charges and credit commitments |       | 5,061            |       | 4,734                  |       | 2,174 |   | 4,337 |   | 2,851 |   |
| Less provisions for credit commitments (refer to Note 20)      |       | (350             | )          | (350                   | )          | (229 | ) | (325 | ) | (223 | ) |
| **Total provisions on loans**                                  |       | 4,711            |       | 4,384                  |       | 1,945 |   | 4,012 |   | 2,628 |   |

 
| ** **                                | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Reconciliation of impairment  charges** |       |             |       |                   |       |   |   |   |   |   |   |
| New individually assessed provisions      |       | 1,497            |       | 2,111                  |       | 447 |   | 1,138 |   | 1,322 |   |
| Write-backs                               |       | (353             | )          | (106                   | )          | (90 | ) | (312 | ) | (83 | ) |
| Recoveries                                |       | (51              | )          | (49                    | )          | (32 | ) | (32 | ) | (26 | ) |
| New collectively assessed provisions      |       | 363              |       | 1,282                  |       | 606 |   | 164 |   | 805 |   |
| **Impairment charges**                    |       | 1,456            |       | 3,238                  |       | 931 |   | 958 |   | 2,018 |   |

 

172

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 12. Provisions for impairmentcharges (continued)**

 

The following tablepresents provision for impairment charges on loans by industry classificationfor the past four years:

 
| ** **                                                          | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                          | ** ** | **2010**         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                          | ** ** | **$m**           | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** |
| **Individually assessed provision  by type of customer**            | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Australia**                                                       | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accommodation, cafes and restaurants                                |       | 44               |       | 0.9 |   | 50 |   | 1.1 |   | 1 |   | — |   | 6 |   | 0.4 |   |
| Agriculture, forestry and fishing                                   |       | 27               |       | 0.5 |   | 43 |   | 0.9 |   | 3 |   | 0.1 |   | 3 |   | 0.2 |   |
| Construction                                                        |       | 32               |       | 0.6 |   | 33 |   | 0.7 |   | 3 |   | 0.1 |   | 1 |   | 0.1 |   |
| Finance and insurance                                               |       | 60               |       | 1.2 |   | 74 |   | 1.6 |   | 50 |   | 2.3 |   | — |   | — |   |
| Manufacturing                                                       |       | 143              |       | 2.8 |   | 93 |   | 2.0 |   | 17 |   | 0.8 |   | 31 |   | 2.0 |   |
| Mining                                                              |       | 31               |       | 0.6 |   | 46 |   | 1.0 |   | — |   | — |   | 2 |   | 0.1 |   |
| Property, property services and business services                   |       | 595              |       | 11.8 |   | 409 |   | 8.6 |   | 51 |   | 2.4 |   | 12 |   | 0.7 |   |
| Services(1)                                                         |       | 51               |       | 1.0 |   | 49 |   | 1.0 |   | 137 |   | 6.3 |   | 3 |   | 0.2 |   |
| Trade(2)                                                            |       | 47               |       | 0.9 |   | 62 |   | 1.3 |   | 55 |   | 2.6 |   | 17 |   | 1.1 |   |
| Transport and storage                                               |       | 80               |       | 1.6 |   | 15 |   | 0.3 |   | 3 |   | 0.1 |   | 1 |   | 0.1 |   |
| Utilities(3)                                                        |       | 27               |       | 0.5 |   | 37 |   | 0.8 |   | — |   | — |   | — |   | — |   |
| Retail lending                                                      |       | 137              |       | 2.7 |   | 148 |   | 3.1 |   | 9 |   | 0.4 |   | 4 |   | 0.3 |   |
| Other                                                               |       | 26               |       | 0.5 |   | 23 |   | 0.5 |   | 2 |   | 0.1 |   | 10 |   | 0.6 |   |
| **Total Australia**                                                 |       | 1,300            |       | 25.6 |   | 1,082 |   | 22.9 |   | 331 |   | 15.2 |   | 90 |   | 5.8 |   |
| **New Zealand**                                                     | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accommodation, cafes and restaurants                                |       | 2                |       | — |   | 2 |   | — |   | 1 |   | — |   | — |   | — |   |
| Agriculture, forestry and fishing                                   |       | 46               |       | 0.9 |   | 17 |   | 0.4 |   | 6 |   | 0.3 |   | — |   | — |   |
| Construction                                                        |       | 2                |       | — |   | 4 |   | 0.1 |   | 1 |   | — |   | — |   | — |   |
| Finance and insurance                                               |       | 1                |       | — |   | 1 |   | — |   | — |   | — |   | — |   | — |   |
| Manufacturing                                                       |       | 10               |       | 0.2 |   | 14 |   | 0.3 |   | 1 |   | — |   | 2 |   | 0.1 |   |
| Property, property services and business services                   |       | 143              |       | 2.9 |   | 43 |   | 0.9 |   | 22 |   | 1.0 |   | 5 |   | 0.3 |   |
| Services(1)                                                         |       | 5                |       | 0.1 |   | 4 |   | 0.1 |   | 1 |   | — |   | 6 |   | 0.4 |   |
| Trade(2)                                                            |       | 13               |       | 0.3 |   | 6 |   | 0.1 |   | 4 |   | 0.2 |   | 9 |   | 0.6 |   |
| Transport and storage                                               |       | —           |       | — |   | 2 |   | — |   | — |   | — |   | — |   | — |   |
| Utilities(3)                                                        |       | 12               |       | 0.2 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Retail lending                                                      |       | 36               |       | 0.8 |   | 31 |   | 0.7 |   | 20 |   | 0.9 |   | — |   | — |   |
| Other                                                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| **Total New Zealand**                                               |       | 270              |       | 5.4 |   | 124 |   | 2.6 |   | 56 |   | 2.4 |   | 22 |   | 1.4 |   |
| **Other overseas**                                                  | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accommodation, cafes and restaurants                                |       | 1                |       | — |   | 4 |   | 0.1 |   | 1 |   | — |   | — |   | — |   |
| Agriculture, forestry and fishing                                   |       | 1                |       | — |   | 3 |   | 0.1 |   | 1 |   | — |   | — |   | — |   |
| Construction                                                        |       | —           |       | — |   | 8 |   | 0.2 |   | — |   | — |   | — |   | — |   |
| Manufacturing                                                       |       | —           |       | — |   | — |   | — |   | 5 |   | 0.2 |   | 5 |   | 0.3 |   |
| Mining                                                              |       | —           |       | — |   | — |   | — |   | 1 |   | — |   | — |   | — |   |
| Property, property services and business services                   |       | 6                |       | 0.1 |   | — |   | — |   | 11 |   | 0.5 |   | 3 |   | 0.2 |   |
| Services(1)                                                         |       | 16               |       | 0.3 |   | 1 |   | — |   | — |   | — |   | — |   | — |   |
| Trade(2)                                                            |       | —           |       | — |   | 4 |   | 0.1 |   | 2 |   | 0.1 |   | — |   | — |   |
| Transport and storage                                               |       | 19               |       | 0.4 |   | 2 |   | — |   | 2 |   | 0.1 |   | — |   | — |   |
| Utilities(3)                                                        |       | —           |       | — |   | — |   | — |   | — |   | — |   | 28 |   | 1.8 |   |
| Retail lending                                                      |       | 9                |       | 0.2 |   | — |   | — |   | 1 |   | — |   | — |   | — |   |
| Other                                                               |       | —           |       | — |   | — |   | — |   | 2 |   | 0.1 |   | — |   | — |   |
| **Total other overseas**                                            |       | 52               |       | 1.0 |   | 22 |   | 0.5 |   | 26 |   | 1.0 |   | 36 |   | 2.3 |   |
| **Total overseas**                                                  |       | 322              |       | 6.4 |   | 146 |   | 3.1 |   | 82 |   | 3.4 |   | 58 |   | 3.7 |   |
| **Total individually assessed  provisions**                         |       | 1,622            |       | 32.0 |   | 1,228 |   | 26.0 |   | 413 |   | 18.6 |   | 148 |   | 9.5 |   |
| **Total collectively assessed  provisions**                         |       | 3,439            |       | 68.0 |   | 3,506 |   | 74.0 |   | 1,761 |   | 81.4 |   | 1,410 |   | 90.5 |   |
| **Total provisions for impairment  charges and credit commitments** |       | 5,061            |       | 100 |   | 4,734 |   | 100 |   | 2,174 |   | 100 |   | 1,558 |   | 100 |   |

 

----

| (1) | Services includes education, health and  community services, cultural and recreational services and personal and other  services. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------|
| (2) | Trade includes wholesale trade and retail  trade.                                                                                 |
| (3) | Utilities includes electricity, gas and water  and communication services.                                                        |

 

173

----

 

**Note 12. Provisions for impairmentcharges (continued)**

 

The following tableshows details of write-off of loans by industry classifications for the pastfour years:

 
| ** **                                        | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|------------------|------------|
| ** **                                        | ** ** | **2010**         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                        | ** ** | **$m**           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Write-offs**                                    |       |             |       |   |   |   |   |   |   |
| **Australia**                                     |       |             |       |   |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | (47              | )          | (5 | ) | (3 | ) | (2 | ) |
| Agriculture, forestry and fishing                 |       | (9               | )          | (6 | ) | (7 | ) | (5 | ) |
| Construction                                      |       | (68              | )          | (37 | ) | (5 | ) | (2 | ) |
| Finance and insurance                             |       | (30              | )          | (327 | ) | — |   | (2 | ) |
| Manufacturing                                     |       | (45              | )          | (37 | ) | (30 | ) | (6 | ) |
| Mining                                            |       | (14              | )          | (13 | ) | — |   | — |   |
| Property, property services and business services |       | (272             | )          | (156 | ) | (26 | ) | (12 | ) |
| Services(1)                                       |       | (32              | )          | (107 | ) | (6 | ) | (3 | ) |
| Trade(2)                                          |       | (51              | )          | (115 | ) | (10 | ) | (36 | ) |
| Transport and storage                             |       | (25              | )          | (13 | ) | (7 | ) | (5 | ) |
| Utilities(3)                                      |       | (4               | )          | (101 | ) | — |   | — |   |
| Retail lending                                    |       | (566             | )          | (611 | ) | (291 | ) | (266 | ) |
| Other                                             |       | (39              | )          | (22 | ) | (9 | ) | (16 | ) |
| **Total Australia**                               |       | (1,202           | )          | (1,550 | ) | (394 | ) | (355 | ) |
| **New Zealand**                                   |       |             |       |   |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | (2               | )          | (1 | ) | — |   | — |   |
| Agriculture, forestry and fishing                 |       | (4               | )          | — |   | — |   | — |   |
| Construction                                      |       | (4               | )          | (27 | ) | — |   | — |   |
| Finance and insurance                             |       | (1               | )          | (3 | ) | — |   | — |   |
| Manufacturing                                     |       | (15              | )          | (70 | ) | (1 | ) | (2 | ) |
| Property, property services and business services |       | (29              | )          | (146 | ) | (4 | ) | (1 | ) |
| Services(1)                                       |       | (4               | )          | (3 | ) | (1 | ) | (1 | ) |
| Trade(2)                                          |       | (3               | )          | (10 | ) | (16 | ) | — |   |
| Transport and storage                             |       | (2               | )          | — |   | — |   | — |   |
| Retail lending                                    |       | (79              | )          | (88 | ) | (53 | ) | (2 | ) |
| Other                                             |       | (3               | )          | (2 | ) | — |   | — |   |
| **Total New Zealand**                             |       | (146             | )          | (350 | ) | (75 | ) | (6 | ) |
| **Other overseas**                                |       |             |       |   |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | —           |       | (3 | ) | — |   | — |   |
| Agriculture, forestry and fishing                 |       | —           |       | (2 | ) | — |   | — |   |
| Construction                                      |       | —           |       | (5 | ) | — |   | — |   |
| Manufacturing                                     |       | —           |       | — |   | — |   | (2 | ) |
| Property, property services and business services |       | (3               | )          | (3 | ) | — |   | — |   |
| Services(1)                                       |       | —           |       | (6 | ) | — |   | — |   |
| Trade(2)                                          |       | —           |       | (3 | ) | — |   | — |   |
| Transport and storage                             |       | —           |       | (1 | ) | — |   | — |   |
| Utilities(3)                                      |       | —           |       | — |   | — |   | (8 | ) |
| Retail lending                                    |       | —           |       | — |   | (1 | ) |   |   |
| Other                                             |       | —           |       | — |   | (1 | ) | — |   |
| **Total other overseas**                          |       | (3               | )          | (23 | ) | (2 | ) | (10 | ) |
| **Total write-offs**                              |       | (1,351           | )          | (1,923 | ) | (471 | ) | (371 | ) |
| Write-offs in relation to:                        |       |             |       |   |   |   |   |   |   |
| Collectively assessed provision                   |       | (667             | )          | (632 | ) | (378 | ) | (302 | ) |
| Individually assessed provision                   |       | (684             | )          | (1,291 | ) | (93 | ) | (69 | ) |
| **Total write-offs**                              |       | (1,351           | )          | (1,923 | ) | (471 | ) | (371 | ) |

 

----

| (1) | Services includes education, health and  community services, cultural and recreational services and personal and other  services. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------|
| (2) | Trade includes wholesale trade and retail  trade.                                                                                 |
| (3) | Utilities includes electricity, gas and water  and communication services.                                                        |

 

174

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 12. Provisions for impairmentcharges (continued)**

 

The following tableshows details of recoveries of loans by industry classifications for the pastfour years:

 
| ** **                                        | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|------------------|------------|
| ** **                                        | ** ** | **2010**         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                        | ** ** | **$m**           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Recoveries**                                    |       |             |       |   |   |   |   |   |   |
| **Australia**                                     |       |             |       |   |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | 1                |       | — |   | — |   | — |   |
| Construction                                      |       | 2                |       | — |   | — |   | 1 |   |
| Manufacturing                                     |       | 2                |       | — |   | 1 |   | 2 |   |
| Property, property services and business services |       | 3                |       | — |   | — |   | — |   |
| Services                                          |       | 1                |       | — |   | — |   | — |   |
| Trade(1)                                          |       | 1                |       | — |   | — |   | 1 |   |
| Transport and storage                             |       | 1                |       | — |   | — |   | — |   |
| Utilities(2)                                      |       | —           |       | 2 |   | — |   | — |   |
| Retail lending                                    |       | 31               |       | 37 |   | 22 |   | 16 |   |
| Other                                             |       | 2                |       | 2 |   | — |   | 2 |   |
| **Total Australia**                               |       | 44               |       | 41 |   | 23 |   | 22 |   |
| **Total New Zealand**                             |       | 4                |       | — |   | — |   | — |   |
| **Total other overseas**                          |       | 3                |       | 8 |   | 9 |   | — |   |
| **Total recoveries**                              |       | 51               |       | 49 |   | 32 |   | 22 |   |
| **Total write-offs**                              |       | (1,351           | )          | (1,923 | ) | (471 | ) | (371 | ) |
| **Net write-offs and recoveries**                 |       | (1,300           | )          | (1,874 | ) | (439 | ) | (349 | ) |

 

----

| (1) | Trade includes wholesale trade and retail  trade.                          |
|-----|----------------------------------------------------------------------------|
| (2) | Utilities includes electricity, gas and water  and communication services. |

 

175

----

 

**Note 13. Goodwill and otherintangible assets**

 
| ** **                                      | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Goodwill**                                    |       |             |       |                   |       |   |   |   |   |
| Balance as at beginning of the year             |       | 8,597            |       | 2,425                  |       | 804 |   | 784 |   |
| Additions through merger                        |       | —           |       | 6,162                  |       | 5,849 |   | — |   |
| Other additions                                 |       | —           |       | 9                      |       | — |   | 20 |   |
| Impairment                                      |       | —           |       | (2                     | )          | — |   | — |   |
| Exchange rate and other adjustments             |       | (28              | )          | 3                      |       | — |   | — |   |
| Balance as at end of the year                   |       | 8,569            |       | 8,597                  |       | 6,653 |   | 804 |   |
| **Computer software**                           |       |             |       |                   |       |   |   |   |   |
| Balance as at beginning of the year             |       | 629              |       | 464                    |       | 409 |   | 328 |   |
| Additions through merger                        |       | —           |       | 83                     |       | 88 |   | — |   |
| Other additions                                 |       | 508              |       | 295                    |       | 438 |   | 204 |   |
| Impairment                                      |       | (37              | )          | (15                    | )          | (37 | ) | (7 | ) |
| Amortisation                                    |       | (263             | )          | (191                   | )          | (190 | ) | (111 | ) |
| Exchange rate adjustments                       |       | (5               | )          | (2                     | )          | — |   | — |   |
| Other(1)                                        |       | —           |       | (5                     | )          | — |   | (5 | ) |
| Balance as at end of the year                   |       | 832              |       | 629                    |       | 708 |   | 409 |   |
| Cost                                            |       | 2,022            |       | 1,697                  |       | 1,326 |   | 857 |   |
| Accumulated amortisation                        |       | (1,190           | )          | (1,068                 | )          | (618 | ) | (448 | ) |
| **Carrying amount**                             |       | 832              |       | 629                    |       | 708 |   | 409 |   |
| **Brand Names**                                 |       |             |       |                   |       |   |   |   |   |
| Balance as at beginning of the year             |       | 668              |       | 32                     |       | — |   | — |   |
| Additions through merger                        |       | —           |       | 636                    |       | 636 |   | — |   |
| Balance as at end of the year                   |       | 668              |       | 668                    |       | 636 |   | — |   |
| **Carrying amount**                             |       | 668              |       | 668                    |       | 636 |   | — |   |
| **Core deposit intangibles**                    |       |             |       |                   |       |   |   |   |   |
| Balance as at beginning of the year             |       | 1,349            |       | —                 |       | — |   | — |   |
| Additions through merger                        |       | —           |       | 1,494                  |       | 1,279 |   | — |   |
| Amortisation                                    |       | (167             | )          | (145                   | )          | (97 | ) | — |   |
| Balance as at end of the year                   |       | 1,182            |       | 1,349                  |       | 1,182 |   | — |   |
| Cost                                            |       | 1,494            |       | 1,494                  |       | 1,279 |   | — |   |
| Accumulated amortisation                        |       | (312             | )          | (145                   | )          | (97 | ) | — |   |
| **Carrying amount**                             |       | 1,182            |       | 1,349                  |       | 1,182 |   | — |   |
| **Other intangible assets**                     |       |             |       |                   |       |   |   |   |   |
| Balance as at beginning of the year             |       | 298              |       | 68                     |       | — |   | 5 |   |
| Additions through merger                        |       | —           |       | 280                    |       | 226 |   | — |   |
| Amortisation                                    |       | (45              | )          | (50                    | )          | (24 | ) | (5 | ) |
| Balance as at end of the year                   |       | 253              |       | 298                    |       | 202 |   | — |   |
| Cost                                            |       | 428              |       | 428                    |       | 263 |   | 37 |   |
| Accumulated amortisation                        |       | (175             | )          | (130                   | )          | (61 | ) | (37 | ) |
| **Carrying amount**                             |       | 253              |       | 298                    |       | 202 |   | — |   |
| **Total goodwill and other  intangible assets** |       | 11,504           |       | 11,541                 |       | 9,381 |   | 1,213 |   |

 

----

| (1) | During the 2009 financial year capitalised  computer software costs that were integral to associated hardware were  reclassified to property, plant and equipment as it better reflected the  nature of the item. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

176

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 13. Goodwill and otherintangible assets (continued)**

 

Goodwill has beenallocated to the following CGUs:

 
| ** **                                 | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|--------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Westpac Retail & Business Banking |       | 1,112            |       | 1,112                  |       | 999 |   | 611 |   |
| St.George Bank                             |       | 4,332            |       | 4,332                  |       | 4,332 |   | — |   |
| Westpac Institutional Bank                 |       | 613              |       | 613                    |       | 487 |   | — |   |
| BT Financial Group Australia               |       | 2,033            |       | 2,033                  |       | 835 |   | 193 |   |
| New Zealand Retail Banking                 |       | 393              |       | 421                    |       | — |   | — |   |
| BT New Zealand                             |       | 10               |       | 10                     |       | — |   | — |   |
| Hastings                                   |       | 63               |       | 63                     |       | — |   | — |   |
| Bank of Tonga                              |       | 13               |       | 13                     |       | — |   | — |   |
| **Total goodwill**                         |       | 8,569            |       | 8,597                  |       | 6,653 |   | 804 |   |

 

The increase in theparent entity goodwill balance of $5,849 million is attributable to Westpac andSt.George Bank Limited becoming a single ADI from 1 March 2010. Thegoodwill was allocated to the CGUs listed above based on management’s analysisof where synergies of the merger were expected to arise. Refer to Note 43 forfurther details.

 

The recoverableamount of each CGU is determined based on the future cash flow projectiondiscounted by the Group’s after tax return on equity rate of 11.0% (2009 11.0%)adjusted to a pre-tax rate. All future cash flows are based on approved three(2009 two) year strategic plans. While the strategic business plan assumescertain economic conditions, the forecast is not reliant on one particularassumption. These business forecasts applied by management are consideredappropriate as they are based on past experience and are consistent withobservable current market information. The growth rates after 2013 are assumedto be zero for all CGUs for the purpose of goodwill impairment testing.

 

**Note 14. Property, plant andequipment**

 
| ** **                               | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                               | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                               | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Premises and sites**                   | ** ** | ** **       |       |                   | ** ** | ** ** |   |   |   |
| Cost                                     |       | 312              |       | 392                    |       | 199 |   | 98 |   |
| Accumulated depreciation                 |       | (102             | )          | (85                    | )          | (15 | ) | (4 | ) |
| Net carrying amount                      |       | 210              |       | 307                    |       | 184 |   | 94 |   |
| **Leasehold improvements**               |       |             |       |                   |       |   |   |   |   |
| Cost                                     |       | 811              |       | 524                    |       | 646 |   | 375 |   |
| Accumulated amortisation                 |       | (357             | )          | (311                   | )          | (269 | ) | (225 | ) |
| Net carrying amount                      |       | 454              |       | 213                    |       | 377 |   | 150 |   |
| **Furniture and equipment**              |       |             |       |                   |       |   |   |   |   |
| Cost                                     |       | 752              |       | 750                    |       | 549 |   | 486 |   |
| Accumulated depreciation                 |       | (571             | )          | (542                   | )          | (387 | ) | (349 | ) |
| Net carrying amount                      |       | 181              |       | 208                    |       | 162 |   | 137 |   |
| **Technology**                           |       |             |       |                   |       |   |   |   |   |
| Cost                                     |       | 707              |       | 666                    |       | 342 |   | 400 |   |
| Accumulated depreciation                 |       | (542             | )          | (506                   | )          | (213 | ) | (317 | ) |
| Net carrying amount                      |       | 165              |       | 160                    |       | 129 |   | 83 |   |
| **Total property, plant and  equipment** |       | 1,010            |       | 888                    |       | 852 |   | 464 |   |

 

177

----

 

**Note 14. Property, plant andequipment (continued)**

 

Reconciliations ofthe carrying amount for each class of property, plant and equipment are set outbelow:

 
| ** **                          | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                          | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                          | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Premises and sites**              | ** ** | ** **       |       |                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance as at beginning of the year |       | 307              |       | 89                     |       | 94 |   | 67 |   |
| Additions through merger            |       | —           |       | 208                    |       | 175 |   | — |   |
| Other additions                     |       | 9                |       | 36                     |       | 9 |   | 30 |   |
| Disposals                           |       | (15              | )          | (2                     | )          | (3 | ) | — |   |
| Depreciation                        |       | (17              | )          | (18                    | )          | (17 | ) | (1 | ) |
| Exchange rate adjustments           |       | (1               | )          | (2                     | )          | (1 | ) | (1 | ) |
| Other(1)                            |       | (73              | )          | (4                     | )          | (73 | ) | (1 | ) |
| **Balance as at end of the year**   |       | 210              |       | 307                    |       | 184 |   | 94 |   |
| **Leasehold improvements**          |       |             |       |                   |       |   |   |   |   |
| Balance as at beginning of the year |       | 213              |       | 169                    |       | 150 |   | 129 |   |
| Additions through merger            |       | —           |       | 5                      |       | 6 |   | — |   |
| Other additions                     |       | 235              |       | 93                     |       | 201 |   | 63 |   |
| Disposals                           |       | (3               | )          | —                 |       | (3 | ) | — |   |
| Amortisation                        |       | (62              | )          | (52                    | )          | (50 | ) | (42 | ) |
| Exchange rate adjustments           |       | (2               | )          | (1                     | )          | — |   | — |   |
| Other(1)                            |       | 73               |       | (1                     | )          | 73 |   | — |   |
| **Balance as at end of the year**   |       | 454              |       | 213                    |       | 377 |   | 150 |   |
| **Furniture and equipment**         |       |             |       |                   |       |   |   |   |   |
| Balance as at beginning of the year |       | 208              |       | 151                    |       | 137 |   | 133 |   |
| Additions through merger            |       | —           |       | 71                     |       | 37 |   | — |   |
| Other additions                     |       | 43               |       | 67                     |       | 39 |   | 44 |   |
| Disposals                           |       | (1               | )          | (11                    | )          | (1 | ) | (1 | ) |
| Depreciation                        |       | (61              | )          | (62                    | )          | (50 | ) | (36 | ) |
| Exchange rate adjustments           |       | (1               | )          | (1                     | )          | — |   | — |   |
| Other(1)                            |       | (7               | )          | (7                     | )          | — |   | (3 | ) |
| **Balance as at end of the year**   |       | 181              |       | 208                    |       | 162 |   | 137 |   |
| **Technology**                      |       |             |       |                   |       |   |   |   |   |
| Balance as at beginning of the year |       | 160              |       | 96                     |       | 83 |   | 67 |   |
| Additions through merger            |       | —           |       | 37                     |       | 42 |   | — |   |
| Other additions                     |       | 79               |       | 89                     |       | 59 |   | 49 |   |
| Disposals                           |       | (14              | )          | (14                    | )          | (12 | ) | (8 | ) |
| Depreciation                        |       | (66              | )          | (63                    | )          | (43 | ) | (33 | ) |
| Exchange rate adjustments           |       | (1               | )          | (2                     | )          | — |   | (1 | ) |
| Other(1),(2)                        |       | 7                |       | 17                     |       | — |   | 9 |   |
| **Balance as at end of the year**   |       | 165              |       | 160                    |       | 129 |   | 83 |   |

 

----

(1)          During the current financial year, assets werereclassified from premises and sites to leasehold improvements and furnitureand equipment to technology (2009 from premises and sites, leaseholdimprovements and furniture and equipment to technology).

 

(2)          During the 2009 financial year, capitalised computersoftware costs that were integral to associated hardware were reclassified toproperty, plant and equipment as it better reflected the nature of the item.

 

***Premises and sites under construction***

 

There are nosignificant items of premises and sites currently under construction.

 

178

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 15. Deferred tax assets anddeferred tax liabilities**

 

***Deferred tax assets***

 
| ** **                                                            | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                            | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                            | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **The balance comprises temporary  differences attributable to:**     | ** ** | ** **       |       |                   | ** ** | ** ** |   |   |   |
| **Amounts recognised in profit or  loss**                             | ** ** | ** **       |       |                   | ** ** | ** ** |   |   |   |
| Provision for impairment charges on loans                             |       | 1,412            |       | 1,344                  |       | 1,187 |   | 783 |   |
| Provision for employee benefits                                       |       | 296              |       | 314                    |       | 250 |   | 213 |   |
| Treasury/financial market products                                    |       | 951              |       | 532                    |       | 871 |   | 594 |   |
| Property, plant and equipment                                         |       | 136              |       | 105                    |       | 129 |   | 90 |   |
| Loans — carrying amount adjustments                              |       | 78               |       | 106                    |       | 78 |   | 68 |   |
| Provision for litigation and non-lending losses                       |       | 59               |       | 58                     |       | 57 |   | 51 |   |
| Provision for credit commitments                                      |       | 96               |       | 64                     |       | 96 |   | 62 |   |
| Provision for restructuring                                           |       | 16               |       | 21                     |       | 16 |   | 15 |   |
| Provision for lease liabilities                                       |       | 25               |       | 17                     |       | 17 |   | 14 |   |
| Other provisions                                                      |       | 50               |       | 47                     |       | 48 |   | 33 |   |
| Other liabilities                                                     |       | 490              |       | 431                    |       | 453 |   | 344 |   |
| Life insurance policy liabilities                                     |       | 93               |       | 80                     |       | — |   | — |   |
| Tax losses recognised                                                 |       | 2                |       | 6                      |       | — |   | — |   |
| Change in tax rate (refer to Note 5)                                  |       | (5               | )          | —                 |       | (1 | ) | — |   |
|                                                                  |       | 3,699            |       | 3,125                  |       | 3,201 |   | 2,267 |   |
| **Amounts recognised directly in  other comprehensive income**        |       |             |       |                   |       |   |   |   |   |
| Available-for-sale securities                                         |       | (59              | )          | (38                    | )          | (34 | ) | (24 | ) |
| Retirement benefit deficit                                            |       | 137              |       | 94                     |       | 132 |   | 94 |   |
| Other equity items                                                    |       | —           |       | —                 |       | 3 |   | 5 |   |
| Minority interest                                                     |       | 3                |       | 5                      |       | — |   | — |   |
|                                                                  |       | 81               |       | 61                     |       | 101 |   | 75 |   |
| Set-off of deferred tax liabilities pursuant to set-off provisions(1) |       | (1,490           | )          | (1,201                 | )          | (1,364 | ) | (642 | ) |
| Net deferred tax assets                                               |       | 2,290            |       | 1,985                  |       | 1,938 |   | 1,700 |   |
| Net deferred tax assets to be recovered within 12 months              |       | 712              |       | 506                    |       | 631 |   | 687 |   |
| Net deferred tax assets to be recovered after more than 12 months     |       | 1,578            |       | 1,479                  |       | 1,307 |   | 1,013 |   |
| **Movement**                                                          |       |             |       |                   |       |   |   |   |   |
| Opening balance as at beginning of the year                           |       | 1,985            |       | 756                    |       | 1,700 |   | 432 |   |
| Additions through merger                                              |       | —           |       | 362                    |       | 445 |   | — |   |
| Credited to the income statement                                      |       | 1,775            |       | 2,105                  |       | 1,131 |   | 1,928 |   |
| Recognised in other comprehensive income                              |       | 20               |       | (37                    | )          | 26 |   | (18 | ) |
| Set-off of deferred tax liabilities pursuant to set-off provisions(1) |       | (1,490           | )          | (1,201                 | )          | (1,364 | ) | (642 | ) |
| Closing balance as at end of the year                                 |       | 2,290            |       | 1,985                  |       | 1,938 |   | 1,700 |   |

 

----

(1)          Deferred tax assets and liabilities are set-off wherethey relate to income tax levied by the same taxation authority on either thesame taxable entity or different taxable entities within the same taxablegroup.

 

179

----

 

**Note 15. Deferred tax assets anddeferred tax liabilities (continued)**

 

***Unrecognised deferred tax assets***

 

Deferred tax assetshave not been recognised in respect of the following items:

 
| ** **                                    | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-----------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                    | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Deductible temporary differences — other |       | 10               |       | 20                     |       | — |   | 10 |   |
| Tax losses on revenue account                 |       | 87               |       | 77                     |       | 75 |   | 76 |   |

 

The deferred taxassets related to losses will only be recognised if:

 

·         the Group or relevant entity derives futureassessable income of a nature or amount sufficient to enable the benefits fromthe deductions for the losses to be utilised;

·         the Group or relevant entity continues to complywith the conditions of deductibility imposed by tax legislation;

·         no changes in tax legislation adversely affect theGroup or relevant entity in realising the benefits from the deductions for thelosses; and

·         the deductible temporary differences and tax losseshave not expired under current tax legislation.

 

Deferred tax assetshave not been recognised in respect of these items because it is not consideredprobable that future taxable profit will be available against which they can berealised.

 

***Deferred tax liabilities***

 
| ** **                                                             | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                             | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                             | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **The balance comprises temporary  differences attributable to:**      |       |             |       |                   |       |   |   |   |   |
| **Amounts recognised in profit or  loss**                              |       |             |       |                   |       |   |   |   |   |
| Treasury/financial market products                                     |       | 885              |       | 514                    |       | 881 |   | 575 |   |
| Finance lease transactions                                             |       | 105              |       | 70                     |       | 49 |   | 31 |   |
| Property, plant and equipment                                          |       | 18               |       | 8                      |       | 15 |   | 7 |   |
| Intangible assets                                                      |       | —           |       | 16                     |       | — |   | — |   |
| Life insurance assets                                                  |       | 15               |       | 16                     |       | — |   | — |   |
| Loans — carrying amount adjustments                               |       | 120              |       | 126                    |       | 120 |   | 126 |   |
| Other assets                                                           |       | 570              |       | 648                    |       | 463 |   | 29 |   |
|                                                                   |       | 1,713            |       | 1,398                  |       | 1,528 |   | 768 |   |
| **Amounts recognised directly in  other comprehensive income**         |       |             |       |                   |       |   |   |   |   |
| Cash flow hedges                                                       |       | (199             | )          | (162                   | )          | (163 | ) | (100 | ) |
|                                                                   |       | (199             | )          | (162                   | )          | (163 | ) | (100 | ) |
| Set-off of deferred tax liabilities pursuant to set-off provisions(1)  |       | (1,490           | )          | (1,201                 | )          | (1,364 | ) | (642 | ) |
| Net deferred tax liabilities                                           |       | 24               |       | 35                     |       | 1 |   | 26 |   |
| Net deferred tax liabilities to be recovered within 12 months          |       | 11               |       | 11                     |       | — |   | 14 |   |
| Net deferred tax liabilities to be recovered after more than 12 months |       | 13               |       | 24                     |       | 1 |   | 12 |   |
| **Movements**                                                          |       |             |       |                   |       |   |   |   |   |
| Opening balance as at beginning of the year                            |       | 35               |       | —                 |       | 26 |   | — |   |
| Additions through merger                                               |       | —           |       | 486                    |       | 527 |   | — |   |
| Charged to the income statement                                        |       | 1,516            |       | 886                    |       | 875 |   | 773 |   |
| Recognised in other comprehensive income                               |       | (37              | )          | (136                   | )          | (63 | ) | (105 | ) |
| Set-off of deferred tax liabilities pursuant to set-off provisions(1)  |       | (1,490           | )          | (1,201                 | )          | (1,364 | ) | (642 | ) |
| Closing balance as at end of the year                                  |       | 24               |       | 35                     |       | 1 |   | 26 |   |

 

----

(1)          Deferred tax assets and liabilities are set-off wherethey relate to income tax levied by the same taxation authority on either thesame taxable entity or different taxable entities within the same taxablegroup.

 

Deferred taxliabilities relating to aggregate temporary differences of $23 million (2009$21 million) associated with investments in subsidiaries have not beenrecognised because the Parent Entity controls whether the liability will beincurred and it is satisfied that the liability will not be incurred in theforeseeable future.

 

180

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 16. Other assets**

 
| ** **                       | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|----------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                       | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Accrued interest receivable      |       | 1,218            |       | 861                    |       | 1,049 |   | 715 |   |
| Assets held for sale/inventories |       | 18               |       | 289                    |       | — |   | — |   |
| Securities sold not delivered    |       | 725              |       | 1,117                  |       | 725 |   | 1,027 |   |
| Deferred expenditure             |       | 12               |       | 13                     |       | 3 |   | (3 | ) |
| Deferred acquisition costs       |       | 177              |       | 126                    |       | 32 |   | 26 |   |
| Trade debtors                    |       | 377              |       | 465                    |       | 104 |   | 51 |   |
| Prepayments                      |       | 88               |       | 76                     |       | 70 |   | 34 |   |
| Accrued fees and commissions     |       | 193              |       | 137                    |       | 112 |   | 91 |   |
| Other                            |       | 625              |       | 1,240                  |       | 550 |   | 472 |   |
| **Total other assets**           |       | 3,433            |       | 4,324                  |       | 2,645 |   | 2,413 |   |

 

**Note 17. Payables due to otherfinancial institutions**

 

Amounts due to otherfinancial institutions based on location and nature are outlined below:

 
| ** **                                              | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|---------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Australia**                                           | ** ** | ** **       |       |                   | ** ** | ** ** |   |   |   |
| Interest bearing                                        |       | 3,517            |       | 3,376                  |       | 3,517 |   | 3,192 |   |
| Non-interest bearing                                    |       | 1,005            |       | 1,193                  |       | 1,000 |   | 510 |   |
| **Total Australia**                                     |       | 4,522            |       | 4,569                  |       | 4,517 |   | 3,702 |   |
| **Overseas**                                            |       |             |       |                   |       |   |   |   |   |
| Interest bearing                                        |       | 4,294            |       | 4,458                  |       | 4,289 |   | 4,458 |   |
| Non-interest bearing                                    |       | 82               |       | 208                    |       | 81 |   | 208 |   |
| **Total overseas**                                      |       | 4,376            |       | 4,666                  |       | 4,370 |   | 4,666 |   |
| **Total payables due to other  financial institutions** |       | 8,898            |       | 9,235                  |       | 8,887 |   | 8,368 |   |

 

181

----

 

**Note 18. Deposits**

 
| ** **                              | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-----------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                              | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Australia**                           |       |             |       |                   |       |   |   |   |   |
| **Deposits at fair value**              |       |             |       |                   |       |   |   |   |   |
| Certificates of deposit                 |       | 36,615           |       | 45,534                 |       | 36,615 |   | 45,519 |   |
| **Total deposits at fair value**        |       | 36,615           |       | 45,534                 |       | 36,615 |   | 45,519 |   |
| **Deposits at amortised cost**          |       |             |       |                   |       |   |   |   |   |
| Non-interest bearing, repayable at call |       | 12,407           |       | 10,459                 |       | 12,407 |   | 8,188 |   |
| Certificates of deposit                 |       | 1,756            |       | 3,262                  |       | 1,756 |   | 50 |   |
| Other interest bearing:                 |       |             |       |                   |       |   |   |   |   |
| At call                                 |       | 142,255          |       | 141,321                |       | 142,255 |   | 106,111 |   |
| Term                                    |       | 90,436           |       | 80,887                 |       | 90,436 |   | 55,894 |   |
| **Total deposits at amortised cost**    |       | 246,854          |       | 235,929                |       | 246,854 |   | 170,243 |   |
| **Total Australia**                     |       | 283,469          |       | 281,463                |       | 283,469 |   | 215,762 |   |
| **New Zealand**                         |       |             |       |                   |       |   |   |   |   |
| **Deposits at fair value**              |       |             |       |                   |       |   |   |   |   |
| Certificates of deposit                 |       | 1,447            |       | 2,844                  |       | — |   | — |   |
| **Total deposits at fair value**        |       | 1,447            |       | 2,844                  |       | — |   | — |   |
| **Deposits at amortised cost**          |       |             |       |                   |       |   |   |   |   |
| Non-interest bearing, repayable at call |       | 1,932            |       | 1,976                  |       | 80 |   | 136 |   |
| Other interest bearing:                 |       |             |       |                   |       |   |   |   |   |
| At call                                 |       | 10,039           |       | 10,629                 |       | 2,226 |   | 1,942 |   |
| Term                                    |       | 15,505           |       | 14,407                 |       | 1,919 |   | 1,133 |   |
| **Total deposits at amortised cost**    |       | 27,476           |       | 27,012                 |       | 4,225 |   | 3,211 |   |
| **Total New Zealand**                   |       | 28,923           |       | 29,856                 |       | 4,225 |   | 3,211 |   |
| **Other overseas**                      |       |             |       |                   |       |   |   |   |   |
| **Deposits at fair value**              |       |             |       |                   |       |   |   |   |   |
| Certificates of deposit                 |       | 15,187           |       | 10,113                 |       | 15,187 |   | 10,113 |   |
| **Total deposits at fair value**        |       | 15,187           |       | 10,113                 |       | 15,187 |   | 10,113 |   |
| **Deposits at amortised cost**          |       |             |       |                   |       |   |   |   |   |
| Non-interest bearing, repayable at call |       | 406              |       | 381                    |       | 163 |   | 166 |   |
| Certificates of deposit                 |       | 2,203            |       | 410                    |       | 2,203 |   | 410 |   |
| Other interest bearing:                 |       |             |       |                   |       |   |   |   |   |
| At call                                 |       | 2,116            |       | 2,217                  |       | 1,845 |   | 1,960 |   |
| Term                                    |       | 5,081            |       | 5,016                  |       | 4,470 |   | 4,591 |   |
| **Total deposits at amortised cost**    |       | 9,806            |       | 8,024                  |       | 8,681 |   | 7,127 |   |
| **Total other overseas**                |       | 24,993           |       | 18,137                 |       | 23,868 |   | 17,240 |   |
| **Total deposits at fair value**        |       | 53,249           |       | 58,491                 |       | 51,802 |   | 55,632 |   |
| **Total deposits at amortised cost**    |       | 284,136          |       | 270,965                |       | 259,760 |   | 180,581 |   |

 

182

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 18. Deposits (continued)**

 

The following tableshows average balances and average rates in each of the past three years formajor categories of deposits:

 
| ** **                     | ** ** | **Consolidated** | ** ** |
|--------------------------------|------------|------------------|------------|
| ** **                     | ** ** | **2010**         | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                     | ** ** | **Average**      | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** |
| ** **                     | ** ** | **Balance**      | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Rate** | ** ** |
| ** **                     | ** ** | **$m**           | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** |
| **Australia**                  | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Non-interest bearing           |       | 11,404           |       | — |   | 9,532 |   | — |   | 6,750 |   | — |   |
| Certificates of deposit        |       | 43,268           |       | 3.9 |   | 56,150 |   | 3.2 |   | 48,316 |   | 7.4 |   |
| Other interest bearing at call |       | 136,906          |       | 3.6 |   | 126,006 |   | 3.2 |   | 85,554 |   | 5.4 |   |
| Other interest bearing term    |       | 90,375           |       | 5.2 |   | 72,726 |   | 5.4 |   | 31,656 |   | 7.1 |   |
| **Total Australia**            |       | 281,953          |       |   |   | 264,414 |   |   |   | 172,276 |   |   |   |
| **Overseas**                   |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest bearing           |       | 2,360            |       | — |   | 2,299 |   | — |   | 2,162 |   | — |   |
| Certificates of deposit        |       | 20,010           |       | 0.6 |   | 12,827 |   | 2.5 |   | 14,552 |   | 4.9 |   |
| Other interest bearing at call |       | 12,655           |       | 2.8 |   | 13,388 |   | 3.1 |   | 11,846 |   | 6.2 |   |
| Other interest bearing term    |       | 19,326           |       | 4.0 |   | 21,093 |   | 4.5 |   | 21,977 |   | 6.6 |   |
| **Total overseas**             |       | 54,351           |       |   |   | 49,607 |   |   |   | 50,537 |   |   |   |

 

***Certificates of deposit***

 

All certificates ofdeposit issued by foreign offices were greater than US$100,000.

 

The maturity profileof certificates of deposit greater than US$100,000 issued by Australianoperations were:

 
| ** **                                      | ** ** | **Consolidated 2010** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | ** **                 | ** ** | **Between 3** | ** ** | **Between** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Less Than**         | ** ** | **and 6** | ** ** | **6 Months** | ** ** | **Over** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **3 Months**          | ** ** | **Months** | ** ** | **and 1 Year** | ** ** | **1 Year** | ** ** | **Total** | ** ** |
| ** **                                      | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Certificates of deposit greater than US$100,000 |       | 24,834                     |       | 10,574 |   | 2,183 |   | 610 |   | 38,201 |   |
| Term deposits greater than US$100,000           |       | 39,915                     |       | 17,344 |   | 10,218 |   | 4,481 |   | 71,958 |   |

 

183

----

 

**Note 19. Trading liabilities andother financial liabilities designated at fair value**

 
| ** **                                                                   | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                   | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Securities sold under agreements to repurchase                               |       | 2,731            |       | 8,173                  |       | 2,731 |   | 6,470 |   |
| Securities sold short                                                        |       | 1,897            |       | 2,255                  |       | 1,897 |   | 2,255 |   |
| **Total trading liabilities**                                                |       | 4,628            |       | 10,428                 |       | 4,628 |   | 8,725 |   |
| Financial liabilities designated at fair value                               |       | 222              |       | 420                    |       | 222 |   | 357 |   |
| **Total trading liabilities and  other financial liabilities at fair value** |       | 4,850            |       | 10,848                 |       | 4,850 |   | 9,082 |   |

 

The differencebetween the carrying amount of financial liabilities designated at fair valueand the amount that the Group would be contractually required to pay to theholder at maturity is $12 million (2009 $9 million). For the Parent Entitythis amount would be $12 million (2009 $5 million).

 

**Note 20. Provisions**

 
| ** **                                     | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Long service leave                             |       | 310              |       | 292                    |       | 275 |   | 200 |   |
| Annual leave and other employee benefits       |       | 773              |       | 716                    |       | 649 |   | 475 |   |
| Litigation and non-lending losses              |       | 197              |       | 197                    |       | 190 |   | 170 |   |
| Provision for impairment on credit commitments |       | 350              |       | 350                    |       | 325 |   | 223 |   |
| Leasehold premises                             |       | 29               |       | 2                      |       | 29 |   | 2 |   |
| Restructuring provisions                       |       | 67               |       | 71                     |       | 58 |   | 50 |   |
| **Total provisions**                           |       | 1,726            |       | 1,628                  |       | 1,526 |   | 1,120 |   |

 

***Litigation and non-lending losses***

 

Litigation andnon-lending loss provisions include litigation and associated costs, frauds andthe correction of operational issues.

 

***Provision for impairment on credit commitments***

 

Provision is madefor incurred losses as a result of the commitment to extend credit.

 

***Leasehold premises***

 

Provision is madefor unavoidable costs in relation to make good costs and premises sub let atlower rates of rent than payable under the head lease. These amounts will besettled as the leases expire over the next three years.

 

***Restructuring provisions***

 

Provisions arerecognised for restructuring activities when a detailed financial plan has beendeveloped and a valid expectation that the plan will be carried out is held bythose affected by it. The majority of restructuring provisions are expected tobe used within 12 months after 30 September 2010.

 

184

----

 

NOTESTO THE FINANCIAL STATEMENTS

 

**Note 20. Provisions (continued)**

 
| ** **                          | ** ** | ** **  | ** ** | **Annual Leave** | ** ** | **Litigation**    | ** ** | **Provision for** | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-------------|------------|-----------------------|------------|-------------------|------------|------------------------|------------|---------------|------------|-------------------|------------|------------|------------|
| ** **                          | ** ** | **Long**    | ** ** | **and Other**    | ** ** | **and Non-** | ** ** | **Impairment**         | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Service** | ** ** | **Employee**          | ** ** | **Lending**       | ** ** | **on Credit**     | ** ** | **Leasehold** | ** ** | **Restructuring** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Leave**   | ** ** | **Benefits**          | ** ** | **Losses**        | ** ** | **Commitments**        | ** ** | **Premises**  | ** ** | **Provisions**    | ** ** | **Total**  | ** ** |
| ** **                          | ** ** | **$m**      | ** ** | **$m**                | ** ** | **$m**            | ** ** | **$m**                 | ** ** | **$m**        | ** ** | **$m**            | ** ** | **$m**     | ** ** |
| **Consolidated**                    |       |        |       |                  |       |              |       |                   |       |          |       |              |       |       |       |
| Balance as at beginning of the year |       | 292         |       | 716                   |       | 197               |       | 350                    |       | 2             |       | 71                |       | 1,628      |       |
| Additions                           |       | 51          |       | 530                   |       | 49                |       | —                 |       | 28            |       | 67                |       | 725        |       |
| Utilised                            |       | (33         | )          | (441                  | )          | (45               | )          | —                 |       | (1            | )          | (51               | )          | (571       | )          |
| Unutilised reversed                 |       | —      |       | (30                   | )          | (3                | )          | —                 |       | —        |       | (20               | )          | (53        | )          |
| Exchange differences                |       | —      |       | (2                    | )          | (1                | )          | —                 |       | —        |       | —            |       | (3         | )          |
| Increase on unwinding of discount   |       | —      |       | —                |       | —            |       | 13                     |       | —        |       | —            |       | 13         |       |
| Other                               |       | —      |       | —                |       | —            |       | (13                    | )          | —        |       | —            |       | (13        | )          |
| **Balance as at end of the year**   |       | 310         |       | 773                   |       | 197               |       | 350                    |       | 29            |       | 67                |       | 1,726      |       |
| **Parent Entity**                   |       |        |       |                  |       |              |       |                   |       |          |       |              |       |       |       |
| Balance as at beginning of the year |       | 200         |       | 475                   |       | 170               |       | 223                    |       | 2             |       | 50                |       | 1,120      |       |
| Additions                           |       | 35          |       | 508                   |       | 43                |       | —                 |       | 28            |       | 53                |       | 667        |       |
| Additions through merger            |       | 70          |       | 94                    |       | 18                |       | 78                     |       | —        |       | 25                |       | 285        |       |
| Utilised                            |       | (30         | )          | (399                  | )          | (38               | )          | —                 |       | (1            | )          | (50               | )          | (518       | )          |
| Unutilised reversed                 |       | —      |       | (30                   | )          | (3                | )          | —                 |       | —        |       | (20               | )          | (53        | )          |
| Exchange differences                |       | —      |       | 1                     |       | —            |       | —                 |       | —        |       | —            |       | 1          |       |
| Increase on unwinding of discount   |       | —      |       | —                |       | —            |       | 11                     |       | —        |       | —            |       | 11         |       |
| Other                               |       | —      |       | —                |       | —            |       | 13                     |       | —        |       | —            |       | 13         |       |
| **Balance as at end of the year**   |       | 275         |       | 649                   |       | 190               |       | 325                    |       | 29            |       | 58                |       | 1,526      |       |

 

**Note 21. Other liabilities**

 
| ** **                                 | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|--------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Unearned general insurance premiums        |       | 427              |       | 477                    |       | — |   | — |   |
| Outstanding general insurance claims       |       | 198              |       | 139                    |       | — |   | — |   |
| Retirement benefit deficit                 |       | 425              |       | 388                    |       | 388 |   | 362 |   |
| Accrued interest payable                   |       | 3,056            |       | 1,601                  |       | 2,762 |   | 1,146 |   |
| Credit card loyalty program(1)             |       | 270              |       | 248                    |       | — |   | — |   |
| Securities purchased not delivered         |       | 1,208            |       | 1,432                  |       | 1,208 |   | 1,432 |   |
| Trade creditors and other accrued expenses |       | 886              |       | 1,101                  |       | 663 |   | 362 |   |
| Other                                      |       | 2,302            |       | 2,119                  |       | 1,967 |   | 1,789 |   |
| **Total other liabilities**                |       | 8,772            |       | 7,505                  |       | 6,988 |   | 5,091 |   |

 

----

(1)          Credit card loyalty programme relates to the Altituderewards program launched by Westpac on 25 November 2001. Westpac hasestablished a trust to hold the liability in respect of the program.

 

185

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**Note 22. Debt issues**

 

Presented below are the Group and Parent Entity’sdebt issues at 30 September 2010 and 2009. The distinction between shortand long-term debt is based on the maturity of the underlying security atorigination.

 
| ** **                    | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                    | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                    | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Debt issues**               |       |             |       |                   |       |   |   |   |   |
| Short term debt:              |       |             |       |                   |       |   |   |   |   |
| Own issuances                 |       | 31,982           |       | 33,067                 |       | 27,224 |   | 28,087 |   |
| Customer conduits             |       | 2,415            |       | 2,440                  |       | — |   | — |   |
| Total short term debt         |       | 34,397           |       | 35,507                 |       | 27,224 |   | 28,087 |   |
| Long term debt:               |       |             |       |                   |       |   |   |   |   |
| Senior                        |       | 103,451          |       | 80,398                 |       | 96,423 |   | 67,683 |   |
| Securitisation                |       | 11,228           |       | 14,193                 |       | — |   | — |   |
| 2007 convertible notes        |       | 1,000            |       | 1,000                  |       | 1,000 |   | 1,000 |   |
| Structured notes              |       | 260              |       | 255                    |       | — |   | — |   |
| Total long term debt          |       | 115,939          |       | 95,846                 |       | 97,423 |   | 68,683 |   |
| **Total debt issues**         |       | 150,336          |       | 131,353                |       | 124,647 |   | 96,770 |   |
| Debt issues at fair value     |       | 33,327           |       | 34,408                 |       | 28,085 |   | 29,166 |   |
| Debt issues at amortised cost |       | 117,009          |       | 96,945                 |       | 96,562 |   | 67,604 |   |
| **Total debt issues**         |       | 150,336          |       | 131,353                |       | 124,647 |   | 96,770 |   |

 

186

----

 

NOTESTO THE FINANCIAL STATEMENTS

 

**Note 22. Debt issues (continued)**

 
| ** **                               | ** ** | **Consolidated** | ** ** |
|------------------------------------------|------------|------------------|------------|
| ** **                               | ** ** | **2010**         | ** ** | **2009** | ** ** |
| ** **                               | ** ** | **$m**           | ** ** | **$m** | ** ** |
| **Short term debt:**                     |       |             |       |   |   |
|                                     |       |             |       |   |   |
| **US commercial paper**                  |       | 31,110           |       | 27,385 |   |
|                                     |       |             |       |   |   |
| **Euro commercial paper:**               |       |             |       |   |   |
| AUD euro commercial paper                |       | 106              |       | 714 |   |
| CAD euro commercial paper                |       | 12               |       | 26 |   |
| CHF euro commercial paper                |       | —           |       | 94 |   |
| DKK euro commercial paper                |       | —           |       | — |   |
| EUR euro commercial paper                |       | 210              |       | 1,653 |   |
| GBP euro commercial paper                |       | 276              |       | 2,551 |   |
| HKD euro commercial paper                |       | —           |       | 96 |   |
| JPY euro commercial paper                |       | —           |       | — |   |
| NZD euro commercial paper                |       | 99               |       | 32 |   |
| SGD euro commercial paper                |       | 13               |       | 12 |   |
| USD euro commercial paper                |       | 120              |       | 465 |   |
| **Total euro commercial paper**          |       | 836              |       | 5,643 |   |
|                                     |       |             |       |   |   |
| **Asset backed commercial paper:**       |       |             |       |   |   |
| AUD asset backed commercial paper        |       | 1,999            |       | 2,253 |   |
| USD asset backed commercial paper        |       | 416              |       | 187 |   |
| **Total asset backed commercial  paper** |       | 2,415            |       | 2,440 |   |
|                                     |       |             |       |   |   |
| **NZD promissory notes**                 |       | 36               |       | 39 |   |
| **Total short term debt**                |       | 34,397           |       | 35,507 |   |
| **Long term debt:**                      |       |             |       |   |   |
| AUD                                      |       | 35,525           |       | 29,520 |   |
| CAD                                      |       | 485              |       | 120 |   |
| CHF                                      |       | 1,596            |       | 1,243 |   |
| EUR                                      |       | 15,502           |       | 22,086 |   |
| GBP                                      |       | 2,937            |       | 3,109 |   |
| HKD                                      |       | 1,931            |       | 2,334 |   |
| JPY                                      |       | 13,335           |       | 6,941 |   |
| NOK                                      |       | 54               |       | — |   |
| NZD                                      |       | 7,527            |       | 2,801 |   |
| SGD                                      |       | 268              |       | 131 |   |
| USD                                      |       | 36,779           |       | 27,561 |   |
| **Total long term debt**                 |       | 115,939          |       | 95,846 |   |

 

187

----

 

**Note 22. Debt issues (continued)**

 
| ** **                                                     | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|
| **(in $millions unless otherwise stated)** | ** ** | **2010**         | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Short term borrowings**                                      |       |             |       |   |   |   |   |
| **US commercial paper**                                        |       |             |       |   |   |   |   |
| Maximum amount outstanding at any month end                    |       | 51,300           |       | 28,938 |   | 34,589 |   |
| Approximate average amount outstanding                         |       | 41,588           |       | 23,135 |   | 25,989 |   |
| Approximate weighted average interest rate on:                 |       |             |       |   |   |   |   |
| Average amount outstanding                                     |       | 0.3              | %          | 1.3 | % | 2.9 | % |
| Outstanding as at end of the year                              |       | 0.4              | %          | 0.4 | % | 2.8 | % |
| **Euro commercial paper**                                      |       |             |       |   |   |   |   |
| Maximum amount outstanding at any month end                    |       | 3,222            |       | 7,197 |   | 12,126 |   |
| Approximate average amount outstanding                         |       | 2,314            |       | 5,553 |   | 9,050 |   |
| Approximate weighted average interest rate on:                 |       |             |       |   |   |   |   |
| Average amount outstanding                                     |       | 0.2              | %          | 1.5 | % | 4.4 | % |
| Outstanding as at end of the year                              |       | 0.8              | %          | 0.9 | % | 4.7 | % |
| **Other commercial paper**                                     |       |             |       |   |   |   |   |
| Maximum amount outstanding at any month end                    |       | 2,473            |       | 3,911 |   | 5,800 |   |
| Approximate average amount outstanding                         |       | 2,254            |       | 3,024 |   | 4,969 |   |
| Approximate weighted average interest rate on:                 |       |             |       |   |   |   |   |
| Average amount outstanding                                     |       | 4.5              | %          | 5.0 | % | 8.3 | % |
| Outstanding as at end of the year                              |       | 5.0              | %          | 3.8 | % | 8.0 | % |

 

**Note 23. Loan capital**

 
| ** **                                          | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                          | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Loan capital**                                    |       |             |       |                   |       |   |   |   |   |
| **Subordinated bonds, notes and  debentures**       |       |             |       |                   |       |   |   |   |   |
| SGD 100 million subordinated bonds due 2010(1)      |       | —           |       | 83                     |       | — |   | 83 |   |
| AUD 600 million subordinated bonds due 2015(2)      |       | —           |       | 600                    |       | — |   | 600 |   |
| AUD 625 million subordinated bonds due 2015         |       | 625              |       | 625                    |       | 625 |   | 625 |   |
| EUR 350 million subordinated bonds due 2015         |       | 491              |       | 581                    |       | 491 |   | 581 |   |
| USD 75 million subordinated bonds due 2015          |       | 90               |       | 93                     |       | 90 |   | 93 |   |
| USD 150 million subordinated bonds due 2015(3)      |       | —           |       | 170                    |       | — |   | 170 |   |
| EUR 250 million subordinated bonds due 2015(4)      |       | —           |       | 395                    |       | — |   | — |   |
| USD 400 million subordinated bonds due 2015         |       | 422              |       | 443                    |       | 422 |   | — |   |
| USD 300 million subordinated bonds due 2016         |       | 310              |       | 341                    |       | 310 |   | 341 |   |
| AUD 225 million subordinated bonds due 2016         |       | 225              |       | 216                    |       | 225 |   | — |   |
| AUD 75 million subordinated bonds due 2016          |       | 75               |       | 71                     |       | 75 |   | — |   |
| AUD 1000 million subordinated bonds due 2017        |       | 991              |       | 997                    |       | 991 |   | 997 |   |
| AUD 600 million subordinated bonds due 2017         |       | 574              |       | 573                    |       | 574 |   | 573 |   |
| USD 250 million subordinated bonds due 2017         |       | 259              |       | 284                    |       | 259 |   | 284 |   |
| CAD 250 million subordinated bonds due 2017         |       | 226              |       | 254                    |       | 226 |   | — |   |
| AUD 200 million subordinated bonds due 2017         |       | 200              |       | 191                    |       | 200 |   | — |   |
| AUD 160 million subordinated bonds due 2018         |       | 160              |       | 159                    |       | 160 |   | 159 |   |
| AUD 500 million subordinated bonds due 2018         |       | 509              |       | 500                    |       | 509 |   | 500 |   |
| USD 350 million subordinated bonds due 2018         |       | 415              |       | 422                    |       | 415 |   | 422 |   |
| GBP 200 million subordinated bonds due 2018         |       | 359              |       | 393                    |       | 359 |   | 393 |   |
| AUD 625 million subordinated bonds due 2018         |       | 622              |       | 616                    |       | 622 |   | — |   |
| AUD 125 million subordinated bonds due 2018         |       | 126              |       | 120                    |       | 126 |   | — |   |
| **Total subordinated bonds, notes  and debentures** |       | 6,679            |       | 8,127                  |       | 6,679 |   | 5,821 |   |

 

----

(1)          These bonds matured on 15 August 2010.

(2)          These bonds were redeemed on 4 February 2010.

(3)          These bonds were redeemed on 17 February 2010.

(4)          These bonds were redeemed on 18 March 2010.

 

188

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 23. Loan capital (continued)**

 
| ** **                                                                           | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                           | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                           | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Subordinated perpetual notes**                                                     |       |             |       |                   |       |   |   |   |   |
| US$390.2 million (2009 US$390.2 million) subordinated perpetual  floating rate notes |       | 404              |       | 443                    |       | 404 |   | 443 |   |
|                                                                                 |       |             |       |                   |       |   |   |   |   |
| **Convertible debentures and Trust  preferred securities**                           |       |             |       |                   |       |   |   |   |   |
| Convertible debentures issued on 5 April 2004 US$525,000,000                    |       | —           |       | —                 |       | 624 |   | 647 |   |
| 525,000 2004 TPS of US$1,000 each                                                    |       | 624              |       | 647                    |       | — |   | — |   |
| **Total convertible debentures and  Trust preferred securities**                     |       | 624              |       | 647                    |       | 624 |   | 647 |   |
|                                                                                 |       |             |       |                   |       |   |   |   |   |
| **Stapled preferred securities**                                                     |       |             |       |                   |       |   |   |   |   |
| 10,362,670 Westpac SPS of A$100 each                                                 |       | 1,026            |       | 1,024                  |       | 1,026 |   | 1,024 |   |
| 9,083,278 Westpac SPS II of A$100 each                                               |       | 899              |       | 897                    |       | 899 |   | 897 |   |
|                                                                                 |       | 1,925            |       | 1,921                  |       | 1,925 |   | 1,921 |   |

 

***Subordinated perpetual notes***

 

These notes have nofinal maturity but may, subject to the approval of APRA and subject to certainother conditions, be redeemed at par at the option of Westpac. The rights ofthe noteholders and couponholders are subordinated to the claims of allcreditors (including depositors) of Westpac other than those creditors whoseclaims against Westpac are expressed to rank equally with or after the claimsof the noteholders and couponholders. Interest is cumulative and is payable onthe notes semi-annually, subject to Westpac being solvent immediately aftermaking the payment and having paid any dividend on any class of share capitalof Westpac within the prior 12 month period.

 

***Convertible debentures and 2004 TPS***

 

A wholly ownedentity Westpac Capital Trust IV (Capital Trust IV) issued 525,000 2004 TPS inthe United States of America at US$1,000 each on 5 April 2004, withnon-cumulative semi-annual distributions (31 March and 30 September) inarrears at the annual rate of 5.256% up to but excluding 31 March 2016.From, and including 31 March 2016 the 2004 TPS will pay non-cumulativequarterly distributions (30 June, 30 September, 31 December and 31 March)in arrears at a floating rate equal to LIBOR plus 1.7675% per year. CapitalTrust IV has also issued common securities with a total price of US$1,000 toWestpac Capital Holdings Inc. 2004 TPS qualify as innovative residual Tier 1capital of Westpac.

 

The sole assets ofthe Capital Trust IV comprise 525,001 2004 Funding TPS issued by a wholly ownedentity, Tavarua Funding Trust IV (Funding Trust IV) totalling US$525,001,000.The 2004 Funding TPS have an issue price of US$1,000 each with non-cumulativesemi-annual distributions in arrears at the annual rate of 5.256% up to butexcluding 31 March 2016. From and including 31 March 2016, the2004 Funding TPS will pay non-cumulative quarterly distributions (30 June, 30September, 31 December and 31 March) in arrears at a floating rateequal to LIBOR plus 1.7675% per year.

 

Funding Trust IV hasissued common securities with a total price of US$1,000 to Westpac. The assetsof Funding Trust IV comprise convertible debentures issued by Westpac inaggregate amount of US$525,001,000 and US Government securities purchased withthe proceeds of the common securities.

 

The convertibledebentures are unsecured, junior subordinated obligations of Westpac and willrank subordinate and junior in right of payment of principal and distributionsto Westpac’s obligations to its depositors and creditors. The convertibledebentures will only pay distributions to the extent they are declared by theBoard of Directors of Westpac, or an authorised committee of the Board. Anydistribution is subject to the satisfaction that no deferral conditions exist.If certain deferral conditions exist a distribution is not permitted to bedeclared unless approved by APRA. The convertible debentures have no statedmaturity, but will automatically convert into American Depositary Receipts(ADRs) each representing 40 Westpac preference shares (non-cumulativepreference shares in Westpac with a liquidation amount of US$25) on 31 March 2053,or earlier in the event that a distribution is not made or certain other eventsoccur. Upon issue the amount paid up on each Westpac preference share will bedeemed to be US$25. The 2004 TPS will then be redeemed for ADRs. Thedividend payment dates and distribution rates on Westpac preference shares willbe the same as those otherwise applicable to 2004 TPS. The holders of the ADRswill, in certain circumstances, have the right to convert their Westpacpreference shares into a variable number of Westpac ordinary shares on 31 March 2054by giving notice to Westpac. The variable number of Westpac ordinary shareswill be determined by reference to the weighted average trading price ofWestpac ordinary shares in the 20 trading days immediately preceding 31 March 2054.

 

Westpac hasguaranteed, on a subordinated basis, the payment in full of distributions orredemption amounts, the delivery of ADRs and other payments on the 2004 TPS andthe 2004 Funding TPS to the extent that the Capital Trust IV and the FundingTrust IV have funds available.

 

189

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**Note 23. Loan capital (continued)**

 

With the priorwritten consent of APRA, if required, Westpac may elect to redeem theconvertible debentures for cash before 31 March 2016 in whole upon theoccurrence of certain specific events, and in whole or in part on anydistribution date on or after 31 March 2016. The proceeds received by FundingTrust IV from the redemption of the convertible debentures must be used toredeem the 2004 Funding TPS and ultimately the 2004 TPS. The redemption priceof the 2004 TPS will equal US$1,000 per 2004 TPS plus the accrued and unpaiddistribution for the then current semi-annual or quarterly period to the dateof redemption or, if the date of redemption is a distribution date, the accruedand unpaid distribution for the most recent semi-annual orquarterly period.

 

The holders of theconvertible debentures, 2004 Funding TPS and 2004 TPS do not have an option torequire redemption of these instruments. The laws of the United States ofAmerica, Australia and New Zealand apply to various parts ofthis transaction.

 

***Westpac SPS and Westpac SPS II***

 

Westpac issued10,362,670 Westpac SPS at face value of $100 each on 30 July 2008 and 9,083,278Westpac SPS II at face value of $100 each on 31 March 2009. Westpac SPS andWestpac SPS II are stapled securities, each consisting of a perpetual,unsecured, non-cumulative subordinated note issued by Westpac’s New York branchstapled to a preference share issued by Westpac. Westpac SPS and Westpac SPS IIqualify as non-innovative residual Tier 1 capital of Westpac.

 

Westpac SPS andWestpac SPS II are expected to pay non-cumulative, floating rate quarterlydistributions (30 September, 31 December, 31 March and 30 June) which areexpected to be fully franked. The distribution rate on Westpac SPS is calculatedas the Australian 90-day bank bill rate plus the margin of 2.40% per annum,together multiplied by one minus the Australian corporate tax rate (30% duringthe year ended 30 September 2010). The distribution rate on WestpacSPS II is calculated as the Australian 90-day bank bill rate plus the margin of3.80% per annum, together multiplied by one minus the Australian corporate taxrate (30% during the year ended 30 September 2010). Westpac SPS andWestpac SPS II distributions are subject to a distribution payment test anddistributions will not be paid if the Westpac directors determine not to pay adistribution, the distribution payment exceeds the distributable profits ofWestpac (unless APRA otherwise gives its prior written approval), or APRA objectsto the payment of the distribution.

 

Westpac SPS andWestpac SPS II distributions will consist of interest payment on the noteswhile the notes remain stapled to the preference shares. Following anassignment event, the notes will unstaple from the preference shares andholders will only hold preference shares. Dividends will then become payable onthe preference shares if the preference shares have not been converted orredeemed.

 

An assignment eventincludes among others, a date selected by Westpac at its absolute discretion,the date preference shares are converted or redeemed, or where interest on thenotes has not been paid in full.

 

On 26 September 2013and 30 September 2014, the initial mandatory conversion dates of Westpac SPSand Westpac SPS II respectively, it is expected that the Westpac SPS andWestpac SPS II will be either converted into a variable number of Westpacordinary shares (subject to a conversion discount) provided certain conversionconditions are satisfied, or transferred to a nominated party at the electionof Westpac for cash equal to their face value. If the conversion conditions arenot satisfied, Westpac SPS and Westpac SPS II may in certain circumstances beredeemed for their face value subject to APRA approval.

 

If Westpac SPS andWestpac SPS II are not converted, transferred or redeemed on the initialmandatory conversion date, they will remain on issue and may either beconverted, transferred or redeemed at the next possible conversion date,subject to satisfaction of the conversion conditions. In certain other limitedcircumstances Westpac SPS and Westpac SPS II may be converted, transferred orredeemed, prior to the initial mandatory conversion date.

 

Westpac SPS andWestpac SPS II rank for payment in a winding up of Westpac ahead of ordinaryshares and equally with equal ranking capital securities but are subordinatedto claims of Westpac deposit holders and other senior creditors. Holders ofWestpac SPS and Westpac SPS II are entitled to vote at a general meeting of Westpacin limited circumstances only.

 

190

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 24. Shareholder equity andnon-controlling interest**

 
| ** **                                                                        | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                        | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Contributed equity**                                                            |       |             |       |                   |       |   |   |   |   |
| **Ordinary shares 2,989,207,519  (2009 2,940,946,145) each fully paid**           |       | 24,686           |       | 23,684                 |       | 24,686 |   | 23,684 |   |
| **RSP treasury shares 6,022,097  (2009 6,039,054)**                               |       | (100             | )          | (100                   | )          | (100 | ) | (100 | ) |
| **Other treasury shares 6,226,960  (2009 6,092,030)**                             |       | (90              | )          | (88                    | )          | (18 | ) | (17 | ) |
|                                                                              |       | (190             | )          | (188                   | )          | (118 | ) | (117 | ) |
| **Share capital**                                                                 |       | 24,496           |       | 23,496                 |       | 24,568 |   | 23,567 |   |
| **Other equity instruments**                                                      |       |             |       |                   |       |   |   |   |   |
| Convertible debentures:                                                           |       |             |       |                   |       |   |   |   |   |
| Issued on 13 August 2003 NZ$1,293,105,172 (with net issue costs of  NZ$9 million) |       | —           |       | —                 |       | 1,137 |   | 1,137 |   |
| Issued on 21 June 2006 A$762,737,500 (with net issue costs of A$8  million)       |       | —           |       | —                 |       | 755 |   | 755 |   |
| **Total other equity instruments**                                                |       | —           |       | —                 |       | 1,892 |   | 1,892 |   |
| **Non-controlling interests**                                                     |       |             |       |                   |       |   |   |   |   |
| Trust preferred securities:                                                       |       |             |       |                   |       |   |   |   |   |
| 750,000 2003 TPS of US$1,000 each (with net issue costs of A$9  million)          |       | 1,137            |       | 1,137                  |       | — |   | — |   |
| 7,627,375 2006 TPS of A$100 each (with net issue costs of A$8 million)            |       | 755              |       | 755                    |       | — |   | — |   |
| Other                                                                             |       | 37               |       | 42                     |       | — |   | — |   |
| **Total non-controlling interests**                                               |       | 1,929            |       | 1,934                  |       | — |   | — |   |

 

***Ordinary shares***

 

In accordance withthe Corporations Act Westpac does not have authorised capital and all ordinaryshares issued have no par value.

 

Ordinary sharesentitle the holder to participate in dividends as declared and in the event ofwinding up of Westpac, to participate in the proceeds in proportion to thenumber of and amounts paid on the shares held.

 

Ordinary sharesentitle the holder to one vote per share, either in person or by proxy, at ameeting of Westpac shareholders.

 

During the yearended 30 September 2010, the following ordinary shares were issued:

 

·         to eligible staff under the Employee Share Plan, 991,485 ordinary sharesissued for nil consideration;

 

·         to equity holders in relation to the Dividend Reinvestment Plan (DRP),29,495,110 ordinary shares at a price of $23.61 and 11,666,112 ordinary sharesat a price of $22.64;

 

·         to eligible executives and senior management upon the exercise ofperformance options under the Westpac Performance Plan (WPP), 2,091,729ordinary shares at an average exercise price of $19.38. Upon the exercise ofperformance share rights, 736,430 ordinary shares for nil consideration andupon the exercise of share rights, 203,368 ordinary shares for nilconsideration;

 

·         to eligible employees upon exercise of performance options under theWestpac Reward Plan (WRP), 30,831 ordinary shares at an average exercise priceof $23.40;

 

·         to eligible employees under the Restricted Share Plan (RSP), 2,466,809ordinary shares for nil consideration; and

 

·         to senior officers upon the exercise of options under the SeniorOfficers’ Share Purchase Scheme (SOSPS), 579,500 ordinary shares at anaverage exercise price of $12.40.

 

During the yearended 30 September 2010, 181,667 ordinary shares were purchased on market at anaverage purchase price of $27.27 and delivered upon exercise of performanceshare rights under the Chief Executive Securities Agreement 2003.

 

***Restricted Share Plan treasury shares***

 

Ordinary sharesallocated to eligible employees under the RSP are classified as treasury sharesuntil unconditional ownership of the shares vest at the end of the restrictionperiod.

 

***Other treasury shares***

 

Treasury sharesincludes ordinary shares held by statutory life funds and managed investmentschemes and ordinary shares held by Westpac in respect of equity derivativessold to customers.

 

During the year488,009 treasury shares were purchased at an average price of $24.15 and353,079 treasury shares were sold at an average price of $25.28.

 

191

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**Note 24. Shareholder equity andnon-controlling interest (continued)**

 

***Convertible debentures and 2003 TPS***

 

A wholly ownedentity Westpac Capital Trust III (Capital Trust III) issued 750,000 2003 TPS inthe United States of America at US$1,000 each on 13 August 2003, withnon-cumulative semi-annual distributions (31 March and 30 September) in arrearsat the annual rate of 5.819% up to but excluding 30 September 2013. From, andincluding, 30 September 2013 the 2003 TPS will pay non-cumulative quarterlydistributions (31 December, 31 March, 30 June and 30 September) in arrears at afloating rate of LIBOR plus 2.05% per year. Capital Trust III has also issuedcommon securities with a total price of US$1,000 to Westpac Capital HoldingsInc.

 

The sole assets ofthe Capital Trust III comprise 750,001 Funding 2003 TPS issued by a whollyowned entity, Tavarua Funding Trust III (Funding Trust III) totallingUS$750,001,000. The Funding 2003 TPS have an issue price of US$1,000 each witha non-cumulative semi-annual distributions in arrears at the annual rate of5.819% up to, but excluding 30 September 2013 and subsequently,including 30 September 2013, quarterly distributions in arrears at the annualrate of LIBOR plus 2.05%.

 

Funding Trust IIIhas issued common securities with a total price of US$1,000 to Westpac FundingHoldings Pty Limited. The assets of Funding Trust III comprise convertibledebentures issued by Westpac in aggregate amount of NZ$1,293,105,172,US Government securities purchased with the proceeds of the commonsecurities and a currency swap with Westpac.

 

The convertibledebentures are unsecured, junior subordinated obligations of Westpac and willrank subordinate and junior in right of payment of principal and distributionsto Westpac’s obligations to its depositors and creditors. The convertibledebentures are limited in aggregate principal amount to the New Zealand dollarequivalent, based on a fixed exchange rate of US$0.58, of the sum of the statedliquidation amounts of the 2003 TPS and the proceeds of the common securitiesissued by Capital Trust III. The convertible debentures will only paydistributions to the extent they are declared by the Board of Directors ofWestpac, or an authorised committee of the Board. Any distribution is subjectto the satisfaction that no deferral conditions exist. If certain deferralconditions exist a distribution is not permitted to be declared unless approvedby APRA. The convertible debentures have no stated maturity, but willautomatically convert into ADRs each representing 40 Westpac preference shares(non-cumulative preference shares in Westpac with a liquidation amount ofUS$25) on 30 September 2053, or earlier in the event that a distributionis not made or certain other events occur. Upon issue the amount paid up oneach Westpac preference share will be deemed to be US$25. The 2003 TPS willthen be redeemed for ADRs. The dividend payment dates and distribution rates onWestpac preference shares will be the same as those otherwise applicable to the2003 TPS.

 

Under the currencyswap, Funding Trust III initially paid an amount equal to the proceeds of theissue of the Funding 2003 TPS in US dollars to Westpac, in exchange for the NewZealand dollar equivalent using a fixed exchange rate ofNZ$1.00 = US$0.58. Funding Trust III is also required to pay to Westpacany amount in New Zealand dollars it receives under the convertible debentures,in return for an amount denominated in US dollars at the fixed exchange rate.

