WNZL Disclosure Statement – 30 September 2019
Westpac
New Zealand
Limited
Annual Report and Disclosure Statement
For the year ended 30 September 2019
This page has been intentionally left blank
Westpac New Zealand Limited 3
Contents
Westpac New Zealand sustainability performance
5
Annual report6
Directors’ statement7
Financial statements
Income statement8Note 16 Deposits and other borrowings
Note 18 Debt issues
38
39
Statement of comprehensive income8Note 17 Other financial liabilities38
Balance sheet9Note 18 Debt issues39
Statement of changes in equity10Note 19 Provisions40
Statement of cash flows11Note 20 Loan capital40
Note 1 Financial statements preparation12Note 21 Share capital42
Note 2 Net interest income21Note 22 Related entities42
Note 3 Non-interest income22Note 23 Derivative financial instruments45
Note 4 Operating expenses24Note 24 Fair values of financial assets and financial liabilities52
Note 5 Auditor’s remuneration24Note 25 Offsetting financial assets and financial liabilities56
Note 6 Impairment charges/(benefits)25Note 26 Operating lease commitments58
Note 7 Income tax expense26
Note 8 Imputation credit account26
Note 27 Credit related commitments, contingent assets and
contingent liabilities
58
Note 9 Trading securities and financial assets measured at FVIS27Note 28 Segment reporting60
Note 10 Investment securities/Available-for-sale securities27
Note 11 Loans28
Note 29 Securitisation, covered bonds and other transferred
assets
61
Note 30 Structured entities63
Note 12 Provisions for expected credit losses/impairment
charges
29
Note 31 Capital management64
Note 13 Other financial assets35Note 32 Financial risk
65
Note 14 Deferred tax assets36Note 33 Notes to the statement of cash flows82
Note 15 Intangible assets37Note 34 Accounting policies relating to prior years83
Registered bank disclosures
i. General information85vi. Credit exposures to connected persons103
ii. Additional financial disclosures90
iii. Asset quality92
vii. Insurance business, securitisation, funds management,
other fiduciary activities, and marketing and distribution of
insurance products
104
iv. Capital adequacy under the internal models based approach,
and regulatory liquidity ratios
93
viii. Risk management policies105
v. Concentration of credit exposures to individual counterparties102
Conditions of registration
110
Independent auditor’s report115
4 Westpac New Zealand Limited
Glossary of terms
Certain information contained in this Disclosure Statement is required by the Registered Bank Disclosure Statements (New Zealand Incorporated
Registered Banks) Order 2014 (as amended) (‘Order’).
In this Disclosure Statement, reference is made to:
– Westpac New Zealand Limited (otherwise referred to as the ‘Bank’);
– Westpac New Zealand Limited and its controlled entities (otherwise referred to as the ‘Banking Group’). Controlled entities of the Bank as at 30
September 2019 are set out in Note 22;
– Westpac Banking Corporation (otherwise referred to as the ‘Ultimate Parent Bank’); and
– Ultimate Parent Bank and its controlled entities (otherwise referred to as the ‘Ultimate Parent Bank Group’).
Words and phrases not defined in this Disclosure Statement, but defined by the Order, have the meaning given by the Order when used in this
Disclosure Statement.
Westpac New Zealand Limited 5
Westpac New Zealand sustainability performance
Our purpose is to help our customers financially, to grow a better New Zealand
We are committed to creating shared value – for our customers,
our shareholders, our people and our communities. We do this
through our core business, which is focused on helping our
customers grow their financial wellbeing, and more widely by using
our financial and economic expertise to generate positive
economic, social and environmental outcomes for our customers
and New Zealand.
Our 2020 sustainability strategy focuses on:
Growing New Zealanders’ financial wellbeing
Taking action on climate change
Caring for people and communities.
Grow New Zealanders’ financial wellbeing
Increased economic participation and inclusive prosperity is
beneficial to all. We want all New Zealanders to be financially
secure and independent, enabling them to reach their full potential.
We aim to 1. Grow the financial capability of our communities and
our people by integrating financial capability into everyday banking,
and 2. Grow financial independence by helping New Zealanders
participate in the economy and grow their wealth.
2020 targetsProgress
1.20,000 financial education workshop
participants
15,870
participants
2.Introduce a new product or service to
tackle financial exclusion and poverty
In progress
1
3.Provide $300m in lending to social
and affordable housing
$215m
1
New target
In addition to the above results, key highlights in the year to 30
September 2019 include:
Launching a modern papakāinga shared equity housing
development initiated on iwi land with Ngāti Koroki Kahukura.
Supporting the Middlemore Foundation’s Mana-ā-Riki pilot
programme, which takes an integrated approach to reducing
inequality and improving health and educational outcomes in
South Auckland.
Launching new financial education primary school games with
more than 600 children taking part.
Our CashNav app continues to help over 94,476 customers
track, categorise and benchmark their spending.
Take action on climate change
We want to lead New Zealand’s transition to a resilient, low-
emissions economy that continues to grow to the benefit of future
generations.
2020 targetsProgress
1.Reduce our operational emissions by
25% (2016 baseline)
1
8%
2.Convert 30% of our car fleet to
electric vehicles or PHeV
2
30%
3.Provide $2 billion in lending to climate
change solutions
$1.6b
1
Environmental year runs 1 July to 30 June. CO
2
e results include all Westpac
business units based in New Zealand. In the current year, we changed the
way we measure and report carbon emissions, to align with the Greenhouse
Gas Protocol (2004) and ISO 14064-1:2006 Specification.
2
Plug in Hybrid electric Vehicles
We recognise climate change is a major threat to our environment,
economy and wellbeing. However, it also presents opportunities for
new products and services, technologies and jobs. We believe
business has a major role to play. Our strategy is to actively address
climate change with urgency, to reduce and disclose our own
emissions, and to better understand our own exposure to climate
risk and help our customers manage the transition to a low carbon
economy. We also want to ensure capital flows to those parts of the
economy where it is needed to facilitate that transition.
In addition to the above results, key highlights in the year to 30
September 2019 include:
Westpac New Zealand becoming the first New Zealand bank to
raise funding through the issuance of a green bond. The 5 year
green bond issued by Westpac raised €500 million
(NZD860million) from European investors, to support the
funding of climate change solutions.
As one of the founding members of the Climate Leaders
Coalition, we are one of 121 New Zealand companies committed
to measuring and reporting our own greenhouse gas emissions,
and working with suppliers to reduce emissions.
In late 2018, we supported the launch of the Aotearoa Circle, a
public-private initiative to halt and reverse the decline of New
Zealand’s natural capital. We co-chair the Sustainable Finance
Forum stream of the Circle.
We have commenced a scenario analysis to better understand
the Bank’s exposure to climate risk, taking guidance from the
recommendations of the Taskforce for Climate-Related
Financial Disclosure. This work is ongoing.
To read the Westpac Climate Change Impact report, visit:
https://www.westpac.co.nz/climateimpactreport
Care for people and communities
We want to help create thriving New Zealand communities and a
workforce and society where everyone feels valued.
2020 targetsProgress
1.Raise $3 million for Westpac
Rescue Choppers
$2.48m
2.50% Women in Leadership50.7%
3.Introduce a Supply Chain
Responsible Sourcing Assessment in
100% of Supplier Risk Assessments
Complete
In addition to the above results, key highlights for the year ended 30
September 2019 include:
The first New Zealand bank to become an accredited Living
Wage Employer.
1
Sole platinum sponsor of Rainbow Excellence Awards,
reflecting our commitment to our LGBTI+ community.
Received the Accessibility Tick, for committing to making our
branches and offices more inclusive and accessible to people
with disabilities.
For more information on our approach to sustainability please visit
www.westpacsustainability.co.nz
1
Accredited by Living Wage Aotearoa NZ.
6 Westpac New Zealand Limited
Annual report
Pursuant to section 211(3) of the Companies Act 1993, the shareholder of Westpac New Zealand Limited has agreed that the Annual Report of Westpac
New Zealand Limited need not comply with the requirements of paragraphs (a), and (e) to (j) of subsection (1) and subsection (2) of section 211.
Accordingly, there is no information to be included in the Annual Report other than the financial statements for the year ended 30 September 2019
and the independent auditor’s report on those financial statements.
For and on behalf of the Board of Directors:
J.A. Dawson
Chair
25 November 2019
D.A. McLean
Chief Executive
25 November 2019
Westpac New Zealand Limited 7
Directors’ statement
Each Director of the Bank believes, after due enquiry, that, as at the date on which this Disclosure Statement is signed, the Disclosure Statement:
(a) contains all the information that is required by the Order; and
(b) is not false or misleading.
Each Director of the Bank believes, after due enquiry, that over the year ended 30 September 2019:
(a) the Bank has complied with all conditions of registration that applied during that period, except as noted on pages 113 to 114;
(b) credit exposures to connected persons were not contrary to the interests of the Banking Group; and
(c) the Bank had systems in place to monitor and control adequately the Banking Group’s material risks, including credit risk, concentration of
credit risk, interest rate risk, currency risk, equity risk, liquidity risk, operational risk and other business risks, and that those systems were
being properly applied.
This Disclosure Statement has been signed by all the Directors:
Janice Dawson
David McLean
Malcolm Bailey
Philippa Greenwood
Peter King
Jonathan Mason
Christopher Moller
Mary Quin
Dated this 25
th
day of November 2019
Income statement for the year ended 30 September 2019
8 Westpac New Zealand Limited
THE BANKING GROUP
$ millionsNote2019
1
2018
1
Interest income:
Calculated using the effective interest rate method2 3,976 3,938
Other2 35 51
Total Interest income2 4,011 3,989
Interest expense2 (2,068) (2,145)
Net interest income 1,943 1,844
Net fees and commissions income3 281 330
Other income3 48 14
Net operating income before operating expenses and impairment charges 2,272 2,188
Operating expenses4 (961) (886)
Impairment (charges)/benefits6 10 (3)
Profit before income tax 1,321 1,299
Income tax expense7 (357) (363)
Net profit attributable to the owners of the Banking Group 964 936
1
The Banking Group has adopted NZ IFRS 9 Financial Instruments (‘NZ IFRS 9’) and NZ IFRS 15 Revenue from Contracts with Customers (‘NZ IFRS 15’) from 1
October 2018. Comparatives have not been restated. In addition, the Banking Group has made a number of presentational changes to the balance sheet and
income statement. Comparatives have been restated. Refer to Note 1 for further detail.
The above income statement should be read in conjunction with the accompanying notes.
Statement of comprehensive income for the year ended 30 September 2019
THE BANKING GROUP
$ millions2019
1
2018
1
Net profit attributable to the owners of the Banking Group 964 936
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Gains/(losses) recognised in equity on:
Investment securities (8) -
Cash flow hedging instruments (106) (20)
Transferred to income statement:
Cash flow hedging instruments 77 39
Income tax on items taken to or transferred from equity:
Investment securities reserve 3 -
Cash flow hedge reserve 8 (5)
Items that will not be reclassified subsequently to profit or loss (net of tax)
Remeasurement of defined benefit obligation (10) (2)
Other comprehensive income for the year (net of tax) (36) 12
Total comprehensive income attributable to the owners of the Banking Group 928 948
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
The above statement of comprehensive income should be read in conjunction with the accompanying notes.
Balance sheet as at 30 September 2019
Westpac New Zealand Limited 9
THE BANKING GROUP
$ millionsNote2019
1
2018
1
Assets
Cash and balances with central banks33 1,864 1,353
Collateral paid 168 70
Trading securities and financial assets measured at fair value through income statement ('FVIS')9 1,661 1,151
Derivative financial instruments 23 616 585
Available-for-sale securities10 - 3,810
Investment securities10 4,469 -
Loans11 84,160 80,378
Other financial assets13 178 225
Due from related entities22 2,571 1,319
Property and equipment 137 144
Deferred tax assets14 174 156
Intangible assets15 636 629
Other assets 42 51
Total assets 96,676 89,871
Liabilities
Collateral received 473 476
Deposits and other borrowings16 65,606 63,102
Other financial liabilities17 455 560
Derivative financial instruments 23 257 181
Debt issues18 17,846 13,725
Current tax liabilities 72 96
Provisions19 144 106
Other liabilities 96 82
Total liabilities excluding related entities liabilities 84,949 78,328
Due to related entities22 1,701 1,643
Loan capital20 2,609 2,622
Total related entities liabilities 4,310 4,265
Total liabilities 89,259 82,593
Net assets 7,417 7,278
Shareholder's equity
Share capital21 7,300 5,100
Reserves (77) (51)
Retained profits 194 2,229
Total shareholder's equity 7,417 7,278
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
The above balance sheet should be read in conjunction with the accompanying notes.
Signed on behalf of the Board of Directors.
J.A. DawsonJ.P. Mason
25 November 201925 November 2019
Statement of changes in equity for the year ended 30 September 2019
10 Westpac New Zealand Limited
THE BANKING GROUP
Reserves
Available-
for-saleInvestmentCash Flow
Share SecuritiesSecuritiesHedgeRetained
$ millionsCapital ReserveReserveReserveProfitsTotal
As at 1 October 2017 3,750 9 - (74) 3,165 6,850
Year ended 30 September 2018
Net profit attributable to the owners of the Banking Group - - - - 936 936
Net gains/(losses) from changes in fair value - - - (20) - (20)
Income tax effect - - - 6 - 6
Transferred to income statement - - - 39 - 39
Income tax effect - - - (11) - (11)
Remeasurement of defined benefit obligations - - - - (3) (3)
Income tax effect - - - - 1 1
Total comprehensive income for the year
ended 30 September 2018 - - - 14 934 948
Transactions with owners:
Ordinary share capital issued 1,350 - - - - 1,350
Dividends paid on ordinary shares - - - - (1,870) (1,870)
As at 30 September 2018 5,100 9 - (60) 2,229 7,278
Impact on adoption of new accounting standards
1
- (9) 9 - (24) (24)
As at 1 October 2018 (restated) 5,100 - 9 (60) 2,205 7,254
Year ended 30 September 2019
Net profit attributable to the owners of the Banking Group - - - - 964 964
Net gains/(losses) from changes in fair value - - (8) (106) - (114)
Income tax effect - - 3 30 - 33
Transferred to income statement - - - 77 - 77
Income tax effect - - - (22) - (22)
Remeasurement of defined benefit obligations - - - - (14) (14)
Income tax effect - - - - 4 4
Total comprehensive income for the year
ended 30 September 2019 - - (5) (21) 954 928
Transactions with owners:
Ordinary share capital issued (refer to Note 21) 2,200 - - - -
2,200
Dividends paid on ordinary shares (refer to Note 21) - - - - (2,965) (2,965)
As at 30 September 2019 7,300 - 4 (81) 194 7,417
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
The above statement of changes in equity should be read in conjunction with the accompanying notes.
Statement of cash flows for the year ended 30 September 2019
Westpac New Zealand Limited 11
THE BANKING GROUP
$ millionsNote2019
1
2018
1
Cash flows from operating activities
Interest received 4,042 3,985
Interest paid (2,095) (2,161)
Non-interest income received 289 333
Operating expenses paid (817) (791)
Income tax paid (373) (336)
Cash flows from operating activities before changes in operating assets and liabilities 1,046 1,030
Net (increase)/decrease in:
Collateral paid (98) 337
Trading securities and financial assets measured at FVIS (510) 666
Loans (3,714) (3,121)
Other financial assets 21 (10)
Due from related entities (816) 1,025
Other assets - 1
Net increase/(decrease) in:
Collateral received (3) 340
Deposits and other borrowings 2,504 4,104
Other financial liabilities (83) 91
Due to related entities 102 (7)
Net movement in external and related entity derivative financial instruments 417 (63)
Net cash provided by/(used in) operating activities33 (1,134) 4,393
Cash flows from investing activities
Purchase of available-for-sale securities - (268)
Proceeds from available-for-sale securities - 499
Purchase of investment securities (2,009) -
Proceeds from investment securities 1,387 -
Proceeds from disposal of associates 48 -
Purchase of capitalised computer software (62) (64)
Purchase of property and equipment (35) (44)
Net cash provided by/(used in) investing activities (671) 123
Cash flows from financing activities
Issue of ordinary share capital21 2,200 1,350
Net movement in due to related entities (625) (388)
Proceeds from debt issues18 8,707 550
Repayments of debt issues18 (5,001) (4,464)
Dividends paid to ordinary shareholders21 (2,965) (1,870)
Net cash provided by/(used in) financing activities 2,316 (4,822)
Net increase/(decrease) in cash and cash equivalents 511 (306)
Cash and cash equivalents at the beginning of the year 1,353 1,659
Cash and cash equivalents at the end of the year33 1,864 1,353
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
The above statement of cash flows should be read in conjunction with the accompanying notes. Details of the reconciliation of net cash provided
by/(used
in) operating activities to net profit are provided in Note
33.
Notes to the financial statements
12 Westpac New Zealand Limited
Note 1 Financial statements preparation
In this Disclosure Statement, reference is made to:
– Westpac New Zealand Limited (otherwise referred to as the ‘Bank’);
– Westpac New Zealand Limited and its controlled entities (otherwise referred to as the ‘Banking Group’). Controlled entities of the Bank as at 30
September 2019 are set out in Note 22;
– Westpac Banking Corporation (otherwise referred to as the ‘Ultimate Parent Bank’); and
– Ultimate Parent Bank and its controlled entities (otherwise referred to as the ‘Ultimate Parent Bank Group’).
The Bank was incorporated as Westpac New Zealand Limited under the Companies Act 1993 (Company Number 1763882) on 14 February 2006. The
head office of the Bank is situated at Westpac on Takutai Square, 16 Takutai Square, Auckland 1010, New Zealand and the address for service of
process on the Bank is Westpac on Takutai Square, 53 Galway Street, Auckland 1010, New Zealand.
The Bank is a locally incorporated subsidiary of the Ultimate Parent Bank undertaking the Ultimate Parent Bank’s New Zealand consumer and
business banking operations.
The consolidated financial statements are for the Banking Group.
These financial statements were authorised for issue by the Board of Directors of the Bank (the ‘Board’) on 25 November 2019. The Board has the
power to amend and reissue the financial statements.
The principal accounting policies are set out below and in the relevant notes to the financial statements. These policies have been consistently
applied to all the years presented, unless otherwise stated.
a.Basis of preparation
(i) Basis of accounting
These financial statements are general purpose financial statements prepared in accordance with:
the requirements of the Financial Markets Conduct Act 2013; and
the requirements of the Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014 (as amended)
(‘Order’).
These financial statements comply with Generally Accepted Accounting Practice, applicable New Zealand equivalents to International Financial
Reporting Standards (‘NZ IFRS’) and other authoritative pronouncements of the External Reporting Board, as appropriate for for-profit entities.
These financial statements also comply with International Financial Reporting Standards, as issued by the International Accounting Standards Board
(‘IASB’).
All amounts in these financial statements have been rounded to the nearest million dollars unless otherwise stated.
(ii) Historical cost convention
These financial statements have been prepared under the historical cost convention, as modified by applying fair value accounting to financial
assets and financial liabilities (including derivative instruments) measured at FVIS or in other comprehensive income (‘FVOCI’). The going concern
concept has been applied.
(iii) Comparative revisions
Comparative information has been restated where appropriate to conform to changes in presentation in the current year and to enhance
comparability. Where there has been a material restatement of comparative information the nature of, and the reason for, the restatement is
disclosed in the ‘Changes in accounting policies’ section below or the relevant note.
Notes to the financial statements
Westpac New Zealand Limited 13
Note 1 Financial statements preparation (continued)
(iv) Changes in accounting policies
Voluntary presentation changes
Balance sheet
The following voluntary presentation changes to the balance sheet (and related notes) have been made to improve consistency and provide more
relevant information to the users of the financial statements by reporting balances of a similar nature together in the same place in the balance
sheet. These changes have no effect on the measurement of these items and therefore had no impact on retained earnings or net profit.
These changes are:
the addition of new balance sheet lines for ‘collateral paid’, ‘other financial assets’, ‘collateral received’ and ‘other financial liabilities’;
removal of the balance sheet line ‘receivables due from other financial institutions’ and reclassification to ‘collateral paid’;
removal of the balance sheet line ‘payables due to other financial institutions’ and reclassification to ‘collateral received’ and ‘other financial
liabilities’; and
reclassification of financial assets or financial liabilities included in other assets or other liabilities, respectively, to other financial assets and
other financial liabilities, respectively.
Collateral paid/collateral received relates to cash provided to/received from counterparties as collateral over financial liabilities/assets arising from
derivative contracts.
Comparatives have been restated for these voluntary presentation changes and are detailed as follows:
THE BANKING GROUP
2018
$ millions
Reported
Presentation
changesRestated
Assets
Receivables due from other financial institutions 70 (70) -
Collateral paid - 70 70
Other financial assets - 225 225
Other assets 276 (225) 51
All other assets 89,525 - 89,525
Total assets 89,871 - 89,871
Liabilities
Payables due to other financial institutions 497 (497) -
Collateral received - 476 476
Other financial liabilities - 560 560
Other liabilities 621 (539) 82
All other liabilities 81,475 - 81,475
Total liabilities 82,593 - 82,593
Income statement
The following voluntary presentation changes to the income statement (and related notes) have been made to provide more relevant information to
the users of the financial statements. These changes have no effect on the measurement of these items and therefore had no impact on retained
earnings or net profit.
Net interest income
the components of interest income and interest expense relating to the balance sheet reclassifications have been restated accordingly. Note
that there was no net impact to total interest income, total interest expense or to net interest income. Comparatives have been restated for
these voluntary presentation changes. Refer to Note 2.
in addition, to comply with disclosure requirements, interest income calculated using the effective interest rate method, has been presented
separately from other interest income. For consistency, within Note 2, interest expense is presented in the same way. The details are provided in
Note 2.
Notes to the financial statements
14 Westpac New Zealand Limited
Note 1 Financial statements preparation (continued)
Non-interest income and operating expenses
disaggregating the non-interest income line on the income statement into two separate lines for net fees and commissions income and other
income.
separating net fees and commissions income in the non-interest income note into fees and commissions income and fees and commissions
expenses.
reclassifying credit card loyalty program expense included in purchased services from operating expenses to the new fees and commissions
expenses category in the non-interest income note.
Fees and commissions expenses include those expenses that are incremental external costs that vary directly with the provision of goods or services
to customers (excluding expenses which would qualify as transaction costs relating to the issue, acquisition or disposal of a financial asset or a
financial liability which are deferred and included in the effective interest rate and recognised in net interest income).
An incremental cost is one that would not have been incurred if a specific good or service had not been provided to a specific customer.
Comparatives have been restated for these voluntary presentation changes and are detailed in the table below.
THE BANKING GROUP
2018
$ millionsReported
Presentation
changesRestated
Income statement
Net interest income 1,844 - 1,844
Non-interest income 373 (373) -
Net fees and commissions income - 330 330
Other income - 14 14
Net operating income before operating expenses and impairment charges 2,217 (29) 2,188
Operating expenses (915) 29 (886)
Impairment (charges)/benefits (3) - (3)
Profit before income tax 1,299 - 1,299
Income tax expense (363) - (363)
Net profit attributable to the owners of the Banking Group 936 - 936
Note 3: Non-interest income (extract)
Net fees and commissions income
Facility fees 57 - 57
Transaction fees and commissions 252 28 280
Other non-risk fee income 50 - 50
Fees and commissions income 359 28 387
Credit card loyalty programs - (29) (29)
Transaction fees and commissions related expenses - (28) (28)
Fees and commissions expenses - (57) (57)
Net fees and commissions income 359 (29) 330
Note 4: Operating expenses (extract)
Purchased services 120 (29) 91
Total operating expenses 915 (29) 886
Notes to the financial statements
Westpac New Zealand Limited 15
Note 1 Financial statements preparation (continued)
(v) Standards adopted during the year ended 30 September 2019
NZ IFRS 9 Financial Instruments (September 2014) (NZ IFRS 9)
The Banking Group adopted NZ IFRS 9 on 1 October 2018. The adoption of NZ IFRS 9 has been applied by adjusting the opening balance sheet at 1
October 2018, with no restatement of comparatives as permitted by the standard. The adoption of NZ IFRS 9 reduced retained earnings at 1 October
2018 by $27 million (net of tax), primarily due to the increase in impairment provisions under the new standard.
Impairment
NZ IFRS 9 introduces a revised impairment model which requires entities to recognise expected credit losses (‘ECL’) based on unbiased forward
looking information, replacing the incurred loss model under NZ IAS 39 Financial instruments: Recognition and Measurement (‘NZ IAS 39’) which
only recognised impairment if there was objective evidence that a loss had been incurred. The revised impairment model applies to all financial
assets at amortised cost, investment securities, and credit commitments.
The accounting policy for the provision for ECL under NZ IFRS 9 is detailed in Notes 6 and 12.
Classification and measurement
NZ IFRS 9 replaced the classification and measurement model in NZ IAS 39 with a new model that categorises financial assets based on: a) the
business model within which the assets are managed and b) whether the contractual cash flows under the instrument represent solely payments of
principal and interest (‘SPPI’).
The accounting policies for the classification and measurement of financial assets and financial liabilities are detailed in Note 1c and in the relevant
notes to the financial statements for financial assets and financial liabilities.
In the 2014 financial year, the Banking Group early adopted part of NZ IFRS 9 which relates to the recognition of the changes in fair value of financial
liabilities designated at fair value attributable to the Banking Group’s own credit risk in other comprehensive income (except where it would create
an accounting mismatch, in which case all changes in fair value are recognised in the income statement). As a result, the accounting for this remains
unchanged for the Banking Group.
Hedging
NZ IFRS 9 changes hedge accounting by increasing the eligibility of both hedged items and hedging instruments and introducing a more principles-
based approach to assessing hedge effectiveness. Adoption of the new hedge accounting model is optional until the IASB completes its accounting
for dynamic risk management project. Until this time, current hedge accounting under NZ IAS 39 can continue to be applied. The Banking Group has
applied the option to continue hedge accounting under NZ IAS 39, however the Banking Group has adopted the amended NZ IFRS 7 Financial
Instruments: Disclosures (‘NZ IFRS 7’) hedge accounting disclosures as required.
NZ IFRS 15 Revenue from Contracts with Customers (NZ IFRS 15)
The Banking Group adopted NZ IFRS 15 on 1 October 2018. It replaced NZ IAS 18 Revenue and related interpretations and applies to all contracts with
customers, except leases, financial instruments and insurance contracts. The standard provides a systematic approach to revenue recognition by
introducing a five-step model governing revenue measurement and recognition. This includes:
identifying the contract with customer;
identifying each of the performance obligations included in the contract;
determining the amount of consideration in the contract;
allocating the consideration to each of the identified performance obligations; and
recognising revenue as each performance obligation is satisfied.
The Banking Group has applied NZ IFRS 15 by increasing the opening balance of retained earnings at the date of initial application, 1 October 2018, by
$3 million (net of tax) with no comparative restatement.
In addition, the Banking Group identified certain income and expenses which were previously reported on a net basis primarily within fees and
commissions income which are now being presented on a gross basis. This resulted in an increase of $21 million in net fees and commissions income
and a corresponding increase in operating expenses for the current year.
Finally, certain facility fees have been reclassified from non-interest income to interest income. This resulted in a decrease of $56 million in net fees
and commissions income and a corresponding increase in interest income for the current year.
Notes to the financial statements
16 Westpac New Zealand Limited
Note 1 Financial statements preparation (continued)
Transition (NZ IFRS 9 and NZ IFRS 15)
Impact of the adoption of NZ IFRS 9 – impairment
The following table shows the impact of the adoption of NZ IFRS 9 on impairment balances.
THE BANKING GROUP
$ millions
Provisions
on loans
Provisions for
credit
commitments
Loss allowance
on investment
securities
Provisions on all other
financial assets at
amortised costTotal
30 September 2018 - carrying amount 324 34 - - 358
Increase in provision for impairment 19 18 - - 37
1 October 2018 - NZ IFRS 9 carrying amount 343 52 - - 395
Impact of the adoption of NZ IFRS 9 – loss allowance on loans and credit commitments
The following table shows the impact of the adoption of NZ IFRS 9 on collectively assessed provisions (‘CAP’) and individually assessed provisions
(‘IAP’) for loans and credit commitments.
THE BANKING GROUP
NZ IFRS 9NZ IAS 39
PerformingNon-performing
CAPCAPCAPIAP
$ millions
Stage 1Stage 2Stage 3Stage 3
CAPIAPTotal
Provision for impairment charges as at 30 September 2018----32236358
Restatement for adoption of NZ IFRS 9
1032035336(322)(36)37
Restated provision for ECL as at 1 October 20181032035336--395
Impact of the adoption of NZ IFRS 9 - classification and measurement
Available-for-sale securities / Investment securities
The balance sheet line item previously named Available-for-sale securities has been renamed to Investment securities. Investment securities consist
of debt securities at FVOCI as the business model is achieved by both collecting the contractual cash flows and selling the instruments and the
contractual cash flows represent SPPI.
Basis of measurement
There has been no change in the basis of measurement of financial assets and financial liabilities under NZ IFRS 9 as shown in the ‘Reconciliation of
the opening balance sheet’ section.
Notes to the financial statements
Westpac New Zealand Limited 17
Note 1 Financial statements preparation (continued)
Reconciliation of the opening balance sheet
The table below reconciles the restated 30 September 2018 balance sheet to the 1 October 2018 opening balance sheet on adoption of NZ IFRS 9 and
NZ IFRS 15 showing separately the impact of adjustments relating to reclassification and remeasurement, including the related tax impacts.
THE BANKING GROUP
30 Sep 20181 Oct 201830 Sep 20181 Oct 2018
NZ IFRS 9 changes
$ millions
NZ IAS 39
measurement
basis
NZ IFRS 9
measurement
basis
Restated
carrying
amount
Reclass-
ifications
Remeas-
urements
NZ IFRS 15
changes
Opening
carrying
amount
Assets
Cash and balances with central banksAmortised costAmortised cost1,353---1,353
Collateral paidAmortised costAmortised cost70---70
Trading securities and financial assets measured
at FVIS
FVISFVIS1,151---1,151
Derivative financial instrumentsFVISFVIS585---585
Available-for-sale securitiesFVOCIFVOCI3,810(3,810)---
Investment securitiesFVOCIFVOCI-3,810--3,810
LoansAmortised costAmortised cost80,378-(19)-80,359
Other financial assetsAmortised costAmortised cost225---225
Amortised costAmortised cost761---761
Due from related entities
FVISFVIS558---558
Property and equipmentN/AN/A144---144
Deferred tax assetsN/AN/A156-10(1)165
Intangible assetsN/AN/A629---629
Other assetsN/AN/A51---51
Total assets89,871-(9)(1)89,861
Liabilities
Collateral receivedAmortised costAmortised cost476---476
Amortised costAmortised cost61,884---61,884
Deposits and other borrowings
FVISFVIS1,218---1,218
Other financial liabilitiesAmortised costAmortised cost560--(4)556
Derivative financial instrumentsFVISFVIS181---181
Debt issuesAmortised costAmortised cost13,725---13,725
Current tax liabilitiesN/AN/A96---96
ProvisionsN/AN/A106-18-124
Other liabilitiesN/AN/A82---82
Total liabilities excluding related entities
liabilities
78,328-18(4)78,342
Amortised costAmortised cost1,392---1,392
Due to related entities
FVISFVIS251---251
Loan capitalAmortised costAmortised cost2,622---2,622
Total related entities liabilities4,265---4,265
Total liabilities82,593-18(4)82,607
Net assets7,278-(27)37,254
Shareholder's equity
Share capitalN/AN/A5,100---5,100
ReservesN/AN/A(51)---(51)
Retained profits N/AN/A2,229-(27)32,205
Total shareholder's equity 7,278-(27)37,254
As permitted by NZ IFRS 9 and NZ IFRS 15, comparatives have not been restated. Comparatives have been restated for voluntary presentation
changes as detailed in the section 'Changes in accounting policies' on page 12.
Notes to the financial statements
18 Westpac New Zealand Limited
Note 1 Financial statements preparation (continued)
(vi) Business combinations
Business combinations are accounted for using the acquisition method of accounting. Acquisition cost is measured as the aggregate of the fair value
at the date of acquisition of the assets given, equity instruments issued or liabilities incurred or assumed. Acquisition-related costs are expensed as
incurred (except for those costs arising on the issue of equity instruments which are recognised directly in equity).
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at fair value on the acquisition
date. Goodwill is measured as the excess of the acquisition cost, the amount of any non-controlling interest and the fair value of any previous
Banking Group’s equity interest in the acquiree, over the fair value of the identifiable net assets acquired.
(vii) Foreign currency translation
Functional and presentational currency
The consolidated financial statements are presented in New Zealand dollars which is the Banking Group’s functional and presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of
monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in other
comprehensive income for qualifying cash flow hedges.
(viii) Reserves
Investment securities reserve
This comprises the changes in the fair value of debt securities measured at FVOCI (except for interest income, impairment charges and foreign
exchange gains and losses which are recognised in the income statement), net of any related hedge accounting adjustments and tax. These changes
are transferred to non-interest income in the income statement when the asset is disposed.
Cash flow hedge reserve
This comprises the fair value gains and losses associated with the effective portion of designated cash flow hedging instruments, net of tax.
b.Principles of consolidation
The Banking Group subsidiaries are entities which the Bank controls and consolidates as it is exposed to, or has rights to, variable returns from the
entities, and can affect those returns through its power over the entities.
All transactions between entities within the Banking Group are eliminated. Subsidiaries are fully consolidated from the date on which control
commences and are de-consolidated from the date that control ceases.
c.Financial assets and financial liabilities
(i) Recognition
Purchases and sales by regular way of financial assets, except for loans and receivables, are recognised on trade-date; the date on which the
Banking Group commits to purchase or sell the asset. Loans and receivables are recognised on settlement date, when cash is advanced to the
borrowers.
Financial liabilities are recognised when an obligation arises.
(ii) Classification and measurement
As comparatives have not been restated upon the adoption of NZ IFRS 9 the accounting policy applied in 2019 differs to that applied in comparative
periods. The accounting policy applied in comparative periods is discussed in Note 34. The accounting policy applied in 2019 is as follows.
Financial assets are grouped into the following classes: cash and balances with central banks, collateral paid, trading securities and financial assets
measured at FVIS, derivative financial instruments, investment securities, loans, other financial assets and due from related entities.
Financial assets
Financial assets are classified based on a) the business model within which the assets are managed, and b) whether the contractual cash flows of
the instrument represent SPPI.
The Banking Group determines the business model at the level that reflects how groups of financial assets are managed. When assessing the
business model the Banking Group considers factors including how performance and risks are managed, evaluated and reported and the frequency
and volume of, and reason for, sales in previous periods and expectations of sales in future periods.
When assessing whether contractual cash flows are SPPI, interest is defined as consideration primarily for the time value of money and the credit
risk of the principal outstanding. The time value of money is defined as the element of interest that provides consideration only for the passage of
time and not consideration for other risks or costs associated with holding the financial asset. Terms that could change the contractual cash flows
so that they may not meet the SPPI criteria include contingent and leverage features, non-recourse arrangements, and features that could modify
the time value of money.
Notes to the financial statements
Westpac New Zealand Limited 19
Note 1 Financial statements preparation (continued)
Debt instruments
If the debt instruments have contractual cash flows which represent SPPI on the principal balance outstanding they are classified at:
amortised cost if they are held within a business model whose objective is achieved through holding the financial asset to collect these cash
flows; or
FVOCI if they are held within a business model whose objective is achieved both through collecting these cash flows or selling the financial asset;
or
FVIS if they are held within a business model whose objective is achieved through selling the financial asset.
Debt instruments are measured at FVIS where the contractual cash flows do not represent SPPI on the principal balance outstanding or where it is
designated at FVIS to eliminate or reduce an accounting mismatch.
Debt instruments at amortised cost are initially recognised at fair value and subsequently measured at amortised cost using the effective interest
rate method. They are presented net of provisions for expected credit losses determined using the ECL model. Refer to Notes 6 and 12 for further
details.
Debt instruments at FVOCI are measured at fair value with unrealised gains and losses recognised in other comprehensive income except for
interest income, impairment charges and foreign exchange gains and losses, which are recognised in the income statement. Impairment on debt
instruments at FVOCI is determined using the ECL model and is recognised in the income statement with a corresponding amount in other
comprehensive income. There is no reduction of the carrying value of the debt security which remains at fair value.
The cumulative gain or loss recognised in other comprehensive income is subsequently recognised in the income statement when the instrument is
derecognised.
Debt instruments at FVIS are measured at fair value with subsequent changes in fair value recognised in the income statement.
Financial liabilities
Financial liabilities are grouped into the following classes: collateral received, deposits and other borrowings, other financial liabilities, derivative
financial instruments, debt issues, due to related entities and loan capital.
Financial liabilities are measured at amortised cost if they are not held for trading or designated at FVIS, otherwise they are measured at FVIS.
Financial assets and financial liabilities measured at FVIS are recognised initially at fair value. All other financial assets and financial liabilities are
recognised initially at fair value plus or minus directly attributable transaction costs respectively.
Further details of the accounting policy for each category of financial asset or financial liability mentioned above is set out in the note for the relevant
item.
The Banking Group’s policies for determining the fair value of financial assets and financial liabilities are set out in Note 24.
(iii) Derecognition
Financial assets are derecognised when the rights to receive cash flows from the asset have expired, or when the Banking Group has either
transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full under a ‘pass through’
arrangement and transferred substantially all the risks and rewards of ownership.
There may be situations where the Banking Group has partially transferred the risks and rewards of ownership but has neither transferred nor
retained substantially all the risks and rewards of ownership. In such situations, the asset continues to be recognised on the balance sheet to the
extent of the Banking Group’s continuing involvement in the asset.
Financial liabilities are derecognised when the obligation is discharged, cancelled or expires. Where an existing financial liability is replaced by
another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, the exchange or
modification is treated as a derecognition of the original liability and the recognition of a new liability, with the difference in the respective carrying
amounts recognised in the income statement.
The terms are deemed to be substantially different if the discounted present value of the cashflows under the new terms (discounted using the
original effective interest rate) is at least 10% different from the discounted present value of the remaining cash flows of the original financial
liability. Qualitative factors such as a change in the currency the instrument is denominated in, a change in the interest rate from fixed to floating
and conversion features are also considered.
d.Critical accounting assumptions and estimates
Applying the Banking Group’s accounting policies requires the use of judgement, assumptions and estimates which impact the financial information.
The significant assumptions and estimates used are discussed in the relevant notes below.
Note 7Income tax expense
Note 12Provisions for expected credit losses/impairment charges
Note 14Deferred tax assets
Note 15Intangible assets
Note 24Fair value of financial assets and financial liabilities
Notes to the financial statements
20 Westpac New Zealand Limited
Note 1 Financial statements preparation (continued)
e.Future developments in accounting standards
The following new standards and interpretations which may have a material impact on the Banking Group have been issued but are not yet effective,
and unless otherwise stated, have not been early adopted by the Banking Group:
NZ IFRS 16 Leases (‘NZ IFRS 16’) was issued on 11 February 2016 and will be effective for the 30 September 2020 financial year. The standard will not
result in significant changes for lessor accounting. The main changes under the standard are:
all operating leases of greater than 12 months duration will be required to be presented on balance sheet by the lessee as a right-of-use (‘ROU’)
asset and lease liability. The asset and liability will initially be measured at the present value of non-cancellable lease payments and payments
to be made in optional periods where it is reasonably certain that the option will be exercised; and
all leases on balance sheet will give rise to a combination of interest expense on the lease liability and depreciation of the ROU asset.
The NZ IFRS 16 implementation and governance program is led by Finance with representatives from the impacted areas of the business with
oversight from the Chief Financial Officer. The project has identified the portfolios impacted by that standard which are predominantly property
leases. In addition, the project has updated finance systems and processes, established a governance framework, updated relevant policies and
addressed key judgements including the transition option that will be applied in order to determine the expected impact to the Banking Group.
The Banking Group will adopt the standard using the simplified approach of transition with no restatement of comparative information. The
expected impact on adoption of the standard will be to recognise a ROU asset of approximately $292 million and an equivalent lease liability with no
impact on retained earnings.
The Banking Group has determined that it will use the incremental borrowing rate as the discount rate when determining present value. This
discount rate will be based on the remaining maturity of the lease at the date of transition. The Banking Group will also apply the practical
exemptions for low-value assets and short-term leases.
NZ IFRIC 23 Uncertainty over Income Tax Treatments (‘NZ IFRIC 23’) was issued in August 2017 and will be effective for the 30 September 2020
financial year. NZ IFRIC 23 clarifies the recognition and measurement criteria in NZ IAS 12 Income Taxes where there is uncertainty over income tax
treatments, and requires an assessment of each uncertain tax position as to whether it is probable that a taxation authority will accept the position.
Where it is not considered probable, the effect of the uncertainty will be reflected in determining the relevant taxable profit or loss, tax bases,
unused tax losses and unused tax credits or tax rates. The amount will be determined as either the single most likely amount or the sum of the
probability weighted amounts in a range of possible outcomes, whichever better predicts the resolution of the uncertainty. Judgements will be
reassessed as and when new facts and circumstances are presented.
The interpretation is not expected to have a material impact on the Banking Group.
A revised Conceptual Framework (‘Framework’) was issued on 10 May 2018. This will be effective for the Banking Group for the 30 September 2021
financial year. The revised Framework includes new definitions and recognition criteria for assets, liabilities, income and expenses and other relevant
financial reporting concepts. The changes are not expected to have a material impact on the Banking Group.
Other amendments to existing standards that are not yet effective are not expected to have a material impact to the Banking Group.
Interbank-offered rates (‘IBOR’) reform
IBORs are interest rate benchmarks used in financial markets for pricing, valuing and hedging a wide variety of financial instruments such as
derivatives, loans and bonds. Examples of IBOR include the London Interbank Offered Rate (‘LIBOR’) and the Euro Interbank Offered Rate
(‘EURIBOR’).
A review of the global major IBORs is being conducted to reform or replace existing IBORs with more suitable alternative reference rates (‘ARRs’).
This IBOR reform will impact the accounting for financial instruments that reference IBORs including hedge accounting, fair value methodologies and
existing financial instruments that reference IBORs at transition. This replacement process is at different stages and is progressing at different
speeds in different jurisdictions. Therefore, there is uncertainty as to the basis, method, timing and implications of transition to the ARRs.
In November 2019, the External Reporting Board issued amendments to NZ IFRS 9, NZ IAS 39 and NZ IFRS 7 which enable hedge accounting to
continue for certain hedges that might otherwise need to be discontinued due to uncertainties arising from IBOR reform and requires certain
disclosures. These amendments are effective for the Banking Group for the 30 September 2021 financial year with early application permitted.
As a result of these developments, the Banking Group has applied judgement in the current reporting period to determine that hedge relationships
that include IBORs as a hedged risk continue to qualify for hedge accounting. The Banking Group continues to monitor these developments and the
expected impact.
Notes to the financial statements
Westpac New Zealand Limited 21
Note 2 Net interest income
Accounting policy
Interest income and interest expense for all interest earning financial assets and interest bearing financial liabilities at amortised cost or FVOCI,
detailed within the table below, are recognised using the effective interest rate method. Net income from treasury’s interest rate and liquidity
management activities is included in net interest income.
The effective interest rate method calculates the amortised cost of a financial instrument by discounting the financial instrument’s estimated
future cash receipts or payments to their present value and allocates the interest income or interest expense, including any fees, costs, premiums
or discounts integral to the instrument, over its expected life.
Interest income is calculated based on the gross carrying amount of financial assets in stages 1 and 2 of the Banking Group’s ECL model and on the
carrying amount net of the provision for ECL for financial assets in stage 3. Refer to Note 12 for further details of the Banking Group’s ECL model.
THE BANKING GROUP
$ millions
Note2019
1
2018
1
Interest income
Calculated using the effective interest rate method
Cash and balances with central banks 21 25
Collateral paid 4 3
Available-for-sale securities - 148
Investment securities 138 -
Loans 3,809 3,751
Due from related entities22 3 11
Other interest income 1 -
Total interest income calculated using the effective interest rate method 3,976 3,938
Other
Trading securities and financial assets measured at FVIS 29 46
Due from related entities22 6 5
Total other 35 51
Total interest income 4,011 3,989
Interest expense
Calculated using the effective interest rate method
Collateral received 7 5
Deposits and other borrowings 1,289 1,290
Debt issues 285 306
Due to related entities22 31 42
Loan capital22 137 144
Other interest expense 4 5
Total interest expense calculated using the effective interest rate method 1,753 1,792
Other
Deposits and other borrowings 18 13
Debt issues 22 11
Due to related entities22 1 1
Other interest expense
2
274 328
Total other 315 353
Total interest expense 2,068 2,145
Net interest income 1,943 1,844
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
2
Includes the net impact of treasury's interest rate and liquidity management activities.
Notes to the financial statements
22 Westpac New Zealand Limited
Note 3 Non-interest income
Accounting policy
Non-interest income includes net fees and commissions income and other income.
Net fees and commissions income
When another party is involved in providing goods or services to a Banking Group customer, the Banking Group assesses whether the nature of the
arrangement with its customer is as a principal provider or an agent of another party. Where the Banking Group is acting as an agent for another
party, the income earned by the Banking Group is the net consideration received (i.e. the gross amount received from the customer less amounts
paid to a third party provider). As an agent, the net consideration represents fees and commissions income for facilitating the transaction
between the customer and the third party provider with primary responsibility for fulfilling the contract.
Fees and commissions income
Fees and commissions income is recognised when the performance obligation is satisfied by transferring the promised good or service to the
customer. Fees and commissions income includes facility fees, transaction fees and commissions and other non-risk fee income.
Facility fees include certain line fees, annual credit card fees and fees for providing customer bank accounts. They are recognised over the term of
the facility/period of service on a straight line basis.
Transaction fees and commissions are earned for facilitating banking transactions such as foreign exchange fees, telegraphic transfers and issuing
bank cheques. Fees and commissions for these one-off transactions are recognised once the transaction has been completed. Transaction fees
and commissions are also recognised for credit card transactions including interchange fees net of scheme charges. These are recognised once
the transaction has been completed, however, a component of interchange fees received is deferred as unearned income as the Banking Group
has a future service obligation to customers under the Banking Group’s credit card reward programs.
Other non-risk fee income includes advisory and underwriting fees which are recognised when the related service is completed.
Income which forms an integral part of the effective interest rate of a financial instrument is recognised using the effective interest method and
recorded in interest income (for example, loan origination fees).
Fees and commissions expenses
Fees and commissions expenses include incremental external costs that vary directly with the provision of goods or services to customers. An
incremental cost is one that would not have been incurred if a specific good or service had not been provided to a specific customer. Fees and
commissions expenses which form an integral part of the effective interest rate of a financial instrument are recognised using the effective interest
method and recorded in net interest income. Fees and commissions expenses include the costs associated with credit card loyalty programs
which are recognised as an expense when the services are provided on the redemption of points as well as merchant transaction costs.
THE BANKING GROUP
$ millions2019
1
2018
1
Net fees and commissions income
Facility fees 50 57
Transaction fees and commissions
2
268 280
Other non-risk fee income
3
24 50
Fees and commissions income 342 387
Credit card loyalty programs (32) (29)
Transaction fees and commissions related expenses (29) (28)
Fees and commissions expenses (61) (57)
Net fees and commissions income 281 330
Other income
Net ineffectiveness on qualifying hedges 2 4
Other non-interest income
4
46 10
Total other income 48 14
Total non-interest income 329 344
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
2
Includes transaction fees and commissions due from related entities. Refer to Note 22.
3
Includes management fees due from related entities. Refer to Note 22.
4
Westpac NZ Operations Limited (‘WNZOL’) sold its 25% shareholding in Paymark Limited to Ingenico Group S.A, resulting in a gain on sale of $40 million for the
year ended 30 September 2019. Refer to Note 22 for details.
Notes to the financial statements
Westpac New Zealand Limited 23
Note 3 Non-interest income (continued)
Deferred income in relation to the credit card loyalty programs for the Banking Group was $31 million as at 30 September 2019 (30 September 2018:
$29 million). This will be recognised as fees and commissions income as the credit card reward points are redeemed.
There were no other material contract assets or contract liabilities for the Banking Group.
Non-interest income in scope of NZ IFRS 15 can be further disaggregated into the following operating segments and is consistent with the segment
descriptions detailed in Note 28.
THE BANKING GROUP
$ millions
Consumer
Banking and
Wealth
Commercial,
Corporate
and
Institutional
Investments
and Insurance
NZ IFRS 9 and
NZ IFRS 15
changes
Reconciling
ItemsTotal
Year ended 30 September 2019
Fees and commissions income
Facility fees 30 15 - N/A 5 50
Transaction fees and commissions 150 95 - N/A 23 268
Other non-risk fee income 7 14 - N/A 3 24
Fees and commissions income 187 124 - N/A 31 342
Fees and commissions expenses (56) - - N/A (5) (61)
Net fees and commissions income 131 124 - N/A 26 281
Year ended 30 September 2018
Fees and commissions income
Facility fees 36 14 - 10 (3) 57
Transaction fees and commissions 142 88 - 16 34 280
Other non-risk fee income 11 17 - 16 6 50
Fees and commissions income 189 119 - 42 37 387
Fees and commissions expenses (49) - - - (8) (57)
Net fees and commissions income 140 119 - 42 29 330
Notes to the financial statements
24 Westpac New Zealand Limited
Note 4 Operating expenses5967-2 04-18
THE BANKING GROUP
$ millionsNote2019
1
2018
1
Staff expenses 491 455
Operating lease rentals 58 62
Depreciation 39 44
Technology services and telecommunications 92 98
Purchased services 111 91
Software amortisation costs 55 42
Related entities - management fees22 4 4
Other 111 90
Total operating expenses 961 886
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
Note 5 Auditor’s remuneration5967-2 04-18
THE BANKING GROUP
$'000s20192018
Audit and audit related services
Audit and review of financial statements
1
2,295 1,770
Other audit related services
2
224 175
Total remuneration for audit and other audit related services 2,519 1,945
Other services - -
Total remuneration for non-audit services - -
Total remuneration for audit, other audit related services and non-audit services 2,519 1,945
1
Fees for the annual audit of the financial statements including audit procedures in relation to the transition impact of new accounting standards, the review or
other procedures performed on the interim financial statements and Sarbanes-Oxley reporting undertaken in the role of auditor.
2
Primarily assurance provided on certain financial information performed in the role of auditor (or where most appropriate to be performed by the auditor)
including the issue of comfort letters and agreed procedures reports in relation to debt issuance programmes.
It is the Banking Group’s policy to engage the external auditor on assignments additional to their statutory audit duties only if their independence
is not either impaired or seen to be impaired, and where their expertise and experience with the Banking Group is important.
Notes to the financial statements
Westpac New Zealand Limited 25
Note 6 Impairment charges/(benefits)
Accounting policy
As comparatives have not been restated upon the adoption of NZ IFRS 9, the accounting policy applied in 2019 differs to that applied in comparative
periods. The accounting policy applied in comparative periods is discussed in Note 34. The accounting policy applied in 2019 is as follows.
Impairment charges are based on an expected loss model which measures the difference between the current carrying amount and the present value
of expected future cash flows taking into account past experience, current conditions and multiple probability-weighted macroeconomic scenarios for
reasonably supportable future economic conditions. Further details of the calculation of expected credit losses and the critical accounting
assumptions and estimates relating to impairment charges are included in Note 12.
Impairment charges are recognised in the income statement, with a corresponding amount recognised as follows:
Loans at amortised cost: as a reduction of the carrying value of the financial asset through an offsetting provision account (refer to Note 12);
Investment securities: in reserves in other comprehensive income with no reduction of the carrying value of the debt security (refer to the
statement of changes in equity); and
Credit commitments: as a provision (refer to Note 19).
Uncollectable loans
A loan may become uncollectable in full or part if, after following the Banking Group’s loan recovery procedures, the Banking Group remains unable to
collect that loan’s contractual repayments. Uncollectable amounts are written off against their related provision for expected credit losses, after all
possible repayments have been received.
Where loans are secured, amounts are generally written off after receiving the proceeds from the security, or in certain circumstances, where the net
realisable value of the security has been determined and this indicates that there is no reasonable expectation of full recovery, write-off may be earlier.
Unsecured consumer loans are generally written off after 180 days past due.
The Banking Group may subsequently be able to recover cash flows from loans written off. In the period which these recoveries are made, they are
recognised in the income statement.
The following table details impairment charges for the year ended 30 September 2019 based on the requirements of NZ IFRS 9.
THE BANKING GROUP
$ millions2019
Provisions raised/(released):
Performing (35)
Non-performing (3)
Bad debts written-off/(recovered) directly to the income statement 28
Impairment charges/(benefits) (10)
of which relates to:
Loans and credit commitments (10)
Investment securities -
Impairment charges/(benefits) (10)
Impairment losses on other financial assets are not material to the Banking Group.
As comparatives have not been restated for the adoption of NZ IFRS 9, the following table details impairment charges for the year ended 30
September 2018 based on the requirements of NZ IAS 39. In subsequent reporting periods, as NZ IFRS 9 will have been effective for this disclosure
for all periods presented in the Disclosure Statement, this table will no longer be required.
THE BANKING GROUP
2018
ResidentialOther
$ millionsMortgagesRetail
CorporateOther
Total
Individually assessed provisions raised 9 2 17 - 28
Reversal of previously recognised impairment charges (3) (2) (13) - (18)
Collectively assessed provisions raised/(released) (2) (10) (22) - (34)
Bad debts written-off/(recovered) directly to the income statement
(2) 41 (12) - 27
Total impairment charges/(benefits) 2 31 (30) - 3
Notes to the financial statements
26 Westpac New Zealand Limited
Note 7 Income tax expense
Accounting policy
The income tax expense for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it
relates to items recognised directly in other comprehensive income, in which case it is recognised in the statement of comprehensive income.
Current tax is the tax payable for the year using enacted or substantively enacted tax rates and laws. Current tax also includes adjustments to tax
payable for previous years.
Goods and services tax (‘GST’)
Revenue, expenses and assets are recognised net of GST except to the extent that GST is not recoverable from the New Zealand Inland Revenue.
In these circumstances, GST is recognised as part of the expense or the cost of the asset.
Critical accounting assumptions and estimates
Significant judgement is required in determining the current tax liability. There may be transactions with uncertain tax outcomes and provisions
are determined based on the expected outcomes.
THE BANKING GROUP
$ millions
2019
2018
Income tax expense
Current tax:
Current year 350 361
Prior year adjustments 4 -
Deferred tax (refer to Note 14)
Current year 8 2
Prior year adjustments
(5) -
Total income tax expense
357
363
Profit before income tax 1,321 1,299
Tax calculated at tax rate of 28%
370 364
Income not subject to tax
(12) (1)
Expenses not deductible for tax purposes
- 2
Prior year adjustments
(1) -
Other items
- (2)
Total income tax expense 357 363
The effective tax rate for the year ended 30 September 2019 was 27.0% (30 September 2018: 27.9%).
Note 8 Imputation credit account
THE BANKING GROUP
$ millions20192018
Imputation credits available for use in subsequent reporting periods
1,109 775
Notes to the financial statements
Westpac New Zealand Limited 27
Note 9 Trading securities and financial assets measured at FVIS
Accounting policy
Trading securities
Trading securities include actively traded debt (government, semi-government and other) and those acquired for sale in the near term and are
held at fair value.
Reverse repurchase agreements
Securities purchased under these agreements are not recognised on the balance sheet, as the Banking Group has not obtained the risks and
rewards of ownership. The cash consideration paid is recognised as a reverse repurchase agreement, which forms part of a trading portfolio that
is measured at fair value.
Gains and losses on these financial assets are recognised in the income statement. Interest earned from debt securities is recognised in interest
income (refer to Note 2).
THE BANKING GROUP
$ millions20192018
Government and semi-government securities 1,064 828
Other debt securities
486
323
Reverse repurchase agreements
111
-
Total trading securities and financial assets measured at FVIS 1,661 1,151
Note 10 Investment securities/Available-for-sale securities
Accounting policy
As comparatives have not been restated upon the adoption of NZ IFRS 9 the accounting policy applied in 2019 differs to that applied in
comparative years. The accounting policy applied in comparative years is discussed in Note 34. The accounting policy applied in 2019 is as follows.
Investment securities include debt securities (government and other) that are measured at FVOCI. These instruments are classified based on the
criteria disclosed under the heading “Financial assets and financial liabilities” in Note 1.
Debt securities measured at FVOCI
Includes debt instruments that have contractual cash flows which represent SPPI on the principal balance outstanding and they are held within a
business model whose objective is achieved both through collecting these cash flows or selling the financial asset.
These securities are measured at fair value with gains and losses recognised in other comprehensive income except for interest income,
impairment charges and foreign exchange gains and losses which are recognised in the income statement.
Impairment is measured using the same ECL model applied to financial assets measured at amortised cost. Impairment is recognised in the
income statement with a corresponding amount in other comprehensive income with no reduction of the carrying value of the debt security which
remains at fair value. Refer to Note 12 for further details.
The cumulative gain or loss recognised in other comprehensive income is subsequently recognised in the income statement when the instrument
is disposed.
Balances recognised under NZ IFRS 9
THE BANKING GROUP
$ millions2019
1
Government and semi-government securities
2,599
Other debt securities1,870
Total investment securities4,469
Balances recognised under NZ IAS 39
THE BANKING GROUP
$ millions2018
1
Government and semi-government securities2,155
Other debt securities1,655
Total available-for-sale securities3,810
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated.
Notes to the financial statements
28 Westpac New Zealand Limited
Note 11 Loans
Accounting policy
As comparatives have not been restated upon the adoption of NZ IFRS 9 the accounting policy applied in 2019 differs to that applied in
comparative years. The accounting policy applied in comparative years is discussed in Note 34. The accounting policy applied in 2019 is as follows.
Loans are financial assets initially recognised at fair value plus directly attributable transaction costs and fees.
Loans are subsequently measured at amortised cost using the effective interest rate method where they have contractual cash flows which
represent SPPI on the principal balance outstanding and they are held within a business model whose objective is achieved through holding the
loans to collect these cash flows. They are presented net of any provisions for ECL.
Loan products that have both mortgage and deposit facilities are presented gross on the balance sheet, segregating the asset and liability
component, because they do not meet the criteria to be offset. Interest earned on these products is presented on a net basis in the income
statement as this reflects how the customer is charged.
The following table shows loans disaggregated by types of credit exposure:
THE BANKING GROUP
$ millions2019
1,2
2018
1,2
Residential mortgages 51,487 48,893
Other retail 3,753 3,928
Corporate 29,124 27,603
Other
111 278
Total gross loans 84,475 80,702
Provisions for ECL/impairment charges on loans (refer to Note 12) (315) (324)
Total net loans 84,160 80,378
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
2
The Banking Group has changed the presentation of loan categories for consistency with the types of credit exposures defined in the Reserve Bank of New Zealand
(‘Reserve Bank’) Capital Adequacy Framework (Internal Models Based Approach) (‘BS2B’). This has no effect on the balance sheet or income statement.
Comparatives have been restated.
Notes to the financial statements
Westpac New Zealand Limited 29
Note 12 Provisions for expected credit losses/impairment charges
Accounting policy
As comparatives have not been restated upon the adoption of NZ IFRS 9 the accounting policy applied in 2019 differs to that applied in
comparative years. The accounting policy applied in comparative years is discussed in Note 34. The accounting policy applied in 2019 is as follows.
Note 6 provides details of impairment charges.
Impairment under NZ IFRS 9 applies to all financial assets at amortised cost, investment securities and credit commitments.
The ECL determined under NZ IFRS 9 is recognised as follows:
Loans at amortised cost: as a reduction of the carrying value of the financial asset through an offsetting provision account (refer to Note 11);
Investment securities: in reserves in other comprehensive income with no reduction of the carrying value of the debt security itself (refer to
the statement of changes in equity); and
Credit commitments: as a provision (refer to Note 19).
Measurement
The Banking Group calculates the provisions for ECL based on a three stage approach. ECL are a probability-weighted estimate of the cash
shortfalls expected to result from defaults over the relevant timeframe. They are determined by evaluating a range of possible outcomes and
taking into account the time value of money, past events, current conditions and forecasts of future economic conditions.
The models use three main components to determine the ECL (as well as the time value of money) including:
Probability of default (‘PD’): the probability that a counterparty will default;
Loss given default (‘LGD’): the loss that is expected to arise in the event of a default; and
Exposure at default (‘EAD’): the estimated outstanding amount of credit exposure at the time of the default.
Model stages
The three stages are as follows:
Stage 1: 12 months ECL - performing
For financial assets where there has been no significant increase in credit risk since origination a provision for 12 months ECL is recognised.
Stage 2: Lifetime ECL – performing
For financial assets where there has been a significant increase in credit risk since origination but where the asset is still performing a provision for
lifetime ECL is recognised. The indicators of a significant increase in credit risk are described on the following page.
Stage 3: Lifetime ECL – non-performing
For financial assets that are non-performing a provision for lifetime ECL is recognised. Indicators include a breach of contract with the Banking
Group such as a default on interest or principal payments, a borrower experiencing significant financial difficulties or observable economic
conditions that correlate to defaults on a group of loans.
Financial assets in stage 3 are those that are in default. A default occurs when the Banking Group considers that the customer is unlikely to repay
its credit obligations in full, irrespective of recourse by the Banking Group to actions such as realising security, or the customer is more than 90
days past due on any material credit obligation. This definition of default is aligned to the Reserve Bank regulatory definition of default.
Collective and individual assessment
Financial assets that are in stages 1 and 2 are assessed on a collective basis as are financial assets in stage 3 below specified thresholds. Financial
assets that are collectively assessed are grouped in pools of similar assets with similar credit risk characteristics including the type of product and
the customer risk grade. Those financial assets in stage 3 above the specified thresholds are assessed on an individual basis.
Expected life
In considering the lifetime time frame for expected credit losses in stages 2 and 3, the standard generally requires use of the remaining
contractual life adjusted where appropriate for prepayments, extension and other options. For certain revolving credit facilities which include
both a drawn and undrawn component (e.g. credit cards and revolving lines of credit), the Banking Group’s contractual ability to demand
repayment and cancel the undrawn commitment does not limit our exposure to credit losses to the contractual notice period. For these facilities,
lifetime is based on historical behaviour.