 

The currency swapterminates upon the payment in full of the cash redemption price of theoutstanding convertible debentures and the exchange of such redemption pricefor US dollars or the conversion of the convertible debentures into ADRs.

 

A netting agreementhas been entered into between Westpac and Funding Trust III. Pursuant to thenetting agreement, the distributions on the convertible debentures will betreated as a payment by Funding Trust III under the currency swap. In return,Westpac will pay US dollars to Funding Trust III under the currency swap equalto the NZ dollars it would have received from Funding Trust III under thecurrency swap (calculated by reference to the fixed exchange rate).

 

Westpac hasguaranteed, on a subordinated basis, the payment in full of distributions orredemption amounts, the delivery of ADRs and other payments on the 2003 TPS andthe Funding 2003 TPS to the extent that the Capital Trust III and the FundingTrust III have funds available.

 

With the priorwritten consent of APRA, if required, Westpac may elect to redeem theconvertible debentures for cash before 30 September 2013 in wholeupon the occurrence of certain specific events, and in whole or in part on anydistribution date on or after 30 September 2013. The proceeds received byFunding Trust III from the redemption of the convertible debentures must be usedto redeem the Funding 2003 TPS and ultimately the 2003 TPS. The redemptionprice of the 2003 TPS will equal US$1,000 per 2003 TPS plus the unpaiddistribution for the then current semi-annual or quarterly period to the dateof redemption or, if the date of redemption is a distribution payment date, theunpaid distribution for the most recent semi-annual or quarterly period.

 

The holders of theconvertible debentures, Funding 2003 TPS and 2003 TPS do not have an option torequire redemption of these instruments.

 

The laws of theUnited States of America, Australia and New Zealand apply to various parts ofthis transaction.

 

192

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 24. Shareholder equity andnon-controlling interest (continued)**

 

***Convertible notes and 2006 TPS***

 

A Westpac controlledentity, Westpac TPS Trust, issued 7,627,375 2006 TPS in Australia at $100 eachon 21 June 2006. The 2006 TPS are preferred units in the Westpac TPS Trust,with non-cumulative floating rate distributions which are expected to be fullyfranked. Westpac TPS Trust also issued one ordinary unit with an issue price of$100 to Westpac. Westpac, as holder of the ordinary unit, is entitled to anyresidual income or assets of the Westpac TPS Trust not distributed to holdersof 2006 TPS.

 

The principal assetsof Westpac TPS Trust are 7,627,375 convertible notes (the notes) issued byWestpac in an aggregate amount of $762,737,500.

 

The 2006 TPS arescheduled to pay quarterly distributions (30 September, 31 December, 31 Marchand 30 June) in arrears, subject to certain conditions being satisfied. Thedistribution rate on 2006 TPS, until 30 June 2016 (the step-up date), iscalculated as the Australian 90 day bank bill rate plus 1% per annum (theinitial margin), together multiplied by one minus the Australian corporate taxrate (30% during the year ended 30 September 2010). After the step-up date, theinitial margin will increase by a one time step-up of 1% per annum.

 

The notes areunsecured obligations of Westpac and rank subordinate and junior in right ofpayment of principle and interest to Westpac’s obligations to depositors andcreditors, other than subordinated creditors holding subordinated indebtednessthat is stated to rank equally with, or junior to the notes.

 

Distributions on the2006 TPS will only be made if Westpac pays interest on the notes and certainother conditions (which correspond to the interest payment conditions on thenotes) are satisfied. Interest on the notes is subject to a distributionpayment test and interest will not be paid if Westpac directors have notresolved to make the interest payment, the payment of interest exceedsdistributable profits (unless APRA gives its prior approval) and APRA does nototherwise object to the payment. The interest payments on the notes areexpected to exceed the aggregate amount of the distributions to be made on 2006TPS. The excess will be distributed to Westpac, as holder of the ordinary unitin the Westpac TPS Trust, on each distribution payment date.

 

Westpac can requireholders to exchange each of their 2006 TPS for $100 cash (subject to anyrequired APRA approval) or a variable number of Westpac ordinary sharescalculated in accordance with the applicable conversion number, on the step-up dateor any distribution payment date after the step-up date, or in certain otherlimited circumstances. If Westpac elects to initiate redemption of 2006 TPS forcash or conversion into a variable number of ordinary shares, Westpac must alsoredeem or convert the notes in a corresponding manner.

 

The 2006 TPS willautomatically exchange into Westpac preference shares upon the occurrence of anautomatic exchange event, that is, if the 2006 TPS are still on issue on 30September 2055 or in certain other limited circumstances, including theoccurrence of an event of default or an APRA event (unless APRA determinesotherwise). On exchange, all 2006 TPS on issue will exchange into preferenceshares directly issued by Westpac and the notes and the 2006 TPS will beredeemed simultaneously. On exchange, 2006 TPS holders will receive onepreference share for each 2006 TPS.

 

The laws ofAustralia and New Zealand apply to various parts of this transaction.

 

**Note 25. Share-based payments**

 

**Executive and Senior Officer equityplans**

 

Options, restrictedshares and/or share rights are granted to the Chief Executive Officer, selectedexecutives and key senior employees under the following schemes.

 

***(i)******                 ******Westpac Reward Plan***

 

The Westpac RewardPlan (WRP) was introduced in 2006. It provides a mechanism for rewardingsuperior long term performance from the most senior management in Australia andoverseas.

 

Under the WRP seniormanagers may be invited to receive an award of performance options orperformance share rights. An option or share right under the WRP is the rightto acquire a share in the future provided all conditions are met, with anexercise price set at the commencement of the performance period. The exerciseprice for options is based on the prevailing market price of Westpac ordinaryshares at the commencement of the performance period. The exercise price forshare rights is nil.

 

The performanceoptions and performance share rights may vest over a three to five year periodfrom the commencement of the performance period, provided a performance hurdleof relative Total Shareholder Return (TSR)(1) is met or exceeded by Westpac.The comparator group for TSR comparisons focuses on 10 financial sector peers.

 

Full vesting ofperformance options and performance share rights occurs when Westpac’s TSR isat (or exceeds) the 75th percentile relative to the comparator group, scalingdown to 50% vesting on a straight-line basis for median performance. Belowmedian performance, no vesting occurs.

 

----

(1)          TSR measures a company’s share price movement andaccumulated dividend yields over a specific measurement period (i.e. the changein value of an investment in that company’s shares) and excluding tax effects.

 

193

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**Note 25. Share-based payments(continued)**

 

The WRP vestingframework has been designed to strengthen the performance link withshareholders over the longer term. Initial TSR performance is tested at thethird anniversary of the commencement of the performance period, with subsequentperformance testing possible at the fourth and fifth anniversaries of thecommencement of the performance period. Securities vest only if Westpac’s TSRranking is at or above the median of the peer group at a performance test date.TSR performance is tested at subsequent performance test dates (where theyexist) and further vesting may occur only if the TSR ranking has improved. Thismodel encourages executives to focus on performance over the full fiveyear period.

 

Upon exercisingvested performance options and performance share rights, the executive has theright to take up his or her entitlement in whole or in part as fully paidordinary shares. The exercise price is payable at that time. A performanceoption or performance share right lapses if it is not exercised prior to theend of its term.

 

*WRP — outstanding performance options and sharerights*

 

The following tablesets out details of outstanding performance options and performance sharerights under the WRP:

 
| **Commencement  Date**                          | ** ** | **Latest Date for  Exercise** | ** ** | **Exercise  Price** | ** ** | **Outstanding  at  1 October  2009** | ** ** | **Granted  During  the Year** | ** ** | **Exercised  During  the Year** | ** ** | **Lapsed  During  the Year** | ** ** | **Total  Outstanding  at  30 September  2010** | ** ** | **Outstanding  and  Exercisable at  30 September  2010** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|---------------------|------------|-------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Options**                                     |       |                                    |       |                |       |                                      |       |                               |       |                                 |       |                              | ** ** | ** **                                          | ** ** | ** **                                                         | ** ** |
| 17 December 2007                                |       | 20 December 2017                        |       | $                   | 30.10      |                                      | 1,811,301  |                               | —     |                                 | —     |                              | 96,979     |                                                | 1,714,322  |                                                               | 258,288    |   |
| 1 October 2008                                  |       | 1 October 2018                          |       | $                   | 23.40      |                                      | 1,744,870  |                               | —     |                                 | 30,831     |                              | 68,746     |                                                | 1,645,293  |                                                               | 96,756     |   |
| 1 March 2009                                    |       | 1 March 2019                            |       | $                   | 16.49      |                                      | 260,869    |                               | —     |                                 | —     |                              | —     |                                                | 260,869    |                                                               | —     |   |
| **Totals 2010**                                 | ** ** | ** **                              |       |                |       | 3,817,040                                 |       | —                             |       | 30,831                               |       | 165,725                           |       | 3,620,484                                           |       | 355,044                                                            |       |
| **Weighted average exercise price**             | ** ** | ** **                              |       |                |       | $                                         | 26.11      |                               | —     |                                 | $          | 23.40                             |       | $                                                   | 27.32      |                                                               | $          | 26.07 |   | $ | 28.27 |   |
| **Share rights**                                |       |                                    |       |                |       |                                      |       |                               |       |                                 |       |                              | ** ** | ** **                                          | ** ** | ** **                                                         | ** ** |
| 1 October 2009                                  |       | 1 October 2019                          |       | nil                 |       | —                                    |       | 756,079                            |       | —                               |       | 33,279                            |       | 722,800                                             |       | —                                                             |       |
| **Totals 2010**                                 | ** ** | ** **                              |       |                |       | —                                    |       | 756,079                            |       | —                               |       | 33,279                            |       | 722,800                                             |       | —                                                             |       |
| Totals 2009                                     | ** ** | ** **                              | ** ** | ** **          |       |                                      |       |                               |       |                                 |       |                              |       |                                                |       |                                                               |       |
| Options                                         |       |                                    |       |                |       | 2,167,288                                 |       | 2,219,272                          |       | —                               |       | 569,520                           |       | 3,817,040                                           |       | 231,929                                                            |       |
| Performance share  rights                       |       |                                    | ** ** | ** **          |       | —                                    |       | —                             |       | —                               |       | —                            |       | —                                              |       | —                                                             |       |
| Weighted average  exercise price — options |       |                                    | ** ** | ** **          |       | $                                         | 30.10      |                               | $          | 22.59                                |       | —                            |       | $                                                   | 27.59      |                                                               | $          | 26.11 |   | $ | 28.78 |   |
|                                                 |            |                                         |            |                     |            |                                           |            |                                    |            |                                      |            |                                   |            |                                                     |            |                                                                    |            |  |  |  |  |  |  |  |

 

The weighted averageremaining contractual life of outstanding performance options at 30 September2010 was 7.7 years (2009 8.7 years). The remaining contractual life ofoutstanding performance share rights at 30 September 2010 was 9.0 years.The fair value at grant date of WRP performance share rights issued during theyear was $15.31.

 

***(ii)******             ******Westpac Performance Plan***

 

The WestpacPerformance Plan (WPP) was introduced in 2002 and was used to provide awards ofperformance options and/or performance share rights to senior executives andother key employees. Currently the WPP is primarily used for employees based inNew Zealand to provide long term incentive awards or as a mechanism for themandatory deferral of a portion of their short-term incentives.

 

An option or shareright under the WPP is the right to acquire a share in the future provided allconditions are met, with an exercise price generally set at the time theinvitation is made. The exercise price for options is equal to the averagemarket price of Westpac ordinary shares traded on the ASX over the five tradingdays up to the time the invitation is made. The exercise price for share rightsis nil.

 

194

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 25. Share-based payments(continued)**

 

*Performance options and performance share rights*

 

Performance optionsand performance share rights granted under the WPP vest after a period of twoto five years, but only if the performance hurdle has been met. The performancehurdle compares Westpac’s TSR against the TSR of a defined ranking group ofother companies.

 

·         for grants made up to November 2005, the ranking group is the 50 largestcompanies listed on the ASX by market capitalisation at the commencement of theperformance period (excluding Westpac, property and investment trusts andspecified resources companies);

 

·         for grants made from December 2005 to December 2006, 50% of the award invalue is assessed against a TSR ranking group of the top 10 of the largest 13Australian banking and financial sector companies by market capitalisation atthe time of grant (excluding Westpac). The other 50% assesses TSR performanceagainst a ranking group of the 50 largest companies on the ASX by marketcapitalisation at the time of grant (excluding Westpac, specified resourcecompanies and the first ranking group); and

 

·         for grants made from December 2008, the ranking group is the top 10 ofthe largest 13 Australian banking and financial sector companies by marketcapitalisation at the commencement of the performance period(excluding Westpac).

 

Full vesting ofperformance options and performance share rights occurs when Westpac’s relativeTSR is at (or exceeds) the 75th percentile of the ranking group, scaling downto 50% vesting on a straight-line basis for median performance. Below medianperformance, no vesting occurs.

 

Upon exercisingvested performance options or performance share rights, the executive has theright to take up his or her entitlement in whole or in part as fully paidordinary shares. The exercise price is payable at that time. A performanceoption or performance share right lapses if it is not exercised prior to theend of its term.

 

*WPP — Outstanding Performance Options*

 

No performanceoptions were granted under the WPP during the year. The following table setsout details of outstanding performance options granted under the WPP inprevious years:

 
| **Commencement  Date**              | ** ** | **Latest Date for  Exercise** | ** ** | **Exercise  Price** | ** ** | **Outstanding  at  1 October  2009** | ** ** | **Granted  During  the Year** | ** ** | **Exercised  During  the Year** | ** ** | **Lapsed  During  the Year** | ** ** | **Total  Outstanding  at  30 September  2010** | ** ** | **Outstanding  and  Exercisable at  30 September  2010** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|---------------------|------------|-------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| 20 January 2003                     |       | 20 January 2013                         |       | $                   | 13.59      |                                      | 292,860    |                               | —     |                                 | 26,246     |                              | —     |                                                | 266,614    |                                                               | 266,614    |   |
| 1 May 2003                          |       | 1 May 2013                              |       | $                   | 15.04      |                                      | 16,433     |                               | —     |                                 | —     |                              | —     |                                                | 16,433     |                                                               | 16,433     |   |
| 3 November 2003                     |       | 3 November 2013                         |       | $                   | 16.34      |                                      | 11,475     |                               | —     |                                 | 11,475     |                              | —     |                                                | —     |                                                               | —     |   |
| 21 January 2004                     |       | 21 January 2014                         |       | $                   | 16.34      |                                      | 1,215,979  |                               | —     |                                 | 482,671    |                              | —     |                                                | 733,308    |                                                               | 733,308    |   |
| 20 January 2005                     |       | 20 January 2015                         |       | $                   | 18.98      |                                      | 1,805,243  |                               | —     |                                 | 511,505    |                              | —     |                                                | 1,293,738  |                                                               | 1,293,738  |   |
| 2 May 2005                          |       | 2 May 2015                              |       | $                   | 19.00      |                                      | 25,609     |                               | —     |                                 | 25,609     |                              | —     |                                                | —     |                                                               | —     |   |
| 1 August 2005                       |       | 1 August 2015                           |       | $                   | 19.62      |                                      | 16,891     |                               | —     |                                 | 16,891     |                              | —     |                                                | —     |                                                               | —     |   |
| 20 December 2005                    |       | 20 December 2015                        |       | $                   | 20.53      |                                      | 2,118,898  |                               | —     |                                 | 818,879    |                              | —     |                                                | 1,300,019  |                                                               | 1,300,019  |   |
| 20 December 2005                    |       | 20 December 2015                        |       | $                   | 22.53      |                                      | 70,374     |                               | —     |                                 | —     |                              | —     |                                                | 70,374     |                                                               | 56,861     |   |
| 15 December 2006                    |       | 15 December 2016                        |       | $                   | 23.98      |                                      | 1,868,756  |                               | —     |                                 | 198,453    |                              | 34,975     |                                                | 1,635,328  |                                                               | 1,564,941  |   |
| **Totals 2010**                     | ** ** | ** **                              | ** ** | ** **          |       | 7,442,518                                 |       | —                             |       | 2,091,729                            |       | 34,975                            |       | 5,315,814                                           |       | 5,231,914                                                          |       |
| **Weighted average exercise price** | ** ** | ** **                              |       |                |       | $                                         | 20.06      |                               | —     |                                 | $          | 19.38                             |       | $                                                   | 23.98      |                                                               | $          | 20.30 |   | $ | 20.24 |   |
| Totals 2009                         | ** ** | ** **                              | ** ** | ** **          |       | 8,121,835                                 |       | —                             |       | 298,578                              |       | 380,739                           |       | 7,442,518                                           |       | 5,912,685                                                          |       |
| Weighted average  exercise price    |       |                                    |       |                |       | $                                         | 20.06      |                               | —     |                                 | $          | 18.21                             |       | $                                                   | 21.67      |                                                               | $          | 20.06 |   | $ | 19.05 |   |

 

The weighted averageremaining contractual life of outstanding performance options at30 September 2010 was 4.9 years (2009 5.8 years).

 

195

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**Note 25. Share-based payments(continued)**

 

*WPP — outstanding performance share rights*

 

The following tablesets out details of outstanding performance share rights granted under the WPP:

 
| **Commencement  Dates**                            | ** ** | **Latest Dates for  Exercise**           | ** ** | **Outstanding at  1 October  2009** | ** ** | **Granted  During  the Year** | ** ** | **Exercised  During  the Year** | ** ** | **Lapsed  During  the Year** | ** ** | **Total  Outstanding at  30 September  2010** | ** ** | **Outstanding  and  Exercisable at  30 September  2010** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Two-year initial testing period**                | ** ** | ** **                                         |       |                                          |       |                               |       |                                 |       |                              |       |                                                    |       |                                                               |       |
| 20 January 2003 to 1 August 2003    |       | 20 January 2013 to 1 August 2013    |       | 45,702                                        |       | —                             |       | 19,138                               |       | —                            |       | 26,564                                                  |       | 26,564                                                             |       |
| 3 November 2003 to 3 August 2004    |       | 3 November 2013 to 3 August 2014    |       | 197,569                                       |       | —                             |       | 109,434                              |       | —                            |       | 88,135                                                  |       | 88,135                                                             |       |
| 5 November 2004 to 1 August 2005    |       | 5 November 2014 to 1 August 2015    |       | 334,833                                       |       | —                             |       | 134,209                              |       | 345                               |       | 200,279                                                 |       | 200,279                                                            |       |
| 1 November 2005 to 3 August 2006    |       | 1 November 2015 to 3 August 2016    |       | 315,833                                       |       | —                             |       | 114,308                              |       | 1,793                             |       | 199,732                                                 |       | 199,732                                                            |       |
| 1 November 2006 to 15 December 2006 |       | 1 November 2016 to 15 December 2016 |       | 125,076                                       |       | —                             |       | 70,328                               |       | —                            |       | 54,748                                                  |       | 54,748                                                             |       |
| 1 December 2008 to 1 March 2009     |       | 1 December 2018 to 1 March 2019     |       | 72,907                                        |       | —                             |       | 585                                  |       | 7,013                             |       | 65,309                                                  |       | 3,263                                                              |       |
|                                               |       |                                               |       |                                          |       |                               |       |                                 |       |                              |       |                                                    |       |                                                               |       |
| **Three-year initial testing period**              | ** ** | ** **                                         |       |                                          |       |                               |       |                                 |       |                              |       |                                                    |       |                                                               |       |
| 20 January 2003 to 1 August 2003    |       | 20 January 2013 to 1 August 2013    |       | 68,501                                        |       | —                             |       | 23,726                               |       | —                            |       | 44,775                                                  |       | 44,775                                                             |       |
| 3 November 2003 to 3 August 2004    |       | 3 November 2013 to 3 August 2014    |       | 119,639                                       |       | —                             |       | 44,642                               |       | —                            |       | 74,997                                                  |       | 74,997                                                             |       |
| 5 November 2004 to 1 August 2005    |       | 5 November 2014 to 1 August 2015    |       | 196,927                                       |       | —                             |       | 58,878                               |       | —                            |       | 138,049                                                 |       | 138,049                                                            |       |
| 1 November 2005 to 3 August 2006    |       | 1 November 2015 to 3 August 2016    |       | 474,637                                       |       | —                             |       | 155,494                              |       | 5,901                             |       | 313,242                                                 |       | 305,358                                                            |       |
| 1 November 2006 to 15 December 2006 |       | 1 November 2016 to 15 December 2016 |       | 7,584                                         |       | —                             |       | 5,688                                |       | —                            |       | 1,896                                                   |       | —                                                             |       |
| **Totals 2010**                                    |       |                                               |       | 1,959,208                                     |       | —                             |       | 736,430                              |       | 15,052                            |       | 1,207,726                                               |       | 1,135,900                                                          |       |
| Totals 2009                                        |       |                                               |       | 3,548,692                                     |       | 72,907                             |       | 1,546,432                            |       | 115,959                           |       | 1,959,208                                               |       | 1,810,734                                                          |       |

 

The weighted averageremaining contractual life of outstanding performance share rights at30 September 2010 was 5.4 years (2009 5.7 years).

 

*Unhurdled options and unhurdled share rights*

 

The WPP is also usedfor key employees based outside Australia, who received unhurdled share rightsrestricted for one to three years or unhurdled options restricted for threeyears. After the restriction period applying to them has passed, vestedunhurdled options and unhurdled share rights can be exercised to receive theunderlying fully paid ordinary shares.

 

196

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NOTES TO THE FINANCIAL STATEMENTS

** **

**Note 25. Share-based payments(continued)**

 

*WPP — outstanding unhurdled options and unhurdledshare rights*

 

The following tablesets out details of outstanding unhurdled options and unhurdled share rightsgranted under the WPP:

 
| **Commencement  Date**                              | ** ** | **Latest Date for  Exercise**             | ** ** | **Exercise  Price** | ** ** | **Outstanding  at 1 October  2009** | ** ** | **Granted  During  the Year** | ** ** | **Exercised  During  the Year** | ** ** | **Lapsed  During  the Year** | ** ** | **Outstanding  at  30 September  2010** | ** ** | **Outstanding  and excercisable  at  30 September  2010** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------|------------|-----------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **Options**                                         |       |                                                |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                         |       |                                                                |       |
| 15 December 2006                               |       | 15 December 2016                               |       | $                   | 23.93      |                                          | 56,147     |                               | —     |                                 | —     |                              | —     |                                         | 56,147     |                                                                | 56,147     |   |
| **Totals 2010**                                     |       |                                                |       |                |       | 56,147                                        |       | —                             |       | —                               |       | —                            |       | 56,147                                       |       | 56,147                                                              |       |
| **Share rights**                                    |       |                                                |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                         |       |                                                                |       |
| **One-year vesting period**                         | ** ** | ** **                                          |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                         |       |                                                                |       |
| 1 December 2008 to 1 June 2009       |       | 1 December 2018 to 1 June 2019       |       | nil                 |       | 71,706                                        |       | —                             |       | 66,025                               |       | —                            |       | 5,681                                        |       | 5,681                                                               |       |
| 1 November 2009 to 1 April 2010      |       | 1 November 2019 to 1 April 2020      |       | nil                 |       | —                                        |       | 30,293                             |       | —                               |       | —                            |       | 30,293                                       |       | —                                                              |       |
|                                                |       |                                                |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                         |       |                                                                |       |
| **Two-year vesting period**                         | ** ** | ** **                                          |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                         |       |                                                                |       |
| 3 September 2007                               |       | 3 September 2017                               |       | nil                 |       | 6,660                                         |       | —                             |       | —                               |       | —                            |       | 6,660                                        |       | 6,660                                                               |       |
| 1 November 2007 to 1 September 2008  |       | 1 November 2017 to 1 September 2018  |       | nil                 |       | 77,691                                        |       | —                             |       | 36,606                               |       | 1,432                             |       | 39,653                                       |       | 39,653                                                              |       |
| 1 October 2008 to 1 April 2009       |       | 1 October 2018 to 1 April 2019       |       | nil                 |       | 132,930                                       |       | —                             |       | 861                                  |       | 7,216                             |       | 124,853                                      |       | 2,399                                                               |       |
| 1 October 2009 to 1 April 2010       |       | 1 October 2019 to 1 April 2020       |       | nil                 |       | —                                        |       | 81,880                             |       | —                               |       | 609                               |       | 81,271                                       |       | —                                                              |       |
|                                                |       |                                                |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                         |       |                                                                |       |
| **Three-year vesting period**                       | ** ** | ** **                                          |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                         |       |                                                                |       |
| 15 December 2006 to 1 June 2007      |       | 15 December 2016 to 1 June 2017      |       | nil                 |       | 204,533                                       |       | —                             |       | 96,732                               |       | 838                               |       | 106,963                                      |       | 106,963                                                             |       |
| 17 December 2007 to 1 September 2008 |       | 17 December 2017 to 1 September 2018 |       | nil                 |       | 163,680                                       |       | —                             |       | 2,229                                |       | 9,614                             |       | 151,837                                      |       | 3,928                                                               |       |
| 1 October 2008 to 1 April 2009       |       | 1 October 2018 to 1 April 2019       |       | nil                 |       | 113,606                                       |       | —                             |       | 915                                  |       | 8,495                             |       | 104,196                                      |       | 2,913                                                               |       |
| 1 October 2009 to 1 April 2010       |       | 1 October 2019 to 1 April 2020       |       | nil                 |       | —                                        |       | 115,573                            |       | —                               |       | 2,153                             |       | 113,420                                      |       | —                                                              |       |
| **Totals 2010**                                     |       |                                                |       |                |       | 770,806                                       |       | 227,746                            |       | 203,368                              |       | 30,357                            |       | 764,827                                      |       | 168,197                                                             |       |
| Totals 2009                                         |       |                                                |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                         |       |                                                                |       |
| Options                                             |       |                                                |       | $                   | 23.93      |                                          | 56,147     |                               | —     |                                 | —     |                              | —     |                                         | 56,147     |                                                                | —     |   |
| Performance share  rights                           |       |                                                |       | —              |       | 461,305                                       |       | 543,103                            |       | 14,761                               |       | 218,841                           |       | 770,806                                      |       | —                                                              |       |

 

The weighted averagefair value at grant date of unhurdled share rights issued during the year was$22.61 per right (2009 $15.81 per right). No unhurdled options wereissued during the year (2009 nil). The weighted average remaining contractuallife of outstanding unhurdled options and unhurdled share rights at 30 September 2010was 7.8 years (2009 8.3 years).

 

***(iii)******         ******Chief Executive Officer Performance Plan (Gail Kelly)***

 

Gail Kelly currentlyholds performance options and performance share rights under the ChiefExecutive Officer Performance Plan (CEOPP). Grants to Mrs Kelly under the CEOPPwere approved by shareholders at Westpac’s AGM on 13 December 2007and 16 December 2009.

 

Performance optionsgranted under the CEOPP have an exercise price equal to the volume weightedaverage market price of Westpac ordinary shares traded on the ASX during theone week period immediately before the start of the performance period.Performance share rights have a nil exercise price.

 

197

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**Note 25. Share-based payments(continued)**

 

Under the CEOPP,performance hurdles must be met before any performance share rights orperformance options can vest. Performance is measured based on Westpac’s TSRbetween the grant date and the performance test date compared to TSRs for aranking group of 10 listed Australian financial services companies. The rankinggroup is determined at the beginning of the performance period and includes thelargest retail banks and other ASX-listed financial services companies withwhich Westpac competes for customers.

 

Initial performancetesting will occur at the third anniversary of the beginning of the performanceperiod, with subsequent performance testing possible at the fourth and fifthanniversaries of the start of the performance period. Performance share rightsand performance options vest only if Westpac’s TSR ranking is at or above themedian of the ranking group at a performance test date. Full vesting occurs ifrelative TSR is at or exceeds the 75th percentile of the ranking group andscales down on a straight line basis to 50% vesting for median performance.Below median performance, no vesting occurs.

 

For any securitiesthat do not vest, the performance period will continue (it is not reset) andfurther vesting is possible at the fourth and/or fifth anniversaries of thestart of the performance period, but only if Westpac’s TSR ranking has improvedon previous results. At each performance test date Westpac’s relative TSR willbe measured over the full performance period to the applicable performance testdate (i.e. 4 or 5 years). This vesting framework has been designed to encouragea focus on longer term performance over the full five year period.

 

Any performanceshare rights and performance options that vest must be exercised within 10years after the performance period commencement date, or earlier if Mrs Kellyleaves Westpac’s employment.

 

*CEOPP — outstanding performance options andperformance share rights*

 

The following tablesets out details of outstanding awards of performance options and performanceshare rights granted under the CEOPP:

 
| **Commencement  Date**                             | ** ** | **Latest Date for  Exercise** | ** ** | **Exercise  Price** | ** ** | **Outstanding at 1  October  2009** | ** ** | **Granted  During  the Year** | ** ** | **Exercised  During  the Year** | ** ** | **Lapsed  During  the Year** | ** ** | **Outstanding at  30 September  2010** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|---------------------|------------|-----------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|
| **Options**                                        |       |                                    |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                             |       |
| 1  February 2008                              |       | 1 February 2018                    |       | $                   | 25.89      |                                          | 364,431    |                               | —     |                                 | —     |                              | —     |                                             | 364,431    |   |
| 1  December 2008                              |       | 1 December 2018                    |       | $                   | 16.80      |                                          | 356,125    |                               | —     |                                 | —     |                              | —     |                                             | 356,125    |   |
| **Totals 2010**                                    |       |                                    |       |                |       | 720,556                                       |       | —                             |       | —                               |       | —                            |       | 720,556                                          |       |
| **Performance share rights**                       | ** ** | ** **                              |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                             |       |
| 1  February 2008                              |       | 1 February 2018                    |       | —              |       | 82,290                                        |       | —                             |       | —                               |       | —                            |       | 82,290                                           |       |
| 1  December 2008                              |       | 1 December 2018                    |       | —              |       | 119,731                                       |       | —                             |       | —                               |       | —                            |       | 119,731                                          |       |
| 21  December 2009                             |       | 21 December 2019                   |       | —              |       | —                                        |       | 166,002                            |       | —                               |       | —                            |       | 166,002                                          |       |
| **Totals 2010**                                    |       |                                    |       |                |       | 202,021                                       |       | 166,002                            |       | —                               |       | —                            |       | 368,023                                          |       |
| **Weighted average exercise price — options** |       |                                    |       |                |       | $                                             | 21.40      |                               | —     |                                 | —     |                              | —     |                                             | $          | 21.40 |   |
| Totals 2009                                        |       |                                    |       |                |       |                                          |       |                               |       |                                 |       |                              |       |                                             |       |
| Options                                            |       |                                    |       |                |       | 364,431                                       |       | 356,125                            |       | —                               |       | —                            |       | 720,556                                          |       |
| Performance share  rights                          |       |                                    |       |                |       | 82,290                                        |       | 119,731                            |       | —                               |       | —                            |       | 202,021                                          |       |
| Weighted average  exercise price — options    |       |                                    |       |                |       | $                                             | 25.89      |                               | $          | 16.80                                |       | —                            |       | —                                           |       | $ | 21.40 |   |
|                                                    |            |                                         |            |                     |            |                                               |            |                                    |            |                                      |            |                                   |            |                                                  |            |  |  |  |  |

 

No performanceoptions were granted in 2010. The fair value at grant date of performanceoptions issued to Mrs Kelly during 2009 was $3.17 per option and the fair valueat grant date of performance share rights was $14.51 per right(2009 $10.68 per right). As at 30 September 2010, no outstandingperformance options or performance share rights issued to Mrs Kelly were exercisable.The remaining weighted average contractual life of outstanding performanceoptions at 30 September 2010 was 7.8 years (2009 8.8 years)and outstanding performance share rights was 8.5 years(2009 8.8 years).

 

198

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 25. Share-based payments(continued)**

 

***(iv)******           ******Fair value assumptions***

 

The fair value ofperformance options and performance share rights granted during the yearincluded in the tables above have been independently calculated at grant dateusing a Binomial/Monte Carlo simulation pricing model.

 

·         the assumptions included in the valuation of the awards of performanceshare rights to Gail Kelly include a risk free interest rate of 4.99%, adividend yield on Westpac ordinary shares of 5% and a volatility in the Westpacshare price of 30%;

 

·         the assumptions included in the valuation of the awards of performanceshare rights under the WRP include a risk free interest rate of 4.99%, adividend yield on Westpac ordinary shares of 5% and a volatility in the Westpacshare price of 30%;

 

·         the assumptions included in the valuation of the awards of unhurdledshare rights under the WPP include a risk free interest rate ranging from 4.20%to 4.74%, a dividend yield on Westpac ordinary shares of 5% and a volatility inthe Westpac ordinary share price of 30%;

 

·         volatility has been assessed by considering the implied volatility ofpublicly traded options over Westpac’s ordinary shares and the historicvolatility of the market price of Westpac shares;

 

·         other assumptions include volatilities of, and correlation factorsbetween, share price movements of the ranking group members and Westpac, whichare used to assess the impact of performance hurdles; and

 

·         performance options and performance share rights have been valuedassuming an expected life after the vesting date of up to one year.

 

***(v)******               ******Chief Executive Officer Restricted Share Plan***

 

Gail Kelly receivedawards of Westpac ordinary shares under the Chief Executive Officer RestrictedShare Plan (CEO RSP) in relation to her employment agreement. The awards wereapproved by Westpac shareholders at Westpac’s AGM on 13 December 2007and 16 December 2009.

 

Like the generalRSP, Westpac ordinary shares are allocated under the CEO RSP at no cost to MrsKelly, with vesting subject to remaining employed with Westpac for a setperiod. Shares in the CEO RSP are held in Mrs Kelly’s name and are restricteduntil satisfaction of the vesting conditions. Shares in the CEO RSP rank equallywith Westpac ordinary shares for dividends and voting rights, and may be heldin the CEO RSP for up to ten years from the date they are granted.

 

The following tabledetails outstanding awards of shares issued under the CEO RSP:

 
| **Allocation date** | ** ** | **Outstanding at 30  September 2009** | ** ** | **Granted During   the Year** | ** ** | **Released** | ** ** | **Forfeited During  the Year** | ** ** | **Outstanding at  30 September 2010** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|----------------------------------------------|------------|--------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|
| 7 February 2008     |       | 83,292                                               |       | —                                       |       | 83,292       |       | —                                   |       | —                                               |       |
| 12 December 2008    |       | 92,226                                               |       | —                                       |       | 46,113       |       | —                                   |       | 46,113                                               |       |
| 21 December 2009    |       | —                                               |       | 74,626                                       |       | —       |       | —                                   |       | 74,626                                               |       |
| **Total 2010**           |       | 175,518                                              |       | 74,626                                       |       | 129,405      |       | —                                   |       | 120,739                                              |       |
| Total 2009               |       | 277,639                                              |       | 92,226                                       |       | 194,347      |       | —                                   |       | 175,518                                              |       |

 

***(vi)******           ******Restricted Share Plan***

 

The Restricted SharePlan (RSP) provides Westpac with an instrument for attracting and retaining keyemployees. Under the RSP, Westpac shares may be allocated to eligible employeesat no cost with vesting subject to remaining employed with Westpac for a perioddetermined by the Board. Shares in the RSP are held in the name of the employeeand are restricted until satisfaction of the vesting conditions. Shares in theRSP rank equally with Westpac ordinary shares for dividends and voting rights.For awards made prior to October 2009, shares may be held in the RSP forup to 10 years from the date they are granted. For awards made from October 2009,shares are released from the RSP on vesting.

 

199

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**Note 25. Share-based payments(continued)**

 

*Outstanding RSP awards*

 

The following tabledetails outstanding awards of shares issued under the RSP:

 
| **Allocation date**               | ** ** | **Outstanding at  1 October  2009** | ** ** | **Granted During  the Year** | ** ** | **Released** | ** ** | **Forfeited During  the Year** | ** ** | **Outstanding at  30 September 2010** | ** ** |
|----------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------|------------|--------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|
| October — December 2006 |       | 975,631                                       |       | —                                 |       | 342,971      |       | 418                                      |       | 632,242                                              |       |
| January — March 2007    |       | 11,362                                        |       | —                                 |       | 3,987        |       | —                                   |       | 7,375                                                |       |
| April — June 2007       |       | 29,061                                        |       | —                                 |       | 10,224       |       | —                                   |       | 18,837                                               |       |
| July — September 2007   |       | 23,829                                        |       | —                                 |       | 16,806       |       | —                                   |       | 7,023                                                |       |
| October — December 2007 |       | 1,419,440                                     |       | —                                 |       | 313,882      |       | 42,247                                   |       | 1,063,311                                            |       |
| January — March 2008    |       | 39,370                                        |       | —                                 |       | 9,926        |       | 3,856                                    |       | 25,588                                               |       |
| April — June 2008       |       | 51,961                                        |       | —                                 |       | 1,025        |       | —                                   |       | 50,936                                               |       |
| July — September 2008   |       | 46,007                                        |       | —                                 |       | 10,787       |       | 1,054                                    |       | 34,166                                               |       |
| October — December 2008 |       | 2,769,578                                     |       | —                                 |       | 292,993      |       | 108,929                                  |       | 2,367,656                                            |       |
| January — March 2009    |       | 227,530                                       |       | —                                 |       | 37,463       |       | 2,978                                    |       | 187,089                                              |       |
| April — June 2009       |       | 44,715                                        |       | —                                 |       | 5,837        |       | —                                   |       | 38,878                                               |       |
| January — March 2010    |       | —                                        |       | 2,492,935                              |       | —       |       | 78,151                                   |       | 2,414,784                                            |       |
| April — June 2010       |       | —                                        |       | 82,022                                 |       | —       |       | 29,689                                   |       | 52,333                                               |       |
| July — September 2010   |       | —                                        |       | 39,754                                 |       | —       |       | —                                   |       | 39,754                                               |       |
| **Total 2010**                         |       | 5,638,484                                     |       | 2,614,711                              |       | 1,045,901    |       | 267,322                                  |       | 6,939,972                                            |       |
| 2009                                   |       | 2,949,085                                     |       | 3,427,724                              |       | 600,129      |       | 138,196                                  |       | 5,638,484                                            |       |

 

***(vii)******       ******Chief Executive Securities Agreement 2003 (David Morgan)***

 

The former CEOcontinues to hold performance options received under the Chief ExecutiveSecurities Agreement 2003, approved by shareholders at Westpac’s AGM on 11 December 2003.At 30 September 2010 there were 1,649,407 performance options outstanding(2009 1,649,407) with a weighted average exercise price of $22.14 (2009 $22.14)and a weighted average remaining contractual life of 5.3 years (2009 6.3years), all of which are exercisable. At 30 September 2010 there wereno performance share rights outstanding (2009 181,667 with a weighted averageremaining contractual life of 7.2 years). During the year ended30 September 2010 no performance options lapsed (2009 270,940with an exercise price of $23.52). Also during the year 181,667 performanceshare rights were exercised (2009 135,160) and no performance share rightslapsed (2009 82,480).

 

***(viii)******   ******Other Group share-based plans***

 

Westpac alsoprovides plans for small, specialised parts of the Group. The benefits underthese plans are directly linked to growth and performance of the relevant partof the business. The plans individually and in aggregate are not material tothe Group.

 

The detail of a cashsettled share-based payment agreement with Bob McKinnon is set out in the ‘Remunerationreport’ included in Section 1 of this Annual Report.

 

200

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 25. Share-based payments (continued)**

 

***(ix)******          ******Senior Officers’ Share Purchase Scheme***

 

The Senior Officers’Share Purchase Scheme (SOSPS) was approved by shareholders in December 1998and was closed to new invitations in 2002.

 

The SOSPS providedfor the allocation of share options to selected senior officers to acquirefully paid ordinary shares issued by Westpac. No consideration was payable forthe grant of an option under the SOSPS. The exercise price for each option wasbased on the prevailing market price of Westpac ordinary shares at the time ofthe invitation, and the options have a ten-year life. Options granted under theSOSPS were subject to a tenure-based hurdle only.

 

Upon exercising anoption, the officer has the right to take up his or her entitlement in whole orin part as fully paid ordinary shares upon payment of the exercise price. If anoption is not exercised prior to the end of its term, it lapses.

 

The following tablesets out details of outstanding options granted under the SOSPS:

 

*SOSPS*

 
| **Commencement  Date**              | ** ** | **Latest Date for  Exercise** | ** ** | **Exercise  Price** | ** ** | **Outstanding at  1 October  2009** | ** ** | **Exercised  During the  Year** | ** ** | **Lapsed During  the Year** | ** ** | **Outstanding at  30 September  2010** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|---------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------|------------|
| 29 December 1999               |       | 29  December 2009                  |       | $                   | 9.53       |                                          | 205,000    |                                 | 205,000    |                                  | —     |                                             | —     |   |
| 8 January 2001                 |       | 8  January 2011                    |       | $                   | 13.26      |                                          | 575,500    |                                 | 179,000    |                                  | —     |                                             | 396,500    |   |
| 23 April 2001                  |       | 23 April 2011                      |       | $                   | 13.50      |                                          | 10,000     |                                 | 5,000      |                                  | —     |                                             | 5,000      |   |
| 9 January 2002                 |       | 9  January 2012                    |       | $                   | 14.65      |                                          | 829,500    |                                 | 190,500    |                                  | —     |                                             | 639,000    |   |
| 22 July 2002                   |       | 22 July 2012                       |       | $                   | 16.24      |                                          | 15,000     |                                 | —     |                                  | —     |                                             | 15,000     |   |
| **Totals 2010**                     |       |                                    |       |                |       | 1,635,000                                     |       | 579,500                              |       | —                                |       | 1,055,500                                        |       |
| **Weighted average exercise price** | ** ** | ** **                              |       |                |       | $                                             | 13.53      |                                 | $          | 12.40                                 |       | —                                           |       | $ | 14.14 |   |
| Totals 2009                         |       |                                    |       |                |       | 1,884,500                                     |       | 199,500                              |       | 50,000                                |       | 1,635,000                                        |       |
| Weighted average exercise price     |       |                                    |       |                |       | $                                             | 13.25      |                                 | $          | 10.67                                 |       | $                                                | 14.65      |   | $ | 13.53 |   |
|                                     |            |                                         |            |                     |            |                                               |            |                                      |            |                                       |            |                                                  |            |  |  |  |  |  |

 

As at 30 September 2010,47 officers (2009 70 officers) held options under the SOSPS. Theweighted average remaining contractual life of options at30 September 2010 under the SOSPS was 0.9 years (2009 1.7 years). Alloutstanding options under the SOSPS are exercisable.

 

201

----

 

**Note 25. Share-based payments(continued)**

 

**General information on Executiveand Senior Officer share plans**

 

The market price ofWestpac’s ordinary shares as at the close of business on 30 September 2010was $23.24 (2009 $26.25). Details of the shares issued on exercise ofoptions and share rights under each of the Executive and Senior Officer shareplans during the year ended 30 September 2010 are set out below:

 
| **Plan/Agreement** | ** ** | **Dates on which Options or  Share Rights Were Exercised** | ** ** | **Exercise Price  $**               | ** ** | **Total Number of  Shares Issued/  Allocated** | ** ** | **Weighted  Average Share  Price at Date of  Exercise  $** | ** ** | **Consideration   Received  ($’000)** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **2010**           |       | WRP and WPP                                                                                   |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | Options                                                                                       |       | October –  December 2009  |       | 13.59  - 20.53                                                |       | 1,520,363                                                                      |       | 25.39                                           |       | 29,106 |   |
|               |       |                                                                                          |       | January –  March 2010     |       | 16.34  - 20.53                                                |       | 69,841                                                                         |       | 25.80                                           |       | 1,308 |   |
|               |       |                                                                                          |       | April –  September 2010   |       | 16.34  - 23.98                                                |       | 532,356                                                                        |       | 26.87                                           |       | 10,835 |   |
|               |       |                                                                                          |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | Share rights                                                                                  |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       |                                                                                          |       | October –  December 2009  |       | —                                                        |       | 344,503                                                                        |       | 25.32                                           |       | — |   |
|               |       |                                                                                          |       | January –  March 2010     |       | —                                                        |       | 196,292                                                                        |       | 25.01                                           |       | — |   |
|               |       |                                                                                          |       | April –  June 2010        |       | —                                                        |       | 200,107                                                                        |       | 25.32                                           |       | — |   |
|               |       |                                                                                          |       | July –  September 2010    |       | —                                                        |       | 198,896                                                                        |       | 22.42                                           |       | — |   |
|               |       |                                                                                          |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | Chief Executive  Securities Agreement 2003                                                    |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | Share rights                                                                                  |       | January –  March 2010     |       | —                                                        |       | 181,667                                                                        |       | 26.94                                           |       | — |   |
|               |       |                                                                                          |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | SOSPS                                                                                         |       | October –  December 2009  |       | 9.53  - 14.65                                                 |       | 335,500                                                                        |       | 24.80                                           |       | 3,813 |   |
|               |       |                                                                                          |       | January –  March 2010     |       | 13.26  - 14.65                                                |       | 159,000                                                                        |       | 25.52                                           |       | 2,193 |   |
|               |       |                                                                                          |       | April –  June 2010        |       | 13.26                                                         |       | 22,000                                                                         |       | 28.09                                           |       | 292 |   |
|               |       |                                                                                          |       | July –  September 2010    |       | 13.26  -14.65                                                 |       | 63,000                                                                         |       | 21.60                                           |       | 888 |   |
|               |       |                                                                                          |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
| 2009               |       | WRP and WPP                                                                                   |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | Options                                                                                       |       | October –  December 2008  |       | 16.34                                                         |       | 60,989                                                                         |       | 21.70                                           |       | 997 |   |
|               |       |                                                                                          |       | January –  September 2009 |       | 16.34  - 20.53                                                |       | 237,589                                                                        |       | 24.37                                           |       | 4,439 |   |
|               |       |                                                                                          |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | Share rights                                                                                  |       | October –  December 2008  |       | —                                                        |       | 483,349                                                                        |       | 18.21                                           |       | — |   |
|               |       |                                                                                          |       | January –  March 2009     |       | —                                                        |       | 357,871                                                                        |       | 16.65                                           |       | — |   |
|               |       |                                                                                          |       | April –  June 2009        |       | —                                                        |       | 563,375                                                                        |       | 20.00                                           |       | — |   |
|               |       |                                                                                          |       | July –  September 2009    |       | —                                                        |       | 156,598                                                                        |       | 20.33                                           |       | — |   |
|               |       |                                                                                          |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | Chief Executive  Securities Agreement 2003                                                    |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | Share rights                                                                                  |       | January –  March 2009     |       | —                                                        |       | 135,160                                                                        |       | 15.94                                           |       | — |   |
|               |       |                                                                                          |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | GMSOP                                                                                         |       | April –  June 2009        |       | 14.70                                                         |       | 64,628                                                                         |       | 20.47                                           |       | 950 |   |
|               |       |                                                                                          |       | July –  September 2009    |       | 14.70                                                         |       | 65,255                                                                         |       | 24.31                                           |       | 959 |   |
|               |       |                                                                                          |       |                                     |       |                                                          |       |                                                                           |       |                                            |       |   |   |
|               |       | SOSPS                                                                                         |       | October –  December 2008  |       | 9.53  - 14.65                                                 |       | 22,000                                                                         |       | 21.20                                           |       | 301 |   |
|               |       |                                                                                          |       | January –  March 2009     |       | 9.53                                                          |       | 20,000                                                                         |       | 17.12                                           |       | 191 |   |
|               |       |                                                                                          |       | April –  June 2009        |       | 9.53  - 14.65                                                 |       | 107,000                                                                        |       | 19.20                                           |       | 1,146 |   |
|               |       |                                                                                          |       | July –  September 2009    |       | 9.53  - 13.26                                                 |       | 50,500                                                                         |       | 19.80                                           |       | 491 |   |

 

Shares allotted tosatisfy the exercise of options or share rights under the employee equity planswill rank equally with all other issued Westpac ordinary shares and qualify forthe payment of dividends and shareholder voting rights from the day ofallotment.

 

The employee equityplans are operated in compliance with ASIC policy statement 49 which providesrelief from the disclosure and licensing provisions of the Corporations Act.Included in the ASIC policy statement is a five percent limit on the number ofshares that can be issued under an employee equity plan without issuing aprospectus.

 

202

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NOTES TO THE FINANCIAL STATEMENTS

** **

**Note 25. Share-based payments(continued)**

 

Under the policystatement, the number of shares (including shares that are the subject ofoptions and share rights) to be offered to employees at any particular timecannot, at the time the offer is made and when aggregated with the number ofshares the subject of previously issued unexercised options and share rightsissued to employees under those plans and with the number of shares issuedduring the previous five years under all employee share schemes, exceed fivepercent of the total number of shares on issue at the time that offer is made.

 

The names of allpersons who hold options and/or share rights currently on issue are entered inWestpac’s register of option holders which may be inspected at Link MarketServices, Level 12, 680 George Street, Sydney, New South Wales.

 

**Employee Share Plans**

 

***(i)******                 ******The Deferral Share Plan***

 

The Deferral SharePlan (DSP) was suspended for new awards from 1 July 2009. Prior to this,employees had the opportunity to pre-elect to receive any prospectiveshort-term incentive (bonus) as Westpac ordinary shares under the DSP. The 2008DSP award was satisfied by way of newly issued shares, settled in 2009.The number of shares employees received was calculated by dividing the bonusvalue by the prevailing market price of Westpac’s ordinary shares when theshares were granted. The shares were generally required to remain in the planfor 12 months, but could remain for up to 10 years. Participants are entitledto receive any dividend or other distribution attaching to shares held underthe DSP. Participants are also entitled to exercise voting rights attaching tothe shares.

 

Prior to thesuspension of the DSP, Australian-based Directors could elect to receive apercentage of their fees or salary as Westpac ordinary shares under the DSP.The Australian-based Directors paid the current market price, includingacquisition costs, at the time the Westpac ordinary shares were purchased ontheir behalf by an independent plan company.

 

The following tabledetails share awards made under the 2008 DSP, awarded during the year ended30 September 2009:

 
| ** ** | ** ** | **Number of   Participants** | ** ** | **Average Number  of Shares Allocated  per Participant** | ** ** | **Total Number  of Shares  Allocated** | ** ** | **Average Purchase  Price per Share** | ** ** | **Total Purchase  Consideration** | ** ** |
|------------|------------|-----------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------|------------|
| **2010**   |       | —                            |       | —                                                                       |       | —                                           |       | —                                               |       | —                                 |       |
| 2009       |       | 758                               |       | 848                                                                          |       | 650,131                                          |       | $16.72                                               |       | $                                      | 10,870,988 |   |
|            |            |                                   |            |                                                                              |            |                                                  |            |                                                      |            |                                        |            |  |

 

The shares werepurchased on various dates throughout the financial year.

 

***(ii)******             ******The Employee Share Plan***

 

Under the EmployeeShare Plan (ESP), Westpac ordinary shares may be allocated at no cost toemployees to recognise their contribution to Westpac’s financial performanceover the previous financial year. The maximum annual award value under the ESPis $1,000 per employee per year. However, the number of shares employeesreceive (if any) depends on Westpac’s share price performance over the 12months to 30 September or a customer-centric measure, and is subject toBoard discretion.

 

The shares mustnormally remain within the ESP for three years unless the employee leavesWestpac. Participants are entitled to receive any dividend or otherdistribution attaching to shares held under the ESP. Participants are alsoentitled to exercise voting rights attaching to the shares.

 

Westpac’s Australianpermanent employees (including part-time employees) who have been in six monthscontinuous employment as at 30 September each year are eligible toparticipate in the ESP. Executives and senior management who participate in anyWestpac long-term incentive plan or deferred short-term incentive plan are noteligible to participate in the ESP during the same year. The number of sharesemployees receive is calculated by dividing the award value by the prevailingmarket price of Westpac’s ordinary shares when the shares are granted.

 

Share allocation inthe 2009 ESP award was by way of newly issued shares. The following table providesdetails of shares issued under the ESP during the years ended 30 September:

 
| ** ** | ** ** | **Allocation date** | ** ** | **Number of  Participants** | ** ** | **Average Number  of Shares Allocated  per Participant** | ** ** | **Total Number  of Shares  Allocated** | ** ** | **Average Market  Price per Share** | ** ** | **Total  Fair Value** | ** ** |
|------------|------------|--------------------------|------------|----------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------|------------|
| **2010**   |       | 4  December 2009    |       | 28,457                           |       | 41                                                                           |       | 1,166,737                                        |       | $23.98                                             |       | $                          | 27,978,353 |   |
| 2009       |       | 4  November 2008    |       | 20,107                           |       | 24                                                                           |       | 482,568                                          | (1)        | $20.46                                             |       | $                          | 9,873,341  |   |

 

----

(1)          Includes nil shares (2009 1,960 shares) not used inthe previous year’s allocation.

 

The liabilityaccrued in respect of the ESP at 30 September 2010 is $31 million (2009$32 million) and is included in other liabilities.

 

203

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**Note 26. Average balances andrelated interest**

 

The following tablelists the average balances and related interest for the major categories of theGroup’s interest earning assets and interest bearing liabilities. Averages usedare predominantly daily averages:

 
| ** **                                                                  | ** ** | **Consolidated**                | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **Year Ended**             | ** ** | **Year Ended** | ** ** | **Year Ended** | ** ** |
| ** **                                                                  | ** ** | **30 September 2010** | ** ** | **30 September 2009** | ** ** | **30 September 2008** | ** ** |
| ** **                                                                  | ** ** | **Average**                     | ** ** | **Interest** | ** ** | **Average** | ** ** | **Average** | ** ** | **Interest** | ** ** | **Average** | ** ** | **Average** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                                                  | ** ** | **Balance**                     | ** ** | **Income(1)** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Income(1)** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Income(1)** | ** ** | **Rate** | ** ** |
| ** **                                                                  | ** ** | **$m**                          | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **$m** | ** ** | **%** | ** ** |
| **Assets**                                                                  | ** ** | ** **                      | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest earning assets**                                                 | ** ** | ** **                      | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Receivables due from other financial institutions:                          |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia(2)                                                                |       | 4,539                           |       | 176 |   | 3.9 | % | 4,841 |   | 216 |   | 4.5 | % | 7,380 |   | 446 |   | 6.0 | % |
| New Zealand                                                                 |       | 305                             |       | 24 |   | 7.9 | % | 372 |   | 36 |   | 9.7 | % | 943 |   | 109 |   | 11.6 | % |
| Other overseas                                                              |       | 4,948                           |       | 34 |   | 0.7 | % | 7,623 |   | 38 |   | 0.5 | % | 3,605 |   | 139 |   | 3.9 | % |
| Trading securities:                                                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia(2)                                                                |       | 37,847                          |       | 1,838 |   | 4.9 | % | 36,937 |   | 1,826 |   | 4.9 | % | 35,912 |   | 2,593 |   | 7.2 | % |
| New Zealand                                                                 |       | 4,622                           |       | 133 |   | 2.9 | % | 4,539 |   | 182 |   | 4.0 | % | 2,485 |   | 203 |   | 8.2 | % |
| Other overseas                                                              |       | 3,720                           |       | 64 |   | 1.7 | % | 5,739 |   | 141 |   | 2.5 | % | 1,995 |   | 69 |   | 3.5 | % |
| Other financial assets designated at fair value:                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia                                                                   |       | 1,089                           |       | 57 |   | 5.2 | % | 1,104 |   | 37 |   | 3.4 | % | 1,217 |   | 92 |   | 7.6 | % |
| New Zealand                                                                 |       | —                          |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Other overseas                                                              |       | 244                             |       | 7 |   | 2.9 | % | 115 |   | 6 |   | 5.2 | % | — |   | — |   | — |   |
| Available-for-sale securities:                                              |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia                                                                   |       | 5,457                           |       | 340 |   | 6.2 | % | 750 |   | 80 |   | 10.7 | % | 288 |   | 20 |   | 6.9 | % |
| New Zealand                                                                 |       | —                          |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Other overseas                                                              |       | 858                             |       | 28 |   | 3.3 | % | 936 |   | 38 |   | 4.1 | % | 2,084 |   | 118 |   | 5.7 | % |
| Regulatory deposits:                                                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other overseas                                                              |       | 1,363                           |       | 4 |   | 0.3 | % | 868 |   | 17 |   | 2.0 | % | 1,076 |   | 31 |   | 2.9 | % |
| Loans and other receivables(3):                                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia                                                                   |       | 419,148                         |       | 28,208 |   | 6.7 | % | 373,855 |   | 24,012 |   | 6.4 | % | 244,446 |   | 20,784 |   | 8.5 | % |
| New Zealand                                                                 |       | 45,486                          |       | 3,053 |   | 6.7 | % | 46,425 |   | 3,547 |   | 7.6 | % | 45,014 |   | 4,220 |   | 9.4 | % |
| Other overseas                                                              |       | 5,365                           |       | 185 |   | 3.4 | % | 6,565 |   | 315 |   | 4.8 | % | 5,212 |   | 329 |   | 6.3 | % |
| Intragroup receivables                                                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia                                                                   |       | 15,079                          |       | 670 |   | 4.4 | % | 18,270 |   | 795 |   | 4.4 | % | — |   | — |   | — |   |
| Other overseas                                                              |       | 23,193                          |       | 289 |   | 1.2 | % | 13,547 |   | 287 |   | 2.1 | % | 20,937 |   | 658 |   | 3.1 | % |
| **Total interest earning assets  and interest income including intragroup** |       | 573,263                         |       | 35,110 |   | 6.1 | % | 522,486 |   | 31,573 |   | 6.0 | % | 372,594 |   | 29,811 |   | 8.0 | % |
| Intragroup elimination                                                      |       | (38,272                         | )          | (959 | ) |   |   | (31,817 | ) | (1,082 | ) |   |   | (20,937 | ) | (658 | ) |   |   |
| **Total interest earning assets  and interest income**                      |       | 534,991                         |       | 34,151 |   | 6.4 | % | 490,669 |   | 30,491 |   | 6.2 | % | 351,657 |   | 29,153 |   | 8.3 | % |
| **Non-interest earning assets**                                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash, due from other financial institutions and regulatory deposits         |       | 1,097                           |       |   |   |   |   | 1,188 |   |   |   |   |   | 734 |   |   |   |   |   |
| Derivative financial instruments                                            |       | 29,790                          |       |   |   |   |   | 48,244 |   |   |   |   |   | 21,258 |   |   |   |   |   |
| Life insurance assets                                                       |       | 12,257                          |       |   |   |   |   | 11,374 |   |   |   |   |   | 14,060 |   |   |   |   |   |
| All other assets(4)                                                         |       | 29,542                          |       |   |   |   |   | 26,356 |   |   |   |   |   | 13,759 |   |   |   |   |   |
| **Total non-interest earning  assets**                                      |       | 72,686                          |       |   |   |   |   | 87,162 |   |   |   |   |   | 49,811 |   |   |   |   |   |
| **Total assets**                                                            |       | 607,677                         |       |   |   |   |   | 577,831 |   |   |   |   |   | 401,468 |   |   |   |   |   |

 

----

(1)          The tax equivalent gross-up relating to StructuredFinance transactions was discontinued in 2010, reflecting the immaterial natureof the balance as the Group continues to run-down the related assets. In priorperiods this adjustment increased net interest income and comprised an interestincome benefit of $45 million in 2009 and $72 million in 2008.

(2)          In the current year we have revised our presentationand reclassified other bank issued certifications of deposits from receivablesdue from other financial institutions to trading securities. To improvepresentation we have revised comparative periods.

(3)          For the years ended 30 September 2010, 2009 and2008 loans and receivables have been stated net of provisions for impairmentcharges.

(4)          Includes property, plant and equipment, goodwill andintangibles, other assets and deferred tax.

 

204

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note26. Average balances and related interest (continued)**

 
| ** **                                                                        | ** ** | **Consolidated**                | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                        | ** ** | **Year Ended**             | ** ** | **Year Ended** | ** ** | **Year Ended** | ** ** |
| ** **                                                                        | ** ** | **30 September 2010** | ** ** | **30 September 2009** | ** ** | **30 September 2008** | ** ** |
| ** **                                                                        | ** ** | **Average**                     | ** ** | **Interest** | ** ** | **Average** | ** ** | **Average** | ** ** | **Interest** | ** ** | **Average** | ** ** | **Average** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                                                        | ** ** | **Balance**                     | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| ** **                                                                        | ** ** | **$m**                          | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **$m** | ** ** | **%** | ** ** | **$m** | ** ** | **$m** | ** ** | **%** | ** ** |
| **Liabilities**                                                                   | ** ** | ** **                      | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest bearing liabilities**                                                  | ** ** | ** **                      | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Payables due to other financial institutions:                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia                                                                         |       | 2,569                           |       | 101 |   | 3.9 | % | 7,863 |   | 277 |   | 3.5 | % | 3,577 |   | 215 |   | 6.0 | % |
| New Zealand                                                                       |       | 454                             |       | 12 |   | 2.6 | % | 373 |   | 25 |   | 6.7 | % | 431 |   | 30 |   | 7.0 | % |
| Other overseas                                                                    |       | 4,926                           |       | 38 |   | 0.8 | % | 5,704 |   | 63 |   | 1.1 | % | 5,874 |   | 204 |   | 3.5 | % |
| Deposits:                                                                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia                                                                         |       | 270,549                         |       | 11,293 |   | 4.2 | % | 254,848 |   | 9,718 |   | 3.8 | % | 165,524 |   | 10,456 |   | 6.3 | % |
| New Zealand                                                                       |       | 27,750                          |       | 1,017 |   | 3.7 | % | 28,560 |   | 1,295 |   | 4.5 | % | 27,888 |   | 2,096 |   | 7.5 | % |
| Other overseas                                                                    |       | 24,241                          |       | 240 |   | 1.0 | % | 18,786 |   | 369 |   | 2.0 | % | 20,461 |   | 809 |   | 4.0 | % |
| Loan capital:                                                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia                                                                         |       | 7,738                           |       | 418 |   | 5.4 | % | 9,347 |   | 478 |   | 5.1 | % | 6,772 |   | 438 |   | 6.5 | % |
| Other overseas                                                                    |       | 2,528                           |       | 127 |   | 5.0 | % | 2,218 |   | 104 |   | 4.7 | % | 758 |   | 46 |   | 6.1 | % |
| Other interest bearing liabilities(1):                                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia                                                                         |       | 146,993                         |       | 8,505 |   | n/a |   | 126,428 |   | 4,582 |   | n/a |   | 92,422 |   | 6,640 |   | n/a |   |
| New Zealand                                                                       |       | 8,663                           |       | 481 |   | n/a |   | 5,253 |   | 1,354 |   | n/a |   | 4,261 |   | 802 |   | n/a |   |
| Other overseas                                                                    |       | 5,557                           |       | 77 |   | n/a |   | 6,462 |   | 535 |   | n/a |   | 6,897 |   | 123 |   | n/a |   |
| Intragroup payable:                                                               |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia                                                                         |       | 27,998                          |       | 407 |   | 1.5 | % | 17,775 |   | 305 |   | 1.7 | % | 7,196 |   | 460 |   | 6.4 | % |
| New Zealand                                                                       |       | 10,274                          |       | 552 |   | 5.4 | % | 14,042 |   | 777 |   | 5.5 | % | 13,741 |   | 198 |   | 1.4 | % |
| **Total interest bearing liabilities  and interest expense including intragroup** |       | 540,240                         |       | 23,268 |   | 4.3 | % | 497,659 |   | 19,882 |   | 4.0 | % | 355,802 |   | 22,517 |   | 6.3 | % |
| Intragroup elimination                                                            |       | (38,272                         | )          | (959 | ) |   |   | (31,817 | ) | (1,082 | ) |   |   | (20,937 | ) | (658 | ) |   |   |
| **Total interest bearing  liabilities and interest expense**                      |       | 501,968                         |       | 22,309 |   | 4.4 | % | 465,842 |   | 18,800 |   | 4.0 | % | 334,865 |   | 21,859 |   | 6.5 | % |
| **Non-interest bearing liabilities**                                              |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits and due to other financial institutions:                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Australia                                                                         |       | 12,273                          |       |   |   |   |   | 10,681 |   |   |   |   |   | 7,137 |   |   |   |   |   |
| New Zealand                                                                       |       | 1,981                           |       |   |   |   |   | 1,871 |   |   |   |   |   | 1,868 |   |   |   |   |   |
| Other overseas                                                                    |       | 414                             |       |   |   |   |   | 484 |   |   |   |   |   | 312 |   |   |   |   |   |
| Derivative financial instruments                                                  |       | 31,061                          |       |   |   |   |   | 45,626 |   |   |   |   |   | 18,595 |   |   |   |   |   |
| Life insurance policy liabilities                                                 |       | 11,503                          |       |   |   |   |   | 10,775 |   |   |   |   |   | 13,173 |   |   |   |   |   |
| All other liabilities(2)                                                          |       | 10,129                          |       |   |   |   |   | 8,629 |   |   |   |   |   | 6,901 |   |   |   |   |   |
| **Total non-interest bearing  liabilities**                                       |       | 67,361                          |       |   |   |   |   | 78,066 |   |   |   |   |   | 47,986 |   |   |   |   |   |
| **Total liabilities**                                                             |       | 569,329                         |       |   |   |   |   | 543,908 |   |   |   |   |   | 382,851 |   |   |   |   |   |
| Shareholders’ equity                                                         |       | 36,434                          |       |   |   |   |   | 32,008 |   |   |   |   |   | 16,699 |   |   |   |   |   |
| Non-controlling interests                                                         |       | 1,914                           |       |   |   |   |   | 1,915 |   |   |   |   |   | 1,918 |   |   |   |   |   |
| **Total equity**                                                                  |       | 38,348                          |       |   |   |   |   | 33,923 |   |   |   |   |   | 18,617 |   |   |   |   |   |
| **Total liabilities and equity**                                                  |       | 607,677                         |       |   | ** ** | ** ** |   | 577,831 |   |   | ** ** | ** ** |   | 401,468 |   |   |   |   |   |

 

----

(1)          Includes net impact of Treasury balance sheetmanagement activities.

(2)          Includes provisions for current and deferred taxliabilities and other liabilities.

 

205

----

 

**Note 26. Average balances andrelated interest (continued)**

 

The following tableallocates changes in net interest income between changes in volume and changesin rate for the last two fiscal years. Volume and rate variances have beencalculated on the movement in average balances and the change in the interestrates on average interest-earning assets and average interest bearingliabilities. The variance caused by change in both volume and rate has beenallocated in proportion to the relationship of the absolute dollar amount ofeach change to the total. The tax equivalent gross-up relating to StructuredFinance transactions was discontinued in 2010, reflecting the immaterial natureof the balance as the Group continues to run-down the related assets. In priorperiods this adjustment increased net interest income and comprised an interestincome benefit of $45 million in 2009 and $72 million in 2008.

 
| ** **                                           | ** ** | **Consolidated**            | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **2010**                    | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **Change Due To** | ** ** | **Change Due To** | ** ** |
| ** **                                           | ** ** | **Volume**                  | ** ** | **Rate** | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **$m**                      | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Interest-earning assets**                          | ** ** | ** **                  | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Receivables due from other financial institutions:   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                            |       | (13                         | )          | (27 | ) | (40 | ) | (153 | ) | (77 | ) | (230 | ) |
| New Zealand                                          |       | (6                          | )          | (6 | ) | (12 | ) | (66 | ) | (7 | ) | (73 | ) |
| Other overseas                                       |       | (13                         | )          | 9 |   | (4 | ) | 155 |   | (256 | ) | (101 | ) |
| Trading securities:                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                            |       | 45                          |       | (33 | ) | 12 |   | 74 |   | (841 | ) | (767 | ) |
| New Zealand                                          |       | 3                           |       | (52 | ) | (49 | ) | 168 |   | (189 | ) | (21 | ) |
| Other overseas                                       |       | (49                         | )          | (28 | ) | (77 | ) | 129 |   | (57 | ) | 72 |   |
| Other financial assets designated at fair value:     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                            |       | (1                          | )          | 21 |   | 20 |   | (9 | ) | (46 | ) | (55 | ) |
| New Zealand                                          |       | —                      |       | — |   | — |   | — |   | — |   | — |   |
| Other overseas                                       |       | 6                           |       | (5 | ) | 1 |   | 6 |   | — |   | 6 |   |
| Available-for-sale securities:                       |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                            |       | 502                         |       | (242 | ) | 260 |   | 32 |   | 28 |   | 60 |   |
| New Zealand                                          |       | —                      |       | — |   | — |   | — |   | — |   | — |   |
| Other overseas                                       |       | (3                          | )          | (7 | ) | (10 | ) | (65 | ) | (15 | ) | (80 | ) |
| Regulatory deposits:                                 |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Other Overseas                                       |       | 9                           |       | (22 | ) | (13 | ) | (6 | ) | (8 | ) | (14 | ) |
| Loans and other receivables:                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                            |       | 2,909                       |       | 1,287 |   | 4,196 |   | 11,003 |   | (7,775 | ) | 3,228 |   |
| New Zealand                                          |       | (72                         | )          | (422 | ) | (494 | ) | 132 |   | (805 | ) | (673 | ) |
| Other overseas                                       |       | (58                         | )          | (72 | ) | (130 | ) | 85 |   | (99 | ) | (14 | ) |
| Intragroup receivable:                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                            |       | (139                        | )          | 14 |   | (125 | ) | 795 |   | — |   | 795 |   |
| Overseas                                             |       | 205                         |       | (203 | ) | 2 |   | (232 | ) | (139 | ) | (371 | ) |
| Total change in interest income including intragroup |       | 3,325                       |       | 212 |   | 3,537 |   | 12,048 |   | (10,286 | ) | 1,762 |   |
| Intragroup elimination                               |       | (66                         | )          | 189 |   | 123 |   | (563 | ) | 139 |   | (424 | ) |
| **Total change in interest income**                  |       | 3,259                       |       | 401 |   | 3,660 |   | 11,485 |   | (10,147 | ) | 1,338 |   |

 

206

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 26. Average balances andrelated interest (continued)**

 
| ** **                                            | ** ** | **Consolidated**            | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **2010**                    | ** ** | **2009** | ** ** |
| ** **                                            | ** ** | **Change Due To** | ** ** | **Change Due To** | ** ** |
| ** **                                            | ** ** | **Volume**                  | ** ** | **Rate** | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **$m**                      | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Interest-bearing liabilities**                      | ** ** | ** **                  | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Payables due to other financial institutions:         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                             |       | (187                        | )          | 11 |   | (176 | ) | 258 |   | (196 | ) | 62 |   |
| New Zealand                                           |       | 5                           |       | (18 | ) | (13 | ) | (4 | ) | (1 | ) | (5 | ) |
| Other overseas                                        |       | (9                          | )          | (16 | ) | (25 | ) | (6 | ) | (135 | ) | (141 | ) |
| Deposits:                                             |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                             |       | 599                         |       | 976 |   | 1,575 |   | 5,642 |   | (6,380 | ) | (738 | ) |
| New Zealand                                           |       | (37                         | )          | (241 | ) | (278 | ) | 50 |   | (851 | ) | (801 | ) |
| Other overseas                                        |       | 107                         |       | (236 | ) | (129 | ) | (66 | ) | (374 | ) | (440 | ) |
| Loan capital:                                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                             |       | (82                         | )          | 22 |   | (60 | ) | 167 |   | (127 | ) | 40 |   |
| Other Overseas                                        |       | 15                          |       | 8 |   | 23 |   | 89 |   | (31 | ) | 58 |   |
| Other interest-bearing liabilities:                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                             |       | 745                         |       | 3,178 |   | 3,923 |   | 2,443 |   | (4,501 | ) | (2,058 | ) |
| New Zealand                                           |       | 879                         |       | (1,752 | ) | (873 | ) | 187 |   | 365 |   | 552 |   |
| Other overseas                                        |       | (75                         | )          | (383 | ) | (458 | ) | (8 | ) | 420 |   | 412 |   |
| Intragroup payable:                                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                             |       | 175                         |       | (73 | ) | 102 |   | 676 |   | (831 | ) | (155 | ) |
| New Zealand                                           |       | (209                        | )          | (16 | ) | (225 | ) | 4 |   | 575 |   | 579 |   |
| Total change in interest expense including intragroup |       | 1,926                       |       | 1,460 |   | 3,386 |   | 9,432 |   | (12,067 | ) | (2,635 | ) |
| Intragroup elimination                                |       | 34                          |       | 89 |   | 123 |   | (680 | ) | 256 |   | (424 | ) |
| **Total change in interest expense**                  |       | 1,960                       |       | 1,549 |   | 3,509 |   | 8,752 |   | (11,811 | ) | (3,059 | ) |
| **Change in net interest income:**                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Australia                                             |       | 2,053                       |       | (3,094 | ) | (1,041 | ) | 2,556 |   | 3,324 |   | 5,880 |   |
| New Zealand                                           |       | (713                        | )          | 1,547 |   | 834 |   | (3 | ) | (1,089 | ) | (1,092 | ) |
| Other overseas                                        |       | 59                          |       | 299 |   | 358 |   | 63 |   | (454 | ) | (391 | ) |
| **Total change in net interest  income**              |       | 1,399                       |       | (1,248 | ) | 151 |   | 2,616 |   | 1,781 |   | 4,397 |   |

 

207

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**Note 27. Financial risk**

 

Westpac’s riskappetite is set by the Board. The risk appetite cannot be defined by a singlemetric. It has many dimensions and is an amalgam of top-down requirements(including Westpac’s target debt rating and complying with regulatoryrequirements) and bottom-up aggregates (such as risk concentration limits).Westpac uses an economic capital model as the basis of risk measurement,calibrated to its target debt rating.

 

Westpac’s appetitefor risk is influenced by a range of factors, including whether a risk isconsidered consistent with its strategy (core risk) and whether an appropriatereturn can be achieved from taking that risk. Westpac has a lower appetite forrisks that are not part of its core strategy. Westpac seeks to achieve anappropriate return on risk and prices its products accordingly.

 

Westpac seeks tomaximise total shareholder returns over the longer term by achieving anappropriate balance between growth and volatility of returns and by ultimatelyreturning that value to shareholders.

 

Westpacdistinguishes the following types of risk, and takes an integrated approachtowards managing them. These risks are:

 
| **Type of risk**         | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **               | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Key  risks**           | ** ** | ·   credit risk — the risk of financial loss where a customer or  counterparty fails to meet their financial obligations;

·   liquidity risk — the risk that we will be unable to fund our  assets and meet obligations as they come due, without incurring unacceptable  losses;

·   market risk — the risk of an adverse impact on earnings  resulting from changes in market factors, such as foreign exchange rates,  interest rates, commodity prices and equity prices. This includes interest  rate risk in the banking book — the risk to interest income from a mismatch  between the duration of assets and liabilities that arises in the normal  course of business activities; and

·   operational risk — the risk that arises from inadequate or  failed internal processes, people and systems or from external events. This  includes compliance risk, the risk of legal or regulatory sanction and the  financial or reputation loss arising from our failure to abide by the  regulatory standards required of us as a financial services group.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **               | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Other  related risks** | ** ** | ·   business risk — the risk associated with the vulnerability of a  line of business to changes in the business environment;

·   environmental, social and governance risks — the risk that  Westpac damages its reputation or financial performance due to failure to  recognise or address material existing or emerging sustainability related  environmental, social or governance issues;

·   equity risk — the potential for financial loss arising from  movements in the value of our direct and indirect equity investments;

·   insurance risk — the risk of not being able to meet insurance  claims (related to insurance subsidiaries);

·   model risk — the risk of losses arising because of errors in or  inadequacies of a model, or in the control of the model;

·   outsourcing risk — the risk of The Westpac Group being unable to  carry on critical business activities as a result of the failure of an  external supplier or service provider, or that such failure in turn triggers  material concerns in another key risk area;

·   related entity (contagion) risk — the risk that problems arising  in other Westpac Group members compromise the financial and operational  position of the authorised deposit-taking institution in The Westpac Group;  and

·   reputation risk — the risk to earnings or capital arising from  negative public opinion resulting from the loss of reputation or public trust  and standing. |

 

208

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 

Note 27 provides asummary of Westpac’s risk management framework, as well as a discussion ofWestpac’s financial risk management policies and practices and quantitative informationon some of its principal financial risk exposures. The information contained inNote 27 comprises the following:

 

**27.1   Approach to risk management**

 

**27.2   Credit risk management**

 

27.2.1Credit risk management policy

27.2.2Provision and impairment policy

27.2.3Internal credit risk ratings system

27.2.4Credit risk mitigation, collateral and other credit enhancements

27.2.5Credit risk concentrations

27.2.6Credit quality of financial assets

27.2.7Financial assets that are neither past due nor individually impaired

27.2.8Financial assets that are past due, but not individually impaired

27.2.9Items 90 days past due, or otherwise in default, but well secured and notimpaired

27.2.10Impaired loans

 

**27.3   Funding and liquidity risk management**

 

27.3.1Sources of liquidity

27.3.2Liquidity reporting

27.3.3Market developments

27.3.4Contractual maturity of financial liabilities

27.3.5Expected maturity

 

**27.4   Market risk**

 

27.4.1Trading market risk

27.4.2Non-traded market risk

 

**27.1 Approach to risk management**

 

The Board isresponsible for reviewing and approving our overall risk management strategy,including determining our appetite for risk. The Board has delegated to theBoard Risk Management Committee (BRMC) responsibility for providingrecommendations to the Board on The Westpac Group’s risk-reward strategy,setting risk appetite, approving frameworks, policies and processes formanaging risk, and determining whether to accept risks beyond management’sapproval discretion.