Movement between stages
Assets may move in both directions through the stages of the impairment model. Assets previously in stage 2 may move back to stage 1 if it is no
longer considered that there has been a significant increase in credit risk. Similarly, assets in stage 3 may move back to stage 1 or stage 2 if they
are no longer assessed to be non-performing.
Notes to the financial statements
30 Westpac New Zealand Limited
Note 12 Provisions for expected credit losses/impairment charges (continued)
Accounting policy (continued)
Critical accounting assumptions and estimates
Key judgements include when a significant increase in credit risk has occurred and estimation of forward looking macroeconomic information.
Other factors which can impact the provision include the borrower’s financial situation, the realisable value of collateral, the Banking Group’s
position relative to other claimants, the reliability of customer information and the likely cost and duration of recovering the loan.
Significant increase in credit risk
Determining when a financial asset has experienced a significant increase in credit risk since origination is a critical accounting judgement which is
primarily based on changes in internal customer risk grades since origination of the facility. A change in an internal customer risk grade is based
on both quantitative and qualitative factors. The change in the internal customer risk grade that the Banking Group uses to represent a significant
increase in credit risk is based on a sliding scale. This means that a higher credit quality exposure at origination would require a more significant
downgrade compared to a lower credit quality exposure before it is considered to have experienced a significant increase in credit risk.
The Banking Group does not rebut the presumption that instruments that are 30 days past due have experienced a significant increase in risk but
this is used as a backstop rather than the primary indicator.
The Banking Group does not apply the low credit risk exemption which assumes investment grade facilities do not have a significant increase in
credit risk.
Forward looking macroeconomic information
The measurement of ECL for each stage and the assessment of significant increase in credit risk consider information about past events and
current conditions as well as reasonable and supportable projections of future events and economic conditions. The estimation of forward looking
information is a critical accounting judgement. The Banking Group considers three future macroeconomic scenarios including a base case
scenario along with upside and downside scenarios.
The macroeconomic variables used in these scenarios, based on current economic forecasts, include (but are not limited to) Reserve Bank bill
rates, real gross domestic product growth rates and residential and commercial property price indices.
Base case scenario
This scenario utilises the internal Banking Group economics forecast used for strategic decision making and forecasting.
Upside scenario
This scenario represents a modest improvement on the base case scenario.
Downside scenario
This scenario represents a moderate recession.
The macroeconomic scenarios are weighted based on the Banking Group’s best estimate of the relative likelihood of each scenario. The weighting
applied to each of the three macroeconomic scenarios takes into account historical frequency, current trends, and forward looking conditions.
The macroeconomic variables and probability weightings of the three macroeconomic scenarios are subject to the approval of the Banking
Group’s Chief Financial Officer and Chief Risk Officer with oversight from the Board of Directors (and its Committees).
Where appropriate, adjustments will be made to modelled outcomes to reflect reasonable and supportable information not already incorporated
in the models.
Judgements can change with time as new information becomes available which could result in changes to the provision for expected credit
losses.
Notes to the financial statements
Westpac New Zealand Limited 31
Note 12 Provisions for expected credit losses/impairment charges (continued)
Loans and credit commitments
The reconciliation of the provision for ECL tables for loans and credit commitments as at 30 September 2019 below are based on the requirements
of NZ IFRS 9. They have been determined by an aggregation of monthly movements over the year. The key line items in the reconciliation
represent the following:
The transfers between stages lines represent transfers between stage 1, stage 2 and stage 3 prior to remeasurement of the provision for ECL.
The other charges/(credits) to the income statement line represents the impact on the provision for ECL due to changes in credit quality
during the period (including transfers between stages), changes due to forward looking economic scenarios and partial repayments and
additional drawdowns on existing facilities over the year.
Write-offs represent a reduction in the provision for ECL as a result of derecognition of exposures where there is no reasonable expectation
of full recovery.
Movements in components of loss allowance - total
THE BANKING GROUP
PerformingNon-performing
Stage 1Stage 2Stage 3Stage 3
$ millions
CAPCAPCAPIAP
Total
Restated provision for ECL as at 1 October 2018 103 203 53 36 395
Due to changes in credit quality:
Transfers to Stage 1 261 (245) (16) - -
Transfers to Stage 2 (16) 43 (26) (1) -
Transfers to Stage 3 CAP - (38) 42 (4) -
Transfers to Stage 3 IAP - - (8) 8 -
Reversals of previously recognised impairment charges - - - (15) (15)
New financial assets originated 24 - - - 24
Financial assets derecognised during the year (19) (41) (21) - (81)
Changes in CAP due to amounts written off - - (53) - (53)
Other charges/(credits) to the income statement (262) 258 82 9 87
Total charges/(credits) to the income statement for ECL (12) (23) - (3) (38)
Amounts written off from IAP - - - (5) (5)
Total provision for ECL on loans and credit commitments as
at 30 September 2019
91 180 53 28 352
Presented as:
Provision for ECL on loans (refer to Note 11) 76 158 53 28 315
Provision for ECL on credit commitments (refer to Note 19) 15 22 - - 37
Total provision for ECL on loans and credit commitments as
at 30 September 2019
91 180 53 28 352
Notes to the financial statements
32 Westpac New Zealand Limited
Note 12 Provisions for expected credit losses/impairment charges (continued)
Impacts of changes in gross financial assets on loss allowances - total
The following table explains how changes in gross carrying amounts of loans during the year have contributed to changes in the provisions for ECL
on loans.
THE BANKING GROUP
Performing Non-performing
Stage 1Stage 2Stage 3Stage 3
$ millions
CAPCAPCAPIAP
Total
Total gross carrying amount at the beginning of the year 76,532 3,707 383 80 80,702
Transfers:
Transfers to Stage 1 4,202 (4,105) (92) (5) -
Transfers to Stage 2 (5,005) 5,123 (115) (3) -
Transfers to Stage 3 CAP (158) (346) 518 (14) -
Transfers to Stage 3 IAP (6) (2) (40) 48 -
Net further lending/(repayment) (2,456) 228 (75) (24) (2,327)
New financial assets originated 17,693 - - - 17,693
Financial assets derecognised during the year (10,747) (633) (147) (8) (11,535)
Amounts written-off - - (53) (5) (58)
Total gross carrying amount as at 30 September 2019 80,055 3,972 379 69 84,475
Provision for ECL as at 30 September 2019 (76) (158) (53) (28) (315)
Total net carrying amount as at 30 September 2019 79,979 3,814 326 41 84,160
Sensitivity of the provision for ECL
As noted in the accounting policy, the critical accounting assumptions in determining the provision for ECL are the determination of a significant
increase in credit risk and the use of probability weighted forward looking macroeconomic scenarios.
Staging sensitivity
If 1% of the stage 1 gross exposure from loans and credit commitments (calculated on a 12 month ECL) was reflected in stage 2 (calculated on a
lifetime ECL) the provision for ECL would increase by $26 million for the Banking Group based on applying the average provision coverage ratios by
stage to the movement in the gross exposure by stage.
Weighting of macroeconomic scenarios
The Banking Group uses three macro-economic scenarios which are probability weighted based on the Banking Group’s best estimate of the
relative likelihood of each scenario.
The Banking Group assigned a weighting of 62.5% to the base case scenario, 27.5% to the downside scenario and 10% to the upside scenario as at
30 September 2019. During September 2019 there was a 2.5% reduction in the weighting on the base case scenario from 65% and a
corresponding 2.5% increase in the weighting on the downside scenario from 25%. The increase in weighting to the downside scenario was
primarily driven by global economic uncertainties.
The base case scenario utilises the Banking Group’s economic forecasts and assumes the following one-year outlook: GDP growth of 3.2%, an
increase in the rate of growth in commercial property prices and residential property prices to 7% and Reserve Bank bill rate of 1.15%.
The downside scenario represents a moderate recession. In this scenario there is negative GDP growth, declines in commercial and residential
property prices and lower interest rates.
The following table shows the reported provision for ECL based on the probability weighted scenarios and what the provisions for ECL would be
assuming a 100% weighting is applied to the base case scenario and to the downside scenario (with all other assumptions held constant).
THE BANKING GROUP
$ millions2019
Reported probability-weighted ECL
352
100% base case ECL
259
100% downside ECL596
Write-offs still under enforcement activity
The amount of current year write-offs which remain subject to enforcement activity was $43 million for the Banking Group.
Notes to the financial statements
Westpac New Zealand Limited 33
Note 12 Provisions for expected credit losses/impairment charges (continued)
Movements in components of loss allowance – by types of credit exposure
The provisions for ECL on loans and credit commitments can be further disaggregated into the following types of credit exposure:
THE BANKING GROUP
PerformingNon-performing
Stage 1Stage 2Stage 3Stage 3
$ millions
CAPCAPCAPIAP
Total
Residential mortgages
Restated provision for ECL as at 1 October 2018 33 25 25 7 90
Due to changes in credit quality:
Transfers to Stage 1 22 (16) (6) - -
Transfers to Stage 2 (3) 11 (8) - -
Transfers to Stage 3 CAP - (4) 5 (1) -
Transfers to Stage 3 IAP - - (3) 3 -
Reversals of previously recognised impairment charges - - - (3) (3)
New financial assets originated 5 - - - 5
Financial assets derecognised during the year (3) (3) (14) - (20)
Changes in CAP due to amounts written off - - (2) - (2)
Other charges/(credits) to the income statement (32) 6 34 2 10
Total charges/(credits) to the income statement for ECL (11) (6) 6 1 (10)
Amounts written off from IAP - - - (2) (2)
Total provision for ECL as at 30 September 2019 22 19 31 6 78
Other retail
Restated provision for ECL as at 1 October 2018 50 64 18 3 135
Due to changes in credit quality:
Transfers to Stage 1 232 (223) (9) - -
Transfers to Stage 2 (10) 26 (16) - -
Transfers to Stage 3 CAP - (30) 31 (1) -
Transfers to Stage 3 IAP - - - - -
Reversals of previously recognised impairment charges - - - (4) (4)
New financial assets originated 12 - - - 12
Financial assets derecognised during the year (13) (21) (4) - (38)
Changes in CAP due to amounts written off - - (51) - (51)
Other charges/(credits) to the income statement (225) 239 50 5 69
Total charges/(credits) to the income statement for ECL (4) (9) 1 - (12)
Amounts written off from IAP - - - (3) (3)
Total provision for ECL as at 30 September 2019 46 55 19 - 120
Corporate
Restated provision for ECL as at 1 October 2018 20 114 10 26 170
Due to changes in credit quality:
Transfers to Stage 1 7 (6) (1) - -
Transfers to Stage 2 (3) 6 (2) (1) -
Transfers to Stage 3 CAP - (4) 6 (2) -
Transfers to Stage 3 IAP - - (5) 5 -
Reversals of previously recognised impairment charges - - - (8) (8)
New financial assets originated 7 - - - 7
Financial assets derecognised during the year (3) (17) (3) - (23)
Changes in CAP due to amounts written off - - - - -
Other charges/(credits) to the income statement (5) 13 (2) 2 8
Total charges/(credits) to the income statement for ECL 3 (8) (7) (4) (16)
Amounts written off from IAP - - - - -
Total provision for ECL as at 30 September 2019 23 106 3 22 154
The above movements in components of loss allowance table does not include ‘Other’ credit exposures on the basis that the provision for ECL is
nil.
Notes to the financial statements
34 Westpac New Zealand Limited
Note 12 Provisions for expected credit losses/impairment charges (continued)
Impacts of changes in gross financial assets on loss allowances – by types of credit exposure
The impacts of changes in gross carrying amounts of loans on expected loss allowance can be further disaggregated into the following types of
credit exposure:
THE BANKING GROUP
PerformingNon-performing
Stage 1Stage 2Stage 3Stage 3
Total
$ millions
CAPCAPCAPIAP
Residential mortgages
Total gross carrying amount at the beginning of the year 47,254 1,364 264 11 48,893
Transfers:
Transfers to Stage 1 1,670 (1,598) (67) (5) -
Transfers to Stage 2 (2,068) 2,144 (74) (2) -
Transfers to Stage 3 CAP (125) (182) 311 (4) -
Transfers to Stage 3 IAP (6) (2) (21) 29 -
Net further lending/(repayment) (1,842) (51) (15) (3) (1,911)
New financial assets originated 10,307 - - - 10,307
Financial assets derecognised during the year (5,454) (226) (111) (7) (5,798)
Amounts written-off - - (2) (2) (4)
Total gross carrying amount as at 30 September 2019 49,736 1,449 285 17 51,487
Provision for ECL as at 30 September 2019 (19) (18) (31) (6) (74)
Total net carrying amount as at 30 September 2019 49,717 1,431 254 11 51,413
Other retail
Total gross carrying amount at the beginning of the year 3,668 208 48 4 3,928
Transfers:
Transfers to Stage 1 918 (903) (15) - -
Transfers to Stage 2 (900) 919 (19) - -
Transfers to Stage 3 CAP (19) (101) 122 (2) -
Transfers to Stage 3 IAP - - (4) 4 -
Net further lending/(repayment) (371) 119 (11) - (263)
New financial assets originated 832 - - - 832
Financial assets derecognised during the year (618) (52) (19) (1) (690)
Amounts written-off - - (51) (3) (54)
Total gross carrying amount as at 30 September 2019 3,510 190 51 2 3,753
Provision for ECL as at 30 September 2019 (37) (51) (19) - (107)
Total net carrying amount as at 30 September 2019 3,473 139 32 2 3,646
Corporate
Total gross carrying amount at the beginning of the year 25,334 2,133 71 65 27,603
Transfers:
Transfers to Stage 1 1,614 (1,604) (10) - -
Transfers to Stage 2 (2,037) 2,060 (22) (1) -
Transfers to Stage 3 CAP (14) (63) 85 (8) -
Transfers to Stage 3 IAP - - (15) 15 -
Net further lending/(repayment) (17) 128 (49) (21) 41
New financial assets originated 6,279 - - - 6,279
Financial assets derecognised during the year (4,461) (321) (17) - (4,799)
Amounts written-off - - - - -
Total gross carrying amount as at 30 September 2019 26,698 2,333 43 50 29,124
Provision for ECL as at 30 September 2019 (20) (89) (3) (22) (134)
Total net carrying amount as at 30 September 2019 26,678 2,244 40 28 28,990
The above gross carrying amount table does not include 'Other' credit exposures (refer to Note 11) on the basis that the provision for ECL is nil.
Notes to the financial statements
Westpac New Zealand Limited 35
Note 12 Provisions for expected credit losses/impairment charges (continued)
Comparative year information under NZ IAS 39
As comparatives have not been restated for the adoption of NZ IFRS 9, the following table reconciles the 30 September 2018 provision for
impairment charges on loans and credit commitments based on the requirements of NZ IAS 39. In subsequent reporting periods, as NZ IFRS 9 will
have been effective for this disclosure for all periods presented in the Disclosure Statement, this table will no longer be required.
THE BANKING GROUP
2018
$ millions
Residential
MortgagesOther RetailCorporateOtherTotal
Neither past due nor impaired47,9743,72627,29327879,271
Past due but not impaired assets
Less than 30 days past due739143162-1,044
At least 30 days but less than 60 days past due80256-111
At least 60 days but less than 90 days past due33102-45
At least 90 days past due431825-86
Total past due assets not impaired895196195-1,286
Individually impaired assets
Balance at beginning of the year325136-173
Additions31840-79
Amounts written off(6)(2)(14)-(22)
Returned to performing or repaid(33)(5)(47)-(85)
Balance at end of the year246115-145
Total gross loans48,8933,92827,60327880,702
Individually assessed provisions
Balance at beginning of the year7536-48
Impairment charges/(benefits):
New provisions9217-28
Reversal of previously recognised impairment charges(3)(2)(13)-(18)
Amounts written off(6)(2)(14)-(22)
Balance at end of the year7326-36
Collectively assessed provisions
Balance at beginning of the year5497181-332
Impairment charges/(benefits)(2)(10)(22)-(34)
Interest adjustments21210-24
Balance at end of the year5499169-322
Total provisions for impairment charges on loans and credit
commitments
61 102 195 - 358
Provision for credit commitments (refer to Note 19)-(4)(30)-(34)
Total provisions for impairment charges on loans6198165-324
Total net loans
1
48,8323,83027,43827880,378
1
Total net loans represent the estimated recoverable amounts which are net of provisions for impairment.
Note 13 Other financial assets
THE BANKING GROUP
$ millions2019
1
2018
1
Accrued interest receivable 129 154
Trade debtors 2 4
Other
47
67
Total other financial assets 178 225
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
Notes to the financial statements
36 Westpac New Zealand Limited
Note 14 Deferred tax assets
Accounting policy
Deferred tax accounts for temporary differences between the carrying amounts of assets and liabilities in the financial statements and their values
for taxation purposes.
Deferred tax is determined using the enacted or substantively enacted tax rates and laws which are expected to apply when the assets will be
realised or the liabilities settled.
Deferred tax assets and liabilities have been offset where they relate to the same taxation authority, the same taxable entity or group and where
there is a legal right and intention to settle on a net basis.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available to utilise the assets.
Deferred tax is not recognised for the following temporary differences:
the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither the accounting nor
taxable profit or loss; and
the initial recognition of goodwill in a business combination.
Critical accounting assumptions and estimates
On a similar basis to that described in Note 7, determining deferred tax assets and liabilities is considered one of the Banking Group’s critical
accounting assumptions and estimates.
THE BANKING GROUP
$ millions20192018
Deferred tax assets/(liabilities) comprise the following temporary differences:
Provisions for ECL/impairment charges on loans
1
88 94
Provisions for ECL/impairment charges on credit commitments
1
10 10
Cash flow hedges 31 23
Provision for employee entitlements 20 14
Compliance, regulation and remediation provisions 12 3
Software, property and equipment 9 10
Other temporary differences 4 2
Net deferred tax assets 174 156
The deferred tax (charge)/credit in income tax expense comprises the following temporary
differences:
Provisions for ECL/impairment charges on loans
1
(14) (7)
Provisions for ECL/impairment charges on credit commitments
1
(2) 2
Provision for employee entitlements 2 1
Compliance, regulation and remediation provisions 9 3
Software, property and equipment (1) (1)
Other temporary differences 3 -
Total deferred tax (charge)/credit in income tax expense (3) (2)
The deferred tax (charge)/credit in other comprehensive income comprises the following
temporary differences:
Cash flow hedges 8 (5)
Provision for employee entitlements 4 1
Total deferred tax (charge)/credit in other comprehensive income 12 (4)
The deferred tax adjustment to opening retained earnings comprises the following temporary
differences:
Provisions for ECL/impairment charges on loans
1
8 -
Provisions for ECL/impairment charges on credit commitments
1
2 -
Other temporary differences
1
(1) -
Total deferred tax adjustment to opening retained earnings 9 -
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. Refer to Note 1 for further details.
Notes to the financial statements
Westpac New Zealand Limited 37
Note 15 Intangible assets
Accounting policy
Indefinite life intangible assets
Goodwill
Goodwill acquired in a business combination is initially measured at cost, generally being the excess of:
i.the consideration paid; over
ii.the net fair value of the identifiable assets, liabilities and contingent liabilities acquired.
Subsequently, goodwill is not amortised but rather tested for impairment. Impairment is tested at least annually or whenever there is an
indication of impairment. An impairment charge is recognised when a cash generating unit’s (CGU) carrying value exceeds its recoverable
amount. Recoverable amount means the higher of the CGU’s fair value less costs to sell and its value-in-use.
Finite life intangible assets
Finite life intangibles include computer software which are recognised initially at cost and subsequently at amortised cost less any impairment.
IntangibleUseful lifeDepreciation method
GoodwillIndefiniteNot applicable
Computer software3 to 8 yearsStraight-line or diminishing balance method (using the Sum of the Years Digits)
Critical accounting assumptions and estimates
Judgement is required in determining the fair value of assets and liabilities acquired in a business combination. A different assessment of fair
values would have resulted in a different goodwill balance and different post-acquisition performance of the acquired entity.
When assessing impairment of intangible assets, significant judgement is needed to determine the appropriate cash flows and discount rates to
be applied to the calculations. The significant assumptions applied to the value-in-use calculations are outlined below.
THE BANKING GROUP
$ millions20192018
Goodwill 477 477
Computer software
159 152
Total intangible assets
636 629
Significant assumptions used in recoverable amount calculations
Goodwill has been allocated to the Consumer Banking and Wealth operating segment. Assumptions are used to determine the CGU’s recoverable
amount for goodwill, which is based on value-in-use calculations. Value-in-use refers to the present value of expected cash flows under its
current use. The Banking Group discounts the projected cash flows by its adjusted pre-tax equity rate.
Banking Group’s equity rate was 11.0% (2018: 11.0%)
Banking Group’s adjusted pre-tax equity rate was 15.3% (2018: 15.3%)
For the purpose of goodwill impairment testing, the assumptions in the following table are made for each significant CGU. The forecasts applied
by management are not reliant on any one particular assumption.
AssumptionBased on:
Cash flowsZero growth rate beyond 2 year forecast
Economic market conditionsCurrent market expectations
Business performanceObservable historical information and current market expectations of the future
There are no reasonably possible changes in assumptions for any significant CGU that would result in an indication of impairment or have a
material impact on the Banking Group’s reported results.
Notes to the financial statements
38 Westpac New Zealand Limited
Note 16 Deposits and other borrowings
Accounting policy
Deposits and other borrowings are initially recognised at fair value and subsequently either measured at amortised cost using the effective
interest rate method or at fair value.
Deposits and other borrowings are designated at fair value if they are managed on a fair value basis, reduce or eliminate an accounting mismatch,
or contain an embedded derivative.
Where they are measured at fair value, any changes in fair value (except those due to changes in credit risk) are recognised as non-interest
income.
The change in the fair value that is due to changes in credit risk is recognised in other comprehensive income except where it would create an
accounting mismatch, in which case it is also recognised in the income statement.
Interest expense incurred is recognised in net interest income using the effective interest rate method.
THE BANKING GROUP
$ millions20192018
Certificates of deposit 1,142 1,218
Non-interest bearing, repayable at call 6,871 5,903
Other interest bearing:
At call 24,053 23,335
Term
33,540 32,646
Total deposits and other borrowings 65,606 63,102
Deposits at fair value 1,142 1,218
Deposits at amortised cost 64,464 61,884
Total deposits and other borrowings 65,606 63,102
Note 17 Other financial liabilities
Accounting policy
Repurchase agreements
Where securities are sold subject to an agreement to repurchase at a predetermined price, they remain recognised on the balance sheet in their
original category (i.e. trading securities and financial assets measured at FVIS or investment securities).
The cash consideration received is recognised as a liability (repurchase agreements). Repurchase agreements are designated at fair value as they
are managed as part of a trading portfolio and recognised as part of other financial liabilities or due to related entities (refer to Note 22).
Where a repurchase agreement is designated at fair value, subsequent to initial recognition, these liabilities are measured at fair value with
changes in fair value (except credit risk) recognised through the income statement as they arise. The change in fair value that is attributable to
credit risk is recognised in other comprehensive income except where it would create an accounting mismatch, in which case it is also recognised
through the income statement.
THE BANKING GROUP
$ millions2019
1
2018
1
Accrued interest payable 331 356
Trade creditors and other accrued expenses 57 50
Interbank placements 54 21
Other 13 133
Total other financial liabilities 455 560
Other financial liabilities at fair value - -
Other financial liabilities at amortised cost 455 560
Total other financial liabilities 455 560
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
Notes to the financial statements
Westpac New Zealand Limited 39
Note 18 Debt issues
Accounting policy
Debt issues are bonds, notes and commercial paper that have been issued by the Banking Group.
Debt issues are initially measured at fair value and subsequently either measured at amortised cost using the effective interest rate method or at
fair value.
Debt issues are designated at fair value if they reduce or eliminate an accounting mismatch.
The change in the fair value that is due to credit risk is recognised in other comprehensive income except where it would create an accounting
mismatch, in which case it is also recognised in non-interest income.
Interest expense incurred is recognised within net interest income using the effective interest rate method.
In the following table, the distinction between short-term (12 months or less) and long-term (greater than 12 months) debt is based on the original
maturity of the underlying security.
THE BANKING GROUP
$ millions20192018
Short-term debt
Commercial paper 2,312 -
Total short-term debt 2,312 -
Long-term debt
Non-domestic medium-term notes 7,343 6,100
Covered bonds 5,263 5,640
Domestic medium-term notes 2,928 1,985
Total long-term debt 15,534 13,725
Total debt issues 17,846 13,725
Debt issues at fair value 2,312 -
Debt issues at amortised cost 15,534 13,725
Total debt issues 17,846 13,725
THE BANKING GROUP
$ millions20192018
Movement reconciliation
Balance at beginning of the year
13,725 16,729
Issuances
8,707
550
Maturities, repayments, buy backs and reductions
(5,001)
(4,464)
Total cash movements 3,706 (3,914)
Foreign exchange translation impact
273
933
Fair value adjustments
-
(1)
Fair value hedge accounting adjustments
144
(27)
Other
1
(2)
5
Total non-cash movements 415 910
Balance at end of the year 17,846 13,725
1
Includes items such as amortisation of issue costs.
Notes to the financial statements
40 Westpac New Zealand Limited
Note 19 Provisions
Accounting policy
Provisions are recognised for present obligations arising from past events where a payment (or other economic transfer) is likely to be necessary
to settle the obligation and can be reliably estimated.
Employee benefits – annual leave and other employee benefits
The provision for annual leave and other employee benefits (including long service leave, wages and salaries, inclusive of non-monetary benefits,
and any associated on-costs (e.g. payroll tax)) is calculated based on expected payments.
Provision for impairment on credit commitments
The Banking Group is committed to provide facilities and guarantees as explained in Note 27. If it is probable that a facility will be drawn and the
resulting asset will be less than the drawn amount then a provision for impairment is recognised. The provision for impairment is calculated using
the same methodology as the provision for expected credit losses (refer to Note 12).
Compliance, regulation and remediation provisions
The compliance, regulation and remediation provisions relate to matters pertaining to the provision of services to our customers identified both as
a result of regulatory action and internal reviews. An assessment of the likely cost to the Banking Group of these matters (including applicable
customer refunds) is made on a case-by-case basis and specific provisions are made where appropriate.
THE BANKING GROUP
$ millions20192018
Annual leave and other employee benefits 61 58
Provision for impairment on credit commitments (refer to Note 12) 37 34
Compliance, regulation and remediation provisions
1
44 12
Other 2 2
Total provisions 144 106
1
The Banking Group has raised an additional provision of $42 million during the year ended 30 September 2019, This reflects an increase in the identified number of
instances where issues requiring remediation had occurred, together with associated interest and program costs. $10 million has been paid to customers and no
unutilised provisions were reversed during the year ended 30 September 2019.
Note 20 Loan capital
Accounting policy
Loan capital are instruments which qualify for inclusion as regulatory capital under the Reserve Bank Capital Adequacy Framework. Loan capital is
initially measured at fair value and subsequently measured at amortised cost using the effective interest rate method. Interest expense incurred is
recognised in net interest income.
THE BANKING GROUP
$ millions20192018
Additional Tier 1 loan capital - Convertible subordinated perpetual notes
1
1,488 1,487
Tier 2 loan capital - Convertible subordinated notes
1
1,121 1,135
Total loan capital 2,609 2,622
1
Net of capitalised transaction costs.
THE BANKING GROUP
$ millions20192018
Movement reconciliation
Balance at beginning of the year
2,622 2,616
Total cash movements - -
Foreign exchange translation impact (14) 4
Other
1
1 2
Total non-cash movements (13) 6
Balance at end of the year 2,609 2,622
1
Includes items such as amortisation of issue costs.
Notes to the financial statements
Westpac New Zealand Limited 41
Note 20 Loan capital (continued)
Additional Tier 1 loan capital
A summary of the key terms and features of the Additional Tier 1 loan capital (‘AT1 notes’) is provided below:
$Issue dateCounterpartyInterest rateOptional redemption date
NZ$1,500 million notes
1
22 September 2017New Zealand Branch of the Ultimate
Parent Bank (‘NZ Branch’)
NZ 90 day bank bill
rate + 3.9594% p.a.
21 September 2027 and every fifth
anniversary thereafter
1
The AT1 notes were issued by the Bank and rank equally amongst themselves and are subordinated to the claims of depositors and senior or less subordinated
creditors of the Bank.
Interest payable
Quarterly interest payments on the AT1 notes are at the absolute discretion of the Bank and will only be paid if the payment conditions are satisfied,
including that the interest payment will not result in the Bank becoming insolvent immediately following the interest payment; not result in a breach of
the Reserve Bank Prudential Standards; and the payment date not falling on the date of a capital trigger event or non-viability trigger event. Interest
payments are non-cumulative. If interest is not paid in full, the Bank may not determine or pay any dividends on its ordinary shares or undertake a
discretionary buy back or capital reduction of the Bank’s ordinary shares (except in limited circumstances).
Redemption
The Bank may elect to redeem all or some of the AT1 notes for their face value on 21 September 2027 and every fifth anniversary thereafter, subject to
the Reserve Bank’s prior written approval. Early redemption of all of the AT1 notes for certain tax or regulatory reasons is permitted subject to the
Reserve Bank’s prior written approval.
Conversion
If a capital trigger event or non-viability trigger event occurs, the Bank must convert some or all of the AT1 notes into a variable number of ordinary
shares issued by the Bank (calculated with reference to the net assets of the Bank and the total number of ordinary shares on issue at the conversion
date) that is sufficient, in the case of a capital trigger event, to return the Bank’s Common Equity Tier 1 capital ratio to above 5.125% as determined by
the Bank in consultation with the Reserve Bank; or, in the case of a non-viability trigger event, to satisfy the direction of the Reserve Bank or the
decision of the statutory manager of the Bank. A capital trigger event occurs when the Bank determines, or the Reserve Bank notifies in writing that it
believes, the Bank’s Common Equity Tier 1 Capital ratio is equal to or less than 5.125%. A non-viability trigger event occurs when the Reserve Bank or
the statutory manager (appointed pursuant to section 117 of the Reserve Bank of New Zealand Act 1989 (‘Reserve Bank Act’)) directs the Bank to
convert or write off all or some of its AT1 notes.
If conversion of the AT1 notes does not occur within five business days of a capital trigger event or a non-viability trigger event, holders’ rights in
relation to the AT1 notes will be immediately and irrevocably terminated.
The Bank is able to elect to convert all the AT1 notes for certain tax or regulatory reasons (or in certain other circumstances).
Tier 2 loan capital
A summary of the key terms and features of the Tier 2 loan capital (‘Tier 2 notes’) is provided below.
$Issue dateCounterpartyInterest rateMaturity DateOptional redemption date
AU$1,040 million
notes
1
8 September 2015
London Branch of the
Ultimate Parent Bank
Australian 90 day bank
bill rate + 2.87% p.a.
22 March 2026
22 March 2021 and every interest
payment date thereafter
1
The Tier 2 notes were issued by the Bank and rank equally amongst themselves and are subordinated to the claims of depositors and senior or less subordinated
creditors of the Bank.
Interest payable
Interest payments on the Tier 2 notes are subject to the Bank being solvent at the time of, and immediately following the interest payment.