 

The Board RiskManagement Committee monitors the alignment of our risk profile with our riskappetite, which is defined in the Board Statement of Risk Appetite, and withour current and future capital requirements. The BRMC receives regular reportsfrom management on the effectiveness of our management of Westpac’s materialbusiness risks. More detail about the role of the BRMC is set out in theWestpac risk management governance structure table below.

 

The CEO andexecutive management team are responsible for implementing our risk managementstrategy and frameworks, and for developing policies, controls, processes andprocedures for identifying and managing risk in all of Westpac’s activities.

 

Our approach to riskmanagement is that ‘risk is everyone’s business’ and that responsibility andaccountability for risk begins with the business units that originate the risk.

 

209

----

 

**Note 27. Financial risk(continued)**

 

Westpac follows a ‘3Lines of Defence’ philosophy of risk management, the key elements of which are:

 

*The 1st Line of Defence — risk identification, riskmanagement and self-assurance*

 

Divisional businessunits are responsible for identifying, evaluating and managing the risks thatthey originate within approved risk appetite and policies. They are required toestablish and maintain appropriate risk management resources and self-assuranceprocesses.

 

*The 2nd Line of Defence — establishment of riskmanagement frameworks and policies and risk management oversight*

 

Our 2nd Line ofDefence has three layers:

 

·         our executive risk committees lead the optimisation of risk-reward byoverseeing and advising on the development of risk appetite statements, riskmanagement frameworks, policies and risk concentration controls and monitoringbusinesses’ risk profiles for alignment with approved appetites and strategies;

 

·         our Group Risk function is independent from the business divisions,reports to the Chief Risk Officer, and establishes and maintains the Group-widerisk management frameworks, policies and concentration limits that are approvedby the Board Risk Management Committee. It also oversees the establishment andmaintenance of Group-wide risk estimates, risk capital models and the adequacyand quality of reporting of risk management activities and related controls tosenior executive, the Board and relevant Board Committees; and

 

·         divisional risk areas are responsible for developing division-specificrisk appetite statements, policies, controls, procedures, monitoring andreporting capability, which align to the Board’s Statement of Risk Appetite andthe risk management frameworks approved by the BRMC. These risk areas areindependent of the Divisions’ 1st Line business areas, with the Risk GeneralManagers in each Division having direct reporting lines to the Chief RiskOfficer, as well as to their Division’s Group Executive.

 

*The 3rd Line of Defence — independent assurance*

 

Our Group Assurancefunction independently evaluates the adequacy and effectiveness of the Group’soverall risk management framework and controls.

 

This approach allowsrisks within our risk appetite to be balanced against appropriate rewards.

 

210

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 

The Westpac riskmanagement governance structure is set out in more detail in the table below:

 
| **Board**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   reviews and approves our overall risk management strategy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Board  Risk Management Committee (BRMC)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ·   provides recommendations to the Board on The Westpac Group’s  risk-reward strategy;

·   sets risk appetite;

·   approves frameworks and key policies for managing risk;

·   monitors our risk profile, performance, capital levels,  exposures against limits and management and control of our risks;

·   monitors changes anticipated in the economic and business  environment and other factors relevant to our risk profile;

·   oversees the development and ongoing review of key policies that  support our frameworks for managing risk; and

·   determines whether to accept risks beyond the approval  discretion provided to management.                                                                                                                                                                                           |
| **Other  Board Committees with a risk focus**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *Board  Audit Committee*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | *Board  Sustainability Committee* |
| ·   oversees the integrity of financial statements and financial  reporting systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ·   oversees environmental, social, governance and ethical  performance and issues. |
| *Board  Technology Committee*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | *Board  Remuneration Committee* |
| ·   oversees information technology strategy and implementation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ·   reviews any matters raised by the BRMC with respect to  risk-adjusted remuneration. |
| **Executive  Team**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ·   executes the Board-approved strategy;

·   assists with the development of the Board Statement of Risk  Appetite;

·   delivers the Group’s various strategic and performance goals  within the approved risk appetite; and

·   monitors key risks within each business unit, capital adequacy  and the Group’s reputation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Executive  risk committees**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *Westpac  Group Credit Risk Committee (CREDCO)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | *Westpac  Group Operational Risk & Compliance Committee (OPCO)* |
| ·   leads the optimisation of credit risk-reward across the Group;

·   oversees the credit risk management framework and key policies;

·   oversees our credit risk profile; and

·   identifies emerging credit risks and appropriate actions to  address these.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ·   leads the optimisation of operational risk-reward across the  Group;

·   oversees the operational risk management framework and key  supporting policies;

·   oversees our operational risk profile; and

·   identifies emerging operational risks and appropriate actions to  address these. |
| *Westpac  Group Asset & Liability Committee (ALCO)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | *Westpac  Group Market Risk Committee (MARCO)* |
| ·   leads the optimisation of funding & liquidity  risk-reward across the Group;

·   oversees the liquidity risk management framework and key  policies;

·   oversees the funding & liquidity risk profile; and

·   identifies emerging funding & liquidity risks and  appropriate actions to address these.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ·   leads the optimisation of market risk-reward across the Group;

·   oversees the market risk management framework and key policies;

·   oversees our market risk profile; and

·   identifies emerging market risks and appropriate actions to  address these. |
| *Westpac Group Remuneration Oversight Committee  (ROC)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ·   leads the optimisation of risk-adjusted remuneration across the  Group;

·   oversees the Group Remuneration Policy and provides assurance to  the CEO and Board Remuneration Committee that remuneration arrangements  across the Group encourage behaviour that supports Westpac’s long term  financial soundness and the risk management framework;

·   oversees the remuneration arrangements (other than for Group  Executives) for Responsible Persons (as defined in the Group’s Fit and Proper  Policy), risk and financial control personnel, and all other employees for  whom a significant portion of total remuneration is based on performance and  whose activities, either individually or collectively, may affect the  financial soundness of Westpac; and

·   oversees the criteria and rationale for determining the total  quantum of the Group variable reward pool. |
| **Group  and divisional risk management**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| *Group  Risk*

 

·   develops the Group-level risk management frameworks for approval  by the BRMC;

·   directs the review and development of key policies supporting  the risk management frameworks;

·   establishes risk concentration limits and monitors risk  concentrations; and

·   monitors compliance, regulatory obligations and emerging risk  issues.

 

*Divisional  risk management*

 

·   develops division-specific policies, controls, procedures, and  monitoring and reporting capability that align to the frameworks approved by  the BRMC.                                                                                                                                                                                                                                                                                                     |
| **Independent  internal review**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *Group  Assurance*

·   reviews the adequacy and effectiveness of management controls  for risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

211

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**Note 27. Financial risk(continued)**

 

**27.2 Credit risk management**

 

Credit Risk is therisk of financial loss where a customer or counterparty fails to meet theirfinancial obligations.

 

**27.2.1 Credit risk managementpolicy**

 

Westpac maintains acredit risk management framework and a number of key supporting policies, whichare intended to clearly define roles and responsibilities, acceptablepractices, limits and key controls:

 

·         the Credit Risk Management framework describes the principles,methodologies, systems, roles and responsibilities, reports and key controlsthat exist for managing credit risk in Westpac;

 

·         the Credit Risk Rating System policy describes the credit risk ratingsystem philosophy, design, key features and uses of rating outcomes; and

 

·         Westpac has established policies governing the management of three keytypes of concentration risk:

 

·         individual customers or groups of relatedcustomers;

 

·         specific industries (e.g. property); and

 

·         individual countries.

 

Westpac has anestablished policy governing the delegation of credit approval authorities anda set of formal limits for the extension of credit. These limits represent thedelegation of credit approval authority to responsible individuals throughoutthe organisation.

 

Credit manuals existin each business unit to govern the extension of credit. These manuals includegeneral policies covering the origination, evaluation, approval, documentation,settlement and ongoing management of credit risks. These manuals are regularlyupdated by the business units, with significant changes approved by Group Risk.

 

Sector policiesexist to guide the extension of credit where industry-specific guidelines areconsidered necessary (e.g. acceptable financial ratios or types ofcollateral). These policies are maintained by the business unit riskmanagement teams.

 

Westpac has anestablished related entity risk management framework and supporting policies,which include governance of credit exposures to related entities, so as tominimise contagion risk for the extended licensed entity and to ensurecompliance with the prudential limits prescribed by APRA.

 

**27.2.2 Provision and impairmentpolicy**

 

Provisions for loanimpairment represent management’s best estimate of the losses incurred in theloan portfolios as at the balance date. There are two components of Westpac’sloan impairment provisions: individually assessed provisions and collectivelyassessed provisions. In determining the individually assessed provisions,relevant considerations that have a bearing on the expected future cash flowsare taken into account, for example, the business prospects of the customer,the realisable value of collateral, Westpac’s position relative to otherclaimants, the reliability of customer information and the likely cost andduration of the work-out process. These judgments and estimates can change withtime as new information becomes available or as work-out strategies evolve,resulting in revisions to the impairment provision as individual decisions aremade.

 

The collectivelyassessed provisions are established on a portfolio basis taking into accountthe level of arrears, collateral, past loss experience and expected defaultsbased on portfolio trends. The most significant factors in establishing theseprovisions are estimated loss rates and related emergence period. The futurecredit quality of these portfolios is subject to uncertainties that could causeactual credit losses to differ from reported loan impairment provisions. Theseuncertainties include the economic environment, notably interest rates,unemployment levels, payment behaviour and bankruptcy rates.

 

212

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 

**27.2.3 Internal credit riskratings system**

 

The principalobjective of the credit risk rating system is to produce a reliable assessmentof the credit risk to which the Group is exposed.

 

Westpac’s internalcredit risk rating system for transaction—managed customers assigns a CustomerRisk Grade (CRG) to each customer, corresponding to their expected probabilityof default (PD). Each facility is assigned a loss given default (LGD). TheWestpac risk rating system has 20 risk grades for non-defaulted customers and10 risk grades for defaulted customers. Non-defaulted CRGs are mapped to Moody’sand Standard & Poor’s (S&P) external senior ranking unsecuredratings. Customers that are not transaction-managed (referred to as theprogram-managed portfolio) are segmented into pools of similar risk. Segmentsare created by analysing characteristics that have historically provenpredictive in determining if an account is likely to go into default. Customersare then grouped according to these predictive characteristics and each segmentassigned a PD and LGD.

 

The table belowshows the current alignment between Westpac’s CRGs and the correspondingexternal rating. Note that only high-level CRG groupings are shown.

 
| **Financial Statement Disclosure** | ** ** | **Westpac CRG** | ** ** | **Moody’s Rating** | ** ** | **S&P Rating** |
|----------------------------------------------|------------|----------------------|------------|------------------------------|------------|-------------------------|
| Strong                                       |       | A                    |       | Aaa  – Aa3              |       | AAA  – AA–    |
|                                         |       | B                    |       | A1  – A3                |       | A+  – A–      |
|                                         |       | C                    |       | Baa1  – Baa3            |       | BBB+  – BBB–  |
| Good/satisfactory                            |       | D                    |       | Ba1  – B1               |       | BB+  – B+          |

 
| **Financial Statement Disclosure** | ** ** | **Westpac CRG** | ** ** | ** ** | ** ** | **Definitions**     |
|----------------------------------------------|------------|----------------------|------------|------------|------------|---------------------|
| Weak                                         |       | E                    |       |       |       | Watchlist           |
|                                         |       | F                    |       |       |       | Special  Mention    |
| Weak/default/non-performing                  |       | G  – H          |       |       |       | Substandard/Default |

 

***Control mechanisms for the credit risk rating system***

 

Westpac’s creditrisk rating system is reviewed annually to confirm that the rating criteria andprocedures are appropriate given the current portfolio and external conditions.The BRMC and CREDCO monitor the risk profile, performance and management ofWestpac’s credit portfolio and development and review of key credit riskpolicies. All models materially impacting the risk rating process areperiodically reviewed in accordance with Westpac’s model risk policy. Specificcredit risk estimates (including PD, LGD and exposure at default (EAD) levels)are overseen, reviewed annually and approved by the Credit Risk EstimatesCommittee (a subcommittee of CREDCO).

 

213

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**Note 27. Financial risk(continued)**

 

**27.2.4 Credit risk mitigation,collateral and other credit enhancements**

 

Westpac uses avariety of techniques to reduce the credit risk arising from its lendingactivities. Enforceable legal documentation establishes Westpac’s direct,irrevocable and unconditional recourse to any collateral, security or othercredit enhancements provided.

 

The table below describesthe nature of collateral held for financial asset classes:

 
| Cash and balances  with central banks, including regulatory deposits |   | These exposures  are generally considered to be low risk due to the nature of the  counterparties. Collateral is generally not sought on these balances.                                                                                                                                                                                                              |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                  |
| Receivables due  from other financial institutions                   |   | These exposures  are mainly to relatively low risk banks (Rated A+, AA— or better). Collateral  is generally not sought on these balances.                                                                                                                                                                                                                       |
|                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                  |
| Derivative  financial instruments                                    |   | Netting agreements  are typically used to enable the effects of derivative assets and liabilities  with the same counterparty to be offset when measuring these exposures.  Additionally, collateralisation agreements are also typically entered into  with major derivatives counterparties to avoid the potential build up of  excessive mark-to-market positions. |
|                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                  |
| Trading assets                                                       |   | These exposures  are carried at fair value which reflects the credit risk. No collateral is  sought directly from the issuer or counterparty; however this may be implicit  in the terms of the instrument.                                                                                                                                                      |
|                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                  |
| Other financial  assets designated at fair value                     |   | These exposures  are carried at fair value which reflects the credit risk. The terms of debt  securities may include collateralisation. Loans and advances may be  collateralised.                                                                                                                                                                                    |
|                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                  |
| Available-for-sale  securities                                       |   | Collateral is not  sought directly with respect to these exposures; however collateralisation  may be implicit in the structure of the asset.                                                                                                                                                                                                                         |
|                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                  |
| Loans — housing  and personal(1)                                |   | Loans — housing  and personal may be secured, partially secured or unsecured depending on the  product. Security is typically taken by a fixed and/or floating charge over  property or other assets.                                                                                                                                                       |
|                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                  |
| Loans —  business(1)                                            |   | Loans — business  may be secured, partially secured or unsecured. Security is typically taken  by way of a fixed and/or floating charge over property, business assets, or  other assets. Other forms of credit protection may also be sought or taken  out if warranted.                                                                                        |
|                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                  |
| Life insurance  assets                                               |   | These assets are  carried at fair value, which reflects the credit risk. No collateral is held  or provided on these assets other than a fixed charge over the properties  backing Australian mortgage investments. These properties are valued on  origination of the loan, upon extension of facilities or during enforcement  actions only.                        |
|                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                  |
| Due from  subsidiaries                                               |   | These exposures  are generally considered to be low risk due to the nature of the  counterparties. Collateral is generally not sought on these balances.                                                                                                                                                                                                              |

 

----

(1)                                  This includes collateral held in relation toassociated credit commitments.

 

***Risk reduction***

 

Westpac recognisesthe following as eligible collateral for credit risk mitigation by way of riskreduction:

 

·         cash, primarily in Australian dollars (AUD), New Zealand dollars (NZD),US dollars (USD), British pounds (GBP) or Euro (EUR);

 

·         bonds as issued by Australian Commonwealth, State and Territorygovernments or their Public Sector Enterprises, provided these attract a zerorisk-weighting under Australian Prudential Standard (APS) 112;

 

·         securities issued by other specified AAA-rated sovereign governments;and

 

·         credit-linked notes (provided the proceeds are invested in cash or othereligible collateral described above).

 

***Risk transfer***

 

For mitigation byway of risk transfer, Westpac only recognises unconditional irrevocableguarantees or standby letters of credit issued by, or eligible creditderivative protection bought from, the following entities, provided they arenot related to the underlying obligor:

 

·         sovereign entities;

 

·         public sector entities in Australia and New Zealand;

 

·         banks or securities firms; and

 

·         other entities with a minimum risk grade equivalent of A3 / A-.

 

214

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 

***Management of risk mitigation***

 

Westpac facilitatesthe management of these risks through controls covering:

 

·         collateral valuation and management;

 

·         credit portfolio management; and

 

·         balance sheet netting.

 

*Collateral valuation and management*

 

Westpac revaluescollateral related to financial markets positions on a daily basis to monitorthe net risk position, and has formal processes in place so that calls forcollateral top-up or exposure reduction are made promptly. An independentoperational unit has responsibility for monitoring these positions. Thecollaterisation arrangements are documented via the Support Annex of theInternational Swaps and Derivatives Association (ISDA) dealing agreements.

 

*Credit Portfolio Management*

 

Credit PortfolioManagement (CPM) is a division that manages the overall risk in Westpac’scorporate, sovereign and bank credit portfolios. CPM includes a dedicatedportfolio trading desk with the specific mandate of actively monitoring theunderlying exposure and any offsetting hedge positions. Specific reporting ismaintained and monitored on the matching of hedges with underlying facilities,with any adjustments to hedges (including unwinds or extensions) manageddynamically. CPM ensures that credit protection is acquired from sovereignentities, public sector entities in Australia and New Zealand, banks orsecurities firms and other entities with a minimum risk grade equivalent ofA3/A-.

 

*Balance sheet netting*

 

Risk reduction by wayof current account set-off is recognised for exposures to creditworthycustomers domiciled in Australia and New Zealand only. Customers are requiredto enter into formal agreements giving Westpac the unfettered right to set-offgross credit and debit balances in their nominated accounts to determineWestpac’s net exposure within each of these two jurisdictions. Cross-borderset-offs are not permitted.

 

Close-out netting isundertaken for off balance sheet financial market transactions withcounterparties with whom Westpac has entered into master dealing agreementswhich allow such netting in specified jurisdictions. Close-out nettingeffectively aggregates pre-settlement risk exposure at time of default, thusreducing overall exposure.

 

**27.2.5 Credit risk concentrations**

 

A concentration ofcredit risk exists when a number of counterparties are engaged in similaractivities and have similar economic characteristics that would cause theirability to meet contractual obligations to be similarly affected by changes ineconomic or other conditions.

 

Westpac monitors itscredit portfolio to manage risk concentrations. Exposures are actively managedfrom a portfolio perspective, with risk mitigation techniques used tore-balance the portfolio.

 

***Individual customers or groups of related customers***

 

Westpac has largeexposure limits governing the aggregate size of credit exposure normallyacceptable to individual customers and groups of related customers. Theselimits are tiered by customer risk grade.

 

***Specific industries***

 

Exposures tobusinesses, government and other financial institutions are classified into anumber of industry clusters based on groupings of related ANZSIC codes and aremonitored against industry risk appetite limits. The level of industry risk ismeasured on a dynamic basis.

 

***Individual countries***

 

Westpac has limitsgoverning risks related to individual countries, such as political situations,government policies, economic conditions or other country-specific events, thatmay adversely affect either a customer’s ability to purchase or transfercurrency to meet its obligations to Westpac, or Westpac’s ability to realiseits assets in a particular country. Such risks include, but are not limited to,exchange control events, nationalisation, war, disaster, economic meltdown orgovernment failure.

 

215

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**Note 27. Financial risk(continued)**

 

The table below setsout the maximum exposure to credit risk (excluding any collateral received) andthe credit risk concentrations to which the Group and the Parent Entity isexposed. The total will not reconcile to the Group or Parent Entity’s totalassets on the balance sheet as cash, non-financial assets and other financialassets have been excluded from the table below. Investments in subsidiaries anddue from subsidiaries have also been excluded from the Parent Entity’s disclosure.

 
| ** **                                        | ** ** | **Consolidated 2010** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **Trading  Securities**    | ** ** | **Other  Financial  Assets  Designated  at Fair Value** | ** ** | **Available-For-Sale  Securities** | ** ** | **Loans -  housing  and  personal** | ** ** | **Loans -  business** | ** ** | **Derivatives** | ** ** | **Life  Insurance  Assets** | ** ** | **Total (on  balance  sheet)** | ** ** | **Credit  Commitments** | ** ** |
| ** **                                        | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Australia**                                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |   |   |
| Accommodation, cafes and restaurants              |       | —                     |       | — |   | — |   | 141 |   | 7,054 |   | 31 |   | — |   | 7,226 |   | 896 |   |
| Agriculture, forestry and fishing                 |       | —                     |       | — |   | — |   | 99 |   | 7,698 |   | 27 |   | — |   | 7,824 |   | 1,523 |   |
| Construction                                      |       | 1                          |       | — |   | — |   | 317 |   | 5,651 |   | 100 |   | — |   | 6,069 |   | 3,238 |   |
| Finance and insurance                             |       | 21,683                     |       | 2,849 |   | 357 |   | 1,275 |   | 12,368 |   | 28,799 |   | 9,963 |   | 77,294 |   | 13,850 |   |
| Government, administration and defence            |       | 9,537                      |       | 28 |   | 10,248 |   | — |   | 806 |   | 266 |   | — |   | 20,885 |   | 1,251 |   |
| Manufacturing                                     |       | 31                         |       | 18 |   | — |   | 191 |   | 10,767 |   | 511 |   | 122 |   | 11,640 |   | 6,891 |   |
| Mining                                            |       | 9                          |       | 11 |   | — |   | 31 |   | 1,306 |   | 38 |   | 790 |   | 2,185 |   | 1,650 |   |
| Property, property services and business services |       | 56                         |       | 54 |   | 89 |   | 2,600 |   | 45,798 |   | 566 |   | 871 |   | 50,034 |   | 12,111 |   |
| Services(1)                                       |       | 80                         |       | — |   | 4 |   | 525 |   | 8,883 |   | 41 |   | 134 |   | 9,667 |   | 3,739 |   |
| Trade(2)                                          |       | 55                         |       | — |   | — |   | 449 |   | 15,791 |   | 231 |   | 153 |   | 16,679 |   | 6,000 |   |
| Transport and storage                             |       | 133                        |       | 26 |   | 316 |   | 62 |   | 7,289 |   | 279 |   | 75 |   | 8,180 |   | 2,499 |   |
| Utilities(3)                                      |       | 71                         |       | 26 |   | 177 |   | 20 |   | 2,401 |   | 593 |   | 76 |   | 3,364 |   | 2,601 |   |
| Retail lending                                    |       | —                     |       | 318 |   | — |   | 301,150 |   | — |   | 148 |   | — |   | 301,616 |   | 70,482 |   |
| Other                                             |       | —                     |       | — |   | 1 |   | 11 |   | 1,271 |   | 69 |   | 24 |   | 1,376 |   | 529 |   |
| **Total Australia**                               |       | 31,656                     |       | 3,330 |   | 11,192 |   | 306,871 |   | 127,083 |   | 31,699 |   | 12,208 |   | 524,039 |   | 127,260 |   |
| **New Zealand**                                   |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | —                     |       | — |   | — |   | 264 |   | 144 |   | 1 |   | 1 |   | 410 |   | 53 |   |
| Agriculture, forestry and fishing                 |       | 2                          |       | — |   | — |   | 497 |   | 4,177 |   | 98 |   | 4 |   | 4,778 |   | 433 |   |
| Construction                                      |       | —                     |       | — |   | — |   | 694 |   | 386 |   | 6 |   | 1 |   | 1,087 |   | 276 |   |
| Finance and insurance                             |       | 2,397                      |       | — |   | 70 |   | 418 |   | 982 |   | 3,359 |   | 49 |   | 7,275 |   | 1,027 |   |
| Government, administration and defence            |       | 1,764                      |       | — |   | — |   | 3 |   | 458 |   | 78 |   | 41 |   | 2,344 |   | 499 |   |
| Manufacturing                                     |       | —                     |       | — |   | — |   | 369 |   | 1,287 |   | 72 |   | 1 |   | 1,729 |   | 1,169 |   |
| Mining                                            |       | —                     |       | — |   | — |   | 15 |   | 302 |   | 3 |   | — |   | 320 |   | 137 |   |
| Property, property services and business services |       | —                     |       | — |   | — |   | 4,098 |   | 4,644 |   | 222 |   | — |   | 8,964 |   | 1,285 |   |
| Services(1)                                       |       | 17                         |       | — |   | — |   | 1,277 |   | 702 |   | 35 |   | 2 |   | 2,033 |   | 602 |   |
| Trade(2)                                          |       | —                     |       | — |   | — |   | 946 |   | 1,747 |   | 32 |   | — |   | 2,725 |   | 1,254 |   |
| Transport and storage                             |       | 1                          |       | — |   | — |   | 166 |   | 841 |   | 45 |   | — |   | 1,053 |   | 440 |   |
| Utilities(3)                                      |       | 102                        |       | — |   | — |   | 68 |   | 685 |   | 157 |   | 2 |   | 1,014 |   | 1,187 |   |
| Retail lending                                    |       | —                     |       | — |   | — |   | 18,484 |   | — |   | — |   | 1 |   | 18,485 |   | 2,216 |   |
| Other                                             |       | —                     |       | — |   | — |   | 32 |   | 99 |   | 202 |   | — |   | 333 |   | 2,855 |   |
| **Total New Zealand**                             |       | 4,283                      |       | — |   | 70 |   | 27,331 |   | 16,454 |   | 4,310 |   | 102 |   | 52,550 |   | 13,433 |   |

 

----

(1)          Services includes education, health and communityservices, cultural and recreational services and personal and other services.

(2)          Trade includes wholesale trade and retail trade.

(3)          Utilities includes electricity, gas and water andcommunication services.

 

216

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NOTESTO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 
| ** **                                        | ** ** | **Consolidated 2010** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **Trading  Securities**    | ** ** | **Other  Financial  Assets  Designated  at Fair Value** | ** ** | **Available-For-Sale  Securities** | ** ** | **Loans -  housing  and  personal** | ** ** | **Loans -  business** | ** ** | **Derivatives** | ** ** | **Life  Insurance  Assets** | ** ** | **Total (on  balance  sheet)** | ** ** | **Credit  Commitments** | ** ** |
| ** **                                        | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Other Overseas**                                |       |                       |       |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |   |   |
| Accommodation, cafes and restaurants              |       | —                     |       | — |   | — |   | 3 |   | 159 |   | — |   | — |   | 162 |   | 66 |   |
| Agriculture, forestry and fishing                 |       | —                     |       | — |   | — |   | — |   | 25 |   | — |   | — |   | 25 |   | 15 |   |
| Construction                                      |       | —                     |       | — |   | — |   | 8 |   | 92 |   | — |   | — |   | 100 |   | 230 |   |
| Finance and insurance                             |       | 4,072                      |       | 134 |   | 456 |   | 1 |   | 485 |   | 76 |   | — |   | 5,224 |   | 3,426 |   |
| Government, administration and defence            |       | —                     |       | — |   | 406 |   | — |   | 13 |   | — |   | — |   | 419 |   | 227 |   |
| Manufacturing                                     |       | —                     |       | — |   | — |   | 2 |   | 485 |   | 15 |   | — |   | 502 |   | 5,110 |   |
| Mining                                            |       | —                     |       | — |   | — |   | 1 |   | 45 |   | — |   | — |   | 46 |   | 598 |   |
| Property, property services and business services |       | —                     |       | — |   | — |   | 51 |   | 363 |   | — |   | — |   | 414 |   | 304 |   |
| Services(1)                                       |       | —                     |       | — |   | — |   | 4 |   | 43 |   | — |   | — |   | 47 |   | 38 |   |
| Trade(2)                                          |       | —                     |       | — |   | — |   | 9 |   | 587 |   | — |   | — |   | 596 |   | 1,705 |   |
| Transport and storage                             |       | —                     |       | — |   | — |   | 3 |   | 790 |   | 2 |   | — |   | 795 |   | 186 |   |
| Utilities(3)                                      |       | —                     |       | — |   | — |   | — |   | 351 |   | — |   | — |   | 351 |   | 381 |   |
| Retail lending                                    |       | —                     |       | — |   | — |   | 947 |   | 143 |   | — |   | — |   | 1,090 |   | 279 |   |
| Other                                             |       | —                     |       | — |   | — |   | 7 |   | 10 |   | — |   | — |   | 17 |   | — |   |
| **Total Other Overseas**                          |       | 4,072                      |       | 134 |   | 862 |   | 1,036 |   | 3,591 |   | 93 |   | — |   | 9,788 |   | 12,565 |   |
| ** **                                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other risk concentrations**                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amounts due from financial institutions           |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   | 12,588 |   |   |   |
| Regulatory deposits                               |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   | 1,322 |   |   |   |
| **Total gross credit risk**                       |       | 40,011                     |       | 3,464 |   | 12,124 |   | 335,238 |   | 147,128 |   | 36,102 |   | 12,310 |   | 600,287 |   | 153,258 |   |

 

----

(1)          Services includes education, health and communityservices, cultural and recreational services and personal and other services.

(2)          Trade includes wholesale trade and retail trade.

(3)          Utilities includes electricity, gas and water andcommunication services.

 

217

----

 

**Note 27. Financial risk(continued)**

 
| ** **                                        | ** ** | **Consolidated 2009** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **Trading  Securities(1)** | ** ** | **Other  Financial  Assets  Designated  at Fair Value** | ** ** | **Available-For-Sale  Securities** | ** ** | **Loans -  housing  and  personal** | ** ** | **Loans -  business** | ** ** | **Derivatives** | ** ** | **Life  Insurance  Assets** | ** ** | **Total (on  balance  sheet)** | ** ** | **Credit  Commitments** | ** ** |
| ** **                                        | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Australia**                                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |   |   |
| Accommodation, cafes and restaurants              |       | —                     |       | — |   | — |   | 106 |   | 7,068 |   | 34 |   | — |   | 7,208 |   | 796 |   |
| Agriculture, forestry and fishing                 |       | —                     |       | — |   | — |   | 89 |   | 7,706 |   | 16 |   | — |   | 7,811 |   | 1,311 |   |
| Construction                                      |       | —                     |       | — |   | — |   | 236 |   | 6,275 |   | 51 |   | — |   | 6,562 |   | 7,514 |   |
| Finance and insurance                             |       | 25,548                     |       | 2,256 |   | 785 |   | 1,126 |   | 18,262 |   | 24,775 |   | 10,078 |   | 82,830 |   | 15,876 |   |
| Government, administration and defence            |       | 8,477                      |       | 43 |   | — |   | — |   | 563 |   | 224 |   | — |   | 9,307 |   | 1,821 |   |
| Manufacturing                                     |       | 153                        |       | 75 |   | — |   | 142 |   | 12,145 |   | 621 |   | 27 |   | 13,163 |   | 8,166 |   |
| Mining                                            |       | 22                         |       | 20 |   | — |   | 18 |   | 1,865 |   | 52 |   | 719 |   | 2,696 |   | 4,512 |   |
| Property, property services and business services |       | 126                        |       | 36 |   | 53 |   | 2,160 |   | 51,906 |   | 739 |   | 779 |   | 55,799 |   | 12,596 |   |
| Services(2)                                       |       | 56                         |       | 46 |   | — |   | 406 |   | 9,757 |   | 33 |   | 129 |   | 10,427 |   | 1,359 |   |
| Trade(3)                                          |       | 19                         |       | — |   | — |   | 341 |   | 15,342 |   | 149 |   | 194 |   | 16,045 |   | 6,033 |   |
| Transport and storage                             |       | 106                        |       | 11 |   | 10 |   | 48 |   | 7,991 |   | 187 |   | 64 |   | 8,417 |   | 1,380 |   |
| Utilities(4)                                      |       | 32                         |       | 3 |   | 157 |   | 18 |   | 2,622 |   | 614 |   | 102 |   | 3,548 |   | 3,551 |   |
| Retail lending                                    |       | —                     |       | 383 |   | — |   | 267,436 |   | 54 |   | 372 |   | 163 |   | 268,408 |   | 50,920 |   |
| Other                                             |       | —                     |       | — |   | 1 |   | 250 |   | 2,139 |   | 78 |   | 36 |   | 2,504 |   | 1,369 |   |
| **Total Australia**                               |       | 34,539                     |       | 2,873 |   | 1,006 |   | 272,376 |   | 143,695 |   | 27,945 |   | 12,291 |   | 494,725 |   | 117,204 |   |
| **New Zealand**                                   |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | —                     |       | — |   | — |   | 268 |   | 206 |   | — |   | — |   | 474 |   | 66 |   |
| Agriculture, forestry and fishing                 |       | —                     |       | — |   | — |   | 494 |   | 4,357 |   | 395 |   | 3 |   | 5,249 |   | 494 |   |
| Construction                                      |       | —                     |       | — |   | — |   | 660 |   | 473 |   | 2 |   | 1 |   | 1,136 |   | 742 |   |
| Finance and insurance                             |       | 2,512                      |       | — |   | 70 |   | 357 |   | 1,270 |   | 4,602 |   | 39 |   | 8,850 |   | 777 |   |
| Government, administration and defence            |       | 1,918                      |       | — |   | — |   | 2 |   | 438 |   | 39 |   | 43 |   | 2,440 |   | 530 |   |
| Manufacturing                                     |       | —                     |       | — |   | — |   | 394 |   | 1,503 |   | 12 |   | 2 |   | 1,911 |   | 1,334 |   |
| Mining                                            |       | —                     |       | — |   | — |   | 11 |   | 253 |   | — |   | — |   | 264 |   | 209 |   |
| Property, property services and business services |       | —                     |       | — |   | — |   | 4,173 |   | 5,333 |   | 55 |   | — |   | 9,561 |   | 1,250 |   |
| Services(2)                                       |       | —                     |       | — |   | — |   | 1,387 |   | 739 |   | — |   | 1 |   | 2,127 |   | — |   |
| Trade(3)                                          |       | —                     |       | — |   | — |   | 900 |   | 1,863 |   | 21 |   | — |   | 2,784 |   | 1,175 |   |
| Transport and storage                             |       | —                     |       | — |   | — |   | 163 |   | 959 |   | 2 |   | — |   | 1,124 |   | 420 |   |
| Utilities(4)                                      |       | —                     |       | — |   | — |   | 71 |   | 685 |   | 9 |   | 3 |   | 768 |   | 1,262 |   |
| Retail lending                                    |       | —                     |       | — |   | — |   | 19,002 |   | — |   | 26 |   | 1 |   | 19,029 |   | 5,977 |   |
| Other                                             |       | 2                          |       | — |   | — |   | — |   | 119 |   | 43 |   | — |   | 164 |   | — |   |
| **Total New Zealand**                             |       | 4,432                      |       | — |   | 70 |   | 27,882 |   | 18,198 |   | 5,206 |   | 93 |   | 55,881 |   | 14,236 |   |

 

----

(1)          In the current year we have revised our presentationand reclassified other bank issued certificates of deposit from receivables duefrom other financial institutions to trading securities. To improvepresentation, we have revised comparative periods. Refer to Note 1(a)(ii) formore details.

(2)          Services includes education, health and communityservices, cultural and recreational services and personal and other services.

(3)          Trade includes wholesale trade and retail trade.

(4)          Utilities includes electricity, gas and water andcommunication services.

 

218

----

 

NOTESTO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 
| ** **                                        | ** ** | **Consolidated 2009** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **Trading  Securities(1)** | ** ** | **Other  Financial  Assets  Designated  at Fair Value** | ** ** | **Available-For-Sale  Securities** | ** ** | **Loans -  housing  and  personal** | ** ** | **Loans -  business** | ** ** | **Derivatives** | ** ** | **Life  Insurance  Assets** | ** ** | **Total (on  balance  sheet)** | ** ** | **Credit  Commitments** | ** ** |
| ** **                                        | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Other Overseas**                                |       |                       |       |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |   |   |
| Accommodation, cafes and restaurants              |       | —                     |       | — |   | — |   | 15 |   | 202 |   | — |   | — |   | 217 |   | 45 |   |
| Agriculture, forestry and fishing                 |       | —                     |       | — |   | — |   | 2 |   | 50 |   | — |   | — |   | 52 |   | 7 |   |
| Construction                                      |       | —                     |       | — |   | — |   | 2 |   | 107 |   | — |   | — |   | 109 |   | 266 |   |
| Finance and insurance                             |       | 4,143                      |       | 145 |   | 212 |   | 50 |   | 1,022 |   | 30 |   | — |   | 5,602 |   | 6,065 |   |
| Government, administration and defence            |       | —                     |       | — |   | 339 |   | — |   | 10 |   | — |   | — |   | 349 |   | 6 |   |
| Manufacturing                                     |       | —                     |       | — |   | — |   | 2 |   | 708 |   | 3 |   | — |   | 713 |   | 1,703 |   |
| Mining                                            |       | —                     |       | — |   | — |   | — |   | 27 |   | — |   | — |   | 27 |   | 222 |   |
| Property, property services and business services |       | —                     |       | 18 |   | — |   | 37 |   | 301 |   | 2 |   | — |   | 358 |   | 1,879 |   |
| Services(2)                                       |       | —                     |       | 27 |   | — |   | 9 |   | 257 |   | — |   | — |   | 293 |   | — |   |
| Trade(3)                                          |       | —                     |       | — |   | — |   | 5 |   | 208 |   | — |   | — |   | 213 |   | 459 |   |
| Transport and storage                             |       | —                     |       | — |   | — |   | 4 |   | 850 |   | 1 |   | — |   | 855 |   | 92 |   |
| Utilities(4)                                      |       | —                     |       | — |   | — |   | — |   | 584 |   | — |   | — |   | 584 |   | 109 |   |
| Retail lending                                    |       | —                     |       | — |   | — |   | 59 |   | 42 |   | — |   | — |   | 101 |   | 83 |   |
| Other                                             |       | —                     |       | — |   | 3 |   | 797 |   | 342 |   | — |   | — |   | 1,142 |   | 112 |   |
| **Total Other Overseas**                          |       | 4,143                      |       | 190 |   | 554 |   | 982 |   | 4,710 |   | 36 |   | — |   | 10,615 |   | 11,048 |   |
| ** **                                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other risk concentrations**                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amounts due from financial institutions(1)        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   | 9,974 |   |   |   |
| Regulatory deposits                               |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   | 766 |   |   |   |
| **Total gross credit risk**                       |       | 43,114                     |       | 3,063 |   | 1,630 |   | 301,240 |   | 166,603 |   | 33,187 |   | 12,384 |   | 571,961 |   | 142,488 |   |

 

----

(1)          In the current year we have revised our presentationand reclassified other bank issued certificates of deposit from receivables duefrom other financial institutions to trading securities. To improvepresentation, we have revised comparative periods. Refer to Note 1(a)(ii) formore details.

(2)          Services includes education, health and communityservices, cultural and recreational services and personal and other services.

(3)          Trade includes wholesale trade and retail trade.

(4)          Utilities includes electricity, gas and water andcommunication services.

 

219

----

 

**Note 27. Financial risk(continued)**

 
| ** **                                        | ** ** | **Parent Entity 2010** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **Trading  Securities**          | ** ** | **Other  Financial  Assets  Designated  at Fair Value** | ** ** | **Available-For-Sale  Securities** | ** ** | **Loans -  housing  and  personal** | ** ** | **Loans -  business** | ** ** | **Derivatives** | ** ** | **Life  Insurance  Assets** | ** ** | **Total  (on  balance  sheet)** | ** ** | **Credit  Commitments** | ** ** |
| ** **                                        | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Australia**                                     |       |                             |       |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | —                           |       | — |   | — |   | 141 |   | 6,941 |   | 31 |   | — |   | 7,113 |   | 896 |   |
| Agriculture, forestry and fishing                 |       | —                           |       | — |   | — |   | 99 |   | 7,519 |   | 27 |   | — |   | 7,645 |   | 1,523 |   |
| Construction                                      |       | 1                                |       | — |   | — |   | 317 |   | 4,869 |   | 100 |   | — |   | 5,287 |   | 3,238 |   |
| Finance and insurance                             |       | 21,510                           |       | 897 |   | 328 |   | 1,275 |   | 12,644 |   | 28,627 |   | — |   | 65,281 |   | 13,850 |   |
| Government, administration and defence            |       | 9,537                            |       | — |   | 10,247 |   | — |   | 750 |   | 266 |   | — |   | 20,800 |   | 1,251 |   |
| Manufacturing                                     |       | 31                               |       | 18 |   | — |   | 191 |   | 10,341 |   | 511 |   | — |   | 11,092 |   | 6,891 |   |
| Mining                                            |       | 9                                |       | — |   | — |   | 31 |   | 1,158 |   | 37 |   | — |   | 1,235 |   | 1,650 |   |
| Property, property services and business services |       | 34                               |       | 51 |   | 56 |   | 2,598 |   | 44,803 |   | 566 |   | — |   | 48,108 |   | 12,111 |   |
| Services(1)                                       |       | 80                               |       | — |   | 4 |   | 524 |   | 7,906 |   | 41 |   | — |   | 8,555 |   | 3,739 |   |
| Trade(2)                                          |       | 55                               |       | — |   | — |   | 448 |   | 15,026 |   | 231 |   | — |   | 15,760 |   | 6,000 |   |
| Transport and storage                             |       | 110                              |       | 26 |   | 12 |   | 62 |   | 6,789 |   | 279 |   | — |   | 7,278 |   | 2,499 |   |
| Utilities(3)                                      |       | 71                               |       | 10 |   | 177 |   | 20 |   | 2,302 |   | 593 |   | — |   | 3,173 |   | 2,601 |   |
| Retail Lending                                    |       | —                           |       | 318 |   | — |   | 298,531 |   | — |   | 148 |   | — |   | 298,997 |   | 70,482 |   |
| Other                                             |       | —                           |       | — |   | 1 |   | 11 |   | 1,257 |   | 69 |   | — |   | 1,338 |   | 529 |   |
| **Total Australia**                               |       | 31,438                           |       | 1,320 |   | 10,825 |   | 304,248 |   | 122,305 |   | 31,526 |   | — |   | 501,662 |   | 127,260 |   |
| **New Zealand**                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | —                           |       | — |   | — |   | — |   | 2 |   | 1 |   | — |   | 3 |   | 19 |   |
| Agriculture, forestry and fishing                 |       | 2                                |       | — |   | — |   | — |   | 333 |   | 98 |   | — |   | 433 |   | 156 |   |
| Construction                                      |       | —                           |       | — |   | — |   | — |   | 47 |   | 6 |   | — |   | 53 |   | 100 |   |
| Finance and insurance                             |       | 1,480                            |       | — |   | — |   | — |   | 736 |   | 3,345 |   | — |   | 5,561 |   | 370 |   |
| Government, administration and defence            |       | 713                              |       | — |   | — |   | — |   | 60 |   | 78 |   | — |   | 851 |   | 180 |   |
| Manufacturing                                     |       | —                           |       | — |   | — |   | — |   | 590 |   | 72 |   | — |   | 662 |   | 422 |   |
| Mining                                            |       | —                           |       | — |   | — |   | — |   | 259 |   | 3 |   | — |   | 262 |   | 50 |   |
| Property, property services and business services |       | —                           |       | — |   | — |   | — |   | 965 |   | 222 |   | — |   | 1,187 |   | 463 |   |
| Services(1)                                       |       | 17                               |       | — |   | — |   | — |   | 216 |   | 35 |   | — |   | 268 |   | 217 |   |
| Trade(2)                                          |       | —                           |       | — |   | — |   | — |   | 903 |   | 32 |   | — |   | 935 |   | 452 |   |
| Transport and storage                             |       | 1                                |       | — |   | — |   | — |   | 418 |   | 45 |   | — |   | 464 |   | 159 |   |
| Utilities(3)                                      |       | 102                              |       | — |   | — |   | — |   | 584 |   | 157 |   | — |   | 843 |   | 428 |   |
| Retail lending                                    |       | —                           |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 799 |   |
| Other                                             |       | —                           |       | — |   | — |   | — |   | 59 |   | 202 |   | — |   | 261 |   | 1,030 |   |
| **Total New Zealand**                             |       | 2,315                            |       | — |   | — |   | — |   | 5,172 |   | 4,296 |   | — |   | 11,783 |   | 4,845 |   |

 

----

(1)          Services includes education, health and communityservices, cultural and recreational services and personal and other services.

(2)          Trade includes wholesale trade and retail trade.

(3)          Utilities includes electricity, gas and water andcommunication services.

 

220

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 
| ** **                                        | ** ** | **Parent Entity 2010** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **Trading  Securities**          | ** ** | **Other  Financial  Assets  Designated  at Fair Value** | ** ** | **Available-For-Sale  Securities** | ** ** | **Loans -  housing  and  personal** | ** ** | **Loans -  business** | ** ** | **Derivatives** | ** ** | **Life  Insurance  Assets** | ** ** | **Total  (on  balance  sheet)** | ** ** | **Credit  Commitments** | ** ** |
| ** **                                        | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Other Overseas**                                |       |                             |       |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | —                           |       | — |   | — |   | 3 |   | 140 |   | — |   | — |   | 143 |   | 65 |   |
| Agriculture, forestry and fishing                 |       | —                           |       | — |   | — |   | — |   | 17 |   | — |   | — |   | 17 |   | 14 |   |
| Construction                                      |       | —                           |       | — |   | — |   | 5 |   | 72 |   | — |   | — |   | 77 |   | 225 |   |
| Finance and insurance                             |       | 4,068                            |       | 4 |   | 79 |   | — |   | 461 |   | 74 |   | — |   | 4,686 |   | 3,355 |   |
| Government, administration and defence            |       | —                           |       | — |   | 28 |   | — |   | 11 |   | — |   | — |   | 39 |   | 222 |   |
| Manufacturing                                     |       | —                           |       | — |   | — |   | 2 |   | 414 |   | 12 |   | — |   | 428 |   | 5,007 |   |
| Mining                                            |       | —                           |       | — |   | — |   | — |   | 34 |   | — |   | — |   | 34 |   | 585 |   |
| Property, property services and business services |       | —                           |       | — |   | — |   | 18 |   | 196 |   | — |   | — |   | 214 |   | 298 |   |
| Services(1)                                       |       | —                           |       | — |   | — |   | 1 |   | 32 |   | — |   | — |   | 33 |   | 37 |   |
| Trade(2)                                          |       | —                           |       | — |   | — |   | 5 |   | 471 |   | — |   | — |   | 476 |   | 1,669 |   |
| Transport and storage                             |       | —                           |       | — |   | — |   | 2 |   | 642 |   | — |   | — |   | 644 |   | 182 |   |
| Utilities(3)                                      |       | —                           |       | — |   | — |   | — |   | 316 |   | — |   | — |   | 316 |   | 373 |   |
| Retail lending                                    |       | —                           |       | — |   | — |   | 479 |   | 123 |   | — |   | — |   | 602 |   | 273 |   |
| Other                                             |       | —                           |       | — |   | — |   | 5 |   | 5 |   | — |   | — |   | 10 |   | — |   |
| **Total Other Overseas**                          |       | 4,068                            |       | 4 |   | 107 |   | 520 |   | 2,934 |   | 86 |   | — |   | 7,719 |   | 12,305 |   |
| **Other risk concentrations**                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amounts due from financial institutions           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   | 10,047 |   |   |   |
| Regulatory deposits                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   | 1,288 |   |   |   |
| **Total gross credit risk**                       |       | 37,821                           |       | 1,324 |   | 10,932 |   | 304,768 |   | 130,411 |   | 35,908 |   | — |   | 532,499 |   | 144,410 |   |

 

----

(1)          Services includes education, health and communityservices, cultural and recreational services and personal and other services.

(2)          Trade includes wholesale trade and retail trade.

(3)          Utilities includes electricity, gas and water andcommunication services.

 

221

----

 

**Note 27. Financial risk(continued)**

 
| ** **                                        | ** ** | **Parent Entity 2009** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **Trading  Securities(1)**       | ** ** | **Other  Financial  Assets  Designated  at Fair Value** | ** ** | **Available-For-Sale  Securities** | ** ** | **Loans -  housing  and  personal** | ** ** | **Loans -  business** | ** ** | **Derivatives** | ** ** | **Life  Insurance  Assets** | ** ** | **Total  (on  balance  sheet)** | ** ** | **Credit  Commitments** | ** ** |
| ** **                                        | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Australia**                                     |       |                             |       |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | —                           |       | — |   | — |   | 103 |   | 4,127 |   | 6 |   | — |   | 4,236 |   | 647 |   |
| Agriculture, forestry and fishing                 |       | —                           |       | — |   | — |   | 87 |   | 6,246 |   | 9 |   | — |   | 6,342 |   | 1,050 |   |
| Construction                                      |       | —                           |       | — |   | — |   | 224 |   | 4,308 |   | 46 |   | — |   | 4,578 |   | 6,980 |   |
| Finance and insurance                             |       | 22,522                           |       | 741 |   | 211 |   | 1,116 |   | 17,081 |   | 22,714 |   | — |   | 64,385 |   | 15,570 |   |
| Government, administration and defence            |       | 7,480                            |       | 24 |   | — |   | — |   | 532 |   | 224 |   | — |   | 8,260 |   | 1,809 |   |
| Manufacturing                                     |       | 153                              |       | 75 |   | — |   | 137 |   | 10,390 |   | 606 |   | — |   | 11,361 |   | 7,890 |   |
| Mining                                            |       | 22                               |       | 11 |   | — |   | 18 |   | 1,565 |   | 51 |   | — |   | 1,667 |   | 4,476 |   |
| Property, property services and business services |       | 85                               |       | 35 |   | 52 |   | 2,126 |   | 32,579 |   | 602 |   | — |   | 35,479 |   | 8,554 |   |
| Services(2)                                       |       | 56                               |       | 40 |   | — |   | 395 |   | 6,465 |   | 33 |   | — |   | 6,989 |   | 810 |   |
| Trade(3)                                          |       | 19                               |       | — |   | — |   | 327 |   | 11,107 |   | 149 |   | — |   | 11,602 |   | 4,358 |   |
| Transport and storage                             |       | 85                               |       | 11 |   | — |   | 45 |   | 6,730 |   | 182 |   | — |   | 7,053 |   | 1,231 |   |
| Utilities(4)                                      |       | 32                               |       | — |   | 100 |   | 17 |   | 2,495 |   | 614 |   | — |   | 3,258 |   | 3,528 |   |
| Retail lending                                    |       | —                           |       | 383 |   | — |   | 176,502 |   | 36 |   | 356 |   | — |   | 177,277 |   | 34,056 |   |
| Other                                             |       | —                           |       | — |   | 1 |   | 20 |   | 1,075 |   | 42 |   | — |   | 1,138 |   | 16 |   |
| **Total Australia**                               |       | 30,454                           |       | 1,320 |   | 364 |   | 181,117 |   | 104,736 |   | 25,634 |   | — |   | 343,625 |   | 90,975 |   |
| **New Zealand**                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | —                           |       | — |   | — |   | — |   | 2 |   | — |   | — |   | 2 |   | 13 |   |
| Agriculture, forestry and fishing                 |       | —                           |       | — |   | — |   | — |   | 462 |   | 395 |   | — |   | 857 |   | 132 |   |
| Construction                                      |       | —                           |       | — |   | — |   | — |   | 3 |   | 2 |   | — |   | 5 |   | 168 |   |
| Finance and insurance                             |       | 789                              |       | — |   | — |   | — |   | 945 |   | 4,585 |   | — |   | 6,319 |   | 667 |   |
| Government, administration and defence            |       | 16                               |       | — |   | — |   | — |   | 178 |   | 38 |   | — |   | 232 |   | 350 |   |
| Manufacturing                                     |       | —                           |       | — |   | — |   | — |   | 703 |   | 12 |   | — |   | 715 |   | 878 |   |
| Mining                                            |       | —                           |       | — |   | — |   | — |   | 216 |   | — |   | — |   | 216 |   | 192 |   |
| Property, property services and business services |       | —                           |       | — |   | — |   | — |   | 1,306 |   | 55 |   | — |   | 1,361 |   | 538 |   |
| Services(2)                                       |       | —                           |       | — |   | — |   | — |   | 234 |   | — |   | — |   | 234 |   | — |   |
| Trade(3)                                          |       | —                           |       | — |   | — |   | — |   | 1,013 |   | 21 |   | — |   | 1,034 |   | 518 |   |
| Transport and storage                             |       | —                           |       | — |   | — |   | — |   | 562 |   | 2 |   | — |   | 564 |   | 332 |   |
| Utilities(4)                                      |       | —                           |       | — |   | — |   | — |   | 618 |   | 9 |   | — |   | 627 |   | 1,238 |   |
| Retail lending                                    |       | —                           |       | — |   | — |   | — |   | — |   | 26 |   | — |   | 26 |   | — |   |
| Other                                             |       | 2                                |       | — |   | — |   | — |   | 50 |   | 43 |   | — |   | 95 |   | — |   |
| **Total New Zealand**                             |       | 807                              |       | — |   | — |   | — |   | 6,292 |   | 5,188 |   | — |   | 12,287 |   | 5,026 |   |

 

----

(1)          In the current year we have revised our presentationand reclassified other bank issued certificates of deposit from receivables duefrom other financial institutions to trading securities. To improvepresentation, we have revised comparative periods. Refer to Note 1(a)(ii) formore details.

(2)          Services includes education, health and communityservices, cultural and recreational services and personal and other services.

(3)          Trade includes wholesale trade and retail trade.

(4)          Utilities includes electricity, gas and water andcommunication services.

 

222

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 
| ** **                                        | ** ** | **Parent Entity 2009** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **Trading  Securities(1)**       | ** ** | **Other  Financial  Assets  Designated  at Fair Value** | ** ** | **Available-For-Sale  Securities** | ** ** | **Loans -  housing  and  personal** | ** ** | **Loans -  business** | ** ** | **Derivatives** | ** ** | **Life  Insurance  Assets** | ** ** | **Total  (on  balance  sheet)** | ** ** | **Credit  Commitments** | ** ** |
| ** **                                        | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Other Overseas**                                |       |                             |       |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Accommodation, cafes and restaurants              |       | —                           |       | — |   | — |   | 15 |   | 164 |   | — |   | — |   | 179 |   | 44 |   |
| Agriculture, forestry and fishing                 |       | —                           |       | — |   | — |   | 2 |   | 13 |   | — |   | — |   | 15 |   | 5 |   |
| Construction                                      |       | —                           |       | — |   | — |   | 2 |   | 77 |   | — |   | — |   | 79 |   | 263 |   |
| Finance and insurance                             |       | 4,143                            |       | 91 |   | 96 |   | 49 |   | 713 |   | 30 |   | — |   | 5,122 |   | 6,061 |   |
| Government, administration and defence            |       | —                           |       | — |   | 2 |   | — |   | 9 |   | — |   | — |   | 11 |   | 6 |   |
| Manufacturing                                     |       | —                           |       | — |   | — |   | 2 |   | 624 |   | — |   | — |   | 626 |   | 1,683 |   |
| Mining                                            |       | —                           |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 222 |   |
| Property, property services and business services |       | —                           |       | — |   | — |   | 37 |   | 179 |   | — |   | — |   | 216 |   | 1,872 |   |
| Services(2)                                       |       | —                           |       | — |   | — |   | 9 |   | 256 |   | — |   | — |   | 265 |   | — |   |
| Trade(3)                                          |       | —                           |       | — |   | — |   | 5 |   | 107 |   | — |   | — |   | 112 |   | 443 |   |
| Transport and storage                             |       | —                           |       | — |   | — |   | 4 |   | 756 |   | — |   | — |   | 760 |   | 89 |   |
| Utilities(4)                                      |       | —                           |       | — |   | — |   | — |   | 432 |   | — |   | — |   | 432 |   | 107 |   |
| Retail lending                                    |       | —                           |       | — |   | — |   | 20 |   | 33 |   | — |   | — |   | 53 |   | 68 |   |
| Other                                             |       | —                           |       | — |   | — |   | 396 |   | 270 |   | — |   | — |   | 666 |   | 7 |   |
| **Total Other Overseas**                          |       | 4,143                            |       | 91 |   | 98 |   | 541 |   | 3,633 |   | 30 |   | — |   | 8,536 |   | 10,870 |   |
| **Other risk concentrations**                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amounts due from financial institutions(1)        |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   | 6,868 |   |   |   |
| Regulatory deposits                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   | 737 |   |   |   |
| **Total gross credit risk**                       |       | 35,404                           |       | 1,411 |   | 462 |   | 181,658 |   | 114,661 |   | 30,852 |   | — |   | 372,053 |   | 106,871 |   |

 

----

(1)          In the current year we have revised our presentationand reclassified other bank issued certificates of deposit from receivables duefrom other financial institutions to trading securities. To improvepresentation, we have revised comparative periods. Refer to Note 1(a)(ii) formore details.

(2)          Services includes education, health and communityservices, cultural and recreational services and personal and other services.

(3)          Trade includes wholesale trade and retail trade.

(4)          Utilities includes electricity, gas and water andcommunication services.

 

223

----

 

**Note 27. Financial risk(continued)**

 

**27.2.6 Credit quality of financialassets**

 

The tables belowsegregate the financial assets of the Group and Parent Entity between financialassets that are neither past due nor impaired, past due but not impaired andimpaired.

 

An asset isconsidered to be past due when any payment under the contractual terms havebeen missed. The amount included as past due is the entire contractual balance,rather than the overdue portion. The breakdown in the tables below does notalways align with the underlying basis by which credit risk is managed withinWestpac. Westpac considers Loans — business to be delinquent afterconsidering all relevant circumstances surrounding the customer. Loans —housing and personal that are more than five days past due are considered to bedelinquent.

 

Financial assets ofthe Group at 30 September 2010 and 2009 can be disaggregated as follows:

 
| ** **                                        | ** ** | **Consolidated 2010**                    | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **Neither Past  Due Nor  Impaired** | ** ** | **Past Due But  Not Impaired** | ** ** | **Impaired** | ** ** | **Total** | ** ** | **Impairment** | ** ** | **Total  Carrying  Value** | ** ** |
| ** **                                        | ** ** | **$m**                                        | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Cash and balances with central banks              |       | 4,464                                         |       | — |   | — |   | 4,464 |   | — |   | 4,464 |   |
| Receivables due from other financial institutions |       | 12,588                                        |       | — |   | — |   | 12,588 |   | — |   | 12,588 |   |
| Derivative financial instruments                  |       | 36,099                                        |       | — |   | 3 |   | 36,102 |   | — |   | 36,102 |   |
| Trading securities                                |       | 40,011                                        |       | — |   | — |   | 40,011 |   | — |   | 40,011 |   |
| Other financial assets designated at fair value   |       | 3,464                                         |       | — |   | — |   | 3,464 |   | — |   | 3,464 |   |
| Available-for-sale securities                     |       | 12,065                                        |       | — |   | 59 |   | 12,124 |   | — |   | 12,124 |   |
| Loans:                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Loans — housing and personal                 |       | 320,888                                       |       | 13,547 |   | 803 |   | 335,238 |   | 1,267 |   | 333,971 |   |
| Loans — business                             |       | 139,519                                       |       | 3,827 |   | 3,782 |   | 147,128 |   | 3,444 |   | 143,684 |   |
| Life insurance assets                             |       | 12,305                                        |       | 5 |   | — |   | 12,310 |   | — |   | 12,310 |   |
| Regulatory deposits with central banks overseas   |       | 1,322                                         |       | — |   | — |   | 1,322 |   | — |   | 1,322 |   |
| Other financial assets                            |       | 2,627                                         |       | 44 |   | 12 |   | 2,683 |   | 12 |   | 2,671 |   |
| **Total**                                         |       | 585,352                                       |       | 17,423 |   | 4,659 |   | 607,434 |   | 4,723 |   | 602,711 |   |

 
| ** **                                        | ** ** | **Consolidated 2009**                    | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **Neither Past  Due Nor  Impaired** | ** ** | **Past Due But  Not Impaired** | ** ** | **Impaired** | ** ** | **Total** | ** ** | **Impairment** | ** ** | **Total Carrying  Value** | ** ** |
| ** **                                        | ** ** | **$m**                                        | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Cash and balances with central banks              |       | 3,272                                         |       | — |   | — |   | 3,272 |   | — |   | 3,272 |   |
| Receivables due from other financial institutions |       | 9,974                                         |       | — |   | — |   | 9,974 |   | — |   | 9,974 |   |
| Derivative financial instruments                  |       | 33,187                                        |       | — |   | — |   | 33,187 |   | — |   | 33,187 |   |
| Trading securities                                |       | 43,114                                        |       | — |   | — |   | 43,114 |   | — |   | 43,114 |   |
| Other financial assets designated at fair value   |       | 3,042                                         |       | — |   | 21 |   | 3,063 |   | — |   | 3,063 |   |
| Available-for-sale securities                     |       | 1,574                                         |       | — |   | 56 |   | 1,630 |   | — |   | 1,630 |   |
| Loans:                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Loans — housing and personal                 |       | 290,093                                       |       | 10,579 |   | 568 |   | 301,240 |   | 991 |   | 300,249 |   |
| Loans — business                             |       | 159,675                                       |       | 3,726 |   | 3,202 |   | 166,603 |   | 3,393 |   | 163,210 |   |
| Life insurance assets                             |       | 12,377                                        |       | 7 |   | — |   | 12,384 |   | — |   | 12,384 |   |
| Regulatory deposits with central banks overseas   |       | 766                                           |       | — |   | — |   | 766 |   | — |   | 766 |   |
| Other financial assets                            |       | 3,631                                         |       | 27 |   | 7 |   | 3,665 |   | 8 |   | 3,657 |   |
| **Total**                                         |       | 560,705                                       |       | 14,339 |   | 3,854 |   | 578,898 |   | 4,392 |   | 574,506 |   |

 

224

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** **

NOTES TO THE FINANCIAL STATEMENTS

** **

**Note 27. Financial risk(continued)**

 

Financial assets ofthe Parent Entity at 30 September 2010 and 2009 can be disaggregated asfollows:

 
| ** **                                        | ** ** | **Parent Entity 2010**              | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **Neither Past  Due Nor  Impaired** | ** ** | **Past Due But  Not Impaired** | ** ** | **Impaired** | ** ** | **Total** | ** ** | **Impairment** | ** ** | **Total  Carrying  Value** | ** ** |
| ** **                                        | ** ** | **$m**                                        | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Cash and balances with central banks              |       | 3,693                                         |       | — |   | — |   | 3,693 |   | — |   | 3,693 |   |
| Receivables due from other financial institutions |       | 10,047                                        |       | — |   | — |   | 10,047 |   | — |   | 10,047 |   |
| Derivative financial instruments                  |       | 35,905                                        |       | — |   | 3 |   | 35,908 |   | — |   | 35,908 |   |
| Trading securities                                |       | 37,821                                        |       | — |   | — |   | 37,821 |   | — |   | 37,821 |   |
| Other financial assets designated at fair value   |       | 1,324                                         |       | — |   | — |   | 1,324 |   | — |   | 1,324 |   |
| Available-for-sale securities                     |       | 10,876                                        |       | — |   | 56 |   | 10,932 |   | — |   | 10,932 |   |
| Loans:                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Loans — housing and personal                 |       | 291,979                                       |       | 12,254 |   | 535 |   | 304,768 |   | 1,019 |   | 303,749 |   |
| Loans — business                             |       | 123,974                                       |       | 3,051 |   | 3,386 |   | 130,411 |   | 2,993 |   | 127,418 |   |
| Life insurance assets                             |       | —                                        |       | — |   | — |   | — |   | — |   | — |   |
| Regulatory deposits with central banks overseas   |       | 1,288                                         |       | — |   | — |   | 1,288 |   | — |   | 1,288 |   |
| Due from subsidiaries                             |       | 58,295                                        |       | — |   | — |   | 58,295 |   | — |   | 58,295 |   |
| Other financial assets                            |       | 2,074                                         |       | 37 |   | 10 |   | 2,121 |   | 10 |   | 2,111 |   |
| **Total**                                         |       | 577,276                                       |       | 15,342 |   | 3,990 |   | 596,608 |   | 4,022 |   | 592,586 |   |

 
| ** **                                        | ** ** | **Parent Entity 2009**              | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **Neither Past  Due Nor  Impaired** | ** ** | **Past Due But  Not Impaired** | ** ** | **Impaired** | ** ** | **Total** | ** ** | **Impairment** | ** ** | **Total Carrying  Value** | ** ** |
| ** **                                        | ** ** | **$m**                                        | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Cash and balances with central banks              |       | 2,578                                         |       | — |   | — |   | 2,578 |   | — |   | 2,578 |   |
| Receivables due from other financial institutions |       | 6,868                                         |       | — |   | — |   | 6,868 |   | — |   | 6,868 |   |
| Derivative financial instruments                  |       | 30,852                                        |       | — |   | — |   | 30,852 |   | — |   | 30,852 |   |
| Trading securities                                |       | 35,404                                        |       | — |   | — |   | 35,404 |   | — |   | 35,404 |   |
| Other financial assets designated at fair value   |       | 1,404                                         |       | — |   | 7 |   | 1,411 |   | — |   | 1,411 |   |
| Available-for-sale securities                     |       | 410                                           |       | — |   | 52 |   | 462 |   | — |   | 462 |   |
| Loans:                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Loans — housing and personal                 |       | 174,374                                       |       | 7,150 |   | 134 |   | 181,658 |   | 567 |   | 181,091 |   |
| Loans — business                             |       | 110,814                                       |       | 2,061 |   | 1,786 |   | 114,661 |   | 2,061 |   | 112,600 |   |
| Life insurance assets                             |       | —                                        |       | — |   | — |   | — |   | — |   | — |   |
| Regulatory deposits with central banks overseas   |       | 737                                           |       | — |   | — |   | 737 |   | — |   | 737 |   |
| Due from subsidiaries                             |       | 83,228                                        |       | — |   | — |   | 83,228 |   | — |   | 83,228 |   |
| Other financial assets                            |       | 1,963                                         |       | 22 |   | 5 |   | 1,990 |   | 6 |   | 1,984 |   |
| **Total**                                         |       | 448,632                                       |       | 9,233 |   | 1,984 |   | 459,849 |   | 2,634 |   | 457,215 |   |

 

225

----

 

**Note 27. Financial risk(continued)**

 

**27.2.7 Financial assets that areneither past due nor individually impaired**

 

The credit qualityof financial assets of the Group that are neither past due nor impaired havebeen assessed by reference to the credit risk rating system adopted internally:

 
| ** **                                         | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------|------------|------------------|------------|
| ** **                                         | ** ** | **2010**         | ** ** | **2009** | ** ** |
| ** **                                         | ** ** | **Strong**       | ** ** | **Good/  Satisfactory** | ** ** | **Weak** | ** ** | **Total** | ** ** | **Strong** | ** ** | **Good/  Satisfactory** | ** ** | **Weak** | ** ** | **Total** | ** ** |
| ** **                                         | ** ** | **$m**           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Cash and balances with central banks               |       | 4,464            |       | — |   | — |   | 4,464 |   | 3,272 |   | — |   | — |   | 3,272 |   |
| Receivables due from other financial institutions  |       | 12,564           |       | 24 |   | — |   | 12,588 |   | 9,872 |   | 102 |   | — |   | 9,974 |   |
| Derivative financial instruments(1)                |       | 35,253           |       | 747 |   | 99 |   | 36,099 |   | 31,918 |   | 1,178 |   | 91 |   | 33,187 |   |
| Trading securities(1),(2)                          |       | 39,958           |       | 31 |   | 22 |   | 40,011 |   | 43,080 |   | 26 |   | 8 |   | 43,114 |   |
| Other financial assets designated at fair value(2) |       | 3,077            |       | 387 |   | — |   | 3,464 |   | 2,634 |   | 406 |   | 2 |   | 3,042 |   |
| Available-for-sale securities(1)                   |       | 11,658           |       | 379 |   | 28 |   | 12,065 |   | 1,456 |   | 118 |   | — |   | 1,574 |   |
| Loans:                                             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans — housing and personal(3)               |       | n/a              |       | 320,888 |   | n/a |   | 320,888 |   | n/a |   | 290,093 |   | n/a |   | 290,093 |   |
| Loans — business                              |       | 50,384           |       | 77,635 |   | 11,500 |   | 139,519 |   | 59,003 |   | 88,378 |   | 12,294 |   | 159,675 |   |
| Life insurance assets(2)                           |       | 12,174           |       | 131 |   | — |   | 12,305 |   | 12,218 |   | 159 |   | — |   | 12,377 |   |
| Regulatory deposits with central banks overseas    |       | 1,228            |       | 40 |   | 54 |   | 1,322 |   | 766 |   | — |   | — |   | 766 |   |
| Other financial assets                             |       | 1,582            |       | 1,016 |   | 29 |   | 2,627 |   | 2,905 |   | 703 |   | 23 |   | 3,631 |   |
| **Total financial assets**                         |       | 172,342          |       | 401,278 |   | 11,732 |   | 585,352 |   | 167,124 |   | 381,163 |   | 12,418 |   | 560,705 |   |

 

----

| (1) | We have revised the prior year published 2009  balances in available-for-sale securities ($168 million), trading securities  ($693 million) and derivative financial instruments ($5,080 million) by  reclassifying amounts from satisfactory to strong as this better reflects the  credit rating of the instruments. For derivative financial instruments there  was also a reclassification from satisfactory to weak ($15 million) in  relation to 2009. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Trading securities, other financial assets  designated at fair value and life insurance assets of $11,552 million (2009  $11,557 million) that do not have assigned credit ratings have been included  in the strong category.                                                                                                                                                                                                                               |
| (3) | Loans - housing and personal do not qualify  as strong credit quality based on Westpac’s CRG’s. This class of loans are  also not deemed to be weak as non-performing loans would be categorised as  past due or impaired.                                                                                                                                                                                                                         |

 

226

----

 

NOTES TO THE FINANCIAL STATEMENTS

** **

**Note 27. Financial risk(continued)**

 

The credit qualityof financial assets of the Parent Entity that are neither past due norimpaired, have been assessed by reference to the credit risk rating systemadopted internally:

 
| ** **                                         | ** ** | **Parent Entity** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                                         | ** ** | **Strong**             | ** ** | **Good/  Satisfactory** | ** ** | **Weak** | ** ** | **Total** | ** ** | **Strong** | ** ** | **Good/  Satisfactory** | ** ** | **Weak** | ** ** | **Total** | ** ** |
| ** **                                         | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Cash and balances with central banks               |       | 3,693                  |       | — |   | — |   | 3,693 |   | 2,578 |   | — |   | — |   | 2,578 |   |
| Receivables due from other financial institutions  |       | 10,023                 |       | 24 |   | — |   | 10,047 |   | 6,866 |   | 2 |   | — |   | 6,868 |   |
| Derivative financial instruments(1)                |       | 35,059                 |       | 747 |   | 99 |   | 35,905 |   | 29,841 |   | 960 |   | 51 |   | 30,852 |   |
| Trading securities(1),(2)                          |       | 37,768                 |       | 31 |   | 22 |   | 37,821 |   | 35,378 |   | 26 |   | — |   | 35,404 |   |
| Other financial assets designated at fair value(2) |       | 984                    |       | 340 |   | — |   | 1,324 |   | 1,017 |   | 385 |   | 2 |   | 1,404 |   |
| Available-for-sale securities(1)                   |       | 10,817                 |       | 10 |   | 49 |   | 10,876 |   | 410 |   | — |   | — |   | 410 |   |
| Loans:                                             |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans — housing and personal(3)               |       | n/a                    |       | 291,979 |   | n/a |   | 291,979 |   | n/a |   | 174,374 |   | n/a |   | 174,374 |   |
| Loans — business                              |       | 48,210                 |       | 65,736 |   | 10,028 |   | 123,974 |   | 54,560 |   | 49,807 |   | 6,447 |   | 110,814 |   |
| Regulatory deposits with central banks overseas    |       | 1,228                  |       | 6 |   | 54 |   | 1,288 |   | 737 |   | — |   | — |   | 737 |   |
| Due from subsidiaries                              |       | 58,295                 |       | — |   | — |   | 58,295 |   | 83,228 |   | — |   | — |   | 83,228 |   |
| Other financial assets                             |       | 1,179                  |       | 871 |   | 24 |   | 2,074 |   | 1,401 |   | 546 |   | 16 |   | 1,963 |   |
| **Total financial assets**                         |       | 207,256                |       | 359,744 |   | 10,276 |   | 577,276 |   | 216,016 |   | 226,100 |   | 6,516 |   | 448,632 |   |

 

----

| (1) | We have revised the prior year published 2009  balances in available-for-sale securities ($168 million), trading securities  ($693 million) and derivative financial instruments ($5,080 million) by  reclassifying amounts from satisfactory to strong as this better reflects the  credit rating of the instruments. For derivative financial instruments there  was also a reclassification from satisfactory to weak ($15 million) in  relation to 2009. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Trading securities and other financial assets  designated at fair value of $120 million (2009 $74 million) that do not have  assigned credit ratings have been included in the strong category.                                                                                                                                                                                                                                                              |
| (3) | Loans - housing and personal do not qualify  as strong credit quality based on Westpac’s CRG’s. This class of loans are  also not deemed to be weak as non-performing loans would be categorised as  past due or impaired.                                                                                                                                                                                                                         |

 

**27.2.8 Financial assets that arepast due, but not individually impaired**

 

An age analysis offinancial assets that are past due, but not individually impaired is set out inthe table below. For the purposes of this analysis an asset is considered to bepast due when any payment under the contractual terms has been missed. Theamount included is the entire contractual amount, rather than the overdueamount.

 

The Group expendsconsiderable effort in monitoring overdue assets. Assets may be overdue for anumber of reasons, including late payments or incomplete documentation. Latepayment may be influenced by factors such as the holiday periods and the timingof weekends.

 

Financial assetsthat were past due, but not impaired can be disaggregated based on days overdueat 30 September as follows:

 
| ** **                        | ** ** | **Consolidated**  | ** ** |
|-----------------------------------|------------|-------------------|------------|
| ** **                        | ** ** | **2010**          | ** ** | **2009** | ** ** |
| ** **                        | ** ** | **1-5 days** | ** ** | **6-89 days** | ** ** | **90+ days** | ** ** | **Total** | ** ** | **1-5 days** | ** ** | **6-89 days** | ** ** | **90+ days** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **$m**            | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Loans                             |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans — housing and personal |       | 4,195             |       | 8,124 |   | 1,228 |   | 13,547 |   | 3,514 |   | 6,232 |   | 833 |   | 10,579 |   |
| Loans — business             |       | 946               |       | 1,912 |   | 969 |   | 3,827 |   | 1,128 |   | 1,603 |   | 995 |   | 3,726 |   |
| Life insurance assets             |       | —            |       | 5 |   | — |   | 5 |   | — |   | 7 |   | — |   | 7 |   |
| Other financial assets            |       | 13                |       | 25 |   | 6 |   | 44 |   | 9 |   | 15 |   | 3 |   | 27 |   |
| **Total**                         |       | 5,154             |       | 10,066 |   | 2,203 |   | 17,423 |   | 4,651 |   | 7,857 |   | 1,831 |   | 14,339 |   |

 

227

----

 

**Note 27. Financial risk(continued)**

 
| ** **                        | ** ** | **Parent Entity** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                        | ** ** | **1-5 days**      | ** ** | **6-89 days** | ** ** | **90+ days** | ** ** | **Total** | ** ** | **1-5 days** | ** ** | **6-89 days** | ** ** | **90+ days** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Loans                             |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans — housing and personal |       | 3,826                  |       | 7,277 |   | 1,151 |   | 12,254 |   | 2,581 |   | 4,073 |   | 496 |   | 7,150 |   |
| Loans — business             |       | 809                    |       | 1,501 |   | 741 |   | 3,051 |   | 904 |   | 880 |   | 277 |   | 2,061 |   |
| Life insurance assets             |       | —                 |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Other financial assets            |       | 11                     |       | 21 |   | 5 |   | 37 |   | 8 |   | 12 |   | 2 |   | 22 |   |
| **Total**                         |       | 4,646                  |       | 8,799 |   | 1,897 |   | 15,342 |   | 3,493 |   | 4,965 |   | 775 |   | 9,233 |   |

 

It has not beenpracticable to determine the fair value of collateral held against past duebalances. The following analysis shows the collateral held in support of pastdue, but not impaired financial assets, determined based on the value ofcollateral on the date of origination or subsequently remeasured in accordancewith the Group’s credit policies. A financial asset is deemed to be fullysecured where the LVR is less than or equal to 100%. Partially securedfinancial assets have a LVR of greater than 100%. Unsecured financial assetsprimarily include highly rated corporate loans, credit cards and personalloans. This is summarised in the tables below as at 30 September:

 
| ** **        | ** ** | **Consolidated**                             | ** ** |
|-------------------|------------|----------------------------------------------|------------|
| ** **        | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **        | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** |
| ** **        | ** ** | **%**                                        | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** |
| Fully secured     |       | 89.5                                         |       | 51.5 |   | 81.2 |   | 87.1 |   | 51.3 |   | 77.7 |   |
| Partially secured |       | 1.9                                          |       | 32.1 |   | 8.5 |   | 2.1 |   | 22.4 |   | 7.4 |   |
| Unsecured         |       | 8.6                                          |       | 16.4 |   | 10.3 |   | 10.8 |   | 26.3 |   | 14.9 |   |
| **Total**         |       | 100.0                                        |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

 
| ** **        | ** ** | **Parent Entity**                       | ** ** |
|-------------------|------------|----------------------------------------------|------------|
| ** **        | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **        | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** |
| ** **        | ** ** | **%**                                        | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** |
| Fully secured     |       | 93.0                                         |       | 50.9 |   | 84.6 |   | 91.7 |   | 51.6 |   | 82.8 |   |
| Partially secured |       | 0.1                                          |       | 33.4 |   | 6.8 |   | 0.2 |   | 18.0 |   | 4.2 |   |
| Unsecured         |       | 6.9                                          |       | 15.7 |   | 8.6 |   | 8.1 |   | 30.4 |   | 13.0 |   |
| **Total**         |       | 100.0                                        |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

 

**27.2.9 Items 90 days past due, orotherwise in default, but well secured and not impaired**

 

These includefinancial assets that are:

 

·         currently 90 days or more past due but well secured;

 

·         assets that were, but are no longer 90 days past due however are yet tosatisfactorily demonstrate sustained improvement to allow reclassification; and

 

·         other assets in default, but well secured and not impaired, such aswhere an order for bankruptcy or similar legal action has been instituted inrespect of credit obligations (e.g. appointment of an Administrator orReceiver).

 
| ** **   | ** ** | **Consolidated** | ** ** |
|--------------|------------|------------------|------------|
| ** **   | ** ** | **Australia**    | ** ** | **New Zealand** | ** ** | **Other Overseas** | ** ** | **Total** | ** ** |
| ** **   | ** ** | **2010**         | ** ** | **2009** | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **   | ** ** | **$m**           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Gross amount |       | 2,943            |       | 1,718 |   | 664 |   | 148 |   | 184 |   | 74 |   | 52 |   | 24 |   | 25 |   | 3,143 |   | 1,926 |   | 763 |   |

 

228

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 

**27.2.10 Impaired loans**

 

***Financial assets assessed as impaired***

 

The gross amount ofimpaired loans, along with the provision for impairment, by class of asset at30 September, is summarised in the tables below:

 
| ** **                 | ** ** | **Consolidated**                             | ** ** |
|----------------------------|------------|----------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **                 | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **$m**                                       | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Individually impaired**  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Gross amount               |       | 392                                          |       | 3,447 |   | 3,839 |   | 207 |   | 2,903 |   | 3,110 |   |
| Impairment provision       |       | (200                                         | )          | (1,422 | ) | (1,622 | ) | (96 | ) | (1,130 | ) | (1,226 | ) |
| **Carrying amount**        |       | 192                                          |       | 2,025 |   | 2,217 |   | 111 |   | 1,773 |   | 1,884 |   |
| **Collectively impaired**  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Gross amount               |       | 411                                          |       | 335 |   | 746 |   | 361 |   | 299 |   | 660 |   |
| Impairment provision       |       | (185                                         | )          | (57 | ) | (242 | ) | (164 | ) | (92 | ) | (256 | ) |
| **Carrying amount**        |       | 226                                          |       | 278 |   | 504 |   | 197 |   | 207 |   | 404 |   |
| Total gross amount         |       | 803                                          |       | 3,782 |   | 4,585 |   | 568 |   | 3,202 |   | 3,770 |   |
| Total impairment provision |       | (385                                         | )          | (1,479 | ) | (1,864 | ) | (260 | ) | (1,222 | ) | (1,482 | ) |
| **Total carrying amount**  |       | 418                                          |       | 2,303 |   | 2,721 |   | 308 |   | 1,980 |   | 2,288 |   |

 
| ** **                 | ** ** | **Parent Entity**                       | ** ** |
|----------------------------|------------|----------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **                 | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **$m**                                       | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Individually impaired**  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Gross amount               |       | 265                                          |       | 3,080 |   | 3,345 |   | 37 |   | 1,675 |   | 1,712 |   |
| Impairment provision       |       | (138                                         | )          | (1,222 | ) | (1,360 | ) | (15 | ) | (746 | ) | (761 | ) |
| **Carrying amount**        |       | 127                                          |       | 1,858 |   | 1,985 |   | 22 |   | 929 |   | 951 |   |
| **Collectively impaired**  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Gross amount               |       | 270                                          |       | 306 |   | 576 |   | 97 |   | 111 |   | 208 |   |
| Impairment provision       |       | (157                                         | )          | (49 | ) | (206 | ) | (91 | ) | (53 | ) | (144 | ) |
| **Carrying amount**        |       | 113                                          |       | 257 |   | 370 |   | 6 |   | 58 |   | 64 |   |
| Total gross amount         |       | 535                                          |       | 3,386 |   | 3,921 |   | 134 |   | 1,786 |   | 1,920 |   |
| Total impairment provision |       | (295                                         | )          | (1,271 | ) | (1,566 | ) | (106 | ) | (799 | ) | (905 | ) |
| **Total carrying amount**  |       | 240                                          |       | 2,115 |   | 2,355 |   | 28 |   | 987 |   | 1,015 |   |

 

229

----

 

**Note 27. Financial risk(continued)**

 

The followinganalysis shows the collateral coverage held in support of impaired financialassets, determined based on the value of collateral either on the date oforigination or subsequently remeasured in accordance with the Group’s creditrisk management policies. A financial asset is deemed to be fully secured wherethe LVR is less than or equal to 100%. Partially secured financial assets havea LVR of greater than 100%. Unsecured financial assets primarily include highlyrated corporate loans, credit cards and personal loans. This is summarised inthe tables below as at 30 September:

 
| ** **        | ** ** | **Consolidated**                             | ** ** |
|-------------------|------------|----------------------------------------------|------------|
| ** **        | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **        | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** |
| ** **        | ** ** | **%**                                        | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** |
| Fully secured     |       | 29.3                                         |       | 10.4 |   | 13.7 |   | 42.9 |   | 17.0 |   | 20.9 |   |
| Partially secured |       | 14.6                                         |       | 32.3 |   | 29.2 |   | 20.9 |   | 31.9 |   | 30.2 |   |
| Unsecured         |       | 56.1                                         |       | 57.3 |   | 57.1 |   | 36.2 |   | 51.1 |   | 48.9 |   |
| **Total**         |       | 100.0                                        |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

 
| ** **        | ** ** | **Parent Entity**                       | ** ** |
|-------------------|------------|----------------------------------------------|------------|
| ** **        | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **        | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** | **Loans -  housing and  personal** | ** ** | **Loans -  business** | ** ** | **Total** | ** ** |
| ** **        | ** ** | **%**                                        | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** |
| Fully secured     |       | 26.0                                         |       | 10.5 |   | 12.6 |   | 30.9 |   | 9.4 |   | 10.9 |   |
| Partially secured |       | 1.3                                          |       | 32.3 |   | 28.1 |   | 1.9 |   | 40.3 |   | 37.6 |   |
| Unsecured         |       | 72.7                                         |       | 57.2 |   | 59.3 |   | 67.2 |   | 50.3 |   | 51.5 |   |
| **Total**         |       | 100.0                                        |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

 

Impaired loanscomprise non-performing loans, overdrafts, personal loans, revolving creditfacilities greater than 90 days past due and restructured loans.

 

***Non-performing loans***

 

Non-performing loansare loans with an impaired internal risk grade, excluding restructured assets.These were attributed to the following geographical segments:

 
| ** **           | ** ** | **Australia** | ** ** | **New Zealand** | ** ** | **Other Overseas** | ** ** | **Total** | ** ** |
|----------------------|------------|---------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|
| ** **           | ** ** | **2010**      | ** ** | **2009**             | ** ** | **2008**                | ** ** | **2010**  | ** ** | **2009** | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **           | ** ** | **$m**        | ** ** | **$m**               | ** ** | **$m**                  | ** ** | **$m**    | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Gross amount         |       | 3,456         |       | 2,975                |       | 758                     |       | 691       |       | 495 |   | 234 |   | 93 |   | 56 |   | 67 |   | 4,240 |   | 3,526 |   | 1,059 |   |
| Impairment provision |       | (1,359        | )          | (1,139               | )          | (338                    | )          | (281      | )          | (145 | ) | (67 | ) | (37 | ) | (24 | ) | (33 | ) | (1,677 | ) | (1,308 | ) | (438 | ) |
| **Net**              |       | 2,097         |       | 1,836                |       | 420                     |       | 410       |       | 350 |   | 167 |   | 56 |   | 32 |   | 34 |   | 2,563 |   | 2,218 |   | 621 |   |

 

***Overdrafts, personal loans and revolving credit facilities greater than90 days past due***

 

Overdrafts, personalloans and revolving credit facilities greater than 90 days past due for theGroup were attributed to the following geographical segments:

 
| ** **           | ** ** | **Australia** | ** ** | **New Zealand** | ** ** | **Other Overseas** | ** ** | **Total** | ** ** |
|----------------------|------------|---------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|
| ** **           | ** ** | **2010**      | ** ** | **2009**             | ** ** | **2008**                | ** ** | **2010**  | ** ** | **2009** | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **           | ** ** | **$m**        | ** ** | **$m**               | ** ** | **$m**                  | ** ** | **$m**    | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Gross amount         |       | 197           |       | 151                  |       | 90                      |       | 15        |       | 21 |   | 21 |   | 1 |   | 1 |   | 1 |   | 213 |   | 173 |   | 112 |   |
| Impairment provision |       | (141          | )          | (136                 | )          | (85                     | )          | (13       | )          | (11 | ) | (11 | ) | (1 | ) | (1 | ) | (1 | ) | (155 | ) | (148 | ) | (97 | ) |
| **Net**              |       | 56            |       | 15                   |       | 5                       |       | 2         |       | 10 |   | 10 |   | — |   | — |   | — |   | 58 |   | 25 |   | 15 |   |

 

230

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 

***Restructured financial assets***

 

Assets are deemed tobe restructured financial assets when the original contractual terms have beenformally modified to provide for concessions of interest or principal forreasons related to the financial difficulties of the customer.

 

Restructuredfinancial assets for the Group were attributed to the following geographicalsegments:

 
| ** **           | ** ** | **Consolidated** | ** ** |
|----------------------|------------|------------------|------------|
| ** **           | ** ** | **Australia**    | ** ** | **New Zealand** | ** ** | **Other Overseas** | ** ** | **Total** | ** ** |
| ** **           | ** ** | **2010**         | ** ** | **2009** | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **           | ** ** | **$m**           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Gross amount         |       | 25               |       | 67 |   | — |   | — |   | — |   | — |   | 107 |   | 4 |   | 6 |   | 132 |   | 71 |   | 6 |   |
| Impairment provision |       | (12              | )          | (25 | ) | — |   | — |   | — |   | — |   | (20 | ) | (1 | ) | — |   | (32 | ) | (26 | ) | — |   |
| **Net**              |       | 13               |       | 42 |   | — |   | — |   | — |   | — |   | 87 |   | 3 |   | 6 |   | 100 |   | 45 |   | 6 |   |

 

Restructuredfinancial assets of the parent entity as at 30 September 2010 were:

 
| ** **           | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| ** **           | ** ** | **$m**   | ** ** | **$m**   | ** ** |
| Gross amount         |       | 130      |       | 70       |       |
| Impairment provision |       | (31      | )          | (25      | )          |
| **Net**              |       | 99       |       | 45       |       |

 

The following tablesummarises the interest received and forgone on impaired and restructuredfinancial assets for the period ended 30 September 2010:

 
| ** **        | ** ** | **Consolidated 2010** | ** ** |
|-------------------|------------|----------------------------|------------|
| ** **        | ** ** | **Australia**              | ** ** | **Overseas** | ** ** | **Total** | ** ** |
| ** **        | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** |
| Interest received |       | 33                         |       | 34 |   | 67 |   |
| Interest forgone  |       | 210                        |       | 4 |   | 214 |   |

 

**27.3 Funding and liquidity riskmanagement**

 

Liquidity risk isthe risk that we will be unable to fund increases in assets or meet ourobligations as they become due, without incurring unacceptable losses. Thiscould potentially arise as a result of mismatched cash flows generated by theGroup’s banking business. Liquidity risk is managed through our BRMC-approvedliquidity framework.

 

Responsibility forliquidity management is delegated to Group Treasury, under the oversight ofALCO. Group Treasury manages liquidity on a daily basis and submits monthlyreports to ALCO and quarterly reports to the BRMC. Monthly reports are providedto APRA. Group Treasury is also responsible for monitoring and managing ourfunding base so that it is prudently maintained and adequately diversified.

 

Our liquidity riskmanagement framework models our ability to fund under both normal conditionsand during a crisis situation, with models run globally and for specificgeographical regions: Australia, New Zealand and offshore. This approach isdesigned to ensure that our funding framework is sufficiently flexible toaccommodate a wide range of market conditions. The global liquidity managementframework is reviewed annually. The annual review encompasses the fundingscenarios modelled, the modelling approach, wholesale funding capacity, limitdetermination and minimum holdings of liquid assets. The liquidity framework isreviewed by ALCO prior to approval by the BRMC.

 

Group Treasury alsoundertakes an annual funding review that outlines the funding strategy for thecoming year. This review encompasses trends in global markets, peer analysis,wholesale funding capacity, expected funding requirements and a funding riskanalysis. This strategy is continuously reviewed to take account of changingmarket conditions, investor sentiment and estimations of asset and liabilitygrowth rates. The annual funding strategy is reviewed and supported by ALCOprior to approval by the BRMC.

 

We maintain acontingency funding plan that details the broad actions to be taken in responseto severe disruptions in our ability to fund some or all of our activities in atimely manner and at a reasonable cost. This document is reviewed annually anddefines a committee of senior executives to manage a crisis and allocatesresponsibility to individuals for key tasks.

 

231

----

 

**Note 27. Financial risk (continued)**

 

**27.3.1 Sources of liquidity**

 

Sources of liquidityare regularly reviewed to maintain a wide diversification by currency,geography, product and term. Sources include, but are not limited to:

 

·         deposits;

 

·         debt issues;

 

·         proceeds from sale of marketable securities;

 

·         repurchase agreements with central banks;

 

·         principal repayments on loans;

 

·         interest income;

 

·         fee income; and

 

·         an interbank deposit agreement (IDA).

 

The Group does notrely on committed funding lines as a source of liquidity.

 

***Wholesale funding***

 

The Group monitorsthe composition and stability of its funding base so it is maintained withinthe Group’s funding liquidity risk appetite. This includes a target of greaterthan 75% for the stable funding ratio. Stable funding includes customerdeposits, wholesale term funding with residual maturity greater than 12 months,equity and securitisation.

 

Over the last 12months the Group has improved the strength of its funding base, with the stablefunding ratio(1) increasing by two percentage points to 80%. This wasachieved through using the more stable funding sources of customer deposits andlong-term wholesale funding to fund asset growth and contractual maturities.Customer deposits increased by $13 billion over the year and comprised 52%of the Group’s total funding. Long term wholesale funding comprised 19% of theGroup’s total funding at 30 September 2010, up from 16% since 2009. TheGroup also reduced its reliance on short-term wholesale funding during 2010.Short-term wholesale funding as a proportion of the Group’s total fundingdecreased to 20% from 22% in 2009.

 

In addition toimproving its funding composition, the Group strengthened its funding base bylengthening the duration of the wholesale funding portfolio. In 2010, the Groupraised a total of $43 billion in long-term wholesale funding at an averageduration of 4.8 years, up from 4.2 years in 2009. Over the same period theGroup lengthened the duration of its short-term wholesale funding outstanding,with the proportion of short-term funding maturing in less than six monthsdecreasing to 15% from 19% at 30 September 2009.

 

The othersignificant change during the year was the removal of the government guaranteefor new wholesale funding from 31 March 2010 in Australia and 30 April 2010in New Zealand. This had little impact on the Group’s ability to access termwholesale markets as the Group has continued to benefit from strong investorsupport both domestically and offshore. In 2010, 76% of the Group’s new longterm wholesale funding was not government guaranteed.

 

Maintaining adiverse funding base and ensuring the Group has capacity and flexibility toaccess a wide range of funding markets, debt investors and products is animportant part of managing liquidity risk.

 

Over the last 12months the Group’s funding profile in global wholesale markets has supportedissuance in Australia, Japan, United States, United Kingdom, Hong Kong, NewZealand, Singapore, Canada, Europe, Switzerland and Norway. Westpac was thefirst major Australian bank to access the Australian mortgage backed securitymarket since the onset of the global financial crisis with its $2.0 billiontransaction in December 2009. The Group was also the only major Australianbank to issue in SEC registered format into the United States during the year.

 

Borrowings andoutstandings from existing debt programmes and issuing shelves at 30 September 2010can be found in various notes to the financial statements including Note 17,Note 18, Note 22 and Note 23.

 

In Management’sopinion, liquidity is sufficient to meet our present requirements.

 

***Credit ratings***

 

As of 30 September 2010,approximately 41% of our total net funding originated from wholesale fundingmarkets, principally in Australia, the United States, Europe and Japan.Investors in these markets have historically relied significantly upon creditratings issued by independent credit rating organisations in making theirinvestment decisions. If our credit ratings were to decline, our borrowingcosts and capacity may be adversely affected. A downgrade in our credit ratingsis likely to require us to pay higher interest rates than we do currently onour wholesale borrowings, which would increase our funding costs and couldreduce our net interest margins. In addition, our borrowing capacity could bediminished, which may adversely affect our ability to fund the growth of ourbalance sheet or reduce our liquidity.

 

----

| (1) | The  methodology used to calculate the stable funding ratio was revised in early  2010. The revised methodology excludes excess liquid assets and includes  certain equity balances. This resulted in the 2009 stable funding ratio  decreasing from 84% to 78%. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

232

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk (continued)**

 

As at 30 September 2010the Group’s credit ratings were:

 
| ** **                      | ** ** | **2010**            | ** ** |
|---------------------------------|------------|---------------------|------------|
| ** **                      | ** ** | **Short Term** | ** ** | **Long Term** | ** ** | **Outlook** | ** ** |
| Standard & Poor’s |       | A-1+                |       | AA |   | Stable |   |
| Moody’s Investors Services |       | P-1                 |       | Aa1 |   | Negative |   |
| Fitch Ratings                   |       | F1+                 |       | AA |   | Stable |   |

 

A credit rating isnot a recommendation to buy, sell or hold our securities. Such ratings aresubject to revision or withdrawal at any time by the assigning rating agency.Investors are cautioned to evaluate each rating independently of any otherrating.

 

***Liquid assets***

 

Group Treasury holdsa portfolio of high quality liquid assets as a buffer against unforeseenfunding requirements. These assets are 100% eligible for repurchase agreementswith a central bank and are held in cash, government, State Government andhighly rated investment grade paper. The level of liquid asset holdings isreviewed at least annually and more frequently if required and is consistentwith both the requirements of the balance sheet and market conditions.

 

Liquid assets thatqualify as eligible collateral for repurchase agreements with an applicablecentral bank (including internal securitisation) have increased by$8.4 billion to $82.1 billion over the last 12 months, as we focussed onstrengthening our liquidity position. This has provided flexibility to theGroup to be selective in its timing of executing wholesale issuances.

 

WIB also hasholdings of trading securities which arise from its daily business operations.These assets are typically high quality investment grade names, and stock isgenerally very liquid. While these assets are excluded from the Group’sprudential liquidity portfolio, we do consider them as a source of funds in ourcrisis scenario analysis.

 

**27.3.2 Liquidity reporting**

 

***Scenario analysis***

 

In fulfilling ourobligations under APRA’s liquidity prudential standard, the Group performsscenario analysis on a daily basis. The ‘going concern’ and ‘crisis’ scenariospresent the maturity profiles of cash flows, based on assumptions agreedwith APRA.

 

The ‘going concern’model measures our liquidity requirements under normal business conditions.Wholesale debt maturities are added to planned net asset growth to provide anestimate of the wholesale funding task across a range of time horizons. Thecumulative liquidity mismatch is managed within a Board approved limitstructure; with limits set at intervals from one week, to twelve months.

 

The ‘crisis’scenario measures liquidity requirements during the first week of aname-specific crisis. The crisis model reflects normal model flows plusexpected sources and applications of funds under crisis conditions. Under acrisis scenario Westpac is expected to experience large customer and wholesaleoutflows against which liquid assets are held to ensure continued solvency. Inthis scenario, the cumulative mismatch must be positive out to five businessdays.

 

***Liquidity review***

 

The table belowoutlines the review performed in managing our liquidity:

 
| **Frequency** | ** ** | **Liquidity report**               |
|---------------|------------|-----------------------------------------|
| Daily         |       | · Produced by Finance              |
|          |       | · Reviewed by MRM                  |
|          |       | · Monitored within Group  Treasury |
| Monthly       |       | · Submitted to the BBRC(1)         |
|          |       | · Submitted to ALCO                |
|          |       | · Submitted to APRA                |
| Quarterly     |       | · Submitted to the BRMC            |

 

----

| (1) | BBRC is the Banking Book Risk Committee, a  sub-committee of MARCO, responsible for oversight of liquidity and interest  rate risk mismatches in the banking book. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

233

----

 

**Note 27. Financial risk (continued)**

 

**27.3.3 Market developments**

 

During the yearseveral regulatory bodies released consultative papers, including APRA and theBasel Committee on Banking Supervision. Their review of liquidity standardshave yet to be finalised. The United Kingdom’s Financial Services Authority andthe RBNZ have released new standards.

 

The final impact ofnew liquidity and funding regulations on the Group is still uncertain, thoughit is likely that there will be a requirement to increase long-term wholesalefunding and increase holdings of high quality liquid assets. The Groupcontinues to monitor developments in regulation and will update its funding andliquidity policies accordingly.

 

**27.3.4 Contractual maturity offinancial liabilities**

 

The tables belowpresent cash flows associated with financial liabilities and derivativeliabilities, payable at the balance sheet date, by remaining contractualmaturity. The amounts disclosed in the table are the contractual undiscountedcash flows, whereas the Group manages inherent liquidity risk based on expectedcash flows.

 

Cash flows associatedwith liabilities include both principal payments as well as fixed or variableinterest payments incorporated into the relevant coupon period. Principalpayments reflect the earliest contractual maturity date, being the first calldate on the instrument. Derivative liabilities designed for hedging purposesare expected to be held for their remaining contractual lives, and reflectgross cash flows derived as the fixed rate and/or the expected variable rateapplied to the notional principal over the remaining contractual term and whererelevant includes the receipt and payment of the notional amount under thecontract.

 

Foreign exchangeobligations have been translated to Australian dollars using the closing spotrates at the end of the reporting period.

 

The balances in thetables below will not necessarily agree to amounts presented on the face of thebalance sheet as amounts in the table incorporate cash flows on an undiscountedbasis and include both principal and associated future interest payments.

 

Trading liabilitiesand certain other liabilities designated at fair value through profit or lossare not all managed for liquidity purposes on the basis of their contractualmaturity. The liabilities that we manage based on their contractual maturityare presented on a contractual undiscounted basis in the table below.

 
| ** **                                                                    | ** ** | **Consolidated 2010**       | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **Less Than  1 Month** | ** ** | **Over  1 Month to  3 Months** | ** ** | **Over  3 Months to  1 Year** | ** ** | **1 Year to  5 Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
| ** **                                                                    | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Liabilities**                                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Payables due to other financial institutions                                  |       | 7,242                            |       | 1,465 |   | 100 |   | — |   | 133 |   | 8,940 |   |
| Deposits at fair value                                                        |       | 13,233                           |       | 22,546 |   | 16,996 |   | 931 |   | — |   | 53,706 |   |
| Deposits at amortised cost                                                    |       | 193,337                          |       | 35,405 |   | 48,655 |   | 10,743 |   | 1,344 |   | 289,484 |   |
| Debt issues and acceptances                                                   |       | 4,273                            |       | 10,373 |   | 40,488 |   | 94,892 |   | 15,133 |   | 165,159 |   |
| Other financial liabilities                                                   |       | —                           |       | 2,666 |   | 4,375 |   | — |   | — |   | 7,041 |   |
| Trading liabilities and other financial liabilities designated at fair  value |       | 4,628                            |       | 17 |   | 128 |   | 85 |   | — |   | 4,858 |   |
| Derivative financial instruments:                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Held for trading                                                              |       | 34,396                           |       | — |   | — |   | — |   | — |   | 34,396 |   |
| Held for hedging purposes (net settled)                                       |       | 119                              |       | 185 |   | 494 |   | 795 |   | 150 |   | 1,743 |   |
| Held for hedging purposes (gross settled):                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Cash outflow                                                                  |       | 379                              |       | 1,830 |   | 10,104 |   | 42,286 |   | 8,629 |   | 63,228 |   |
| Cash inflow                                                                   |       | (210                             | )          | (1,079 | ) | (7,267 | ) | (32,606 | ) | (6,901 | ) | (48,063 | ) |
| **Total liabilities excluding loan  capital**                                 |       | 257,397                          |       | 73,408 |   | 114,073 |   | 117,126 |   | 18,488 |   | 580,492 |   |
| Loan capital(1)                                                               |       | 1,970                            |       | 1,186 |   | 501 |   | 4,823 |   | 1,926 |   | 10,406 |   |
| **Total undiscounted financial  liabilities**                                 |       | 259,367                          |       | 74,594 |   | 114,574 |   | 121,949 |   | 20,414 |   | 590,898 |   |
| **Total contingent liabilities and  commitments**                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Commitments to extend credit                                                  |       | 140,221                          |       | — |   | — |   | — |   | — |   | 140,221 |   |
| Other commitments                                                             |       | 351                              |       | — |   | — |   | — |   | — |   | 351 |   |
| **Total undiscounted contingent  liabilities and commitments**                |       | 140,572                          |       | — |   | — |   | — |   | — |   | 140,572 |   |

 

----

| (1) | Where the terms of loan capital instruments  include contingent settlement clauses, amounts due have been disclosed as  less than one month. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

 

234

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 
| ** **                                                                    | ** ** | **Consolidated 2009**       | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **Less Than  1 Month** | ** ** | **Over  1 Month to  3 Months** | ** ** | **Over  3 Months to  1 Year** | ** ** | **1 Year to  5 Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
| ** **                                                                    | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Liabilities**                                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Payables due to other financial institutions                                  |       | 8,394                            |       | 260 |   | 483 |   | — |   | 125 |   | 9,262 |   |
| Deposits at fair value                                                        |       | 14,939                           |       | 30,056 |   | 13,015 |   | 959 |   | — |   | 58,969 |   |
| Deposits at amortised cost                                                    |       | 192,446                          |       | 27,647 |   | 44,906 |   | 8,634 |   | 1,507 |   | 275,140 |   |
| Debt issues and acceptances                                                   |       | 11,693                           |       | 14,894 |   | 31,080 |   | 78,813 |   | 7,357 |   | 143,837 |   |
| Other financial liabilities                                                   |       | —                           |       | 3,344 |   | 2,688 |   | 25 |   | — |   | 6,057 |   |
| Trading liabilities and other financial liabilities designated at fair  value |       | 7,816                            |       | 2,197 |   | 656 |   | 230 |   | — |   | 10,899 |   |
| Derivative financial instruments:                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Held for trading                                                              |       | 29,706                           |       | — |   | — |   | — |   | — |   | 29,706 |   |
| Held for hedging purposes (net settled)                                       |       | 144                              |       | 233 |   | 825 |   | 982 |   | 21 |   | 2,205 |   |
| Held for hedging purposes (gross settled):                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Cash outflow                                                                  |       | 380                              |       | 4,559 |   | 6,255 |   | 22,724 |   | 2,633 |   | 36,551 |   |
| Cash inflow                                                                   |       | (298                             | )          | (4,384 | ) | (5,205 | ) | (17,436 | ) | (2,127 | ) | (29,450 | ) |
| **Total liabilities excluding loan  capital**                                 |       | 265,220                          |       | 78,806 |   | 94,703 |   | 94,931 |   | 9,516 |   | 543,176 |   |
| Loan capital(1)                                                               |       | 1,952                            |       | 59 |   | 1,528 |   | 6,859 |   | 2,260 |   | 12,658 |   |
| **Total undiscounted financial  liabilities**                                 |       | 267,172                          |       | 78,865 |   | 96,231 |   | 101,790 |   | 11,776 |   | 555,834 |   |
| **Total contingent liabilities and  commitments**                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Commitments to extend credit                                                  |       | 127,295                          |       | — |   | — |   | — |   | — |   | 127,295 |   |
| Other commitments                                                             |       | 2,370                            |       | — |   | — |   | — |   | — |   | 2,370 |   |
| **Total undiscounted contingent  liabilities and commitments**                |       | 129,665                          |       | — |   | — |   | — |   | — |   | 129,665 |   |

 

----

| (1) | Where the terms of loan capital instruments  include contingent settlement clauses, amounts due have been disclosed as  less than one month. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

 

235

----

 

**Note 27. Financial risk(continued)**

 
| ** **                                                                    | ** ** | **Parent Entity 2010** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **Less Than  1 Month** | ** ** | **Over  1 Month to  3 Months** | ** ** | **Over   3 Months to  1 Year** | ** ** | **1 Year to  5 Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
| ** **                                                                    | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Liabilities**                                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Payables due to other financial institutions                                  |       | 7,231                            |       | 1,465 |   | 100 |   | — |   | 133 |   | 8,929 |   |
| Deposits at fair value                                                        |       | 12,962                           |       | 21,500 |   | 16,855 |   | 931 |   | — |   | 52,248 |   |
| Deposits at amortised cost                                                    |       | 180,205                          |       | 31,941 |   | 41,928 |   | 9,149 |   | 1,343 |   | 264,566 |   |
| Debt issues and acceptances                                                   |       | 2,246                            |       | 6,132 |   | 35,134 |   | 81,964 |   | 12,081 |   | 137,557 |   |
| Other financial liabilities                                                   |       | —                           |       | 2,489 |   | 3,840 |   | — |   | — |   | 6,329 |   |
| Due to subsidiaries                                                           |       | 62,463                           |       | — |   | — |   | — |   | — |   | 62,463 |   |
| Trading liabilities and other financial liabilities designated at fair  value |       | 4,628                            |       | 17 |   | 128 |   | 85 |   | — |   | 4,858 |   |
| Derivative financial instruments:                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Held for trading                                                              |       | 34,715                           |       | — |   | — |   | — |   | — |   | 34,715 |   |
| Held for hedging purposes (net settled)                                       |       | 80                               |       | 165 |   | 372 |   | 660 |   | 149 |   | 1,426 |   |
| Held for hedging purposes (gross settled):                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Cash outflow                                                                  |       | 197                              |       | 1,469 |   | 8,770 |   | 37,985 |   | 6,158 |   | 54,579 |   |
| Cash inflow                                                                   |       | (85                              | )          | (827 | ) | (6,334 | ) | (29,400 | ) | (4,791 | ) | (41,437 | ) |
| **Total liabilities excluding loan  capital**                                 |       | 304,642                          |       | 64,351 |   | 100,793 |   | 101,374 |   | 15,073 |   | 586,233 |   |
| Loan capital(1)                                                               |       | 1,970                            |       | 1,186 |   | 501 |   | 4,823 |   | 1,926 |   | 10,406 |   |
| **Total undiscounted financial  liabilities**                                 |       | 306,612                          |       | 65,537 |   | 101,294 |   | 106,197 |   | 16,999 |   | 596,639 |   |
| **Total contingent liabilities and  commitments**                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Commitments to extend credit                                                  |       | 132,301                          |       | — |   | — |   | — |   | — |   | 132,301 |   |
| Other commitments                                                             |       | 351                              |       | — |   | — |   | — |   | — |   | 351 |   |
| **Total undiscounted contingent  liabilities and commitments**                |       | 132,652                          |       | — |   | — |   | — |   | — |   | 132,652 |   |

 

----

| (1) | Where the terms of loan capital instruments  include contingent settlement clauses, amounts due have been disclosed as  less than one month. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

 

236

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 
| ** **                                                                    | ** ** | **Parent Entity 2009** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **Less Than  1 Month** | ** ** | **Over  1 Month to  3 Months** | ** ** | **Over   3 Months to  1 Year** | ** ** | **1 Year to  5 Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
| ** **                                                                    | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Liabilities**                                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Payables due to other financial institutions                                  |       | 7,526                            |       | 260 |   | 483 |   | — |   | 125 |   | 8,394 |   |
| Deposits at fair value                                                        |       | 13,811                           |       | 28,576 |   | 12,754 |   | 955 |   | — |   | 56,096 |   |
| Deposits at amortised cost                                                    |       | 135,687                          |       | 18,758 |   | 22,226 |   | 4,790 |   | 1,504 |   | 182,965 |   |
| Debt issues and acceptances                                                   |       | 7,892                            |       | 11,049 |   | 22,822 |   | 58,767 |   | 6,087 |   | 106,617 |   |
| Other financial liabilities                                                   |       | —                           |       | 2,620 |   | 391 |   | 178 |   | — |   | 3,189 |   |
| Due to subsidiaries                                                           |       | 45,224                           |       | — |   | — |   | — |   | — |   | 45,224 |   |
| Trading liabilities and other financial liabilities designated at fair  value |       | 7,381                            |       | 853 |   | 656 |   | 230 |   | — |   | 9,120 |   |
| Derivative financial instruments:                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Held for trading                                                              |       | 28,674                           |       | — |   | — |   | — |   | — |   | 28,674 |   |
| Held for hedging purposes (net settled)                                       |       | 43                               |       | 86 |   | 288 |   | 664 |   | 20 |   | 1,101 |   |
| Held for hedging purposes (gross settled):                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Cash outflow                                                                  |       | 176                              |       | 4,150 |   | 2,536 |   | 17,529 |   | 1,609 |   | 26,000 |   |
| Cash inflow                                                                   |       | (136                             | )          | (4,060 | ) | (1,820 | ) | (12,717 | ) | (1,175 | ) | (19,908 | ) |
| **Total liabilities excluding loan  capital**                                 |       | 246,278                          |       | 62,292 |   | 60,336 |   | 70,396 |   | 8,170 |   | 447,472 |   |
| Loan capital(1)                                                               |       | 1,941                            |       | 36 |   | 1,024 |   | 5,017 |   | 1,694 |   | 9,712 |   |
| **Total undiscounted financial  liabilities**                                 |       | 248,219                          |       | 62,328 |   | 61,360 |   | 75,413 |   | 9,864 |   | 457,184 |   |
| **Total contingent liabilities and  commitments**                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Commitments to extend credit                                                  |       | 94,906                           |       | — |   | — |   | — |   | — |   | 94,906 |   |
| Other commitments                                                             |       | 1,207                            |       | — |   | — |   | — |   | — |   | 1,207 |   |
| **Total undiscounted contingent  liabilities and commitments**                |       | 96,113                           |       | — |   | — |   | — |   | — |   | 96,113 |   |

 

----

| (1) | Where the terms of loan capital instruments  include contingent settlement clauses, amounts due have been disclosed as  less than one month. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

 

237

----

 

**Note 27. Financial risk(continued)**

 

**27.3.5 Expected maturity**

 

The tables belowpresents the balance sheet based on expected maturity dates. The liabilitybalances in the following tables will not agree to the contractual maturitytables (27.3.4 Contractual maturity of financial liabilities) due to theanalysis below being based on expected rather than contractual maturities, theimpact of discounting and the exclusion of interest accruals beyond thereporting period. Included in the tables below are equity securities classifiedas trading securities, available-for-sale investments and life insurance assetsthat have no specific maturity. These assets have been classified based on theexpected period of disposal. Deposits are presented in the table below on acontractual basis, however as part of our normal banking operations we wouldexpect a large proportion of these balances to roll over.

 
| ** **                                                                    | ** ** | **Consolidated 2010** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                    | ** ** | **Due within**        | ** ** | **Greater than** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **12 Months**         | ** ** | **12 Months** | ** ** | **Total** | ** ** |
| ** **                                                                    | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Assets**                                                                    |       |                       |       |   | ** ** | ** ** | ** ** |
| Cash and balances with central banks                                          |       | 4,464                      |       | — |   | 4,464 |   |
| Receivables due from other financial institutions                             |       | 12,588                     |       | — |   | 12,588 |   |
| Derivative financial instruments                                              |       | 23,482                     |       | 12,620 |   | 36,102 |   |
| Trading securities                                                            |       | 23,712                     |       | 16,299 |   | 40,011 |   |
| Other financial assets designated at fair value                               |       | 2,232                      |       | 1,232 |   | 3,464 |   |
| Available-for-sale securities                                                 |       | 874                        |       | 11,250 |   | 12,124 |   |
| Loans (net of provisions)                                                     |       | 112,985                    |       | 364,670 |   | 477,655 |   |
| Life insurance assets                                                         |       | 537                        |       | 11,773 |   | 12,310 |   |
| Regulatory deposits with central banks overseas                               |       | 1,136                      |       | 186 |   | 1,322 |   |
| All other assets                                                              |       | 3,314                      |       | 14,923 |   | 18,237 |   |
| **Total assets**                                                              |       | 185,324                    |       | 432,953 |   | 618,277 |   |
| **Liabilities**                                                               |       |                       |       |   | ** ** | ** ** | ** ** |
| Payables due to other financial institutions                                  |       | 8,798                      |       | 100 |   | 8,898 |   |
| Deposits                                                                      |       | 326,284                    |       | 11,101 |   | 337,385 |   |
| Derivative financial instruments                                              |       | 28,190                     |       | 15,849 |   | 44,039 |   |
| Trading liabilities and other financial liabilities designated at fair  value |       | 4,770                      |       | 80 |   | 4,850 |   |
| Debt issues and acceptances                                                   |       | 49,851                     |       | 101,120 |   | 150,971 |   |
| Life insurance policy liabilities                                             |       | 29                         |       | 11,531 |   | 11,560 |   |
| All other liabilities                                                         |       | 9,416                      |       | 1,408 |   | 10,824 |   |
| **Total liabilities excluding loan  capital**                                 |       | 427,338                    |       | 141,189 |   | 568,527 |   |
| Loan capital                                                                  |       | 3,326                      |       | 6,306 |   | 9,632 |   |
| **Total liabilities**                                                         |       | 430,664                    |       | 147,495 |   | 578,159 |   |
| **Net assets/(net liabilities)**                                              |       | (245,340                   | )          | 285,458 |   | 40,118 |   |

 

238

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 
| ** **                                                                    | ** ** | **Consolidated 2009** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                    | ** ** | **Due within**        | ** ** | **Greater than** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **12 Months**         | ** ** | **12 Months** | ** ** | **Total** | ** ** |
| ** **                                                                    | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Assets**                                                                    |       |                       |       |   |   |   |   |
| Cash and balances with central banks                                          |       | 3,272                      |       | — |   | 3,272 |   |
| Receivables due from other financial institutions                             |       | 9,974                      |       | — |   | 9,974 |   |
| Derivative financial instruments                                              |       | 19,239                     |       | 13,948 |   | 33,187 |   |
| Trading securities                                                            |       | 29,716                     |       | 13,398 |   | 43,114 |   |
| Other financial assets designated at fair value                               |       | 1,918                      |       | 1,145 |   | 3,063 |   |
| Available-for-sale securities                                                 |       | 576                        |       | 1,054 |   | 1,630 |   |
| Loans (net of provisions)                                                     |       | 113,974                    |       | 349,485 |   | 463,459 |   |
| Life insurance assets                                                         |       | 685                        |       | 11,699 |   | 12,384 |   |
| Regulatory deposits with central banks overseas                               |       | 762                        |       | 4 |   | 766 |   |
| All other assets                                                              |       | 4,325                      |       | 14,413 |   | 18,738 |   |
| **Total assets**                                                              |       | 184,441                    |       | 405,146 |   | 589,587 |   |
| **Liabilities**                                                               |       |                       |       |   |   |   |   |
| Payables due to other financial institutions                                  |       | 9,134                      |       | 101 |   | 9,235 |   |
| Deposits                                                                      |       | 320,461                    |       | 8,995 |   | 329,456 |   |
| Derivative financial instruments                                              |       | 22,021                     |       | 14,457 |   | 36,478 |   |
| Trading liabilities and other financial liabilities designated at fair  value |       | 9,824                      |       | 1,024 |   | 10,848 |   |
| Debt issues and acceptances                                                   |       | 51,436                     |       | 81,588 |   | 133,024 |   |
| Life insurance policy liabilities                                             |       | 137                        |       | 11,600 |   | 11,737 |   |
| All other liabilities                                                         |       | 9,231                      |       | 1,869 |   | 11,100 |   |
| **Total liabilities excluding loan  capital**                                 |       | 422,244                    |       | 119,634 |   | 541,878 |   |
| Loan capital                                                                  |       | 2,399                      |       | 8,739 |   | 11,138 |   |
| **Total liabilities**                                                         |       | 424,643                    |       | 128,373 |   | 553,016 |   |
| **Net assets/(net liabilities)**                                              |       | (240,202                   | )          | 276,773 |   | 36,571 |   |

 

239

----

 

**Note 27. Financial risk(continued)**

 
| ** **                                                         | ** ** | **Parent Entity 2010** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **Due within**              | ** ** | **Greater than** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **12 Months**               | ** ** | **12 Months** | ** ** | **Total** | ** ** |
| ** **                                                         | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Assets**                                                         |       |                             |       |   |   |   |   |
| Cash and balances with central banks                               |       | 3,693                            |       | — |   | 3,693 |   |
| Receivables due from other financial institutions                  |       | 10,047                           |       | — |   | 10,047 |   |
| Derivative financial instruments                                   |       | 23,477                           |       | 12,431 |   | 35,908 |   |
| Trading securities                                                 |       | 21,522                           |       | 16,299 |   | 37,821 |   |
| Other financial assets designated at fair value                    |       | 276                              |       | 1,048 |   | 1,324 |   |
| Available-for-sale securities                                      |       | 195                              |       | 10,737 |   | 10,932 |   |
| Loans (net of provisions)                                          |       | 108,221                          |       | 322,946 |   | 431,167 |   |
| Due from subsidiaries                                              |       | 58,295                           |       | — |   | 58,295 |   |
| Investment in subsidiaries                                         |       | —                           |       | 5,005 |   | 5,005 |   |
| Regulatory deposits with central banks overseas                    |       | 1,106                            |       | 182 |   | 1,288 |   |
| All other assets                                                   |       | 2,614                            |       | 12,202 |   | 14,816 |   |
| **Total assets**                                                   |       | 229,446                          |       | 380,850 |   | 610,296 |   |
| **Liabilities**                                                    |       |                             |       |   |   |   |   |
| Payables due to other financial institutions                       |       | 8,787                            |       | 100 |   | 8,887 |   |
| Deposits                                                           |       | 301,964                          |       | 9,598 |   | 311,562 |   |
| Derivative financial instruments                                   |       | 28,143                           |       | 14,834 |   | 42,977 |   |
| Trading liabilities and other liabilities designated at fair value |       | 4,770                            |       | 80 |   | 4,850 |   |
| Debt issues and acceptances                                        |       | 41,590                           |       | 83,692 |   | 125,282 |   |
| Due to subsidiaries                                                |       | 62,463                           |       | — |   | 62,463 |   |
| All other liabilities                                              |       | 7,778                            |       | 1,019 |   | 8,797 |   |
| **Total liabilities excluding loan  capital**                      |       | 455,495                          |       | 109,323 |   | 564,818 |   |
| Loan capital                                                       |       | 3,326                            |       | 6,306 |   | 9,632 |   |
| **Total liabilities**                                              |       | 458,821                          |       | 115,629 |   | 574,450 |   |
| **Net assets/(net liabilities)**                                   |       | (229,375                         | )          | 265,221 |   | 35,846 |   |

 

240

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 
| ** **                                                         | ** ** | **Parent Entity 2009** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **Due within**              | ** ** | **Greater than** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **12 Months**               | ** ** | **12 Months** | ** ** | **Total** | ** ** |
| ** **                                                         | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Assets**                                                         |       |                             |       |   |   |   |   |
| Cash and balances with central banks                               |       | 2,578                            |       | — |   | 2,578 |   |
| Receivables due from other financial institutions                  |       | 6,868                            |       | — |   | 6,868 |   |
| Derivative financial instruments                                   |       | 18,767                           |       | 12,085 |   | 30,852 |   |
| Trading securities                                                 |       | 22,012                           |       | 13,392 |   | 35,404 |   |
| Other financial assets designated at fair value                    |       | 404                              |       | 1,007 |   | 1,411 |   |
| Available-for-sale securities                                      |       | 90                               |       | 372 |   | 462 |   |
| Loans (net of provisions)                                          |       | 65,444                           |       | 228,247 |   | 293,691 |   |
| Due from subsidiaries                                              |       | 83,228                           |       | — |   | 83,228 |   |
| Investment in subsidiaries                                         |       | —                           |       | 18,751 |   | 18,751 |   |
| Regulatory deposits with central banks overseas                    |       | 737                              |       | — |   | 737 |   |
| All other assets                                                   |       | 2,412                            |       | 3,378 |   | 5,790 |   |
| **Total assets**                                                   |       | 202,540                          |       | 277,232 |   | 479,772 |   |
| **Liabilities**                                                    |       |                             |       |   |   |   |   |
| Payables due to other financial institutions                       |       | 8,268                            |       | 100 |   | 8,368 |   |
| Deposits                                                           |       | 230,706                          |       | 5,507 |   | 236,213 |   |
| Derivative financial instruments                                   |       | 21,326                           |       | 12,028 |   | 33,354 |   |
| Trading liabilities and other liabilities designated at fair value |       | 8,058                            |       | 1,024 |   | 9,082 |   |
| Debt issues and acceptances                                        |       | 39,075                           |       | 59,087 |   | 98,162 |   |
| Due to subsidiaries                                                |       | 45,224                           |       | — |   | 45,224 |   |
| All other liabilities                                              |       | 5,495                            |       | 2,620 |   | 8,115 |   |
| **Total liabilities excluding loan  capital**                      |       | 358,152                          |       | 80,366 |   | 438,518 |   |
| Loan capital                                                       |       | 2,004                            |       | 6,828 |   | 8,832 |   |
| **Total liabilities**                                              |       | 360,156                          |       | 87,194 |   | 447,350 |   |
| **Net assets/(net liabilities)**                                   |       | (157,616                         | )          | 190,038 |   | 32,422 |   |

 

**27.4 Market risk**

 

Market risk is thepotential for loss arising from adverse movements in the level and volatilityof market factors such as foreign exchange rates, interest rates, commodityprices and equity prices.

 

**27.4.1 Traded market risk**

 

***Approach***

 

Westpac’s exposureto traded market risk arises out of the trading activities of Financial Marketsand Group Treasury. These activities are controlled by a Board-approved marketrisk framework that incorporates Board-approved Value at Risk (VaR) limits. VaRis the primary mechanism for measuring and controlling market risk. Market riskis managed using VaR and structural risk limits (including volume limits andbasis point value limits) in conjunction with scenario analysis and stresstesting. Market risk limits are allocated to business managers based uponbusiness strategies and experience, in addition to market liquidity andconcentration risks. All trades are fair valued daily, using independentlysourced or reviewed rates. Rates that have limited independent sources arereviewed at least on a monthly basis.

 

Financial Market’strading book activity represents dealings that encompass book running anddistribution activity. The types of market risk arising from these activitiesinclude interest rate, foreign exchange, commodity, equity price, credit spreadand volatility risk.

 

Group Treasury’strading activity represents dealings that include the management of interestrate, foreign exchange and credit spread risk associated with wholesalefunding, liquid asset portfolios and foreign exchange repatriations.

 

*VaR limits*

 

Market risks arisingfrom trading book activities are primarily measured using VaR based onhistorical simulation methodology. VaR is the potential loss in earnings froman adverse market movement calculated to a 99% confidence level, with a minimumof one year of historical rate data and a one-day time horizon. VaR takesaccount of all material market variables that may cause a change in the valueof the trading portfolio, including interest rates, foreign exchange rates,price changes, volatility and the correlations between these variables.

 

The BRMC hasapproved an overall market risk VaR limit for trading activities. MARCO hasapproved separate VaR sub-limits for the trading activities of FinancialMarkets and Group Treasury.

 

241

----

 

**Note 27. Financial risk(continued)**

 

*Backtesting*

 

Daily backtesting ofVaR results is performed to support model integrity. A review of both thepotential profit or loss outcomes is also undertaken to monitor any skewcreated by the historical data.

 

*Stress testing*

 

Daily stress testingagainst pre-determined scenarios is carried out to analyse potential lossesarising from extreme or unexpected movements beyond the 99% confidence level.An escalation framework around selective stress tests has been approved byMARCO. Stress and scenario tests include historical market movements, thosedefined by MARCO or Market Risk Management (MRM) and independent scenariosdeveloped by Westpac’s economics department.

 

*Profit or loss notification framework*

 

The BRMC hasapproved a profit or loss notification framework. Included in this frameworkare levels of escalation in accordance with the size of the profit or loss.Triggers are applied to both a 1-day and a rolling 20-day cumulative total.

 

*Risk reporting*

 

Daily monitoring ofcurrent exposure and limit utilisation is conducted independently by the MRMunit, which monitors market risk exposures against VaR and structural limits.Daily VaR position reports are produced by risk type, by product lines and bygeographic region. These are supplemented by structural risk reporting, adviceof profit or loss trigger levels and stress testing escalation trigger points.Model accreditation has been granted by APRA to use the internal model for thedetermination of regulatory capital for the key classes of interest rate(general market), foreign exchange, commodity and equity risks (includingspecific risk). Specific risk refers to the variations in individual securityprices that cannot be explained by general market movements and event anddefault risk.

 

*Risk mitigation*

 

Market riskpositions are managed by the trading desks consistent with delegated tradingand product authorities. Risks are consolidated into portfolios based onproduct and risk types. Risk management is carried out by suitably qualifiedpersonnel with varying levels of seniority commensurate with the nature andscale of market risks under management.

 

*Determination of fair value*

 

Refer to Note 28 forthe basis for determining fair value.

 

The following controlsallow for continuous monitoring of market risk by management:

 

·         trading authorities and responsibilities are clearly delineated at alllevels to provide accountability;

 

·         a structured system of limits and reporting of exposures;

 

·         all new products and significant product variations undergo an approvalprocess to confirm business risks have been identified prior to launch;

 

·         models that are used to determine risk or profit or loss for Westpac’sfinancial statements are independently reviewed;

 

·         duties are segregated so that employees involved in the origination,processing and valuation of transactions operate under separate reportinglines, minimising the opportunity for collusion; and

 

·         legal counsel approves documentation for compliance with relevant lawsand regulations.

 

Segregation ofduties is a significant feature of Westpac’s internal controls. Separation ofpersons executing transactions from those responsible for processing contracts,confirming transactions, settling transactions, approving the accountingmethodology or entries and performing revaluations minimises opportunities forfraud or embezzlement. Additionally, Internal Audit reviews compliancewith policies, procedures and limits.

 

The table belowdepicts the aggregate VaR, by risk type, for the six months ended30 September 2010, 31 March 2010 and 30 September 2009:

 
| ** **             | ** ** | **Consolidated**                | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **30 September 2010** | ** ** | **31 March 2010** | ** ** | **30 September 2009** | ** ** |
| ** **             | ** ** | **High**                        | ** ** | **Low** | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** |
| ** **             | ** ** | **$m**                          | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Interest rate risk     |       | 25.6                            |       | 11.2 |   | 18.0 |   | 50.8 |   | 13.3 |   | 28.5 |   | 59.9 |   | 24.2 |   | 37.7 |   |
| Foreign exchange risk  |       | 5.0                             |       | 1.0 |   | 2.5 |   | 8.0 |   | 0.6 |   | 3.1 |   | 10.8 |   | 1.2 |   | 5.4 |   |
| Equity risk            |       | 0.9                             |       | 0.3 |   | 0.5 |   | 1.6 |   | 0.4 |   | 0.9 |   | 2.0 |   | 1.0 |   | 1.4 |   |
| Commodity risk(1)      |       | 3.3                             |       | 1.3 |   | 1.9 |   | 1.9 |   | 0.5 |   | 1.1 |   | 6.4 |   | 1.0 |   | 3.6 |   |
| Other market risks(2)  |       | 27.5                            |       | 15.8 |   | 19.3 |   | 18.3 |   | 11.7 |   | 14.3 |   | 26.0 |   | 17.7 |   | 21.4 |   |
| Diversification effect |       | n/a                             |       | n/a |   | (17.0 | ) | n/a |   | n/a |   | (17.6 | ) | n/a |   | n/a |   | (29.7 | ) |
| Net market risk        |       | 35.9                            |       | 17.1 |   | 25.2 |   | 51.1 |   | 18.3 |   | 30.3 |   | 54.5 |   | 23.7 |   | 39.8 |   |

 

----

| (1) | Includes electricity risk.                                                                               |
|-----|----------------------------------------------------------------------------------------------------------|
| (2) | Includes prepayment risk and credit spread  risk (exposure to movements in generic credit rating bands). |

 

242

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 

Prior to 1 October 2009St.George trading positions were included on an additive basis. From 1 October 2009,these positions were integrated into Westpac’s risk system and VaR numbers havebeen calculated on a diversified basis. The impact of this inclusion on theoverall VaR is small, with St.George risk typically being less than 5% of thetotal.

 

The table belowdepicts the aggregate VaR, by risk type for the six months ended30 September 2010, 31 March 2010 and 30 September 2009:

 
| ** **             | ** ** | **Parent Entity**          | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **30 September 2010** | ** ** | **31 March 2010** | ** ** | **30 September 2009** | ** ** |
| ** **             | ** ** | **High**                        | ** ** | **Low** | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** |
| ** **             | ** ** | **$m**                          | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Interest rate risk     |       | 25.6                            |       | 11.2 |   | 18.0 |   | 51.4 |   | 14.1 |   | 28.5 |   | 58.1 |   | 23.1 |   | 36.2 |   |
| Foreign exchange risk  |       | 5.0                             |       | 1.0 |   | 2.5 |   | 8.1 |   | 0.6 |   | 3.2 |   | 10.6 |   | 1.2 |   | 5.3 |   |
| Equity risk            |       | 0.9                             |       | 0.3 |   | 0.5 |   | 1.6 |   | 0.4 |   | 0.9 |   | 2.0 |   | 1.0 |   | 1.4 |   |
| Commodity risk(1)      |       | 3.3                             |       | 1.3 |   | 1.9 |   | 1.9 |   | 0.5 |   | 1.1 |   | 6.4 |   | 1.0 |   | 3.6 |   |
| Other market risks(2)  |       | 27.5                            |       | 15.8 |   | 19.3 |   | 18.3 |   | 11.7 |   | 14.3 |   | 26.0 |   | 17.7 |   | 21.4 |   |
| Diversification effect |       | n/a                             |       | n/a |   | (17.0 | ) | n/a |   | n/a |   | (17.6 | ) | n/a |   | n/a |   | (29.6 | ) |
| Net market risk        |       | 35.9                            |       | 17.1 |   | 25.2 |   | 51.8 |   | 18.3 |   | 30.4 |   | 52.5 |   | 22.6 |   | 38.3 |   |

 

----

| (1) | Includes electricity risk.                                                                               |
|-----|----------------------------------------------------------------------------------------------------------|
| (2) | Includes prepayment risk and credit spread  risk (exposure to movements in generic credit rating bands). |

 

With Westpac andSt.George Bank operating as a single ADI from 1 March 2010, the St.Georgetrading positions are included in the Parent Entity from this date.

 

***Commodity, Carbon and Energy trading***

 

Commodity, Carbonand Energy trading (CCE) activity is part of our Financial Markets business.All trades are marked-to-market daily, using independently sourced or reviewedrates. Rates are compared to Australian Financial Market Association (AFMA)published prices, brokers’ quotes, and futures prices as appropriate. Ratesthat have limited independent sources are reviewed on a regular basis by theWIB Revaluation Committee. The CCE business is managed within market riskstructural and VaR limits. Credit risk is controlled by pre-settlement risklimits by counterparty.

 

CCE tradingactivities include electricity, gas, oil, emission, agricultural products, basemetals and precious metals. These activities involve dealings in swaps,options, swaptions, Asian options and futures. Energy trading also includesSettlement Residue Auctions (SRAs) and Renewable Energy Certificates (RECs).Trading on the European and US markets is limited to the futures markets.

 

The total fair valueof commodity and energy contracts outstanding as at 30 September 2010 werenet assets of $59 million (2009 net assets of $27 million).

 

**27.4.2 Non-traded market risk**

 

***Approach***

 

The banking bookactivities that give rise to market risk include lending activities, balancesheet funding and capital management. Interest rate risk, currency risk andfunding and liquidity risk are inherent in these activities. Group Treasury’sAsset and Liability Management (ALM) unit is responsible for managing theinterest rate risk arising from these activities.

 

All materialregions, business lines and legal entities are included in Westpac’s InterestRate Risk in the Banking Book (IRRBB) framework.

 

*Asset and Liability Management*

 

ALM manages thestructural interest rate mismatch associated with the transfer priced balancesheet, including the investment of Westpac’s capital to its agreed benchmarkduration. A key risk management objective is to achieve reasonable stability ofnet interest income (NII) over time. These activities are overseen by theindependent MRM unit, reviewed by MARCO and conducted within a risk frameworkand appetite set down by the BRMC.

 

Material non-tradedinterest rate risk is managed in three centres: Sydney manages risk associatedwith the Australian balance sheet, the Wellington office manages riskassociated with the New Zealand balance sheet, and the London centre managesrisk associated with all other locations. The risk from these three centres ismonitored both at a local and aggregate level.

 

243

----

 

**Note 27. Financial risk(continued)**

 

*NII sensitivity*

 

NII sensitivity ismanaged in terms of the net interest income-at-risk (NaR) modelled over a threeyear time horizon using a 99% confidence interval for movements in wholesalemarket interest rates. The position managed covers the Australian andNew Zealand banking books, where the banking book is defined as the entirebanking balance sheet less the trading book. A simulation model is used tocalculate Westpac’s potential NaR. The NII simulation framework combines theunderlying balance sheet data with assumptions about run off and new business,expected repricing behaviour and changes in wholesale market interest rates.Simulations using a range of interest rate scenarios are used to provide aseries of potential future NII outcomes. The interest rate scenarios modelledinclude those projected using historical market interest rate volatility aswell as 100 and 200 basis point shifts up and down from the current marketyield curves in Australia and New Zealand. Additional stressed interest ratescenarios are also considered and modelled.

 

A comparison betweenthe NII outcomes from these modelled scenarios indicates the sensitivity tointerest rate changes.

 

*NaR limit*

 

The BRMC hasapproved a NaR limit. This limit is managed by the Group Treasurer and isexpressed as a deviation from benchmark hedge levels over a one-year rollingtime frame, to a 99% confidence level. This limit is monitored by MRM.

 

*VaR limit*

 

The BRMC has alsoapproved a VaR limit for ALM activities. This limit is managed by the GroupTreasurer and monitored by MRM. Additionally, MRM sets structural risk limitsto prevent undue concentration of risk.

 

*Structural foreign exchange risk*

 

Structural foreignexchange rate risk results from the generation of foreign currency denominatedearnings and from the foreign currency capital that we have deployed inoffshore branches and subsidiaries with functional currencies other than Australian dollars.

 

As a result of therequirement to translate earnings and net assets of the foreign operations intoour Australian dollar consolidated financial statements, movements in exchangerates could lead to changes in the Australian dollar equivalent of offshoreearnings and capital which could introduce variability to our reportedfinancial results. This is referred to as translation risk. In order tominimise this exposure, we manage the foreign exchange rate risk associatedwith offshore earnings and capital as follows:

 

·         foreign currency denominated earnings that are generated during thecurrent financial year and form part of capital that is defined to be availablefor repatriation at our option at any time is hedged. This hedging removes theimpact of changes in exchange rates on the cash flows that result from therepatriation of our profits or capital;

 

·         capital that is defined to be permanently employed in an offshorejurisdiction (for example to meet regulatory or prudential requirements) andwhich has no fixed term is hedged;

 

·         capital or profits that are denominated in currencies to which we havean immaterial exposure are not hedged; and

 

·         the economic risk of New Zealand dollar future earnings are managedwhere the bank believes there is a strong likelihood of significant adversemoves in the AUD/NZD exchange rate. Westpac manages these flows over a timehorizon under which up to 100% of the expected earnings for the followingfinancial year and 50% of the expected earnings for the subsequent financialyear can be hedged.

 

ALCO determines theappropriateness of the foreign exchange earnings hedges and associated limits.The identification and management of structural foreign exchange risk isreported to ALCO monthly.

 

***Risk reporting***

 

IRRBB riskmeasurement systems and personnel are centralised in Sydney. These includefront office product systems, which capture all treasury funding and derivativetransactions; the transfer pricing system, which captures all retailtransactions in Australia and New Zealand; non-traded VaR systems; and the NIIsystem, which calculates NII and NaR for the Australian and New Zealand balancesheets.

 

Daily monitoring ofcurrent exposure and limit utilisation is conducted independently by MRM, whichmonitors market risk exposures against VaR and NaR limits. Reports detailingstructural positions and VaR are produced and distributed daily for use bydealers and management across all stakeholder groups. Monthly and quarterlyreports are produced for the senior management market risk forums of MARCO andthe BRMC respectively to provide transparency of material market risks andissues.

 

244

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 27. Financial risk(continued)**

 

***Risk mitigation***

 

Market risk arisingin the banking book stems from the ordinary course of banking activities,including structural interest rate risk (the mismatch between the duration ofassets and liabilities) and capital management. Hedging Westpac’s exposure tointerest rate risk is undertaken using derivatives. The hedge accountingstrategy adopted is to utilise a combination of cash flow, fair value and netinvestment hedge approaches. Some derivatives held for economic hedgingpurposes do not meet the criteria for hedge accounting as defined under AASB139, and therefore are accounted for in the same way as derivatives held fortrading.

 

The same controls asused to monitor traded market risk allow for the continuous monitoring bymanagement of non-traded market risk.

 

The table belowdepicts the aggregate VaR for non-traded market rate risk for the six monthsended 30 September 2010, 31 March 2010 and 30 September 2009:

 
| ** **      | ** ** | **Consolidated**                | ** ** |
|-----------------|------------|---------------------------------|------------|
| ** **      | ** ** | **30 September 2010** | ** ** | **31 March 2010** | ** ** | **30 September 2009** | ** ** |
| ** **      | ** ** | **High**                        | ** ** | **Low** | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** |
| ** **      | ** ** | **$m**                          | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Half year ended |       | 6.3                             |       | 1.4 |   | 3.6 |   | 22.4 |   | 1.5 |   | 5.4 |   | 20.8 |   | 1.9 |   | 10.3 |   |

 

As at30 September 2010 the non-traded VaR for the Parent Entity was$3.1 million (31 March 2010 $5.3 million,30 September 2009 $3.8 million). The St.George banking book positionsare included in the Parent Entity from 1 March 2010 as a consequenceof becoming a single ADI.

 

**Note 28. Fair values of financialassets and liabilities**

 

***Fair valuation control framework***

 

Westpac uses a wellestablished Fair Valuation Control Framework to determine the fair value offinancial assets and liabilities. The framework consists of policies andprocedures that ensure the Group is in compliance with relevant accounting,industry and regulatory standards. This framework includes details on theapproach taken with respect to the revaluation of financial instruments,independent price verification, fair value adjustments and financial reporting.

 

The method ofdetermining a fair value according to the Fair Valuation Control Frameworkfalls into one of two main approaches:

 

·         Mark to marketWhere the valuation uses independent unadjusted quoted market prices.

 

·         Mark to modelWhere valuation techniques are used to determine the valuation.

 

Valuation techniquesoften require adjustments to ensure correct fair value representation. Some ofour more significant valuation adjustments include:

 

·         Credit valuation adjustment: Some market and model derived valuationsassume similar credit quality for all counterparties. To correct for thisassumption, an adjustment is employed on the majority of derivative positionswhich reflects the market view of both the counterparty credit risk forderivatives with a positive mark to market and recorded as assets (CVA), andfor our own credit risk for derivatives with a negative mark to market andrecorded as liabilities (DVA). Westpac uses a Monte Carlo simulationmethodology to calculate the expected future credit exposure for all derivativeexposures including inputs regarding probabilities of default (PDs) and lossgiven default (LGD). PDs are derived from market observed credit spreads byreference to credit default swap (CDS) sector curves for the relevant tenors tocalculate CVA, and Westpac’s CDS curve for the relevant tenors to calculateDVA. PDs are then applied to the horizon of potential exposures to derive boththe CVA and DVA.

 

·         Bid-offer spreads adjustment: The fair value of financial assets andliabilities should reflect bid prices for assets and offer prices forliabilities. Prices are adjusted to reflect current bid-offer spreads.

 

·         Single currency basis risk adjustment: Currently some Westpac valuationtechniques use projected cash-flows generated from standard curves. Often thesestandard curves do not fit the payment frequency of the valued instrument. Asingle currency basis risk adjustment is made to reflect the difference inpayment frequency. Observed market data of single currency basis swaps is usedto calculate the adjustment.

 

The fair values oflarge holdings of financial instruments are based on a multiple of theestimated value of a single instrument, and do not include block adjustmentsfor the size of the holding.

 

245

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**Note 28. Fair values of financialassets and liabilities (continued)**

 

***Fair value hierarchy***

 

Westpac categorisesall fair value instruments according to the following hierarchy:

 

·         Quoted market price (Level 1)

 

This valuationtechnique uses recent unadjusted quoted prices for identical assets orliabilities in active markets where the price represents actual and regularlyoccurring market transactions on an arm’s length basis.

 

Financialinstruments included in this class are spot and exchange traded derivatives forcommodities, equities, foreign exchange and interest rate products.

 

·         Valuation technique using observable inputs (Level 2)

 

This valuationtechnique is used for financial instruments where quoted market prices are notavailable so prices are derived from standard valuation models, and inputs tothese models are directly observable. The valuation techniques include the useof discounted cash flow analysis, option pricing models and other valuationtechniques widely used and accepted by market participants. The financialinstruments included in this category are mainly OTC derivatives withobservable market inputs and financial instruments with fair value derived fromconsensus pricing with sufficient contributors. Financial instruments includedin the Level 2 category are trading securities including government bonds, StateGovernment bonds, corporate fixed rate bonds and floating rate bonds andderivatives including interest rate swaps, CDSs, FX swaps, equity options andFX options.

 

·         Valuation technique with significant non-observable inputs (Level 3)

 

This valuation techniqueis used where at least one significant input is not observable and reliance isplaced on reasonable assumptions based on market conditions. These estimatesare calibrated against industry standards, economic models and observabletransaction prices where possible. The financial instruments included in thisclass show illiquidity in the market. Some valuations rely on estimation fromrelated markets or proxies.

 

FinancialInstruments included in the Level 3 category are trading securities, includingsome asset backed securities and non-Australian dollar denominated StateGovernment bonds.

 

***Valuation techniques, valuation inputs and asset classification***

 

A variety ofvaluation techniques are used to derive the fair value of each instrument. Markto market is the preferred valuation technique for all products. However, whenmarkets are illiquid and prices are not quoted, modelling techniques are usedto derive fair value. The specific valuation techniques, the observability ofthe inputs used in valuation models and the subsequent classification for eachsignificant product category are outlined below:

 

*Interest rate products*

 

·         Exchange traded interest rate (IR) options and futuresExchange traded IR options and futures are liquid and their prices are observable.No modelling or assumptions are used in valuation. Thus, IR options andfutures are categorised as Level 1 instruments.

 

·         Other interest rate derivativesThese are products with a payoff linked to interest rates; for example BankBills Swap reset Rate (BBSW), London InterBank Offer Rate (LIBOR) or inflationrates. This category includes interest rate and inflation swaps, swaptions,caps, floors and collars and other complex interest rate derivatives. For theseinstruments, as market prices are unavailable, Westpac uses valuation models toderive fair value. The models are industry standard and mostly employ a Black-Scholesframework to calculate the expected future value of payments by product, whichis discounted back to a present value. The models’ interest rate inputs arebenchmark interest rates such as BBSW and active broker quoted interest ratesin the swap, bond and futures markets. Interest rate volatilities are sourcedthrough a consensus data provider. As such the input parameters into the modelsare deemed observable, thus these interest rate derivatives are categorised asLevel 2 instruments.

 

*FX products*

 

·         FX Spot and FuturesThere are observable markets for spot and futures contracts in major globalcurrencies. No modelling or assumptions are used in valuation of theseinstruments. These assets are categorised as Level 1 instruments.

 

·         FX Swaps, Options, Forwards (outright) and other FX derivativesFX swaps and forwards are not traded on exchanges and options, although someare traded on exchanges, are not generally liquid. FX swap and forwardvaluations are derived from consensus data providers. Both simple and complexderivatives are valued using industry standard models which revolve around aBlack-Scholes framework. The inputs to the calculation include FX spot rates,interest rates and FX volatilities. In general, these inputs are marketobservable or provided by consensus data providers. Thus, FX swaps, options,forwards and other FX derivatives are categorised as Level 2 instruments.

 

246

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 28. Fair values of financialassets and liabilities (continued)**

 

*Debt and credit market products*

 

·         Single Name and Index CDSCDSs are mainly traded OTC, therefore market prices are not always observable.Westpac uses a standard industry model to derive the fair value of CDSs. Themain input the model relies on is the credit spread. Credit spreads are obtainedfrom consensus market data providers, thus CDS single name and index areclassified as Level 2 assets.

 

·         Government bonds, State Government bonds, corporate bonds, commercialpaper, certificates of deposit and notesWithin this category, most instruments do not have quoted market prices.Westpac uses valuation models to derive the fair value of these instruments.The valuation techniques are standard and mainly use a discounted cashflowapproach. The main model inputs are observed instrument data used to derive thediscount curves. Thus, Debt market products are classified as Level 2instruments.

 

*Asset backed products*

 

·         Australian Residential Mortgage Backed Securities (RMBS) denominated inAustralian dollarsAustralian RMBS are traded OTC, therefore trade price observability is limited.Westpac uses a model to derive the fair value of RMBS. The model follows theindustry standard approach to valuing floating rate debt with prepaymentfeatures. The main inputs to the model are the trading margin and the weightedaverage life (WAL) of the security. These inputs are sourced from a consensusdata provider. Therefore, Australian issued RMBS denominated in AUD areclassified as Level 2 instruments.

 

·         Australian RMBS denominated in foreign currency and offshore RMBSDespite the availability of an RMBS model in Westpac, input data for thetrading margin on Australian issued RMBS, denominated in foreign currency isconsidered unreliable. Therefore, proxy data from the Australian denominatedRMBS market is used to retrieve the fair value for these instruments.

 

For offshore RMBS,broker data is used to determine fair value however if trading levels in theseinstruments is low, both Australian issued RMBS denominated in foreign currencyand offshore RMBS are classified as Level 3 instruments.

 

·         Synthetic credit default obligations (CDOs)As synthetic CDO prices are not generally available, Synthetic CDOs are valuedusing a model. The model uses a combination of established analytic andnumerical approaches. The model calculates fair value based on observable andunobservable parameters including credit spreads, recovery rates, correlationsand interest rates. As some of the model inputs (e.g. correlations) areindirectly implied or unobservable, synthetic CDOs are classified as Level 3instruments.

 

·         Cash CDOs, credit linked obligations (CLOs), and other asset backedsecurities (ABSs)Cash CDO, CLO and ABS prices are obtained from broker quotes and consensus dataproviders. Modelling is not used in the valuation as generally there is noinformation on the underlying asset pool. If consensus pricing data isavailable these are classified as Level 2 instruments. Otherwise, Cash CDOs,CLOs and other ABSs are classified as Level 3 instruments.

 

*Equity products*

 

·         Cash equities and indexThe Australian cash equity market is liquid and cash equities and index pricesare listed on the ASX. No modelling or assumptions are used in valuation. Thus,cash equities are categorised as Level 1 assets.

 

·         Exchange traded equity options, OTC equity options and AUD warrantsExchange traded equity options and warrants are traded on the ASX. However,currently there is very little liquidity in the market for these instruments.For OTC equity options there is no observable source of pricing. Therefore,industry standard models are used to value options and warrants, which arebased on a Black-Scholes framework. The models calculate fair value based oninput parameters such as stock prices, dividends, volatilities and interestrates. In general, these input parameters are deemed observable. Thus, exchangetraded equity options, OTC equity options and warrants are categorised as Level2 instruments.

 

*Commodity products*

 

·         Commodity and energy spot and futures and carbon futuresThe commodity and energy spot and futures and carbon futures markets aregenerally liquid and instruments are listed on major global exchanges. Tradedcommodity and energy spot and futures include metals, agriculture, oil related,power and natural gas. No modelling or assumptions are used in the valuation ofthese instruments. Thus, commodity and energy spot and futures and carbonfutures are categorised as Level 1 instruments.

 

·         Commodity, carbon and energy swapsEnergy, carbon and commodity swaps are not traded on exchanges and options,although traded on exchanges, are not generally liquid. Therefore, marketprices are not regularly observed. Westpac uses models to derive the fair valueof these instruments. The models calculate the expected future value ofdeliveries and payments and discounts them back to a present value. The modelinputs include forward curves, volatility surfaces, discount curves andunderlying spot and futures prices. Most of these inputs are market observablesor provided by consensus data providers. Thus carbon, commodity and energyderivatives are categorised as Level 2 instruments.

 

247

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**Note 28. Fair values of financialassets and liabilities (continued)**

 

*Certificates of deposits*

 

The fair value ofcertificates of deposit are determined using a discounted cash flow analysisusing markets rates offered for deposits of similar remaining maturities andare therefore classified as Level 2 instruments.

 

*Debt issues at fair value*

 

Where a quoted priceis not available the fair value of debt issues is determined using a discountedcash flow approach, using a discount rate which reflects the terms of theinstrument and the timing of cash flows adjusted for market observable changesin the applicable credit rating of Westpac. These instruments are thereforeclassified as Level 2 instruments.

 

*Disclosure of fair value*

 

Due to the number ofdifferent valuation models used and the underlying assumptions made regardinginputs selected, such as timing and amounts of future cash flows, discountrates, credit risk and volatility, it is often difficult to compare the fairvalue information disclosed here, against the fair value information disclosedby other financial institutions.

 

The fair valuesdisclosed in this note represent estimates at which the instruments could beexchanged. However, the intention is to hold many of these instruments tomaturity and thus it is possible that the realised amount may differ to theamounts disclosed in the tables below.