Early redemption
The Bank may elect to redeem all or some of the Tier 2 notes for their face value together with accrued interest (if any) on 22 March 2021 or any interest
payment date thereafter, subject to the Reserve Bank’s prior written approval. Early redemption of all of the Tier 2 notes for certain tax or regulatory
reasons is permitted on an interest payment date subject to the Reserve Bank’s prior written approval.
Conversion
If a non-viability trigger event occurs, the Bank must convert such number of the Tier 2 notes into a variable number of ordinary shares issued by the
Bank (calculated with reference to the net assets of the Bank and the total number of ordinary shares on issue on the conversion date) that is sufficient
to satisfy the direction of the Reserve Bank or the decision of the statutory manager. A non-viability trigger event occurs when the Reserve Bank or the
statutory manager (appointed pursuant to section 117 of the Reserve Bank Act) directs the Bank to convert or write off all or some of its Tier 2 notes. If
conversion of the Tier 2 notes fails to take effect within five business days, holders’ rights in relation to the Tier 2 notes will be immediately and
irrevocably terminated.
Notes to the financial statements
42 Westpac New Zealand Limited
Note 21 Share capital4-18
Accounting policy
Share capital
Ordinary shares are recognised at the amount paid up per ordinary share, net of directly attributable issue costs.
Ordinary shares fully paid
THE BANKING GROUP
20192018
Number ofNumber of
Shares IssuedShares Issued
and Authorisedand Authorised
Balance at beginning of the year 5,100,001,000 3,750,001,000
Share capital issued 2,200,000,000 1,350,000,000
Balance at end of the year 7,300,001,000 5,100,001,000
In accordance with the Reserve Bank document BS2B ordinary share capital is classified as Common Equity Tier 1 capital.
The ordinary shares have no par value. Subject to the constitution of the Bank, each ordinary share of the Bank carries the right to one vote on a
poll at meetings of shareholders, the right to an equal share in dividends authorised by the Board and the right to an equal share in the
distribution of the surplus assets of the Bank in the event of liquidation.
On 15 February 2019, the Bank declared and paid a dividend of $1,890 million to its immediate parent company Westpac New Zealand Group
Limited (‘WNZGL’). An issue of 1,500 million ordinary shares in the Bank to WNZGL was made on the same day of payment of the dividend at a
price of $1 per share and on the same terms of issue as all other ordinary shares on issue to WNZGL.
On 8 August 2019, the Bank declared and paid a dividend of $1,075 million to its immediate parent company WNZGL. An issue of 700 million
ordinary shares in the Bank to WNZGL was made on the same day of payment of the dividend at a price of $1 per share and on the same terms of
issue as all other ordinary shares on issue to WNZGL.
Note 22 Related entities
Related entities
The Banking Group’s related parties are those it controls or can exert significant influence over. Examples include subsidiaries, associates, joint
ventures and superannuation plans as well as key management personnel and their related parties.
Banking Group
The Bank is a controlled entity of WNZGL. The ultimate parent bank of the Bank is Westpac Banking Corporation.
Notes to the financial statements
Westpac New Zealand Limited 43
Note 22 Related entities (continued)
The Banking Group consists of the Bank and all of its controlled entities. As at 30 September 2019, the Bank had the following controlled entities:
Name of entityPrincipal activityNotes
Westpac NZ Operations Limited
1
Holding company
Aotearoa Financial Services LimitedNon-active company
Number 120 LimitedFinance company
The Home Mortgage Company LimitedResidential mortgage company
Westpac New Zealand Staff Superannuation Scheme Trustee LimitedTrustee company
Westpac (NZ) Investments Limited ('WNZIL')Property company
Westpac Securities NZ Limited (‘WSNZL’)Funding company
Westpac NZ Covered Bond Holdings Limited (‘WNZCBHL’)Holding company9.5% owned
2
Westpac NZ Covered Bond Limited (‘WNZCBL’)Guarantor9.5% owned
2
Westpac NZ Securitisation Holdings Limited (‘WNZSHL’)Holding company9.5% owned
3
Westpac NZ Securitisation Limited (‘WNZSL’)Funding company9.5% owned
3
Westpac NZ Securitisation No.2 Limited (‘WNZSL2’)Non-active company9.5% owned
3
Westpac Cash PIE FundPortfolio investment entityNot owned
4
Westpac Notice Saver PIE FundPortfolio investment entityNot owned
4
Westpac Term PIE FundPortfolio investment entityNot owned
4
1
On 11 January 2019, WNZOL sold its 25% shareholding in Paymark Limited to Ingenico Group S.A, resulting in a gain on sale of $40 million which is recognised in
other non-interest income. Refer to Note 3.
2
The Banking Group, through its subsidiary, WNZOL, has a qualifying interest of 9.5% in WNZCBHL and its wholly-owned subsidiary company, WNZCBL. The Bank is
considered to control both WNZCBHL and WNZCBL based on contractual arrangements in place, and as such both WNZCBHL and WNZCBL are consolidated within
the financial statements of the Banking Group.
3
The Banking Group, through its subsidiary WNZOL, has a qualifying interest of 9.5% in WNZSHL and its wholly-owned subsidiary companies, WNZSL and WNZSL2.
The Bank is considered to control WNZSHL, WNZSL and WNZSL2 based on contractual arrangements in place, and as such WNZSHL, WNZSL and WNZSL2 are
consolidated within the financial statements of the Banking Group.
4
Westpac Term PIE Fund, Westpac Cash PIE Fund and Westpac Notice Saver PIE Fund (collectively referred to as the ‘PIE Funds’) were established as unit trusts.
The PIE Funds are Portfolio Investment Entities (‘PIE’), where BT Funds Management (NZ) Limited (‘BTNZ’) (an indirectly wholly-owned subsidiary of the Ultimate
Parent Bank) is the manager and issuer. The manager has appointed the Bank to perform all customer management and account administration for the PIE Funds.
The Bank is the PIE Funds’ registrar and administration manager. The Bank does not hold any units in the PIE Funds, however is considered to control them based on
contractual arrangements in place, and as such the PIE Funds are consolidated in the financial statements of the Banking Group.
There have been no changes in the ownership percentages since 30 September 2018.
All entities in the Banking Group are 100% owned unless otherwise stated. All the entities within the Banking Group have a balance date of
30 September and are incorporated in New Zealand except the PIE Funds which have a balance date of 31 March.
Nature of transactions
The Banking Group has transactions with members of the Ultimate Parent Bank Group on commercial terms, including the provision of
management, distribution and administrative services.
Loan finance and current account banking facilities are provided by the Ultimate Parent Bank to members of the Banking Group on normal
commercial terms. The interest earned on these loans and the interest paid on deposits are at market rates.
The NZ Branch provides financial market services, foreign currency, trade and interest rate risk products to the Banking Group and its customers,
which includes derivative transactions (refer to Note 23).
Effective 1 October 2014, the Bank and the NZ Branch entered into an agreement whereby the Bank will reimburse the NZ Branch for any credit
losses incurred by it due to certain customers of the Bank defaulting on certain financial market and international products. The Banking Group
receives commission from the sale of these products to customers for providing this guarantee.
This is treated as a financial guarantee for accounting purposes. Financial guarantee contracts are recognised as financial liabilities (recorded
within provisions) when a payment under a contract has become probable. The liability is initially measured at fair value and subsequently at the
higher of the amount of the loss allowance determined in accordance with NZ IFRS 9 and the amount initially recognised less, when appropriate,
the cumulative amount of income recognised.
Refer to Note 20 for details of the loan capital transactions undertaken by the Banking Group with related entities.
Notes to the financial statements
44 Westpac New Zealand Limited
Note 22 Related entities (continued)
Transactions with related entities
THE BANKING GROUP
$ millionsNote20192018
Ultimate Parent Bank
Interest income
1
2 9 16
Interest expense:
Loan capital2 137 144
Other
2
2 31 42
Non-interest income:
Commissions received 55 54
Management fees received 3 3
Operating expenses - management fees4 4 4
Funding repaid 710 400
Immediate Parent Company
Dividends paid21 2,965 1,870
Other controlled entities of the Ultimate Parent Bank
Interest expense:
Interest expense - other2 1 1
Non-interest income:
Distribution fees received on managed fund products 15 14
Distribution fees received on life and general insurance products 31 36
Management fees received 4 4
Associate
Dividends received
3 6
1
Includes interest income on reverse repurchase agreements and cash held with the NZ Branch.
2
Includes interest expense on other funding provided by and repurchase agreements with the NZ Branch.
Due from and to related entities
THE BANKING GROUP
$ millions20192018
Due from related entities
Ultimate Parent Bank 2,561 1,309
Other controlled entities of the Ultimate Parent Bank 10 10
Total due from related entities 2,571 1,319
Due from related entities at fair value
1
1,703 558
Due from related entities at amortised cost 868 761
Total due from related entities 2,571 1,319
Due to related entities
Ultimate Parent Bank 1,665 1,588
Other controlled entities of the Ultimate Parent Bank 36 55
Total due to related entities 1,701 1,643
Due to related entities at fair value
2
820 251
Due to related entities at amortised cost 881 1,392
Total due to related entities 1,701 1,643
1
Consists of reverse repurchase agreements of $872 million (2018: $163 million) and derivative financial instruments of $831 million (2018: $395 million) (refer to
Note 23).
2
Consists of repurchase agreements of $10 million (2018: $15 million) and derivative financial instruments of $810 million (2018: $236 million) (refer to Note 23).
Notes to the financial statements
Westpac New Zealand Limited 45
Note 22 Related entities (continued)
Key management personnel compensation
Key management personnel are those who, directly or indirectly, have authority and responsibility for planning, directing and controlling the
activities of the Banking Group. This includes all Executive/Non-Executive Directors and members of the executive team.
THE BANKING GROUP
$'000s20192018
Salaries and other short-term benefits 7,590 8,019
Post-employment benefits 811 613
Other termination benefits - 615
Share-based payments 3,330 2,559
Total key management personnel compensation 11,731 11,806
Loans to key management personnel 26,876 22,349
Deposits from key management personnel 7,623 6,006
Interest income on amounts due from key management personnel 896 819
Interest expense on amounts due to key management personnel 67 107
The Directors have received remuneration from the Banking Group and these amounts are included in the table above.
Loans and deposits with key management personnel
All loans and deposits are made in the ordinary course of business of the Banking Group. Loans are on terms that range between variable, fixed
rate up to five years and interest only loans, all of which are in accordance with the Banking Group’s lending policies.
As at 30 September 2019, no individual provision has been recognised in respect of loans given to key management personnel and their related
parties (30 September 2018: nil). These loans have been included within the loan portfolio when determining collectively assessed provisions.
Other key management personnel transactions
All other transactions with key management personnel, their related entities and other related parties are conducted in the ordinary course of
business. These transactions principally involve the provision of financial, investment and insurance services.
Note 23 Derivative financial instruments
Accounting policy
Derivative financial instruments are instruments whose values are derived from the value of an underlying asset, reference rate or index and
include forwards, futures, swaps and options. Derivatives with related parties are included in due from/due to related entities.
The Banking Group uses derivative financial instruments for our asset and liability risk management (‘ALM’) activities.
Trading derivatives
Derivatives which are used in our ALM activities but are not designated into a hedge accounting relationship are considered economic hedges.
These derivatives are measured at FVIS and are disclosed as trading derivatives.
Hedging derivatives
Hedging derivatives are those which are used in our ALM activities and have also been designated into one of two hedge accounting relationships:
fair value hedge; or cash flow hedge. These derivatives are measured at fair value. These hedge designations and the associated accounting
treatment are detailed below.
For more details regarding the Banking Group’s ALM activities, refer to Note 32.
Notes to the financial statements
46 Westpac New Zealand Limited
Note 23 Derivative financial instruments (continued)
Accounting policy (continued)
Fair value hedges
Fair value hedges are used to hedge the exposure to changes in the fair value of an asset or liability.
Changes in the fair value of derivatives and the hedged asset or liability in fair value hedges are recognised in non-interest income. The carrying
value of the hedged asset or liability is adjusted for the changes in fair value related to the hedged risk.
If a hedge is discontinued, any fair value adjustments to the carrying value of the asset or liability are amortised to net interest income over the
period to maturity. If the asset or liability is sold, any unamortised adjustment is immediately recognised in net interest income.
Cash flow hedges
Cash flow hedges are used to hedge the exposure to variability of cash flows attributable to an asset, liability or future forecast transaction.
For effective hedges, changes in the fair value of derivatives are recognised in the cash flow hedge reserve through other comprehensive income
and subsequently recognised in net interest income when the cash flows attributable to the asset or liability that was hedged impact the income
statement.
For hedges with some ineffectiveness, the changes in the fair value of the derivatives relating to the ineffective portion are immediately recognised
in non-interest income.
If a hedge is discontinued, any cumulative gain or loss remains in other comprehensive income. It is amortised to net interest income over the
period which the asset or liability that was hedged also impacts the income statement.
If a hedge of a forecast transaction is no longer expected to occur, any cumulative gain or loss in other comprehensive income is immediately
recognised in net interest income.
Notes to the financial statements
Westpac New Zealand Limited 47
Note 23 Derivative financial instruments (continued)
The carrying values of derivative instruments are set out in the tables below:
THE BANKING GROUP
2019
TradingHedging
Total derivatives carrying
value
$ millions
AssetsLiabilitiesAssetsLiabilitiesAssetsLiabilities
Interest rate contracts
Swap agreements
3-120(565)123(565)
Total interest rate contracts
3-120(565)123(565)
Foreign exchange contracts
Cross currency swap agreements (principal and
interest)
498(378)826(124)1,324(502)
Total foreign exchange contracts
498(378)826(124)1,324(502)
Total of gross derivatives
501(378)946(689)1,447(1,067)
Impact of netting arrangements
------
Total of net derivatives
501(378)946(689)1,447(1,067)
Consisting of:
Derivatives held with external counterparties
--616(257)616(257)
Derivatives held with related parties
501(378)330(432)831(810)
THE BANKING GROUP
2018
TradingHedging
Total derivatives carrying
value
$ millions
AssetsLiabilitiesAssetsLiabilitiesAssetsLiabilities
Interest rate contracts
Swap agreements
-(1)58(313)58(314)
Total interest rate contracts
-(1)58(313)58(314)
Foreign exchange contracts
Cross currency swap agreements (principal and
interest)
--922(103)922(103)
Total foreign exchange contracts
--922(103)922(103)
Total of gross derivatives
-(1)980(416)980(417)
Impact of netting arrangements
------
Total of net derivatives
-(1)980(416)980(417)
Consisting of:
Derivatives held with external counterparties
--585(181)585(181)
Derivatives held with related parties
-(1)395(235)395(236)
Notes to the financial statements
48 Westpac New Zealand Limited
Note 23 Derivative financial instruments (continued)
Hedge accounting
The Banking Group designates derivatives into hedge accounting relationships in order to manage the volatility in earnings and capital that would
otherwise arise from interest rate risk and foreign exchange risk that may result from differences in the accounting treatment of derivatives and
underlying exposures. These hedge accounting relationships and the risks they are used to hedge are described below.
The Banking Group enters into one-to-one hedge relationships to manage specific exposures where the terms of the hedged item significantly
match the terms of the hedging instrument. The Banking Group also uses dynamic hedge accounting where the hedged items are part of a
portfolio of assets and/or liabilities that frequently change. In this hedging strategy, the exposure being hedged and the hedging instruments may
change frequently rather than there being a one-to-one hedge accounting relationship for a specific exposure.
Fair value hedges
Interest rate risk
The Banking Group hedges its interest rate risk to reduce exposure to changes in fair value due to interest rate fluctuations over the hedging
period. Interest rate risk arising from fixed rate debt issuances and fixed rate bonds classified as investment securities at FVOCI is hedged with
single currency fixed to floating interest rate derivatives. The Banking Group also hedges its benchmark interest rate risk from fixed rate foreign
currency denominated debt issuances using cross currency swaps. In applying fair value hedge accounting the Banking Group primarily uses one-
to-one hedge accounting to manage specific exposures.
The Banking Group also uses a dynamic hedge accounting strategy for fair value portfolio hedge accounting of some fixed rate mortgages to
reduce exposure to changes in fair value due to interest rate fluctuations over the hedging period. These fixed rate mortgages are allocated to
time buckets based on their expected repricing dates and the fixed-to-floating interest rate derivatives are designated according to the capacity
in the relevant time buckets.
The Banking Group hedges the benchmark interest rate which generally represents the most significant component of the changes in fair value.
The benchmark interest rate is a component of interest rate risk that is observable in the relevant financial markets, for example, LIBOR for USD
interest rates and Bank Bill Benchmark Rate (‘BKBM’) for NZD interest rates. Ineffectiveness generally arises from timing differences on repricing
between the hedged item and the derivative. For portfolio hedge accounting ineffectiveness also arises from prepayment risk (i.e. the difference
between actual and expected prepayment of loans). In order to manage the ineffectiveness from early repayments and accommodate new
originations the portfolio hedges are de-designated and redesignated periodically.
Cash flow hedges
Interest rate risk
The Banking Group’s exposure to the volatility of interest cash flows from customer deposits and loans is hedged with interest rate derivatives
using a dynamic hedge accounting strategy called macro cash flow hedges. Customer deposits and loans are allocated to time buckets based on
their expected repricing dates. The interest rate derivatives are designated according to the gross asset or gross liability positions for the relevant
time buckets. The Banking Group hedges the benchmark interest rate which generally represents the most significant component of the changes
in fair value. The benchmark interest rate is a component of interest rate risk that is observable in the relevant financial markets, for example,
Bank Bill Swap Rate for AUD interest rates, LIBOR for USD interest rates and BKBM for NZD interest rates. Ineffectiveness arises from timing
differences on repricing between the hedged item and the interest rate derivative. Ineffectiveness also arises if the notional values of the interest
rate derivatives exceed the aggregate notional exposure for the relevant time buckets. The hedge accounting relationship is reviewed on a
monthly basis and the hedging relationships are de-designated and redesignated if necessary.
Foreign exchange risk
The Banking Group’s exposure to foreign currency principal and credit margin cash flows from fixed rate foreign currency debt issuances is
hedged through the use of cross currency derivatives in a one-to-one hedging relationship to manage the changes between the foreign currency
and NZD. In addition, for floating rate foreign currency debt issuances, the Banking Group hedges from foreign floating to NZD floating interest
rates. Ineffectiveness may arise from foreign currency basis risk and may arise from timing differences on repricing between the hedged item and
the cross currency derivative.
Economic hedges
As part of the Banking Group’s ALM activities, economic hedges are entered into to hedge long term funding transactions.
Notes to the financial statements
Westpac New Zealand Limited 49
Note 23 Derivative financial instruments (continued)
Hedging instruments
The following table shows the carrying value of hedging instruments and a maturity analysis of the notional amounts of the hedging instruments in
one-to-one hedge relationships categorised by the types of hedge relationships and the hedged risk.
THE BANKING GROUP
2019
Notional amounts Carrying value
$ millions
Hedging
instrument Hedged risk
Within 1
year
Over 1 year
to 5 years
Over 5
years TotalAssetsLiabilities
One-to-one hedge relationships
Fair value hedges Interest rate swap
Interest rate risk
2,1572,0134214,59113(213)
Cross currency swap Interest rate risk 1,2516,1343497,734155(100)
Cash flow hedges Cross currency swap
Foreign exchange
risk
2,55810,33834913,245671(24)
Total one-to-one hedge relationships5,96618,4851,11925,570839(337)
Macro hedge relationships
Portfolio fair value hedges Interest rate swap Interest rate risk N/AN/AN/A16,375-(178)
Macro cash flow hedges Interest rate swap Interest rate risk N/AN/AN/A10,220107(174)
Total macro hedge relationships N/AN/AN/A26,595107(352)
Total of gross hedging derivatives N/AN/AN/A52,165946(689)
Impact of netting arrangements N/AN/AN/AN/A--
Total of net hedging derivatives N/AN/AN/AN/A946(689)
The following table shows the weighted average exchange rate related to significant hedging instruments in one-to-one hedge relationships:
THE BANKING GROUP
2019
Currency /Weighted average
$ millionsHedging instrumentHedged risk Currency pairrate
Cash flow hedges Cross currency swapForeign exchange riskCHF:NZD
0.7001
EUR:NZD
0.6079
GBP:NZD
0.4538
NZD:AUD
1.1272
HKD:NZD
4.9670
USD:NZD
0.7230
Notes to the financial statements
50 Westpac New Zealand Limited
Note 23 Derivative financial instruments (continued)
Impact of hedge accounting on the balance sheet and reserves
The following table shows the carrying amount of hedged items in a fair value hedge relationship and the component of the carrying amount related to
accumulated hedge accounting adjustments.
THE BANKING GROUP
2019
$ millions
Carrying amount of
hedged item
Accumulated fair value
hedge adjustment included
in carrying amount
Interest rate risk
Investment securities
4,469120
Loans
16,375121
Debt issues and loan capital
(8,215)(169)
There were no accumulated fair value hedge adjustments included in the above carrying amounts relating to hedged items that have ceased to
be adjusted for hedging gains and losses.
The pre-tax impact of cash flow hedges on reserves is detailed below:
THE BANKING GROUP
2019
$ millionsInterest rate riskForeign exchange risk Total
Cash flow hedge reserve
Balance at beginning of the year
(46)(37)(83)
Net gains/(losses) from changes in fair value
(40)(66)(106)
Transferred to net interest income
473077
Balance at end of year
(39)(73)(112)
There were no balances remaining in the cash flow hedge reserve relating to hedge relationships for which hedge accounting is no longer
applied.
Notes to the financial statements
Westpac New Zealand Limited 51
Note 23 Derivative financial instruments (continued)
Hedge effectiveness
Hedge effectiveness is tested prospectively at inception and during the lifetime of hedge relationships. For one-to-one hedge relationships this testing uses a
qualitative assessment of matched terms where the critical terms of the derivatives used as the hedging instrument match the terms of the hedged item. In
addition, a quantitative effectiveness test is performed for all hedges which could include regression analysis, dollar offset and/or sensitivity analysis.
Retrospective testing is also performed to determine whether the hedge relationship remains highly effective so that hedge accounting can continue to be
applied and also to determine any ineffectiveness. These tests are performed using regression analysis and the dollar offset method.
The following table provides information regarding the determination of hedge effectiveness:
THE BANKING GROUP
2019
$ millions
Hedging
instrument Hedged risk
Change in fair value of
hedging instrument
used for calculating
ineffectiveness
Change in value of
the hedged item
used for calculating
ineffectiveness
Hedge
ineffectiveness
recognised in non-
interest income
Fair value hedges
Interest rate swap Interest rate risk (146)1471
Cross currency swap Interest rate risk 150(147)3
Cash flow hedges
Interest rate swap Interest rate risk 4(6)(2)
Cross currency swap Foreign exchange risk(35)35-
Total
(27)292
Comparative year information under prior NZ IFRS 7 disclosure requirements
Ineffectiveness of hedge relationships
Fair value hedges
THE BANKING GROUP
$ millions
2018
Change in fair value of hedging instruments 10
Change in fair value of hedged items attributed to hedged risk
(10)
Ineffectiveness in non-interest income -
Cash flow hedges
THE BANKING GROUP
$ millions
2018
Cash flow hedge ineffectiveness
4
Hedging instruments
Gross cash inflows and outflows on derivatives designated in cash flow hedges are, as a proportion of total gross cash flows, expected to occur
in the following periods:
THE BANKING GROUP
2018
Less Than 1 Month to 3 Months to 1 Year to 2 Years to 3 Years to 4 Years to Over
1 Month3 Months 1 Year2 Years3 Years 4 Years5 Years5 Years
Cash inflows0%0%19%18%24%23%3%13%
Cash outflows0%0%17%18%25%22%3%
15%
Notes to the financial statements
52 Westpac New Zealand Limited
Note 24 Fair values of financial assets and financial liabilities
Accounting policy
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
On initial recognition, the transaction price generally represents the fair value of the financial instrument unless there is observable information
from an active market to the contrary. Where unobservable information is used, the difference between the transaction price and the fair value
(day one profit or loss) is recognised in the income statement over the life of the instrument when the inputs become observable.
Critical accounting assumptions and estimates
The majority of valuation models used by the Banking Group employ only observable market data as inputs. However, for certain financial
instruments, data may be employed which is not readily observable in current markets.
The availability of observable inputs is influenced by factors such as:
– product type;
– depth of market activity;
– maturity of market models; and
– complexity of the transaction.
Where unobservable market data is used, more judgement is required to determine fair value. The significance of these judgements depends on
the significance of the unobservable input to the overall valuation. Unobservable inputs are generally derived from other relevant market data and
adjusted against:
– standard industry practice;
– economic models; and
– observed transaction prices.
In order to determine a reliable fair value for a financial instrument, management may apply adjustments to the techniques previously described.
These adjustments reflect the Banking Group’s assessment of factors that market participants would consider in setting the fair value.
These adjustments incorporate bid/offer spreads, credit valuation adjustments (‘CVA’) and funding valuation adjustments (‘FVA’).
Fair Valuation Control Framework
The Banking Group uses a Fair Valuation Control Framework where the fair value is either determined or validated by a function independent of the
transaction. This framework formalises the policies and procedures used to achieve compliance with relevant accounting, industry and regulatory
standards. The framework includes specific controls relating to:
– the revaluation of financial instruments;
– independent price verification;
– fair value adjustments; and
– financial reporting.
A key element of the framework is the Revaluation Committee, comprising senior valuation specialists from within the Ultimate Parent Bank Group.
The Revaluation Committee reviews the application of the agreed policies and procedures to assess that a fair value measurement basis has been
applied.
The method of determining fair value differs depending on the information available.
Fair value hierarchy
A financial instrument’s categorisation within the valuation hierarchy is based on the lowest level input that is significant to the fair value
measurement.
The Banking Group categorises all fair value instruments according to the hierarchy described below.
Valuation techniques
The Banking Group applies market accepted valuation techniques in determining the fair valuation of over-the-counter (‘OTC’) derivatives. This
includes CVA and FVA, which incorporate credit risk and funding costs and benefits that arise in relation to uncollateralised derivative positions,
respectively.
The specific valuation techniques, the observability of the inputs used in valuation models and the subsequent classification for each significant
product category are outlined as follows:
Notes to the financial statements
Westpac New Zealand Limited 53
Note 24 Fair values of financial assets and financial liabilities (continued)
Financial instruments measured at fair value
Level 1 instruments
The fair value of financial instruments traded in active markets is based on recent unadjusted quoted prices. These prices are based on actual arm’s
length basis transactions.
The valuations of Level 1 instruments require little or no management judgement.
InstrumentBalance sheet categoryIncludes:Valuation technique
Non-asset backed debt
instruments
Trading securities and
financial assets measured
at FVIS
Available-for-sale
securities/Investment
securities
New Zealand
Government bonds
These instruments are traded in liquid, active markets where
prices are readily observable. No modelling or assumptions
are used in the valuation.
Level 2 instruments
The fair value for financial instruments that are not actively traded is determined using valuation techniques which maximise the use of observable
market prices. Valuation techniques include:
– the use of market standard discounting methodologies;
– option pricing models; and
– other valuation techniques widely used and accepted by market participants.
InstrumentBalance sheet categoryIncludes:Valuation technique
Interest rate
products
Derivative financial instruments
Due from related entities
Due to related entities
Interest rate swaps,
forwards and options
– derivative financial
instruments
Industry standard valuation models are used to calculate the
expected future value of payments by product, which is
discounted back to a present value. The model’s interest rate
inputs are benchmark interest rates and active broker quoted
interest rates in the swap, bond and futures markets. Interest
rate volatilities are sourced from brokers and consensus data
providers. If consensus prices are not available, these are
classified as Level 3 instruments.
Foreign exchange
products
Derivative financial instruments
Due from related entities
Due to related entities
FX swaps – derivative
financial instruments
Derived from market observable inputs or consensus pricing
providers using industry standard models.
Non-asset backed
debt instruments
Trading securities and financial
assets measured at FVIS
Available-for-sale
securities/Investment
securities
Due from related entities
Due to related entities
Local authority and
NZ public securities,
other bank issued
certificates of deposit,
commercial paper, other
government securities
and corporate bonds
Repurchase
agreements and reverse
repurchase agreements
over non-asset backed
debt securities
Valued using observable market prices which are sourced from
independent pricing services, broker quotes or inter-dealer
prices.
Deposits and
other borrowings
at fair value
Deposits and other borrowingsCertificates of deposit
Discounted cash flow using market rates offered for
deposits of similar remaining maturities.
Debt issues at fair
value
Debt issuesCommercial paper
Discounted cash flows, using a discount rate which reflects
the terms of the instrument and the timing of cash flows
adjusted for market observable changes in the Bank’s implied
credit worthiness.
Notes to the financial statements
54 Westpac New Zealand Limited
Note 24 Fair values of financial assets and financial liabilities (continued)
Level 3 instruments
Financial instruments valued where at least one input that could have a significant effect on the instrument’s valuation is not based on observable
market data due to illiquidity or complexity of the product. These inputs are generally derived and extrapolated from other relevant market data and
calibrated against current market trends and historical transactions.
These valuations are calculated using a high degree of management judgement.
The table below summarises the attribution of financial instruments measured at fair value to the fair value hierarchy:
THE BANKING GROUP
2019
1
2018
1
$ millionsLevel 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Financial assets measured at fair value on a
recurring basis
Trading securities and financial assets measured at FVIS-1,661-1,661 6 1,145 - 1,151
Derivative financial instruments-616-616 - 585 - 585
Investment securities/Available-for-sale securities1,0493,420-4,469 1,167 2,643 - 3,810
Due from related entities-1,703-1,703 - 558 - 558
Total financial assets measured at fair value1,0497,400-8,449 1,173 4,931 - 6,104
Financial liabilities measured at fair value on a
recurring basis
Deposits and other borrowings at fair value-1,142-1,142 - 1,218 - 1,218
Derivative financial instruments-257-257 - 181 - 181
Debt issues at fair value-2,312-2,312 - - - -
Due to related entities-820-820 - 251 - 251
Total financial liabilities measured at fair value-4,531-4,531 - 1,650 - 1,650
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
Analysis of movements between fair value hierarchy levels
During the year, there were no material transfers between levels of the fair value hierarchy (30 September 2018: no material transfers between
levels).
Financial instruments not measured at fair value
For financial instruments not measured at fair value on a recurring basis, fair value has been derived as follows:
InstrumentValuation technique
Loans
Where available, the fair value of loans is based on observable market transactions; otherwise fair value is estimated
using discounted cash flow models. For variable rate loans, the discount rate used is the current effective interest rate.
The discount rate applied for fixed rate loans reflects the market rate for the maturity of the loan and the credit
worthiness of the borrower.
Deposits and other
borrowings
Fair values of deposit liabilities payable on demand (interest free, interest bearing and savings deposits) approximate
their carrying value. Fair values for term deposits are estimated using discounted cash flows, applying market rates
offered for deposits of similar remaining maturities.
Debt issues and
loan capital
Fair values are calculated using a discounted cash flow 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 the Banking Group’s credit spreads.
Due to related
entities
The fair value of the loan due to related entities is estimated using a discounted cash flow model. The discount rate
applied reflects the terms of the loan and the timing of the estimated cash flows. The carrying value of all other balances
due to related entities approximates the fair value. These items are either short-term in nature or re-price frequently,
and are of a high credit rating.
All other financial
assets and financial
liabilities
For all other financial assets and financial liabilities, the carrying value approximates the fair value. These items are either
short-term in nature or re-price frequently, and are of a high credit rating.
Notes to the financial statements
Westpac New Zealand Limited 55
Note 24 Fair values of financial assets and financial liabilities (continued)
The following table summarises the estimated fair value and fair value hierarchy of the Banking Group’s financial instruments not measured at fair value:
THE BANKING GROUP
2019
1
Fair Value
$ millions
Carrying
Amount
Level 1Level 2Level 3Total
Financial assets not measured at fair value
Cash and balances with central banks 1,864 1,864 - - 1,864
Collateral paid 168 168 - - 168
Other financial assets 178 - - 178 178
Loans 84,160 - - 84,412 84,412
Due from related entities
868 - 858 10
868
Total financial assets not measured at fair value 87,238 2,032 858 84,600 87,490
Financial liabilities not measured at fair value
Collateral received 473 473 - - 473
Other financial liabilities 455 - 455 - 455
Deposits and other borrowings 64,464 - 63,974 564 64,538
Debt issues
2
15,534 - 15,701 - 15,701
Due to related entities 881 - 881 -
881
Loan capital
2
2,609 - - 2,703
2,703
Total financial liabilities not measured at fair value 84,416 473 81,011 3,267 84,751
THE BANKING GROUP
2018
1
Fair Value
$ millions
Carrying
Amount
Level 1Level 2Level 3Total
Financial assets not measured at fair value
Cash and balances with central banks 1,353 1,353 - - 1,353
Collateral paid 70 70 - - 70
Other financial assets 225 - - 225 225
Loans 80,378 - - 80,503 80,503
Due from related entities 761 - 751 10 761
Total financial assets not measured at fair value 82,787 1,423 751 80,738 82,912
Financial liabilities not measured at fair value
Collateral received 476 476 - - 476
Other financial liabilities 560 - 560 - 560
Deposits and other borrowings 61,884 - 61,276 647 61,923
Debt issues
2
13,725 - 13,845 - 13,845
Due to related entities 1,392 - 1,399 - 1,399
Loan capital
2
2,622 - - 2,645
2,645
Total financial liabilities not measured at fair value 80,659 476 77,080 3,292 80,848
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
2
The estimated fair value of debt issues and loan capital include the impact of changes in the Banking Group's credit spreads since origination.
Notes to the financial statements
56 Westpac New Zealand Limited
Note 25 Offsetting financial assets and financial liabilities
Accounting policy
Financial assets and financial liabilities are presented net on the balance sheet when the Banking Group has a legally enforceable right to offset
them in all circumstances and there is an intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability
simultaneously. The gross assets and liabilities behind the net amounts reported on the balance sheet are disclosed in the table below.
Some of the Banking Group’s offsetting arrangements are not enforceable in all circumstances. The amounts in the tables below may not tie back
to the balance sheet if there are balances which are not subject to offsetting or enforceable netting arrangements. The amounts presented in this
note do not represent the credit risk exposure of the Banking Group. Refer to Note 32.2 for information on credit risk management. The offsetting
and collateral arrangements and other credit risk mitigation strategies used by the Banking Group are further explained in the ‘Management of risk
mitigation’ section under Note 32.2.
THE BANKING GROUP
2019
1
Amounts Subject to Enforceable
Effects of Offsetting on Balance SheetNetting Arrangements But Not Offset
$ millions
Gross
Amounts
Amounts
Offset
Net Amounts
Reported on
the Balance
Sheet
Other
Recognised
Financial
Instruments
Cash
Collateral
Financial
Instrument
Collateral
Net
Amount
Assets
Reverse repurchase agreements
2
111 - 111 - - (111) -
Derivative financial instruments
616 - 616 (89) (473) - 54
Due from related entities - Reverse
repurchase agreements
3
872 - 872 - - (872) -
Due from related entities - derivative
financial instruments
3
831 - 831 (810) - - 21
Total assets 2,430 - 2,430 (899) (473) (983) 75
Liabilities
Derivative financial instruments
257 - 257 (89) (166) - 2
Due to related entities - repurchase
agreements
4
10 - 10 - - (10) -
Due to related entities - derivative
financial instruments
4
810 - 810 (810) - - -
Total liabilities 1,077 - 1,077 (899) (166) (10) 2
1
The Banking Group has adopted the NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made
a number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
2
Forms part of trading securities and financial assets measured at FVIS (refer to Note 9).
3
Forms part of due from related entities on the balance sheet (refer to Note 22).
4
Forms part of due to related entities on the balance sheet (refer to Note 22).
Notes to the financial statements
Westpac New Zealand Limited 57
Note 25 Offsetting financial assets and financial liabilities (continued)
THE BANKING GROUP
2018
1
Amounts Subject to Enforceable
Effects of Offsetting on Balance SheetNetting Arrangements But Not Offset
$ millions
Gross
Amounts
Amounts
Offset
Net Amounts
Reported on
the Balance
Sheet
Other
Recognised
Financial
Instruments
Cash
Collateral
Financial
Instrument
CollateralNet Amount
Assets
Derivative financial instruments
585 - 585 (109) (471) - 5
Due from related entities - reverse
repurchase agreements
2
163 - 163 - - (163) -
Due from related entities - derivative
financial instruments
2
395 - 395 (236) - - 159
Total assets 1,143 - 1,143 (345) (471) (163) 164
Liabilities
Derivative financial instruments 181 - 181 (109) (70) - 2
Due to related entities - repurchase
agreements
3
15 - 15 - - (15) -
Due to related entities - derivative
financial instruments
3
236 - 236 (236) - - -
Total liabilities 432 - 432 (345) (70) (15) 2
1
The Banking Group has adopted the NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made
a number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
2
Forms part of due from related entities on the balance sheet (refer to Note 22).
3
Forms part of due to related entities on the balance sheet (refer to Note 22).
Other recognised financial instruments
These financial assets and financial liabilities are subject to master netting agreements which are not enforceable in all circumstances, so they are
recognised gross on the balance sheet. The offsetting rights of the master netting arrangements can only be enforced if a predetermined event
occurs in the future, such as a counterparty defaulting.
Cash collateral and financial instrument collateral
These amounts are received or pledged under master netting arrangements against the gross amounts of assets and liabilities. Financial
instrument collateral typically comprises securities which can be readily liquidated in the event of counterparty default. The offsetting rights of the
master netting arrangement can only be enforced if a predetermined event occurs in the future, such as a counterparty defaulting.
Notes to the financial statements
58 Westpac New Zealand Limited
Note 26 Operating lease commitments
The Banking Group leases various commercial and retail premises and related plant and equipment. The lease commitments at 30 September are
as follows:
THE BANKING GROUP
$ millions20192018
1
Due within one year 52 54
Due after one year but not later than five years 130 122
Due after five years 124 141
Total lease commitments 306 317
1
Comparative information for the year ended 30 September 2018 has been restated to ensure consistent presentation with the current reporting period. This has
no effect on the balance sheet or income statement.
Operating leases are entered into to meet the business needs of entities in the Banking Group. Lease rentals are determined in accordance with
market conditions when leases are entered into or on rental review dates.
Note 27 Credit related commitments, contingent assets and contingent liabilities
Accounting policy
Undrawn credit commitments
The Banking Group enters into various arrangements with customers which are only recognised in the balance sheet when called upon.
These arrangements include commitments to extend credit, bill endorsements, financial guarantees, standby letters of credit and underwriting
facilities.
Contingent assets
Contingent assets are possible assets whose existence will be confirmed only by uncertain future events. Contingent assets are not recognised on
the balance sheet but are disclosed if an inflow of economic benefits is probable.
Contingent liabilities
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events, and present obligations where
the transfer of economic resources is not probable or cannot be reliably measured. Contingent liabilities are not recognised on the balance sheet
but are disclosed unless the outflow of economic resources is remote.
Notes to the financial statements
Westpac New Zealand Limited 59
Note 27 Credit related commitments, contingent assets and contingent liabilities (continued)
Undrawn credit commitments
Undrawn credit commitments expose the Banking Group to liquidity risk when called upon and also to credit risk if the customer fails to repay the
amounts owed at the due date. The maximum exposure to credit loss is the contractual or notional amount of the instruments disclosed below.
Some of the arrangements can be cancelled by the Banking Group at any time and a significant portion is expected to expire without being drawn.
The actual required liquidity and credit risk exposure is therefore less than the amounts disclosed. The Banking Group uses the same credit
policies when entering into these arrangements as it does for on-balance sheet instruments. Refer to Note 32 for further details on liquidity risk
and credit risk management.
The Banking Group is obliged to repurchase any loan sold to and held by:
(a) WNZSL (pursuant to its securitisation programme) where the loan does not meet certain terms and conditions of the WNZSL securitisation
programme;
(b) WNZCBL (pursuant to the Bank’s Global Covered Bond Programme (‘CB Programme’)) where:
(i)it is discovered that there has been a material breach of a sale warranty (or any such sale warranty is materially untrue);
(ii) the loan becomes materially impaired or is enforced prior to the second monthly covered bond payment date falling after the assignment of
the loan; or
(iii) at the cut-off date relating to the loan, there were arrears of interest and that loan subsequently becomes a delinquent loan prior to the
second monthly covered bond payment date falling after the assignment of the loan.
It is not envisaged that any liability resulting in material loss to the Banking Group will arise from these obligations.
THE BANKING GROUP
$ millions
20192018
Letters of credit and guarantees
1
828 863
Commitments to extend credit
2
25,858 24,650
Other - 60
Total undrawn credit commitments 26,686 25,573
1
Standby letters of credit and guarantees are undertakings to pay, against presentation documents, an obligation in the event of a default by a customer.
Guarantees are unconditional undertakings given to support the obligations of a customer to third parties. The Banking Group may hold cash as collateral for
certain guarantees issued.
2
Commitments to extend credit include all obligations on the part of the Banking Group to provide credit facilities. As facilities may expire without being drawn
upon, the notional amounts do not necessarily reflect future cash requirements.
Contingent assets
The credit commitments shown in the table above also constitute contingent assets. These commitments would be classified as loans on the balance
sheet on the contingent event occurring.
Contingent liabilities
The Banking Group has contingent liabilities in respect of actual and potential claims and proceedings. An assessment of the Banking Group’s likely
loss in respect of these matters has been made on a case-by-case basis and provision has been made in these financial statements where
appropriate.
Compliance, regulation and remediation
The Banking Group is subject to continued regulatory action and internal reviews relating to matters pertaining to the provision of services to our
customers. Contingent liabilities may exist in respect of actual or potential claims, compensation payments and/or refunds identified as part of
these reviews. An assessment of the Banking Group’s likely loss has been made on a case-by-case basis for the purpose of the Disclosure Statement
but cannot always be reliably estimated.
Guarantees
As disclosed in Note 22, the Bank has an agreement with the NZ Branch whereby the Bank will reimburse the NZ Branch for any credit losses
incurred by it due to certain customers of the Bank defaulting on certain financial market and international products.
Notes to the financial statements
60 Westpac New Zealand Limited
Note 28 Segment reporting
Accounting policy
Operating segments are presented on a basis that is consistent with information provided internally to the Banking Group’s chief operating
decision-maker and reflects the management of the business, rather than the legal structure of the Banking Group. The chief operating decision-
maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Banking Group
has determined that the Bank’s executive team is its chief operating decision-maker.
All transactions between business segments are conducted on an arm’s length basis, with inter-segment revenue and costs being eliminated at
head office. Income and expenses directly associated with each segment are included in determining business segment performance.
The Banking Group’s segment reporting incorporates consumer banking and wealth, commercial, corporate and institutional banking, and
investments and insurance sectors within New Zealand. On this basis, no geographical segment reporting is provided.
The operating segment results have been presented on a management reporting basis and consequently internal charges and transfer pricing
adjustments have been reflected in the performance of each operating segment. Intersegment pricing is determined on a cost recovery basis.
The Banking Group does not rely on any single major customer for its revenue base.
Segment comparative information for the year ended 30 September 2018 has been restated to ensure consistent presentation with the current
reporting period. This includes adjustments for:
–changes in the segmentation classification for small business customers;
–changes to expense allocations and the Ultimate Parent Bank’s capital allocation framework; and
–NZ IFRS 9 and NZ IFRS 15 that were adopted on 1 October 2018. Segment comparatives have been restated as though the standards were adopted
on 1 October 2017, except for ECL provisioning. This resulted in comparative reclassifications between individual line items that do not impact total
results. These adjustments are comprised of:
–facility fees: The Banking Group has reclassified facility fees (mostly business) from non-interest income to net interest income to more
appropriately reflect the relationship with drawn lines of credit;
–other fees and expenses: The Banking Group has restated the classification of a number of fees and expenses which has resulted in the
grossing up of non-interest income and operating expenses;
–card scheme: Support payments received from Mastercard have been reclassified to non-interest income and related expenses have been
reclassified to operating expenses; and
–interest carrying adjustments: Interest on performing loans (stage 1 and stage 2 loans) is now measured on the gross loan value. Previously,
interest on performing loans was recognised on the loan balance net of provisions. This adjustment increases interest income and impairment
charges.
Operating segments are defined by the customers they serve and the services they provide. The Banking Group has identified the following main
operating segments:
–Consumer Banking and Wealth provides financial services predominantly for individuals;
–Commercial, Corporate and Institutional Banking provides a broad range of financial services for commercial, corporate, property finance,
agricultural, institutional and government customers; and
–Investments and Insurance provides funds management and insurance services.
Reconciling items primarily represent:
–business units that do not meet the definition of operating segments under NZ IFRS 8 Operating Segments;
–elimination entries on consolidation of the results, assets and liabilities of the Banking Group’s controlled entities in the preparation of the
consolidated financial statements of the Banking Group;
–results of certain entities included for management reporting purposes including insurance and investments, but excluded from the consolidated
financial statements of the Banking Group for statutory financial reporting purposes; and
–results of certain business units excluded for management reporting purposes, but included within the consolidated financial statements of the
Banking Group for statutory financial reporting purposes.
Notes to the financial statements
Westpac New Zealand Limited 61
Note 28 Segment reporting (continued)
THE BANKING GROUP
ConsumerCommercial,InvestmentsNZ IFRS 9 and
Banking and
Corporate
and
andNZ IFRS 15Reconciling
$ millionsWealth InstitutionalInsurancechangesItemsTotal
Year ended 30 September 2019
Net interest income1,042887-N/A14
1,943
Non-interest income
131124147N/A(73)329
Net operating income before operating
expenses and impairment charges
1,1731,011147N/A(59)2,272
Operating expenses(721)(239)(29)N/A28
(961)
Impairment (charges)/benefits
(17)33-N/A(6)10
Profit before income tax435805118
N/A
(37)1,321
Year ended 30 September 2018
(restated)
Net interest income1,0748611(85)(7)
1,844
Non-interest income14011913842(95)
344
Net operating income before operating
expenses and impairment charges
1,214980139(43)(102) 2,188
Operating expenses(672)(224)(29)2118
(886)
Impairment (charges)/benefits(45)(2)-2222
(3)
Profit before income tax497754110-(62)1,299
As at 30 September 2019
Total gross loans45,73038,624-N/A12184,475
Total deposits and other borrowings35,12529,340-N/A1,14165,606
As at 30 September 2018
Total gross loans43,26637,408-N/A2880,702
Total deposits and other borrowings33,84028,043-N/A1,21963,102
Note 29 Securitisation, covered bonds and other transferred assets
The Banking Group enters into transactions in the normal course of business by which financial assets are transferred to counterparties or structured
entities. Depending on the circumstances, these transfers may result in derecognition of the assets in their entirety, partial derecognition or no
derecognition of the assets subject to the transfer. For the Banking Group’s accounting policy on derecognition of financial assets, refer to Note 1.
Securitisation
Securitisation is the transferring of assets (or an interest in either the assets or the cash flows arising from the assets) to a structured entity which then
issues interest bearing debt securities to third party investors.
Own assets securitised
Securitisation of its own assets is used by the Banking Group as a funding and liquidity tool.
For securitisation structured entities which the Banking Group controls, as defined in Note 30, the structured entities are classified as subsidiaries and
consolidated. When assessing whether the Banking Group controls a structured entity, it considers its exposure to and ability to affect variable
returns. The Banking Group may have variable returns from a structured entity through ongoing exposures to the risks and rewards associated with
the assets, the provision of derivatives, liquidity facilities, trust management and operational services.
In October 2008, WNZSL was set up as part of the Bank’s internal residential mortgage-backed securitisation programme. Under this programme the
Bank sold the rights (but not the obligations) of a pool of housing loans to WNZSL. The purchase was funded by WNZSL’s issuance of residential
mortgage-backed securities (‘RMBS’). The RMBS and an equivalent liability in the form of a deemed loan from the Bank to WNZSL are fully eliminated
in the Banking Group’s financial statements. Refer to Note 27 for a description of the Banking Group’s obligation to repurchase certain housing loans
sold to WNZSL.
Notes to the financial statements
62 Westpac New Zealand Limited
Note 29 Securitisation, covered bonds and other transferred assets (continued)
Covered bonds
The Banking Group has a covered bond programme whereby selected pools of housing loans it originates are assigned to a bankruptcy remote
structured entity. WNZCBL is a special purpose entity established to purchase from time to time, and hold the rights, but not the obligations, of a pool
of housing loans (‘cover pool’) and to provide a financial guarantee (in addition to that of the Bank) in respect of obligations under the covered bonds
issued from time to time by WSNZL under the CB Programme. That financial guarantee is supported by WNZCBL granting security in favour of the
covered bondholders over the cover pool.
The intercompany loan made by the Bank to WNZCBL to fund the initial purchase (and subsequent further purchases which increased the cover pool)
and the liability representing the deemed loan from WNZCBL to the Bank are fully eliminated in the Banking Group’s financial statements. Refer to
Note 27 for a description of the Banking Group’s obligation to repurchase certain housing loans sold to WNZCBL.
Repurchase agreements
Where securities are sold subject to an agreement to repurchase at a predetermined price, they remain recognised on the balance sheet in their
original category (i.e. trading securities and financial assets measured at FVIS or investment securities/available-for-sale securities).
The cash consideration received is recognised as a liability (repurchase agreements). Refer to Note 17 for further details.
The following table presents the Banking Group’s assets transferred and their associated liabilities:
THE BANKING GROUP
For those liabilities that only have recourse to
the transferred assets:
$ millions
Carrying
amount of
transferred
assets
Carrying
amount of
associated
liabilities
Fair value of
transferred
assets
Fair value of
associated
liabilities
Net fair value
position
2019
Securitisation - own assets
1
7,537 7,518 7,522 7,518 4
Covered bonds
2
7,530 5,274 n/an/an/a
Repurchase agreements 10 10 n/an/an/a
Total 15,077 12,802 7,522 7,518 4
2018
Securitisation - own assets
1
5,033 5,015 5,021 5,015 6
Covered bonds
2
7,533 5,656 n/an/an/a
Repurchase agreements 15 15 n/an/an/a
Total 12,581 10,686 5,021 5,015 6
1
The most senior rated securities at 30 September 2019 of $6,900 million (30 September 2018: $4,700 million) qualify as eligible collateral for repurchase
agreements with the Reserve Bank. The Bank complies with the Reserve Bank’s guidelines for its overnight reverse repurchase agreement facility and open market
operations, which allows banks in New Zealand to offer RMBS as collateral for the Reserve Bank’s repurchase agreements.
2
The difference between the carrying values of the covered bonds and the assets pledged allows for the immediate issuance of additional covered bonds if required.
These additional assets can be repurchased by the Bank at its discretion, subject to the conditions set out in the transaction documents. The cover pool is
comprised of housing loans up to a value of $7,500 million as at 30 September 2019 (30 September 2018: $7,500 million). Over time, the composition of the cover
pool will include, in addition to housing loans, accrued interest (representing accrued and unpaid interest on the outstanding housing loans) and cash (representing
collections of principal and interest from the underlying housing loans).
Notes to the financial statements
Westpac New Zealand Limited 63
Note 30 Structured entities
Accounting policy
Structured entities are generally created to achieve a specific, defined objective and their operations are restricted such as only purchasing
specific assets. Structured entities are commonly financed by debt or equity securities that are collateralised by and/or indexed to their
underlying assets. The debt and equity securities issued by structured entities may include tranches with varying levels of subordination.
Structured entities are classified as subsidiaries and consolidated if they meet the definition in Note 1. If the Banking Group does not control a
structured entity then it will not be consolidated.
The Banking Group engages in various transactions with both consolidated and unconsolidated structured entities that are mainly involved in
securitisations.
Consolidated structured entities
Securitisation and covered bonds
The Banking Group uses structured entities to securitise its financial assets through the CB Programme and the Bank’s internal residential
mortgage-backed securitisation programme. Refer to Note 29 for further details.
Funds managed by a member of the Ultimate Parent Bank Group
As disclosed in Note 22, the PIE Funds are consolidated within the financial statements of the Banking Group.
Non-contractual financial support
The Banking Group does not provide non-contractual financial support to these consolidated structured entities.
Unconsolidated structured entities
The Banking Group has interests in various unconsolidated structured entities including debt instruments, liquidity arrangements, lending, loan
commitments and certain derivatives.
Interests exclude non-complex derivatives (e.g. interest rate swap agreements) and lending to a structured entity with recourse to a wider
operating entity, not just the structured entity.
The Banking Group’s main interests in unconsolidated structured entities, which arise in the normal course of business, are loans and other credit
commitments. The Banking Group lends to unconsolidated structured entities, subject to the Banking Group’s collateral and credit approval
processes, in order to earn interest and fees and commissions income. The structured entities are mainly securitisation entities.
The following table shows the Banking Group’s interests in unconsolidated structured entities and its maximum exposure to loss in relation to
those interests. The maximum exposure does not take into account any collateral or hedges that will reduce the risk of loss.
For on-balance sheet instruments, including debt instruments in and loans to unconsolidated structured entities, the maximum exposure to
loss is the carrying value; and
For off-balance sheet instruments, including liquidity facilities and loan and other credit commitments, the maximum exposure to loss is the
notional amounts.
THE BANKING GROUP
20192018
$ millionsFinancing to Securitisation VehiclesFinancing to Securitisation Vehicles
Assets
Loans
2,784
2,632
Total on-balance sheet exposures2,7842,632
Total notional amounts of off-balance sheet exposures
1,104
765
Maximum exposure to loss3,8883,397
Size of structured entities
1
3,888
3,397
1
Represented by the total assets or market capitalisation of the entity, or if not available, the Banking Group’s total committed exposure (for lending arrangements
and external debt holdings).
Non-contractual financial support
The Banking Group does not provide non-contractual financial support to these unconsolidated structured entities.
Notes to the financial statements
64 Westpac New Zealand Limited
Note 31 Capital management
The primary objectives of the Banking Group’s capital management are to ensure that the Banking Group complies with the regulatory capital
requirements prescribed by the Reserve Bank, maintains strong credit ratings and holds a strong capital position in order to support its business
objectives and maximise shareholders’ value.
The Banking Group manages its capital structure and makes adjustments to this in light of changing economic conditions and the risk characteristics
of its activities. In order to maintain or adjust the capital structure, the Banking Group may adjust the amount of dividend payments to shareholders,
reduce discretionary expenditure, return/issue capital to shareholders or issue capital securities.
Three independent processes, undertaken by Directors and senior management of the Bank, are designed to manage the Banking Group’s capital
adequacy to support its current and future activities:
1.The Banking Group actively monitors its capital adequacy as part of the annual Banking Group internal capital adequacy assessment process
('ICAAP') and reports this to senior management and the Bank’s Board Risk and Compliance Committee (‘BRCC’). This process supports the
Board approved risk appetite statement. This statement outlines the target debt rating, target capital ratios and the degree of earnings
volatility that is acceptable. Capital ratios are set at a higher level than required by the regulator, which both reduces the risk of breaching the
conditions of registration and provides investor confidence.
2.The Banking Group calculates the capital required to be held for its current risk profile and forecasts the estimated capital position based on
expected future activities. The forecast capital required is assessed against the target ranges that have been approved by the Board in regard
to capital ratios. The Banking Group also reviews its positions in this process against other stakeholder requirements to ensure capital
efficiency.
3.The Ultimate Parent Bank Group takes capital considerations into account during its Board Strategy Review (‘BSR’). The BSR is an annual
process where the current strategic direction of the Ultimate Parent Bank Group is reviewed and refinements are made.
The following tables show the Banking Group’s capital summary and capital ratios.
THE BANKING GROUP
20192018
$ millionsUnauditedUnaudited
Tier 1 capital
Common Equity Tier 1 capital
Total shareholder's equity 7,417 7,278
Less deductions from Common Equity Tier 1 capital (1,009) (988)
Total Common Equity Tier 1 capital 6,408 6,290
Additional Tier 1 capital instruments
1
1,500 1,500
Total Tier 1 capital 7,908 7,790
Tier 2 capital instruments
1
1,122 1,135
Total Tier 2 capital 1,122 1,135
Total capital 9,030 8,925
1
Classified as a financial liability and excludes capitalised transaction costs. Additional Tier 1 capital instruments and Tier 2 capital instruments are itemised in Note 20.
THE BANKING GROUP
Reserve Bank20192018
% Minimum Ratios
1
UnauditedUnaudited
Capital ratios
Common Equity Tier 1 capital ratio6.511.311.7
Tier 1 capital ratio8.013.914.5
Total capital ratio10.015.916.6
Buffer ratio2.54.85.2
1
Changes to the Bank’s conditions of registration, effective from 31 December 2017, increased the Common Equity Tier 1 capital ratio, Tier 1 capital ratio and Total
capital ratio (‘minimum capital ratios’) by 2% compared to the minimum capital ratios as at 30 September 2017. The increased minimum capital ratios were to
remain in place until the Bank had satisfied the Reserve Bank that all existing issues in relation to the matters of non-compliance had been resolved. On 30 October
2019, the Reserve Bank informed the Bank that, with effect from 31 December 2019, the Reserve Bank will amend the Bank’s conditions of registration to remove the
two percentage point overlay applying to its minimum capital requirements. Refer to the ‘Non-compliance with conditions of registration’ section on page 113 for
further details.
Notes to the financial statements
Westpac New Zealand Limited 65
Note 32 Financial risk
Financial instruments are fundamental to the Banking Group’s business of providing banking and financial services. The associated financial risks
(including credit risk, funding and liquidity risk and market risk) are a significant proportion of the total risks faced by the Banking Group.
This note details the financial risk management policies, practices and quantitative information of the Banking Group’s principal financial risk
exposures.
Principal risksNote nameNote number
OverviewRisk management frameworks32.1
Credit risk ratings system32.2.1
Credit risk mitigation, collateral and other credit enhancements32.2.2
Credit risk concentrations32.2.3
Credit quality of financial assets32.2.4
Non-performing loans and credit commitments32.2.5
Credit risk
The risk of financial loss where a customer or counterparty
fails to meet their financial obligations.
Collateral held32.2.6
Liquidity modelling32.3.1
Sources of funding32.3.2
Assets pledged as collateral32.3.3
Contractual maturity of financial liabilities32.3.4
Funding and liquidity risk
The risk that the Banking Group cannot meet its payment
obligations or that it does not have the appropriate amount,
tenor and composition of funding and liquidity to support its
assets.
Expected maturity32.3.5
Value-at-Risk (‘VaR’)32.4.1
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.
Non-traded market risk32.4.2
32.1 Risk management frameworks
The Board is responsible for approving the Banking Group’s Risk Management Framework, Risk Management Strategy and Risk Appetite Statement
and monitoring the effectiveness of risk management by the Banking Group. The Bank is wholly owned by the Ultimate Parent Bank and, therefore,
a member of the group of companies comprising the Ultimate Parent Bank Group. Accordingly, the Banking Group’s Risk Management Framework
is closely aligned with the Ultimate Parent Bank’s Risk Management Strategy.
The Board has delegated to the BRCC to:
review and recommend the Banking Group’s Risk Management Framework, Risk Management Strategy and Risk Appetite Statement to the
Board for approval;
review and monitor the risk profile and controls of the Banking Group consistent with the Banking Group’s Risk Appetite Statement;
approve frameworks, policies and processes for managing risk (consistent with the Banking Group’s Risk Management Framework and Risk
Appetite Statement); and
review and, where appropriate, approve risks beyond the approval discretion provided to management.
Notes to the financial statements
66 Westpac New Zealand Limited
Note 32 Financial risk (continued)
For each of its primary financial risks, the Banking Group maintains risk management frameworks and a number of supporting policies that define
roles and responsibilities, acceptable practices, limits and key controls:
RiskRisk management framework and controls
Credit risk
- The Banking Group’s Credit Risk Management Framework
describes the principles, methodologies, systems, roles and
responsibilities, reports and key controls for managing credit
risk. Within the Credit Risk Management Framework, the
Banking Group has its own credit approval limits approved by
the Banking Group’s Board as delegated by the Ultimate Parent
Bank Group Chief Risk Officer.
- The BRCC, Executive Risk Committee (‘RISKCO’) and Credit Risk
Committee (‘CREDCO’) monitor the risk profile, performance
and management of the Banking Group’s credit portfolio and
the development and review of key credit risk policies.
- The Banking Group’s Credit Risk Rating System Policy describes
the credit risk rating system philosophy, design, key features, IT
systems and uses of rating outcomes.
- All models materially impacting the risk rating process are
periodically reviewed in accordance with the Banking Group’s
model risk policies.
- An annual review is performed of the Credit Risk Rating System
for approval by the BRCC.
- Specific credit risk estimates (including PD, LGD and EAD) are
reviewed by CREDCO, overseen, reviewed annually and approved
by the Chief Risk Officer and by the Ultimate Parent Bank’s Credit
Risk Estimates Committee (a subcommittee of the Ultimate
Parent Bank’s BRCC).
- In determining the provision for expected credit losses, the
macroeconomic variables and the probability weightings of the
forward looking scenarios as well as any adjustments made to the
modelled outcomes are subject to the approval of the Chief
Financial Officer and the Chief Risk Officer with oversight from the
Board of Directors (and its Committees).
- Policies for delegating credit approval authorities and formal
limits for the extension of credit are established throughout
the Banking Group. These include those for the approval and
management of all credit risk arising from other banks and
related entities.
- Credit manuals are established throughout the Banking Group.
They include policies governing the origination, evaluation,
approval, documentation, settlement and ongoing management
of credit risks.
- Sector policies guide credit extension where industry-specific
guidelines are considered necessary (e.g. acceptable financial
ratios or permitted collateral).
- The Ultimate Parent Bank’s Related Entity Risk Management
Framework and supporting policies govern credit exposures to
related entities to minimise the spread of credit risk between the
Ultimate Parent Bank Group.
Funding and
liquidity
risk
- Funding and liquidity risk is measured and managed in
accordance with the policies and processes defined in the
Board-approved Liquidity Risk Management Framework which
is part of the Banking Group’s Board-approved Risk
Management Strategy.
- Responsibility for managing the Banking Group's liquidity and
funding positions in accordance with the Liquidity Risk
Management Framework is delegated to Treasury, under the
oversight of the Banking Group’s Asset and Liability Committee
(‘ALCO’) and Banking Group Liquidity Risk.