 

The table belowsummarises the attribution of financial instruments to the fair value hierarchybased on the measurement basis after initial recognition:

 
| ** **                                                                    | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                    | ** ** | **2010**         | ** ** | **2009** | ** ** |
| ** **                                                                    | ** ** | ** **       | ** ** | **Valuation** | ** ** | **Valuation** | ** ** | ** ** | ** ** | ** ** | ** ** | **Valuation** | ** ** | **Valuation** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Quoted**       | ** ** | **Techniques** | ** ** | **Techniques** | ** ** | ** ** | ** ** | **Quoted** | ** ** | **Techniques** | ** ** | **Techniques** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Market**       | ** ** | **(Market** | ** ** | **(Non-Market** | ** ** | ** ** | ** ** | **Market** | ** ** | **(Market** | ** ** | **(Non-Market** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Prices**       | ** ** | **Observable)** | ** ** | **Observable)** | ** ** | **Total** | ** ** | **Prices** | ** ** | **Observable)** | ** ** | **Observable)** | ** ** | **Total** | ** ** |
| ** **                                                                    | ** ** | **$m**           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Assets**                                                                    |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Derivative financial instruments                                              |       | 860              |       | 35,233 |   | 9 |   | 36,102 |   | 253 |   | 32,906 |   | 28 |   | 33,187 |   |
| Trading securities(1)                                                         |       | 267              |       | 39,699 |   | 45 |   | 40,011 |   | 1,371 |   | 41,637 |   | 106 |   | 43,114 |   |
| Other financial assets designated at fair value                               |       | 1,986            |       | 826 |   | 652 |   | 3,464 |   | 932 |   | 1,467 |   | 664 |   | 3,063 |   |
| Available-for-sale securities(2)                                              |       | 412              |       | 11,245 |   | 51 |   | 11,708 |   | 442 |   | 833 |   | — |   | 1,275 |   |
| Life insurance assets                                                         |       | 11,919           |       | 391 |   | — |   | 12,310 |   | 11,970 |   | 414 |   | — |   | 12,384 |   |
| **Total assets carried at fair  value**                                       |       | 15,444           |       | 87,394 |   | 757 |   | 103,595 |   | 14,968 |   | 77,257 |   | 798 |   | 93,023 |   |
| **Liabilities**                                                               |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits at fair value                                                        |       | —           |       | 53,249 |   | — |   | 53,249 |   | — |   | 58,491 |   | — |   | 58,491 |   |
| Derivative financial instruments                                              |       | 1,179            |       | 42,816 |   | 44 |   | 44,039 |   | 75 |   | 36,329 |   | 74 |   | 36,478 |   |
| Trading liabilities and other financial liabilities designated at fair  value |       | 114              |       | 4,736 |   | — |   | 4,850 |   | 52 |   | 10,796 |   | — |   | 10,848 |   |
| Debt issues at fair value                                                     |       | —           |       | 33,218 |   | 109 |   | 33,327 |   | — |   | 34,272 |   | 136 |   | 34,408 |   |
| **Total liabilities carried at  fair value**                                  |       | 1,293            |       | 134,019 |   | 153 |   | 135,465 |   | 127 |   | 139,888 |   | 210 |   | 140,225 |   |

 

----

| (1) | In the current year we have revised our  presentation and reclassified other bank issued certificates of deposit from  receivables due from other financial institutions to trading securities. To  improve presentation, we have revised comparative periods. Refer to Note  1(a)(ii) for more details.      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | At 30 September 2010 financial  instruments with a carrying value of $416 million were included in  available-for-sale securities, however as their fair value could not be  reliably measured these were carried at cost (2009 $355 million). These  amounts have not been included in the table above. |

 

248

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 28. Fair values of financialassets and liabilities (continued)**

 
| ** **                                                                    | ** ** | **Parent Entity** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                                                                    | ** ** | ** **             | ** ** | **Valuation** | ** ** | **Valuation** | ** ** | ** ** | ** ** | ** ** | ** ** | **Valuation** | ** ** | **Valuation** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Quoted**             | ** ** | **Techniques** | ** ** | **Techniques** | ** ** | ** ** | ** ** | **Quoted** | ** ** | **Techniques** | ** ** | **Techniques** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Market**             | ** ** | **(Market** | ** ** | **(Non-Market** | ** ** | ** ** | ** ** | **Market** | ** ** | **(Market** | ** ** | **(Non-Market** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Prices**             | ** ** | **Observable)** | ** ** | **Observable)** | ** ** | **Total** | ** ** | **Prices** | ** ** | **Observable)** | ** ** | **Observable)** | ** ** | **Total** | ** ** |
| ** **                                                                    | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Assets**                                                                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Derivative financial instruments                                              |       | 860                    |       | 35,039 |   | 9 |   | 35,908 |   | 253 |   | 30,571 |   | 28 |   | 30,852 |   |
| Trading securities(1)                                                         |       | 267                    |       | 37,509 |   | 45 |   | 37,821 |   | 350 |   | 34,993 |   | 61 |   | 35,404 |   |
| Other financial assets designated at fair value                               |       | 57                     |       | 666 |   | 601 |   | 1,324 |   | 21 |   | 726 |   | 664 |   | 1,411 |   |
| Available-for-sale securities(2)                                              |       | 266                    |       | 10,637 |   | — |   | 10,903 |   | 220 |   | 227 |   | — |   | 447 |   |
| **Total assets carried at fair  value**                                       |       | 1,450                  |       | 83,851 |   | 655 |   | 85,956 |   | 844 |   | 66,517 |   | 753 |   | 68,114 |   |
| **Liabilities**                                                               |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits at fair value                                                        |       | —                 |       | 51,802 |   | — |   | 51,802 |   | — |   | 55,632 |   | — |   | 55,632 |   |
| Derivative financial instruments                                              |       | 1,179                  |       | 41,754 |   | 44 |   | 42,977 |   | 103 |   | 33,177 |   | 74 |   | 33,354 |   |
| Trading liabilities and other financial liabilities designated at fair  value |       | 114                    |       | 4,736 |   | — |   | 4,850 |   | 52 |   | 9,030 |   | — |   | 9,082 |   |
| Debt issues at fair value                                                     |       | —                 |       | 28,085 |   | — |   | 28,085 |   | — |   | 29,166 |   | — |   | 29,166 |   |
| **Total liabilities carried at  fair value**                                  |       | 1,293                  |       | 126,377 |   | 44 |   | 127,714 |   | 155 |   | 127,005 |   | 74 |   | 127,234 |   |

 

----

| (1) | In the current year we have revised our  presentation and reclassified other bank issued certificates of deposit from  receivables due from other financial institutions to trading securities. To  improve presentation, we have revised comparative periods. Refer to Note  1(a)(ii) for more details.    |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | At 30 September 2010 financial  instruments with a carrying value of $29 million were included in available-for-sale  securities, however as their fair value could not be reliably measured these  were carried at cost (2009 $15 million). These amounts have not been included  in the table above. |

 

Sensitivities toreasonably possible changes in non-market observable valuation assumptionswould not have a material impact on the Group or Parent Entity’s reportedresults.

 

249

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**Note 28. Fair values of financialassets and liabilities (continued)**

 

The following tablesummarises the changes in financial instruments carried at fair value derivedfrom non-market observable valuation techniques (Level 3) for the year ended 30September 2010:

 

***Reconciliation of non-market observables***

 
| ** **                                                                                                                | ** ** | **Consolidated 2010** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                | ** ** | **Derivatives**            | ** ** | **Trading  Securities** | ** ** | **Other  Financial Assets  Designated at  Fair Value** | ** ** | **Available  for Sale  Securities** | ** ** | **Total  Assets** | ** ** | **Derivatives** | ** ** | **Debt  Issues at  Fair Value** | ** ** | **Total  Liabilities** | ** ** |
| ** **                                                                                                                | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Balance as at beginning of year                                                                                           |       | 28                         |       | 106 |   | 664 |   | — |   | 798 |   | 74 |   | 136 |   | 210 |   |
| Gains/(losses) on assets/ (Gains)/losses on liabilities recognised in:                                                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income statements                                                                                                         |       | (1                         | )          | (4 | ) | (13 | ) | — |   | (18 | ) | (15 | ) | 11 |   | (4 | ) |
| Acquisitions                                                                                                              |       | —                     |       | — |   | 120 |   | — |   | 120 |   | — |   | — |   | — |   |
| Issues                                                                                                                    |       | —                     |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Disposals                                                                                                                 |       | —                     |       | (62 | ) | (225 | ) | — |   | (287 | ) | — |   | — |   | — |   |
| Settlements                                                                                                               |       | (24                        | )          | — |   | — |   | — |   | (24 | ) | (18 | ) | (56 | ) | (74 | ) |
| Transfers into or out of non-market observables                                                                           |       | 6                          |       | 5 |   | 106 |   | 51 |   | 168 |   | 3 |   | 18 |   | 21 |   |
| **Balance as at end of year**                                                                                             |       | 9                          |       | 45 |   | 652 |   | 51 |   | 757 |   | 44 |   | 109 |   | 153 |   |
| Unrealised gains/(losses) recognised in the income statement for  financial instruments held as at 30 September 2010 |       | (1                         | )          | — |   | (34 | ) | — |   | (35 | ) | (15 | ) | 11 |   | (4 | ) |

 
| ** **                                                                                                                | ** ** | **Parent Entity 2010** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                | ** ** | **Derivatives**                  | ** ** | **Trading  Securities** | ** ** | **Other  Financial Assets  Designated at  Fair Value** | ** ** | **Available  for Sale  Securities** | ** ** | **Total  Assets** | ** ** | **Derivatives** | ** ** | **Debt  Issues at  Fair Value** | ** ** | **Total  Liabilities** | ** ** |
| ** **                                                                                                                | ** ** | **$m**                           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Balance as at beginning of year                                                                                           |       | 28                               |       | 61 |   | 664 |   | — |   | 753 |   | 74 |   | — |   | 74 |   |
| Gains/(losses) on assets/ (Gains)/losses on liabilities recognised in:                                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income statements                                                                                                         |       | (1                               | )          | 1 |   | (3 | ) | — |   | (3 | ) | (15 | ) | — |   | (15 | ) |
| Acquisitions                                                                                                              |       | —                           |       | — |   | 109 |   | — |   | 109 |   | — |   | — |   | — |   |
| Issues                                                                                                                    |       | —                           |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Disposals                                                                                                                 |       | —                           |       | (62 | ) | (225 | ) | — |   | (287 | ) | — |   | — |   | — |   |
| Settlements                                                                                                               |       | (24                              | )          | — |   | — |   | — |   | (24 | ) | (18 | ) | — |   | (18 | ) |
| Transfers into or out of non-market observables                                                                           |       | 6                                |       | 45 |   | 56 |   | — |   | 107 |   | 3 |   | — |   | 3 |   |
| **Balance as at end of year**                                                                                             |       | 9                                |       | 45 |   | 601 |   | — |   | 655 |   | 44 |   | — |   | 44 |   |
| Unrealised gains/(losses) recognised in the income statement for  financial instruments held as at 30 September 2010 |       | (1                               | )          | — |   | (24 | ) | — |   | (25 | ) | (15 | ) | — |   | (15 | ) |

 

250

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 28. Fair values of financialassets and liabilities (continued)**

 

There have been nosignificant transfers of financial instruments between Level 1 and Level 2.Transfers into Level 3 have occurred due to unobservability in the significantinputs into the valuation models used to determine the fair value of therelated financial instruments.

 

***Day one profit or loss***

 

For financial assetsand financial liabilities measured at fair value through the profit or loss,when the transaction price in a non-active market is different to the fairvalue from other observable current market transactions in the same instrumentor based on a valuation technique whose inputs include only data fromobservable markets, Westpac recognises the difference between the transactionprice and the fair value (‘day one’ profit or loss) in the income statement asnon-interest income. In cases where use is made of data which is notobservable, day one profit or loss is only recognised in the income statementwhen the inputs become observable, or over the life of the instrument.

 

The following tablesummarises the deferral and recognition of day one profit or loss for the Groupand the Parent Entity, where a valuation technique has been applied for whichnot all the inputs are observable in the market:

 
| ** **                                            | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                            | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Balance at the beginning of the period                |       | 11               |       | 22                     |       | 11 |   | 22 |   |
| Deferral on new transactions                          |       | 1                |       | 8                      |       | 1 |   | 8 |   |
| Recognised in the income statement during the  period |       | (3               | )          | (19                    | )          | (3 | ) | (19 | ) |
| Subsequent to observability                           |       | —           |       | —                 |       | — |   | — |   |
| Derecognition of the instruments                      |       | —           |       | —                 |       | — |   | — |   |
| Exchange differences                                  |       | —           |       | —                 |       | — |   | — |   |
| **Balance at the end of the period**                  |       | 9                |       | 11                     |       | 9 |   | 11 |   |

 

251

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**Note 28. Fair values of financialassets and liabilities (continued)**

 

***Fair value of financial instruments***

 

Financial assets andfinancial liabilities are measured on an ongoing basis either at fair value orat amortised cost. AASB 7 *Financial InstrumentsDisclosures* requires the disclosure of the fair value of thosefinancial instruments not already carried at fair value in the balance sheet.The fair value is the amount for which an asset could be exchanged, or aliability settled, in an arm’s-length transaction between knowledgeable,willing parties. The fair value disclosure does not cover those instrumentsthat are not considered to be financial instruments from an accountingperspective, such as income tax and intangible assets.

 

The table belowsummarises the carrying value and fair value of all financial instruments ofthe Group and the Parent Entity as at 30 September 2010:

 
| ** **                                                                    | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                    | ** ** | **2010**         | ** ** | **2009** | ** ** |
| ** **                                                                    | ** ** | **Amount**       | ** ** | **Fair Value** | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| ** **                                                                    | ** ** | **$m**           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Financial assets**                                                          |       |             |       |   |   |   |   |   |   |
| Cash and balances with central banks                                          |       | 4,464            |       | 4,464 |   | 3,272 |   | 3,272 |   |
| Due from other financial institutions                                         |       | 12,588           |       | 12,588 |   | 9,974 |   | 9,974 |   |
| Derivative financial instruments                                              |       | 36,102           |       | 36,102 |   | 33,187 |   | 33,187 |   |
| Trading securities(1)                                                         |       | 40,011           |       | 40,011 |   | 43,114 |   | 43,114 |   |
| Other financial assets designated at fair value                               |       | 3,464            |       | 3,464 |   | 3,063 |   | 3,063 |   |
| Available-for-sale securities(2)                                              |       | 12,124           |       | 12,124 |   | 1,630 |   | 1,630 |   |
| Loans (net of impairment provision)                                           |       | 477,655          |       | 476,597 |   | 463,459 |   | 462,879 |   |
| Life insurance assets                                                         |       | 12,310           |       | 12,310 |   | 12,384 |   | 12,384 |   |
| Regulatory deposits with central banks overseas                               |       | 1,322            |       | 1,322 |   | 766 |   | 766 |   |
| Other financial assets                                                        |       | 2,671            |       | 2,671 |   | 2,443 |   | 2,443 |   |
| **Total financial assets**                                                    |       | 602,711          |       | 601,653 |   | 573,292 |   | 572,712 |   |
| **Financial liabilities**                                                     |       |             |       |   |   |   |   |   |   |
| Due to other financial institutions                                           |       | 8,898            |       | 8,898 |   | 9,235 |   | 9,235 |   |
| Deposit at fair value                                                         |       | 53,249           |       | 53,249 |   | 58,491 |   | 58,491 |   |
| Deposits at amortised cost                                                    |       | 284,136          |       | 284,642 |   | 270,965 |   | 271,534 |   |
| Derivative financial instruments                                              |       | 44,039           |       | 44,039 |   | 36,478 |   | 36,478 |   |
| Trading liabilities and other financial  liabilities designated at fair value |       | 4,850            |       | 4,850 |   | 10,848 |   | 10,848 |   |
| Debt issues at fair value                                                     |       | 33,327           |       | 33,327 |   | 34,408 |   | 34,408 |   |
| Debt issues at amortised cost                                                 |       | 117,009          |       | 116,845 |   | 96,945 |   | 97,070 |   |
| Acceptances                                                                   |       | 635              |       | 635 |   | 1,671 |   | 1,671 |   |
| Loan capital                                                                  |       | 9,632            |       | 9,186 |   | 11,138 |   | 11,143 |   |
| Other financial liabilities                                                   |       | 7,041            |       | 7,041 |   | 6,057 |   | 6,057 |   |
| **Total financial liabilities**                                               |       | 562,816          |       | 562,712 |   | 536,236 |   | 536,935 |   |

 

----

(1)              In the current year we have revised our presentationand reclassified other bank issued certificates of deposit from receivables duefrom other financial institutions to trading securities. To improvepresentation, we have revised comparative periods. Refer to Note 1(a)(ii) formore details.

(2)              At 30 September 2010 financial instruments with acarrying value of $416 million were included in available-for-sale securities,however as their fair value could not be reliably measured these were carriedat cost (2009 $355 million). These amounts have not been included in the fairvalue hierarchy tables, however have been included in the tables above.

 

252

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 28. Fair values of financialassets and liabilities (continued)**

 
| ** **                                                                    | ** ** | **Parent Entity** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                                                                    | ** ** | **Amount**             | ** ** | **Fair Value** | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| ** **                                                                    | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Financial assets**                                                          |       |                   |       |   |   |   |   |   |   |
| Cash and balances with central banks                                          |       | 3,693                  |       | 3,693 |   | 2,578 |   | 2,578 |   |
| Due from other financial institutions                                         |       | 10,047                 |       | 10,047 |   | 6,868 |   | 6,868 |   |
| Derivative financial instruments                                              |       | 35,908                 |       | 35,908 |   | 30,852 |   | 30,852 |   |
| Trading securities(1)                                                         |       | 37,821                 |       | 37,821 |   | 35,404 |   | 35,404 |   |
| Other financial assets designated at fair value                               |       | 1,324                  |       | 1,324 |   | 1,411 |   | 1,411 |   |
| Available-for-sale securities(2)                                              |       | 10,932                 |       | 10,932 |   | 462 |   | 462 |   |
| Loans (net of impairment provision)                                           |       | 431,167                |       | 430,091 |   | 293,691 |   | 292,981 |   |
| Life insurance assets                                                         |       | —                 |       | — |   | — |   | — |   |
| Regulatory deposits with central banks overseas                               |       | 1,288                  |       | 1,288 |   | 737 |   | 737 |   |
| Due from subsidiaries                                                         |       | 58,295                 |       | 58,295 |   | 83,228 |   | 83,228 |   |
| Other financial assets                                                        |       | 2,111                  |       | 2,111 |   | 1,793 |   | 1,793 |   |
| **Total financial assets**                                                    |       | 592,586                |       | 591,510 |   | 457,024 |   | 456,314 |   |
| **Financial liabilities**                                                     |       |                   |       |   |   |   |   |   |   |
| Due to other financial institutions                                           |       | 8,887                  |       | 8,887 |   | 8,368 |   | 8,368 |   |
| Deposit at fair value                                                         |       | 51,802                 |       | 51,802 |   | 55,632 |   | 55,632 |   |
| Deposits at amortised cost                                                    |       | 259,760                |       | 260,232 |   | 180,581 |   | 180,847 |   |
| Derivative financial instruments                                              |       | 42,977                 |       | 42,977 |   | 33,354 |   | 33,354 |   |
| Trading liabilities and other financial  liabilities designated at fair value |       | 4,850                  |       | 4,850 |   | 9,082 |   | 9,082 |   |
| Debt issues at fair value                                                     |       | 28,085                 |       | 28,085 |   | 29,166 |   | 29,166 |   |
| Debt issues at amortised cost                                                 |       | 96,562                 |       | 95,867 |   | 67,604 |   | 68,404 |   |
| Acceptances                                                                   |       | 635                    |       | 635 |   | 1,392 |   | 1,392 |   |
| Due to subsidiaries                                                           |       | 62,463                 |       | 62,463 |   | 45,224 |   | 45,224 |   |
| Loan capital                                                                  |       | 9,632                  |       | 9,186 |   | 8,832 |   | 8,874 |   |
| Other financial liabilities                                                   |       | 6,329                  |       | 6,329 |   | 3,189 |   | 3,189 |   |
| **Total financial liabilities**                                               |       | 571,982                |       | 571,313 |   | 442,424 |   | 443,532 |   |

 

----

(1)              In the current year we have revised our presentation andreclassified other bank issued certificates of deposit from receivables duefrom other financial institutions to trading securities. To improvepresentation, we have revised comparative periods. Refer to Note 1(a)(ii) formore details.

(2)              At 30 September 2010 financial instruments with acarrying value of $29 million were included in available-for-sale securities,however as their fair value could not be reliably measured these were carriedat cost (2009 $15 million). These amounts have not been included in the fairvalue hierarchy tables, however have been included in the tables above.

 

For financialinstruments not carried at fair value in the balance sheet, fair value has beenderived as follows:

 

***Loans***

 

The carrying valueof loans is net of individually and collectively assessed provisions forimpairment charges. The fair value of loans is based on observable markettransactions, where available. In the absence of observable markettransactions, fair value is estimated using discounted cash flow models. Forvariable rate loans, the discount rate used is the current effective interestrate. The discount rate applied for fixed rate loans reflects the market ratefor the maturity of the loan and the credit worthiness of the borrower.

 

***Deposits***

 

Deposits bycustomers’ accounts are grouped by maturity. Fair values of deposit liabilitiespayable on demand (interest free, interest bearing and savings deposits)approximate their carrying value. Fair values for term deposits are estimatedusing discounted cash flows, applying market rates offered for deposits ofsimilar remaining maturities.

 

***Debt issues and loan capital***

 

Fair values arecalculated using quoted market prices, where available. Where a quoted marketprice is not available, the fair value is determined using a discounted cashflow model. The discount rates applied reflect the terms of the instruments,the timing of the estimated cash flows and are adjusted for any changes in theapplicable credit rating of Westpac.

 

***Other financial assets and liabilities***

 

For all otherfinancial assets and liabilities, the carrying value approximates to the fairvalue. These items are either short-term in nature, re-price frequently or areof a high credit rating.

 

253

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**Note 29. Derivative financialinstruments**

 

Derivative contractsinclude forwards, futures, swaps and options, all of which are bilateralcontracts or payment exchange agreements, whose values derive from the value ofan underlying asset, reference rate or index. Derivatives are flexible andcost-effective tools for assisting in the management of interest rate, exchangerate, commodity, credit and equity exposures.

 

A forward contractobliges one party to buy and the other to sell a specific underlying product orinstrument at a specific price, amount and date in the future. A forward rateagreement (FRA) is an agreement between two parties establishing a contractinterest rate on a notional principal over a specified period commencing at aspecific future date.

 

A futures contractis similar to a forward contract. A futures contract obliges its owner to buy aspecific underlying commodity or financial instrument at a specified price onthe contract maturity date (or to settle the value for cash). Futures areexchange traded.

 

A swap transactionobliges the two parties to the contract to exchange a series of cash flows atspecified intervals known as payment or settlement dates.

 

An option contractgives the option holder the right, but not the obligation, to buy or sell aspecified amount of a given commodity or financial instrument at a specifiedprice during a certain period or on a specific date. The writer of the optioncontract is obliged to perform if the holder exercises the right containedtherein.

 

A credit defaultswap (CDS) is a contract that provides for a specified payment to be made tothe purchaser of the swap following a defined credit event.

 

The following termsare used in the remainder of this note to describe the Group and the ParentEntity’s exposure to derivatives. Reference to the Group applies equally to theParent Entity.

 

The notional amountis a measure of the volume which may be used for examining changes inderivative activity over time. The notional amount is the face value of the contractand does not reflect the amount at risk, which is generally only a smallfraction of this value.

 

The notional amountsof certain types of financial instruments provide a basis for comparison withinstruments recognised on the balance sheet, but do not necessarily indicatethe amount of future cash flows involved or the current fair value of theinstruments, and therefore do not indicate the Group’s exposure to credit orprice risk.

 

Certain leveragedderivatives include an explicit leverage factor in the payment formula. Theleverage factor has the effect of multiplying the notional amount such that theimpact of changes in the underlying price or prices may be greater than thatindicated by the notional amount alone. The Group has no significant exposureto these types of transactions.

 

The derivativeinstruments become favourable (assets) or unfavourable (liabilities) as aresult of fluctuations in the reference rate or index relative to their terms.The aggregate contractual or notional amount of derivative financialinstruments on hand, the extent to which instruments are favourable orunfavourable and thus the aggregate fair values of derivative financial assetsand liabilities can fluctuate significantly from time to time.

 

The Group usesderivatives in two distinct capacities: as a trader, and as an end-user as partof its asset and liability management activities.

 

*Trading*

 

As a trader, theGroup’s primary objective is to derive income from the sale of derivatives tomeet Westpac’s customers’ needs. In addition to the sale of derivatives tocustomers, the Group also undertakes market making and discretionary tradingactivities. Market making involves providing quotes to other dealers, whoreciprocate by providing the Group with their own quotes. This process providesliquidity in the key markets in which the Group operates. The Group also tradeson its own account to exploit arbitrage opportunities and market anomalies, aswell as to take outright views on market direction. These activities, known asproprietary trading, represent a limited part of the Group’s derivativeactivities.

 

*Hedging*

 

Hedging the Group’sexposures to interest rate, credit and foreign exchange rate risk is undertakenin the normal course of business by using derivatives. This activity isprincipally carried out by Group Treasury within the risk management frameworkof limits, practices and procedures set and overseen by MARCO.

 

The hedge accountingstrategy adopted by Westpac is to utilise a combination of cash flow, fair valueand net investment hedge approaches. Some derivatives held for economic hedgingpurposes do not meet the criteria for hedge accounting as defined under AASB139 and therefore are accounted for in the same way as derivatives held fortrading. This includes the management of risks associated with future NewZealand dollar earnings and the management of credit risk exposures in Westpac’slending portfolio.

 

254

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 29. Derivative financialinstruments (continued)**

 

a.             Fair value hedges

 

The Group hedges aproportion of its interest rate risk and foreign exchange risk from medium-termdebt issuances through fair value hedges in the form of single currency andcross-currency interest rate derivatives. The Group also hedges part of itsinterest rate risk of fixed rate assets and liabilities denominated both inlocal and foreign currencies through the use of interest rate derivativesdesignated as fair value hedges.

 

For the Group, thechange in the fair value of hedging instruments designated in fair value hedgeswas $855 million gain (30 September 2009 $494 million loss) while thechange in the fair value of hedged items attributed to the hedge risk was$855 million loss (30 September 2009 $497 million gain).

 

For the ParentEntity, the change in the fair value of hedging instruments designated in fairvalue hedges was $623 million gain (30 September 2009 $675million gain) while the change in the fair value of hedged items attributed tothe hedge risk was $626 million loss (30 September 2009 $668million loss).

 

b.             Cash flow hedges

 

The Group hedges itsexposure to volatility of interest cash flows from floating rate customerdeposits and loans through the use of interest rate derivatives.

 

The Group alsohedges its exposure to foreign currency principal and interest cash flows fromfloating rate medium-term debt issuances through the use of cross-currencyderivatives.

 

Amounts accumulatedin other comprehensive income in respect of cash flow hedges are recycled tothe income statement when the forecast transaction occurs.

 

Underlying cashflows from cash flow hedges are, as a proportion of total cash flows, expectedto occur in the following periods:

 
| ** **                  | ** ** | **Less Than** | ** ** | **1 Month to** | ** ** | **3 Months**       | ** ** | **1 Year to** | ** ** | **2 to**    | ** ** | **3 to**    | ** ** | **4 to**    | ** ** | **Over**         | ** ** |
|-----------------------------|------------|--------------------|------------|--------------------------|------------|-------------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **1 Month**   | ** ** | **3 Months**        | ** ** | **to 1 Year** | ** ** | **2 Years**        | ** ** | **3 Years** | ** ** | **4 Years** | ** ** | **5 Years** | ** ** | **5 Years** | ** ** |
| **2010**                    |       |               |       |                     |       |                    |       |                    |       |             |       |             |       |             |       |             |       |
| Cash inflows (assets)       |       | 1.6                | %          | 3.6                      | %          | 25.0                    | %          | 15.4                    | %          | 18.7             | %          | 17.4             | %          | 12.5             | %          | 5.8              | %          |
| Cash outflows (liabilities) |       | 1.8                | %          | 3.8                      | %          | 26.3                    | %          | 16.3                    | %          | 17.6             | %          | 17.4             | %          | 11.4             | %          | 5.4              | %          |
| 2009                        |       |               |       |                     |       |                    |       |                    |       |             |       |             |       |             |       |             |       |
| Cash inflows (assets)       |       | 2.0                | %          | 11.2                     | %          | 18.5                    | %          | 29.1                    | %          | 13.3             | %          | 13.0             | %          | 8.9              | %          | 4.0              | %          |
| Cash outflows (liabilities) |       | 2.1                | %          | 10.6                     | %          | 20.4                    | %          | 28.5                    | %          | 13.5             | %          | 11.5             | %          | 10.1             | %          | 3.3              | %          |

 

For the year ended30 September 2010 a loss on cashflow hedges of $1 million was recogniseddue to hedge ineffectiveness (30 September 2009 $12 million loss). Inthe Parent Entity, a loss on cashflow hedges of $1 million was recognised dueto hedge ineffectiveness for the year ended 30 September 2010 (30 September 2009$12 million loss).

 

c.              Dual fair value and cashflow hedges

 

The Group hedgesforeign currency denominated fixed rate medium-term debt using cross-currencyinterest rate derivatives, designated as fair value hedges of foreign interestrates and cash flow hedges of foreign exchange rates.

 

d.             Net investment hedges

 

The Group hedges themajority of the currency translation risk of net investments in foreignoperations through foreign exchange forward contracts. There were nosignificant changes to the level of hedging during the current year.

 

255

----

 

**Note 29. Derivative financialinstruments (continued)**

 

The notional amountand fair value of derivative instruments held for trading and designated inhedge relationships is set out in the following tables:

 
| ** **                                | ** ** | **Consolidated**                | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **30 September 2010** | ** ** | **30 September 2009** | ** ** |
| ** **                                | ** ** | ** **                      | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** | ** ** | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** |
| ** **                                | ** ** | **Notional**                    | ** ** | **Asset** | ** ** | **Liability** | ** ** | **Notional** | ** ** | **Asset** | ** ** | **Liability** | ** ** |
| ** **                                | ** ** | **$m**                          | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Held for trading**                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **Interest rate**                         | ** ** | ** **                      | ** ** | ** ** |   |   | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Futures(1)                                |       | 93,763                          |       | — |   | — |   | 113,220 |   | 110 |   | — |   |
| Forwards                                  |       | 156,121                         |       | 54 |   | (31 | ) | 77,783 |   | 28 |   | (24 | ) |
| Swaps                                     |       | 900,229                         |       | 11,560 |   | (10,600 | ) | 823,536 |   | 12,695 |   | (11,640 | ) |
| Options                                   |       | 25,317                          |       | 135 |   | (83 | ) | 32,719 |   | 155 |   | (128 | ) |
| **Foreign exchange**                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Forwards                                  |       | 423,536                         |       | 8,817 |   | (10,255 | ) | 348,378 |   | 8,108 |   | (9,565 | ) |
| Swaps                                     |       | 256,152                         |       | 12,643 |   | (12,609 | ) | 177,559 |   | 8,260 |   | (7,232 | ) |
| Options                                   |       | 12,551                          |       | 194 |   | (223 | ) | 15,074 |   | 247 |   | (220 | ) |
| **Commodities**                           |       | 3,537                           |       | 240 |   | (181 | ) | 4,674 |   | 376 |   | (348 | ) |
| **Equities**                              |       | 802                             |       | 77 |   | (25 | ) | 893 |   | 126 |   | (50 | ) |
| **Credit**                                |       | 40,518                          |       | 376 |   | (389 | ) | 29,386 |   | 459 |   | (499 | ) |
| **Total held for trading  derivatives**   |       | 1,912,526                       |       | 34,096 |   | (34,396 | ) | 1,623,222 |   | 30,564 |   | (29,706 | ) |
| **Fair value hedges**                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **Interest rate**                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Swaps                                     |       | 26,147                          |       | 765 |   | (560 | ) | 12,277 |   | 210 |   | (372 | ) |
| **Foreign exchange**                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Swaps(2)                                  |       | 34,241                          |       | 380 |   | (5,326 | ) | 36,689 |   | 1,373 |   | (4,051 | ) |
| **Total fair value hedging  derivatives** |       | 60,388                          |       | 1,145 |   | (5,886 | ) | 48,966 |   | 1,583 |   | (4,423 | ) |
| **Cash flow hedges**                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **Interest rate**                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Futures(1)                                |       | —                          |       | — |   | — |   | 766 |   | — |   | — |   |
| Swaps                                     |       | 88,394                          |       | 622 |   | (1,108 | ) | 82,660 |   | 818 |   | (1,725 | ) |
| **Foreign exchange**                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Swaps                                     |       | 17,582                          |       | 186 |   | (2,649 | ) | 6,859 |   | 219 |   | (614 | ) |
| **Total cash flow hedging  derivatives**  |       | 105,976                         |       | 808 |   | (3,757 | ) | 90,285 |   | 1,037 |   | (2,339 | ) |
| Net investment hedges                     |       | 2,448                           |       | 53 |   | — |   | 2,886 |   | 3 |   | (10 | ) |
| **Total net investment hedges**           |       | 2,448                           |       | 53 |   | — |   | 2,886 |   | 3 |   | (10 | ) |
| **Total Derivatives**                     |       | 2,081,338                       |       | 36,102 |   | (44,039 | ) | 1,765,359 |   | 33,187 |   | (36,478 | ) |

 

----

(1)              Futures contract fair value is settled daily with theexchange, as a result of there are no balance sheet amounts.

(2)              Included with foreign exchange swaps are derivativesdesignated in both cash flow and fair value hedge relationships under the dualdesignation strategy.

 

256

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 29. Derivative financialinstruments (continued)**

 
| ** **                                | ** ** | **Parent Entity**          | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **30 September 2010** | ** ** | **30 September 2009** | ** ** |
| ** **                                | ** ** | ** **                      | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** | ** ** | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** |
| ** **                                | ** ** | **Notional**                    | ** ** | **Asset** | ** ** | **Liability** | ** ** | **Notional** | ** ** | **Asset** | ** ** | **Liability** | ** ** |
| ** **                                | ** ** | **$m**                          | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Held for trading**                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **Interest rate**                         | ** ** | ** **                      | ** ** | ** ** |   |   | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Futures(1)                                |       | 93,763                          |       | — |   | — |   | 113,220 |   | 110 |   | — |   |
| Forwards                                  |       | 155,803                         |       | 41 |   | (31 | ) | 77,783 |   | 28 |   | (24 | ) |
| Swaps                                     |       | 908,265                         |       | 11,666 |   | (10,974 | ) | 762,173 |   | 11,482 |   | (10,892 | ) |
| Options                                   |       | 25,317                          |       | 135 |   | (83 | ) | 32,108 |   | 152 |   | (127 | ) |
| **Foreign exchange**                      |       | —                          |       | — |   | — |   |   |   |   |   |   |   |
| Forwards                                  |       | 423,704                         |       | 8,829 |   | (10,226 | ) | 348,312 |   | 7,881 |   | (9,347 | ) |
| Swaps                                     |       | 258,088                         |       | 12,665 |   | (12,583 | ) | 176,396 |   | 8,237 |   | (7,172 | ) |
| Options                                   |       | 12,551                          |       | 194 |   | (223 | ) | 14,887 |   | 242 |   | (216 | ) |
| **Commodities**                           |       | 3,537                           |       | 240 |   | (181 | ) | 4,674 |   | 375 |   | (347 | ) |
| **Equities**                              |       | 802                             |       | 77 |   | (25 | ) | 893 |   | 126 |   | (50 | ) |
| **Credit**                                |       | 40,518                          |       | 376 |   | (389 | ) | 29,359 |   | 463 |   | (499 | ) |
| **Total held for trading  derivatives**   |       | 1,922,348                       |       | 34,223 |   | (34,715 | ) | 1,559,805 |   | 29,096 |   | (28,674 | ) |
| **Fair value hedges**                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **Interest rate**                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Swaps                                     |       | 22,157                          |       | 487 |   | (445 | ) | 2,110 |   | 27 |   | (70 | ) |
| **Foreign exchange**                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Swaps(2)                                  |       | 32,296                          |       | 363 |   | (5,316 | ) | 20,692 |   | 847 |   | (3,043 | ) |
| **Total fair value hedging  derivatives** |       | 54,453                          |       | 850 |   | (5,761 | ) | 22,802 |   | 874 |   | (3,113 | ) |
| **Cash flow hedges**                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **Interest rate**                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Futures(1)                                |       | —                          |       | — |   | — |   | 766 |   | — |   | — |   |
| Swaps                                     |       | 84,798                          |       | 618 |   | (914 | ) | 52,951 |   | 660 |   | (945 | ) |
| **Foreign exchange**                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Swaps                                     |       | 12,895                          |       | 179 |   | (1,587 | ) | 6,859 |   | 220 |   | (614 | ) |
| **Total cash flow hedging  derivatives**  |       | 97,693                          |       | 797 |   | (2,501 | ) | 60,576 |   | 880 |   | (1,559 | ) |
| Net investment hedges                     |       | 1,747                           |       | 38 |   | — |   | 2,175 |   | 2 |   | (8 | ) |
| **Total net investment hedges**           |       | 1,747                           |       | 38 |   | — |   | 2,175 |   | 2 |   | (8 | ) |
| **Total Derivatives**                     |       | 2,076,241                       |       | 35,908 |   | (42,977 | ) | 1,645,358 |   | 30,852 |   | (33,354 | ) |

 

----

(1)              Futures contract fair value is settled daily with theexchange.

(2)              Included with foreign exchange swaps are derivativesdesignated in both cash flow and fair value hedge relationships under the dualdesignation strategy.

 

***Creditderivatives***

 

Through the use ofcredit derivatives, the Group is exposed to or protected from the risk ofdefault of the underlying entity referenced by the derivative, dependant onwhether the Group is a purchaser or seller of credit protection. The primarycredit derivatives used by the Group are CDSs, which are predominately executedwith other financial institutions.

 

257

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**Note 29. Derivative financialinstruments (continued)**

 

Credit derivatives are primarily entered intoto facilitate institutional customer transactions and to manage our credit riskexposures. The notional amount and fair value of credit derivatives is presentedin the following tables:

 
| ** **                  | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|------------------|------------|
| ** **                  | ** ** | **2010**         | ** ** | **2009** | ** ** |
| ** **                  | ** ** | **Notional**     | ** ** | **Fair Value  Asset** | ** ** | **Fair Value  Liability** | ** ** | **Notional** | ** ** | **Fair Value  Asset** | ** ** | **Fair Value  Liability** | ** ** |
| ** **                  | ** ** | **$m**           | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Credit protection bought(1) |       | 20,918           |       | 71 |   | (298 | ) | 15,526 |   | 84 |   | (381 | ) |
| Credit protection sold      |       | 19,582           |       | 310 |   | (91 | ) | 13,860 |   | 375 |   | (118 | ) |
| Total(2)                    |       | 40,500           |       | 381 |   | (389 | ) | 29,386 |   | 459 |   | (499 | ) |

 

----

(1)              Counterparties to derivatives relating to creditprotected purchased are predominantly financial institutions.

(2)              The table above does not include total return swapsincluded with credit derivatives in the previous table.

 
| ** **                  | ** ** | **Parent Entity** | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                  | ** ** | **Notional**           | ** ** | **Fair Value  Asset** | ** ** | **Fair Value  Liability** | ** ** | **Notional** | ** ** | **Fair Value  Asset** | ** ** | **Fair Value  Liability** | ** ** |
| ** **                  | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Credit protection bought(1) |       | 20,918                 |       | 71 |   | (298 | ) | 15,526 |   | 84 |   | (381 | ) |
| Credit protection sold      |       | 19,582                 |       | 310 |   | (91 | ) | 13,833 |   | 379 |   | (118 | ) |
| Total(2)                    |       | 40,500                 |       | 381 |   | (389 | ) | 29,359 |   | 463 |   | (499 | ) |

 

----

(1)              Counterparties to derivatives relating to creditprotected purchased are predominantly financial institutions.

(2)              The table above does not include total return swapsincluded with credit derivatives in the previous table.

 

**Note 30. Capital adequacy**

 

APRA hasresponsibility for the prudential supervision of authorised deposit-takinginstitutions (ADIs), life and general insurance companies and superannuationfunds in Australia. Westpac is an ADI.

 

Australia’srisk-based capital adequacy guidelines are generally consistent with theapproach agreed upon by the Basel Committee on Banking Supervision. APRA hasexercised its discretion in applying the Basel framework to Australian ADIs. Onbalance, the applications of these discretions act to reduce reported capitalratios relative to those reported in other jurisdictions.

 

Australian banks arerequired to maintain a minimum ratio of capital to risk-adjusted assets of atleast 8%. At least half of this capital must be in the form of Tier 1 capital.Subject to certain limitations, Tier 1 capital consists of paid-up sharecapital, retained profits, certain reserves and other equity instruments, lessthe deduction of certain intangible assets, capitalised expenses and software,and retained earnings in insurance and funds management subsidiaries that arenot consolidated for capital adequacy purposes. The balance of eligible capitalis defined as supplementary or Tier 2 capital. Supplementary capital includes,subject to limitations, mandatory convertible notes, perpetual floating ratenotes and like instruments, and term subordinated debt (provided such term debtis not in excess of 50% of Tier 1 capital) less a deduction for holdings ofWestpac’s own subordinated debt. Deductions with equal scaling at Tier 1 andTier 2 include capital invested or guarantees or similar support provided toentities involved in securitisation, in insurance and funds management,controlled entities not already deducted at Tier 1 level, excess investments innon-subsidiary entities and any shortfall of provisions compared to regulatoryexpected loss.

 

Westpac’s capitalratios are in compliance with APRA minimum capital adequacy requirements.

 

***Capital management strategy***

 

Westpac’s approachseeks to balance the fact that capital is an expensive form of funding with theneed to be adequately capitalised as an ADI. Westpac considers the need tobalance efficiency, flexibility and adequacy when determining sufficiency ofcapital and when developing capital management plans.

 

Westpac evaluatesthese considerations through an Internal Capital Adequacy Assessment Process(ICAAP), the key features of which include:

 

·         the development of a capital management strategyincluding target capital ratios, capital buffers and contingency plans whichguide the development of specific capital plans;

·         consideration of both economic and regulatorycapital driven requirements;

·         a process which challenges the capital measures,coverage and requirements which incorporates a comparison of economic andregulatory requirements and the use of the Quantitative Scenario Analysis(stress testing) framework that considers, amongst other things, the impact ofadverse economic scenarios that threaten the achievement ofplanned outcomes; and

·         consideration of the perspectives of externalstakeholders such as regulators, rating agencies and equity investors.

 

258

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 31. Securitisation**

 

Westpac derives rewardsand has exposure to risks from various forms of securitisation structures:

 

·         own asset securitisation; and

 

·         customer funding conduits.

 

***Own assets securitised***

 

Securitisation is afunding, liquidity and capital management tool. Securitisation provides Westpacthe option to liquefy a pool of assets and increase the Group’s wholesalefunding capacity. Westpac may provide arm’s length facilities to thesecuritisation vehicles. The facilities entered into typically include theprovision of liquidity, funding and derivative contracts.

 

Where the ParentEntity and the Group have continuing involvement with the securitisationvehicle, through on-going exposure to the risks and rewards associated with theassets, the provision of derivatives, liquidity facilities and trust managementand operational services, the originated assets remain recognised on thebalance sheet for accounting purposes, and Westpac consolidates thesecuritisation vehicles.

 

***Customer funding conduits***

 

The Group arrangesfunding for certain customer transactions through a securitisation conduit(Waratah Receivables Corporation Limited and other related SPVs) that providescustomers with access to funding from commercial paper markets. Given thatWestpac provides liquidity, credit enhancements, foreign exchange facilitiesand management and operational services, it is deemed to have exposure to theassociated risks and rewards and is required to consolidate the vehicles.

 

**Revenue from securitisationstructures**

 

***Fee income***

 

Westpac receives amarket-based fee or margin in return for its services as trust manager,servicer, foreign exchange counterparty and facilities provider.

 

**Securitisation risk management**

 

***Credit exposure***

 

Where relevant,counterparty exposure arising from funding, liquidity, credit support andfunding facilities, foreign exchange and swap arrangements for both own assetsecuritisation and customer funding conduits are approved within the Group’snormal credit process and are captured and monitored in key source systems alongwith other facilities and derivatives entered into by Westpac.

 

***Market risk***

 

Exposures arisingfrom transactions with securitisation conduits and other counterparties arecaptured as part of Westpac’s traded and non-traded market risk reporting andlimit management framework.

 

The interest rateand basis risk generated by Westpac’s provision of hedge arrangements tosecuritisation vehicles are captured and managed in Westpac’s ALM framework.The risk generated by Westpac’s provision of liquidity and redraw facilities toown asset vehicles is captured and managed within Treasury’s liquidity riskpolicies along with all other contingent liquidity facilities.

 

***Funding and liquidity management***

 

Exposure to and theimpact of securitisation transactions are managed under the Market andLiquidity Risk Management Framework and are integrated into routine reportingfor capital and liquidity positions, net interest margin analysis, balancesheet forecasting and funding scenario testing. The Group’s funding plan incorporatesconsideration of overall liquidity risk limits and the level of securitisationof Westpac originated assets. Westpac provided undrawn liquidity facilities tothe customer funding conduit of $2,400 million at 30 September 2010(30 September 2009 $2,400 million). Similarly undrawn funding andliquidity facilities of $291 million were provided by Westpac (30 September 2009$206 million) for the securitisation of its own assets.

 

259

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**Note 31. Securitisation(continued)**

 

The table belowpresents assets securitised by the Group:

 
| ** **                 | ** ** | **Consolidated**    | ** ** |
|----------------------------|------------|---------------------|------------|
| ** **                 | ** ** | **2010**            | ** ** | **2009** | ** ** |
| ** **                 | ** ** | ** **          | ** ** | **Customer** | ** ** | ** ** | ** ** | ** ** | ** ** | **Customer** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Own Assets** | ** ** | **Conduits** | ** ** | **Total** | ** ** | **Own Assets** | ** ** | **Conduits** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **$m**              | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Residential mortgage       |       | 11,640              |       | 2,370 |   | 14,010 |   | 13,555 |   | 2,279 |   | 15,834 |   |
| Auto and equipment finance |       | 316                 |       | — |   | 316 |   | 701 |   | — |   | 701 |   |
| Other assets securitised   |       | —              |       | 71 |   | 71 |   | — |   | 166 |   | 166 |   |
| Other(1)                   |       | 688                 |       | — |   | 688 |   | 734 |   | — |   | 734 |   |
| **Total**                  |       | 12,644              |       | 2,441 |   | 15,085 |   | 14,990 |   | 2,445 |   | 17,435 |   |

 

----

(1)              This reflects cash and accrued income held by the ownasset securitisation vehicles, which have not yet been distributed tonoteholders.

 

The table belowpresents assets securitised by the Parent Entity:

 
| ** **                 | ** ** | **Parent Entity** | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                 | ** ** | ** **             | ** ** | **Customer** | ** ** | ** ** | ** ** | ** ** | ** ** | **Customer** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Own Assets(1)** | ** ** | **Conduits** | ** ** | **Total** | ** ** | **Own Assets** | ** ** | **Conduits** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Residential mortgage       |       | 44,965                 |       | — |   | 44,965 |   | 30,621 | ** ** | **—** |   | 30,621 |   |
| Auto and equipment finance |       | —                 |       | — |   | — |   | — |   | — |   | — |   |
| Other assets securitised   |       | —                 |       | — |   | — |   | — |   | — |   | — |   |
| Other(2)                   |       | 2,176                  |       | — |   | 2,176 |   | 1,116 |   | — |   | 1,116 |   |
| **Total**                  |       | 47,141                 |       | — |   | 47,141 |   | 31,737 |   | — |   | 31,737 |   |

 

----

(1)              Own assets securitised by the Parent Entity includeinternal mortgage backed securitisation $33,325 million (30 September 2009$27,438 million) which are available for external issuance and qualifiesfor repurchase with the RBA.

(2)              This reflects cash and accrued income held by the ownasset securitisation vehicles, which have not yet been distributed to noteholders.

 

The table belowpresents the underlying liabilities of the Group as a result of thesecuritisation of assets:

 
| ** **       | ** ** | **Consolidated**    | ** ** |
|------------------|------------|---------------------|------------|
| ** **       | ** ** | **2010**            | ** ** | **2009** | ** ** |
| ** **       | ** ** | ** **          | ** ** | **Customer** | ** ** | ** ** | ** ** | ** ** | ** ** | **Customer** | ** ** | ** ** | ** ** |
| ** **       | ** ** | **Own Assets** | ** ** | **Conduits** | ** ** | **Total** | ** ** | **Own Assets** | ** ** | **Conduits** | ** ** | **Total** | ** ** |
| ** **       | ** ** | **$m**              | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Notes issued** |       | 11,227              |       | 2,415 |   | 13,642 |   | 14,193 |   | 2,440 |   | 16,633 |   |

 

The table belowpresents the underlying liabilities of the Parent Entity as a result of thesecuritisation of assets:

 
| ** **              | ** ** | **Parent Entity** | ** ** |
|-------------------------|------------|------------------------|------------|
| ** **              | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **              | ** ** | ** **             | ** ** | **Customer** | ** ** | ** ** | ** ** | ** ** | ** ** | **Customer** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Own Assets**    | ** ** | **Conduits** | ** ** | **Total** | ** ** | **Own Assets** | ** ** | **Conduits** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Due to subsidiaries** |       | 45,674                 |       | — |   | 45,674 |   | 31,473 |   | — |   | 31,473 |   |

 

Certain own assetsecuritisation and customer funding conduit notes have been issued in foreigncurrencies and have been translated to Australian dollars using the spotforeign exchange rate on the balance sheet date. These foreign exchangeexposures are fully hedged with foreign exchange derivatives. Associatedderivatives are not presented in the tables above and explain the mismatchbetween assets securitised and notes issued.

 

260

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 32. Group segment information**

 

The accountingstandard AASB 8 was applied for the first time during the year ended 30 September 2010.This standard requires segment results to be presented on a basis that isconsistent with information provided internally to Westpac’s key decisionmakers. In assessing the financial performance of our divisions internally,Westpac uses a measure of performance it refers to as ‘Cash Earnings’. Tocalculate Cash Earnings, Westpac adjusts the statutory results for the itemsoutlined below. Westpac believes Cash Earnings allows the Group to moreeffectively assess performance for the current period against prior periods andto compare performance across business divisions and across peer companies.Three categories of adjustments are made to statutory results to determine CashEarnings:

 

·         material items that key decision makers believe donot reflect ongoing operations;

 

·         items that are not considered when dividends arerecommended, such as the amortisation of intangibles and economic hedgingimpacts; and

 

·         accounting reclassifications betweenindividual line items that do not impact statutory results, such as policy holder tax recoveries.

 

The basis of segmentreporting reflects the management of the business, rather than the legalstructure of the Group. The operating segment results have been presented on amanagement reporting basis and consequently internal charges and transferpricing adjustments have been reflected in the performance of each operatingsegment. Inter-segment pricing is determined on an arms length basis.

 

***Reportable operating segments***

 

The businesssegments are defined by the customers they service and the services theyprovide:

 

·         Westpac Retail & Business Banking isresponsible for sales and service for our consumer, small-to-medium enterprisecustomers and commercial customers in Australia under the Westpac and RAMSbrands;

 

·         Westpac Institutional Bank delivers a broad rangeof financial services to commercial, corporate, institutional and governmentcustomers either based in or with interests in Australia and New Zealand.Customers are supported through Westpac branches and subsidiaries located inAustralia, New Zealand, New York, London and Asia;

 

·         St.George Bank is responsible for sales and servicefor our consumer, business and corporate customers in Australia under theSt.George brand;

 

·         BT Financial Group (Australia) is the wealthmanagement arm of the Group which, following the merger with St.George BankLimited, also includes the wealth division of St.George. BTFG’s brands includeAdvance Asset Management, Asgard, BT, BT Investment Management (60% owned bythe Group and consolidated in BTFG’s Funds Management business), LicenseeSelect, Magnitude, Ascalon, Securitor, and the advice, private banking andinsurance operations of BankSA, St.George and Westpac RBB;

 

·         New Zealand Banking is responsible for sales andservice of banking, wealth and insurance products for consumers and small tomedium business customers in New Zealand. Banking products are provided underthe Westpac brand while wealth and insurance products are provided by WestpacLife New Zealand and BT New Zealand. Institutional customers are supported bythe New Zealand Institutional Bank, the results of which appear in WIB; and

 

·         Other Divisions include Pacific Banking,Group Treasury, Product & Operations, Technology and Core Support. Themajority of the direct operating expenses of Other are recharged back to thebusiness segments.

 

261

----

 

**Note 32. Group segment information(continued)**

 

The tables below presentthe segment results on a Cash Earnings basis:

 
| ** **                                                                              | ** ** | **Consolidated 2010** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                              | ** ** | **Westpac**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Retail &**      | ** ** | **Westpac** | ** ** | ** ** | ** ** | **BT Financial** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Business**               | ** ** | **Institutional** | ** ** | **St.George** | ** ** | **Group** | ** ** | **New** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Banking**                | ** ** | **Bank** | ** ** | **Bank** | ** ** | **(Australia)** | ** ** | **Zealand** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                                                              | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Net interest income                                                                     |       | 5,132                      |       | 1,776 |   | 2,668 |   | 257 |   | 957 |   | 1,065 |   | 11,855 |   |
| Non-interest income                                                                     |       | 1,014                      |       | 1,519 |   | 572 |   | 1,475 |   | 277 |   | 198 |   | 5,055 |   |
| **Total operating income before  operating expenses and impairment charges on loans**   |       | 6,146                      |       | 3,295 |   | 3,240 |   | 1,732 |   | 1,234 |   | 1,263 |   | 16,910 |   |
| Operating expenses                                                                      |       | (3,045                     | )          | (1,038 | ) | (1,242 | ) | (866 | ) | (592 | ) | (189 | ) | (6,972 | ) |
| Impairment charges on loans                                                             |       | (589                       | )          | (123 | ) | (511 | ) | (12 | ) | (276 | ) | 55 |   | (1,456 | ) |
| **Profit before income tax**                                                            |       | 2,512                      |       | 2,134 |   | 1,487 |   | 854 |   | 366 |   | 1,129 |   | 8,482 |   |
| Income tax expense                                                                      |       | (756                       | )          | (620 | ) | (446 | ) | (251 | ) | (106 | ) | (358 | ) | (2,537 | ) |
| Profit attributable to non-controlling interests                                        |       | —                     |       | — |   | — |   | (8 | ) | (2 | ) | (56 | ) | (66 | ) |
| **Cash Earnings for the year**                                                          |       | 1,756                      |       | 1,514 |   | 1,041 |   | 595 |   | 258 |   | 715 |   | 5,879 |   |
| Net Cash Earnings adjustments                                                           |       | —                     |       | — |   | (129 | ) | (17 | ) | — |   | 613 |   | 467 |   |
| **Net profit attributable to equity  holders of Westpac Banking Corporation**           |       | 1,756                      |       | 1,514 |   | 912 |   | 578 |   | 258 |   | 1,328 |   | 6,346 |   |
| **Total assets**                                                                        |       | 243,690                    |       | 99,155 |   | 134,010 |   | 27,530 |   | 38,975 |   | 74,917 |   | 618,277 |   |
| **Total liabilities**                                                                   |       | 134,729                    |       | 93,789 |   | 85,560 |   | 28,391 |   | 23,612 |   | 212,078 |   | 578,159 |   |
| **Acquisition of property, plant  and equipment, goodwill and other intangible assets** |       | 112                        |       | 65 |   | 69 |   | 42 |   | 68 |   | 518 |   | 874 |   |

 
| ** **                                                                              | ** ** | **Consolidated 2009** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                              | ** ** | **Westpac**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Retail &**      | ** ** | **Westpac** | ** ** | ** ** | ** ** | **BT Financial** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Business**               | ** ** | **Institutional** | ** ** | **St.George** | ** ** | **Group** | ** ** | **New** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Banking**                | ** ** | **Bank** | ** ** | **Bank** | ** ** | **(Australia)** | ** ** | **Zealand** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                                                              | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Net interest income                                                                     |       | 4,943                      |       | 1,761 |   | 2,313 |   | 263 |   | 1,007 |   | 1,214 |   | 11,501 |   |
| Non-interest income                                                                     |       | 1,274                      |       | 1,249 |   | 589 |   | 1,284 |   | 332 |   | 104 |   | 4,832 |   |
| **Total operating income before  operating expenses and impairment charges on loans**   |       | 6,217                      |       | 3,010 |   | 2,902 |   | 1,547 |   | 1,339 |   | 1,318 |   | 16,333 |   |
| Operating expenses                                                                      |       | (2,943                     | )          | (1,011 | ) | (1,027 | ) | (829 | ) | (604 | ) | (120 | ) | (6,534 | ) |
| Impairment charges on loans                                                             |       | (551                       | )          | (1,516 | ) | (547 | ) | (17 | ) | (466 | ) | (141 | ) | (3,238 | ) |
| **Profit before income tax**                                                            |       | 2,723                      |       | 483 |   | 1,328 |   | 701 |   | 269 |   | 1,057 |   | 6,561 |   |
| Income tax expense                                                                      |       | (815                       | )          | (144 | ) | (398 | ) | (213 | ) | (73 | ) | (335 | ) | (1,978 | ) |
| Profit attributable to non-controlling interests                                        |       | —                     |       | — |   | — |   | (4 | ) | (2 | ) | (65 | ) | (71 | ) |
| **Cash Earnings for the year**                                                          |       | 1,908                      |       | 339 |   | 930 |   | 484 |   | 194 |   | 657 |   | 4,512 |   |
| Net Cash Earnings adjustments                                                           |       | —                     |       | — |   | (113 | ) | (15 | ) | — |   | (938 | ) | (1,066 | ) |
| **Net profit attributable to equity  holders of Westpac Banking Corporation**           |       | 1,908                      |       | 339 |   | 817 |   | 469 |   | 194 |   | (281 | ) | 3,446 |   |
| **Total assets**                                                                        |       | 219,624                    |       | 114,639 |   | 127,585 |   | 26,085 |   | 40,128 |   | 61,526 |   | 589,587 |   |
| **Total liabilities**                                                                   |       | 123,544                    |       | 101,065 |   | 81,876 |   | 25,460 |   | 24,015 |   | 197,056 |   | 553,016 |   |
| **Acquisition of property, plant  and equipment, goodwill and other intangible assets** |       | 429                        |       | 569 |   | 6,551 |   | 1,202 |   | 66 |   | 748 |   | 9,565 |   |

 

262

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NOTES TO THE FINANCIAL STATEMENTS

 

**Note 32. Group segment information(continued)**

 
| ** **                                                                              | ** ** | **Consolidated 2008** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                              | ** ** | **Westpac**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Retail &**      | ** ** | **Westpac** | ** ** | ** ** | ** ** | **BT Financial** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Business**               | ** ** | **Institutional** | ** ** | **St.George** | ** ** | **Group** | ** ** | **New** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Banking**                | ** ** | **Bank** | ** ** | **Bank** | ** ** | **(Australia)** | ** ** | **Zealand** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                                                              | ** ** | **$m**                     | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Net interest income                                                                     |       | 4,287                      |       | 1,248 |   |   |   | 111 |   | 970 |   | 607 |   | 7,223 |   |
| Non-interest income                                                                     |       | 1,356                      |       | 1,110 |   |   |   | 1,096 |   | 355 |   | 162 |   | 4,079 |   |
| **Total operating income before  operating expenses and impairment charges on loans**   |       | 5,643                      |       | 2,358 |   |   |   | 1,207 |   | 1,325 |   | 769 |   | 11,302 |   |
| Operating expenses                                                                      |       | (2,787                     | )          | (902 | ) |   |   | (645 | ) | (599 | ) | (128 | ) | (5,061 | ) |
| Impairment charges on loans                                                             |       | (352                       | )          | (341 | ) |   |   | (4 | ) | (143 | ) | (91 | ) | (931 | ) |
| **Profit before income tax**                                                            |       | 2,504                      |       | 1,115 |   |   |   | 558 |   | 583 |   | 550 |   | 5,310 |   |
| Income tax expense                                                                      |       | (752                       | )          | (319 | ) |   |   | (155 | ) | (185 | ) | (100 | ) | (1,511 | ) |
| Profit attributable to non-controlling interests                                        |       | —                     |       | — |   |   |   | (4 | ) | (3 | ) | (66 | ) | (73 | ) |
| **Cash Earnings for the year**                                                          |       | 1,752                      |       | 796 |   |   |   | 399 |   | 395 |   | 384 |   | 3,726 |   |
| Net Cash Earnings adjustments                                                           |       | —                     |       | — |   |   |   | — |   | — |   | 133 |   | 133 |   |
| **Net profit attributable to equity  holders of Westpac Banking Corporation**           |       | 1,752                      |       | 796 |   |   |   | 399 |   | 395 |   | 517 |   | 3,859 |   |
| **Total assets**                                                                        |       | 193,925                    |       | 119,040 |   |   |   | 22,660 |   | 39,939 |   | 64,112 |   | 439,676 |   |
| **Total liabilities**                                                                   |       | 106,832                    |       | 82,704 |   |   |   | 23,967 |   | 23,534 |   | 183,168 |   | 420,205 |   |
| **Acquisition of property, plant  and equipment, goodwill and other intangible assets** |       | 206                        |       | 56 |   |   |   | 37 |   | 71 |   | 304 |   | 674 |   |

 

263

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**Note 32. Group segment information(continued)**

 

***Reconciliation of cash earnings to net profit***

 

*Consolidated2010*

* *
| ** **                                                                            | ** ** | **Cash Earnings  for the Year** | ** ** | **Policyholder  Tax Recoveries** | ** ** | **Hybrid  Revaluations(1)** | ** ** | **Treasury  Shares(2)** | ** ** | **Ineffective  Hedges(3)** | ** ** | **Merger Transaction  and Integration  Expense(4)** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **$m**                                         | ** ** | **$m**                                | ** ** | **$m**                      | ** ** | **$m**                  | ** ** | **$m**                     | ** ** | **$m**                                                        | ** ** |
| Net interest income                                                                   |       | 11,855                                         |       | —                                |       | —                      |       | —                  |       | (1                         | )          | (3                                                            | )          |
| Non-interest income                                                                   |       | 5,055                                          |       | (12                                   | )          | 13                          |       | 12                      |       | 10                         |       | —                                                        |       |
| **Total operating income before  operating expenses and impairment charges on loans** |       | 16,910                                         |       | (12                                   | )          | 13                          |       | 12                      |       | 9                          |       | (3                                                            | )          |
| Operating expenses                                                                    |       | (6,972                                         | )          | —                                |       | —                      |       | —                  |       | —                     |       | (236                                                          | )          |
| Impairment charges on loans                                                           |       | (1,456                                         | )          | —                                |       | —                      |       | —                  |       | —                     |       | —                                                        |       |
| **Profit before income tax**                                                          |       | 8,482                                          |       | (12                                   | )          | 13                          |       | 12                      |       | 9                          |       | (239                                                          | )          |
| Income tax expense                                                                    |       | (2,537                                         | )          | 12                                    |       | (27                         | )          | (2                      | )          | (3                         | )          | 72                                                            |       |
| Profit attributable to non-controlling interests                                      |       | (66                                            | )          | —                                |       | —                      |       | —                  |       | —                     |       | —                                                        |       |
| **Cash Earnings for the year**                                                        |       | 5,879                                          |       | —                                |       | (14                         | )          | 10                      |       | 6                          |       | (167                                                          | )          |

 

*Consolidated2009*

 
| ** **                                                                            | ** ** | **Cash Earnings  for the Year** | ** ** | **Policyholder  Tax Recoveries** | ** ** | **Hybrid  Revaluations(1)** | ** ** | **Treasury  Shares(2)** | ** ** | **Ineffective  Hedges(3)** | ** ** | **Merger Transaction  and Integration  Expense(4)** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **$m**                                         | ** ** | **$m**                                | ** ** | **$m**                      | ** ** | **$m**                  | ** ** | **$m**                     | ** ** | **$m**                                                        | ** ** |
| Net interest income                                                                   |       | 11,501                                         |       | —                                |       | —                      |       | —                  |       | (9                         | )          | (1                                                            | )          |
| Non-interest income                                                                   |       | 4,832                                          |       | 7                                     |       | 43                          |       | (35                     | )          | 3                          |       | —                                                        |       |
| **Total operating income before  operating expenses and impairment charges on loans** |       | 16,333                                         |       | 7                                     |       | 43                          |       | (35                     | )          | (6                         | )          | (1                                                            | )          |
| Other operating expenses                                                              |       | (6,534                                         | )          | —                                |       | —                      |       | —                  |       | —                     |       | (334                                                          | )          |
| Impairment charges on loans                                                           |       | (3,238                                         | )          | —                                |       | —                      |       | —                  |       | —                     |       | —                                                        |       |
| **Profit before income tax**                                                          |       | 6,561                                          |       | 7                                     |       | 43                          |       | (35                     | )          | (6                         | )          | (335                                                          | )          |
| Income tax expense                                                                    |       | (1,978                                         | )          | (7                                    | )          | (38                         | )          | 3                       |       | 2                          |       | 101                                                           |       |
| Profit attributable to non-controlling interests                                      |       | (71                                            | )          | —                                |       | —                      |       | —                  |       | —                     |       | —                                                        |       |
| **Cash Earnings for the year**                                                        |       | 4,512                                          |       | —                                |       | 5                           |       | (32                     | )          | (4                         | )          | (234                                                          | )          |

 

*Consolidated2008*

 
| ** **                                                                            | ** ** | **Cash Earnings  for the Year** | ** ** | **Policyholder  Tax Recoveries** | ** ** | **Hybrid  Revaluations(1)** | ** ** | **Treasury  Shares(2)** | ** ** | **Ineffective  Hedges(3)** | ** ** | **Merger Transaction  and Integration  Expense(4)** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **$m**                                         | ** ** | **$m**                                | ** ** | **$m**                      | ** ** | **$m**                  | ** ** | **$m**                     | ** ** | **$m**                                                        | ** ** |
| Net interest income                                                                   |       | 7,223                                          |       | —                                |       | —                      |       | —                  |       | (1                         | )          |                                                          |       |
| Non-interest income                                                                   |       | 4,079                                          |       | (198                                  | )          | 45                          |       | 29                      |       | 3                          |       | —                                                        |       |
| **Total operating income before  operating expenses and impairment charges on loans** |       | 11,302                                         |       | (198                                  | )          | 45                          |       | 29                      |       | 2                          |       | —                                                        |       |
| Other operating expenses                                                              |       | (5,061                                         | )          | —                                |       | —                      |       | —                  |       | —                     |       | (13                                                           | )          |
| Impairment charges on loans                                                           |       | (931                                           | )          | —                                |       | —                      |       | —                  |       | —                     |       | —                                                        |       |
| **Profit before income tax**                                                          |       | 5,310                                          |       | (198                                  | )          | 45                          |       | 29                      |       | 2                          |       | (13                                                           | )          |
| Income tax expense                                                                    |       | (1,511                                         | )          | 198                                   |       | 12                          |       | (4                      | )          | (1                         | )          | 2                                                             |       |
| Profit attributable to non-controlling interests                                      |       | (73                                            | )          | —                                |       | —                      |       | —                  |       | —                     |       | —                                                        |       |
| **Cash Earnings for the year**                                                        |       | 3,726                                          |       | —                                |       | 57                          |       | 25                      |       | 1                          |       | (11                                                           | )          |

 

264

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

*Consolidated2010*

 
| ** **                                                                            | ** ** | **Fair Value  Gain/(Loss) on  Economic Hedges(5)** | ** ** | **Amortisation  of Intangible  Assets(6)** | ** ** | **NZ Structured  Finance  Transactions(7)** | ** ** | **Fair Value  Amortisation of  Financial Instruments(8)** | ** ** | **Tax  Consolidation  adjustment(9)** | ** ** | **Total Cash  Earnings  Adjustments** | ** ** | **Net Profit  for the Year** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **$m**                                                            | ** ** | **$m**                                          | ** ** | **$m**                                           | ** ** | **$m**                                                                   | ** ** | **$m**                                | ** ** | **$m**                                     | ** ** | **$m**                                      | ** ** |
| Net  interest income                                                                  |       | (66                                                               | )          | —                                          |       | —                                           |       | 57                                                                       |       | —                                |       | (13                                        | )          | 11,842                                      |       |
| Non-interest  income                                                                  |       | (10                                                               | )          | —                                          |       | —                                           |       | —                                                                   |       | —                                |       | 13                                         |       | 5,068                                       |       |
| **Total operating income before operating expenses and  impairment charges on loans** |       | (76                                                               | )          | —                                          |       | —                                           |       | 57                                                                       |       | —                                |       | —                                     |       | 16,910                                      |       |
| Operating  expenses                                                                   |       | —                                                            |       | (208                                            | )          | —                                           |       | —                                                                   |       | —                                |       | (444                                       | )          | (7,416                                      | )          |
| Impairment  charges on loans                                                          |       | —                                                            |       | —                                          |       | —                                           |       | —                                                                   |       | —                                |       | —                                     |       | (1,456                                      | )          |
| **Profit before income tax**                                                          |       | (76                                                               | )          | (208                                            | )          | —                                           |       | 57                                                                       |       | —                                |       | (444                                       | )          | 8,038                                       |       |
| Income  tax expense                                                                   |       | 23                                                                |       | 62                                              |       | 106                                              |       | (17                                                                      | )          | 685                                   |       | 911                                        |       | (1,626                                      | )          |
| Profit  attributable to non-controlling interests                                     |       | —                                                            |       | —                                          |       | —                                           |       | —                                                                   |       | —                                |       | —                                     |       | (66                                         | )          |
| **Cash Earnings for the year**                                                        |       | (53                                                               | )          | (146                                            | )          | 106                                              |       | 40                                                                       |       | 685                                   |       | 467                                        |       | 6,346                                       |       |

 

*Consolidated2009*

 
| ** **                                                                            | ** ** | **Fair Value  Gain/(Loss) on  Economic Hedges(5)** | ** ** | **Amortisation  of Intangible  Assets(6)** | ** ** | **NZ Structured  Finance  Transactions(7)** | ** ** | **Fair Value  Amortisation of  Financial Instruments(8)** | ** ** | **Other  Non-  Statutory  Adjustments(11)** | ** ** | **Total Cash  Earnings  Adjustments** | ** ** | **Net Profit  for the Year** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **$m**                                                            | ** ** | **$m**                                          | ** ** | **$m**                                           | ** ** | **$m**                                                                   | ** ** | **$m**                                      | ** ** | **$m**                                     | ** ** | **$m**                                      | ** ** |
| Net  interest income                                                                  |       | —                                                            |       | —                                          |       | —                                           |       | 155                                                                      |       | —                                      |       | 145                                        |       | 11,646                                      |       |
| Non-interest  income                                                                  |       | 9                                                                 |       | —                                          |       | —                                           |       | —                                                                   |       | —                                      |       | 27                                         |       | 4,859                                       |       |
| **Total operating income before operating expenses and  impairment charges on loans** |       | 9                                                                 |       | —                                          |       | —                                           |       | 155                                                                      |       | —                                      |       | 172                                        |       | 16,505                                      |       |
| Other  operating expenses                                                             |       | —                                                            |       | (182                                            | )          | —                                           |       | —                                                                   |       | (121                                        | )          | (637                                       | )          | (7,171                                      | )          |
| Impairment  charges on loans                                                          |       | —                                                            |       | —                                          |       | —                                           |       | —                                                                   |       | —                                      |       | —                                     |       | (3,238                                      | )          |
| **Profit before income tax**                                                          |       | 9                                                                 |       | (182                                            | )          | —                                           |       | 155                                                                      |       | (121                                        | )          | (465                                       | )          | 6,096                                       |       |
| Income  tax expense                                                                   |       | (2                                                                | )          | 54                                              |       | (703                                             | )          | (47                                                                      | )          | 36                                          |       | (601                                       | )          | (2,579                                      | )          |
| Profit  attributable to non-controlling interests                                     |       | —                                                            |       | —                                          |       | —                                           |       | —                                                                   |       | —                                      |       | —                                     |       | (71                                         | )          |
| **Cash Earnings for the year**                                                        |       | 7                                                                 |       | (128                                            | )          | (703                                             | )          | 108                                                                      |       | (85                                         | )          | (1,066                                     | )          | 3,446                                       |       |

 

*Consolidated2008*

 
| ** **                                                                            | ** ** | **Fair Value  Gain/(Loss) on  Economic Hedges(5)** | ** ** | **Gain from BTIM  and VISA IPO(10)** | ** ** | **Other Non-  Statutory  Adjustments(11)** | ** ** | **Total Cash  Earnings  Adjustments** | ** ** | **Net Profit  for the Year** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **$m**                                                            | ** ** | **$m**                                                   | ** ** | **$m**                                          | ** ** | **$m**                                     | ** ** | **$m**                                      | ** ** |
| Net  interest income                                                                  |       | —                                                            |       | —                                                   |       | —                                          |       | (1                                         | )          | 7,222                                       |       |
| Non-interest  income                                                                  |       | (6                                                                | )          | 431                                                      |       | —                                          |       | 304                                        |       | 4,383                                       |       |
| **Total operating income before operating expenses and  impairment charges on loans** |       | (6                                                                | )          | 431                                                      |       | —                                          |       | 303                                        |       | 11,605                                      |       |
| Other  operating expenses                                                             |       | —                                                            |       | (58                                                      | )          | (323                                            | )          | (394                                       | )          | (5,455                                      | )          |
| Impairment  charges on loans                                                          |       | —                                                            |       | —                                                   |       | —                                          |       | —                                     |       | (931                                        | )          |
| **Profit before income tax**                                                          |       | (6                                                                | )          | 373                                                      |       | (323                                            | )          | (91                                        | )          | 5,219                                       |       |
| Income  tax expense                                                                   |       | 2                                                                 |       | (82                                                      | )          | 97                                              |       | 224                                        |       | (1,287                                      | )          |
| Profit  attributable to non-controlling interests                                     |       | —                                                            |       | —                                                   |       | —                                          |       | —                                     |       | (73                                         | )          |
| **Cash Earnings for the year**                                                        |       | (4                                                                | )          | 291                                                      |       | (226                                            | )          | 133                                        |       | 3,859                                       |       |

 

265

----

 

**Note 32. Group segment information(continued)**

 
| ** **                                           | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **30 September 2010** | ** ** | **30 September 2009** | ** ** | **30 September 2008** | ** ** |
| ** **                                           | ** ** | **$m**                          | ** ** | **$m**                          | ** ** | **$m**                          | ** ** |
| **Cash Earnings for the year**                       |       | 5,879                           |       | 4,512                           |       | 3,726                           |       |
| **Cash Earnings adjustments:**                       |       |                            |       |                            |       |                            |       |
| Hybrid instruments(1)                                |       | (14                             | )          | 5                               |       | 57                              |       |
| Treasury shares(2)                                   |       | 10                              |       | (32                             | )          | 25                              |       |
| Ineffective hedges(3)                                |       | 6                               |       | (4                              | )          | 1                               |       |
| Merger transaction and integration expenses(4)       |       | (167                            | )          | (234                            | )          | (11                             | )          |
| Fair value gain/(loss) on economic hedges(5)         |       | (53                             | )          | 7                               |       | (4                              | )          |
| Amortisation of intangible assets(6)                 |       | (146                            | )          | (128                            | )          | —                          |       |
| NZ structured finance transactions(7)                |       | 106                             |       | (703                            | )          | —                          |       |
| Fair value amortisation of financial  instruments(8) |       | 40                              |       | 108                             |       | —                          |       |
| Tax consolidation adjustment(9)                      |       | 685                             |       | —                          |       | —                          |       |
| Gain from BTIM IPO and VISA IPO(10)                  |       | —                          |       | —                          |       | 291                             |       |
| Other non-statutory adjustments(11)                  |       | —                          |       | (85                             | )          | (226                            | )          |
| **Total Cash Earnings adjustments**                  |       | 467                             |       | (1,066                          | )          | 133                             |       |
| **Net profit for the year**                          |       | 6,346                           |       | 3,446                           |       | 3,859                           |       |

 

----

(1)         Adjustment for economic hedges, including associatedtax effects impacting the foreign currency translation reserve, relating tohybrid instruments classified as non-controlling interests. The hybridinstrument is not fair valued, however, the hedge is fair valued and thereforethere is a mismatch in the timing of income recognition in the statutoryresults. The mismatch is added back in deriving Cash Earnings as it does notaffect the Group’s profits over time.

(2)         Under A-IFRS, Westpac shares held by the Group inmanaged funds and life business are deemed to be treasury shares and theresults of holding these shares are not permitted to be recognised as income.In deriving Cash Earnings, these results are included to ensure there is noasymmetrical impact on the Group’s profits because the treasury shares supportpolicyholder liabilities and equity derivative transactions which are re-valuedin deriving income.

(3)         The gain/(loss) on ineffective hedges is reversed inderiving Cash Earnings for the period because the gain/(loss) arising from thefair value movement in these hedges reverses over time and does not affect theGroup’s profits over time.

(4)         As part of the merger with St.George, transaction andintegration expenses incurred over three years are being treated as CashEarnings adjustments as they do not impact the earnings expected from St.Georgefollowing the integration period.

(5)         Fair value gain/(loss) on other economic hedges (whichdo not qualify for hedge accounting under A-IFRS) comprise:

·         the unrealised fair value gain/(loss) on hedges of future New Zealandearnings impacting non-interest income is reversed in deriving Cash Earnings inthe current period as it may potentially create a material timing difference onreported earnings. The Cash Earnings adjustment ensures that this does notaffect the Group’s profits over the life of the hedge;

·         the unrealised fair value gain/(loss) on foreign exchange hedges of feespayable for the use of the government guarantee on foreign denominated wholesalefunding is reversed in deriving Cash Earnings in the current period as it maypotentially create a material timing difference on reported earnings. The CashEarnings adjustment ensures that this does not affect the Group’s profits overthe life of the hedge; and

·         the unrealised fair value gains/(losses) on cross currency swaps hedgingaccrual accounted term funding transactions are reversed in deriving CashEarnings in the current period as it may potentially create a material timingdifference on reported earnings but does not affect the Group’s profits overthe life of the hedge.

(6)         The merger with St.George resulted in the recognitionof core deposit intangibles and customer relationship intangible assets thatare amortised over their useful lives, ranging between five and nine years. Theamortisation of intangible assets (excluding software) is a Cash Earningsadjustment because it is a non-cash flow item and does not affect cashdistributions available to shareholders.

(7)         In the year ended 30 September 2009, the Groupincreased tax provisioning by $703 million for New Zealand structured financetransactions entered into between 1998 and 2002. The increase in the provisionfollowed the High Court in New Zealand finding in favour of the CIR inproceedings where Westpac challenged amended tax assessments in relation tothese transactions. Due to the significant size and historical nature of theissue, the provision was treated as a Cash Earnings adjustment. In the yearended 30 September 2010, the Group reached a settlement with the CIR byagreeing to pay 80% of the full amount of primary tax and interest. Theassociated reversal of tax provisions of $106 million in the year ended 30September 2010 has also been treated as a Cash Earnings adjustment.

(8)         The accounting for the merger with St.George resultedin the recognition of fair value adjustments on the St.George retail bankloans, deposits, wholesale funding and associated hedges, with these fair valueadjustments being amortised over the life of the underlying transactions. Theamortisation of these adjustments is considered to be a timing differencerelating to non-cash flows that and do not affect cash distributions availableto shareholders.

(9)         Finalisation of a component of tax consolidationrelated to the merger with St.George gave rise to an income tax expenseadjustment of $685 million for the year ended 30 September 2010. The taxconsolidation process required Westpac to reset the tax value of certainSt.George assets to the appropriate market value of those assets as at the timeof tax consolidation (31 March 2009). This has been treated as a Cash Earningsadjustment due to its size and it does not reflect ongoing operations.