- The Banking Group’s Liquidity Risk Management Framework
sets out the Banking Group’s funding and liquidity risk appetite,
roles and responsibilities of key people managing funding and
liquidity risk within the Banking Group, risk reporting and
control processes and limits and targets used to manage the
Banking Group’s balance sheet.
- Treasury undertakes an annual funding review that outlines the
Banking Group's balance sheet funding strategy over a three
year period. This review encompasses trends in global markets,
peer analysis, wholesale funding capacity, expected funding
requirements and a funding risk analysis. This strategy is
continuously reviewed to take account of changing market
conditions, investor sentiment and estimations of asset and
liability growth rates.
- The Banking Group monitors the composition and stability of its
funding so that it remains within the Banking Group’s funding
risk appetite. This includes compliance with both the Liquidity
Coverage Ratio (‘LCR’) and Net Stable Funding Ratio (‘NSFR’).
- The Banking Group holds a portfolio of liquid assets for several
purposes, including as a buffer against unforeseen funding
requirements. The level of liquid assets held takes into account
the liquidity requirements of the Banking Group's balance sheet
under normal and stress conditions.
- Treasury also maintains a contingent funding plan that outlines
the steps that should be taken by the Banking Group in the
event of an emerging ‘funding crisis’. The plan is aligned with
the Banking Group’s broader Liquidity Crisis Management Policy
which is approved annually by the Board.
- Daily liquidity risk reports are reviewed by Treasury and the
Banking Group’s Liquidity Risk teams. Liquidity reports are
presented to ALCO monthly and to the BRCC quarterly.
Notes to the financial statements
Westpac New Zealand Limited 67
Note 32 Financial risk (continued)
RiskRisk management framework and controls
-
Market risk
- The Market Risk Framework describes the Banking Group’s
approach to managing non-traded market risk.
- As the Ultimate Parent Bank’s financial markets business in New
Zealand is conducted by the NZ Branch, the market risks faced
by the Banking Group are only of a non-traded nature. Non-
traded market risk includes interest rate and foreign exchange
risks. The Banking Group does not carry material foreign
currency or equity price risk due to the risks being hedged.
- Market risk is managed using VaR limits, Net interest income at
risk (‘NaR’) and structural risk limits (including credit spread
and interest rate basis point value limits) as well as scenario
analysis and stress testing.
- The BRCC approves the VaR and NaR limits for non-traded risk.
- Market risk limits are assigned to business management based
upon the Banking Group’s risk appetite and business strategies
in addition to the consideration of market liquidity and
concentration.
- Market risk positions are managed by the trading desks and
ALM unit consistent with their delegated authorities and the
nature and scale of the market risks involved.
- Daily monitoring of current exposure and limit utilisation is
conducted independently by the Banking Group’s Market Risk
unit, which monitors market risk exposures against VaR and
structural risk limits. Daily VaR position reports are produced by
risk type, by product lines and by geographic region. Monthly and
quarterly reports are produced for both the Banking Group’s and
Ultimate Parent Bank’s risk forums and Ultimate Parent Bank’s
BRCC, respectively, to ensure transparency of material market
risks and issues.
- Daily stress testing and backtesting of VaR results are performed
to support model integrity and to analyse extreme or unexpected
movements. A review of both the potential profit and loss
outcomes is also undertaken to monitor any skew created by the
historical data. RISKCO has ratified an approved escalation
framework.
- Treasury’s ALM unit is responsible for managing the non-traded
interest rate risk including risk mitigation through hedging using
derivatives. This is overseen by the Market Risk unit and reviewed
by the Ultimate Parent Bank’s Market Risk Committee, RISKCO
and BRCC.
32.2 Credit risk
32.2.1 Credit risk ratings system
The principal objective of the credit risk rating system is to reliably assess the credit risk to which the Banking Group is exposed. The Banking Group
has two main approaches to this assessment.
Transaction-managed customers
Transaction managed customers are generally customers with business lending exposures. They are individually assigned a Customer Risk Grade
(‘CRG’), corresponding to their expected PD. Each facility is assigned an LGD. The Banking Group’s risk rating system has a tiered scale of risk grades
for both non-defaulted customers and defaulted customers. Non-defaulted CRGs are mapped to Moody’s Investor Service (‘Moody’s’) and S&P Global
Ratings (‘S&P’) external senior ranking unsecured ratings.
The following table shows the Banking Group’s high level CRG’s for transaction-managed portfolios mapped to the Banking Group’s credit quality
disclosure categories and to their corresponding external rating.
Transaction-managed
Financial Statement DisclosureBanking Group’s CRGMoody’s RatingS&P Rating
StrongAAaa – Aa3AAA – AA-
BA1 – A3A+ – A-
CBaa1 – Baa3BBB+ – BBB-
Good/satisfactoryDBa1 – B1BB+ – B+
Banking Group Rating
WeakEWatchlist
FSpecial Mention
Weak/default/non-performingGSubstandard/Default
HDefault
Program-managed portfolio
The program-managed portfolio generally includes retail products including mortgages, personal lending (including credit cards) as well as Small and
Medium-sized Enterprises (‘SME’) lending. These customers are grouped into pools of similar risk. Pools are created by analysing similar risk
characteristics that have historically predicted that an account is likely to go into default. Customers grouped according to these predictive
characteristics are assigned a PD and LGD relative to their pool. The credit quality of these pools is based on a combination of behavioural factors,
delinquency trends, PD estimates and loan to valuation ratio (housing loans only).
Notes to the financial statements
68 Westpac New Zealand Limited
Note 32 Financial risk (continued)
32.2.2 Credit risk mitigation, collateral and other credit enhancements
The Banking Group uses a variety of techniques to reduce the credit risk arising from its lending activities.
This includes the Banking Group establishing that it has direct, irrevocable and unconditional recourse to collateral and other credit enhancements
through obtaining legally enforceable documentation.
The Banking Group includes the effect of credit risk mitigation through eligible guarantees within the calculation applied to LGD. Due to system
limitations, the value of the guarantee is not always separately recorded, and therefore, not available for disclosure, under Clause 7 of Schedule 11 to
the Order.
Collateral
The table below describes the nature of collateral or security held for each relevant class of financial asset:
Financial assetsNature of collateral
Loans – residential mortgages
1
Housing loans are secured by a mortgage over property and additional security may take the form of
guarantees and deposits.
Loans – other retail
1
Personal lending (including credit cards and overdrafts) is predominantly unsecured. Where security is
taken, it is restricted to eligible motor vehicles, caravans, campers, motor homes and boats.
SME loans may be secured, partially secured or unsecured. Security is typically taken by way of a mortgage
over property and/or a general security agreement over business assets or other assets.
Loans – corporate
1
Business loans may be secured, partially secured or unsecured. Security is typically taken by way of a
mortgage over property and/or a general security agreement over business assets or other assets.
Other security such as guarantees or standby letters of credit may also be taken as collateral, if
appropriate.
Trading securities, financial assets
measured at FVIS, due from related
entities and derivative financial
instruments
These exposures are carried at fair value which reflects the credit risk.
For trading securities, no collateral is sought directly from the issuer or counterparty; however this may be
implicit in the terms of the instrument (such as an asset-backed security). The terms of debt securities
may include collateralisation.
Master netting agreements are typically used to enable the effects of derivative assets and derivative
liabilities with the same counterparty to be offset when measuring these exposures. Additionally,
collateralisation agreements are also typically entered into with major institutional counterparties to avoid
the potential build-up of excessive mark-to-market positions. Derivative transactions are increasingly
being cleared through central clearers.
1
This includes collateral held in relation to associated credit commitments.
Notes to the financial statements
Westpac New Zealand Limited 69
Note 32 Financial risk (continued)
Management of risk mitigation
The Banking Group mitigates credit risk through controls covering:
Collateral and valuation
management
The Ultimate Parent Bank manages collateral under collateralisation agreements centrally for all branches
of the Ultimate Parent Bank and the Bank.
The estimated realisable value of collateral held in support of loans is based on a combination of:
formal valuations currently held for such collateral; and
management’s assessment of the estimated realisable value of all collateral held.
This analysis also takes into consideration any other relevant knowledge available to management at the
time. Updated valuations are obtained when appropriate.
The Banking Group revalues collateral related to financial markets positions on a daily basis and has formal
processes in place to promptly call for collateral top-ups, if required. These processes include margining
for non-centrally cleared customer derivatives where required under Australian Prudential Regulation
Authority’s (‘APRA’) Prudential Standard CPS226. The collateralisation arrangements are documented via
the Credit Support Annex of the International Swaps and Derivatives Association dealing agreements and
Global Master Repurchase Agreements for repurchase transactions.
Other credit enhancements
The Banking Group only recognises guarantees, standby letters of credit, or credit derivative protection
from the following entities (provided they are not related to the entity with which the Banking Group has a
credit exposure):
Sovereign;
Australia and New Zealand public sector;
Authorised deposit-taking institutions and overseas banks with a minimum risk grade equivalent
of A3 / A-; and
Other entities with a minimum risk grade equivalent of A3 / A-.
Offsetting
Close-out netting is undertaken with counterparties with whom the Banking Group has entered into a
legally enforceable master netting agreement for their off-balance sheet financial market transactions in
the event of default.
Further details of offsetting are provided in Note 25.
Central clearing
The Banking Group increasingly executes derivative transactions through central clearing counterparties.
Central clearing counterparties mitigate risk through stringent membership requirements, the collection of
margin against all trades placed, the default fund, and an explicitly defined order of priority of payments in
the event of default.
32.2.3 Credit risk concentrations
Credit risk is concentrated when a number of counterparties are engaged in similar activities, have similar economic characteristics and thus may
be similarly affected by changes in economic or other conditions.
The Banking Group monitors its credit portfolio to manage risk concentrations and rebalance the portfolio.
Individual customers or groups of related customers
The Banking Group has large exposure limits governing the aggregate size of credit exposure normally acceptable to individual customers and
groups of related customers. These limits are tiered by customer risk grade.
Specific industries
Exposures to businesses, governments and other financial institutions are classified into a number of industry clusters based on related Australian
and New Zealand Standard Industrial Classification (‘ANZSIC’) codes and are monitored against the Banking Group’s industry risk appetite limits.
Notes to the financial statements
70 Westpac New Zealand Limited
Note 32 Financial risk (continued)
Individual countries
The Banking Group has limits governing risks related to individual countries, such as political situations, government policies and economic
conditions that may adversely affect either a customer’s ability to meet its obligations to the Banking Group, or the Banking Group’s ability to
realise its assets in a particular country.
Maximum exposure to credit risk
The maximum exposure to credit risk (excluding collateral received) is represented by the carrying amount of on-balance sheet financial assets
and undrawn credit commitments as set out in the following table.
THE BANKING GROUP
$ millions20192018
Financial assets
Cash and balances with central banks1,8641,353
Collateral paid16870
Trading securities and financial assets measured at FVIS1,6611,151
Derivative financial instruments616585
Investment securities/Available-for-sale securities4,4693,810
Loans84,16080,378
Other financial assets178225
Due from related entities2,5711,319
Total financial assets95,68788,891
Undrawn credit commitments
Letters of credit and guarantees828863
Commitments to extend credit25,85824,650
Other commitments-60
Total undrawn credit commitments26,68625,573
Total maximum credit risk exposure122,373114,464
Notes to the financial statements
Westpac New Zealand Limited 71
Note 32 Financial risk (continued)
Concentration of credit exposures
THE BANKING GROUP
$ millions20192018
On-balance sheet credit exposures
Analysis of on-balance sheet credit exposures by geographical areas
New Zealand92,940
86,125
Australia857
656
United Kingdom603
669
United States of America58
47
Other1,229
1,394
Total on-balance sheet credit exposures95,68788,891
Analysis of on-balance sheet credit exposures by industry sector
Accommodation, cafes and restaurants465443
Agriculture8,7738,446
Construction557540
Finance and insurance4,9704,861
Forestry and fishing434458
Government, administration and defence6,6815,304
Manufacturing1,9372,146
Mining300235
Property7,3876,766
Property services and business services1,3191,274
Services2,0561,822
Trade2,1312,213
Transport and storage1,1981,115
Utilities1,7511,397
Retail lending53,42350,805
Subtotal93,38287,825
Provisions for impairment charges on loans(315)(324)
Due from related entities2,5711,319
Other financial assets4971
Total on-balance sheet credit exposures95,68788,891
Off-balance sheet credit exposures consists of
Credit risk-related instruments26,68625,573
Total off-balance sheet credit exposures26,68625,573
Analysis of off-balance sheet credit exposures by industry sector
Accommodation, cafes and restaurants11693
Agriculture624606
Construction492508
Finance and insurance1,6251,597
Forestry and fishing204143
Government, administration and defence884753
Manufacturing1,8401,744
Mining35175
Property1,9861,540
Property services and business services700516
Services592596
Trade1,6721,704
Transport and storage801828
Utilities1,6461,651
Retail lending13,46913,119
Total off-balance sheet credit exposures 26,68625,573
ANZSIC has been used as the basis for disclosing industry sectors.
Notes to the financial statements
72 Westpac New Zealand Limited
Note 32 Financial risk (continued)
32.2.4 Credit quality of financial assets
Credit quality disclosures (NZ IFRS 9)
The following table shows the credit quality of gross credit risk exposures measured at amortised cost or at FVOCI to which the impairment
requirements of NZ IFRS 9 apply. The credit quality is determined by reference to the credit risk ratings system (refer to Note 32.2.1) and
expectations of future economic conditions under multiple scenarios:
THE BANKING GROUP
$ millions
Stage 1Stage 2Stage 3Total
1
Loans - Residential Mortgages
Strong
42,096 - - 42,096
Good/satisfactory
7,612 1,201 - 8,813
Weak
28 248 302 578
Total Loans - Residential Mortgages
49,736 1,449 302 51,487
Loans - Other retail
Strong
610 - - 610
Good/satisfactory
2,881 172 - 3,053
Weak
19 18 53 90
Total Loans - Other retail
3,510 190 53 3,753
Loans - Corporate
Strong
11,368 - - 11,368
Good/satisfactory
15,330 1,104 - 16,434
Weak
- 1,229 93 1,322
Total Loans - Corporate
26,698 2,333 93 29,124
Loans - Other
Strong
111 - - 111
Good/satisfactory
- - - -
Weak
- - - -
Total Loans - Other
111 - - 111
Investment Securities
Strong
4,469 - - 4,469
Good/satisfactory
- - - -
Weak
- - - -
Total Investment Securities
4,469 - - 4,469
All other financial assets
Strong
3,032 - - 3,032
Good/satisfactory
39 4 - 43
Weak
- 2 1 3
Total all other financial assets
3,071 6 1 3,078
Undrawn credit commitments
Strong
18,435 - - 18,435
Good/Satisfactory
7,812 230 - 8,042
Weak
10 179 20 209
Total undrawn credit commitments
26,257 409 20 26,686
Total strong
80,121 - - 80,121
Total good/satisfactory
33,674 2,711 - 36,385
Total weak
57 1,676 469 2,202
Total on and off balance sheet
113,852 4,387 469 118,708
1
This credit quality disclosure differs to that of credit risk concentration as it relates only to financial assets measured at amortised costs or at FVOCI and therefore
excludes trading securities and financial assets measured at FVIS, and derivative financial instruments.
Details of collateral held in support of these balances are provided in Note 32.2.6.
Notes to the financial statements
Westpac New Zealand Limited 73
Note 32 Financial risk (continued)
Credit quality disclosures (NZ IAS 39)
An asset is considered to be past due when any payment under the contractual terms has been missed. The entire contractual balance is
considered to be past due, rather than only the overdue portion. Assets may be overdue for a number of reasons, including late payments or
incomplete documentation. Late payment may be influenced by the timing of weekends and holidays. This does not always align with the
underlying basis by which credit risk is managed.
As comparatives have not been restated for the adoption of NZ IFRS 9, the following table presents the credit quality of financial assets of the
Banking Group that are neither past due nor impaired as determined by reference to the credit risk ratings system under NZ IAS 39. As these
tables do not reflect the adoption of NZ IFRS 9 they are not directly comparable to the credit quality disclosures under NZ IFRS 9.
All the financial assets of the Banking Group as at 30 September 2018, other than loans, are neither past due nor impaired.
All the financial assets of the Banking Group that are neither past due nor impaired fall into the ‘Strong’ category in their entirety except those
financial assets disclosed below:
THE BANKING GROUP
2018
Good/
$ millionsStrongSatisfactoryWeak
Total
Accrued interest receivable
(refer to Note 13) 68 83 3 154
Trading securities and financial assets measured at FVIS (refer to Note 9) 1,151 - - 1,151
Loans (refer to Note 12) 35,027 42,860 1,384 79,271
32.2.5 Non-performing loans and credit commitments
The loans and credit commitments balance in stage 3 (non-performing) is represented by those loans and credit commitments which are in
default. A default occurs when the Banking Group considers that the customer is unlikely to repay its credit obligations in full, irrespective of
recourse by the Banking Group to actions such as realising security, or the customer is more than 90 days past due on any material credit
obligation. This definition of default is aligned to the Reserve Bank regulatory definition of default.
The determination of the provision for expected credit losses is one of the Banking Group’s critical accounting assumptions and estimates. Details
of this and the Banking Group’s accounting policy for the provision for expected credit losses are discussed in Notes 6 and 12 along with the total
provision for expected credit losses on loans and credit commitments and the total for those loans and credit commitments that are considered
non-performing (i.e. stage 3).
32.2.6 Collateral held
Loans
The Banking Group analyses the coverage of the loan portfolio which is secured by the collateral that it holds. Coverage is measured as follows:
Coverage
Secured loan to collateral value ratio
Fully secured
Less than or equal to 100%
Partially secured
Greater than 100% but not more than 150%
Unsecured
Greater than 150%, or no security held (e.g. can include credit cards, personal loans, and
exposure to highly rated corporate entities)
Notes to the financial statements
74 Westpac New Zealand Limited
Note 32 Financial risk (continued)
The Banking Group’s loan portfolio has the following coverage from collateral held based on the requirements of NZ IFRS 9:
Performing Loans
%
Residential
Mortgages
1
Other
Retail
Corporate Other Total
Fully secured
100 39 61 37 84
Partially secured
- 4 20 11 7
Unsecured
- 57 19 52 9
Total 100 100 100 100 100
Non-performing loans
%
Residential
Mortgages
1
Other
Retail
Corporate Other Total
Fully secured
94 53 10 - 72
Partially secured
6 4 50 - 15
Unsecured
- 43 40 - 13
Total 100 100 100 - 100
1
For the purposes of collateral classifications, residential mortgages are classified as fully secured, unless they are non-performing in which case they may be
classified as partially secured. Refer to Section iv ‘Additional mortgage information’ for loan-to-value ratio ('LVR') analysis of residential mortgages.
Details of the carrying value and associated provisions for ECL are disclosed in Notes 11 and 12 respectively. The credit quality of loans is
disclosed in Note 32.2.4.
As the comparatives have not been restated for the adoption of NZ IFRS 9, the Banking Group’s loan portfolio has the following coverage from
collateral held based on the requirements of NZ IAS 39 for prior years. Once NZ IFRS 9 has been effective for the comparative year end, these
tables will no longer be presented.
THE BANKING GROUP
%2018
1
Fully secured 84
Partially secured 6
Unsecured 10
Total net loans 100
1
Comparative information for the year ended 30 September 2018 has been restated. Certain exposures have been re-classified between ‘fully secured’ and
‘partially secured’. The impact of the restatement is an increase in ‘fully secured’ loans from 78% to 84% and a corresponding decrease in ‘partially secured’ loans
from 12% to 6%.
Collateral held against financial assets other than loans
THE BANKING GROUP
$ millions20192018
Cash, primarily for derivatives 473 476
Securities under reverse repurchase agreements
1
983 163
Total other collateral held
1,456 639
1
Securities received as collateral are not recognised on the Banking Group's balance sheet
Notes to the financial statements
Westpac New Zealand Limited 75
Note 32 Financial risk (continued)
32.3 Funding and liquidity risk
The Bank aims to maintain a mix of retail and wholesale funding, with emphasis on the value of core funding consistent with the principles inherent in
the Reserve Bank’s document entitled ‘Liquidity Policy’ (BS13) (‘BS13’).
32.3.1 Liquidity modelling
The Bank is subject to the conditions of BS13. The following metrics are calculated and reported on a daily basis in accordance with BS13:
the level of liquid assets held;
the one-week mismatch ratio;
the one-month mismatch ratio; and
the one-year core funding ratio.
In addition, the Bank calculates the following liquidity ratios in accordance with the Ultimate Parent Bank’s liquidity risk framework under APRA
Prudential Standard APS 210 Liquidity:
liquidity coverage ratio; and
net stable funding ratio.
32.3.2 Sources of funding
Sources of funding are 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; and
fees and commissions income.
Liquid assets
The Banking Group holds a portfolio of high-quality liquid assets as a buffer against unforeseen funding requirements. These assets are eligible for
repurchase agreements with the Reserve Bank and are held in cash, government, local government and highly rated investment grade securities.
The level of liquid asset holdings is reviewed frequently and is consistent with both the requirements of the balance sheet and market conditions.
The table below shows the Banking Group’s holding of liquid assets and represents the key liquidity information provided to management. Liquid
assets include high quality assets readily convertible to cash to meet the Banking Group’s liquidity requirements. In management’s opinion,
liquidity is sufficient to meet the Banking Group’s present requirements.
THE BANKING GROUP
$ millions20192018
Cash and balances with central banks1,8641,353
Receivables due from the Ultimate Parent Bank122134
Supranational securities1,7121,503
NZ Government securities2,0221,322
NZ public securities2,6141,809
NZ corporate securities645476
Residential mortgage-backed securities5,7983,950
Total liquid assets14,77710,547
Notes to the financial statements
76 Westpac New Zealand Limited
Note 32 Financial risk (continued)
Concentration of funding
THE BANKING GROUP
$ millions20192018
Funding consists of
Collateral received 473 476
Deposits and other borrowings 65,606 63,102
Other financial liabilities
1
54 21
Debt issues
2
17,846 13,725
Due to related entities
3
870 1,386
Loan capital 2,609 2,622
Total funding 87,458 81,332
Analysis of funding by geographical areas
2
New Zealand 66,799 63,962
Australia 1,397 1,250
United Kingdom 8,714 8,186
United States of America 2,961 581
Other 7,587 7,353
Total funding 87,458 81,332
Analysis of funding by industry sector
Accommodation, cafes and restaurants 421 405
Agriculture 1,425 1,373
Construction 1,918 1,739
Finance and insurance 34,390 29,520
Forestry and fishing 193 222
Government, administration and defence 2,626 2,068
Manufacturing 1,589 1,530
Mining 65 67
Property services and business services 5,790 5,809
Services 4,112 4,152
Trade 1,533 1,444
Transport and storage 386 593
Utilities 450 485
Households 27,229 26,141
Other
4
4,461 4,398
Subtotal 86,588 79,946
Due to related entities
3
870 1,386
Total funding 87,458 81,332
1
Other financial liabilities, as presented above, are in respect of interbank placements.
2
The geographic region used for debt issues is based on the nature of the debt programmes. The nature of the debt programmes is used as a proxy for the location
of the original purchaser. Where the nature of the debt programmes does not necessarily represent an appropriate proxy, the debt issues are classified as 'Other’.
These instruments may have subsequently been on-sold.
3
Amounts due to related entities, as presented above, are in respect of deposits and borrowings and exclude amounts which relate to derivative financial
instruments and other financial liabilities.
4
Includes deposits from non-residents.
ANZSIC has been used as the basis for disclosing industry sectors.
Notes to the financial statements
Westpac New Zealand Limited 77
Note 32 Financial risk (continued)
32.3.3 Assets pledged as collateral
The Banking Group is required to provide collateral (predominantly to other financial institutions), as part of standard terms, to secure liabilities.
In addition to assets supporting the CB Programme disclosed in Note 29, the carrying value of these financial assets pledged as collateral is:
THE BANKING GROUP
$ millions20192018
Cash 168 70
Securities pledged under repurchase agreements:
1
Available-for-sale securities - 15
Investment securities 1 -
Trading securities and financial assets measured at FVIS 9 -
Total amount pledged to secure liabilities (excluding CB Programme) 178 85
1
Securities were pledged as collateral to the NZ Branch which is recorded within due to related entities on the balance sheet.
32.3.4 Contractual maturity of financial liabilities
The table below presents cash flows associated with financial liabilities, payable at the balance sheet date, by remaining contractual maturity. The
amounts disclosed in the table are the future contractual undiscounted cash flows, whereas the Banking Group manages inherent liquidity risk based on
expected cash flows.
Cash flows associated with these financial liabilities include both principal payments as well as fixed or variable interest payments incorporated into the
relevant coupon period. Principal payments reflect the earliest contractual maturity date. Derivative financial instruments designated for hedging
purposes are expected to be held for their remaining contractual lives, and reflect gross cash flows over the remaining contractual term.
Derivatives held for trading and certain liabilities classified in “Other financial liabilities” which are measured at FVIS are not managed for liquidity
purposes on the basis of their contractual maturity, and accordingly these liabilities are presented in either the on demand or up to 1 month columns.
Only the liabilities that the Banking Group manages based on their contractual maturity are presented on a contractual undiscounted basis in the table
below.
Notes to the financial statements
78 Westpac New Zealand Limited
Note 32 Financial risk (continued)
THE BANKING GROUP
2019
1
OverOver
1 Month3 MonthsOver 1
Year
OnUp toand Up toand Up toand Up toOver
$ millions
Demand1 Month3 Months1 Year5 Years5 YearsTotal
Financial liabilities
Collateral received-473----473
Deposits and other borrowings29,6646,85313,53114,4201,788-66,256
Other financial liabilities-1168---124
Derivative financial instruments:
Held for hedging purposes (net settled)-1714511053190
Held for hedging purposes (gross settled):
Cash outflow-55911558-1,479
Cash inflow---(889)(503)-(1,392)
Debt issues-1229474,30912,74639318,517
Due to related entities:
Non-derivative balances725113637652903
Derivative financial instruments:
Held for trading 377-----377
Held for hedging purposes (net settled)-13661351655384
Held for hedging purposes (gross settled):
Cash outflow--12351,195-1,242
Cash inflow--(11)(31)(1,142)-(1,184)
Loan capital--11311592,6812,882
Total undiscounted financial liabilities30,7667,61014,61918,97515,1473,13490,251
Total contingent liabilities and commitments
Letters of credit and guarantees828-----828
Commitments to extend credit25,858-----25,858
Other commitments-------
Total undiscounted contingent liabilities and
commitments
26,686-----26,686
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
Notes to the financial statements
Westpac New Zealand Limited 79
Note 32 Financial risk (continued)
THE BANKING GROUP
2018
1
OverOver
1 Month3 MonthsOver 1 Year
OnUp toand Up toand Up toand Up toOver
$ millions
Demand1 Month3 Months1 Year5 Years5 YearsTotal
Financial liabilities
Collateral received-476----476
Deposits and other borrowings28,0836,48812,16614,7592,363-63,859
Other financial liabilities20184----204
Derivative financial instruments:
Held for hedging purposes (net settled)-645160-121
Held for hedging purposes (gross settled):
Cash outflow-55326825811,305
Cash inflow---(15)(529)(584)(1,128)
Debt issues-10521,77211,5951,01714,446
Due to related entities:
Non-derivative balances609156072011-1,415
Derivative financial instruments:
Held for trading 2-----2
Held for hedging purposes (net settled)-9426384-198
Held for hedging purposes (gross settled):
Cash outflow--14441,264-1,322
Cash inflow--(14)(41)(1,221)-(1,276)
Loan capital--14412322,7823,069
Total undiscounted financial liabilities28,7147,19312,34317,42614,5413,79684,013
Total contingent liabilities and commitments
Letters of credit and guarantees863-----863
Commitments to extend credit24,650-----24,650
Other commitments60-----60
Total undiscounted contingent liabilities and
commitments
25,573-----25,573
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
Notes to the financial statements
80 Westpac New Zealand Limited
Note 32 Financial risk (continued)
32.3.5 Expected maturity
The following table presents the balance sheet based on expected maturity dates, except for deposits, based on historical behaviours. The liability
balances in the following table will not agree to the contractual maturity tables due to the analysis below being based on expected rather than
contractual maturities, the impact of discounting and the exclusion of interest accruals beyond the reporting period. Deposits are presented in the
following table on a contractual basis, however as part of our normal banking operations, the Banking Group would expect a large proportion of these
balances to be retained.
THE BANKING GROUP
2019
1
2018
1
Due within
Greater
than
Due withinGreater than
$ millions
12 months12 months
Total
12 months12 months
Total
Assets
Cash and balances with central banks1,864-1,8641,353-1,353
Collateral paid168-16870-70
Trading securities and financial assets measured at
FVIS
1,5201411,6616415101,151
Derivative financial instruments84532616163422585
Investment securities/Available-for-sale securities1,9482,5214,4691,3862,4243,810
Loans11,87172,28984,16011,05769,32180,378
Due from related entities2,4361352,5711,0262931,319
All other assets3518161,1673768291,205
Total assets20,24276,43496,67616,07273,79989,871
Liabilities
Collateral received473-473476-476
Deposits and other borrowings63,9201,68665,60660,8782,22463,102
Derivative financial instruments4920825719162181
Debt issues5,11312,73317,8461,56712,15813,725
Due to related entities1,2594421,7011,4551881,643
Loan capital-2,6092,609-2,6222,622
All other liabilities63513276776282844
Total liabilities71,44917,81089,25965,15717,43682,593
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated. Refer to Note 1 for further detail.
32.4 Market risk
32.4.1 Value-at-Risk
The Banking Group uses VaR as one of the mechanisms for controlling non-traded market risk.
VaR is a statistical estimate of the potential loss in earnings over a specified period of time and to a given level of confidence based on historical
market movements. The confidence level indicates the probability that the loss will not exceed the VaR estimate on any given day.
VaR seeks to take account of all material market variables that may cause a change in the value of the portfolio, including interest rates, foreign
exchange rates, price changes, volatility and the correlations between these variables. Daily monitoring of current exposure and limit utilisation is
conducted independently by the Market Risk unit which monitors market risk exposures against VaR and structural concentration limits. These are
supplemented by escalation triggers for material profits or losses and stress testing of risks beyond the 99% confidence level.
The key parameters of VaR are:
Holding period1 day
Confidence level99%
Period of historical data used1 year
Notes to the financial statements
Westpac New Zealand Limited 81
Note 32 Financial risk (continued)
32.4.2 Non-traded market risk
Non-traded market risk includes interest rate risk in the banking book (‘IRRBB’) – the risk to interest income from a mismatch between the
duration of assets and liabilities that arises in the normal course of business activities.
Net interest income (‘NII’) sensitivity is managed in terms of the NaR. A simulation model is used to calculate the Banking Group’s potential NaR.
This combines the underlying 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 a series of potential future NII outcomes. The interest rate scenarios
modelled, over a three year time horizon using a 99% confidence interval, include those projected using historical market interest rate volatility as
well as 100 and 200 basis point shifts up and down from the current market yield curves in Australia and New Zealand. Additional stressed
interest rate scenarios are also considered and modelled.