 

266

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 32. Group segment information(continued)**

 

(10)  In the year ended 30 September 2008, the gainsassociated with the IPO of BTIM ($136 million, $86 million after tax), the IPOof Visa Inc. ($295 million, $205 million after tax) and merger transactionexpenses and related integration expenses were treated as cash earningsadjustments as they were non-recurring and did not reflect the ongoingoperations of the Group.

(11)  Other non-statutory adjustments comprise:

·         in the year ended 30 September 2009, a provision of $121 million ($85million after tax) with respect to long-standing legal proceedings, wherejudgments were received in the full year ended 30 September 2009. This wastreated as a Cash Earnings adjustment due to its size and historical nature ofthe proceedings; and

·         in the year ended 30 September 2008, one-off expenses related toefficiency initiatives and capitalised expense reviews were treated as CashEarnings adjustments, as these were deemed to be material items that did notreflect on-going operations.

 

***Revenue from Products and Services***

 

Details of revenuefrom external customers by product or service are disclosed in Notes 2 and 3.

 

***Secondary reporting — geographic segments***

 

Geographic segmentsare based on the location of the office in which the following items arerecognised:

 
| ** **                | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                | ** ** | **$m**   | ** ** | **%**    | ** ** | **$m**   | ** ** | **%** | ** ** | **$m** | ** ** | **%** | ** ** |
| **Revenue**               |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Australia                 |       | 35,376   |       | 90.2     |       | 30,003   |       | 85.0 |   | 28,185 |   | 84.3 |   |
| New Zealand               |       | 3,592    |       | 9.2      |       | 4,705    |       | 13.3 |   | 4,529 |   | 13.5 |   |
| Other(2)                  |       | 251      |       | 0.6      |       | 597      |       | 1.7 |   | 750 |   | 2.2 |   |
| **Total**                 |       | 39,219   |       | 100.0    |       | 35,305   |       | 100.0 |   | 33,464 |   | 100.0 |   |
| **Non-current assets(1)** |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Australia                 |       | 11,912   |       | 95.2     |       | 11,794   |       | 94.9 |   | 2,860 |   | 81.8 |   |
| New Zealand               |       | 564      |       | 4.5      |       | 593      |       | 4.8 |   | 582 |   | 16.7 |   |
| Other(2)                  |       | 38       |       | 0.3      |       | 42       |       | 0.3 |   | 52 |   | 1.5 |   |
| **Total**                 |       | 12,514   |       | 100.0    |       | 12,429   |       | 100.0 |   | 3,494 |   | 100.0 |   |

 

----

(1)         Non-current assets includes property, plant andequipment, goodwill and other intangible assets.

(2)         Other includes Pacific Islands, Asia, the Americas andEurope.

 

**Note 33. Auditor’s remuneration**

 

During the financialyear, the auditor of the Group and Parent Entity, PricewaterhouseCoopers (PwC),and its related practices earned the following remuneration including goods andservices tax:

 
| ** **                                                                                       | ** ** | **Consolidated**     | ** ** | **Parent Entity** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                                                                       | ** ** | **2010 **       | ** ** | **2009 **         | ** ** | **2010 ** | ** ** | **2009** | ** ** |
| ** **                                                                                       | ** ** | **$’000 ** | ** ** | **$’000 **   | ** ** | **$’000 ** | ** ** | **$’000** | ** ** |
| **PwC — Australian firm**                                                                   |       |                 |       |                   |       |   |   |   |   |
| Audit and review of financial reports of Westpac  Banking Corporation or any entity in the Group |       | 13,309               |       | 14,603                 |       | 12,830 |   | 12,617 |   |
| Other audit-related work                                                                         |       | 1,706                |       | 1,537                  |       | 1,706 |   | 1,425 |   |
| **Total audit and other assurance  services**                                                    |       | 15,015               |       | 16,140                 |       | 14,536 |   | 14,042 |   |
| Taxation                                                                                         |       | 178                  |       | 145                    |       | 178 |   | 123 |   |
| Other services                                                                                   |       | 761                  |       | 1,098                  |       | 761 |   | 911 |   |
| **Total remuneration paid to PwC —  Australian firm**                                       |       | 15,954               |       | 17,383                 |       | 15,475 |   | 15,076 |   |
|                                                                                             |       |                 |       |                   |       |   |   |   |   |
| **Related practices of PwC**                                                                     |       |                 |       |                   |       |   |   |   |   |
| Audit and review of financial reports of Westpac  Banking Corporation or any entity in the Group |       | 3,070                |       | 2,732                  |       | 258 |   | 653 |   |
| Other audit-related work                                                                         |       | 50                   |       | 122                    |       | — |   | — |   |
| **Total audit and other assurance  services**                                                    |       | 3,120                |       | 2,854                  |       | 258 |   | 653 |   |
| Taxation                                                                                         |       | 189                  |       | 230                    |       | 20 |   | 6 |   |
| Other services                                                                                   |       | —               |       | 5                      |       | — |   | 5 |   |
| **Total remuneration paid to  related practices of PwC**                                         |       | 3,309                |       | 3,089                  |       | 278 |   | 664 |   |
| **Total remuneration paid to PwC**                                                               |       | 19,263               |       | 20,472                 |       | 15,753 |   | 15,740 |   |

 

267

----

 

**Note 33. Auditor’s remuneration(continued)**

 

For compliance withUS disclosure requirements, remuneration to the external auditor, includinggoods and services tax, for the years ended 30 September 2010 and 2009 issummarised from the table above as follows:

 
| ** **                 | ** ** | **2010**       | ** ** | **2009**       | ** ** |
|----------------------------|------------|----------------|------------|----------------|------------|
| ** **                 | ** ** | **$’000** | ** ** | **$’000** | ** ** |
| Audit fees                 |       | 16,379         |       | 17,335         |       |
| Non-audit fees:            |       |           |       |           |       |
| Audit-related fees         |       | 1,756          |       | 1,659          |       |
| Tax fees                   |       | 367            |       | 375            |       |
| All other fees             |       | 761            |       | 1,103          |       |
| **Total non-audit fees**   |       | 2,884          |       | 3,137          |       |
| **Total fees paid to PwC** |       | 19,263         |       | 20,472         |       |

 

It is Westpac’spolicy to engage the external auditors on assignments additional to theirstatutory audit duties, only if their independence is not impaired or seen tobe impaired, and where their expertise and experience with Westpac isimportant. All services were approved by the Audit Committee in accordance withthe pre-approval policy and procedures.

 

In the tables above,audit services include the audit of the year end and review of the half yearstatutory reports and comfort letters associated with debt issues and capitalraisings for the Parent Entity, its controlled entities and theconsolidated Group.

 

Audit-relatedservices include consultations regarding accounting standards and reportingrequirements and regulatory compliance reviews.

 

Taxation servicesinclude tax compliance and tax advisory services.

 

Other servicesinclude consultation services in relation to the APRA Standard Implementationproject and Westpac’s compliance with the new APRA remuneration and governancerequirements and the provision and delivery of a credit risk training programfor St.George.

 

The externalauditor, PwC, also provides audit and non-audit services to non-consolidatedentities including non-consolidated securitisation vehicles sponsored by theGroup, non-consolidated trusts of which a Westpac Group entity is trustee,manager or responsible entity and non-consolidated superannuation funds orpension funds. The fees in respect of their services were approximately $8.6million in total (2009 $6.3 million). PricewaterhouseCoopers may also provideaudit and non-audit services to other entities in which Westpac holds aminority interest, and which are not consolidated. Westpac is not aware of theamount of any fees paid by those entities.

 

268

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 34. Expenditure commitments**

 
| ** **                                                                                  | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                                  | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                  | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Commitments for capital  expenditure not provided for in the financial statements**       | ** ** | ** **       |       |                   | ** ** | ** ** |   |   |   |
| Payable within one year                                                                     |       | 23               |       | 20                     |       | — |   | — |   |
| Payable later than one year but not later than  five years                                  |       | —           |       | —                 |       | — |   | — |   |
| Payable after five years                                                                    |       | —           |       | —                 |       | — |   | — |   |
| **Total commitments for capital  expenditure not provided for in the financial statements** |       | 23               |       | 20                     |       | — |   | — |   |
| **Lease commitments (all leases are  classified as operating leases)**                      |       |             |       |                   |       |   |   |   |   |
| Premises and sites                                                                          |       | 2,265            |       | 1,947                  |       | 1,967 |   | 1,316 |   |
| Furniture and equipment                                                                     |       | 6                |       | 5                      |       | 1 |   | 2 |   |
| **Total lease commitments**                                                                 |       | 2,271            |       | 1,952                  |       | 1,968 |   | 1,318 |   |
| Due within one year                                                                         |       | 413              |       | 380                    |       | 362 |   | 253 |   |
| Due after one year but not later than five years                                            |       | 1,163            |       | 983                    |       | 1,033 |   | 668 |   |
| Due after five years                                                                        |       | 695              |       | 589                    |       | 573 |   | 397 |   |
| **Total lease commitments**                                                                 |       | 2,271            |       | 1,952                  |       | 1,968 |   | 1,318 |   |
| **Other expenditure commitments(1)**                                                        |       |             |       |                   |       |   |   |   |   |
| Payable within one year                                                                     |       | 480              |       | 740                    |       | 414 |   | 639 |   |
| Payable later than one year but not later than  five years                                  |       | 444              |       | 583                    |       | 370 |   | 366 |   |
| Payable after five years                                                                    |       | 126              |       | 60                     |       | 126 |   | 35 |   |
| **Total other expenditure  commitments**                                                    |       | 1,050            |       | 1,383                  |       | 910 |   | 1,040 |   |

 

----

(1)         Amounts presented for other expenditure commitmentsrepresent the estimated spend on Westpac’s significant contracts over theirremaining term. This would differ from the contractually committed amount.

 

As at 30 September2010, the total future minimum lease payments expected to be received by theGroup and Parent Entity from non-cancellable sub-leases was $30 million (2009$36 million) and $29 million (2009 $18 million) respectively.

 

***Operating lease arrangements***

 

Operating leases areentered into to meet the business needs of entities in the Group. Leases areprimarily over commercial and retail premises and plant and equipment. Leaserentals are determined in accordance with market conditions when leases areentered into or on rental review dates.

 

Leased premises thathave become excess to the Group’s business needs have been sublet wherepossible and any expected rental shortfalls fully provided for. There are norestrictions imposed on the Group by lease arrangements other than in respectof the specific premises being leased.

 

The Group has leasecommitments resulting from the sale and lease back of various premises. Theseleases are generally for a term of five years with an option to extend foranother five years. In most instances, other than the lease arrangement, theGroup has no ongoing interests in the premises.

 

***Service agreements***

 

The maximumcontingent liability for termination benefits in respect of service agreementswith the Chief Executive Officer and other Group Key Management Personnel at 30September 2010 was $13.8 million (2009 $13.4 million).

 

***Significant long term contracts***

 

On 27 July 2010,Westpac entered into a lease and services agreement for a purpose built DataCentre in Western Sydney. This agreement is for a period of 15 years with twofurther five year option periods.

 

On 28 June 2010,Westpac extended its agreement with FDR Australia Limited to provide a managedservice for cards processing until 2019. This involves managing the applicationwithin the Westpac/IBM environment. FDR Australia Limited is now providingservices for Westpac’s Australasian cards processing in phases since October2002. Westpac retains control of its cards sales, credit, collections andcustomer service functions.

 

On 22 December 2009,Westpac entered into a five year master services agreement with United GroupServices Pty Limited for the provision of real estate services, facilitiesmanagement, workplace management, program management, finance and critical siteoperational management. The contract commenced on 1 April 2010.

 

On 1 October 2009,Westpac entered into a three year agreement with Stream Solutions (Holdings)Pty Limited to provide Westpac’s end to end print management services.

 

269

----

 

**Note 34. Expenditure commitments(continued)**

 

On 22 September2009, Westpac entered into a two year mortgage services agreement with UnisysCredit Services Pty Limited to provide post settlement back office servicing.The contract commenced on 1 November 2009.

 

On 31 March 2009, St.Georgeextended the term of the contract with IBM Daksh Business Process ServicesPrivate Limited by three years to September 2016. This contract commenced on 18September 2006 with an original seven year term for the provision of businessprocess outsourcing services.

 

On 1 October 2007,St.George entered into a four year contract with Optus for the provision oftelecommunications carriage services and various outsourced administrationfunctions. After the initial four year term the contract will extend for afifth year if certain service level agreements are met.

 

On 3 November 2006,Westpac entered into a five year master relationship agreement with GenpactU.S. LLC for the provision of back office administrative support services.

 

On 17 September 2006,Westpac renewed its agreement with Cash Services Australia (CSA) for a term offive years and nine months. CSA will continue to provide key operationalservices as well as commercial and operational governance ofcash-in-transit providers.

 

On 1 December 2005,Westpac renewed its managed network service agreement with Telstra Corporation(Telstra) for a further five year term. Under this agreement Telstra willprovide voice, data and video services for corporate and retail banking inAustralia and the Pacific Region. In October 2010, the agreement was extendedfor a further 12 month term, expiring December 2011.

 

On 4 February 2005,Westpac, in conjunction with the National Australia Bank and the CommonwealthBank of Australia, entered into a 12 year arrangement with Fiserv SolutionsAustralia Pty Limited for the provision of voucher (cheque) processingservices.

 

On 1 October 2001,Westpac entered into a ten year agreement with HP Enterprise Services PtyLimited whereby they will provide mortgage and other processing services inconnection with the mortgage loan portfolio.

 

On 3 December 2000,Westpac entered into a ten year contract with IBM Global Services Australiarelating to the management of the core banking technology operations inAustralia, New Zealand and the Pacific Bank. In September 2010, the termof the agreement was extended until April 2011.

 

Commitments inrelation to long term contracts are included in other expenditure commitmentsabove.

 

**Note 35. Superannuationcommitments**

 

Westpac had thefollowing defined benefit plans at 30 September 2010:

 
| **Name of Plan**                                                                                 | ** ** | **Type**                          | ** ** | **Form of benefit** | ** ** | **Date of last actuarial  assessment of the  funding status** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|---------------------------------------------------------------------------------------------|
| Westpac Staff  Superannuation Plan (WSSP)                                                                  |       | Defined  benefit and accumulation |       | Indexed  pension and lump sum |       | 30  June 2009                                                                               |
| Westpac New  Zealand Superannuation Scheme (WNZS)                                                          |       | Defined  benefit and accumulation |       | Indexed  pension and lump sum |       | 30  June 2010                                                                               |
| M&F Defined  Benefit Category of the St.George Staff sub-plan of the Plum Superannuation  Fund (SGPSF) |       | Defined  benefit                  |       | Guaranteed  return            |       | 30  June 2009                                                                               |
| Westpac Banking  Corporation UK Staff Superannuation Scheme (UKSS)                                         |       | Defined  benefit                  |       | Indexed  pension and lump sum |       | 5  April 2009                                                                               |
| Westpac UK Medical  Benefits Scheme                                                                        |       | Defined  benefit                  |       | Medical  benefits             |       | 1  June 2009                                                                                |

 

All of the definedbenefit sections of the schemes are closed to new members.

 

***Contributions***

 

Fundingrecommendations are made based on the Attained Age Method, which impacts thetiming of contribution requirements and assumes that the plans will not bediscontinued.

 

270

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 35. Superannuationcommitments (continued)**

 

The specificcontributions for each of the plans are set-out below:

 

·         WSSP — contributions are made to the WSSP at the rate of 11.5% ofmembers’ salaries.

·         WNZS — contributions are made to the WNZS at the rate of 12% of members’salaries.

·         SGPSF — contributions are made to the SGPSF at the rate of 12.5% ofmembers’ salaries.

·         UKSS — contributions are made to the UKSS at the rate of £3.8 millionper annum.

 

The table belowsummarises the calculation of the surplus/(deficit) used to make fundingrecommendations, based on the guidance in Australian Accounting Standard AAS 25*Financial Reporting by Superannuation Plans*:

 
| ** **                        | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-----------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                        | ** ** | **2010(1)**      | ** ** | **2009(2)**            | ** ** | **2010(1)** | ** ** | **2009(2)** | ** ** |
| ** **                        | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Market value of assets            |       | 1,797            |       | 1,615                  |       | 1,741 |   | 1,522 |   |
| Present value of accrued benefits |       | 1,723            |       | 1,760                  |       | 1,659 |   | 1,645 |   |
| **Surplus/(deficit)**             |       | 74               |       | (145                   | )          | 82 |   | (123 | ) |

 

----

(1)         Calculated as at 30 June 2009 (WSSP), 5 April 2009(UKSS), 30 June 2010 (WNZS) and 30 June 2009 (SGPSF).

(2)         Calculated as at 30 June 2009 (WSSP), 5 April 2009(UKSS), 30 June 2008 (WNZS) and 30 June 2009 (SGPSF).

 

The followingeconomic assumptions applied for the funding calculations differ to assumptionsused in the accounting calculations due to different valuation dates, discountrates and assumptions linked to expected returns on assets.

 
| ** **                                           | ** ** | **WSSP** | ** ** | **WNZS** | ** ** | **SGPSF** | ** ** | **UKSS** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|
| Discount rate                                        |       | 7.5      | %          | 6.0      | %          | 6.0       | %          | 6.5      | %          |
| Expected return on plan assets                       |       | 7.5      | %          | 6.0      | %          | 6.0       | %          | 5.4      | %          |
| Expected increase in average salary of plan  members |       | 3.8      | %          | 3.5      | %          | 4.0       | %          | 4.7      | %          |

 

***Retirement benefit deficit***

 

The retirement benefitdeficit amount reported in the balance sheet, based on the AASB 119 *Employee Benefits* accounting calculations can be reconciledas follows:

 
| ** **                                       | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Present value of funded and unfunded obligations |       | 2,134            |       | 2,042                  |       | 2,139 |   | 2,025 |   | 2,132 |   | 2,039 |   | 1,915 |   | 2,041 |   | 1,931 |   | 2,132 |   |
| Fair value of plan assets                        |       | 1,709            |       | 1,654                  |       | 1,666 |   | 1,909 |   | 2,022 |   | 1,651 |   | 1,553 |   | 1,604 |   | 1,825 |   | 2,022 |   |
| **Net obligations**                              |       | (425             | )          | (388                   | )          | (473 | ) | (116 | ) | (110 | ) | (388 | ) | (362 | ) | (437 | ) | (106 | ) | (110 | ) |

 

***Superannuation expense***

 

The amountrecognised in the income statement is as follows:

 
| ** **                                      | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Current service cost                            |       | 57               |       | 59                     |       | 42 |   | 56 |   | 55 |   | 41 |   |
| Interest cost                                   |       | 98               |       | 106                    |       | 117 |   | 95 |   | 100 |   | 113 |   |
| Expected return of fund assets                  |       | (116             | )          | (128                   | )          | (153 | ) | (112 | ) | (121 | ) | (148 | ) |
| **Net defined benefit superannuation  expense** |       | 39               |       | 37                     |       | 6 |   | 39 |   | 34 |   | 6 |   |

 

271

----

 

**Note 35. Superannuationcommitments (continued)**

 

***Change in benefit obligation***

 

The change in thepresent value of the defined benefit obligation is as follows:

 
| ** **                                             | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|--------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                             | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Benefit obligation at the  beginning of the period** |       | 2,042            |       | 2,139                  |       | 1,915 |   | 2,041 |   |
| Current service cost                                   |       | 57               |       | 59                     |       | 56 |   | 55 |   |
| Interest cost                                          |       | 98               |       | 106                    |       | 95 |   | 100 |   |
| Additions through merger                               |       | —           |       | 53                     |       | 48 |   | — |   |
| Actuarial losses/(gains)                               |       | 125              |       | (112                   | )          | 113 |   | (96 | ) |
| Contributions by members                               |       | 19               |       | 18                     |       | 19 |   | 18 |   |
| Benefits paid                                          |       | (193             | )          | (177                   | )          | (186 | ) | (161 | ) |
| Exchange and other adjustments                         |       | (14              | )          | (44                    | )          | (21 | ) | (42 | ) |
| **Benefit obligation at the end of  the period**       |       | 2,134            |       | 2,042                  |       | 2,039 |   | 1,915 |   |
| **Funded status of plans:**                            |       |             |       |                   |       |   |   |   |   |
| Unfunded obligations(1)                                |       | 19               |       | 20                     |       | 19 |   | 20 |   |
| Wholly or partly funded obligations                    |       | 2,115            |       | 2,022                  |       | 2,020 |   | 1,895 |   |
|                                                   |       | 2,134            |       | 2,042                  |       | 2,039 |   | 1,915 |   |

 

----

(1)         Unfunded obligations relate to the UK medicalbenefits.

 

***Change in plan assets***

 

The change in thefair value of plan assets is as follows:

 
| ** **                                              | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|---------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Fair value of plan assets at  beginning of the year** |       | 1,654            |       | 1,666                  |       | 1,553 |   | 1,604 |   |
| Expected returns on plan assets                         |       | 116              |       | 128                    |       | 112 |   | 121 |   |
| Actuarial (losses)/gains                                |       | (3               | )          | (69                    | )          | (1 | ) | (66 | ) |
| **Actual returns on plan assets**                       |       | 113              |       | 59                     |       | 111 |   | 55 |   |
| Employer contributions                                  |       | 262              |       | 187                    |       | 257 |   | 180 |   |
| Additions through merger                                |       | —           |       | 45                     |       | 39 |   | — |   |
| Contributions by members                                |       | 19               |       | 18                     |       | 19 |   | 18 |   |
| Benefits paid                                           |       | (193             | )          | (177                   | )          | (186 | ) | (161 | ) |
| Contributions to the accumulation plan                  |       | (125             | )          | (104                   | )          | (125 | ) | (104 | ) |
| Exchange and other adjustments                          |       | (21              | )          | (40                    | )          | (17 | ) | (39 | ) |
| **Fair value of plan assets at end  of the year**       |       | 1,709            |       | 1,654                  |       | 1,651 |   | 1,553 |   |

 

***Assumptions used in the AASB 119 accounting calculations***

*** ***
| ** **                                           | ** ** | **Consolidated and Parent Entity** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **Australian**                                    | ** ** | **Overseas** | ** ** | **Australian** | ** ** | **Overseas** | ** ** |
| ** **                                           | ** ** | **Funds**                                         | ** ** | **Funds** | ** ** | **Fund** | ** ** | **Funds** | ** ** |
| Discount rate                                        |       | 5.0 - 5.1                                         | %          | 3.7 - 5.3 | % | 5.3 - 5.4 | % | 4.0 - 6.1 | % |
| Expected return on plan assets - active members      |       | 7.0 - 7.1                                         | %          | 6.0 - 6.1 | % | 7.2 - 7.4 | % | 5.7 - 6.4 | % |
| Expected return on plan assets – pensioners     |       | 8.2                                               | %          | 6.0 - 6.1 | % | 8.4 | % | 5.7 - 6.4 | % |
| Expected increase in average salary of plan  members |       | 3.5 - 4.5                                         | %          | 3.5 - 4.8 | % | 3.3 - 4.5 | % | 2.0 - 4.6 | % |
| Rate of increase for pensions                        |       | 2.5                                               | %          | 2.5 - 3.2 | % | 2.3 | % | 1.5 - 3.1 | % |
| Initial health care inflation                        |       | n/a                                               |       | 6.0 | % | n/a |   | 6.0 | % |
| Long term health care inflation                      |       | n/a                                               |       | 4.0 | % | n/a |   | 4.0 | % |

 

272

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 35. Superannuationcommitments (continued)**

 

In addition to thefinancial assumptions presented above, the pension mortality assumptions may alsohave a significant impact on measuring the net obligation. The averagemortality assumptions are age related and allowances are made for futuremortality improvements. The assumptions for our principal fund the WSSP for2010 are that a 60-year-old male pensioner is assumed to have a remaining lifeexpectancy of 30.2 and a 60-year-old female pensioner is assumed to have aremaining life expectancy of 34.5.

 

AASB 119 requiresthat the expected return on assets be based on assumptions about the expectedlong-term rate of return. The expected returns on assets were calculatedas the weighted average return based on the benchmark asset allocation andestimates of the expected future return in each sector in each asset class(consistent with the inflation assumption). The expected return on assets foractive members is net of tax and the expected return on pensioner assets isgross of tax.

 

***Experience adjustments***

 
| ** **                                 | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|--------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Experience adjustments on plan assets      |       | (3               | )          | (69                    | )          | (473 | ) | 125 |   | 134 |   | (1 | ) | (66 | ) | (454 | ) | 124 |   | 134 |   |
| Experience adjustments on plan liabilities |       | (125             | )          | 112                    |       | (64 | ) | (56 | ) | (145 | ) | (113 | ) | 96 |   | (56 | ) | (57 | ) | (145 | ) |

 

***Asset allocation***

 

The actual assetallocation at 30 September was:

 
| ** **         | ** ** | **Consolidated and Parent Entity** | ** ** |
|--------------------|------------|---------------------------------------------------|------------|
| ** **         | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| ** **         | ** ** | **Australian**                                    | ** ** | **Overseas** | ** ** | **Australian** | ** ** | **Overseas** | ** ** |
| ** **         | ** ** | **Funds**                                         | ** ** | **Funds** | ** ** | **Fund** | ** ** | **Funds** | ** ** |
| Cash               |       | 7                                                 | %          | 1 | % | 8 | % | 1 | % |
| Equity instruments |       | 55-66                                             | %          | 49-55 | % | 58 - 65 | % | 49 - 58 | % |
| Debt instruments   |       | 21-30                                             | %          | 44-51 | % | 17 - 30 | % | 41 - 51 | % |
| Property           |       | 4-6                                               | %          | — |   | 5 - 7 | % | — |   |
| Other assets       |       | 11                                                | %          | — |   | 10 | % | — |   |
|               |       | 100                                               | %          | 100 | % | 100 | % | 100 | % |

 

***Investments held in Westpac and related entities***

 
| ** **                                                   | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                   | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Value of plan assets invested in debt and equity  securities |       | 77               |       | 85                     |       | 67 |   | 80 |   |
| Value of plan assets invested in related parties  of Westpac |       | 12               |       | 12                     |       | 12 |   | 12 |   |
| **Total**                                                    |       | 89               |       | 97                     |       | 79 |   | 92 |   |

 

***Post-retirement health care***

 

The effect of a onepercentage point change in assumed health care trend rates, assuming all otherassumptions remain constant, would not be material on either the currentservice costs or the accumulated benefit obligation of the Westpac UK MedicalBenefits Scheme at 30 September 2010.

 

273

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**Note 36. Contingent liabilities,contingent assets and credit commitments**

 

The Group is a partyto financial instruments with off-balance sheet credit risk in the normalcourse of business to meet the financing needs of its customers and in managingits own risk profile. These financial instruments include commitments to extendcredit, bill endorsements, financial guarantees, standby letters of credit andunderwriting facilities.

 

The Group’s exposureto credit loss in the event of non-performance by the other party isrepresented by the contract or notional amount of those financial instruments.However, some commitments to extend credit and provide underwriting facilitiescan be cancelled or revoked at any time at the Group’s option.

 

The Group uses the samecredit policies in making commitments and conditional obligations as it doesfor on-balance sheet instruments.

 

The Group takescollateral where it is considered necessary to support both on- and off-balancesheet financial instruments with credit risk. The Group evaluates each customer’scredit worthiness on a case-by-case basis. The amount of collateral taken, ifdeemed necessary, on the provision of a financial facility is based onmanagement’s evaluation of the credit risk of the counterparty.

 

Off-balance sheetcredit-risk related financial instruments excluding derivatives at 30 September areas follows:

 
| ** **                                             | ** ** | **Contract or Notional Amount** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                             | ** ** | **Consolidated**                               | ** ** | **Parent Entity** | ** ** |
| ** **                                             | ** ** | **2010**                                       | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                             | ** ** | **$m**                                         | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Credit-risk related instruments**                    |       |                                           |       |   |   |   |   |   |   |
| Standby letters of credit and financial  guarantees(1) |       | 4,442                                          |       | 4,980 |   | 4,303 |   | 3,785 |   |
| Trade letters of credit(2)                             |       | 1,014                                          |       | 1,055 |   | 418 |   | 437 |   |
| Non-financial guarantees(3)                            |       | 7,230                                          |       | 6,788 |   | 7,037 |   | 6,536 |   |
| Commitments to extend credit(4)                        |       | 140,221                                        |       | 127,295 |   | 132,301 |   | 94,906 |   |
| Other commitments(5)                                   |       | 351                                            |       | 2,370 |   | 351 |   | 1,207 |   |
| **Total credit-risk related  instruments**             |       | 153,258                                        |       | 142,488 |   | 144,410 |   | 106,871 |   |

 

----

(1)         Includes $2.3 billion (2009 $2.1 billion) cashcollateralised guarantees.

(2)         Trade letters of credit are supported by an underlyingshipment of goods and export trade letters of credit are backed by aconfirmatory letter from another bank.

(3)         Non-financial guarantees include other trade-relatedletters of credit and obligations backing the performance of commercialcontracts.

(4)         In addition to the commercial commitments disclosedabove at 30 September 2010, the Group offered $4.8 billion (2009 $6.5billion) of facilities to customers, which had not yet been accepted.

(5)         Other commitments include underwriter facilities andcommitments with certain drawdowns.

 
| ** **                                         | ** ** | **Consolidated**   | ** ** |
|----------------------------------------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **Less Than** | ** ** | **Between 1** | ** ** | **Between 3** | ** ** | **Over** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **1 Year**    | ** ** | **and 3 Years** | ** ** | **and 5 Years** | ** ** | **5 Years** | ** ** | **Total** | ** ** |
| ** **                                         | ** ** | **$m**             | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **2010**                                           |       |               |       |   |   |   |   |   | ** ** | ** ** | ** ** |
| Standby letters of credit and financial guarantees |       | 1,142              |       | 1,126 |   | 102 |   | 2,072 |   | 4,442 |   |
| Trade letters of credit                            |       | 1,014              |       | — |   | — |   | — |   | 1,014 |   |
| Non-financial guarantees                           |       | 253                |       | 3,212 |   | 397 |   | 3,368 |   | 7,230 |   |
| Commitments to extend credit                       |       | 21,269             |       | 43,660 |   | 5,204 |   | 70,088 |   | 140,221 |   |
| Other commitments                                  |       | 243                |       | — |   | 12 |   | 96 |   | 351 |   |
| **Total commercial commitments**                   |       | 23,921             |       | 47,998 |   | 5,715 |   | 75,624 |   | 153,258 |   |

 

274

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 36. Contingent liabilities,contingent assets and credit commitments (continued)**

 

***Contingent assets***

 

The creditcommitments shown in the table above also constitute assets. These commitmentswould be classified as loans and other assets in the balance sheet on thecontingent event occurring.

 

***Additional liabilities and commitments***

 

*Legislative liabilities*

 

The Group had thefollowing assessed liabilities as at 30 September 2010:

 

·         $18 million (2009 $16 million) based on an actuarial assessment as aself-insurer under the *Workers’ Compensation Act 1987* and the *Workplace Injury Management and Workers’Compensation Act 1998*(New South Wales);

·         $9 million (2009 $8 million) based on actuarial assessment as aself-insurer under the *Accident Compensation Act 1985* (Victoria); and

·         $2 million (2009 $2 million) based on an actuarial assessment as aself-insurer under the *Workers’ Compensation and Rehabilitation Act 2003* (Queensland).

 

Adequate provisionhas been made for these liabilities in the provision for annual leave and otherstaff benefits (refer to Note 20).

 

***Litigation***

 

Contingentliabilities exist in respect of actual and potential claims and proceedings. Anassessment of the Group’s likely loss has been made on a case-by-case basis forthe purpose of the financial statements and specific provisions have been madewhere appropriate.

 

Westpac is awarefrom reports in the media and other public statements that class actionproceedings relating to exception fees have been commenced against oneAustralian bank, and may be commenced against other Australian banks. At thisstage no such proceedings have been commenced against Westpac.

 

On 23 December 2009,Westpac reached a settlement with the New Zealand Commissioner of InlandRevenue (CIR) of the previously reported proceedings relating to ninestructured finance transactions undertaken between 1998 and 2002. Under thesettlement, Westpac agreed to pay the CIR 80% of the full amount of primary taxand interest and with no imposition of penalties. All proceedings have beendiscontinued and the other terms of the settlement are subjectto confidentiality. Westpac provided in full for the primary tax andinterest claimed by the CIR as part of its 2009 result, and consequently therehas been a write back through income tax expense in the year ended 30 September 2010.

 

Westpac was one of20 defendant banks named in proceedings concerning the Bell Group of companies.The proceedings were brought by the liquidators of several Bell Group companieswho challenged the defendant banks’ entitlement to receive the proceeds ofrealisation of Bell Group assets in the early 1990s. Judgment was delivered on28 October 2008 and final orders were handed down on 30 April 2009.Westpac, along with the other defendant banks, was found liable to repay itsshare of the monies received from the Bell Group plus interest. Westpac isentitled to prove a claim in the liquidation of the Bell Group, but the amountof its recovery, although anticipated to be considerable, is uncertain at thisstage. Before allowance is made for recoveries of money in the liquidation,Westpac’s liability was approximately $188 million after taking intoaccount its arrangements with the other banks. As a result of the judgment,Westpac paid this amount into court. The banks have appealed the decision. Nofurther information is disclosed due to the sensitive nature ofthis matter.

 

*Liquidity support*

 

Westpac is aparticipant to the Interbank Deposit Agreement along with three otherAustralian banks. In accordance with the Interbank Deposit Agreement, a depositnotice may be served upon the other participants by a bank which isexperiencing liquidity problems. The other participants are then required todeposit equal amounts of up to $2 billion each for a period of 30 days. Atthe end of 30 days the deposit holder has the option to repay the deposit incash or by way of assignment of mortgages to the value of the deposit.

 

275

----

 

**Note 36. Contingent liabilities,contingent assets and credit commitments (continued)**

 

*Assets pledged*

 

As part of standardterms of transaction with other financial institutions, the Group and ParentEntity have provided collateral to secure its liabilities. The carrying valueof financial assets pledged as collateral to secure liabilities is:

 
| ** **                                      | ** ** | **Group** | ** ** | **Parent Entity** | ** ** |
|-------------------------------------------------|------------|-----------|------------|------------------------|------------|
| ** **                                      | ** ** | **2010**  | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **$m**    | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** |
| Cash                                            |       | 7,707     |       | 4,966                  |       | 7,707 |   | 4,375 |   |
| Cash deposit on stock borrowed                  |       | 132       |       | 65                     |       | — |   | — |   |
| Securities (including certificates of deposit)  |       | 336       |       | 6,249                  |       | 336 |   | 4,240 |   |
| **Total amount pledged to secure  liabilities** |       | 8,175     |       | 11,280                 |       | 8,043 |   | 8,615 |   |

 

*Collateral received*

 

All collateralreceived from counterparties to secure liabilities, besides residentialmortgages, is received in the form of cash or securities. Cash and securitiesheld as collateral, recognised on the Group’s balance sheet as at30 September 2010 was $1,410 million (2009 $2,454 million).

 

*Parent Entity guarantees and undertakings*

 

Excluded from theconsolidated amounts disclosed above are the following guarantees and undertakingsextended to entities in the Group by the Parent Entity:

 

·         issue of letters of comfort in respect of certain subsidiaries in thenormal course of business. The letters recognise that Westpac has aresponsibility to ensure that those subsidiaries continue to meet theirobligations; and

·         guarantees made by the Group to its Westpac Bank-PNG-Limited and WestpacBank Samoa Limited subsidiaries that support loans made to customers in thosetwo jurisdictions, to the extent that the loans exceed prescribed limits.

 

**Note 37. Fund managementactivities**

 

Certain controlledentities within the Group conduct investment management and other fiduciaryactivities as responsible entity or manager on behalf of individuals, trusts,retirement benefit plans and other institutions. These activities involve themanagement of assets in investment schemes and superannuation funds, and theholding or placing of assets on behalf of third parties.

 

Where controlledentities, as responsible entities, incur liabilities in respect of theseactivities, a right of indemnity exists against the assets of the applicabletrusts. As these assets are sufficient to cover liabilities, and it is notprobable that the controlled entities will be required to settle them, theliabilities are not included in the consolidated financial statements.

 

The Group alsomanages life insurance statutory fund assets that are included in theconsolidated financial statements.

 

276

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 38. Group entities**

 

The consolidatedGroup as at 30 September 2010 includes the following controlled entities:

 
| **Name**                                                    | ** ** | **Country of Incorporation** |
|-------------------------------------------------------------|------------|----------------------------------------|
| **Westpac Banking Corporation**                             |       | Australia                              |
| **1925 Advances Pty Limited**                               |       | Australia                              |
| General Credit Holdings Pty Limited                         |       | Australia                              |
| General Credits Pty Limited                                 |       | Australia                              |
| G.C.L. Investments Pty Limited                              |       | Australia                              |
| **Ascalon Capital Managers Limited**(2),(18)                |       | Australia                              |
| TPC Services Australia Pty Limited(2)                       |       | Australia                              |
| **Ascalon Funds Seed Pool Trust**(18)                       |       | Australia                              |
| **Asgard Wealth Solutions Limited**(18)                     |       | Australia                              |
| Asgard Capital Management Limited                           |       | Australia                              |
| Hitton Pty Limited                                          |       | Australia                              |
| Pact Accountants Investment Group Pty Limited               |       | Australia                              |
| Securitor Financial Group Limited                           |       | Australia                              |
| **Australian Loan Processing Security Company Pty Limited** |       | Australia                              |
| Australian Loan Processing Security Trust                   |       | Australia                              |
| **Beech Trust**                                             |       | Australia                              |
| **Bill Acceptance Corporation Limited**                     |       | Australia                              |
| Mortgage Management Limited                                 |       | Australia                              |
| **BLE Capital Limited**                                     |       | Australia                              |
| BLE Capital Investments Pty Limited                         |       | Australia                              |
| BLE Development Pty Limited                                 |       | Australia                              |
| BLE Holdings Pty Limited                                    |       | Australia                              |
| BLE Capital (NZ) Limited(4)                                 |       | New  Zealand                           |
| **Buchelin Pty Limited**(18)                                |       | Australia                              |
| **Canberra Advance Property Limited**(18)                   |       | Australia                              |
| **Castlereagh Trust**                                       |       | Australia                              |
| **CBA Limited**                                             |       | Australia                              |
| Belliston Pty Limited(15)                                   |       | Australia                              |
| **Challenge Limited**                                       |       | Australia                              |
| Challenge Finance Pty Limited                               |       | Australia                              |
| **Crusade CP Management Pty Limited**(18)                   |       | Australia                              |
| **Crusade CP No.1 Pty Limited**(18)                         |       | Australia                              |
| **Crusade CP Trust No. 41**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 44**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 48**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 49**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 50**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 52**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 53**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 54**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 55**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 56**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 57**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 58**(18)                        |       | Australia                              |
| **Crusade CP Trust No. 60**(18)                        |       | Australia                              |
| **Crusade Management Limited**(18)                          |       | Australia                              |
| Crusade ABS Series 2008-1                              |       | Australia                              |
| Crusade ABS Series 2008-2                              |       | Australia                              |
| Crusade Euro Trust 1E of 2004                               |       | Australia                              |
| Crusade Euro Trust 1E of 2006                               |       | Australia                              |
| Crusade Euro Trust 1E of 2007                               |       | Australia                              |
| Crusade Global Trust 1 of 2003                              |       | Australia                              |
| Crusade Global Trust 2 of 2003                              |       | Australia                              |
| Crusade Global Trust 1 of 2004                              |       | Australia                              |
| Crusade Global Trust 2 of 2004                              |       | Australia                              |
| Crusade Global Trust 1 of 2005                              |       | Australia                              |
| Crusade Global Trust 2 of 2005                              |       | Australia                              |
| Crusade Global Trust 1 of 2006                              |       | Australia                              |
| Crusade Global Trust 2 of 2006                              |       | Australia                              |
| Crusade Global Trust 1 of 2007                              |       | Australia                              |
| Crusade Trust 1A of 2005                                    |       | Australia                              |
| **Crusade Trust 2P of 2008**(18)                            |       | Australia                              |
| **Danaby Pty Limited**(18)                                  |       | Australia                              |
| **Dragon Investments Service Limited**(18)                  |       | Australia                              |
| **Dysty Pty Limited**(18)                                   |       | Australia                              |
| **FAI No. 2 Trust**                                    |       | Australia                              |
| **Gemini Trust**                                            |       | Australia                              |
| **Hastings Management Pty Limited**                         |       | Australia                              |
| Hastings Funds Management Limited                           |       | Australia                              |
| Australian Infrastructure Fund International 1 Pty  Limited |       | Australia                              |
| Hastings Forestry Investments Limited                       |       | New  Zealand                           |
| Hastings Forests Australia Pty Limited                      |       | Australia                              |
| Hastings Funds Management (UK) Limited                      |       | UK                                     |
| Hastings Funds Management (USA) Inc.                        |       | USA                                    |
| Hastings Advisers, LLC                                      |       | USA                                    |
| Hastings Investment LLC(2)                                  |       | USA                                    |
| Hastings Investment Capital, LP(2),(10)                     |       | USA                                    |
| Hastings Private Equity Fund IIA Pty Limited                |       | Australia                              |
| Hastings Private Equity Fund IIB Pty Limited                |       | Australia                              |
| TIF International 1 Pty Limited                             |       | Australia                              |
| Westpac Asset Services Pty Limited                          |       | Australia                              |
| **Hickory Trust**                                           |       | Australia                              |
| **Nationwide Management Pty Limited**(18)                   |       | Australia                              |
| St.George Custodial Pty Limited                             |       | Australia                              |
| **Orion Trust**                                             |       | Australia                              |
| **Partnership Pacific Limited**                             |       | Australia                              |
| Partnership Pacific Securities Limited                      |       | Australia                              |
| **Phoenix Trust**                                           |       | Australia                              |
| **RESI-Statewide Mortgage Corporation Pty Limited**         |       | Australia                              |
| **RMS Warehouse Trust 2007-1**                              |       | Australia                              |
| **Series 2005-1G WST Trust**                           |       | Australia                              |
| **Series 2007-1G WST Trust**                           |       | Australia                              |
| **Series 2008-1M WST Trust**                           |       | Australia                              |
| **Series 2009-1 WST Trust**(2)                         |       | Australia                              |
| **Sixty Martin Place (Holdings) Pty Limited**               |       | Australia                              |
| 1925 (Commercial) Pty Limited                               |       | Australia                              |
| 1925 (Industrial) Pty Limited                               |       | Australia                              |
| Athena Finance Pty Limited                                  |       | Australia                              |
| Enfield Downs Pty Limited                                   |       | Australia                              |
| Halcyon Securities Limited                                  |       | Australia                              |
| Infrastructure Australia (No.1) Limited                     |       | Australia                              |
| Tasman Funding No.1 Limited(4)                              |       | New  Zealand                           |
| Tasman Funding No.2 Limited(4)                              |       | New  Zealand                           |
| PF No. 2(4),(7)                                        |       | New  Zealand                           |
| Westpac NZ Funding Limited(4)                               |       | New  Zealand                           |
| Infrastructure Australia (No.3) Limited                     |       | Australia                              |

 

277

----

 

**Note 38. Group entities(continued)**

 
| **Name**                                                  | ** ** | **Country of Incorporation** |
|-----------------------------------------------------------|------------|----------------------------------------|
| Infrastructure Australia (No.4) Limited                   |       | Australia                              |
| Oakjet Pty Limited                                        |       | Australia                              |
| Packaging Properties 1 Pty Limited                        |       | Australia                              |
| Packaging Properties 2 Pty Limited                        |       | Australia                              |
| Packaging Properties 3 Pty Limited                        |       | Australia                              |
| Pashley Investments Pty Limited                           |       | Australia                              |
| Westpac Investment Vehicle No.3 Pty Limited(3)            |       | Australia                              |
| Sallmoor Pty Limited                                      |       | Australia                              |
| Sarnia Pty Limited(9)                                     |       | Australia                              |
| Teuton Pty Limited                                        |       | Australia                              |
| Westpac Administration Pty Limited                        |       | Australia                              |
| Westpac Asian Lending Pty Limited                         |       | Australia                              |
| Tasman LLC                                                |       | USA                                    |
| Westpac Debt Securities Pty Limited                       |       | Australia                              |
| Westpac Direct Equity Investments Pty Limited             |       | Australia                              |
| Westpac Equipment Finance Limited                         |       | Australia                              |
| Westpac Equipment Finance (No.1) Pty Limited(11)          |       | Australia                              |
| Westpac Group Investments Australia Pty Limited           |       | Australia                              |
| W1 Investments Pty Limited                                |       | Australia                              |
| Mayfair Australia Investments Limited                     |       | Jersey                                 |
| Westpac Investment Vehicle Pty Limited                    |       | Australia                              |
| Westpac Funds Financing Holdco Pty Limited(3)             |       | Australia                              |
| Westpac Funds Financing Pty Limited                       |       | Australia                              |
| Westpac Investment Vehicle No.2 Pty Limited(12)           |       | Australia                              |
| Westpac Cook Cove Trust I                                 |       | Australia                              |
| Westpac Cook Cove Trust II                                |       | Australia                              |
| Westpac Residential Real Estate Investment Trust I        |       | Australia                              |
| Real Estate Investment Trust B                            |       | Australia                              |
| Westpac Residential Real Estate Investment Trust  II      |       | Australia                              |
| Westpac Investment Vehicle No.4 Pty Limited               |       | Australia                              |
| Westpac Residential Property Trust                        |       | Australia                              |
| First Residential Property Trust                          |       | Australia                              |
| Westpac Pacific Limited Partnership                       |       | Australia                              |
| Westpac Syndications Management Pty Limited               |       | Australia                              |
| **St.George (Note Issuing Vehicle Only) Pty Limited**(18) |       | Australia                              |
| **St.George Business Finance Pty Limited**(18)            |       | Australia                              |
| **St.George Equity Finance Limited**(18)                  |       | Australia                              |
| **St.George Finance Holdings Limited**(18)                |       | Australia                              |
| St.George Finance Limited                                 |       | Australia                              |
| St.George Motor Finance Limited(6)                        |       | Australia                              |
| **St.George Financial Investments 1 Pty Limited**(18)     |       | Australia                              |
| **St.George Financial Services Limited**(18)              |       | Australia                              |
| **St.George Group Holdings Pty Limited**(18)              |       | Australia                              |
| St.George WEL Pty Limited                                 |       | Australia                              |
| Assirt Software Pty Limited                               |       | Australia                              |
| St.George APL Pty Limited                                 |       | Australia                              |
| **St.George Insurance Australia Pty Limited**(18)         |       | Australia                              |
| **St.George Life Limited**(18)                            |       | Australia                              |
| **St.George New Zealand Limited**(18)                     |       | New  Zealand                           |
| **St.George Procurement Management Pty Limited**(18)      |       | Australia                              |
| Advance Asset Management Limited                          |       | Australia                              |
| **St.George Security Holdings Pty Limited**(18)           |       | Australia                              |
| **St.George Wealth Management Pty Limited**(18)           |       | Australia                              |
| **Sydney Capital Corp Inc**(17)                           |       | USA                                    |
| **Tasman Pacific Investments Pty Limited**                |       | Australia                              |
| **Tavarua Funding Trust IV**                              |       | USA                                    |
| **The Mortgage Company Pty Limited**                      |       | Australia                              |
| **Value Nominees Pty Limited**(18)                        |       | Australia                              |
| **Waratah Receivables Corp Pty Limited**(17)              |       | Australia                              |
| **Waratah Securities Australia Limited**(17)              |       | Australia                              |
| **Westpac Bank of Tonga**                                 |       | Tonga                                  |
| **Westpac Bank Samoa Limited**(6)                         |       | Samoa                                  |
| **Westpac Bank-PNG-Limited**(6)                           |       | Papua  New Guinea                      |
| **Westpac Capital Corporation**                           |       | USA                                    |
| **Westpac Capital Holdings Inc.**                         |       | USA                                    |
| Westpac Capital Trust III                                 |       | USA                                    |
| Westpac Capital Trust IV                                  |       | USA                                    |
| **Westpac Delta LLC**                                     |       | USA                                    |
| **Westpac Equity Holdings Pty Limited**                   |       | Australia                              |
| Altitude Administration Pty Limited                       |       | Australia                              |
| Westpac Altitude Rewards Trust                            |       | Australia                              |
| Altitude Rewards Pty Limited                              |       | Australia                              |
| Autodirect Pty Limited                                    |       | Australia                              |
| Hastings Group Pty Limited                                |       | Australia                              |
| Qvalent Pty Limited                                       |       | Australia                              |
| RAMS Financial Group Pty Limited                          |       | Australia                              |
| Westpac Financial Consultants Limited                     |       | Australia                              |
| Westpac Financial Services Group Limited                  |       | Australia                              |
| BT Financial Group (NZ) Limited                           |       | New  Zealand                           |
| BT Funds Management (NZ) Limited                          |       | New  Zealand                           |
| BT Financial Group Pty Limited                            |       | Australia                              |
| BT Australia Pty Limited                                  |       | Australia                              |
| BT Australia Corporate Services Pty Limited               |       | Australia                              |
| BT Finance Pty Limited                                    |       | Australia                              |
| BT Nominees Pty Limited                                   |       | Australia                              |
| Chifley Services Pty Limited                              |       | Australia                              |
| BT Funds Management Limited                               |       | Australia                              |
| BT Finance & Investments Pty Limited             |       | Australia                              |
| Oniston Pty Limited                                       |       | Australia                              |
| BT Life Limited                                           |       | Australia                              |
| BT Portfolio Services Limited                             |       | Australia                              |
| Magnitude Group Pty Limited                               |       | Australia                              |
| BT Funds Management No.2 Limited                          |       | Australia                              |
| BT Investment Management No.2 Limited                     |       | Australia                              |
| BT Investment Management Limited(6)                       |       | Australia                              |
| BT Investment Management (RE) Limited                     |       | Australia                              |
| Westpac Custodian Nominees Limited                        |       | Australia                              |
| Westpac Financial Services Group-NZ-Limited               |       | New  Zealand                           |
| Westpac Life-NZ-Limited                                   |       | New  Zealand                           |
| Westpac Nominees-NZ-Limited                               |       | New  Zealand                           |
| Westpac Superannuation Nominees-NZ-Limited                |       | New  Zealand                           |
| Westpac Financial Services Limited                        |       | Australia                              |
| Westpac Life Insurance Services Limited                   |       | Australia                              |
| Westpac RE Limited(5)                                     |       | Australia                              |
| Westpac Securities Administration Limited                 |       | Australia                              |
| Westpac General Insurance Services Limited                |       | Australia                              |

 

278

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 38. Group entities(continued)**

 
| **Name**                                             | ** ** | **Country of Incorporation** |
|------------------------------------------------------|------------|----------------------------------------|
| Westpac Equity Pty Limited                           |       | Australia                              |
| Westpac General Insurance Limited                    |       | Australia                              |
| Westpac Lenders Mortgage Insurance Limited           |       | Australia                              |
| Westpac Private Equity Pty Limited                   |       | Australia                              |
| Westpac Securities Limited                           |       | Australia                              |
| Net Nominees Limited                                 |       | Australia                              |
| Westpac Securitisation Management Pty Limited        |       | Australia                              |
| **Westpac Europe Limited**                           |       | UK                                     |
| **Westpac Financial Holdings Pty Limited**           |       | Australia                              |
| BT Securities Limited                                |       | Australia                              |
| BT (Queensland) Pty Limited                          |       | Australia                              |
| **Westpac Funding Holdings Pty Limited**             |       | Australia                              |
| Tavarua Funding Trust III                            |       | USA                                    |
| **Westpac Investments U.K. Limited**                 |       | UK                                     |
| Codrington S.a.r.l.                                  |       | Luxembourg                             |
| **Westpac Leasing Nominees-Vic.-Pty Limited**        |       | Australia                              |
| **Westpac Leasing Pty Limited**                      |       | Australia                              |
| **Westpac Matching Gifts Limited**                   |       | Australia                              |
| **Westpac Overseas Holdings No. 2 Pty Limited** |       | Australia                              |
| Westpac New Zealand Group Limited                    |       | New  Zealand                           |
| Westpac New Zealand Limited                          |       | New  Zealand                           |
| Westpac NZ Operations Limited                        |       | New  Zealand                           |
| Number 120 Limited(2)                                |       | New  Zealand                           |
| The Home Mortgage Company Limited                    |       | New  Zealand                           |
| The Warehouse Financial Services Limited(6)          |       | New  Zealand                           |
| Westpac (NZ) Investments Limited                     |       | New  Zealand                           |
| Westpac Securities NZ Limited                        |       | New  Zealand                           |
| Westpac NZ Securitisation Holdings Limited(6),  (13) |       | New  Zealand                           |
| Westpac NZ Securitisation Limited                    |       | New  Zealand                           |
| Westpac Term PIE Fund(17)                            |       | New  Zealand                           |
| **Westpac Overseas Holdings Pty Limited**            |       | Australia                              |
| A.G.C. (Pacific) Limited                             |       | Papua  New Guinea                      |
| Westpac Americas Inc.                                |       | USA                                    |
| Westpac Investment Capital Corporation               |       | USA                                    |
| Westpac USA Inc.                                     |       | USA                                    |
| Southern Cross Inc.                                  |       | USA                                    |
| Westpac Finance (HK) Limited                         |       | Hong  Kong                             |
| WFAL No.1 Loan Trust                                 |       | Hong  Kong                             |
| Westpac Group Investment-NZ-Limited                  |       | New  Zealand                           |
| Westpac Holdings-NZ-Limited(19)                      |       | New  Zealand                           |
| HLT Custodian Trust                                  |       | New  Zealand                           |
| MIF Custodian Trust                                  |       | New  Zealand                           |
| TBNZ Investments (UK) Limited                        |       | UK                                     |
| Westpac Capital-NZ-Limited(20)                       |       | New  Zealand                           |
| Aotearoa Financial Services Limited                  |       | New  Zealand                           |
| Westpac Equity Investments NZ Limited                |       | New  Zealand                           |
| Westpac Securities Inc.                              |       | USA                                    |
| Westpac Singapore Limited                            |       | Singapore                              |
| **Westpac Properties Limited**                       |       | Australia                              |
| **Westpac Securitisation Holdings Pty Limited**      |       | Australia                              |
| **Westpac Structured Products Limited**              |       | Australia                              |
| **Westpac TPS Trust**                                |       | Australia                              |
| **Westpac Unit Trust**                               |       | Australia                              |

 

279

----

 

**Note 38. Group entities(continued)**

 

----

***Notes***

 
| (1)    | Controlled entities shown in bold type are  owned directly by Westpac Banking Corporation (WBC). Overseas companies  predominantly carry on business in the country of incorporation. For  unincorporated entities, ‘Country of Incorporation’ refers to the country  where business is carried on. The financial years of all controlled entities  are the same as that of Westpac. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | The following controlled entities were  incorporated, formed or acquired during the period 1 October 2009 to 30  September 2010:                                                                                                                                                                                                                                                     |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | Ascalon Capital Managers Limited and its  controlled entity TPC Services Australia Pty Limited | Acquired |   | 13 November 2009 |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | Hastings Investment LLC | Created |   | 5 May 2010 |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | Hastings Investment Capital, LP | Created |   | 5 May 2010 |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | Series 2009-1 WST Trust | Created |   | 16 December 2009 |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | Number 120 Limited | Incorporated |   | 11 February 2010 |
| (3)    | The following controlled entities changed  their ownership during the period 1 October 2009 to 30 September 2010:                                                                                                                                                                                                                                                                    |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | Westpac Funds Financing Holdco Pty Limited |   |   |   | 24 February 2010 |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | Westpac Investment Vehicle No.3 Pty Limited |   |   |   | 1 September 2010 |
| (4)    | The following controlled entities have been  liquidated during the period 1 October 2009 to 30 September 2010  but not removed from New Zealand companies register:                                                                                                                                                                                                             |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | BLE Capital (NZ) Limited |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | Tasman Funding No. 1 Limited |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | Tasman Funding No. 2 Limited |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | PF No. 2 |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | Westpac NZ Funding Limited |
| (5)    | The following controlled entities changed  their name during the period 1 October 2009 to 30 September 2010:                                                                                                                                                                                                                                                                         |
|   | ·                                                                                                                                                                                                                                                                                                                                                                                         | BT Investment Management No. 3 Limited                         to |   | Westpac RE Limited |   | 24 March 2010 |
| (6)    | All entities listed in this note are wholly  owned controlled entities except the following:                                                                                                                                                                                                                                                                                                   |
|        |                                                                                                                                                                                                                                                                                                                                                                                                |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                 | ** ** | **Percentage Owned** | ** ** |
|--------------------------------------------|------------|---------------------------|------------|
| ** **                                 | ** ** | **2010**                  | ** ** | **2009** | ** ** |
| BT Investment Management Limited           |       | 60.0                      | %          | 60.0 | % |
| The Warehouse Financial Services Limited   |       | 51.0                      | %          | 51.0 | % |
| Westpac Bank-PNG-Limited                   |       | 89.9                      | %          | 89.9 | % |
| Westpac Bank Samoa Limited                 |       | 93.5                      | %          | 93.5 | % |
| Westpac NZ Securitisation Holdings Limited |       | 19.0                      | %          | 19.0 | % |
| St.George Motor Finance Limited            |       | 75.0                      | %          | 75.0 | % |

 
| (7)  | 50.0% of the equity in PF No.2 is owned by  Tasman Funding No.1 Limited. The remaining 50.0% is owned by Tasman Funding  No.2 Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (8)  | A.F.G Insurances Limited in its present form  ceased to be controlled by WBC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (9)  | 50.0% of the equity in Sarnia Pty Limited is  held directly by Sixty Martin Place (Holdings) Pty Limited. The remaining  50.0% is held directly by WBC.                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (10) | 1.0% of the equity in Hastings Investment  Capital, LP is held directly by Hastings Funds Management (USA). The  remaining 99.0% is held directly by Westpac Investment Capital Corporation.  Hastings Investment LLC is the general partner.                                                                                                                                                                                                                                                                                                                                                                        |
| (11) | 5.0% of the equity in Westpac Equipment  Finance (No.1) Pty Limited is held directly by Teuton Pty Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (12) | 0.1% of the equity in Westpac Investment  Vehicle No.2 Pty Limited is held directly by Westpac Holdings-NZ-Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (13) | Westpac NZ Securitisation Holdings Limited  (WNZSHL) and its wholly-owned subsidiary company, Westpac NZ Securitisation Limited  (WNZSL), were incorporated on 14 October 2008. The NZ Banking Group,  through its subsidiaries, Westpac NZ Operations Limited (9.5%) and Westpac  Holdings —NZ- Limited (9.5%), has a total qualifying interest of 19% in  WNZSHL. Westpac New Zealand is considered to control both WNZSHL and WNZSL  based on contractual arrangements put in place, and as such both WNZSHL and  WNZSL are consolidated within the financial statements of the NZ Banking  Group. |
| (14) | The following unit trusts have been  consolidated where ownership has exceeded 50.0%. BT Wholesale Partner Funds  Wholesale Multi-Manager Growth Fund, which ceased to be controlled by WBC  during the year, is included below for comparative purposes.                                                                                                                                                                                                                                                                                                                                                            |

 
| ** **                                                        | ** ** | **Percentage Owned** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                        | ** ** | **Balance Date**     | ** ** | **2010** | ** ** | **2009** | ** ** |
| BT Wholesale Partner Funds Wholesale Multi-Manager  Growth Fund   |       | 30 June                   |       | 49.55 | % | 50.25 | % |
| BT Enhanced Fixed Interest Sector Trust                           |       | 30 September              |       | 100.00 | % | 100.00 | % |
| BT Ethical Share Fund                                             |       | 30 June                   |       | 85.41 | % | 83.95 | % |
| BT Institutional Conservative Growth PST                          |       | 30 September              |       | 66.67 | % | 100.00 | % |
| BT Institutional Enhanced Australian Shares Fund                  |       | 30 September              |       | 99.98 | % | 99.98 | % |
| BT Institutional Enhanced Fixed Interest Fund                     |       | 30 September              |       | 93.26 | % | 91.75 | % |
| BT Institutional Enhanced Global Fixed Interest  Fund             |       | 30 September              |       | 50.52 | % | 62.26 | % |
| BT Institutional Enhanced Property Securities Fund                |       | 30 September              |       | 74.76 | % | 80.22 | % |
| BT Institutional Global Share Fund                                |       | 30 September              |       | 98.48 | % | 98.07 | % |
| BT Institutional Stable Growth PST                                |       | 30 June                   |       | 100.00 | % | 100.00 | % |
| BT Wholesale Active Balanced Fund                                 |       | 30 June                   |       | 61.49 | % | 53.86 | % |
| BT Wholesale Partner Funds Wholesale Multi-Manager  Balanced Fund |       | 30 June                   |       | 56.82 | % | 56.64 | % |

 

280

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 38. Group entities(continued)**

 

(15)            54.1% of the equity of Belliston Pty Limited is helddirectly by CBA Limited. 45.9% of the equity is held directly by Westpac EquityHoldings Pty Limited.

(16)            The following controlled entities ceased to becontrolled or were disposed of during the period 1 October 2009 to 30 September 2010:
| · | 1925 House Pty Limited                                            |   | Deregistered |   | 16 December 2009  |
|--------|-------------------------------------------------------------------|--------|--------------|--------|------------------------|
| · | 1925 (Insurance Premium Funding) Pty Limited                      |   | Deregistered |   | 15 March 2010     |
| · | 1925 (Properties) Pty Limited                                     |   | Deregistered |   | 24 February 2010  |
| · | A.C.N 001 231 027 Pty Ltd                                         |   | Deregistered |   | 1 June 2010       |
| · | Advance Leasing Limited                                           |   | Deregistered |   | 6 September 2010  |
| · | A.F.G Insurances Limited(8)                                       |   | Ceased       |   | 30 September 2010 |
| · | AGRI Private Capital Management Limited                           |   | Struck off   |   | 30 March 2010     |
| · | Armour Securitisation Pty Limited                                 |   | Deregistered |   | 4 November 2009   |
| · | Brenmar Holdings Pty Limited                                      |   | Deregistered |   | 30 June 2010      |
| · | Castlereagh Pacific Investments Pty Limited                       |   | Deregistered |   | 6 September 2010  |
| · | Challenge Funds Management Pty Limited                            |   | Deregistered |   | 23 September 2010 |
| · | Challenge Information Technology Pty Limited                      |   | Deregistered |   | 15 March 2010     |
| · | Colmso Pty Limited                                                |   | Deregistered |   | 8 March 2010      |
| · | Colmtea Pty Limited                                               |   | Deregistered |   | 11 February 2010  |
| · | Como Properties Pty Limited                                       |   | Deregistered |   | 1 August 2010     |
| · | Comserv (No. 3011) Pty Limited                               |   | Deregistered |   | 28 July 2010      |
| · | Developmental Learning Centres Pty Limited                        |   | Sold         |   | 30 October 2009   |
| · | Hargrave Investments Pty Limited                                  |   | Deregistered |   | 26 April 2010     |
| · | Jacaranda Trust                                                   |   | Terminated   |   | 30 September 2010 |
| · | Minami Investments Pty Limited                                    |   | Deregistered |   | 29 August 2010    |
| · | PersonalDirect Limited                                            |   | Deregistered |   | 8 March 2010      |
| · | Secure Australian Facilities Environment  Partnership Pty Limited |   | Deregistered |   | 27 June 2010      |
| · | St.George Bank Limited(18)                                        |   | Deregistered |   | 1 March 2010      |
| · | St.George Bank Employee Share Trust                               |   | Terminated   |   | 1 April 2010      |
| · | St.George Commercial Credit Corporation  Limited                  |   | Deregistered |   | 25 November 2009  |
| · | St.George Crusade Investment Pty Limited                          |   | Deregistered |   | 19 April 2010     |
| · | St.George Dragon Investment Pty Limited                           |   | Deregistered |   | 24 February 2010  |
| · | St.George Financial Investments New Zealand  Limited              |   | Struck off   |   | 10 September 2010 |
| · | St.George Management Services Pty Limited                         |   | Deregistered |   | 15 November 2009  |
| · | The Exchange Plaza Trust                                          |   | Terminated   |   | 14 July 2010      |
| · | The Swan Trust                                                    |   | Terminated   |   | 4 August 2010     |
| · | Victor Finance Pty Limited                                        |   | Deregistered |   | 2 September 2010  |
| · | Victor Funding Pty Limited                                        |   | Deregistered |   | 23 September 2010 |
| · | Votraint No.1182 Pty Limited                                      |   | Deregistered |   | 4 July 2010       |
| · | VS&L Insurance Agency Pty Limited                             |   | Deregistered |   | 30 December 2009  |
| · | VS&L Services Pty Limited                                     |   | Deregistered |   | 21 October 2009   |
| · | Waratah Receivables Corporation NZ Limited                        |   | Struck off   |   | 23 October 2009   |
| · | Westpac Funds Management Limited                                  |   | Sold         |   | 30 September 2010 |
| · | Westpac Funds Management Administration Pty  Limited              |   | Sold         |   | 30 September 2010 |
| · | Westpac Information Technology Services Pty  Limited              |   | Deregistered |   | 25 November 2009  |
| · | Westpac Leasing Nominees Pty Limited                              |   | Deregistered |   | 11 November 2009  |
| · | Westpac Properties —Vic- Limited                             |   | Deregistered |   | 5 April 2010      |
| · | Westpac Property Investments Pty Limited                          |   | Deregistered |   | 25 November 2009  |
| · | Westpac Resources and Infrastructure Pty  Limited                 |   | Deregistered |   | 1 November 2009   |
| · | Westpac Training Services Pty Limited                             |   | Deregistered |   | 11 November 2009  |
| · | Wollemi 2005-1 Trust                                              |   | Terminated   |   | 30 September 2010 |
| · | WST — NZ Warehouse Trust #1                                  |   | Terminated   |   | 29 January 2010   |

(17)            Control without ownership.

(18)            In applying the principles of universal succession,Westpac Banking Corporation became successor in law of St.George Bank Limitedon 1 March 2010. All legal entities previously directly owned bySt.George Bank Limited are now owned by Westpac Banking Corporation.

(19)            The following entities were amalgamated into WestpacHoldings-NZ-Limited in accordance with the Companies Act 1993 (NZ):
| · | Augusta (1962) Limited             |   |   |   | 22 September 2010 |
|--------|------------------------------------|--------|--------|--------|------------------------|
| · | TBNZ Limited                       |   |   |   | 24 September 2010 |
| · | TBNZ Capital Limited               |   |   |   | 24 September 2010 |
| · | TBNZ Developments Limited          |   |   |   | 24 September 2010 |
| · | TBNZ Equity Limited                |   |   |   | 24 September 2010 |
| · | TBNZ Investments Limited           |   |   |   | 24 September 2010 |
| · | Westpac Finance Limited            |   |   |   | 22 September 2010 |
| · | WestpacTrust Securities-NZ-Limited |   |   |   | 22 September 2010 |

(20)            The following entities were amalgamated into WestpacCapital-NZ-Limited in accordance with the Companies Act 1993 (NZ):
| · | Westpac Financial Synergy Limited     |   |   |   | 24 September 2010 |
|--------|---------------------------------------|--------|--------|--------|------------------------|
| · | Westpac Lease Discounting-NZ-Limited  |   |   |   | 24 September 2010 |
| · | Westpac Overseas Investments Limited  |   |   |   | 24 September 2010 |
| · | Westpac Operations Integrated Limited |   |   |   | 24 September 2010 |

 

281

----

 

**Note 39. Other group investments**

 

The Group had asignificant non-controlling shareholding in the following entities as at 30 September 2010:

 
| ** **                                                                                  | ** ** | **Country where** | ** ** | **Beneficial** | ** ** | ** **                       | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------|------------|----------------------------------|------------|
| ** **                                                                                  | ** ** | **Business is**   | ** ** | **Interest**   | ** ** | ** **                       | ** ** |
| ** **                                                                                  | ** ** | **Carried on**    | ** ** | **%**          | ** ** | **Nature of Business** | ** ** |
| Alleron Investment Management Limited                                                       |       | Australia              |       | 39.7           |       | Funds management                 |       |
| Angusknight Pty Limited                                                                     |       | Australia              |       | 27.8           |       | Employment and training          |       |
| Arkx Investment Management Pty Limited                                                      |       | Australia              |       | 30.0           |       | Investment company               |       |
| Above The Index Asset Management Pty Limited                                                |       | Australia              |       | 37.2           |       | Funds management                 |       |
| Boyd Cook Cove Unit Trust                                                                   |       | Australia              |       | 50.0           |       | Investment fund                  |       |
| Cardlink Services Limited                                                                   |       | Australia              |       | 25.0           |       | Card clearing system             |       |
| Cards NZ Limited                                                                            |       | New Zealand            |       | 15.0           |       | Credit card provider             |       |
| Cash Services Australia Pty Limited                                                         |       | Australia              |       | 25.0           |       | Cash logistics                   |       |
| Continuum Capital Management Limited                                                        |       | Australia              |       | 45.0           |       | Funds management                 |       |
| Cook Cove Investment Pty Limited                                                            |       | Australia              |       | 50.0           |       | Investment company               |       |
| Cook Cove Investment Trust                                                                  |       | Australia              |       | 50.0           |       | Investment fund                  |       |
| Cook Cove Pty Limited and its controlled entities                                           |       | Australia              |       | 50.0           |       | Investment company               |       |
| CV Services Group Pty Limited                                                               |       | Australia              |       | 26.9           |       | Investment company               |       |
| Direct Portfolio Group Limited                                                              |       | Australia              |       | 50.0           |       | Holding company                  |       |
| H3 Global Advisors Pty Limited                                                              |       | Australia              |       | 45.0           |       | Funds management                 |       |
| Helix Partners Limited                                                                      |       | Australia              |       | 46.0           |       | Funds management                 |       |
| Mondex Australia Pty Limited                                                                |       | Australia              |       | 25.0           |       | Smart card operations            |       |
| Mondex New Zealand Limited                                                                  |       | New Zealand            |       | 20.0           |       | Smart card operations            |       |
| Paymark Limited                                                                             |       | New Zealand            |       | 25.0           |       | Electronic payments processing   |       |
| Quadrant Capital Fund No. 2                                                            |       | Australia              |       | 26.7           |       | Investment fund                  |       |
| Regal Funds Management Pty Limited                                                          |       | Australia              |       | 30.0           |       | Funds management                 |       |
| Rhodes Contracting Pty Limited                                                              |       | Australia              |       | 25.5           |       | Services to mining               |       |
| Ronin Consolidated Holdings Pty Limited (in  voluntary liquidation)                         |       | Australia              |       | 25.0           |       | Property funds management        |       |
| St Hilliers Enhanced Property Fund No.2                                                     |       | Australia              |       | 15.0           |       | Property funds fund              |       |
| Sydney Harbour Bridge Holdings Pty Limited                                                  |       | Australia              |       | 49.0           |       | Intellectual property            |       |
| Vipro Pty Limited                                                                           |       | Australia              |       | 33.3           |       | Voucher processing               |       |
| Westpac Employee Assistance Foundation Pty Limited                                          |       | Australia              |       | 50.0           |       | Corporate trustee                |       |
| Westpac Essential Services Trust I and II and their  controlled and non-controlled entities |       | Australia              |       | 36.8           |       | Asset management                 |       |
| Westpac Staff Superannuation Plan Pty Limited                                               |       | Australia              |       | 50.0           |       | Corporate trustee                |       |

 

The total carryingamount of the Group’s significant non-controlling shareholding was $124 million(2009 $179 million).

 

During the 2010financial year the Group acquired a non-controlling interest in the followingentities:

 

·         Alleron Investment Management Limited

·         Arkx Investment Management Pty Limited

·         Above The Index Asset Management Limited

·         Continuum Capital Management Limited

·         Direct Portfolio Group Limited

·         H3 Global Advisors Pty Limited

·         Helix Partners Limited

·         Regal Funds Management Pty Limited

 

During the 2010financial year the Group’s interests in the following investments changed:

 

·         Alleron Investment Management Limited (from 46.7% to 39.7% in June 2010)

·         Cardlink Services Limited (from 22.3% to 25% in September 2010)

·         Continuum Capital Management Limited (from 50% to 45% in December 2009)

·         Direct Portfolio Group (from 42.2% to 50% in November 2009)

·         Helix Partners Limited (from 40% to 46% in January 2010)

·         Rhodes Contracting Pty Limited (from 17.2% to 25.5% in February 2010)

 

282

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 39. Other group investments(continued)**

 

During the 2010financial year the Group’s interests in the following investments were disposedof or ceased to be significant:

 

·         First Samuel Limited (October 2009, disposed May 2010)

·         Franklyn Scholar (sold September 2010)

·         Isomer Structured Investment Vehicle I (disposed December 2009)

·         North Queensland Airports No. 1 (Mackay) Trust and its controlledentities (disposed 13 January 2010)

·         North Queensland Airports No. 2 (Mackay) Trust and its controlledentities (disposed 13 January 2010)

·         Resco Services Pty Limited (ceased February 2010)

·         St Hilliers Enhanced Property Fund No. 1 (terminated 28 February 2010)

 

During the 2010financial year the following investment changed its name:

 

·         Electronic Transaction Services Limited to Paymark Limited

 

In terms of thecontribution to the results of the Group, the above investments are notmaterial either individually or in aggregate.

 

**Note 40. Related party disclosures**

 

***Directors’ interests in contracts***

 

As required by theCorporations Act, some Directors have given notice that they hold office inspecified companies and as such are to be regarded as having an interest in anycontract or proposed contract which may be made between Westpac andthose companies.

 

Unless otherwisenoted all other transactions with Directors, Director-related entities andother related parties are conducted on an arm’s length basis in the normalcourse of business and on commercial terms and conditions. These transactionsconsist principally of normal personal banking and financial investmentservices.

 

***Greg Bartlett — loan***

 

Greg Bartlett has aninterest-free loan of $140,785 that was advanced by St.George in 1989.

 

***Ultimate parent***

 

Westpac BankingCorporation is the ultimate parent company of the Group.

 

***Subsidiaries***

 

Transactions betweenWestpac and its subsidiaries during the 2010 financial year have included theprovision of a wide range of banking and other financial facilities, some ofwhich have been on commercial terms and conditions; others have been on termsand conditions which represented a concession to the subsidiaries. Details ofamounts paid to or received from related parties, in the form of dividends orinterest, are set out in Note 2 and Note 3.

 

Other intragrouptransactions, which may or may not be on commercial terms, include theprovision of management and administration services, staff training, dataprocessing facilities, transfer of tax losses, and the leasing of property,plant and equipment. Similar transactions between Group entities and otherrelated parties have been almost invariably on commercial terms and conditionsas agreed between the parties. Such transactions are not considered to bematerial, either individually or in aggregate.

 

**Note 41. Director and other keymanagement personnel disclosures**

 

Directors of Westpacduring the financial year ended 30 September 2010 were:

 
| **Ted  Evans**       |   | Chairman                          |
|----------------------|--------|-----------------------------------|
| ** **           |   |                              |
| **Gail  Kelly**      |   | Managing  Director & CEO |
| ** **           |   |                              |
| **John  Curtis**     |   | Deputy Chairman                   |
| ** **           |   |                              |
| **Elizabeth  Bryan** |   |                              |
| ** **           |   |                              |
| **Gordon  Cairns**   |   |                              |
| ** **           |   |                              |
| **Peter  Hawkins**   |   |                              |
| ** **           |   |                              |
| **Carolyn  Hewson**  |   |                              |
| ** **           |   |                              |
| **Lindsay  Maxsted** |   |                              |
| ** **           |   |                              |
| **Graham  Reaney**   |   |                              |
| ** **           |   |                              |
| **Peter  Wilson**    |   |                              |

 

283

----

 

**Note 41. Director and other keymanagement personnel disclosures (continued)**

 

Other key managementpersonnel with the greatest authority for strategic direction and managementduring the year ended 30 September 2010 were:

 
| **John  Arthur**      |   | Group Executive,  Counsel & Secretariat                                                                                                                        |
|-----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **            |   |                                                                                                                                                                    |
| **Ilana  Atlas**      |   | Group Executive,  People (until 31 January 2010)                                                                                                                   |
| ** **            |   |                                                                                                                                                                    |
| **Greg  Bartlett(1)** |   | Chief Executive,  St.George Bank                                                                                                                                        |
| ** **            |   |                                                                                                                                                                    |
| **Peter  Clare**      |   | Group Executive,  Product & Operations                                                                                                                         |
| ** **            |   |                                                                                                                                                                    |
| **Philip  Coffey**    |   | Chief Financial  Officer                                                                                                                                                |
| ** **            |   |                                                                                                                                                                    |
| **Rob  Coombe**       |   | Chief Executive  Officer, BT Financial Group (until 31 January 2010)  Group Executive, Westpac Retail & Business Banking (from 1  February 2010)     |
| ** **            |   |                                                                                                                                                                    |
| **Brad  Cooper**      |   | Group Chief  Transformation Officer (until 31 January 2010)Chief  Executive Officer, BT Financial Group (from 1 February 2010)                                |
| ** **            |   |                                                                                                                                                                    |
| **George  Frazis**    |   | Chief Executive,  Westpac New Zealand Limited                                                                                                                           |
| ** **            |   |                                                                                                                                                                    |
| **Peter  Hanlon**     |   | Group Executive,  Westpac Retail & Business Banking (until 31 January 2010)Group  Executive, People & Transformation (from 1 February 2010) |
| ** **            |   |                                                                                                                                                                    |
| **Bob  McKinnon**     |   | Group Executive,  Technology                                                                                                                                            |
| ** **            |   |                                                                                                                                                                    |
| **Greg  Targett**     |   | Chief Risk Officer                                                                                                                                                      |
| ** **            |   |                                                                                                                                                                    |
| **Rob  Whitfield**    |   | Group Executive,  Westpac Institutional Bank                                                                                                                            |

 

----

(1)         Effective 1 December 2010, Greg Bartlett willretire as the Chief Executive of St.George Bank. Rob Chapman will be appointedas his successor in the role, effective 1 December 2010.