A comparison between the NII outcomes from these modelled scenarios indicates the sensitivity to interest rate changes.
Net interest income-at-risk (‘NaR’)
The table below depicts NaR assuming a 100 basis point shock (with a floor of zero for falling interest rates) over the 12 months as a percentage of
reported net interest income:
THE BANKING GROUP
20192018
1
% (increase)/decrease
in net interest income
As at
Maximum
Exposure
Minimum
Exposure
Average
ExposureAs at
Maximum
Exposure
Minimum
Exposure
Average
Exposure
NaR6.976.972.244.512.212.611.882.25
1
Comparative information for the year ended 30 September 2018 has been restated to correctly depict NaR assuming a 100 basis point shock on a 12 months basis.
Previously reported percentages were calculated on a 1 month basis. The impact of the restatement is an increase for: ‘As at’ from 0.27% to 2.21%, ‘Maximum
Exposure’ from 0.35% to 2.61%, ‘Minimum Exposure’ from 0.22% to 1.88% and ‘Average Exposure’ from 0.27% to 2.25%.
Value at Risk – IRRBB
1
The table below depicts VaR for IRRBB:
THE BANKING GROUP
20192018
$ millions
As at
Maximum
Exposure
Minimum
Exposure
Average
ExposureAs at
Maximum
Exposure
Minimum
Exposure
Average
Exposure
Interest rate risk 1.4 2.0 0.6 1.1 0.9 1.2 0.3 0.8
1
IRRBB VaR includes interest rate risk, credit spread risk on liquid assets and other basis risks used for internal management purposes.
The Banking Group does not carry material foreign currency or equity risk.
Risk mitigation
IRRBB stems from the ordinary course of banking activities, including structural interest rate risk (the mismatch between the duration of assets
and liabilities) and capital management.
The Banking Group hedges its exposure to such interest rate risk using derivatives. Further details on the Banking Group’s use of hedge accounting
are discussed in Note 23.
Notes to the financial statements
82 Westpac New Zealand Limited
Note 33 Notes to the statement of cash flows
Accounting policy
Cash and cash equivalents includes cash held at branches and in ATMs, balances with overseas banks in their local currency and balances with
central banks.
Cash and cash equivalents
THE BANKING GROUP
$ millions20192018
Cash and cash equivalents comprise:
Cash and balances with central banks:
Cash on hand 180 169
Balances with central banks 1,684 1,184
Cash and cash equivalents at end of the year 1,864 1,353
Reconciliation of net cash provided by/(used in) operating activities to net profit attributable to the owners of the Banking Group
THE BANKING GROUP
$ millions20192018
Net profit attributable to the owners of the Banking Group 964 936
Adjustments:
Impairment charges/(benefits) on loans (10) 3
Computer software amortisation costs 55 42
Depreciation 39 44
(Gain)/loss from hedging ineffectiveness (2) (4)
Movement in accrued interest receivable 12 (4)
Movement in accrued interest payable (8) (16)
Movement in current and deferred tax (16) 27
Gain on disposal of associate (40) -
Share of associate's net profit - 1
Share-based payments 5 4
Other non-cash items 47 (3)
Cash flows from operating activities before changes in operating assets and liabilities 1,046 1,030
Movement in collateral paid (98) 337
Movement in trading securities and financial assets measured at FVIS (510) 666
Movement in loans (3,714) (3,121)
Movement in other financial assets 21 (10)
Movement in due from related entities (816) 1,025
Movement in other assets - 1
Movement in collateral received (3) 340
Movement in deposits and other borrowings 2,504 4,104
Movement in other financial liabilities (83) 91
Movement in due to related entities 102 (7)
Net movement in external and related entity derivative financial instruments 417 (63)
Net cash flows provided by/(used in) operating activities (1,134) 4,393
Notes to the financial statements
Westpac New Zealand Limited 83
Note 34 Accounting policies relating to prior years
Due to the adoption of NZ IFRS 9, the accounting policies relating to the accounting for some financial instruments and related balances have
changed. The policies applicable to the current year are provided in the relevant note to the financial statements above. As prior comparative
years have not been restated, the accounting policies detailed below reflect the policies applicable to financial years prior to 2019 based on NZ IAS
39. Refer to Note 1 for further information.
Accounting policy relating to impairment (Note 6 and Note 12)
Impairment charges/(benefits) (Note 6)
At each balance sheet date, the Banking Group assesses whether there is any objective evidence of impairment of its loan portfolio. An impairment
charge is recognised if there is objective evidence that the principal or interest repayments may not be recoverable and when the financial impact of
the non-recoverable loan can be reliably measured.
Objective evidence of impairment could include a breach of contract with the Banking Group such as a default on interest or principal payments, a
borrower experiencing significant financial difficulties or observable economic conditions that correlate to defaults on a group of loans.
The impairment charge is measured as the difference between the loan’s current carrying amount and the present value of its estimated future cash
flows. The estimated future cash flows exclude any expected future credit losses which have not yet occurred and are discounted to their present
value using the loan’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment is the current
effective interest rate.
The impairment charge is recognised in the income statement with a corresponding reduction of the carrying value of the loan through an offsetting
provision account (refer to Note 12).
In subsequent periods, objective evidence may indicate that an impairment charge should be reversed. Objective evidence could include a borrower’s
credit rating or financial circumstances improving. The impairment charge is reversed in the income statement of that future period and the related
provision for impairment is reduced.
Uncollectable loans
The policy for uncollectable loans is consistent with that applicable to 2019 based on NZ IFRS 9.
Provisions for impairment charges (Note 12)
The Banking Group recognises two types of impairment provisions for its loans, being provisions for loans which are:
individually assessed for impairment; and
collectively assessed for impairment.
Note 6 explains how impairment charges are determined. The Banking Group assesses impairment as follows:
individually for loans that exceed specified thresholds. Where there is objective evidence of impairment, individually assessed provisions will be
recognised; and
collectively for loans below the specified thresholds noted above or if there is no objective evidence of impairment. These loans are included in a
group of loans with similar risk characteristics and collectively assessed for impairment. If there is objective evidence that the group of loans is
collectively impaired, collectively assessed provisions will be recognised.
Critical accounting assumptions and estimates
The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Banking Group to reduce differences
between impairment provisions and actual loss experience.
Individual component
Key judgements include the business prospects for the customer, the realisable value of collateral, the Banking Group’s position relative to other
claimants, the reliability of customer information and the likely cost and duration of recovering the loan.
Judgements can change with time as new information becomes available or as loan recovery strategies evolve, which may result in revisions to
the impairment provision.
Collective component
Collective provisions are established on a portfolio basis taking into account the level of arrears, collateral and security, past loss experience,
current economic conditions, expected default and timing of recovery based on portfolio trends.
Key judgements include estimated loss rates and their related emergence periods. The emergence period for each loan type is determined
through studies of loss emergence patterns. Loan files are reviewed to identify the average time period between observable loss indicator events
and the loss becoming identifiable.
Actual credit losses may differ materially from reported loan impairment provisions due to uncertainties including interest rates and their effect
on consumer spending, unemployment levels, payment behaviour and bankruptcy rates.
Notes to the financial statements
84 Westpac New Zealand Limited
Note 34 Accounting policies relating to prior years (continued)
Accounting policy relating to classification and measurement of financial instruments
Classification and measurement of financial assets and financial liabilities (Note 1)
The Banking Group classifies its significant financial assets in the following categories: cash and balances with central banks, collateral paid, trading
securities and financial assets measured at FVIS, derivative financial instruments, available-for-sale securities, loans and due from related entities. The
Banking Group has not classified any of its financial assets as held-to-maturity investments.
The Banking Group classifies its significant financial liabilities in the following categories: collateral received, deposits and other borrowings, other
financial liabilities, derivative financial instruments, debt issues, due to related entities and loan capital.
Financial assets and financial liabilities measured at FVIS are recognised initially at fair value. All other financial assets and financial liabilities are
recognised initially at fair value plus directly attributable transaction costs.
Reverse repurchase agreements (Note 9)
Reverse repurchase agreements which are part of a trading portfolio are designated at fair value and recognised as part of due from related
entities (refer to Note 22).
Available-for-sale securities (Note 10)
Available-for-sale debt (government, semi-government and other) securities are held at fair value with gains and losses recognised in other
comprehensive income except for the following amounts, which are recognised in the income statement:
Interest on debt securities; and
Impairment charges.
The cumulative gain or loss recognised in other comprehensive income is subsequently recognised in the income statement when the instrument
is disposed.
At each reporting date, the Banking Group assesses whether any available-for-sale securities are impaired. Impairment exists if one or more
events have occurred which have a negative impact on the security’s estimated cash flows.
Evidence of impairment includes significant financial difficulties or adverse changes in the payment status of an issuer. If impairment exists, the
cumulative loss is removed from other comprehensive income and recognised in the income statement. Any subsequent reversals of impairment
on debt securities are also recognised in the income statement.
Available-for-sale securities reserve (Note 1)
This comprises the changes in the fair value of available-for-sale debt securities, net of any related hedge accounting adjustments and tax. These
changes were transferred to non-interest income in the income statement when the asset is either disposed or impaired. This reserve was closed
on the adoption of NZ IFRS 9 and the closing balance was allocated to investment securities reserve.
Loans (Note 11)
Loans are financial assets initially recognised at fair value plus directly attributable transaction costs and fees. Loans are subsequently measured
at amortised cost using the effective interest rate method and are presented net of any provisions for impairment.
Registered bank disclosures
Westpac New Zealand Limited 85
This section contains the additional disclosures required by the Registered Bank Disclosure Statements (New Zealand Incorporated Registered
Banks) Order 2014 (as amended).
i. General information (Unaudited)
Ultimate Parent Bank
The Ultimate Parent Bank is incorporated in Australia under the Australian Corporations Act 2001 and its address for service of process is Level 18,
Westpac Place, 275 Kent Street, Sydney, New South Wales 2000, Australia.
Limits on material financial support by the Ultimate Parent Bank
The Ultimate Parent Bank is an authorised deposit-taking institution (‘ADI’) under the Banking Act 1959 of Australia (‘Australian Banking Act’) and,
as such, is subject to prudential regulation and supervision by APRA. APRA has the power to prescribe prudential requirements which may affect the
ability of the Ultimate Parent Bank to provide material financial support to the Bank. Pursuant to current APRA requirements, and unless APRA
provides otherwise, the Ultimate Parent Bank must comply with, among other prudential requirements, APRA’s Prudential Standard APS 222
Associations with Related Entities (‘APS 222’). APS 222 includes the following prudential requirements:
the Ultimate Parent Bank’s exposure to the Bank (being a related ADI as defined in APS 222) must not exceed 50% of the Ultimate Parent Bank’s
Level 1 capital base (as defined in APS 222);
the Ultimate Parent Bank’s aggregate exposure to all related ADI’s must not exceed 150% of the Ultimate Parent Bank’s Level 1 capital base (as
defined in APS 222);
the Ultimate Parent Bank must not hold unlimited exposures to the Bank (such as a general guarantee covering any of the Bank’s obligations);
the Ultimate Parent Bank must not enter into cross-default clauses whereby a default by the Bank on an obligation (whether financial or
otherwise) is deemed to trigger a default of the Ultimate Parent Bank in its obligations;
when determining limits on acceptable levels of exposure to the Bank, the Board of Directors of the Ultimate Parent Bank must have regard to:
the level of exposures that would be approved to third parties of broadly equivalent credit status; and
the impact on the Ultimate Parent Bank’s stand-alone capital and liquidity positions, and its ability to continue operating, in the event of a
failure by the Bank or any other related entity to which it is exposed.
In January 2013, a provision in APS 222 took effect which allows APRA to set specific limits on the Ultimate Parent Bank’s exposures to related
entities, which include the Bank.
The Ultimate Parent Bank complies with the requirements set by APRA in respect of the extent of financial support that is provided to the Bank.
On 20 August 2019, APRA released the finalised prudential standard APS 222: Associations with Related Entities. The revised standard is intended to
strengthen the ability of ADIs to monitor, limit and control risks arising from transactions and other associations with related entities. Key changes
include revisions to the limit for exposure to ADIs from 50% of Total Capital to 25% of Tier 1 capital. The revised standard is effective from 1 January
2021.
Section 13A(3) of the Australian Banking Act provides that, in the event that the Ultimate Parent Bank becomes unable to meet its obligations or
suspends payment, the assets of the Ultimate Parent Bank in Australia are to be available to satisfy the liabilities of the Ultimate Parent Bank in the
following order:
first, certain obligations of the Ultimate Parent Bank to APRA (if any) arising under Division 2AA of Part II of the Australian Banking Act in respect of
amounts payable by APRA to holders of 'protected accounts' (as defined in the Australian Banking Act) as part of the Financial Claims Scheme
(‘FCS’) for the Australian Government guarantee of ‘protected accounts’ (including most deposits) up to A$250,000 in the winding-up of the
Ultimate Parent Bank;
second, APRA's costs (if any) in exercising its powers and performing its functions relating to the Ultimate Parent Bank in connection with the
FCS;
third, the Ultimate Parent Bank’s liabilities (if any) in Australia in relation to ‘protected accounts’ that account-holders keep with the Ultimate
Parent Bank;
fourth, the Ultimate Parent Bank’s debts (if any) to the Reserve Bank of Australia;
fifth, the Ultimate Parent Bank’s liabilities (if any) under an ‘industry support contract’ that is certified by APRA in accordance with the Australian
Banking Act; and
sixth, the Ultimate Parent Bank’s other liabilities (if any) in the order of their priority apart from the above.
Under section 16 of the Australian Banking Act, on the winding-up of an ADI, APRA’s cost of being in control of an ADI’s business, or having an
administrator in control of an ADI’s business, is a debt due to APRA. Debts due to APRA shall have, subject to section 13A(3) of the Australian Banking
Act, priority over all other unsecured debts of that ADI.
On 19 November 2015, APRA informed the Ultimate Parent Bank that its Extended Licensed Entity (‘ELE’) non-equity exposures to New Zealand
banking subsidiaries is to transition to be below a limit of 5% of the Ultimate Parent Bank’s Level 1 Tier 1 capital, as part of an initiative to reduce
Australian bank non-equity exposure to their respective New Zealand banking subsidiaries and branches.
The ELE consists of the Ultimate Parent Bank and its subsidiary entities that have been approved by APRA to be included in the ELE for the purposes
of measuring capital adequacy.
Registered bank disclosures
86 Westpac New Zealand Limited
i. General information (Unaudited) (continued)
APRA has allowed a period of five years commencing on 1 January 2016 to transition to be less than the 5% limit. Exposures for the purposes of this
limit include all committed, non-intraday, non-equity exposures including derivatives and off-balance sheet exposures. For the purposes of
assessing this exposure, the 5% limit excludes equity investments and holdings of capital instruments in New Zealand banking subsidiaries. As at 30
September 2019, the ELE’s non-equity exposures to New Zealand banking subsidiaries affected by the limit were below 5% of Level 1 Tier 1 capital of
the Ultimate Parent Bank.
APRA has also confirmed the terms on which the Ultimate Parent Bank ‘may provide contingent funding support to a New Zealand banking
subsidiary during times of financial stress’. APRA has confirmed that, at this time, only covered bonds meet its criteria for contingent funding
arrangements.
Voting securities and power to appoint directors
The Bank is a wholly-owned subsidiary of WNZGL, a New Zealand company, which in turn is a wholly-owned subsidiary of Westpac Overseas
Holdings No. 2 Pty Limited (‘WOHL’), an Australian company. WOHL is, in turn, a wholly-owned subsidiary of the Ultimate Parent Bank.
At 30 September 2019, WNZGL has a direct qualifying interest in 100% of the voting securities of the Bank. The Ultimate Parent Bank has an indirect
qualifying interest in 100% of the voting securities of the Bank.
WNZGL has the ability to directly appoint up to 100% of the Board and, as indirect holding companies of the Bank, both the Ultimate Parent Bank
and WOHL have the ability to indirectly appoint up to 100% of the Board.
In addition, the Ultimate Parent Bank has the power under the Bank’s constitution to directly appoint up to 100% of the Board from time to time by
giving written notice to the Bank.
Priority of financial liabilities in the event of liquidation
In the unlikely event that the Bank was put into liquidation or ceased to trade, claims of secured creditors and those classes of creditors set out in
the Seventh Schedule of the Companies Act 1993 would rank ahead of the claims of unsecured creditors in accordance with the priorities set out in
that Schedule. Deposits from customers are unsecured and rank equally with other unsecured liabilities of the Bank, and such liabilities would rank
ahead of any subordinated instruments issued by the Bank to the extent of any such subordination.
Guarantee arrangements
No material obligations of the Bank are guaranteed as at the date the Directors signed this Disclosure Statement.
WNZGL does not guarantee any of the obligations of the Bank or any member of the Banking Group.
Directorate
The Directors of the Bank at the time this Disclosure Statement was signed were:
Name: Janice Amelia Dawson, B.Com, FCA
Non-executive: Yes
Country of Residence: New Zealand
Primary Occupation: Director
Secondary Occupations: None
Board Audit Committee Member: Yes
Independent Director: Yes
External Directorships: Deputy Chair of Air New Zealand Limited. Director of each of AIG
Insurance New Zealand Limited, Meridian Energy Limited, Erua Limited, and Jan Dawson Limited.
Member of each of the Capital Investment Committee of the National Health Board, the Council of
the University of Auckland and World Sailing Council Vice President and Director. Member of HR
Committee of BECA Group Limited.
Name: David Alexander McLean, LLB (Hons)
Non-executive: No
Country of Residence: New Zealand
Primary Occupation: Chief Executive, Westpac New Zealand
Limited
Secondary Occupations: None
Board Audit Committee Member: No
Independent Director: No
External Directorships: Member of each of the Mastercard Asia/Pacific Advisory Board, the New
Zealand Prime Minister’s Business Advisory Council and the Capital Markets 2029 Steering
Committee. Chair of the New Zealand Bankers’ Association. Co-Chair of Champions for Change.
Name: Malcolm Guy Bailey, B.Ag.Econ.
Non-executive: Yes
Country of Residence: New Zealand
Primary Occupation: Director
Secondary Occupations: None
Board Audit Committee Member: Yes
Independent Director: Yes
External Directorships: Chairman of each of the Dairy Companies Association of New Zealand,
Red Meat Profit Partnership General Partner Limited, New Zealand International Business Forum
and Central Economic Development Agency Limited. Director of each of RMI NZ Limited, Bailey
Agriculture Limited, Bailey Family Properties Limited, BBD Industrial Properties Limited, Embryo
Technologies Limited, Etech Engineering Services Limited, Etech NZ Limited, Gleneig Holdings
Limited, Tadpole NZ Limited and Greentech NZ Limited.
Registered bank disclosures
Westpac New Zealand Limited 87
i. General information (Unaudited) (continued)
Name: Philippa Mary Greenwood, LLB
Non-executive: Yes
Country of Residence: New Zealand
Primary Occupation: Director
Secondary Occupations: None
Board Audit Committee Member: Yes
Independent Director: Yes
External Directorships: Director of each of Fisher & Paykel Healthcare Corporation Limited, Spark
New Zealand Limited, The A2 Milk Company Limited and Vulcan Steel Limited.
Name: Peter Francis King, BEc, FCA
Non-executive: Yes
Country of Residence: Australia
Primary Occupation: Chief Financial Officer, Westpac Banking
Corporation (April 2014 to June 2018, and October 2018 to date) /
Acting Chief Risk Officer, Westpac Banking Corporation (June 2018
to September 2018)
Secondary Occupations: None
Board Audit Committee Member: Yes
Independent Director: No
External Directorships: None
Name: Jonathan Parker Mason, MBA, MA, BA
Non-executive: Yes
Country of Residence: New Zealand
Primary Occupation: Director
Secondary Occupations: None
Board Audit Committee Member: Yes, Chair
Independent Director: Yes
External Directorships: Director of each of Air New Zealand Limited, Advanced Metering Assets
Limited, Advanced Metering Services Limited, Allagash Limited, Alvarium Wealth (NZ) Limited, Arc
Innovations Limited, NGC Holdings Limited, On Gas Limited, Vector Advanced Metering Assets
(Australia) Limited, Vector Communications Limited, Vector Gas Trading Limited, Vector Limited,
Vector Metering Data Services Limited, Zespri Group Limited, and Zespri International Limited.
Board Member of the American Chamber of Commerce in New Zealand and World Wildlife Fund
New Zealand.
Name: Christopher John David Moller, BCA, Dip Accounting, FCA
Non-executive: Yes
Country of Residence: New Zealand
Primary Occupation: Director
Secondary Occupations: None
Board Audit Committee Member: Yes
Independent Director: Yes
External Directorships: Director of Urenui Consultants Limited.
Name: Mary Patricia Leonie Quin, PhD, MBA, BSc (Hons)
Non-executive: Yes
Country of Residence: New Zealand
Primary Occupation: Director
Secondary Occupations: None
Board Audit Committee Member: Yes
Independent Director: Yes
External Directorships: None
All communications may be sent to the Directors at the head office of the Bank at Westpac on Takutai Square, 16 Takutai Square, Auckland 1010, New
Zealand.
Board Audit Committee
There is a Board Audit Committee (‘BAC’) that covers audit matters, comprising seven directors, six of whom are non-executive independent
directors and one of whom is a non-executive non-independent director.
Conflicts of interest policy
The Board has a procedure to ensure that conflicts and potential conflicts of interest between the Directors’ duty to the Bank and their personal,
professional or business interests are avoided or dealt with.
Each Director must give notice to the Board of any direct or indirect interest in a matter relating to the affairs of the Bank as soon as practicable after
the relevant facts have come to that Director’s knowledge. Where a matter is to be considered at a Directors’ meeting in which one or more
Directors have an interest, the Board's practice is to manage any conflict of interest on a case-by-case basis, depending on the circumstances.
Registered bank disclosures
88 Westpac New Zealand Limited
i. General information (Unaudited) (continued)
Auditor
PricewaterhouseCoopers
PricewaterhouseCoopers Tower
188 Quay Street
Auckland, New Zealand
Pending proceedings or arbitration
A description of any pending legal proceedings or arbitration concerning any member of the Banking Group, whether in New Zealand or otherwise,
that may have a material adverse effect on the Bank or the Banking Group is included in Note 27 Credit related commitments, contingent assets and
contingent liabilities.
Credit ratings
The Bank has the following credit ratings with respect to its long-term senior unsecured obligations, including obligations payable in New Zealand in
New Zealand dollars, as at the date the Directors signed this Disclosure Statement:
Rating AgencyCurrent Credit RatingRating Outlook
Fitch Ratings (‘Fitch’)
Moody’s Investors Service (‘Moody’s’)
S&P Global Ratings (‘S&P’)
AA-
A1
AA-
Negative
Stable
Stable
On 17 July 2019, Fitch affirmed the Bank’s long term rating at AA- but revised its outlook to “Negative” from “Stable”, in line with its outlook for the
Ultimate Parent Bank. Fitch revised the outlook for all of the major Australian banks. The change in outlook follows APRA’s announcement on 11 July
2019 that it was applying additional operational risk capital requirements on the Ultimate Parent Bank due to the findings in its culture, governance
and accountability self-assessment.
On 9 July 2019, S&P affirmed the Bank’s long term rating at AA- long term and revised its outlook for the Bank to “Stable” from “Negative” in line with
its outlook for the Ultimate Parent Bank. This outlook change reflects S&P’s view that the Australian Government remains highly supportive of
Australia’s systemically important banks based on APRA’s release on loss absorbing capacity, also dated 9 July 2019.
Descriptions of credit rating scales
1
Fitch RatingsMoody’s S&P
The following grades display investment grade characteristics:
Capacity to meet financial commitments is extremely strong. This is the highest issuer credit
rating
AAAAaaAAA
Very strong capacity to meet financial commitmentsAAAaAA
Strong capacity to meet financial commitments although somewhat susceptible to adverse
changes in economic, business or financial conditions
AAA
Adequate capacity to meet financial commitments, but adverse business or economic
conditions are more likely to impair this capacity
BBBBaaBBB
The following grades have predominantly speculative characteristics:
Significant ongoing uncertainties exist which could affect the capacity to meet financial
commitments on a timely basis
BBBaBB
Greater vulnerability and therefore greater likelihood of defaultBBB
Likelihood of default now considered a real possibility. Capacity to meet financial
commitments is dependent on favourable business, economic and financial conditions
CCCCaaCCC
Highest risk of defaultCC to C CaCC
Obligations currently in defaultRD to DCSD to D
1
This is a general description of the rating categories based on information published by Fitch Ratings, Moody’s and S&P.
Credit ratings by Fitch Ratings and S&P may be modified by a plus (higher end) or minus (lower end) sign to show relative standing within the major
categories. Moody’s apply numeric modifiers 1 (higher end), 2 or 3 (lower end) to ratings from Aa to Caa to show relative standing within the major
categories.
The Bank’s current position is indicated in bold.
Registered bank disclosures
Westpac New Zealand Limited 89
i. General Information (Unaudited) (continued)
Historical summary of financial statements
THE BANKING GROUP
$ millions2019
1
2018
1
201720162015
Income statement
Interest income 4,011 3,989 3,917 4,113 4,397
Interest expense (2,068) (2,145) (2,176) (2,369) (2,607)
Net interest income 1,943 1,844 1,741 1,744 1,790
Non-interest income 329 344 405 400 399
Net operating income before operating expenses and impairment
charges
2,272 2,188 2,146 2,144 2,189
Operating expenses (961) (886) (954) (907) (888)
Impairment (charges)/benefits 10 (3) 76 (59) (47)
Profit before income tax 1,321 1,299 1,268 1,178 1,254
Income tax expense (357) (363) (359) (327) (343)
Net profit for the year attributable to: 964 936 909 851 911
Owners of the Banking Group 964 936 909 851 908
Non-controlling interests - - - - 3
Net profit for the year 964 936 909 851 911
Dividends paid or provided (2,965) (1,870) (640) (660) (608)
Balance sheet
Total assets 96,676 89,871 88,627 86,307 79,925
Total individually impaired assets 69 145 173 222 282
Total liabilities 89,259 82,593 81,777 79,747 73,534
Total shareholder's equity 7,417 7,278 6,850 6,560 6,391
1
The Banking Group has adopted NZ IFRS 9 and NZ IFRS 15 from 1 October 2018. Comparatives have not been restated. In addition, the Banking Group has made a
number of presentational changes to the balance sheet and income statement. Comparatives have been restated for 2018. Refer to Note 1 for further detail.
The amounts for the years ended 30 September have been extracted from the audited financial statements of the Banking Group.
Other material matters
Reserve Bank Capital Review
On 14 December 2018, the Reserve Bank released a consultation paper to seek the public's view on a proposal to set a Tier 1 capital requirement
equal to 16% of risk weighted assets for banks deemed systemically important, such as the Bank. The proposal of a Tier 1 ratio of 6% of risk weighted
assets as a regulatory minimum is unchanged, and of this no more than 1.5% of risk weighted assets can be contributed by Additional Tier 1 capital
or redeemable preference shares. The Reserve Bank has proposed a five year transition period.
The proposed changes aim to further strengthen the New Zealand banking system to protect the economy and depositors from bank failure. The
Bank would be required to hold a further estimated NZ$2.3 – 2.9 billion of Tier 1 capital (assuming a Tier 1 capital ratio of 16-17%) if the proposals
were applied at 30 September 2019. The Bank is already strongly capitalised with a Tier 1 capital ratio of 13.9% at 30 September 2019.
Further clarity on the proposals is expected from the Reserve Bank in December 2019 with implementation of any new rules starting from April 2020.
Reserve Bank/Financial Markets Authority (FMA) - Financial Services Conduct & Culture Review
In May 2018, the Reserve Bank and FMA commenced a review in respect of New Zealand's 10 major banks and 15 life insurers, including the Bank, to
explain why conduct issues highlighted by the Australian Royal Commission are not present in New Zealand. An industry thematic review report for
the banks was released on 5 November 2018. The Bank submitted a plan responding to recommendations in the review report and in the Bank’s
individual feedback letters to the regulators on 29 March 2019. The regulators have subsequently confirmed that the plan comprehensively
addresses the regulators’ requirements. The Bank provided its first update to the regulators on 31 October 2019 and will continue its work to execute
and embed the plan.
Conduct of Financial Institutions Review
Following the developments and findings of the Financial Services Conduct and Culture Review and the Australian Royal Commission, the Minister of
Commerce announced a proposal to introduce a conduct licensing regime for banks, insurers and non-bank deposit takers in respect of their
conduct in relation to retail customers. The regime will require licensed institutions to meet a fair treatment standard, and implement effective
policies, processes, systems and controls to meet this standard. The regime will also create obligations relating to remuneration and sales
incentives. Legislation is expected to be introduced to parliament by the end of 2019.
In addition to those matters identified above, the Banking Group remains subject to continued regulatory engagement in the nature of ongoing
investigations and reviews which may result in further regulatory change or requirements for customer remediation. The Banking Group continues to
identify and remediate conduct issues and risks as they arise.
Registered bank disclosures
90 Westpac New Zealand Limited
i. General Information (Unaudited) (continued)
AUSTRAC proceedings issued against the Ultimate Parent Bank
On 20 November 2019 the Ultimate Parent Bank received a statement of claim from AUSTRAC (the Australian money-laundering regulator)
commencing civil proceedings in relation to alleged contraventions of the Ultimate Parent Bank’s obligations under Australia’s Anti-Money
Laundering and Counter-Terrorism Financing Act 2006 (Cth). The proceedings relate to the alleged failure to report a large number of international
fund transfer instructions and alleged failings in relation to correspondent banking, risk assessments, customer due diligence, transaction
monitoring, record keeping and the passing on of certain data in funds transfer instructions.
No related proceedings have been commenced against any member of the Banking Group in New Zealand.
ii. Additional financial disclosures
Additional information on balance sheet
THE BANKING GROUP
$ millions20192018
Interest earning and discount bearing assets 94,076 87,810
Interest and discount bearing liabilities 80,586 75,409
Additional information on concentrations of credit risk
Refer to Note 32.2.3 Credit risk concentrations for additional Information on concentration of credit exposure, in terms of customer and industry
sector and material credit risk exposure to the agricultural sector, using the Australian and New Zealand Industrial Classification 2006.
Additional information on interest rate sensitivity
Sensitivity to interest rates arises from mismatches in the interest rate characteristics of assets and their corresponding liability funding. One of the
major causes of these mismatches is timing differences in the repricing of assets and liabilities. These mismatches are actively managed as part of the
overall interest rate risk management process, which is conducted in accordance with the Banking Group’s policy guidelines.
Registered bank disclosures
Westpac New Zealand Limited 91
ii. Additional financial disclosures (continued)
The following table presents a breakdown of the earlier of the contractual repricing or maturity dates of the Banking Group’s net asset position as at 30
September 2019. The Banking Group uses this contractual repricing information as a base, which is then altered to take account of consumer behaviour,
to manage its interest rate risk.