 

Key management personnelwere all employed by Westpac during the year ended 30 September 2010,except for Greg Bartlett (employed by St.George Bank Limited until 1 March 2010)and George Frazis (WNZL).

 

Total compensationof all key management personnel, including Non-executive Directors, the CEO andother key management personnel:

 
| ** **              | ** ** | **Short Term  Benefits** | ** ** | **Post Employment  Benefits** | ** ** | **Share-based  Payments** | ** ** | **Total**  | ** ** |
|-------------------------|------------|-------------------------------|------------|------------------------------------|------------|---------------------------|------------|------------|------------|
| ** **              | ** ** | **$**                         | ** ** | **$**                              | ** ** | **$**                     | ** ** | **$**      | ** ** |
| **Consolidated Entity** |       |                          |       |                               |       |                      |       |       |       |
| **2010**                |       | 35,378,912                    |       | 1,344,644                          |       | 13,330,623                |       | 50,054,179 |       |
| 2009                    |       | 35,825,208                    |       | 1,130,010                          |       | 14,479,303                |       | 51,434,521 |       |
|                    |       |                          |       |                               |       |                      |       |       |       |
| **Parent Entity**       |       |                          |       |                               |       |                      |       |       |       |
| **2010**                |       | 32,057,101                    |       | 1,274,822                          |       | 11,512,594                |       | 44,844,517 |       |
| 2009                    |       | 33,132,107                    |       | 1,031,488                          |       | 12,600,443                |       | 46,764,038 |       |

 

Detailedremuneration disclosures of Non-executive Directors, CEO and other keymanagement personnel are included in the Remuneration report.

 

284

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 41. Director and other keymanagement personnel disclosures (continued)**

 

***Options and share rights holdings***

 

The following tablesets out details of performance options, performance share rights and sharerights held by the CEO and other key management personnel for the year ended 30September 2010:

 
| ** **     | ** ** | **Type of Equity-Based   Instrument** | ** ** | **Number  Held at  Start of Year** | ** ** | **Number  Granted During  the Year as  Remuneration** | ** ** | **Number  Exercised  During  the Year** | ** ** | **Number  Lapsed  During  the Year** | ** ** | **Number  Held at  End of Year** | ** ** | **Number  Vested and  Exercisable   at End of Year** | ** ** |
|----------------|------------|-------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Gail  Kelly    |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | 720,556                                           |       | —                                                               |       | —                                       |       | —                                    |       | 720,556                                         |       | —                                                                        |       |
|           |       | Performance share  right                        |       | 202,021                                           |       | 166,002                                                              |       | —                                       |       | —                                    |       | 368,023                                         |       | —                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| John  Arthur   |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                        |       |
|           |       | Performance share  right                        |       | —                                            |       | 19,173                                                               |       | —                                       |       | —                                    |       | 19,173                                          |       | —                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Ilana  Atlas   |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | 606,492                                           |       | —                                                               |       | 30,000                                       |       | 6,518                                     |       | —                                          |       | —                                                                        |       |
|           |       | Performance share  right                        |       | 107,480                                           |       | —                                                               |       | 107,480                                      |       | —                                    |       | —                                          |       | —                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Greg  Bartlett |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                        |       |
|           |       | Performance share  right                        |       | 19,685                                            |       | 25,464                                                               |       | —                                       |       | —                                    |       | 45,149                                          |       | —                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Peter  Clare   |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | 81,799                                            |       | —                                                               |       | —                                       |       | —                                    |       | 81,799                                          |       | —                                                                        |       |
|           |       | Performance share  right                        |       | —                                            |       | 25,763                                                               |       | —                                       |       | —                                    |       | 25,763                                          |       | —                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Philip  Coffey |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | 1,029,470                                         |       | —                                                               |       | 353,213                                      |       | —                                    |       | 676,257                                         |       | 456,666                                                                       |       |
|           |       | Performance share  right                        |       | —                                            |       | 35,949                                                               |       | —                                       |       | —                                    |       | 35,949                                          |       | —                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Rob  Coombe    |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | 682,043                                           |       | —                                                               |       | 319,803                                      |       | —                                    |       | 362,240                                         |       | 133,220                                                                       |       |
|           |       | Performance share  right                        |       | 26,827                                            |       | 33,553                                                               |       | —                                       |       | —                                    |       | 60,380                                          |       | 26,827                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Brad  Cooper   |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | 196,785                                           |       | —                                                               |       | —                                       |       | —                                    |       | 196,785                                         |       | —                                                                        |       |
|           |       | Performance share  right                        |       | —                                            |       | 31,455                                                               |       | —                                       |       | —                                    |       | 31,455                                          |       | —                                                                        |       |
|           |       | Share right                                     |       | 22,045                                            |       | —                                                               |       | —                                       |       | —                                    |       | 22,045                                          |       | 22,045                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| George  Frazis |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | 260,869                                           |       | —                                                               |       | —                                       |       | —                                    |       | 260,869                                         |       | —                                                                        |       |
|           |       | Performance share  right                        |       | —                                            |       | 29,958                                                               |       | —                                       |       | —                                    |       | 29,958                                          |       | —                                                                        |       |
|           |       | Share right                                     |       | 140,200                                           |       | 9,995                                                                |       | 58,177                                       |       | —                                    |       | 92,018                                          |       | —                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Peter  Hanlon  |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | 501,656                                           |       | —                                                               |       | 299,265                                      |       | —                                    |       | 202,391                                         |       | 55,249                                                                        |       |
|           |       | Performance share  right                        |       | 11,214                                            |       | 25,763                                                               |       | 11,214                                       |       | —                                    |       | 25,763                                          |       | —                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Bob  McKinnon  |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                        |       |
|           |       | Cash settled  share right                       |       | 67,500                                            |       | —                                                               |       | —                                       |       | —                                    |       | 67,500                                          |       | —                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Greg  Targett  |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                        |       |
|           |       | Performance share  right                        |       | 6,889                                             |       | 28,759                                                               |       | —                                       |       | —                                    |       | 35,648                                          |       | —                                                                        |       |
|           |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
| Rob  Whitfield |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                          |       |
|           |       | Performance  option                             |       | 559,597                                           |       | —                                                               |       | —                                       |       | —                                    |       | 559,597                                         |       | 404,264                                                                       |       |
|           |       | Performance share  right                        |       | 66,585                                            |       | 35,949                                                               |       | —                                       |       | —                                    |       | 102,534                                         |       | 66,585                                                                        |       |

 

285

----

 

**Note 41. Director and other keymanagement personnel disclosures (continued)**

 

The following tablesets out details of performance options, performance share rights and sharerights held by the CEO and other key management personnel for the year ended 30September 2009:

 
| ** **        | ** ** | **Type of Equity-Based   Instrument** | ** ** | **Number  Held at  Start of Year** | ** ** | **Number  Granted During  the Year as  Remuneration** | ** ** | **Number  Exercised  During  the Year** | ** ** | **Number  Lapsed  During  the Year** | ** ** | **Number  Held at  End of Year** | ** ** | **Number   Vested and  Exercisable   at End of Year** | ** ** |
|-------------------|------------|-------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Gail  Kelly       |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | 364,431                                           |       | 356,125                                                              |       | —                                       |       | —                                    |       | 720,556                                         |       | —                                                                              |       |
|              |       | Performance share  right                        |       | 82,290                                            |       | 119,731                                                              |       | —                                       |       | —                                    |       | 202,021                                         |       | —                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| John  Arthur      |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                              |       |
|              |       | Performance share  right                        |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Ilana  Atlas      |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | 542,709                                           |       | 65,184                                                               |       | —                                       |       | 1,401                                     |       | 606,492                                         |       | 364,906                                                                             |       |
|              |       | Performance share  right                        |       | 108,580                                           |       | —                                                               |       | —                                       |       | 1,100                                     |       | 107,480                                         |       | 107,480                                                                             |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Greg  Bartlett    |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                              |       |
|              |       | Performance share  right                        |       | —                                            |       | 19,685                                                               |       | —                                       |       | —                                    |       | 19,685                                          |       | —                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Philip  Chronican |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance option                              |       | 1,231,227                                         |       | 123,210                                                              |       | —                                       |       | 243,623                                   |       | —                                          |       | —                                                                              |       |
|              |       | Performance share  right                        |       | 50,450                                            |       | —                                                               |       | 47,849                                       |       | 2,601                                     |       | —                                          |       | —                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Peter  Clare      |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | —                                            |       | 81,799                                                               |       | —                                       |       | —                                    |       | 81,799                                          |       | —                                                                              |       |
|              |       | Performance share  right                        |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Philip  Coffey    |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | 926,645                                           |       | 104,805                                                              |       | —                                       |       | 1,980                                     |       | 1,029,470                                       |       | 660,312                                                                             |       |
|              |       | Performance share  right                        |       | 159,992                                           |       | —                                                               |       | 158,342                                      |       | 1,650                                     |       | —                                          |       | —                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Rob  Coombe       |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | 573,168                                           |       | 110,224                                                              |       | —                                       |       | 1,349                                     |       | 682,043                                         |       | 319,803                                                                             |       |
|              |       | Performance share  right                        |       | 128,636                                           |       | —                                                               |       | 100,339                                      |       | 1,470                                     |       | 26,827                                          |       | 26,287                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Brad  Cooper      |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | 104,761                                           |       | 92,024                                                               |       | —                                       |       | —                                    |       | 196,785                                         |       | —                                                                              |       |
|              |       | Performance share  right                        |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                              |       |
|              |       | Share right                                     |       | 22,045                                            |       | —                                                               |       | —                                       |       | —                                    |       | 22,045                                          |       | —                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| George  Frazis    |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | —                                            |       | 260,869                                                              |       | —                                       |       | —                                    |       | 260,869                                         |       | —                                                                              |       |
|              |       | Share right                                     |       | —                                            |       | 140,200                                                              |       | —                                       |       | —                                    |       | 140,200                                         |       | —                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Peter  Hanlon     |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | 424,434                                           |       | 78,220                                                               |       | —                                       |       | 998                                       |       | 501,656                                         |       | 299,265                                                                             |       |
|              |       | Performance share  right                        |       | 11,824                                            |       | —                                                               |       | —                                       |       | 610                                       |       | 11,214                                          |       | 11,214                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Bob  McKinnon     |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                              |       |
|              |       | Cash settled  share right                       |       | —                                            |       | 67,500                                                               |       | —                                       |       | —                                    |       | 67,500                                          |       | —                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Greg  Targett     |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | —                                            |       | —                                                               |       | —                                       |       | —                                    |       | —                                          |       | —                                                                              |       |
|              |       | Performance share  right                        |       | —                                            |       | 6,889                                                                |       | —                                       |       | —                                    |       | 6,889                                           |       | —                                                                              |       |
|              |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
| Rob  Whitfield    |       |                                            |       |                                              |       |                                                                 |       |                                         |       |                                      |       |                                            |       |                                                                                |       |
|              |       | Performance  option                             |       | 499,506                                           |       | 61,349                                                               |       | —                                       |       | 1,258                                     |       | 559,597                                         |       | 281,668                                                                             |       |
|              |       | Performance share  right                        |       | 67,938                                            |       | —                                                               |       | —                                       |       | 1,353                                     |       | 66,585                                          |       | 66,585                                                                              |       |

 

286

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 41. Director and other keymanagement personnel disclosures (continued)**

 

*Shareholdings*

 

The following tablesets out details of Westpac ordinary shares held by the Non-executive Directorsduring the year ended 30 September 2010:

 
| ** **      | ** ** | **Number Held at   Start of Year** | ** ** | **Other Changes   During the Year** | ** ** | **Number Held at   End of Year** | ** ** |
|-----------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Ted Evans       |       |                                                   |       |                                                    |       |                                                      |       |
| **2010**        |       | 19,130                                                 |       | 543                                                     |       | 19,673                                                    |       |
| 2009            |       | 13,775                                                 |       | 5,355                                                   |       | 19,130                                                    |       |
|            |       |                                                   |       |                                                    |       |                                                      |       |
| John Curtis     |       |                                                   |       |                                                    |       |                                                      |       |
| **2010**        |       | 72,787                                                 |       | 8,000                                                   |       | 80,787                                                    |       |
| 2009            |       | —                                                 |       | 52,787                                                  |       | 72,787                                                    |       |
|            |       |                                                   |       |                                                    |       |                                                      |       |
| Elizabeth Bryan |       |                                                   |       |                                                    |       |                                                      |       |
| **2010**        |       | 19,444                                                 |       | 1,066                                                   |       | 20,510                                                    |       |
| 2009            |       | 10,458                                                 |       | 8,986                                                   |       | 19,444                                                    |       |
|            |       |                                                   |       |                                                    |       |                                                      |       |
| Gordon Cairns   |       |                                                   |       |                                                    |       |                                                      |       |
| **2010**        |       | 17,038                                                 |       | —                                                  |       | 17,038                                                    |       |
| 2009            |       | 8,506                                                  |       | 8,532                                                   |       | 17,038                                                    |       |
|            |       |                                                   |       |                                                    |       |                                                      |       |
| Peter Hawkins   |       |                                                   |       |                                                    |       |                                                      |       |
| **2010**        |       | 15,218                                                 |       | —                                                  |       | 15,218                                                    |       |
| 2009            |       | —                                                 |       | 15,218                                                  |       | 15,218                                                    |       |
|            |       |                                                   |       |                                                    |       |                                                      |       |
| Carolyn Hewson  |       |                                                   |       |                                                    |       |                                                      |       |
| **2010**        |       | 16,348                                                 |       | —                                                  |       | 16,348                                                    |       |
| 2009            |       | 13,448                                                 |       | 2,900                                                   |       | 16,348                                                    |       |
|            |       |                                                   |       |                                                    |       |                                                      |       |
| Lindsay Maxsted |       |                                                   |       |                                                    |       |                                                      |       |
| **2010**        |       | 7,404                                                  |       | 2,906                                                   |       | 10,310                                                    |       |
| 2009            |       | 1,636                                                  |       | 5,768                                                   |       | 7,404                                                     |       |
|            |       |                                                   |       |                                                    |       |                                                      |       |
| Graham Reaney   |       |                                                   |       |                                                    |       |                                                      |       |
| **2010**        |       | 75,361                                                 |       | —                                                  |       | 75,361                                                    |       |
| 2009            |       | —                                                 |       | 67,161                                                  |       | 75,361                                                    |       |
|            |       |                                                   |       |                                                    |       |                                                      |       |
| Peter Wilson    |       |                                                   |       |                                                    |       |                                                      |       |
| **2010**        |       | 13,597                                                 |       | 746                                                     |       | 14,343                                                    |       |
| 2009            |       | 12,003                                                 |       | 1,594                                                   |       | 13,597                                                    |       |

 

None of the above shares includenon-beneficially held shares.

 

287

----

 

**Note 41. Director and other keymanagement personnel disclosures (continued)**

 

The following tablesets out details of Westpac ordinary shares held by the CEO and other keymanagement personnel for the year ended 30 September 2010:

 
| ** **           | ** ** | **Total Number Held   at Start of Year** | ** ** | **RSP Shares Granted  as Compensation** | ** ** | **Number Received on  Exercise of Equity  Instruments** | ** ** | **Other Changes  During the Year** | ** ** | **RSP Shares Held at  End of Year** | ** ** | **Total Number  Held at End of  Year(1)** | ** ** |
|----------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Gail  Kelly          |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 1,544,883                                                         |       | 74,626                                                 |       | —                                                                      |       | (300,000                                          | )          | 120,739                                                      |       | 1,319,509                                                     |       |
| 2009                 |       | 277,639                                                           |       | 92,226                                                 |       | —                                                                      |       | 1,175,018                                         |       | 175,518                                                      |       | 1,544,883                                                     |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| John  Arthur         |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 26,372                                                            |       | 7,889                                                  |       | —                                                                      |       | 13,676                                            |       | 7,889                                                        |       | 47,937                                                        |       |
| 2009                 |       | —                                                            |       | —                                                 |       | —                                                                      |       | 4,438                                             |       | —                                                       |       | 26,372                                                        |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Ilana  Atlas(3)      |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 199,131                                                           |       | —                                                 |       | 137,480                                                                     |       | —                                            |       | —                                                       |       | —                                                        |       |
| 2009                 |       | 199,540                                                           |       | 18,485                                                 |       | —                                                                      |       | (18,894                                           | )          | 29,991                                                       |       | 199,131                                                       |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Greg  Bartlett       |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 776,424                                                           |       | 10,127                                                 |       | —                                                                      |       | —                                            |       | 28,691                                                       |       | 786,551                                                       |       |
| 2009                 |       | —                                                            |       | 41,700                                                 |       | —                                                                      |       | 734,724                                           |       | 41,700                                                       |       | 776,424                                                       |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Philip  Chronican(2) |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | —                                                            |       | —                                                 |       | —                                                                      |       | —                                            |       | —                                                       |       | —                                                        |       |
| 2009                 |       | 704,217                                                           |       | 30,808                                                 |       | 47,849                                                                      |       | (430,044                                          | )          | —                                                       |       | —                                                        |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Peter  Clare         |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 10,807                                                            |       | 12,260                                                 |       | —                                                                      |       | —                                            |       | 23,043                                                       |       | 23,067                                                        |       |
| 2009                 |       | —                                                            |       | 10,783                                                 |       | —                                                                      |       | 24                                                |       | 10,783                                                       |       | 10,807                                                        |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Philip  Coffey       |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 219,767                                                           |       | 23,987                                                 |       | 353,213                                                                     |       | (276,590                                          | )          | 77,637                                                       |       | 320,377                                                       |       |
| 2009                 |       | 225,421                                                           |       | 38,510                                                 |       | —                                                                      |       | (44,164                                           | )          | 53,650                                                       |       | 219,767                                                       |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Rob  Coombe          |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 300,331                                                           |       | 13,859                                                 |       | 319,803                                                                     |       | (515,142                                          | )          | 55,810                                                       |       | 118,851                                                       |       |
| 2009                 |       | 179,967                                                           |       | 20,025                                                 |       | 100,339                                                                     |       | —                                            |       | 41,951                                                       |       | 300,331                                                       |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Brad  Cooper         |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 54,971                                                            |       | 34,742                                                 |       | —                                                                      |       | —                                            |       | 89,713                                                       |       | 89,713                                                        |       |
| 2009                 |       | —                                                            |       | 54,971                                                 |       | —                                                                      |       | —                                            |       | 54,971                                                       |       | 54,971                                                        |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| George  Frazis       |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | —                                                            |       | —                                                 |       | 58,177                                                                      |       | —                                            |       | —                                                       |       | 58,177                                                        |       |
| 2009                 |       | —                                                            |       | —                                                 |       | —                                                                      |       | —                                            |       | —                                                       |       | —                                                        |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Peter  Hanlon        |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 56,938                                                            |       | 13,859                                                 |       | 310,479                                                                     |       | (310,314                                          | )          | 42,675                                                       |       | 70,962                                                        |       |
| 2009                 |       | 36,466                                                            |       | 20,025                                                 |       | —                                                                      |       | 447                                               |       | 28,816                                                       |       | 56,938                                                        |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Bob  McKinnon        |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | —                                                            |       | 12,793                                                 |       | —                                                                      |       | 41                                                |       | 12,793                                                       |       | 12,834                                                        |       |
| 2009                 |       | —                                                            |       | —                                                 |       | —                                                                      |       | —                                            |       | —                                                       |       | —                                                        |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Greg  Targett        |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 95,668                                                            |       | 6,204                                                  |       | —                                                                      |       | (1,744                                            | )          | 16,189                                                       |       | 100,128                                                       |       |
| 2009                 |       | —                                                            |       | 19,632                                                 |       | —                                                                      |       | 74,292                                            |       | 19,632                                                       |       | 95,668                                                        |       |
|                 |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| Rob  Whitfield       |       |                                                              |       |                                                   |       |                                                                        |       |                                              |       |                                                         |       |                                                          |       |
| **2010**             |       | 264,692                                                           |       | 19,786                                                 |       | —                                                                      |       | (31,333                                           | )          | 103,145                                                      |       | 253,145                                                       |       |
| 2009                 |       | 305,354                                                           |       | 71,888                                                 |       | —                                                                      |       | (112,550                                          | )          | 83,359                                                       |       | 264,692                                                       |       |

 

----

| (1) |   | The highest number of shares held by an  individual in the above tables is 0.05% of total Westpac ordinary shares  outstanding at 30 September 2010.                   |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The above information relates to the period  that these executives were other key management personnel during the year,  and therefore the movements will not add to the totals. |
| (3) |   | Ilana Atlas retired 31 January 2010.                                                                                                                                        |

 

288

----

 

NOTESTO THE FINANCIAL STATEMENTS

 

**Note 41. Director and other keymanagement personnel disclosures (continued)**

 

The following tablesets out the details of the performance options, performance share rights andunhurdled share rights held at 30 September 2010 by the CEO and otherkey management personnel:

 
| ** **    | ** ** | **Latest Date**  | ** ** | **Number of**    | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
|---------------|------------|-----------------------|------------|-----------------------|------------|--------------------|------------|-------------------------|------------|
| ** **    | ** ** | **for Exercise** | ** ** | **Share Rights** | ** ** | **Options**        | ** ** | **of Options**     | ** ** |
| Gail Kelly    |       | 1 Feb 2018            |       | 82,290                |       | 364,431            |       | $                       | 25.89      |   |
|          |       | 1 Dec 2018            |       | 119,731               |       | 356,125            |       | $                       | 16.80      |   |
|          |       | 21 Dec 2019           |       | 166,002               |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| John Arthur   |       | 1 Oct 2019            |       | 19,173                |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| Greg Bartlett |       | 1 Dec 2018            |       | 19,685                |       | —             |       | —                  |       |
|          |       | 1 Oct 2019            |       | 25,464                |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| Peter Clare   |       | 1 Oct 2018            |       | —                |       | 81,799             |       | $                       | 23.40      |   |
|          |       | 1 Oct 2019            |       | 25,763                |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| Philip Coffey |       | 20 Jan 2013           |       | —                |       | 127,308            |       | $                       | 13.59      |   |
|          |       | 20 Jan 2015           |       | —                |       | 179,791            |       | $                       | 18.98      |   |
|          |       | 15 Dec 2016           |       | —                |       | 149,567            |       | $                       | 23.98      |   |
|          |       | 17 Dec 2017           |       | —                |       | 114,786            |       | $                       | 30.10      |   |
|          |       | 1 Oct 2018            |       | —                |       | 104,805            |       | $                       | 23.40      |   |
|          |       | 1 Oct 2019            |       | 35,949                |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| Rob Coombe    |       | 15 Dec 2016           |       | —                |       | 133,220            |       | $                       | 23.98      |   |
|          |       | 17 Dec 2017           |       | —                |       | 118,796            |       | $                       | 30.10      |   |
|          |       | 1 Oct 2018            |       | —                |       | 110,224            |       | $                       | 23.40      |   |
|          |       | 20 Jan 2015           |       | 26,827                |       | —             |       | —                  |       |
|          |       | 1 Oct 2019            |       | 33,553                |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| Brad Cooper   |       | 17 Dec 2017           |       | —                |       | 104,761            |       | $                       | 30.10      |   |
|          |       | 1 Oct 2018            |       | —                |       | 92,024             |       | $                       | 23.40      |   |
|          |       | 1 May 2017       |       | 22,045                |       | —             |       | —                  |       |
|          |       | 1 Oct 2019            |       | 31,455                |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| George Frazis |       | 1 Mar 2019            |       | 82,023                |       | 260,869            |       | $                       | 16.49      |   |
|          |       | 1 Oct 2019            |       | 39,953                |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| Peter Hanlon  |       | 15 Dec 2016           |       | —                |       | 55,249             |       | $                       | 23.98      |   |
|          |       | 17 Dec 2017           |       | —                |       | 68,922             |       | $                       | 30.10      |   |
|          |       | 1 Oct 2018            |       | —                |       | 78,220             |       | $                       | 23.40      |   |
|          |       | 1 Oct 2019            |       | 25,763                |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| Bob McKinnon  |       | —                |       | —                |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| Greg Targett  |       | 1 Dec 2018            |       | 6,889                 |       | —             |       | —                  |       |
|          |       | 1 Oct 2019            |       | 28,759                |       | —             |       | —                  |       |
|          |       |                  |       |                  |       |               |       |                    |       |
| Rob Whitfield |       | 21 Jan 2014           |       | 22,537                |       | 81,319             |       | $                       | 16.34      |   |
|          |       | 20 Jan 2015           |       | 19,162                |       | 74,913             |       | $                       | 18.98      |   |
|          |       | 20 Dec 2015           |       | —                |       | 125,436            |       | $                       | 20.53      |   |
|          |       | 15 Dec 2016           |       | 24,886                |       | 122,596            |       | $                       | 23.98      |   |
|          |       | 17 Dec 2017           |       | —                |       | 93,984             |       | $                       | 30.10      |   |
|          |       | 1 Oct 2018            |       | —                |       | 61,349             |       | $                       | 23.40      |   |
|          |       | 1 Oct 2019            |       | 35,949                |       | —             |       | —                  |       |

 

289

----

 

**Note 41. Director and other keymanagement personnel disclosures (continued)**

 

***Loans to Directors and other key management personnel disclosures***

 

Other than alreadydiscussed in Note 40, all financial instrument transactions that have occurredduring the financial year between the directors and The Westpac Group wereconducted on an arm’s length basis in the ordinary course of business and oncommercial terms and conditions. These transactions consisted principally ofnormal personal banking and financial investment services.

 

Details of loans toDirectors and other key management personnel (including their related parties)of the Group are:

 

*2010*

* *
| ** **                         | ** ** | **Balance at   Start of Year   $** | ** ** | **Interest Paid and  Payable  for the Year  $** | ** ** | **Interest Not  Charged  $** | ** ** | **Balance at  End of Year  $** | ** ** | **Number in Group  at  End of Year** | ** ** |
|------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------|------------|
| **Directors**                      |       | 2,633,472                                         |       | 306,224                                                             |       | —                            |       | 6,018,345                                     |       | 5                                                        |       |
| **Other key management personnel** |       | 13,264,612                                        |       | 846,527                                                             |       | 9,904                             |       | 13,439,098                                    |       | 9                                                        |       |
|                               |       | 15,898,084                                        |       | 1,152,751                                                           |       | 9,904                             |       | 19,457,443                                    |       | 14                                                       |       |

 

Individuals withloans above $100,000 during the 30 September 2010 financial year were:

 
| ** **                         | ** ** | **Balance at   Start of Year   $** | ** ** | **Interest Paid and  Payable  for the Year  $** | ** ** | **Interest Not  Charged  $** | ** ** | **Balance at  End of Year  $** | ** ** | **Highest  Indebtedness   During the Year  $** | ** ** |
|------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------|------------|
| **Directors**                      |       |                                              |       |                                                                |       |                              |       |                                          |       |                                                          |       |
| Ted Evans                          |       | 127,882                                           |       | 6,992                                                               |       | —                            |       | 151,311                                       |       | 186,974                                                       |       |
| Gordon Cairns                      |       | 738,000                                           |       | 59,045                                                              |       | —                            |       | 1,428,591                                     |       | 1,498,000                                                     |       |
| John Curtis                        |       | —                                            |       | 141,815                                                             |       | —                            |       | 3,207,462                                     |       | 3,226,342                                                     |       |
| Lindsay Maxsted                    |       | 1,630,000                                         |       | 84,764                                                              |       | —                            |       | 1,022,454                                     |       | 1,652,454                                                     |       |
| Graham Reaney                      |       | 137,590                                           |       | 13,608                                                              |       | —                            |       | 208,528                                       |       | 427,568                                                       |       |
|                               |       |                                              |       |                                                                |       |                              |       |                                          |       |                                                          |       |
| **Other key management personnel** |       |                                              |       |                                                                |       |                              |       |                                          |       |                                                          |       |
| Ilana Atlas                        |       | 2,500,000                                         |       | 71,550                                                              |       | —                            |       | —                                        |       | 2,500,000                                                     |       |
| Greg Bartlett                      |       | 5,602,538                                         |       | 473,084                                                             |       | 9,904                             |       | 8,004,338                                     |       | 9,941,389                                                     |       |
| Peter Clare                        |       | —                                            |       | 1,228                                                               |       | —                            |       | —                                        |       | 170,225                                                       |       |
| Philip Coffey                      |       | 250,000                                           |       | 15,300                                                              |       | —                            |       | 250,000                                       |       | 250,000                                                       |       |
| Brad Cooper                        |       | 3,925,469                                         |       | 221,958                                                             |       | —                            |       | 3,911,412                                     |       | 4,005,141                                                     |       |
| Peter Hanlon                       |       | 497,873                                           |       | 21,756                                                              |       | —                            |       | 24,472                                        |       | 1,103,830                                                     |       |
| Bob McKinnon                       |       | —                                            |       | 16,714                                                              |       | —                            |       | 921,701                                       |       | 943,219                                                       |       |
| Greg Targett                       |       | 488,732                                           |       | 24,936                                                              |       | —                            |       | 327,175                                       |       | 987,334                                                       |       |

 

290

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 41. Director and other keymanagement personnel disclosures (continued)**

 

Details of loans toDirectors and other key management personnel (including their related parties)of the Group are:

 

*2009*

* *
| ** **                         | ** ** | **Balance at   Start of Year(1)   $** | ** ** | **Interest Paid and  Payable   for the Year  $** | ** ** | **Interest Not  Charged  $** | ** ** | **Balance at  End of Year  $** | ** ** | **Number in Group  at   End of Year** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
| **Directors**                      |       | 2,403,705                                            |       | 203,875                                                                   |       | —                            |       | 2,633,472                                     |       | 4                                                              |       |
| **Other key management personnel** |       | 7,376,105                                            |       | 854,745                                                                   |       | 7,245                             |       | 13,264,612                                    |       | 6                                                              |       |
|                               |       | 9,779,810                                            |       | 1,058,620                                                                 |       | 7,245                             |       | 15,898,084                                    |       | 10                                                             |       |

 

----

| (1) | The balance at the start of the year does not  include balances at the end of the previous year reported for Andrew  Carriline. |
|-----|---------------------------------------------------------------------------------------------------------------------------------|

 

Individuals withloans above $100,000 during the 30 September 2009 financial year were:

 
| ** **                         | ** ** | **Balance at  Start of Year  $** | ** ** | **Interest Paid and  Payable   for the Year  $** | ** ** | **Interest Not  Charged  $** | ** ** | **Balance at  End of Year  $** | ** ** | **Highest  Indebtedness  During the Year  $** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------|------------|
| **Directors**                      |       |                                            |       |                                                                      |       |                              |       |                                          |       |                                                    |       |
| Ted Evans                          |       | 165,705                                         |       | 6,559                                                                     |       | —                            |       | 127,882                                       |       | 165,705                                                 |       |
| Gordon Cairns                      |       | 738,000                                         |       | 69,301                                                                    |       | —                            |       | 738,000                                       |       | 738,000                                                 |       |
| Lindsay Maxsted                    |       | 1,500,000                                       |       | 117,487                                                                   |       | —                            |       | 1,630,000                                     |       | 2,000,000                                               |       |
| Graham Reaney                      |       | —                                          |       | 10,526                                                                    |       | —                            |       | 137,590                                       |       | 138,188                                                 |       |
|                               |       |                                            |       |                                                                      |       |                              |       |                                          |       |                                                    |       |
| **Other key management personnel** |       |                                            |       |                                                                      |       |                              |       |                                          |       |                                                    |       |
| Ilana Atlas                        |       | 2,500,000                                       |       | 113,265                                                                   |       | —                            |       | 2,500,000                                     |       | 2,500,000                                               |       |
| Greg Bartlett                      |       | —                                          |       | 423,050                                                                   |       | 7,245                             |       | 5,602,538                                     |       | 11,006,630                                              |       |
| Peter Clare                        |       | —                                          |       | 72,593                                                                    |       | —                            |       | —                                        |       | 6,263,374                                               |       |
| Philip Coffey                      |       | 607,474                                         |       | 23,806                                                                    |       | —                            |       | 250,000                                       |       | 607,474                                                 |       |
| Brad Cooper                        |       | 3,350,000                                       |       | 155,195                                                                   |       | —                            |       | 3,925,469                                     |       | 7,275,469                                               |       |
| Peter Hanlon                       |       | 139,806                                         |       | 21,092                                                                    |       | —                            |       | 497,873                                       |       | 996,667                                                 |       |
| Greg Targett                       |       | —                                          |       | 6,645                                                                     |       | —                            |       | 488,732                                       |       | 611,331                                                 |       |
| Rob Whitfield                      |       | 778,825                                         |       | 29,140                                                                    |       | —                            |       | —                                        |       | 780,539                                                 |       |

 

***Other transactions with Directors and key management personnel***

 

Certain Directorsand other key management personnel have invested in Infrastructure Notes issuedby subsidiaries which have been financed with limited recourse loans and aresubject to forward sale arrangements. The loan repayments and proceeds arisingfrom the forward sale arrangements are subject to legal right of set-off andare presented on net basis in the financial statements. The net amountrecognised by the Group in respect of these transactions is the annualcontribution paid by the investor in the Infrastructure Notes. Thesetransactions have been undertaken on the same terms and conditions astransactions with customers.

 

The total annualcontributions received in respect of Infrastructure Notes for the year ended 30September 2010 was $2,081,139 (2009 $1,756,284). The contributionswere made by John Curtis, Elizabeth Bryan, Philip Coffey, Rob Coombe and RobWhitfield.

 

**Note 42. Notes to the cash flowstatements**

 

***Cash and balances with central banks***

*** ***
| ** **                                      | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| Cash on hand                                    |       | 3,276            |       | 2,917                  |       | 3,906 |   | 2,914 |   | 2,249 |   |
| Balance with central banks                      |       | 1,188            |       | 355                    |       | 903 |   | 779 |   | 329 |   |
| **Total cash and balances with  central banks** |       | 4,464            |       | 3,272                  |       | 4,809 |   | 3,693 |   | 2,578 |   |

 

291

----

 

**Note 42. Notes to the cash flowstatements (continued)**

 

***Cash and cash equivalents***

 

Reconciliation ofnet cash (used in)/provided by operating activities to net profit attributableto equity holders of Westpac Banking Corporation.

 
| ** **                                                                               | ** ** | **Consolidated** | ** ** | **Parent Entity** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **2010**         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                               | ** ** | **$m**           | ** ** | **$m**                 | ** ** | **$m** | ** ** | **$m** | ** ** | **$m** | ** ** |
| **Reconciliation of net cash (used  in)/provided by operating activities to net profit** | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net profit                                                                               |       | 6,412            |       | 3,517                  |       | 3,932 |   | 6,160 |   | 2,037 |   |
| Adjustments:                                                                             |       |             |       |                   |       |   |   |   |   |   |   |
| Depreciation, amortisation and impairment                                                |       | 720              |       | 610                    |       | 328 |   | 526 |   | 259 |   |
| Increase/(decrease) in sundry provisions and other  non-cash items                       |       | (756             | )          | 435                    |       | (32 | ) | (2,435 | ) | (161 | ) |
| Impairment charges on loans                                                              |       | 1,506            |       | 3,287                  |       | 963 |   | 990 |   | 2,044 |   |
| Increase/(decrease) in derivative financial  instruments                                 |       | (2,418           | )          | 15,000                 |       | (6,214 | ) | (2,499 | ) | 10,162 |   |
| (Increase)/decrease in trading assets                                                    |       | 1,819            |       | 12,428                 |       | (13,819 | ) | 2,932 |   | 11,924 |   |
| Increase/(decrease) in trading liabilities                                               |       | (5,936           | )          | (13,104                | )          | 8,470 |   | (4,205 | ) | (8,266 | ) |
| (Increase)/decrease in accrued interest receivable                                       |       | (357             | )          | 345                    |       | (280 | ) | (224 | ) | 250 |   |
| (Decrease)/increase in accrued interest payable                                          |       | 1,455            |       | (349                   | )          | 470 |   | 1,143 |   | (367 | ) |
| Increase/(decrease) in current and deferred tax                                          |       | (1,977           | )          | 1,168                  |       | (367 | ) | (2,513 | ) | 864 |   |
| **Net cash (used in)/provided by  operating activities**                                 |       | 468              |       | 23,337                 |       | (6,549 | ) | (125 | ) | 18,746 |   |
| **Details of assets and liabilities  of controlled entities and businesses disposed**    | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash                                                                                     |       | —           |       | —                 |       | 12 |   | — |   | — |   |
| Total assets (financial and tangible)                                                    |       | —           |       | —                 |       | 208 |   | — |   | — |   |
| Total liabilities                                                                        |       | —           |       | —                 |       | (155 | ) | — |   | — |   |
| Net assets of entities and businesses disposed                                           |       | —           |       | —                 |       | 65 |   | — |   | — |   |
| Gain on disposal                                                                         |       | —           |       | —                 |       | 17 |   | — |   | — |   |
| **Cash consideration (net of sale  costs)**                                              |       | —           |       | —                 |       | 82 |   | — |   | — |   |
| Less: cash deconsolidated                                                                |       | —           |       | —                 |       | (12 | ) | — |   | — |   |
| **Cash consideration (net of sale  costs and cash held)**                                |       | —           |       | —                 |       | 70 |   | — |   | — |   |
| **Details of assets and liabilities  of controlled entities and businesses acquired**    | ** ** | ** **       |       |                   |       |   |   |   |   |   |   |
| Total assets (financial and tangible) excluding  cash                                    |       | —           |       | 147,939                |       | 42 |   | 131,604 |   | — |   |
| Identifiable intangible assets                                                           |       | —           |       | 2,493                  |       | 38 |   | 2,229 |   | — |   |
| Total liabilities                                                                        |       | —           |       | (144,845               | )          | (74 | ) | (139,890 | ) | — |   |
| **Identifiable net assets acquired**                                                     |       | —           |       | 5,587                  |       | 6 |   | (6,057 | ) | — |   |
| Goodwill                                                                                 |       | —           |       | 6,162                  |       | 131 |   | 5,849 |   | — |   |
| Shares issued                                                                            |       | —           |       | (12,116                | )          | — |   | — |   | — |   |
| Reserves                                                                                 |       | —           |       | —                 |       | — |   | (6 | ) | — |   |
| Non-controlling interests                                                                |       | —           |       | (7                     | )          | — |   | — |   | — |   |
| **Cash (acquired)/paid (net of  transaction costs)**                                     |       | —           |       | (374                   | )          | 137 |   | (214 | ) | — |   |

 

***Business acquired***

 

On 4 January 2008,the Group acquired 100% of the share capital of RAMS Franchising Pty Limited, afranchise distribution business offering mortgage origination services.

 

During the 2009financial year, Westpac completed its merger with St.George Bank Limited. Inthe current year, Westpac and St.George Bank Limited commenced operating as asingle ADI.

 

Refer to Note 43 fordetails of the merger with St.George and transition to a single ADI.

 

***Business disposed***

 

During the 2008financial year Westpac disposed of operations that were warehoused as part ofits Specialised Capital group.

 

***Equity transactions***

 

Refer to Note 24 fordetails of the shares issued during the year.

 

292

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 43. Merger with St.GeorgeBank Limited and transition to a single authorised deposit-taking institution**

 

On 1 December 2008,Westpac completed its merger with St.George Bank Limited by way of a scheme ofarrangement. This merger, originally announced on 13 May 2008, wasapproved by holders of St.George ordinary shares on 13 November 2008and subsequently approved by the Federal Court of Australia on 17 November 2008.For consolidation purposes, the transaction is considered to be effective from17 November 2008. Westpac obtained 100% of the ordinary shares inSt.George for $12,165 million, satisfied by $49 million in cash (includingtransaction costs of $45 million and net costs of $4 million for the on marketpurchase of Westpac ordinary shares to replace existing St.George employeeshare based payment arrangements) and the issue of approximately 743 millionnew Westpac ordinary shares at a fair value of $16.32 per share, based on theclosing price of Westpac ordinary shares on the ASX on 17 November 2008. Thecost of the merger includes directly attributable costs including consultancy,legal, accounting and other professional fees.

 

The principalactivities of St.George at the acquisition date were the provision of retailmortgages, business lending, wealth management and retail banking services.There have been no changes in the principal activities of St.Georgesince acquisition.

 

Goodwill arose inthe business combination as the difference between the consideration paid andthe fair value of net assets, identifiable intangible assets and contingentliabilities acquired. The goodwill balance was attributed to the skills andtalent of the St.George workforce, the benefit of expected head office andoperational synergies, revenue growth and future market developments. Thesebenefits were not recognised separately from goodwill as the future economicbenefits arising from them cannot be measured reliably or they are not capableof being separated from the Group and sold, transferred, licensed, rented orexchanged either individually or together with any related contracts.

 

During the period 18November 2008 to 30 September 2009, St.George Bank Limitedcontributed $971 million to the consolidated net profit for the year ended30 September 2009.

 

If the merger hadoccurred on 1 October 2008, Group revenue would have been$36,847 million and net profit would have been $3,640 million for thefinancial year ended 30 September 2009. This pro-forma financialinformation uses St.George data for the 12-month period ended 30 September 2009and represents the historical operating results of St.George, reported inaccordance with their pre-merger accounting policies.

 

Details of thepurchase consideration are set out below:

 
| ** **                                                                                             | ** ** | **$m** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------|------------|
| Fair value of 743 million Westpac ordinary shares  issued in exchange for St.George ordinary shares(1) |       | 12,116 |       |
| Fair value of Westpac restricted and unrestricted  shares issued to St.George employees                |       | 4      |       |
| Direct costs relating to the merger                                                                    |       | 45     |       |
| **Total purchase consideration**                                                                       |       | 12,165 |       |

 

----

| (1) | Excluding the fair value of $3 million of  shares issued to an employee share trust controlled by St.George. |
|-----|--------------------------------------------------------------------------------------------------------------|

 

 

293

----

 

**Note 43. Merger with St.GeorgeBank Limited and transition to a single authorised deposit-taking institution (continued)**

 

Details of the fairvalue of the identifiable assets and liabilities acquired and goodwill at 17 November 2008are set out below:

 
| ** **                                                                               | ** ** | **Pre-acquisition** | ** ** | **Recognised**     | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|
| ** **                                                                               | ** ** | **Carrying**        | ** ** | **Values on** | ** ** |
| ** **                                                                               | ** ** | **Amount**          | ** ** | **Acquisition**    | ** ** |
| ** **                                                                               | ** ** | **$m**              | ** ** | **$m**             | ** ** |
| **Assets**                                                                               |       |                | ** ** | ** **         | ** ** |
| Cash and balances with central banks                                                     |       | 423                 |       | 423                |       |
| Due from other financial institutions                                                    |       | 10,357              |       | 10,357             |       |
| Derivative financial instruments                                                         |       | 7,155               |       | 7,155              |       |
| Trading securities                                                                       |       | 6,702               |       | 6,702              |       |
| Available-for-sale securities                                                            |       | 2,410               |       | 2,250              |       |
| Loans                                                                                    |       | 120,889             |       | 120,192            |       |
| Life insurance assets                                                                    |       | 59                  |       | 59                 |       |
| Goodwill (pre-merger)                                                                    |       | 1,186               |       | —             |       |
| Intangible assets excluding goodwill:                                                    |       |                |       |               |       |
| Core deposit intangible                                                                  |       | —              |       | 1,494              |       |
| Brand names                                                                              |       | —              |       | 636                |       |
| Distribution relationships financial planners                                            |       | —              |       | 191                |       |
| Customer relationships credit cards                                                      |       | —              |       | 89                 |       |
| Software                                                                                 |       | 190                 |       | 83                 |       |
| Property, plant and equipment                                                            |       | 337                 |       | 321                |       |
| Current tax assets                                                                       |       | 63                  |       | 63                 |       |
| Deferred tax assets                                                                      |       | 249                 |       | —             |       |
| Other assets                                                                             |       | 851                 |       | 840                |       |
| **Total assets**                                                                         |       | 150,871             |       | 150,855            |       |
| **Liabilities**                                                                          |       |                |       |               |       |
| Due to other financial institutions                                                      |       | 5,756               |       | 5,756              |       |
| Deposits at amortised cost                                                               |       | 84,540              |       | 84,754             |       |
| Derivative financial instruments                                                         |       | 3,322               |       | 3,314              |       |
| Other trading liabilities and other financial  liabilities designated at fair value      |       | 6,829               |       | 6,838              |       |
| Debt issues                                                                              |       | 35,287              |       | 34,579             |       |
| Acceptances                                                                              |       | 3,009               |       | 3,009              |       |
| Deferred tax liabilities                                                                 |       | —              |       | 124                |       |
| Life insurance policy liabilities                                                        |       | 38                  |       | 38                 |       |
| Provision for distributions on ordinary shares and  hybrids                              |       | 718                 |       | 718                |       |
| Other provisions                                                                         |       | 291                 |       | 298                |       |
| Other liabilities                                                                        |       | 1,471               |       | 1,653              |       |
| **Total liabilities (excluding loan  capital)**                                          |       | 141,261             |       | 141,081            |       |
| **Loan capital**                                                                         |       |                |       |               |       |
| Subordinated bonds, notes, and debentures(1)                                             |       | 3,397               |       | 3,764              |       |
| **Total loan capital**                                                                   |       | 3,397               |       | 3,764              |       |
| **Total liabilities and loan  capital**                                                  |       | 144,658             |       | 144,845            |       |
| **Net assets**                                                                           |       | 6,213               |       | 6,010              |       |
| Non-controlling interests                                                                |       |                |       | (7                 | )          |
| **Net identifiable assets and  liabilities attributable to Westpac Banking Corporation** |       |                |       | 6,003              |       |
| **Goodwill**                                                                             |       |                |       | 6,162              |       |

 

----

| (1) | In addition to the fair value of St.George  loan capital, the recognised value on acquisition also includes the  reclassification of St.George SAINTS ($350 million) and SPS ($150  million) hybrid instruments that were previously included as part of  St.George’s shareholders’ equity. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

294

----

 

NOTES TO THE FINANCIAL STATEMENTS

 

**Note 43. Merger with St.GeorgeBank Limited and transition to a single authorised deposit-takinginstitution (continued)**

 

On 1 March 2010Westpac and St.George commenced operating as a single ADI. In conjunction withthat process, the legal entity St.George Bank Limited was deregistered andWestpac became its successor in law. This resulted in all of St.George’s assetsand liabilities (including all deposits, contracts and debt securitiespreviously issued by St.George Bank Limited) becoming Westpac’s assets andliabilities. All St.George Bank Limited directly owned subsidiaries becamedirectly owned by Westpac.

 

Details of theimpact of transferring the assets and liabilities of St.George Bank Limited toWestpac and the derecognition of Westpac’s investment in St.George Bank Limitedare set out below:

 
| ** **                                        | ** ** | **1 March 2010** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **$m**                     | ** ** |
| **Assets**                                        | ** ** | ** **                 | ** ** |
| Cash and balances with central banks              |       | 214                        |       |
| Receivables due from other financial institutions |       | 1,675                      |       |
| Derivative financial instruments                  |       | 1,511                      |       |
| Trading securities                                |       | 6,047                      |       |
| Other financial assets designated at fair value   |       | 1                          |       |
| Available-for-sale securities                     |       | 178                        |       |
| Loans                                             |       | 115,684                    |       |
| Due from subsidiaries                             |       | 18,342                     |       |
| Investments in subsidiaries                       |       | (13,284                    | )          |
| Goodwill                                          |       | 5,849                      |       |
| Intangible assets excluding goodwill              |       | 2,229                      |       |
| Property, plant and equipment                     |       | 260                        |       |
| Deferred tax assets                               |       | 445                        |       |
| Other assets                                      |       | 745                        |       |
| **Total assets**                                  |       | 139,896                    |       |
| **Liabilities**                                   |       |                       |       |
| Payables due from other financial institutions    |       | 961                        |       |
| Deposits at amortised cost                        |       | 70,021                     |       |
| Derivative financial instruments                  |       | 2,185                      |       |
| Debt issues                                       |       | 5,017                      |       |
| Acceptances                                       |       | 212                        |       |
| Current tax liabilities                           |       | (98                        | )          |
| Deferred tax liabilities                          |       | 527                        |       |
| Due to subsidiaries                               |       | 56,997                     |       |
| Provisions                                        |       | 285                        |       |
| Other liabilities                                 |       | 1,548                      |       |
| **Total liabilities (excluding loan  capital)**   |       | 137,655                    |       |
| **Loan capital**                                  |       |                       |       |
| Subordinated bonds, notes, and debentures         |       | 2,235                      |       |
| **Total loan capital**                            |       | 2,235                      |       |
| **Total liabilities and loan  capital**           |       | 139,890                    |       |
| **Net assets**                                    |       | 6                          |       |
| **Shareholders’ equity**                     |       |                       |       |
| Reserves                                          |       |                       |       |
| Cash flow hedge                                   |       | (33                        | )          |
| Common Control                                    |       | 41                         |       |
| Other                                             |       | (2                         | )          |
| **Total equity**                                  |       | 6                          |       |

 

**Note 44. Subsequent events**

 

No matter orcircumstance has arisen since the year ended 30 September 2010 whichis not otherwise dealt with in this Financial Report, that has significantlyaffected or may significantly affect the operations of the Group, the resultsof its operations or the state of affairs of the Group in subsequent periods.

 

295

----

 

STATUTORY STATEMENTS

 

**Directors’ declaration**

 

In the Directors’opinion:

 

a.              the financial statementsand notes set out in ‘Section 3 — Financial report for the year ended 30September 2010’ are in accordance with the *Corporations Act 2001*,including:

 

(i)           complying with AustralianAccounting Standards, the Corporations Regulations 2001 and other mandatoryprofessional reporting requirements; and

 

(ii)        giving a true and fair viewof Westpac Banking Corporation and the Group’s financial position as at30 September 2010 and of their performance, as represented by theresults of their operations, changes in equity and their cash flows, for thefinancial year ended on that date; and

 

b.             there are reasonablegrounds to believe that Westpac will be able to pay its debts as and when theybecome due and payable.

 

Note 1(a) confirmsthat the financial statements also comply with International FinancialReporting Standards as issued by the International Accounting Standards Board.

 

The Directors havebeen given the declaration by the Chief Executive Officer and the ChiefFinancial Officer required by section 295A of the *CorporationsAct 2001*.

 

This declaration ismade in accordance with a resolution of the Directors.

 

For and on behalf ofthe Board.

 

 
|                         |   |                                                               |
|-------------------------|--------|---------------------------------------------------------------|
|                    |   |                                                          |
| Ted Evans AC  Chairman  |   | Gail Kelly  Managing Director &   Chief Executive Officer |
| Sydney  3 November 2010 |   |                                                          |

 

296

----

 

STATUTORY STATEMENTS

 

**Management’s report on internal control over financialreporting**

 

**The following report is requiredby rules of the US Securities and Exchange Commission**

 

The management ofWestpac is responsible for establishing and maintaining adequate internalcontrol over financial reporting for Westpac as defined in Rule 13a – 15 (f)under the Securities Exchange Act of 1934, as amended. Westpac’s internalcontrol system is a process designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with applicableaccounting standards.

 

Westpac’s internalcontrol over financial reporting includes policies and procedures that: pertainto the maintenance of records that in reasonable detail accurately reflect thetransactions and dispositions of the assets of Westpac and its consolidatedentities; provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withapplicable accounting standards, and that receipts and expenditures of Westpacare being made only in accordance with authorizations of management anddirectors of Westpac and its consolidated entities; and provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of the assets of Westpac and its consolidated entities thatcould have a material effect on the financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

Westpac management, withthe participation of the CEO and CFO, assessed the effectiveness of Westpac’sinternal control over financial reporting as of 30 September 2010 based on thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in Internal Control-Integrated Framework. Based on thisassessment, management has concluded that Westpac’s internal control overfinancial reporting as of 30 September 2010 was effective.

 

The effectiveness ofWestpac’s internal control over financial reporting as of30 September 2010 has been audited by PricewaterhouseCoopers, anindependent registered public accounting firm, as stated in their report whichis included herein.

 

297

----

 

 
|   | **PricewaterhouseCoopers**

**ABN  52 780 433 757**

 

Darling Park Tower  2

201 Sussex Street

GPO BOX 2650

SYDNEY NSW 1171

DX 77 Sydney

Australia

Telephone +61 2  8266 0000

Facsimile +61 2  8266 9999

www.pwc.com/au |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Independent Auditor’s report to the members of WestpacBanking Corporation**

 

***Report on the financial report***

 

We have audited theaccompanying financial report of Westpac Banking Corporation (the ‘Corporation’),which comprises the balance sheet as at 30 September 2010, and the incomestatement, the statement of comprehensive income, the statement of changes inequity and statement of cash flows for the year ended on that date, a summaryof significant accounting policies, other explanatory notes and the directors’declaration for both the Corporation and the Westpac Banking Corporation Group(the Consolidated Entity). The Consolidated Entity comprises Westpac and theentities it controlled at the year’s end or from time to time during thefinancial year.

 

***Directors’ responsibility for the financial report***

 

The directors of theCorporation are responsible for the preparation and fair presentation of thefinancial report in accordance with Australian Accounting Standards (includingthe Australian Accounting Interpretations) and the *CorporationsAct 2001*. This responsibility includes establishing and maintaininginternal controls relevant to the preparation and fair presentation of thefinancial report that is free from material misstatement, whether due to fraudor error; selecting and applying appropriate accounting policies; and makingaccounting estimates that are reasonable in the circumstances. In Note 1, thedirectors also state, in accordance with Accounting Standard AASB 101 *Presentation of Financial Statements*, that compliance withthe Australian equivalents to International Financial Reporting Standardsensures that the financial report, comprising the financial statements andnotes, complies with International Financial Reporting Standards.

 

***Auditor’s responsibility***

 

Our responsibilityis to express an opinion on the financial report based on our audit. Weconducted our audit in accordance with Australian Auditing Standards. TheseAuditing Standards require that we comply with relevant ethical requirementsrelating to audit engagements and plan and perform the audit to obtainreasonable assurance whether the financial report is free from materialmisstatement.

 

An audit involvesperforming procedures to obtain audit evidence about the amounts anddisclosures in the financial report. The procedures selected depend on the auditor’sjudgment, including the assessment of the risks of material misstatement of thefinancial report, whether due to fraud or error. In making those riskassessments, the auditor considers internal control relevant to the entity’spreparation and fair presentation of the financial report in order to designaudit procedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the entity’s internalcontrol. An audit also includes evaluating the appropriateness of accountingpolicies used and the reasonableness of accounting estimates made by thedirectors, as well as evaluating the overall presentation of the financialreport.

 

Our proceduresinclude reading the other information in the Annual Report to determine whetherit contains any material inconsistencies with the financial report.

 

Our audit did notinvolve an analysis of the prudence of business decisions made by directors ormanagement.

 

We believe that theaudit evidence we have obtained is sufficient and appropriate to provide abasis for our audit opinions.

 

***Independence***

 

In conducting ouraudit, we have complied with the independence requirements of the *Corporations Act 2001*.

 

***Auditor’s opinion***

 

In our opinion:

 

a.              the financial report of theCorporation is in accordance with the *Corporations Act 2001*,including:

 

(i)           giving a true and fair viewof the Corporation’s and the Consolidated Entity’s financial position as at30 September 2010 and of their performance for the year ended on thatdate; and

 

(ii)        complying with AustralianAccounting Standards (including the Australian Accounting Interpretations) andthe *Corporations Regulations 2001*; and

 

b.             the financial report andnotes also comply with International Financial Reporting Standards as disclosedin Note 1.

 

298

----

 

STATUTORY STATEMENTS

 

***Report on the Remuneration Report***

 

We have audited theRemuneration Report included in the Directors’ report in Section 1 of thisAnnual Report for the year ended 30 September 2010. The directors ofthe Corporation are responsible for the preparation and presentation of theRemuneration Report in accordance with section 300A of the *CorporationsAct 2001*. Our responsibility is to express an opinion on the RemunerationReport, based on our audit conducted in accordance with Australian AuditingStandards.

 

***Auditor’s opinion***

 

In our opinion, theRemuneration Report of the Corporation for the year ended30 September 2010, complies with section 300A of the *Corporations Act 2001*.

 

 
|                        |   |                                |
|------------------------|--------|-------------------------------------|
|                   |   |                                |
| PricewaterhouseCoopers |   |                                |
|                   |   |                                |
|                   |   |                                |
|                        |   |                                |
|                   |   |                                |
| Ian Hammond  Partner   |   | Sydney,  Australia  3 November 2010 |

 

299

----

 

 
|   | **PricewaterhouseCoopers**

**ABN  52 780 433 757**

 

Darling Park Tower  2

201 Sussex Street

GPO BOX 2650

SYDNEY NSW 1171

DX 77 Sydney

Australia

Telephone +61 2  8266 0000

Facsimile +61 2  8266 9999

www.pwc.com/au |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Report of independent registered public accounting firm**

 

To the Board ofDirectors and Shareholders of Westpac Banking Corporation:

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidated incomestatements, consolidated statements of comprehensive income, consolidatedstatements of changes in equity, and consolidated cash flow statements presentfairly, in all material respects, the financial position of Westpac BankingCorporation (the ‘Corporation’) and its subsidiaries at 30 September 2010 and2009, and the results of their operations and their cash flows for each of thethree years in the period ended 30 September 2010 in conformity withInternational Financial Reporting Standards as issued by the InternationalAccounting Standards Board. Also in our opinion, the Corporation maintained, inall material respects, effective internal control over financial reporting asof 30 September 2010, based on criteria established in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). The Corporation’s management is responsible for thesefinancial statements, for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting, included under the heading ‘Management’s Report onInternal Control over Financial Reporting’ in the accompanying Annual Report.Our responsibility is to express opinions on these financial statements and onthe Corporation’s internal control over financial reporting based on ourintegrated audits. We conducted our audits in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audits to obtain reasonable assuranceabout whether the financial statements are free of material misstatement andwhether effective internal control over financial reporting was maintained inall material respects. Our audits of the financial statements includedexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. Our audit of internal control over financial reportingincluded obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk. Our audits also included performing such other procedures aswe considered necessary in the circumstances. We believe that our auditsprovide a reasonable basis for our opinions.

 

Our audit of theconsolidated financial statements of the Corporation and its subsidiaries wasconducted for the purpose of forming an opinion on the consolidated financialstatements taken as a whole. The Corporation has included parent entity onlyinformation on the face of the consolidated financial statements and otherparent entity only disclosures in the notes to the financial statements. Suchparent entity only information is presented for purposes of additional analysisand is not a required part of the consolidated financial statements presentedin accordance with International Financial Reporting Standards as issued by theInternational Accounting Standards Board. Such information has been subjectedto the auditing procedures applied in the audit of the consolidated financialstatements, and, in our opinion, is fairly stated in all material respects inrelation to the consolidated financial statements taken as a whole.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

 
|                        |   |                                |
|------------------------|--------|-------------------------------------|
|                   |   |                                |
| PricewaterhouseCoopers |   | Sydney,  Australia  3 November 2010 |

 

300

----

 

STATUTORY STATEMENTS

** **

**Limitation on IndependentRegistered Public Accounting Firm’s Liability**

 

The liability ofPricewaterhouseCoopers (an Australian partnership which we refer to as PwCAustralia), with respect to claims arising out of its audit reports included inthis Annual Report, is subject to the limitations set forth in the ProfessionalStandards Act 1994 of New South Wales, Australia (the ‘Professional StandardsAct’) and The Institute of Chartered Accountants in Australia (NSW) Schemeadopted by The Institute of Chartered Accountants in Australia (ICAA) andapproved by the New South Wales Professional Standards Council pursuant to theProfessional Standards Act (the ‘NSW Accountants Scheme’) or, in relation tomatters occurring on or prior to 7 October 2007, the predecessor scheme. TheProfessional Standards Act and the NSW Accountants Scheme may limit theliability of PwC Australia for damages with respect to certain civil claimsarising in, or governed by the laws of, New South Wales directly or vicariouslyfrom anything done or omitted in the performance of its professional servicesfor us, including, without limitation, its audits of our financial statements,to the lesser of (in the case of audit services) ten times the reasonablecharge for the service provided and a maximum liability for audit work of $75million or, in relation to matters occurring on or prior to7 October 2007, $20 million. The limit does not apply to claims forbreach of trust, fraud or dishonesty.

 

In addition there isequivalent professional standards legislation in place in each state andterritory in Australia and amendments have been made to a number of Australianfederal statutes to limit liability under those statutes to the same extent asliability is limited under state and territory laws by professional standardslegislation.

 

These limitations ofliability may limit recovery upon the enforcement in Australian courts of anyjudgment under US or other foreign laws rendered against PwC Australia based onor related to its audit report on our financial statements. Substantially allof PwC Australia’s assets are located in Australia. However, the ProfessionalStandards Act and the NSW Accountants Scheme have not been subject to judicialconsideration and therefore how the limitation will be applied by the courtsand the effect of the limitation on the enforcement of foreign judgmentsare untested.

 

301

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**This page has been intentionallyleft blank.**

 

302

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SECTION 4

 

Shareholdinginformation

Additional information

Information for shareholders

Glossary of abbreviationsand defined terms

Contactus

 

303

----

 

SHAREHOLDING INFORMATION

 

**Westpac ordinary shares**

 

**Top 20 ordinary shareholders at 5 October 2010**

 
| ** **                                         | ** ** | **Number of Fully Paid   Ordinary Shares** | ** ** | **% Held** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------|------------|-----------------|------------|
| HSBC Custody Nominees (Australia) Limited          |       | 444,695,642                                                    |       | 14.88           |       |
| JP Morgan Nominees Australia Limited               |       | 379,805,564                                                    |       | 12.71           |       |
| National Nominees Limited                          |       | 312,929,618                                                    |       | 10.47           |       |
| Citicorp Nominees Pty Limited                      |       | 143,271,824                                                    |       | 4.79            |       |
| RBC Global Services Australia Nominees Pty Limited |       | 73,948,625                                                     |       | 2.47            |       |
| Cogent Nominees Pty Limited                        |       | 57,815,915                                                     |       | 1.93            |       |
| AMP Life Limited                                   |       | 26,481,210                                                     |       | 0.89            |       |
| Australian Foundation Investment Company Limited   |       | 18,236,232                                                     |       | 0.61            |       |
| UBS Private Clients Australia Nominees Pty Limited |       | 15,635,906                                                     |       | 0.52            |       |
| Australian Reward Investment Alliance              |       | 13,802,315                                                     |       | 0.46            |       |
| ANZ Nominees Limited                               |       | 12,492,571                                                     |       | 0.42            |       |
| Bond Street Custodians Limited                     |       | 11,410,755                                                     |       | 0.38            |       |
| Queensland Investment Corporation                  |       | 10,371,346                                                     |       | 0.35            |       |
| UBS Nominees Pty Limited                           |       | 9,951,463                                                      |       | 0.33            |       |
| Milton Corporation Limited                         |       | 9,000,750                                                      |       | 0.30            |       |
| Argo Investments Limited                           |       | 8,646,851                                                      |       | 0.29            |       |
| Perpetual Trustee Company Limited                  |       | 8,222,131                                                      |       | 0.28            |       |
| Invia Custodian Pty Limited                        |       | 7,557,952                                                      |       | 0.25            |       |
| Tasman Asset Management Limited                    |       | 4,408,952                                                      |       | 0.15            |       |
| Questor Financial Services Limited                 |       | 4,201,956                                                      |       | 0.14            |       |
| **Total of Top 20 registered  shareholders**       | ** ** | **1,572,887,578**                                              | ** ** | **52.62**       | ** ** |

 

As at 5 October 2010there were 561,023 holders of our ordinary shares compared to 538,953 in 2009and 376,813 in 2008. Ordinary shareholders with a registered address inAustralia held approximately 98% of our fully paid share capital at 5October 2010 (approximately 98% in 2009 and 97% in 2008).

 

**Substantial shareholders as at 5 October 2010**

 

As at 5 October 2010there were no shareholders which met the Corporations Act’s definition of beinga ‘substantial shareholder’. A person will have a substantial holding of ourshares if the voting rights attaching to our shares in which that person ortheir associates have relevant interests is 5% or more of the total number ofvotes attached to all our voting shares. The above table of the Top 20 ordinaryshareholders includes shareholders that may hold shares for the benefit ofthird parties.

 

**Significant changes in ordinaryshare ownership of substantial shareholders**

 

On 15 October 2009,Barclays Group became a substantial shareholder having relevant interests in171,119,392 ordinary shares (5.82% of total votes outstanding). They ceased tobe a substantial shareholder on 16 November 2009.

 

On 2 December 2009,BlackRock Investment Management (Australia) Limited became a substantialshareholder having relevant interests in 159,356,967 ordinary shares (5.35% oftotal votes outstanding). They ceased to be a substantial shareholder on18 May 2010.

 

**Control of registrant**

 

We are not directlyor indirectly owned or controlled by any other corporation(s) or by anyforeign government. Refer to the section ‘Exchange controls and otherlimitations affecting security holders’ which provides information on the *Foreign Acquisitions and Takeovers Act 1975*, *Corporations Act 2001* and *FinancialSector (Shareholdings) Act 1998* which impose limits on equity holdings.

 

At 30 September 2010,our Directors and Executive Officers owned beneficially, directly orindirectly, an aggregate of 3,470,839 (0.12%) of the fully paid ordinaryshares outstanding.

 

304

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**Analysis by range of holdings ofordinary shares as at 5 October 2010**

 
| ** **                     | ** ** | **Number of Holders** | ** ** | ** ** | ** ** | **Number of**       | ** ** | ** ** | ** **  | **Number of holders** | ** ** |
|--------------------------------|------------|---------------------------------|------------|------------|------------|--------------------------|------------|------------|-------------|---------------------------------|------------|
| ** **                     | ** ** | **of Fully Paid**     | ** ** | ** ** | ** ** | **Fully Paid**      | ** ** | ** ** | ** **  | **of Share Options**  | ** ** |
| **Number of Shares** | ** ** | **Ordinary Shares**        | ** ** | **%**      | ** ** | **Ordinary Shares** | ** ** | **%**      | ** **  | **and Rights**             | ** ** |
| 1                              | –     | 1,000                           |       |       | 311,621    |                     | 55.54      |       | 130,029,690 |                            | 4.35       |   | 77 |   |
| 1,001                          | –     | 5,000                           |       |       | 193,739    |                     | 34.53      |       | 439,430,587 |                            | 14.70      |   | 209 |   |
| 5,001                          | –     | 10,000                          |       |       | 33,138     |                     | 5.91       |       | 232,665,576 |                            | 7.78       |   | 70 |   |
| 10,001                         | –     | 100,000                         |       |       | 21,852     |                     | 3.90       |       | 465,129,403 |                            | 15.56      |   | 99 |   |
| 100,001 and over               |       | 673                             |       | 0.12       |       | 1,721,952,263            |       | 57.61      |        | 41                              |       |
| **Totals**                     | ** ** | **561,023**                     | ** ** | **100.00** | ** ** | **2,989,207,519**        | ** ** | **100.00** | ** **  | **496**                         | ** ** |

 

There were 10,119shareholders holding less than a marketable parcel ($500) based on a marketprice of $23.11 at the close of trading on 5 October 2010.

 

**Voting rights of ordinary shares**

 

Holders of our fullypaid ordinary shares have, at general meetings (including special generalmeetings), one vote on a show of hands and, upon a poll, one vote for eachfully paid ordinary share held by them.

 

**Westpac Stapled Preferred Securities**

 

**Westpac SPS**

 

***Top 20 holders of Westpac SPS at 5 October 2010***

 
| ** **                                                  | ** ** | **Number of   Westpac SPS** | ** ** | **% Held** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|-----------------|------------|
| BT Portfolio Services Limited                               |       | 638,010                               |       | 6.16            |       |
| RBC Dexia Investor Services Australia Nominees Pty  Limited |       | 302,803                               |       | 2.92            |       |
| UBS Wealth Management Australia Nominees Pty  Limited       |       | 297,046                               |       | 2.87            |       |
| HSBC Custody Nominees (Australia) Limited                   |       | 266,289                               |       | 2.57            |       |
| Bond Street Custodians Limited                              |       | 246,588                               |       | 2.38            |       |
| Invia Custodian Pty Limited                                 |       | 234,871                               |       | 2.27            |       |
| JP Morgan Nominees Australia Limited                        |       | 162,600                               |       | 1.57            |       |
| Avanteos Investments Limited                                |       | 106,288                               |       | 1.03            |       |
| JMB Pty Limited                                             |       | 80,800                                |       | 0.78            |       |
| Eastcote Pty Limited                                        |       | 80,000                                |       | 0.77            |       |
| Wiser Equity Pty Limited                                    |       | 80,000                                |       | 0.77            |       |
| Netwealth Investments Limited                               |       | 76,985                                |       | 0.74            |       |
| Hayson Super Investment Pty Limited                         |       | 70,000                                |       | 0.68            |       |
| Namrog Investments Pty Ltd                                  |       | 60,000                                |       | 0.58            |       |
| Perpetual Trustee Company Limited                           |       | 58,561                                |       | 0.57            |       |
| National Nominees Limited                                   |       | 57,017                                |       | 0.55            |       |
| Equity Trustees Limited                                     |       | 54,082                                |       | 0.52            |       |
| Burrawong Investments Pty Limited                           |       | 50,000                                |       | 0.48            |       |
| Country Employment Services Pty Limited                     |       | 50,000                                |       | 0.48            |       |
| Domer Mining Company Pty Limited                            |       | 50,000                                |       | 0.48            |       |
| **Total of top 20 registered  holders**                     | ** ** | **3,021,940**                         | ** ** | **29.17**       | ** ** |

 

305

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SHAREHOLDING INFORMATION

 

***Analysis by range of holdings of Westpac SPS as at 5 October 2010***

 
| ** **                         | ** ** | **Number of Holders of** | ** ** | ** ** | ** ** | **Number of**   | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|------------|------------|----------------------|------------|------------|------------|
| **Number of Securities** | ** ** | **Westpac SPS**                    | ** ** | **%**      | ** ** | **Westpac SPS** | ** ** | **%**      | ** ** |
| 1                                  | –     | 1,000                                   |       |       | 14,226     |                 | 91.72      |       | 4,439,982  |   | 42.85 |   |
| 1,001                              | –     | 5,000                                   |       |       | 1,128      |                 | 7.27       |       | 2,515,532  |   | 24.27 |   |
| 5,001                              | –     | 10,000                                  |       |       | 88         |                 | 0.57       |       | 712,924    |   | 6.88 |   |
| 10,001                             | –     | 100,000                                 |       |       | 64         |                 | 0.41       |       | 1,700,800  |   | 16.41 |   |
| 100,001 and over                   |       | 4                                       |       | 0.03       |       | 993,432              |       | 9.59       |       |
| **Totals**                         | ** ** | **15,510**                              | ** ** | **100.00** | ** ** | **10,362,670**       | ** ** | **100.00** | ** ** |

 

There were twoshareholders holding less than a marketable parcel based on a market price of$102.00 at the close of trading on 5 October 2010.

 

**Westpac SPS II**

 

***Top 20 holders of Westpac SPS II at 5 October 2010***

*** ***
| ** **                                                  | ** ** | **Number of   Westpac SPS II** | ** ** | **% Held** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------|------------|
| BT Portfolio Services Limited                               |       | 496,433                                       |       | 5.47            |       |
| Invia Custodian Pty Limited                                 |       | 320,930                                       |       | 3.53            |       |
| RBC Dexia Investor Services Australia Nominees Pty  Limited |       | 262,629                                       |       | 2.89            |       |
| Namrog Investments Pty Limited                              |       | 250,000                                       |       | 2.75            |       |
| Bond Street Custodians Limited                              |       | 198,144                                       |       | 2.18            |       |
| Avanteos Investments Limited                                |       | 155,675                                       |       | 1.71            |       |
| UBS Wealth Management Australia Nominees Pty Limited        |       | 139,458                                       |       | 1.54            |       |
| UCA Cash Management Fund Limited                            |       | 135,101                                       |       | 1.49            |       |
| Questor Financial Services Limited                          |       | 125,934                                       |       | 1.39            |       |
| BKI Investment Company Limited                              |       | 90,165                                        |       | 0.99            |       |
| HSBC Custody Nominees (Australia) Limited                   |       | 67,253                                        |       | 0.74            |       |
| Alsop Pty Limited                                           |       | 55,000                                        |       | 0.61            |       |
| Equity Trustees Limited                                     |       | 53,587                                        |       | 0.59            |       |
| National Nominees Limited                                   |       | 52,731                                        |       | 0.58            |       |
| Dimbulu Pty Limited                                         |       | 51,000                                        |       | 0.56            |       |
| Domer Mining Co Pty Limited                                 |       | 50,000                                        |       | 0.55            |       |
| Koll Pty Limited                                            |       | 50,000                                        |       | 0.55            |       |
| Randazzo C&G Developments Pty Limited                   |       | 50,000                                        |       | 0.55            |       |
| JP Morgan Nominees Australia Limited                        |       | 47,000                                        |       | 0.52            |       |
| Fortis Clearing Nominees Pty Limited                        |       | 32,346                                        |       | 0.36            |       |
| **Total of top 20 registered  holders**                     | ** ** | **2,683,386**                                 | ** ** | **29.55**       | ** ** |

 

***Analysis by range of holdings ofWestpac SPS II as at 5 October 2010***

 
| ** **                         | ** ** | **Number of Holders of** | ** ** | ** ** | ** ** | **Number of**           | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| **Number of Securities** | ** ** | **Westpac SPS II**            | ** ** | **%**      | ** ** | **Westpac SPS II** | ** ** | **%**      | ** ** |
| 1                                  | –     | 1,000                                   |       |       | 12,581     |                         | 91.33      |       | 3,697,817  |   | 40.71 |   |
| 1,001                              | –     | 5,000                                   |       |       | 1,048      |                         | 7.61       |       | 2,351,365  |   | 25.89 |   |
| 5,001                              | –     | 10,000                                  |       |       | 88         |                         | 0.64       |       | 720,907    |   | 7.94 |   |
| 10,001                             | –     | 100,000                                 |       |       | 53         |                         | 0.38       |       | 1,482,024  |   | 16.31 |   |
| 100,001 and over                   |       | 5                                       |       | 0.04       |       | 831,165                      |       | 9.15       |       |
| **Totals**                         | ** ** | **13,775**                              | ** ** | **100.00** | ** ** | **9,083,278**                | ** ** | **100.00** | ** ** |

 

There was oneshareholder holding less than a marketable parcel based on a market price of$108.00 at the close of trading on 5 October 2010.

 

306

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SHAREHOLDING INFORMATION

 

**Voting rights of Westpac SPS andWestpac SPS II**

 

In accordance withthe terms of issue, holders of Westpac SPS and Westpac SPS II have no right tovote at any general meeting of Westpac except in the following circumstances:

 

a.               on a proposal:

 

·                  to reduce the share capitalof Westpac;

 

·                  that affect rights attachedto Westpac preference shares;

 

·                  to wind up Westpac; or

 

·                  for the disposal of thewhole of the property, business and undertaking of Westpac.

 

b.              on a resolution to approve the terms of ashare buy back agreement, other than a buy back agreement relating to Westpacpreference shares;

 

c.               during a period in which a dividend (or part of adividend) in respect of the Westpac preference shares is in arrears; and

 

d.              during the winding up of Westpac.

 

When entitled tovote at a general meeting of Westpac in respect of the matters listed above,holders of Westpac SPS and Westpac SPS II are entitled, on a show ofhands, to exercise one vote; and on a poll, to one vote for each Westpac SPS orWestpac SPS II held.

 

Holders of WestpacSPS and Westpac SPS II are entitled to the same rights as the holders ofWestpac’s ordinary shares in relation to receiving notices, reports andfinancial statements, and attending and being heard at all general meetingsof Westpac.

 

***Domicile of ordinary shareholders as at 5 October 2010***

 
| ** **     | ** ** | ** **          | ** ** | ** **                  | ** ** | **Number of**     | ** ** | **% of**          | ** ** |
|----------------|------------|---------------------|------------|-----------------------------|------------|------------------------|------------|------------------------|------------|
| ** **     | ** ** | **Number**          | ** ** | ** **                  | ** ** | **Issued Shares** | ** ** | **Issued Shares** | ** ** |
| ** **     | ** ** | **of Holders** | ** ** | **% of Holdings** | ** ** | **and Options**   | ** ** | **and Options**   | ** ** |
| Australia      |       | 529,993             |       | 94.47                       |       | 2,930,282,875          |       | 98.03                  |       |
| New Zealand    |       | 26,528              |       | 4.73                        |       | 43,557,708             |       | 1.46                   |       |
| United Kingdom |       | 1,780               |       | 0.32                        |       | 4,046,578              |       | 0.14                   |       |
| United States  |       | 592                 |       | 0.10                        |       | 1,942,640              |       | 0.06                   |       |
| Other          |       | 2,130               |       | 0.38                        |       | 9,377,718              |       | 0.31                   |       |
| **Totals**     | ** ** | **561,023**         | ** ** | **100.00**                  | ** ** | **2,989,207,519**      | ** ** | **100.00**             | ** ** |

 

***Domicile of holders of Westpac SPS as at 5 October 2010***

 
| ** **    | ** ** | **Number**          | ** ** | ** **                  | ** ** | **Number of Issued** | ** ** | **% of Issued** | ** ** |
|---------------|------------|---------------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------|------------|
| ** **    | ** ** | **of Holders** | ** ** | **% of Holdings** | ** ** | **Westpac SPS**           | ** ** | **Westpac SPS**      | ** ** |
| Australia     |       | 15,500              |       | 99.94                       |       | 10,355,181                     |       | 99.93                     |       |
| Singapore     |       | 3                   |       | 0.02                        |       | 1,030                          |       | 0.01                      |       |
| United States |       | 2                   |       | 0.01                        |       | 4,250                          |       | 0.04                      |       |
| Other         |       | 5                   |       | 0.03                        |       | 2,209                          |       | 0.02                      |       |
| **Total**     | ** ** | **15,510**          | ** ** | **100.00**                  | ** ** | **10,362,670**                 | ** ** | **100.00**                | ** ** |

 

***Domicile of holders of Westpac SPS II as at 5 October 2010***

 
| ** **    | ** ** | **Number**          | ** ** | ** **                  | ** ** | **Number of Issued** | ** ** | **% of Issued**    | ** ** |
|---------------|------------|---------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **    | ** ** | **of Holders** | ** ** | **% of Holdings** | ** ** | **Westpac SPS II**   | ** ** | **Westpac SPS II** | ** ** |
| Australia     |       | 13,769              |       | 99.96                       |       | 9,081,683                      |       | 99.98                        |       |
| New Zealand   |       | 3                   |       | 0.02                        |       | 650                            |       | 0.01                         |       |
| United States |       | 1                   |       | 0.01                        |       | 255                            |       | —                       |       |
| Other         |       | 2                   |       | 0.01                        |       | 690                            |       | 0.01                         |       |
| **Total**     | ** ** | **13,775**          | ** ** | **100.00**                  | ** ** | **9,083,278**                  | ** ** | **100.00**                   | ** ** |

 

307

----

 

**Market price information**

 

The principallisting of our ordinary shares is on the ASX. American Depositary Shares (ADS),each representing five ordinary shares, are listed on the NYSE.

 

On 11 July 2005,ordinary Westpac shares were issued upon exchange of NZ Class shares.

 

The tables below setforth, for the calendar periods indicated, the reported high and low marketquotations for our ordinary shares on the ASX based on its daily official listand for our ADS on the NYSE.

 
| ** **                          | ** ** | **Per Ordinary Share in A$(1)** | ** ** | **Per American Depositary Share in US$(1)** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **Financial year ending** | ** ** | **High**                                            | ** ** | **Low**                                                              | ** ** | **High** | ** ** | **Low** | ** ** |
| September 2010                 |       | 28.43                                               |       | 20.56                                                                |       | 133.15 |   | 87.70 |   |
| September 2009                 |       | 26.74                                               |       | 14.40                                                                |       | 115.44 |   | 45.90 |   |
| September 2008                 |       | 31.32                                               |       | 18.36                                                                |       | 141.98 |   | 85.28 |   |
| September 2007                 |       | 28.69                                               |       | 22.53                                                                |       | 125.80 |   | 84.74 |   |
| September 2006                 |       | 25.35                                               |       | 21.31                                                                |       | 96.60 |   | 76.46 |   |

 
| ** **              | ** ** | **Per Ordinary Share in A$** | ** ** | **Per American Depositary Share in US$** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **Quarter ending** | ** ** | **High**                                         | ** ** | **Low**                                                           | ** ** | **High** | ** ** | **Low** | ** ** |
| 2010:                   |       |                                             |       |                                                              |       |   |   |   |   |
| March                   |       | 28.35                                            |       | 26.21                                                             |       | 128.52 |   | 97.80 |   |
| June                    |       | 28.43                                            |       | 20.60                                                             |       | 133.15 |   | 88.26 |   |
| September               |       | 24.49                                            |       | 20.56                                                             |       | 116.24 |   | 87.70 |   |
| 2009:                   |       |                                             |       |                                                              |       |   |   |   |   |
| March                   |       | 19.89                                            |       | 14.40                                                             |       | 69.81 |   | 47.90 |   |
| June                    |       | 20.93                                            |       | 18.27                                                             |       | 81.72 |   | 68.75 |   |
| September               |       | 26.74                                            |       | 18.76                                                             |       | 115.44 |   | 73.79 |   |
| December                |       | 27.57                                            |       | 24.67                                                             |       | 124.91 |   | 102.45 |   |
| 2008:                   |       |                                             |       |                                                              |       |   |   |   |   |
| March                   |       | 28.19                                            |       | 20.34                                                             |       | 122.50 |   | 94.45 |   |
| June                    |       | 26.25                                            |       | 19.92                                                             |       | 122.19 |   | 95.29 |   |
| September               |       | 24.82                                            |       | 18.36                                                             |       | 108.35 |   | 85.28 |   |
| December                |       | 24.10                                            |       | 14.59                                                             |       | 91.35 |   | 45.90 |   |
| 2007:                   |       |                                             |       |                                                              |       |   |   |   |   |
| March                   |       | 26.49                                            |       | 23.37                                                             |       | 106.75 |   | 92.04 |   |
| June                    |       | 27.85                                            |       | 25.17                                                             |       | 115.19 |   | 106.40 |   |
| September               |       | 28.69                                            |       | 23.35                                                             |       | 125.80 |   | 97.83 |   |
| December                |       | 31.32                                            |       | 26.70                                                             |       | 141.98 |   | 115.77 |   |

 
| ** **                                  | ** ** | **Per Ordinary Share in A$** | ** ** | **Per American Depositary Share in US$** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **Month ending – 2010** | ** ** | **High**                                         | ** ** | **Low**                                                           | ** ** | **High** | ** ** | **Low** | ** ** |
| October                                     |       | 23.54                                            |       | 22.28                                                             |       | 114.78 |   | 109.15 |   |
| September                                   |       | 24.17                                            |       | 21.90                                                             |       | 116.24 |   | 102.98 |   |
| August                                      |       | 24.49                                            |       | 21.00                                                             |       | 111.51 |   | 93.82 |   |
| July                                        |       | 24.27                                            |       | 20.56                                                             |       | 108.50 |   | 87.70 |   |
| June                                        |       | 23.99                                            |       | 20.60                                                             |       | 103.71 |   | 88.50 |   |
| May                                         |       | 27.83                                            |       | 20.82                                                             |       | 129.00 |   | 88.26 |   |
| April                                       |       | 28.43                                            |       | 26.64                                                             |       | 133.15 |   | 121.20 |   |

 

----

(1)  Market price information is intraday high and lowtrading prices.

 

308

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SHAREHOLDINGINFORMATION

 

**Fees and charges payable by aholder of Westpac ADS**

 

The depositary forWestpac’s ADS program, JPMorgan Chase Bank, N.A. (the ‘Depositary’), collectsfees for delivery and surrender of ADS directly from investors depositing ordinaryshares or surrendering ADS for the purpose of withdrawal or from intermediariesacting for them. The Depositary may also collect fees for making distributionsto investors by deducting those fees from the amounts distributed or by sellinga portion of the distributable property to pay the fees.

 

The charges of theDepositary payable by investors are as follows:

 
| **Type of service**                                               | ** ** | **Depositary actions**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **Fee**                                                                                                                                                            |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Depositing or substituting the underlying  shares                           |       | Delivery of ADS against the deposit of  ordinary shares, including deposits and issuances in respect of :

·   share distributions, stock splits, rights,  mergers; and

·   exchange of securities or other  transactions or events or other distribution affecting the ADS or deposited  securities.                                                                                                                                                                        |       | US$5.00 or less per 100 ADS (or portion  thereof) evidenced by the new ADS delivered                                                                               |
|                                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                                                                                                                                               |
| Receiving  or distributing cash dividends                                   |       | Distribution of cash dividends                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | No fee currently payable                                                                                                                                           |
|                                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                                                                                                                                               |
| Withdrawing an underlying ordinary share                                    |       | Acceptance of ADS surrendered for withdrawal  of deposited ordinary shares                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | US$5.00 or less for each 100 ADS (or portion  thereof) evidenced by the ADS surrendered                                                                            |
|                                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                                                                                                                                               |
| General depositary services, particularly  those charged on an annual basis |       | Other services performed by the Depositary in  administering the ADS program                                                                                                                                                                                                                                                                                                                                                                                                                                |       | No fee currently payable                                                                                                                                           |
|                                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                                                                                                                                               |
| Expenses of the Depositary                                                  |       | Expenses incurred on behalf of Holders in  connection with:

·   taxes and other governmental charges;

·   cable, telex and facsimile  transmission/delivery;

·   transfer or registration fees, if  applicable, for the registration of transfers or underlying ordinary shares;  and

·   expenses of the Depositary in connection  with the conversion of foreign currency into US dollars (which are paid out  of such foreign currency). |       | Expenses payable at the sole discretion of  the Depositary by billing holders or by deducting charges from one or more  cash dividends or other cash distributions |

 

**Fees and payments made by theDepositary to Westpac**

 

The Depositary hasagreed to reimburse certain Westpac expenses related to Westpac’s ADS programand incurred by Westpac in connection with the program. In the year ended 30 September 2010,the Depositary reimbursed to Westpac, or paid amounts on its behalf to thirdparties, a total sum of US$62,244. There are limits on the amount of expensesfor which the Depositary will reimburse Westpac. The table below sets out thetypes of expenses that the Depositary has agreed to reimburse and the amountsreimbursed in the year ended 30 September 2010.

 
| ** **                                                             | ** ** | **Reimbursed for the year ended 30 September 2010** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| **Category of expense reimbursed to Westpac** | ** ** | **US$’000s**                                                                      | ** ** |
| Investor relations                                                     |       | 62                                                                                     |       |
| NYSE listing fees                                                      |       | 0                                                                                      |       |
| **Total**                                                              |       | 62                                                                                     |       |

 

Under certaincircumstances, including removal of the Depositary or termination of the ADSprogram by Westpac, Westpac is required to repay the Depositary certain amountsreimbursed and/or expenses paid to or on behalf of Westpac. The Depositary hasalso agreed to waive certain of its fees for standard costs associated with themaintenance and administration of the ADS program.

 

309

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**Exchange controls and otherlimitations affecting security holders**

 

***Australian exchange controls***

 

Australian lawscontrol and regulate or permit the control and regulation of a broad range ofpayments and transactions involving non-residents of Australia. Pursuant to anumber of exemptions, authorities and approvals, there are no generalrestrictions from transferring funds from Australia or placing funds to thecredit of non-residents of Australia. However, Australian foreign exchangecontrols are implemented from time to time against proscribed countries,entities and persons. At the present time, these are:

 

a.      withholding taxes inrelation to remittances or dividends (to the extent they are unfranked) andinterest payments;

 

b.     the financial sanctionsadministered by the RBA in accordance with the Banking (Foreign Exchange)Regulations 1959, specifically, in relation to transactions involving thetransfer of funds or payments to, by the order of, or on behalf of specified:

 

·         supporters of the former Federal Republic ofYugoslavia (the Milosevic regime);

 

·         ministers and senior officials associated with theMugabe regime in Zimbabwe;

 

·         entities and an individual associated with theDemocratic People’s Republic of Korea;

 

·         specified Iranian entities and persons; and

 

·         figures, supporters and associates of the Burmeseregime;

 

which are prohibitedwithout the prior approval of the RBA.

 

c.      the United Nations SecurityCouncil (UNSC) financial sanctions administered by the Department of ForeignAffairs and Trade (DFAT) including:

 

·         *Terrorist Asset Freezing Regime*

 

In accordance with the Charter of the United Nations Act 1945 and theCharter of the United Nations (Dealings with Assets) Regulations 2008, aperson is prohibited from using or dealing with funds, financial assets oreconomic resources of persons or entities listed as terrorists by the Ministerfor Foreign Affairs in the Commonwealth of Australia Gazette. It is also acriminal offence to make assets available to such persons or entities; and

 

·         *Country-based sanctions*

 

Under the Charter of the United Nations Act 1945 and associatedregulations, UNSC financial sanctions have been implemented. It is an offenceto use or deal with funds, financial assets or economic resources of persons orentities associated with certain countries designated by the UNSC. It is also acriminal offence to make assets available to such persons or entities.

 

***Limitations affecting security holders***

 

The followingAustralian laws impose limitations on the right of non-residents ornon-citizens of Australia to hold, own or vote on shares in Westpac. All theselimitations apply to the holders of the American Depositary Receipts (ADR)evidencing ADS, issued by our Depositary in the United States.

 

*Foreign Acquisitions and Takeovers Act 1975*

 

Acquisitions ofinterests in shares in Australian companies by foreign interests are subject toreview and approval by the Treasurer of Australia under the *Foreign Acquisitions and Takeovers Act 1975 (Cth)*. That legislationapplies to any acquisition by a foreign person, including a corporation orgroup of associated foreign persons, which results in ownership of 15% or moreof the issued shares of an Australian company or control of 15% or more of thetotal voting power. In addition, the legislation applies to any acquisition bynon-associated foreign persons resulting in foreign persons controlling,together with any associate or associates of any of them, in the aggregate, 40%or more of total voting power or ownership. The legislation requires anypersons proposing to make any such acquisition to first notify the Treasurer oftheir intention to do so. Where such an acquisition has already occurred, theTreasurer has the power to order divestment.

 

*Financial Sector (Shareholdings) Act 1998*

 

The *Financial Sector (Shareholdings) Act 1998**(Cth)* imposes restrictions on shareholdings in Australianfinancial sector companies (which includes Westpac). Under that legislation aperson (including a corporation) may not hold more than a 15% ‘stake’ in afinancial sector company without prior approval from the Treasurer ofAustralia. A person’s stake in a financial sector company is equal to theaggregate of the person’s voting power in the company and the voting power ofthe person’s associates. The concept of voting power is very broadly defined.The Treasurer may approve a higher percentage shareholding limit if theTreasurer is satisfied that it is in the national interest to do so.

 

In addition, even ifa person does not exceed the 15% shareholding limit in a financial sectorcompany, the Treasurer has the power to declare that a person has ‘practicalcontrol’ of a financial sector company and require the person to relinquishthat control or reduce their stake in that company.

 

*Corporations Act 2001*

 

The *Corporations Act 2001 (Cth)* prohibits any person (includinga corporation) from acquiring a relevant interest in our voting shares if,after the acquisition, that person or any other person would be entitled toexercise more than 20% of the voting power. The prohibition is subject tocertain limited exceptions, which must strictly be complied with to beapplicable. In addition, under the Corporations Act, any person who begins tohave, or ceases to have, a substantial holding in us, or if any person alreadyhas a substantial holding and there is a movement of at least 1% in theirholding, is required to give a notice to us and to the ASX Limited providingcertain prescribed information, including their name and address and details oftheir relevant interests in our 

 

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voting shares. Suchnotice must, generally, be provided within two business days.

 

A person will have asubstantial holding if the total votes attached to our voting shares in whichthey or their associates have relevant interests is 5% or more of the totalnumber of votes attached to all our voting shares. The concepts of ‘associate’and ‘relevant interests’ are broadly defined in the Corporations Act andinvestors are advised to seek their own advice on their scope. In generalterms, a person will have a relevant interest in a share if they:

 

a.      are the holder of thatshare;

 

b.     have power to exercise, orcontrol the exercise of, a right to vote attached to that share; or

 

c.      have power to dispose of,or control the exercise of a power to dispose of, that share.

 

It does not matterhow remote the relevant interest is or how it arises. If two or more personscan jointly exercise any one of these powers, each of them is taken to havethat power. Nor does it matter that the power or control is express or implied,formal or informal, exercisable either alone or jointly with someone else.

 

*The American Depositary Receipts agreement*

 

The Deposit Agreementamong JPMorgan Chase Bank of New York as Depositary, and us, and the recordholders from time to time of all ADRs, applies all of the provisions of ourConstitution to ADR holders. Record holders of ADRs are required by the DepositAgreement to comply with our requests for information as to the capacity inwhich such holders own ADRs and related ordinary shares as well as to theidentity of any other person interested in such ADRs and related ordinaryshares and the nature of such interest.

 

*Enforceability of foreign judgments in Australia*

 

We are an Australianpublic corporation with limited liability. All of our Directors and ExecutiveOfficers reside outside the US. Substantially all or a substantial portion ofthe assets of all or many of such persons are located outside the US. As aresult, it may not be possible for investors to effect service of processwithin the US upon such persons or to enforce against them judgments obtainedin US courts predicated upon the civil liability provisions of the federalsecurities laws of the US. There may be doubt as to the enforceability inAustralia, in original actions or in actions for enforcement of judgments of UScourts, of civil liabilities predicated upon the federal securities laws of theUS.

 

**Taxation**

 

***Australian taxation***

 

The followingdiscussion is a summary of certain Australian taxation implications of theownership and disposition of ordinary shares (including ADS) for shareholdersholding their shares on capital account. This discussion is based on the lawsin force at the date of the Annual Report and the Convention between theGovernment of Australia and the Government of the United States of America forthe Avoidance of Double Taxation and The Prevention of Fiscal Evasion withrespect to Taxes on Income (the Tax Treaty), and is subject to any changes inAustralian law and any change in the Tax Treaty occurring after that date.

 

This discussion isintended only as a descriptive summary and does not purport to be a completeanalysis of all the potential Australian tax implications of owning anddisposing of ordinary shares. The specific tax position of each investor willdetermine the applicable Australian income tax implications for that investorand we recommend that investors consult their own tax advisers concerning theimplications of owning and disposing of ordinary shares.

 

*Taxation of dividends*

 

Under the Australiandividend imputation system, Australian tax paid at the company level is imputed(or allocated) to shareholders by means of imputation credits which attach todividends paid by the company to the shareholder. Such dividends are termed ‘frankeddividends’.

 

When an Australianresident individual shareholder receives a franked dividend, the shareholderreceives a tax offset to the extent of the franking credits, which can beoffset against the Australian income tax payable by the shareholder. AnAustralian resident shareholder may, in certain circumstances, be entitled to arefund of excess franking.

 

The extent to whicha dividend is franked typically depends upon a company’s available frankingcredits at the time of payment of the dividend. Accordingly, a dividend paid toa shareholder may be wholly or partly franked or wholly unfranked.

 

Fully frankeddividends paid to non-resident shareholders are exempt from Australian dividendwithholding tax. Dividends paid to a non-resident shareholder which are notfully franked are subject to dividend withholding tax at the rate of 30%(unless reduced by a double tax treaty) to the extent they are unfranked. Inthe case of residents of the US, the rate is reduced to 15% under the TaxTreaty, provided the shares are not effectively connected with a permanentestablishment or a fixed base of a non-resident in Australia through which thenon-resident carries on business in Australia or provides independent personalservices. In the case of residents of the US that have a permanentestablishment or fixed base in Australia where the shares in respect of whichthe dividends are paid are attributable to that permanent establishment orfixed base, there is no dividend withholding tax. Rather, such dividends willbe taxed on a net assessment basis and, where the dividends are franked,entitlement to a tax offset may arise.

 

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Fully frankeddividends paid to non-resident shareholders and dividends that have beensubject to dividend withholding tax should not be subject to any furtherAustralian income tax.

 

There arecircumstances where a shareholder may not be entitled to the benefit offranking credits. The application of these rules depend upon theshareholder’s own circumstances, including the period during which the sharesare held and the extent to which the shareholder is ‘at risk’ in relation to theirshareholding.

 

*Gain or loss on disposition of shares*

 

Generally, anyprofit made by a resident shareholder on disposal of shares will be subject tocapital gains tax. However, if the shareholder is regarded as a trader orspeculator, or carries on a business of investing for profit, any profits maybe taxed as ordinary income.

 

A discount may beavailable on capital gains on shares held for 12 months or more by individuals,trusts or complying superannuation entities. The discount is one half for individualsand trusts, and one third for complying superannuation entities. Companies arenot eligible for the capital gains tax discount. For shares acquired prior to 1October 1999, an alternative basis of calculation of the capital gain maybe available which allows the use of an indexation formula.

 

Normal rates ofincome tax would apply to capital gains so calculated. Any capital loss canonly be offset against capital gains. Excess capital losses can be carriedforward for offset against future capital gains.

 

Generally, subjectto two exceptions, a non-resident disposing of shares in an Australian publiccompany will be free from income tax in Australia. The main exceptions are:

 

·         shares held as part of a trade or businessconducted through a permanent establishment in Australia. In such a case, anyprofit on disposal would be assessable to ordinary income tax. Losses wouldconstitute an allowable deduction; and

 

·         shares held in public companies where theshareholder and its associates have held (for at least 12 months in the 24months prior to disposal) a holding of 10% or more in the company and more than50% of the company’s assets are represented by interests in Australian realproperty (which is unlikely to be the case for Westpac). In such a case,capital gains tax would apply.

 

***United States taxation***

 

The following is asummary of certain United States federal income tax implications of theownership and dispositions of ordinary shares (including ADS) by US holders (asdefined below) that hold the ordinary shares as capital assets. This discussionis based on the US Internal Revenue Code of 1986, as amended (the Code), itslegislative history, existing and proposed regulations, published rulings andcourt decisions, and the Tax Treaty, all as currently in effect and all ofwhich are subject to change, possibly on a retroactive basis.

 

This discussion isintended only as a descriptive summary and does not purport to be a completeanalysis of all the potential United States federal income tax consequences ofowning and disposing of ordinary shares and does not address United Statesfederal income tax considerations that may be relevant to US holders subject tospecial treatment under United States federal income tax law (such as banks,insurance companies, real estate investment trusts, regulated investmentcompanies, dealers in securities, tax-exempt entities, retirement plans,certain former citizens or residents of the United States, persons holdingordinary shares as part of a straddle, hedge, conversion transaction or otherintegrated investment, persons that have a ‘functional currency’ other than theUS dollar, persons that own 10% or more (by voting power) of our stock or personsthat generally mark their securities to market for United States tax purposes).We recommend investors consult their own tax advisers concerning theimplications of owning and disposing of ordinary shares.

 

For purposes of thisdiscussion you are a US holder if you are a beneficial owner of ordinary sharesand you are for United States federal income tax purposes:

 

·         an individual that is a citizen or resident of theUnited States;

 

·         corporation created or organised in or under thelaws of the United States or any state thereof or the District of Columbia;

 

·         an estate, the income of which is subject to UnitedStates federal income tax regardless of its source; or

 

·         a trust if a United States court can exerciseprimary supervision over the trust’s administration and one or more UnitedStates persons are authorised to control all substantial decisions of thetrust, or certain electing trusts that were in existence on19 August 1996 and were treated as domestic trusts on that date.

 

If an entity treatedas a partnership for United States federal income tax purposes owns theordinary shares, the United States federal income tax implications of theownership and disposition of ordinary shares will depend in part upon thestatus and activities of the partnership and the partner. Any such partnershipshould consult its own tax adviser concerning the United States federal incometax implications to it and its partners of owning and disposing of ordinaryshares. 

 

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*Taxation of dividends*

 

Under the UnitedStates federal income tax laws, if you are a US holder, you must include inyour gross income the gross amount of any dividend paid by us out of ourcurrent or accumulated earnings and profits (as determined for United Statesfederal income tax purposes). If you are a non-corporate US holder, dividendspaid to you in taxable years beginning before 1 January 2011 thatconstitute qualified dividend income generally will be taxable to you at amaximum tax rate of 15%, provided that you hold the ordinary shares for morethan 60 days during the 121 day period beginning 60 days before the ex-dividenddate and meet other holding period requirements. Dividends we pay with respectto the ordinary shares generally will be qualified dividend income.

 

You must include anyAustralian tax withheld from the dividend payment in this gross amount eventhough you do not in fact receive it. The dividend is ordinary income that youmust include in income when you receive it, actually or constructively. Thedividend will not be eligible for the dividends-received deduction generallyallowed to United States corporations in respect of dividends received fromother United States corporations. The amount of the dividend distribution thatyou must include in your income as a US holder will be the US dollar value ofthe Australian dollar payments made, determined at the spot Australiandollar/US dollar rate on the date the dividend distribution is included in yourincome, regardless of whether the payment is in fact converted into US dollars.Generally, any gain or loss resulting from currency exchange fluctuationsduring the period from the date you include the dividend payment in income tothe date you convert the payment into US dollars will be treated as ordinaryincome or loss and will not be eligible for the special tax rate applicable toqualified dividend income. This gain or loss generally will be income fromsources within the United States for foreign tax credit limitation purposes.Distributions on an ordinary share in excess of current and accumulatedearnings and profits, as determined for United States federal income taxpurposes, will be treated as a non-taxable return of capital to the extent ofyour basis in such ordinary share and thereafter as capital gain.

 

Subject to certainlimitations, the Australian tax withheld in accordance with the Tax Treaty andpaid over to Australia will be creditable against your United States federalincome tax liability. Special rules apply in determining the foreign taxcredit limitation with respect to dividends that are subject to the maximum 15%rate.

 

Dividends generallywill be income from sources outside the United States for foreign tax creditlimitation purposes. Under the foreign tax credit rules, dividends will,depending on your circumstances, be ‘passive category’ or ‘general category’income for purposes of computing the foreign tax credit.

 

*Taxation of capital gains*

 

If you are a USshareholder and you sell or otherwise dispose of your ordinary shares, you willrecognise capital gain or loss for United States federal income tax purposesequal to the difference between the US dollar value of the amount that yourealise and your tax basis, determined in US dollars, in your ordinary shares.Capital gain of a non-corporate US holder is generally taxed at a maximum rateof 15% if recognised before 1 January 2011 (or 20% if recognisedafter 2010) where the holder has a holding period greater than one year. Thedeductibility of capital losses is subject to limitations. Such capital gain orloss generally will be income from sources within the United States, forforeign tax credit limitation purposes.

 

*Passive foreign investment company considerations*

 

We believe that wewill not be treated as a passive foreign investment company (PFIC) for UnitedStates federal income tax purposes, and this discussion so assumes, but that isa factual determination made annually and therefore, may be subject to change.If we were to be treated as a PFIC, a US holder of ordinary shares would besubject to certain adverse tax consequences.

 

*Disclosure requirements for specified foreignfinancial assets*

 

Under recentlegislation, individual US holders (and certain US entities specified in USInternal Revenue Service guidance) who, during any taxable year, hold anyinterest in any specified foreign financial asset generally will be required tofile with their US federal income tax returns a statement setting forth certaininformation if the aggregate value of all such assets exceeds US$50,000. ‘Specifiedforeign financial asset’ generally includes any financial account maintainedwith a non-US financial institution and may also include the ordinary shares ifthey are not held in an account maintained with a US financial institution.Substantial penalties may be imposed, and the period of limitation onassessment and collection of US federal income taxes may be extended, in theevent of a failure to comply. US holders should consult their own tax advisersas to the possible application to them of this new filing requirement.

 

*Information reporting and backup withholding*

 

Under certaincircumstances, information reporting and/or backup withholding may apply to USholders with respect to payments on or the proceeds from the sale, exchange orother disposition of the ordinary shares, unless an applicable exemption issatisfied. US holders that are corporations generally are excluded frominformation reporting and backup withholding.

 

Backup withholdingis not an additional tax. Any amounts withheld under the backup withholding rules generallywill be allowed as a refund or credit against a US holder’s United Statesfederal income tax liability if the required information is furnished by the USholder on a timely basis to the Internal Revenue Service.

 

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ADDITIONAL INFORMATION

 

**Our constitution**

 

**Overview**

 

We were incorporatedin 1850 under the *Bank of New South Wales Act*, aspecial piece of legislation passed by the New South Wales Parliament at a timewhen there was no general companies’ legislation in Australia. On23 August 2002, Westpac became registered under the *Corporations Act 2001 (Cth)* as a public company limited byshares.

 

As part of the processof becoming a company regulated under the Corporations Act, shareholdersadopted a new constitution at the AGM on 15 December 2000, which cameinto operation on 23 August 2002 and was subsequently amended byshareholders on 15 December 2005 and 13 December 2007.

 

**Our objects and purposes**

 

Our constitutiondoes not contain a statement of our objects and purposes. These were originallycontained in the Bank of New South Wales Act, as amended. As a companyregulated by the Corporations Act, we have the legal capacity and powers of anindividual both within and outside Australia, and all the powers of a bodycorporate, including the power to issue and cancel shares, to issue debentures,to distribute our property among our equity holders (either in kind orotherwise), to give security by charging our uncalled capital, to grant afloating charge over our property and to do any other act permitted by any law.

 

**Directors’ voting powers**

 

Under clause 9.11(a) ofour constitution, subject to complying with the Corporations Act regardingdisclosure of and voting on matters involving material personal interests, ourDirectors may:

 

a.      hold any office or place ofprofit in our company, except that of auditor;

 

b.     hold any office or place ofprofit in any other company, body corporate, trust or entity promoted by ourcompany or in which it has an interest of any kind;

 

c.      enter into any contract orarrangement with our company;

 

d.     participate in anyassociation, institution, fund, trust or scheme for past or present employeesor Directors of our company or persons dependent on or connected with them;

 

e.      act in a professionalcapacity (or be a member of a firm that acts in a professional capacity) forour company, except as auditor; and

 

f.        participate in, vote on andbe counted in a quorum for any meeting, resolution or decision of the Directorsand be present at any meeting where any matter is being considered by theDirectors.

 

Under clause 9.11(b) ofour constitution, a Director may do any of the above despite the fiduciaryrelationship of the Director’s office:

 

a.      without any liability toaccount to our company for any direct or indirect benefit accruing to theDirector; and

 

b.     without affecting thevalidity of any contract or arrangement.

 

Under theCorporations Act, however, a Director who has a material personal interest inany matter to be considered at any Board meeting must not be present while thematter is being considered or vote on the matter, unless the other Directorsresolve to allow that Director to be present and vote or a declaration is madeby the ASIC permitting that Director to participate and vote. Theserestrictions do not apply to a limited range of matters set out in section 191of the Corporations Act, where the Director’s interest:

 

a.      arises because the Directoris a shareholder of the company in common with other shareholders;

 

b.     arises in relation to theDirector’s remuneration as a Director of the company;

 

c.      relates to a contract thecompany is proposing to enter into that is subject to shareholder approval andwill not impose obligations on the company if not approved by shareholders;

 

d.     arises merely because theDirector is a guarantor or has given an indemnity or security for all or partof a loan (or proposed loan) to the company;

 

e.      arises merely because theDirector has a right of subrogation in relation to a guarantee or indemnityreferred to in (d);

 

f.        relates to a contract thatinsures, or would insure, the Director against liabilities the Director incursas an officer of the company (but only if the contract does not make thecompany or related body corporate the insurer);

 

g.     relates to any payment bythe company or a related body corporate in respect of certain indemnitiespermitted by the Corporations Act or any contract relating to such anindemnity; or

 

h.     is in a contract orproposed contract with, or for the benefit of, or on behalf of, a related bodycorporate and arises merely because the Director is a Director of that relatedbody corporate.

 

If there are notenough Directors to form a quorum for the board meeting because of the interestof Directors in a particular matter, a general meeting for shareholders may becalled to consider the matter and interested Directors are entitled to vote onany proposal to requisition such a meeting.

 

Under article 9.7 ofour constitution, the aggregate annual amount to be paid to our Non-executiveDirectors must be approved by our shareholders. Once approved, that aggregateamount is paid to those Directors in such manner as the Board from time to timedetermines. Directors’ remuneration is one of the exceptions under section 191of the Corporations Act to the prohibitions against being present and voting onany matter in which a Director has a material personal interest.

 

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ADDITIONAL INFORMATION

 

**Directors’ borrowing powers**

 

Article 10.2 ofour constitution empowers our Directors, as a Board, to exercise all the powersof Westpac to borrow or raise money, to charge any property or business ofWestpac or all or any of its uncalled capital and to issue debentures or giveany other security for a debt, liability or obligation of Westpac or of anyother person. Such powers may only be changed by amending the constitution,which requires a special resolution (that is, a resolution passed by at least75% of the votes cast by members entitled to vote on the resolution and noticeof which has been given in accordance with the Corporations Act).

 

**Minimum number of Directors**

 

Our constitution requiresthat the minimum number of Directors is determined in accordance with theCorporations Act or other regulations. Currently the Corporations Actprescribes three as a minimum number of Directors and APRA governance standardsspecify five as the minimum number of Directors for APRA regulated entities.Westpac’s current number of Directors is above these prescribed minimums.

 

**Share rights**

 

The rights attachingto our ordinary shares are set out in the Corporations Act and in ourconstitution, and may be summarised as follows:

 

***a)******   ******Profits anddividends***

 

Holders of ordinaryshares are entitled to receive such dividends on those shares as may bedeclared by our Directors from time to time. Dividends that are paid but notclaimed, may be invested by our Directors for the benefit of Westpac untilrequired to be dealt with in accordance with any law relating to unclaimedmonies.

 

Our constitutionrequires that dividends be paid out of our profits. In addition, under theCorporations Act, Westpac must not pay a dividend unless our assets exceed ourliabilities immediately before the dividend is declared and the excess issufficient for payment of the dividend. In addition, the payment must be fairand reasonable to the company’s shareholders and must not materially prejudiceour ability to pay our creditors.

 

Subject to theCorporations Act, the constitution, the rights of persons (if any) entitled toshares with special rights to dividend and any contrary terms of issue of orapplying to any shares, our Directors may determine that a dividend is payable,fix the amount and the time for payment and authorise the payment or creditingby Westpac to, or at the direction of, each shareholder entitled to thatdividend.

 

If any dividends arereturned unclaimed, we are generally obliged, under the *UnclaimedMoney Act 1995 (Cth)*, to hold those amounts as unclaimed monies fora period of six years. If at the end of that period the monies remain unclaimedby the shareholder concerned, we must remit by 31 October in each yearthose monies to the Office of State Revenue. Upon such payment being made, weare discharged from further liability in respect of that amount.

 

Our Directors may,before paying any dividend, set aside out of our profits such sums as theythink proper as reserves, to be applied, at the discretion of our Directors,for any purpose for which the profits may be properly applied. Our Directorsmay carry forward so much of the profits remaining as they consider ought notto be distributed as dividends without transferring those profits to a reserve.

 

The followingrestrictions apply to our ability to declare and/or pay dividends:

 

i)        if the payment of thedividend would breach or cause a breach by us of applicable capital adequacy orother supervisory requirements of APRA. Currently, one such requirement is thata dividend should not be paid without APRA’s prior consent if payment of thatdividend, after taking into account all other dividends (if any) paid on ourshares and payments on more senior capital instruments, in the financial yearto which they relate, would cause the aggregate of such dividend payments toexceed our after tax earnings for the financial year, as reflected in ourrelevant audited consolidated financial statements; and

 

ii)     if, under the *Banking Act 1959 (Cth)*, we are directed by APRA not to pay adividend; and

 

iii)  if the declaration orpayment of the dividend would result in us becoming insolvent.

 

***b)******   ******Voting rights***

 

Holders of our fullypaid ordinary shares have, at general meetings (including special generalmeetings), one vote on a show of hands and, upon a poll, one vote for eachfully paid share held by them.

 

***c)******    ******Voting andre-election of Directors***

 

Under ourconstitution, at each AGM one-third of our Directors (or if their number is nota multiple of three, the number nearest to one-third) and any other Directorwho has held office for three years or more since the Director’s last election,must retire from office. In determining the number of Directors to retire, noaccount is to be taken of a Director who holds office in order to fill a casualvacancy or the Managing Director. A retiring Director holds office until theconclusion of the meeting at which that Director retires but is eligible forre-election at the meeting.

 

Under the ASXListing Rules, no Executive or Non-executive Director of a listed entity, apartfrom the Managing Director, may continue to hold office, without offeringhimself or herself for re-election, past the third AGM following theirappointment or three years, whichever is the longer.

 

Under theCorporations Act, the election or re-election of each Director by shareholdersat a general meeting of a public company must proceed as a separate item,unless the shareholders first resolve that the elections or re-elections may bevoted on collectively. A resolution to allow collective voting in relation toelections or re-elections is effective only if no votes are cast against thatresolution. Any resolution electing or 

 

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re-electing two ormore Directors in contravention of this requirement is void.

 

***d)******   ******Winding up***

 

Subject to anypreferential entitlement of holders of preference shares on issue at therelevant time, holders of our ordinary shares are entitled to share equally inany surplus assets if we are wound up.

 

***e)******    ******Sinking fundprovisions***

 

We do not have anyclass of shares on issue that is subject to any sinking fund provisions.

 

**Variation of rights attaching toour shares**

 

Under theCorporations Act, unless otherwise provided by the terms of issue of a class ofshares, the terms of issue of a class of shares in Westpac can only be variedor cancelled in any way by a special resolution of Westpac and with either thewritten consent of our shareholders holding at least three quarters of thevotes in that class of shares or with the sanction of a special resolutionpassed at a separate meeting of the holders of that class of shares.

 

**Convening general meetings**

 

Under ourconstitution, our Directors may convene and arrange to hold a general meetingof Westpac whenever they think fit and must do so if required to do so underthe Corporations Act and ASX Listing Rules. Under the Corporations Act, ourDirectors must call and arrange to hold a general meeting of Westpac ifrequested to do so by our shareholders who hold at least 5% of the votes thatmay be cast at the special general meeting or 100 shareholders entitled to voteat the meeting. Shareholders who hold at least 5% of the votes that may be castat a general meeting may also call and arrange to hold a general meeting ofWestpac at their own expense.

 

At least 28 daysnotice must be given of a meeting of our shareholders. Written notice must begiven to all shareholders entitled to attend and vote at the meeting. Allordinary shareholders are entitled to attend and, subject to the constitutionand the Corporations Act, to vote at general meetings of Westpac.

 

**Limitations on securitiesownership**

 

A number oflimitations apply in relation to the ownership of our shares, and these aremore fully described in the section ‘Limitations affecting security holders’.

 

**Change in control restrictions**

 

Restrictions applyunder the Corporations Act, the *Financial Sector(Shareholdings) Act 1998* and the *Foreign Acquisitions andTakeovers Act 1975*.

 

For more detaileddescriptions of these restrictions, refer to the sections ‘Limitationsaffecting security holders’, *Foreign Acquisitions andTakeovers Act 1975*, *Financial Sector(Shareholdings) Act 1998*, and *Corporations Act 2001*.

 

**Substantial shareholder disclosure**

 

There is noprovision in our constitution that requires a shareholder to disclose theextent of their ownership of our shares.

 

Under theCorporations Act, however, any person who begins or ceases to have asubstantial holding of our shares must, within two business days, give usnotice after they become aware of that information. A further notice must begiven to us by a substantial shareholder within two business days if at anytime there is an increase or decrease of 1% in their holding. Copies of thesenotices must also be given to ASX Limited. A person will have a substantialholding of our shares if the voting rights attaching to our shares in whichthat person and their associates have relevant interests is 5% or more of thetotal number of votes attached to all our voting shares. For more details,refer to the section ‘Corporations Act 2001’.

 

We also have astatutory right under the Corporations Act to trace the beneficial ownership ofshares held by any shareholder, by giving a direction to that shareholderrequiring disclosure to us of, among other things, the name and address of eachother person who has a relevant interest in those shares, the nature and extentof that interest and the circumstances that gave rise to that other person’sinterest. Such disclosure must, except in certain limited circumstances, beprovided within two business days after the direction is received.

 

**Australian Company BusinessNumbers**

 

All corporateentities in Australia have a unique nine-digit identifier, referred to as anAustralian Company Number (ACN) for Australian companies, which must beincluded on public documents, eligible negotiable instruments and the company’scommon seal. In addition, entities can also apply for registration on theAustralian Business Register so they can be allocated a unique eleven-digitidentifier known as an Australian Business Number (ABN). For Australiancompanies, the last nine digits of their ABN are identical to their ACN. TheABN may be quoted on documents in lieu of the ACN.

 

Our ACN is 007 457141 and our ABN is 33 007 457 141.

 

**Documents on display**

 

We are subject tothe disclosure requirements of the US Securities Exchange Act of 1934, asamended. In accordance with these requirements, we file Annual Reports with,and furnish other information to, the United States SEC. These materials andother information furnished by us, may be inspected and copied at the SEC’sConventional and Electronic Reading Room at 100 F Street, N.E., Room 1580,Washington, D.C. 20549 at prescribed rates. The public may obtain informationon the operation of the SEC’s Conventional and Electronic Reading Room bycalling the SEC in the United States at 1-800-SEC-0330. The SEC also maintainsa website at www.sec.gov that contains reports, proxy statements and otherinformation regarding registrants that file electronically with the SEC. SinceApril 2002, we have filed our reports on Form 20-F and have furnishedother information to the SEC in electronic format which may be accessed throughthis website.

 

316

----

 

ADDITIONAL INFORMATION

 

**Exchange rates**

 

For each of theyears indicated, the high, low, average and year-end noon buying rates(1) forAustralian dollars were:

 
| **Year ended 30 September** | ** ** | **2011(2)**                    | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                 | ** ** | **(US$ per A$1.00)** | ** ** |
| High                                       |       | 0.9943                         |       | 0.9714   |       | 0.8824   |       | 0.9797   |       | 0.8855   |       | 0.7781   |       |
| Low                                        |       | 0.9666                         |       | 0.8172   |       | 0.6073   |       | 0.7831   |       | 0.7434   |       | 0.7056   |       |
| Average(3)                                 |       | n/a                            |       | 0.9003   |       | 0.7400   |       | 0.9065   |       | 0.8163   |       | 0.7473   |       |
| Close (on 30 September)(4)                 |       | n/a                            |       | 0.9640   |       | 0.8824   |       | 0.7904   |       | 0.8855   |       | 0.7461   |       |

 

For each of themonths indicated, the high and low noon buying rates for Australian dollarswere:

 
| ** ** | ** ** | **October**                    | ** ** | **September** | ** ** | **August** | ** ** | **July** | ** ** | **June** | ** ** | **May**  | ** ** |
|------------|------------|--------------------------------|------------|---------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| **Month**  | ** ** | **2010(2)**                    | ** ** | **2010**      | ** ** | **2010**   | ** ** | **2010** | ** ** | **2010** | ** ** | **2010** | ** ** |
| ** ** | ** ** | **(US$ per A$1.00)** | ** ** |
| High       |       | 0.9943                         |       | 0.9714        |       | 0.9170     |       | 0.9051   |       | 0.8818   |       | 0.9255   |       |
| Low        |       | 0.9666                         |       | 0.9093        |       | 0.8807     |       | 0.8380   |       | 0.8192   |       | 0.8172   |       |

 

----

| (1) | The noon buying rate in New York City for  cable transfers in Australian dollars as certified for customs purposes by  the Federal Reserve Bank of New York.                                               |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Through to 29October 2010. On 29 October 2010, the noon buying  rate was A$1.00 = US$0.9796.                                                                                                          |
| (3) | The average is  calculated by using the average of the exchange rates on the last day of each  month during the period.                                                                                         |
| (4) | The noon buying  rate at such date may differ from the rate used in the preparation of our  consolidated financial statements at such date. Refer to  Note 1(a)(vi) to the financial statements. |

 

317

----

 

**Signatures**

 

The registrant hereby certifies that it meetsall of the requirements for filing on Form 20-F and that it has duly caused andauthorised the undersigned to sign this Annual Report on its behalf.

 

WESTPAC BANKING CORPORATION

 
| By:                       | /s/ Les Vance |   |
|---------------------------|---------------|--------|
|                      |
| Les Vance                 |
| Authorised Representative |
| Dated  November 12, 2010  |

 

318

----

 

INFORMATION FOR SHAREHOLDERS

 

**Financial calendar**

 
| Record date for final ordinary share dividend                   |   | 12 November 2010(1)     |
|-----------------------------------------------------------------|--------|------------------------------|
|                                                            |   |                         |
| Annual General Meeting                                          |   | 15 December 2010        |
|                                                            |   |                         |
| Final ordinary share dividend payable                           |   | 20 December 2010        |
|                                                            |   |                         |
| Record date for Westpac SPS and SPS II quarterly  distribution  |   | 24 December 2010        |
|                                                            |   |                         |
| Payment date for Westpac SPS and SPS II quarterly  distribution |   | 31 December 2010        |
|                                                            |   |                         |
| Record date for Westpac SPS and SPS II quarterly  distribution  |   | 24 March 2011           |
|                                                            |   |                         |
| Half Year end                                                   |   | 31 March 2011           |
|                                                            |   |                         |
| Payment date for Westpac SPS and SPS II quarterly  distribution |   | 31 March 2011           |
|                                                            |   |                         |
| Interim results and ordinary share dividend  announcement       |   | 4 May 2011              |
|                                                            |   |                         |
| Record date for interim ordinary share dividend                 |   | 20 May 2011(2),(3)      |
|                                                            |   |                         |
| Record date for Westpac SPS and SPS II quarterly  distribution  |   | 23 June 2011            |
|                                                            |   |                         |
| Payment date for Westpac SPS and SPS II quarterly  distribution |   | 30 June 2011            |
|                                                            |   |                         |
| Interim ordinary share dividend payable                         |   | 2 July 2011(3)          |
|                                                            |   |                         |
| Record date for Westpac SPS and SPS II quarterly  distribution  |   | 23 September 2011       |
|                                                            |   |                         |
| Year end                                                        |   | 30 September 2011       |
|                                                            |   |                         |
| Payment date for Westpac SPS and SPS II quarterly  distribution |   | 30 September 2011       |
|                                                            |   |                         |
| Final results and ordinary share dividend  announcement         |   | 2 November 2011         |
|                                                            |   |                         |
| Record date for final ordinary share dividend                   |   | 11 November 2011(4),(5) |
|                                                            |   |                         |
| Annual General Meeting                                          |   | 14 December 2011(6)     |
|                                                            |   |                         |
| Final dividend payable                                          |   | 19 December 2011(4)     |

 

----

| (1) | Record date for  2010 final ordinary share dividend in New York — 11 November 2010.                                                                                  |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Record date for  2011 interim ordinary share dividend in New York — 19 May 2011.                                                                                     |
| (3) | Dates will be  confirmed at the time of announcing the 2011 interim results.                                                                                                   |
| (4) | Dates will be  confirmed at the time of announcing the 2011 final results.                                                                                                     |
| (5) | Record date for  2011 final ordinary share dividend in New York — 10 November 2011.                                                                                  |
| (6) | Details regarding  the location of this meeting and the business to be dealt with will be  contained in the separate Notice of Meeting sent to shareholders in  November 2011. |

 

**Annual General Meeting**

 

The Westpac AnnualGeneral Meeting (AGM) will be held in the Grand Ballroom at the Hilton Sydney,488 George Street, Sydney, on Wednesday, 15 December 2010, commencing at10:30am.

 

The AGM will bewebcast live on the internet at www.westpac.com.au/investorcentre and anarchived version of the webcast will be placed on the website to enable the AGMproceedings to be viewed at a later time.

 

319

----

 

INFORMATION FOR SHAREHOLDERS

 

**Useful information**

 

**Key sources of information forshareholders**

 

We report toshareholders each year, in late October or early November, in two forms:an Annual Review and Sustainability Report, and an Annual Report. We alsoreport half-yearly to shareholders via a newsletter, in conjunction with thedividend payments in July and December.

 

**Electronic communications**

 

Shareholders canelect to receive the following communications electronically:

 

·         Annual Review and Annual Report;

 

·         Dividend statements when paid by direct credit orvia Westpac’s Dividend Reinvestment Plan (DRP);

 

·         Notices of Meetings and proxy forms; and

 

·         Shareholder Newsletters and major companyannouncements.

 

Shareholders whowish to register their email address should go towww.westpac.com.au/investorcentre and click on ‘Register your email’ under ‘ShareholderNews’, or contact the Westpac share registry. For registry contact details seeopposite.

 

**Online information**

 

***Australia***

 

Westpac’s internetsite www.westpac.com.au provides information for shareholders and customers,including:

 

·         access to internet banking and online investingservices;

 

·         details on Westpac’s products and services;

 

·         company history, results, economic updates, marketreleases and news; and

 

·         corporate responsibility and Westpac in thecommunity activities.

 

Investors can shortcut to the Investor Centre at www.westpac.com.au/investorcentre. The Centreincludes the current Westpac share price and charting, and links to the latestASX announcements and Westpac’s share registries.

 

***New Zealand***

 

Westpac’s New Zealandinternet site www.westpac.co.nz provides:

 

·         access to internet banking services;

 

·         details on products and services, including acomprehensive home buying guide;

 

·         economic updates, news and information, keyfinancial results; and

 

·         sponsorships and other community activities.

 

**Stock exchange listings**

 

***Westpacordinary shares*** are listed on:

 

·         Australian Securities Exchange, (code WBC);

 

·         New York Stock Exchange (NYSE), as AmericanDepositary Shares, (code WBK); and

 

·         New Zealand Exchange Limited, (code WBC).

 

**Westpac Investor Relations**

 

Information otherthan that relating to your shareholding can be obtained from:

 

Westpac InvestorRelationsLevel 20, 275 Kent StreetSydney NSW 2000 AustraliaTelephone: +61 2 8253 3143Facsimile: +61 2 8253 1207Email: investorrelations@westpac.com.au

 

**Share registries**

 

For informationabout your shareholding or to notify a change of address etc., you shouldcontact the appropriate share registry. Please note that, in Australia, brokersponsored holders are required to contact their broker to amend their address.

 

***Australia — Ordinary shares on the main register, and Westpac SPS andWestpac SPS II***

 

Link Market ServicesLimitedLevel 12, 680 George StreetSydney NSW 2000Postal address: Locked Bag A6015, Sydney South NSW 1235Website: www.linkmarketservices.com.au

 

Shareholderenquiries:Telephone: 1800 804 255 (toll free in Australia)International: +61 2 8280 7070Facsimile: +61 2 9287 0303Email: westpac@linkmarketservices.com.au

 

***New Zealand — Ordinary shares on the New Zealand branch register***

 

Link Market ServicesLimited Level 16, Brookfields House19 Victoria Street WestAuckland 1142, New ZealandPostal address: P.O. Box 91976, Auckland 1030, New ZealandWebsite: www.linkmarketservices.com

 

Shareholderenquiries:Telephone: 0800 002 727 (toll free in New Zealand)International: +64 9 375 5998Facsimile: +64 9 375 5990Email: lmsenquiries@linkmarketservices.com

 

***Depositary in USA for American Depositary Shares (ADS)(1)***

 

Listed on New YorkStock Exchange (code WBK - CUSIP 961214301)

 

JPMorgan Chase Bank,N.A.PO Box 64504, St PaulMN 55164-0504, USA

 

**Shareholder enquiries:**

 

Telephone: 1 800 9901135 (toll free: non-US callers will be charged IDD)Telephone: +1 651 453 2128(Hearing impaired: +1 866 700 1652)Email: jpmorgan.adr@wellsfargo.com Website: www.adr.com

 

----

| (1) | Each ADS is comprised of five fully paid  ordinary shares. |
|-----|------------------------------------------------------------|

 

320

----

 

GLOSSARY OF ABBREVIATIONSAND DEFINED TERMS

 
| AASB                    | Australian  Accounting Standards Board                                                                                                                                                 |
|-------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |                                                                                                                                                                                   |
| AASB 3                  | Australian  Accounting Standards AASB Business Combinations                                                                                                                            |
|                    |                                                                                                                                                                                   |
| AASB 7                  | Australian  Accounting Standards AASB Financial Instruments Disclosures                                                                                                                |
|                    |                                                                                                                                                                                   |
| AASB 8                  | Australian  Accounting Standards AASB Operating Segments                                                                                                                               |
|                    |                                                                                                                                                                                   |
| AASB 9                  | Australian  Accounting Standards AASB Financial Instruments (Part 1: Classification  and Measurement)                                                                             |
|                    |                                                                                                                                                                                   |
| AASB 101                | Australian  Accounting Standards AASB Presentation of Financial Statements                                                                                                             |
|                    |                                                                                                                                                                                   |
| AASB 114                | Australian  Accounting Standards AASB Segment Reporting                                                                                                                                |
|                    |                                                                                                                                                                                   |
| AASB 119                | Australian  Accounting Standards AASB Employee Benefits                                                                                                                                |
|                    |                                                                                                                                                                                   |
| AASB 127                | Australian  Accounting Standards AASB Consolidated and Separate Financial Statements                                                                                                   |
|                    |                                                                                                                                                                                   |
| AASB 136                | Australian  Accounting Standards AASB Impairment of Assets                                                                                                                             |
|                    |                                                                                                                                                                                   |
| AASB 137                | Australian  Accounting Standards AASB Provisions, Contingent Liabilities and Contingent  Assets                                                                                        |
|                    |                                                                                                                                                                                   |
| AASB 139                | Australian  Accounting Standards AASB Financial Instruments: Recognition and Measurement                                                                                               |
|                    |                                                                                                                                                                                   |
| AASB 1038               | Australian  Accounting Standards AASB Life Insurance Contracts                                                                                                                         |
|                    |                                                                                                                                                                                   |
| AASB 2007-3             | Australian  Accounting Standards AASB Amendments to Australian Accounting Standards  arising from AASB 8 - February 2007                                                          |
|                    |                                                                                                                                                                                   |
| AASB 2007-8             | Australian  Accounting Standards AASB Amendments to Australian Accounting Standards  arising from AASB 101 - September 2007                                                       |
|                    |                                                                                                                                                                                   |
| AASB 2007-10            | Australian  Accounting Standards AASB Further Amendments to Australian Accounting  Standards arising from AASB 101                                                                     |
|                    |                                                                                                                                                                                   |
| AASB 2008-1             | Australian  Accounting Standards AASB Amendments to Australian Accounting Standard —  Share-based Payments: Vesting Conditions and Cancellations                             |
|                    |                                                                                                                                                                                   |
| AASB 2008-3             | Australian  Accounting Standards AASB Amendments to Australian Accounting Standards  arising from AASB 3 and AASB 127 - March 2008                                                |
|                    |                                                                                                                                                                                   |
| AASB 2008-7             | Australian  Accounting Standards AASB Amendments to Australian Accounting Standards -  Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate  - July 2008 |
|                    |                                                                                                                                                                                   |
| AASB 2008-8             | Australian  Accounting Standards AASB Amendments to Australian Accounting Standards -  Eligible Hedged Items - August 2008                                                        |
|                    |                                                                                                                                                                                   |
| AASB 2009-11            | Australian  Accounting Standards AASB Amendments to Australian Accounting Standards  arising from AASB 9 - December 2009                                                          |
|                    |                                                                                                                                                                                   |
| AASB  Interpretation 19 | Extinguishing  Financial Liabilities with Equity Instruments                                                                                                                           |
|                    |                                                                                                                                                                                   |
| ABN                     | Australian  Business Number                                                                                                                                                            |
|                    |                                                                                                                                                                                   |
| ABS                     | Asset backed  securities                                                                                                                                                               |
|                    |                                                                                                                                                                                   |
| ACCC                    | Australian  Competition and Consumer Commission                                                                                                                                        |
|                    |                                                                                                                                                                                   |
| ACN                     | Australian Company  Number                                                                                                                                                             |
|                    |                                                                                                                                                                                   |
| ADI                     | Authorised  Deposit-taking Institution                                                                                                                                                 |
|                    |                                                                                                                                                                                   |
| ADR                     | American  Depositary Receipt                                                                                                                                                           |
|                    |                                                                                                                                                                                   |
| ADS                     | American  Depositary Shares                                                                                                                                                            |
|                    |                                                                                                                                                                                   |
| AFMA                    | Australian  Financial Market Association                                                                                                                                               |
|                    |                                                                                                                                                                                   |
| AGAAP                   | Australian  Generally Accepted Accounting Principles                                                                                                                                   |
|                    |                                                                                                                                                                                   |
| AGM                     | Annual general  meeting                                                                                                                                                                |
|                    |                                                                                                                                                                                   |
| A-IFRS                  | Australian  Equivalents to International Financial Reporting Standards                                                                                                                 |
|                    |                                                                                                                                                                                   |
| AIRB                    | Advanced Internal  Ratings Based                                                                                                                                                       |
|                    |                                                                                                                                                                                   |
| AIRC                    | Australian  Industrial Relations Commission                                                                                                                                            |
|                    |                                                                                                                                                                                   |
| ALCO                    | Westpac Group  Asset & Liability Committee                                                                                                                                    |
|                    |                                                                                                                                                                                   |
| ALM                     | Asset and  Liability Management                                                                                                                                                        |
|                    |                                                                                                                                                                                   |
| AMA                     | Advanced  Measurement Approach                                                                                                                                                         |
|                    |                                                                                                                                                                                   |
| ANZSIC                  | Australian and New  Zealand Standard Industrial Classification                                                                                                                         |
|                    |                                                                                                                                                                                   |
| APRA                    | Australian  Prudential Regulation Authority                                                                                                                                            |
|                    |                                                                                                                                                                                   |
| ASIC                    | Australian  Securities and Investments Commission                                                                                                                                      |
|                    |                                                                                                                                                                                   |
| ASX                     | Australian  Securities Exchange                                                                                                                                                        |
|                    |                                                                                                                                                                                   |
| ASX Limited             | Operates under the  brand name Australian Securities Exchange                                                                                                                          |
|                    |                                                                                                                                                                                   |
| ASXCGC                  | ASX Limited’s  Corporate Governance Council                                                                                                                                       |
|                    |                                                                                                                                                                                   |
| ATM                     | Automatic teller  machines                                                                                                                                                             |
|                    |                                                                                                                                                                                   |
| ATO                     | Australian  Taxation Office                                                                                                                                                            |
|                    |                                                                                                                                                                                   |
| AUSTRAC                 | Australian  Transactions Reports and Analysis Centre                                                                                                                                   |
|                    |                                                                                                                                                                                   |
| BAC                     | Board Audit  Committee                                                                                                                                                                 |
|                    |                                                                                                                                                                                   |
| BBSW                    | Bank Bills Swap  reset Rate                                                                                                                                                            |
|                    |                                                                                                                                                                                   |
| BCBS                    | Basel Committee on  Banking Supervision                                                                                                                                                |
|                    |                                                                                                                                                                                   |
| BankSA                  | Bank of South  Australia                                                                                                                                                               |
|                    |                                                                                                                                                                                   |
| BRMC                    | Board Risk  Management Committee                                                                                                                                                       |
|                    |                                                                                                                                                                                   |
| BTFG                    | BT Financial Group  Australia                                                                                                                                                          |
|                    |                                                                                                                                                                                   |
| BTIM                    | BT Investment  Management Limited                                                                                                                                                      |
|                    |                                                                                                                                                                                   |
| CAPs                    | Collectively  assessed provisions                                                                                                                                                      |
|                    |                                                                                                                                                                                   |
| Capital Trust III       | Westpac Capital  Trust III                                                                                                                                                             |
|                    |                                                                                                                                                                                   |
| Capital Trust IV        | Westpac Capital  Trust IV                                                                                                                                                              |
|                    |                                                                                                                                                                                   |
| CCC                     | Community  Consultative Council                                                                                                                                                        |
|                    |                                                                                                                                                                                   |
| CCE                     | Commodity, Carbon  and Energy trading                                                                                                                                                  |
|                    |                                                                                                                                                                                   |
| CDO                     | Credit default  obligations                                                                                                                                                            |
|                    |                                                                                                                                                                                   |
| CDS                     | Credit default  swap                                                                                                                                                                   |
|                    |                                                                                                                                                                                   |
| CEA                     | Collective  Employment Agreement                                                                                                                                                       |
|                    |                                                                                                                                                                                   |
| CEO                     | Chief Executive  Officer                                                                                                                                                               |
|                    |                                                                                                                                                                                   |
| CEOPP                   | Chief Executive  Officer Performance Plan                                                                                                                                              |
|                    |                                                                                                                                                                                   |
| CEO RSP                 | Chief Executive  Officer Restricted Share Plan                                                                                                                                         |
|                    |                                                                                                                                                                                   |
| CFO                     | Chief Financial  Officer                                                                                                                                                               |
|                    |                                                                                                                                                                                   |
| CGU                     | Cash-generating  unit                                                                                                                                                                  |
|                    |                                                                                                                                                                                   |
| CIR                     | Commissioner of  Inland Revenue                                                                                                                                                        |
|                    |                                                                                                                                                                                   |
| CLO                     | Credit linked  obligations                                                                                                                                                             |
|                    |                                                                                                                                                                                   |
| Corporations Act        | Australian  Corporations Act 2001                                                                                                                                                      |
|                    |                                                                                                                                                                                   |
| COSO                    | Committee of  Sponsoring Organizations of the Treadway Commission                                                                                                                      |
|                    |                                                                                                                                                                                   |
| CPM                     | Credit Portfolio  Management                                                                                                                                                           |

 

321

----

 

GLOSSARY OF ABBREVIATIONS AND DEFINED TERMS

 
| CREDCO            | Westpac Group  Credit Risk Committee                                                                                                                                                                    |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                                                                                    |
| CRG               | Customer Risk  Grade                                                                                                                                                                                    |
|              |                                                                                                                                                                                                    |
| CRO               | Chief Risk Officer                                                                                                                                                                                      |
|              |                                                                                                                                                                                                    |
| CSA               | Cash Services  Australia                                                                                                                                                                                |
|              |                                                                                                                                                                                                    |
| CVA               | Credit valuation  adjustment                                                                                                                                                                            |
|              |                                                                                                                                                                                                    |
| DFAT              | Department of  Foreign Affairs and Trade                                                                                                                                                                |
|              |                                                                                                                                                                                                    |
| Dodd-Frank Act    | Dodd-Frank Wall  Street Reform and Consumer Protection Act                                                                                                                                              |
|              |                                                                                                                                                                                                    |
| DRP               | Dividend  Reinvestment Plan                                                                                                                                                                             |
|              |                                                                                                                                                                                                    |
| DSP               | Deferral Share  Plan                                                                                                                                                                                    |
|              |                                                                                                                                                                                                    |
| DVA               | Derivative  valuation adjustment                                                                                                                                                                        |
|              |                                                                                                                                                                                                    |
| EAA               | NSW Energy  Administration Amendment (Water & Savings) Act 2005                                                                                                                                |
|              |                                                                                                                                                                                                    |
| EAD               | Exposure at  Default                                                                                                                                                                                    |
|              |                                                                                                                                                                                                    |
| EEO               | Energy Efficiency  Opportunities Act 2006 (Cth)                                                                                                                                                    |
|              |                                                                                                                                                                                                    |
| EFTPoS            | Electronic Funds  Transfer Point of Sale                                                                                                                                                                |
|              |                                                                                                                                                                                                    |
| EPS               | Earnings per share                                                                                                                                                                                      |
|              |                                                                                                                                                                                                    |
| ESG               | Environmental,  Social and Governance                                                                                                                                                                   |
|              |                                                                                                                                                                                                    |
| ESP               | Employee Share  Plan                                                                                                                                                                                    |
|              |                                                                                                                                                                                                    |
| FATCA             | Foreign Account  Taxation Compliance Act                                                                                                                                                                |
|              |                                                                                                                                                                                                    |
| FCS               | Financial Claims  Scheme                                                                                                                                                                                |
|              |                                                                                                                                                                                                    |
| FinSec            | Finance and  Information Union                                                                                                                                                                          |
|              |                                                                                                                                                                                                    |
| FIRsTS            | Fixed Interest  Resettable Securities                                                                                                                                                                   |
|              |                                                                                                                                                                                                    |
| FRA               | Forward rate  agreement                                                                                                                                                                                 |
|              |                                                                                                                                                                                                    |
| FSB               | Financial  Stability Board                                                                                                                                                                              |
|              |                                                                                                                                                                                                    |
| FTE               | Full time  equivalent                                                                                                                                                                                   |
|              |                                                                                                                                                                                                    |
| FUA               | Funds under  administration                                                                                                                                                                             |
|              |                                                                                                                                                                                                    |
| FUM               | Funds under  management                                                                                                                                                                                 |
|              |                                                                                                                                                                                                    |
| Funding Trust III | Tavarua Funding  Trust III                                                                                                                                                                              |
|              |                                                                                                                                                                                                    |
| Funding Trust IV  | Tavarua Funding  Trust IV                                                                                                                                                                               |
|              |                                                                                                                                                                                                    |
| FX                | Foreign Exchange                                                                                                                                                                                        |
|              |                                                                                                                                                                                                    |
| GMSOP             | General Management  Share Option Plan                                                                                                                                                                   |
|              |                                                                                                                                                                                                    |
| Hastings          | Hastings Funds  Management Limited                                                                                                                                                                      |
|              |                                                                                                                                                                                                    |
| Henry Review      | Australia’s Future  Tax System Review                                                                                                                                                              |
|              |                                                                                                                                                                                                    |
| HFM               | Home Finance  Manager                                                                                                                                                                                   |
|              |                                                                                                                                                                                                    |
| IAPs              | Individually  Assessed Provisions                                                                                                                                                                       |
|              |                                                                                                                                                                                                    |
| IASB              | International  Accounting Standards Board                                                                                                                                                               |
|              |                                                                                                                                                                                                    |
| IBA               | International  Banking Act of 1978                                                                                                                                                                      |
|              |                                                                                                                                                                                                    |
| ICAA              | Institute of  Chartered Accountants in Australia                                                                                                                                                        |
|              |                                                                                                                                                                                                    |
| ICAAP             | Internal Capital  Adequacy Assessment Process                                                                                                                                                           |
|              |                                                                                                                                                                                                    |
| IDA               | Interbank deposit  agreement                                                                                                                                                                            |
|              |                                                                                                                                                                                                    |
| IEA               | Individual  Employment Agreement                                                                                                                                                                        |
|              |                                                                                                                                                                                                    |
| IFRS              | International  Financial Reporting Standards                                                                                                                                                            |
|              |                                                                                                                                                                                                    |
| IPO               | Initial pubic  offering                                                                                                                                                                                 |
|              |                                                                                                                                                                                                    |
| IR                | Interest rate                                                                                                                                                                                           |
|              |                                                                                                                                                                                                    |
| IRRBB             | Interest Rate Risk  in the Banking Book                                                                                                                                                                 |
|              |                                                                                                                                                                                                    |
| IRS               | Internal Revenue  Service                                                                                                                                                                               |
|              |                                                                                                                                                                                                    |
| ISDA              | International  Swaps and Derivatives Association                                                                                                                                                        |
|              |                                                                                                                                                                                                    |
| LGD               | Loss Given Default                                                                                                                                                                                      |
|              |                                                                                                                                                                                                    |
| LIASB             | Life Insurance  Actuarial Standard Board                                                                                                                                                                |
|              |                                                                                                                                                                                                    |
| LIBOR             | London InterBank  Offer Rate                                                                                                                                                                            |
|              |                                                                                                                                                                                                    |
| LTI               | Long term  incentive                                                                                                                                                                                    |
|              |                                                                                                                                                                                                    |
| LVR               | Loan to value  ratio                                                                                                                                                                                    |
|              |                                                                                                                                                                                                    |
| MARCO             | Westpac Group  Market Risk Committee                                                                                                                                                                    |
|              |                                                                                                                                                                                                    |
| MRM               | Market Risk  Management                                                                                                                                                                                 |
|              |                                                                                                                                                                                                    |
| NaR               | Net interest  income-at-risk                                                                                                                                                                            |
|              |                                                                                                                                                                                                    |
| NII               | Net interest  income                                                                                                                                                                                    |
|              |                                                                                                                                                                                                    |
| NPS               | Net Promoter Score                                                                                                                                                                                      |
|              |                                                                                                                                                                                                    |
| NYSE              | New York Stock  Exchange                                                                                                                                                                                |
|              |                                                                                                                                                                                                    |
| NZ                | New Zealand                                                                                                                                                                                             |
|              |                                                                                                                                                                                                    |
| NZ ETS            | New Zealand  Emissions Trading Scheme                                                                                                                                                                   |
|              |                                                                                                                                                                                                    |
| NZSX              | New Zealand Stock  Exchange                                                                                                                                                                             |
|              |                                                                                                                                                                                                    |
| NZX               | New Zealand  Exchange                                                                                                                                                                                   |
|              |                                                                                                                                                                                                    |
| OHS               | Occupational  Health and Safety                                                                                                                                                                         |
|              |                                                                                                                                                                                                    |
| OPCO              | Westpac Group  Operational Risk and Compliance Committee                                                                                                                                                |
|              |                                                                                                                                                                                                    |
| OTC               | Over the Counter                                                                                                                                                                                        |
|              |                                                                                                                                                                                                    |
| PD                | Probability of  Default                                                                                                                                                                                 |
|              |                                                                                                                                                                                                    |
| PFIC              | Passive foreign  investment company                                                                                                                                                                     |
|              |                                                                                                                                                                                                    |
| PwC               | PricewaterhouseCoopers                                                                                                                                                                                  |
|              |                                                                                                                                                                                                    |
| RAMS              | RAMS Home Loans                                                                                                                                                                                         |
|              |                                                                                                                                                                                                    |
| RBA               | Reserve Bank of  Australia                                                                                                                                                                              |
|              |                                                                                                                                                                                                    |
| RBNZ              | Reserve Bank of  New Zealand                                                                                                                                                                            |
|              |                                                                                                                                                                                                    |
| RECs              | Renewable energy  certificates                                                                                                                                                                          |
|              |                                                                                                                                                                                                    |
| RMBS              | Residential  Mortgage Backed Securities                                                                                                                                                                 |
|              |                                                                                                                                                                                                    |
| ROC               | Westpac Group  Remuneration Oversight Committee                                                                                                                                                         |
|              |                                                                                                                                                                                                    |
| RSP               | Restricted Share  Plan                                                                                                                                                                                  |
|              |                                                                                                                                                                                                    |
| S&P           | Standard &  Poor’s                                                                                                                                                                        |
|              |                                                                                                                                                                                                    |
| SCG               | Specialised  Capital Group                                                                                                                                                                              |
|              |                                                                                                                                                                                                    |
| SEC               | US Securities and  Exchange Commission                                                                                                                                                                  |
|              |                                                                                                                                                                                                    |
| SGPSF             | St.George Staff  sub-plan of the Plum Superannuation Fund                                                                                                                                               |
|              |                                                                                                                                                                                                    |
| SIFI              | Systematically  important financial institution                                                                                                                                                         |
|              |                                                                                                                                                                                                    |
| SIPs              | Strategic  Investment Priorities, an investment portfolio of 15 major strategic programs  aimed at delivering business and technology capabilities across the Group to  improve the customer experience |
|              |                                                                                                                                                                                                    |
| SME               | Small to medium  enterprises                                                                                                                                                                            |
|              |                                                                                                                                                                                                    |
| SOSPS             | Senior Officers’  Share Purchase Scheme                                                                                                                                                            |
|              |                                                                                                                                                                                                    |
| SOX               | Sarbanes Oxley Act  2002                                                                                                                                                                                |
|              |                                                                                                                                                                                                    |
| SPS               | Stapled Preferred  Securities                                                                                                                                                                           |
|              |                                                                                                                                                                                                    |
| SPVs              | Special purpose  vehicles                                                                                                                                                                               |
|              |                                                                                                                                                                                                    |
| SRAs              | Settlement Residue  Auctions                                                                                                                                                                            |
|              |                                                                                                                                                                                                    |
| SSCM              | Sustainable and  Supply Chain Management                                                                                                                                                                |
|              |                                                                                                                                                                                                    |
| St.George         | St.George Bank  Limited and its subsidiaries, unless context clearly means just St.George  Bank Limited                                                                                                 |
|              |                                                                                                                                                                                                    |
| STI               | Short term  incentive                                                                                                                                                                                   |
|              |                                                                                                                                                                                                    |
| TCE               | Total committed  exposures                                                                                                                                                                              |
|              |                                                                                                                                                                                                    |
| The Group         | Westpac Banking  Corporation Group                                                                                                                                                                      |
|              |                                                                                                                                                                                                    |
| TOFA              | Taxation of  financial arrangements rules contained in the Tax Laws Amendment  (Taxation of Financial Arrangements) Act 2009                                                                  |
|              |                                                                                                                                                                                                    |
| TPS 2003          | Trust Preferred  Securities 2003                                                                                                                                                                        |
|              |                                                                                                                                                                                                    |
| TPS 2004          | Trust Preferred  Securities 2004                                                                                                                                                                        |
|              |                                                                                                                                                                                                    |
| TPS 2006          | Trust Preferred  Securities 2006                                                                                                                                                                        |

 

322

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| TSR                | Total shareholder  return                             |
|--------------------|-------------------------------------------------------|
|               |                                                  |
| UKSS               | UK Staff  Superannuation Scheme                       |
|               |                                                  |
| UN PRI             | United Nations  Principles for Responsible Investment |
|               |                                                  |
| UNSC               | United Nations  Security Council                      |
|               |                                                  |
| US Federal Reserve | US Federal Reserve  System                            |
|               |                                                  |
| US                 | United States                                         |
|               |                                                  |
| VaR                | Value at risk                                         |
|               |                                                  |
| WAL                | Weighted average  life                                |
|               |                                                  |
| WBC                | Westpac Banking  Corporation                          |
|               |                                                  |
| WIB                | Westpac  Institutional Bank                           |
|               |                                                  |
| WNZL               | Westpac New  Zealand Limited                          |
|               |                                                  |
| WNZS               | Westpac New  Zealand Superannuation Scheme            |
|               |                                                  |
| WPP                | Westpac  Performance Plan                             |
|               |                                                  |
| Westpac RBB        | Westpac  Retail & Business Banking           |
|               |                                                  |
| WRP                | Westpac Reward  Plan                                  |
|               |                                                  |
| WSNZL              | Westpac Securities  NZ Limited                        |
|               |                                                  |
| WSSP               | Westpac Staff  Superannuation Plan                    |
|               |                                                  |
| WNZSHL             | Westpac NZ  Securitisation Holdings Limited           |
|               |                                                  |
| WNZSL              | Westpac NZ  Securitisation Limited                    |

 

323

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|    |   | **Item 19. Exhibits Index**                                                                                                                                                                                                                                                                                          |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 1.      |   | Constitution (as  amended), incorporated by reference to our Form 6-K/A filed on 20  December 2007.                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 4(c).1  |   | Form of  Access and Indemnity Deed between Westpac Banking Corporation and Director,  incorporated by reference to our Annual Report on Form 20-F for the year  ended 30 September 2001.                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 4(c).2  |   | Access and  Indemnity Deed between Westpac Banking Corporation and Elizabeth Bryan dated  30 November 2006, incorporated by reference to our Annual Report on  Form 20-F for the year ended 30 September 2007.                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 4(c).3  |   | Form of  Access and Indemnity Deed between Westpac Banking Corporation and Director,  incorporated by reference to our Annual Report on Form 20-F for the year  ended 30 September 2008.                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 4(c).4  |   | Indemnity Deed  Poll dated 10 September 2009, of Westpac Banking Corporation,  incorporated by reference to our Annual Report on Form 20-F for the year  ended 30 September 2009.                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 4( c).5 |   | Westpac General  Management Share Option Plan Rules, incorporated by reference to our Annual  Report on Form 20-F for the year ended 30 September 2006.                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 4(c).6  |   | Westpac Employee  Share Plan (WESP) — Stage One Regulations and Rules for Participation  amended on 11 December 2002, incorporated by reference to our Annual  Report on Form 20-F for the year ended 30 September 2006.                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 4(c).7  |   | Senior Officers’  Share Purchase Scheme Rules, incorporated by reference to our Annual Report  on Form 20-F for the year ended 30 September 2006.                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 4(c).8  |   | Employment  Agreement between Westpac Banking Corporation and Rob Coombe dated 6  October 2004, incorporated by reference to our Annual Report on  Form 20-F for the year ended 30 September 2005.                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 7.      |   | Computation of  ratios of earnings to fixed charges.                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 8.      |   | List of controlled  entities — refer note 38 to the financial statements in this Annual Report.                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 11.     |   | Code of ethics,  incorporated by reference to our Annual Report on Form 20-F for the year  ended 30 September 2006.                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 12.     |   | Certifications  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act  of 1934.                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 13.     |   | Certifications  pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                 |
| 15.     |   | Auditor consent  dated 3 November 2010.                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                 |
|    |   | Copies of any instrument relating to the  long-term debt of Westpac Banking Corporation that is not being attached as  an exhibit to this Annual Report on Form 20-F and which does not exceed  10% of the total consolidated assets of Westpac Banking Corporation will be  furnished to the SEC upon request. |

 

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