THE BANKING GROUP
2019
Over 3Over 6Over 1
Months
and
Months
and
Year andNon-
Up to 3Up to 6Up toUp toOverinterest
$ millionsMonthsMonths1 Year2 Years2 YearsBearingTotal
Financial assets
Cash and balances with central banks1,684----1801,864
Collateral paid168-----168
Trading securities and financial assets
measured at FVIS
1,467194----1,661
Derivative financial instruments-----616616
Investment securities886331,2267191,803-4,469
Loans44,2246,33013,81014,3995,631(234)84,160
Other financial assets-----178178
Due from related entities1,701----8702,571
Total financial assets49,3327,15715,03615,1187,4341,61095,687
Non-financial assets989
Total assets96,676
Financial liabilities
Collateral received473-----473
Deposits and other borrowings42,9349,0145,1021,0446416,87165,606
Other financial liabilities2----453455
Derivative financial instruments-----257257
Debt issues7,203-1,3882,4616,794-17,846
Due to related entities 869----8321,701
Loan capital2,609-----2,609
Total financial liabilities54,0909,0146,4903,5057,4358,41388,947
Non-financial liabilities312
Total liabilities89,259
On-balance sheet interest rate repricing
gap
(4,758)(1,857)8,54611,613(1)
Net derivative notional principals
Net interest rate contracts (notional):
Receivable/(payable)13,759(2,550)(5,094)(7,929)1,814
Net interest rate repricing gap9,001(4,407)3,4523,6841,813
Additional information on liquidity risk
Refer to Note 32.3.4 Contractual maturity of financial liabilities which shows the maturity analyses of financial liabilities.
Registered bank disclosures
92 Westpac New Zealand Limited
ii. Additional financial disclosures (continued)
Reconciliation of mortgage-related amounts
The table below provides the Banking Group’s reconciliation between any amounts disclosed in this Disclosure Statement that relate to mortgages
on residential property.
THE BANKING GROUP
$ millions30 Sep 19
Residential mortgages - total gross loans (as disclosed in Note 11 and 12)51,487
Reconciling items:
Unamortised deferred fees and expenses(181)
Fair value hedge adjustments(121)
Value of undrawn commitments and other off-balance sheet amounts relating to residential mortgages10,337
Undrawn at default
1
(2,635)
Residential mortgages by LVR (as disclosed in Additional mortgage information in Section iv.)
58,887
Accrued interest receivable61
Partial write-offs4
Residential mortgages - EAD (as disclosed in Credit risk exposures by asset class in Section iv.)
58,952
1
Estimate of the amount of committed exposure not expected to be drawn by the customer at the time of default.
iii. Asset quality
Past due assets
THE BANKING GROUP
30 Sep 19
Residential
$ millions
MortgagesOther RetailCorporateOtherTotal
Past due but not individually impaired assets
Less than 30 days past due873137263151,288
At least 30 days but less than 60 days past due119248-151
At least 60 days but less than 90 days past due46149-69
At least 90 days past due612329-113
Total past due but not individually impaired assets1,099198309151,621
Refer to Note 12 Provisions for expected credit losses/impairment charges for the Banking Group’s comparative information on past due assets.
Movements in individually impaired assets
Refer to Note 12 Provisions for expected credit losses/impairment charges for the Banking Group’s comparative information on movements in
individually impaired assets.
Movements in balances of total individual credit impairment allowances
Refer to Note 12 Provisions for expected credit losses/impairment charges for the Banking Group’s comparative information on movements in
balances of total individual credit impairment allowances.
Movements in balance of collective credit impairment allowance
Refer to Note 12 Provisions for expected credit losses/impairment charges for the Banking Group’s comparative information on movements in
balance of collective credit impairment allowance.
Movements in components of loss allowance (NZ IFRS 9)
Refer to Note 12 Provisions for expected credit losses/impairment charges for the movements in the Banking Group’s loss allowance components, as
required by NZ IFRS 9.
Impacts of changes in gross financial assets on loss allowances (NZ IFRS 9)
Refer to Note 12 Provisions for expected credit losses/impairment charges for the impacts of changes in gross financial assets on loss allowances, as
required by NZ IFRS 9.
Registered bank disclosures
Westpac New Zealand Limited 93
iii. Asset quality (continued)
Other asset quality information
The Banking Group had undrawn commitments of $6 million (30 September 2018: $4 million) to counterparties for whom drawn balances are
classified as individually impaired assets under corporate loans as at 30 September 2019.
The Banking Group does not have other assets under administration as at 30 September 2019 (30 September 2018: nil).
iv. Capital adequacy under the internal models based approach, and regulatory liquidity ratios (Unaudited)
The information contained in this note has been derived in accordance with the Banking Group’s conditions of registration which relate to capital
adequacy and the Reserve Bank BS2B, except for the matters of non-compliance issued by BS2B with condition of registration 1B disclosed on
page 113. The Bank considers its internal credit model methodologies result in the retention of an appropriate amount of capital to reflect its credit
risk and any effect of the non-compliance with its conditions of registration 1B on the information relating to capital adequacy is not considered by the
Bank to be material.
The Banking Group maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Banking Group’s capital is
monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision (‘BCBS’) and adopted by the
Reserve Bank in supervising the Banking Group.
The Banking Group’s capital summary as at 30 September 2019
THE BANKING GROUP
$ millionsNote2019
Tier 1 capital
Common Equity Tier 1 capital
Paid-up ordinary shares issued by the Bank plus related share premium21 7,300
Retained earnings (net of appropriations) 194
Accumulated other comprehensive income and other disclosed reserves
1
(77)
Less deductions from Common Equity Tier 1 capital
Goodwill (477)
Other intangible assets
2
(173)
Cash flow hedge reserve 81
Deferred tax asset deduction (174)
Expected loss excess over eligible allowance (266)
Total Common Equity Tier 1 capital 6,408
Additional Tier 1 capital
Additional Tier 1 capital instruments
3
20 1,500
Total additional Tier 1 capital 1,500
Total Tier 1 capital 7,908
Tier 2 capital
Tier 2 capital instruments
3
20 1,122
Revaluation reserves-
Eligible impairment allowance in excess of expected loss-
Total Tier 2 capital 1,122
Total capital 9,030
1
Accumulated other comprehensive income and other disclosed reserves consist of investment securities and cash flow hedge reserve as disclosed as reserves on
the balance sheet.
2
Includes capitalised transaction costs on loan capital and debt issues.
3
Classified as a liability and excludes capitalised transaction costs. Additional Tier 1 capital instruments and Tier 2 capital instruments are itemised in Note 20.
Capital Structure
Refer to Note 20 Loan capital and Note 21 Share capital for information on the Banking Group’s capital structure.
Registered bank disclosures
94 Westpac New Zealand Limited
iv. Capital adequacy under the internal models based approach, and regulatory liquidity ratios (Unaudited)
(continued)
Credit risk subject to the Internal Rating Based (‘IRB’) approach
Credit risk exposures by asset class
The Banking Group’s credit risk exposures by asset class as at 30 September 2019
Exposure-Minimum
WeightedExposure-weightedRisk-Pillar 1
AverageweightedRiskweightedCapital
PDEADLGDWeightAssets
1
Requirement
Exposure-weighted PD Grade (%)%$ millions%%$ millions$ millions
Residential mortgages
0.00 to 0.10------
0.10 to 0.250.183,19819.047.2924720
0.25 to 1.00.4929,19120.4316.585,130410
1.0 to 2.51.4222,12220.0934.158,009641
2.5 to 10.04.694,13522.0774.953,285263
10.0 to 99.99------
Default100.0030621.90140.8945737
Total1.6358,95220.3527.4117,1281,371
Other retail
0.00 to 0.10
------
0.10 to 0.25
0.1445740.6712.80625
0.25 to 1.0
0.361,43562.1737.0856445
1.0 to 2.5
2.181,52764.9085.131,378110
2.5 to 10.0
5.5028083.20124.6637030
10.0 to 99.99
20.6222569.83145.4934728
Default
100.00
19
73.7824.83
5-
Total3.043,94362.7265.222,726218
Small business
0.00 to 0.100.0316073.767.08121
0.10 to 0.25
------
0.25 to 1.00.5466722.4716.8311910
1.0 to 2.51.821,46820.5226.0340531
2.5 to 10.05.0323219.9229.28726
10.0 to 99.9917.572622.7447.17131
Default100.004120.74163.37716
Total3.382,59424.2725.1769255
1
The value of the scalar used in determining the risk weighted assets is 1.06 as required by the conditions of registration.
Registered bank disclosures
Westpac New Zealand Limited 95
iv. Capital adequacy under the internal models based approach, and regulatory liquidity ratios (Unaudited)
(continued)
Exposure-Minimum
WeightedExposure-weightedRisk-Pillar 1
AverageweightedRiskweightedCapital
PDEADLGDWeightAssets
1
Requirement
Exposure-weighted PD Grade (%)%$ millions%%$ millions$ millions
Corporate/Business lending
0.00 to 0.02------
0.02 to 0.040.033,55541.2417.4665853
0.04 to 0.100.084,30249.3927.941,274102
0.10 to 0.500.217,84045.9341.713,466277
0.50 to 3.01.4814,58635.1373.1811,314905
3.0 to 10.03.7094535.96102.531,02782
10.0 to 99.027.631,30939.76199.492,768221
Default100.008134.25200.3317214
Total2.1932,61840.4859.8120,6791,654
Sovereign
0.00 to 0.020.011,71420.583.96726
0.02 to 0.040.022,8415.190.76232
0.04 to 0.10------
0.10 to 0.50------
0.50 to 3.0------
3.0 to 10.0------
10.0 to 99.0------
Default------
Total0.014,55510.981.97958
Bank
0.00 to 0.02------
0.02 to 0.040.032,81316.025.3015813
0.04 to 0.100.0597749.2220.2821017
0.10 to 0.500.164960.0034.66181
0.50 to 3.00.691859.89110.06212
3.0 to 10.0------
10.0 to 99.0------
Default------
Total0.043,85725.199.9540733
Total credit risk exposures subject
to the internal ratings based
approach
106,51941,727 3,339
1
The value of the scalar used in determining the risk weighted assets is 1.06 as required by the conditions of registration.
Registered bank disclosures
96 Westpac New Zealand Limited
iv. Capital adequacy under the internal models based approach, and regulatory liquidity ratios (Unaudited)
(continued)
The following table summarises the Banking Group’s credit risk exposures by asset class arising from undrawn commitments and other off-balance
sheet exposures. These unaudited amounts are included in the previous tables.
Undrawn
Commitments and
Other Off-balance Market Related
Sheet Amounts Contracts
$ millionsValueEADValueEAD
Residential mortgages10,3377,702--
Other retail 3,1312,062--
Small business850697--
Corporate/Business lending9,99610,158--
Sovereign8181--
Bank9401,005--
Total 25,33521,705--
Additional mortgage information
Residential mortgages by loan-to-value ratio (‘LVR’) as at 30 September 2019
LVRs are calculated as the current exposure divided by the Banking Group’s valuation of the residential security at origination.
For loans originated from 1 January 2008, the Banking Group utilises data from its loan system. Due to system limitations, for loans originated
prior to 1 January 2008, the origination valuation is not separately recorded and is therefore not available for disclosure. For these loans, the Banking
Group utilises its dynamic LVR process to estimate an origination valuation.
Exposures for which no LVR is available have been included in the ‘Exceeds 90%’ category in accordance with the requirements of the Order.
THE BANKING GROUP
2019
Does notExceeds 60%Exceeds 70%Exceeds 80%
LVR range ($ millions) exceed 60%and not 70%and not 80% and not 90%Exceeds 90%Total
On-balance sheet exposures 21,819 12,262 12,759 2,770 1,575 51,185
Undrawn commitments and other off-balance
sheet exposures 5,401 1,192 809 134 166 7,702
Value of exposures 27,220 13,454 13,568 2,904 1,741 58,887
Registered bank disclosures
Westpac New Zealand Limited 97
iv. Capital adequacy under the internal models based approach, and regulatory liquidity ratios (Unaudited)
(continued)
Specialised lending subject to the slotting approach
The Banking Group’s specialised lending: Project and property finance credit risk exposures as at 30 September 2019
TotalMinimum
Exposures Risk-Pillar 1
After CreditRiskweightedCapital
Risk MitigationWeightAssets
1
Requirement
$ millions%$ millions$ millions
Supervisory slotting grade
Strong3,69370.002,740219
Good3,25790.003,107248
Satisfactory537115.0065552
Weak118250.0031225
Default
30---
Total on-balance sheet exposures7,63584.206,814544
Undrawn commitments and other off-balance sheet exposures
1,43186.301,309105
Total specialised lending exposures (on and off-balance sheet)9,06684.538,123649
1
The value of the scalar used in determining the risk weighted assets is 1.06 as required by the conditions of registration.
Credit risk exposures subject to the standardised approach
The Banking Group’s credit risk exposures subject to the standardised approach as at 30 September 2019
Calculation of on-balance sheet exposures
Total Minimum
ExposureRisk-Pillar 1
After Credit Average RiskweightedCapital
Risk MitigationWeightExposure
1
Requirement
$ millions%$ millions$ millions
Other assets
2
1,98330.07632 51
Total on-balance sheet exposures1,983632 51
1
The value of the scalar used in determining the risk weighted assets is 1.06 as required by the conditions of registration.
2
Relate to property and equipment, other assets and related parties.
Registered bank disclosures
98 Westpac New Zealand Limited
iv. Capital adequacy under the internal models based approach, and regulatory liquidity ratios (Unaudited)
(continued)
Calculation of off-balance sheet exposures
TotalAverageMinimum
Exposure
or
CreditCreditAverageRisk-Pillar 1
PrincipalConversionEquivalentRiskweightedCapital
AmountFactor AmountWeightExposure
1
Requirement
$ millions%$ millions%$ millions$ millions
Market related contracts subject to the
standardised approach
Foreign exchange contracts21,724N/A1,17120.00248 20
Interest rate contracts48,436N/A6720.0014 1
Credit value adjustment-N/A--305 24
Total market related contracts subject to the
standardised approach70,1601,238567 45
Standardised subtotal (on and off-balance sheet)3,2211,199 96
1
The value of the scalar used in determining the risk weighted assets is 1.06 as required by the conditions of registration.
Credit risk mitigation
The Banking Group uses a variety of techniques to reduce the credit risk arising from its lending activities. This includes the Banking Group
establishing that it has direct, irrevocable and unconditional recourse to collateral and other credit enhancements through obtaining legally
enforceable documentation.
The Banking Group includes the effect of credit risk mitigation through eligible guarantees within the calculation applied to LGD. Due to system
limitations, the value of the guarantee is not always separately recorded, and therefore, not available for disclosure, under Clause 7 of Schedule 11 to
the Order.
Equity risk
The Banking Group’s equity exposures as at 30 September 2019
Minimum
Risk-Pillar 1
TotalRiskweightedCapital
ExposureWeightExposure
1
Requirement
Equity$ millions%$ millions$ millions
Equity holdings (not deducted from capital) that are not publicly traded-300--
All other holdings (not deducted from capital)-400--
1
The value of the scalar used in determining the risk weighted assets is 1.06 as required by the conditions of registration.
Operational risk
Operational risk capital requirement
The following table sets out the Banking Group’s unaudited implied risk-weighted exposures under the Advanced Measurement Approach (‘AMA’)
methodology and the operational risk capital requirement.
THE BANKING GROUP
2019
Implied Risk-Total Operational Risk
$ millionsweighted ExposureCapital Requirement
Advanced Measurement Approach
Operational risk 4,559 365
Registered bank disclosures
Westpac New Zealand Limited 99
iv. Capital adequacy under the internal models based approach, and regulatory liquidity ratios (Unaudited)
(continued)
Market risk
Market risk notional capital charges
The Banking Group’s aggregate market risk exposure is derived in accordance with BS2B and is calculated on a six monthly basis. The end-of-period
aggregate market risk exposure is calculated from the period end balance sheet information.
For each category of market risk, the Banking Group’s peak end-of-day aggregate capital charge is derived by determining the maximum over the six
months ended 30 September 2019 of the aggregate capital charge for that category of market risk at the close of each business day derived in
accordance with BS2B.
The following table provides a summary of the Banking Group’s notional capital charges by risk type as at the reporting date and the peak end-of-day
notional capital charges by risk type for the six months ended 30 September 2019:
THE BANKING GROUP
2019
$ millionsImplied Risk-weighted ExposureAggregate Capital Charge
End-of-period
Interest rate risk 1,233 99
Foreign currency risk- -
Equity risk- -
Peak end-of-day
Interest rate risk 1,698 136
Foreign currency risk- -
Equity risk- -
Total capital requirements
Banking Group Pillar I Total Capital Requirement
THE BANKING GROUP
2019
$ millions
Total Exposure
After Credit
Risk Mitigation
Risk-weighted
Exposure or Implied
Risk-weighted
Exposure
Total Capital
Requirement
Credit risk
Exposures subject to the internal ratings based approach 106,519 41,727 3,339
Equity exposures - - -
Specialised lending subject to the slotting approach 9,066 8,123 649
Exposures subject to the standardised approach 3,221 1,199 96
Total credit risk
(scaled)
1
118,806 51,049 4,084
Operational riskN/A4,559 365
Market riskN/A1,233 99
Total 118,806 56,841 4,548
1
The value of the scalar used in determining the credit risk weighted exposure is 1.06 as required by the conditions of registration.
Registered bank disclosures
100 Westpac New Zealand Limited
iv. Capital adequacy under the internal models based approach, and regulatory liquidity ratios (Unaudited)
(continued)
Capital ratios
The Basel banking accords (the ‘Accords’) have been developed and strengthened over time by the BCBS to enhance the banking regulatory framework.
The Accords are made up of the different Basel frameworks with the latest being Basel III. Basel III builds on the Basel I and Basel II frameworks, and
seeks to improve the banking sector’s ability to deal with financial and economic stress, improve risk management and strengthen banks’ transparency.
The Basel III framework is built on three mutually reinforcing pillars. Pillar 1 sets out the mechanics for minimum capital adequacy requirements for
credit, market and operational risks. Pillar 2 relates to the internal assessment of capital adequacy and the supervisory review process. Pillar 3 deals
with market disclosure and market discipline.
For the purposes of calculating the capital adequacy ratios for the Bank on a solo basis, wholly-owned and wholly-funded subsidiaries of the Banking
Group are consolidated with the Bank. In this context, wholly-funded by the Bank means there are no liabilities (including off-balance sheet
obligations) to anyone other than the Bank, the Inland Revenue or trade creditors, where aggregate exposure to trade creditors does not exceed 5%
of the subsidiary’s shareholder’s equity. Wholly-owned by the Bank means that all equity issued by the subsidiary is held by the Bank or is ultimately
owned by the Bank through a chain of ownership where each entity is 100% owned by its parent.
The table below is disclosed under the Reserve Bank’s Basel III framework in accordance with Clauses 15 and 16 of Schedule 11 to the Order and
represents the capital adequacy calculation based on BS2B.
THE BANKING GROUPTHE BANK
Reserve Bank
Minimum
%Ratios
1
30 Sep 1930 Sep 1830 Sep 1930 Sep 18
Common Equity Tier 1 capital ratio6.511.311.710.611.0
Tier 1 capital ratio8.013.914.513.013.6
Total capital ratio10.015.916.614.915.6
Buffer ratio2.54.85.2N/AN/A
1
Changes to the Bank’s conditions of registration, effective from 31 December 2017, increased the minimum capital ratios by 2% compared to the minimum capital
ratios as at 30 September 2017. The increased minimum capital ratios were to remain in place until the Bank had satisfied the Reserve Bank that all existing issues in
relation to the matters of non-compliance had been resolved. On 30 October 2019, the Reserve Bank informed the Bank that, with effect from 31 December 2019, the
Reserve Bank will amend the Bank’s conditions of registration to remove the two percentage point overlay applying to its minimum capital requirements. Refer to the
‘Non-compliance with conditions of registration’ section on page 113 for further details.
Capital for other material risks
Summary of ICAAP
The Banking Group’s ICAAP outlines the Banking Group's approach to meeting minimum capital requirements and confirming that capital held by
the Bank is commensurate with its risk profile. The Banking Group’s ICAAP complies with the requirements set out in the Reserve Bank document
‘Guidelines on a Bank’s Internal Capital Adequacy Assessment Process (ICAAP)’ (BS12) in accordance with the Bank’s Conditions of Registration.
The Banking Group's ICAAP is founded on the principle that its target level of capital is directly related to its risk appetite and corresponding risk
profile. The ICAAP supplements the minimum regulatory capital requirements in respect of credit, market and operational risk through the
consideration of a broader range of risk types and the Banking Group’s risk and capital management capabilities. The ICAAP also takes account of
future strategic objectives, stress testing, regulatory developments and peer group comparatives.
The Banking Group’s ICAAP identifies, reviews and measures additional material risks that must be captured within the Banking Group’s capital
adequacy assessment process. The additional material risks considered are those not captured by Pillar 1 regulatory capital requirements and
include compliance risk, conduct risk, liquidity risk, reputational risk, environmental, social and governance risk, business/strategic risk, other
assets risk, model risk, deferred acquisition cost risk and subsidiary risk.
The Banking Group’s internal capital allocation for ‘other material risks’ is $254 million as at 30 September 2019 (30 September 2018: $245 million).
Registered bank disclosures
Westpac New Zealand Limited 101
iv. Capital adequacy under the internal models based approach, and regulatory liquidity ratios (Unaudited)
(continued)
Ultimate Parent Bank Group Basel III capital adequacy ratios
The table below represents the capital adequacy calculation for the Ultimate Parent Bank and the Ultimate Parent Bank Group based on APRA’s
application of the Basel III capital adequacy framework.
%30 Sep 1930 Sep 18
Ultimate Parent Bank Group (excluding entities specifically excluded by APRA regulations)
1, 2
Common Equity Tier 1 capital ratio 10.7 10.6
Additional Tier 1 capital ratio 2.2 2.2
Tier 1 capital ratio 12.8 12.8
Tier 2 capital ratio 2.8 1.9
Total regulatory capital ratio 15.6 14.7
Ultimate Parent Bank (Extended Licensed Entity)
1, 3
Common Equity Tier 1 capital ratio 11.0 10.5
Additional Tier 1 capital ratio 2.2 2.3
Tier 1 capital ratio 13.2 12.8
Tier 2 capital ratio 2.9 2.0
Total regulatory capital ratio 16.1 14.8
1
The capital ratios represent information mandated by APRA. The capital ratios of the Ultimate Parent Bank Group are publicly available in the Ultimate Parent Bank
Group’s Pillar 3 report. This information is made available to users via the Ultimate Parent Bank’s website (www.westpac.com.au).
2
Ultimate Parent Bank Group (excluding entities specifically excluded by APRA regulations) comprises the consolidation of the Ultimate Parent Bank and its
subsidiary entities except those entities specifically excluded by APRA regulations for the purposes of measuring capital adequacy (Level 2). The head of the Level 2
group is the Ultimate Parent Bank.
3
Ultimate Parent Bank (Extended Licensed Entity) comprises the Ultimate Parent Bank and its subsidiary entities that have been approved by APRA as being part of a
single ELE for the purposes of measuring capital adequacy (Level 1).
Under APRA’s Prudential Standards, ADIs, including the Ultimate Parent Bank Group and the Ultimate Parent Bank are required to maintain
minimum ratios of capital to risk weighted assets, as determined by APRA. For the calculation of risk weighted assets, the Ultimate Parent Bank
Group is accredited by APRA to apply advanced models permitted by the Basel III global capital adequacy regime. The Ultimate Parent Bank Group uses
the Advanced Internal Ratings Based (‘Advanced IRB’) approach for credit risk, the AMA for operational risk and the internal model approach for
IRRBB for calculating regulatory capital.
APRA’s prudential standards are generally consistent with the International Regulatory Framework for Banks, also known as Basel III, issued by the
BCBS, except where APRA has exercised certain discretions.
The Ultimate Parent Bank Group (excluding entities specifically excluded by APRA regulations), and the Ultimate Parent Bank (Extended Licensed Entity
as defined by APRA), exceeded the minimum capital adequacy requirements as specified by APRA as at 30 September 2019.
Registered bank disclosures
102 Westpac New Zealand Limited
iv. Capital adequacy under the internal models based approach, and regulatory liquidity ratios (Unaudited)
(continued)
Regulatory liquidity ratios
The Bank calculates liquidity ratios in accordance with the BS13. Ratios are calculated daily and are part of the Bank’s management of liquidity risk.
Quarterly, average ratios are produced in line with the Reserve Bank rules and guidance.
THE BANKING GOUP
%30 Sep 1930 Jun 19
Average for the three months ended
One-week mismatch ratio6.55.1
One-month mismatch ratio9.78.1
Core funding ratio82.681.2
v. Concentration of credit exposures to individual counterparties
The following credit exposures are based on actual credit exposures to individual counterparties and groups of closely related counterparties.
The number of individual bank and non-bank counterparties to which the Banking Group has an aggregate credit exposure or peak end-of-day aggregate
credit exposure that equals or exceeds 10% of the Banking Group’s Common Equity Tier 1 capital:
THE BANKING GROUP
2019
Bank Counterparties
1
Non-bank Counterparties
2
Long-term credit ratingLong-term credit rating
% of Banking Group's Common Equity Tier 1 CapitalA- or A3 and aboveA- or A3 and above
As at 30 September 2019
3
Exceeds 10% and not 15% - 2
Exceeds 15% and not 20% - -
Exceeds 20% and not 25% - -
Exceeds 25% and not 30% - 1
Peak end-of-day aggregate credit exposure for the six months ended 30
September 2019
3
Exceeds 10% and not 15% 1 1
Exceeds 15% and not 20% - 1
Exceeds 20% and not 25% - -
Exceeds 25% and not 30% - 1
1
A counterparty is a bank counterparty if it is a bank that is not a member of a group of closely related counterparties or it is a group of closely related
counterparties of which a bank is the parent.
2
A counterparty is a non-bank counterparty if it is a non-bank that is not a member of a group of closely related counterparties or it is a group of closely related
counterparties of which a bank is not the parent.
3
There were no individual bank or non-bank counterparties with aggregate credit exposure that equals or exceeds 10% of the Banking Group’s Common Equity Tier 1
capital and with a long-term credit rating of less than A- or A3, or its equivalent, or unrated.
The peak end-of-day aggregate credit exposure to each individual counterparty (which are not members of a group of closely related
counterparties) or a group of closely related counterparties has been calculated by determining the maximum end-of-day aggregate amount of
actual credit exposure over the relevant six-month period, and then dividing that amount by the Banking Group’s Common Equity Tier 1 capital as at
30 September 2019.
Credit exposures to individual counterparties (not being members of a group of closely related counterparties) and to groups of closely related
counterparties exclude exposures to connected persons, to the central government or central bank of any country with a long-term credit rating of
A- or A3 or above, or its equivalent, or to any supranational or quasi-sovereign agency with a long-term credit rating of A- or A3 or above, or its
equivalent. These calculations relate only to exposures held in the financial records of the Banking Group and were calculated net of individually
assessed provisions.
Registered bank disclosures
Westpac New Zealand Limited 103
vi. Credit exposures to connected persons
The Banking Group's credit exposure to connected persons is derived in accordance with the Bank’s conditions of registration and the Reserve Bank
document 'Connected Exposures Policy' (BS8), is net of individual credit impairment allowances and excludes advances to connected persons of a
capital nature.
The Reserve Bank defines connected persons to be other members of the Ultimate Parent Bank Group and Directors of the Bank. Controlled entities
of the Bank are not connected persons. Credit exposures to connected persons are based on actual credit exposures rather than internal limits.
Peak end-of-day aggregate credit exposures to connected persons expressed as a percentage of Tier 1 capital of the Banking Group have been
derived by determining the maximum end-of-day aggregate amount of credit exposure over the year ended 30 September 2019 and then dividing
that amount by the Banking Group’s Tier 1 capital as at 30 September 2019.
Credit exposures to connected persons reported in the table below have been calculated on a partial bilateral net basis. Netting has occurred in
respect of certain transactions which are the subject of a bilateral netting agreement. On this basis, there is a limit of 125% of the Banking Group’s
Tier 1 capital in respect of the gross amount of aggregate credit exposure to connected persons that can be netted off in determining the net
exposure.
THE BANKING GROUP
As at
Peak End-of-
day for the
Year Ended
$ millions
30 Sep 19
30 Sep 19
Credit exposures to connected persons:
On gross basis, before netting 2,775 4,587
As a percentage of Tier 1 capital of the Banking Group at end of the year35.1%58.0%
Amount that has been netted off in determining the net exposure 1,785 3,282
As a percentage of Tier 1 capital of the Banking Group at end of the year22.6%41.5%
On partial bilateral net basis 990 1,305
As a percentage of Tier 1 capital of the Banking Group at end of the year12.5%16.5%
Credit exposures to non-bank connected persons 22 22
As a percentage of Tier 1 capital of the Banking Group at end of the year0.3%0.3%
As at 30 September 2019, the rating-contingent limit applicable to the Banking Group was 60% of Tier 1 capital on a partial bilateral net basis. There
have been no changes to this rating-contingent limit over the year ended 30 September 2019. Within the overall rating-contingent limit there is a
sub-limit of 15% of Tier 1 capital which applies to the aggregate credit exposure to non-bank connected persons.
Where a bank is funding a large loan it is common practice to share the risk of a customer default through risk transfer to an acceptable entity.
These arrangements are called risk lay-off arrangements. As at 30 September 2019, the Banking Group had $2 million of aggregate contingent
exposures to connected persons arising from risk lay-off arrangements in respect of credit exposures to counterparties (excluding counterparties
that are connected persons).
The aggregate amount of the Banking Group’s loss allowance for credit exposures to connected persons that are credit impaired was nil as at 30
September 2019.
Registered bank disclosures
104 Westpac New Zealand Limited
vii. Insurance business, securitisation, funds management, other fiduciary activities, and marketing and
distribution of insurance products
Insurance business
The Banking Group does not conduct any insurance business (as that term is defined in the Order).
The Banking Group’s involvement in securitisation, funds management, other fiduciary activities, and marketing and
distribution of insurance products
Securitisation
The Banking Group uses structured entities to securitise its financial assets through the CB Programme and the Bank’s internal residential mortgage-
backed securitisation program. Refer to Note 29 Securitisation, covered bonds and other transferred assets for further information and amounts of
outstanding securitised assets.
Funds management and other fiduciary activities
The Bank markets the products of BTNZ, a member of the Ultimate Parent Bank Group, through its branches, advisory network and private bank. The
Bank derives distribution fees from the sale of managed fund products, superannuation and unit trusts marketed on behalf of BTNZ. The Bank also
provides investment advice to a number of clients, which includes the provision of other fiduciary activities.
The PIE Funds are administered by the Banking Group (refer to Note 22 for further details) and invest in deposits with the Bank. The Bank is considered
to control the PIE Funds, and as such they are consolidated within the financial statements of the Banking Group. As at 30 September 2019, $3,418
million (30 September 2018: $3,249 million) of funds under management were invested by the PIE Funds in the Bank’s deposits.
Other than funds under management disclosed above, there are no funds held in trust, funds under custodial arrangements or other funds held or
managed subject to fiduciary responsibilities by any member of the Banking Group (30 September 2018: nil).
Marketing and distribution of insurance products
The Bank markets and distributes both life and general insurance products. The life insurance products are underwritten by Westpac Life-NZ- Limited,
a member of the Ultimate Parent Bank Group, and by external third party insurance companies. The general insurance products are fully underwritten
by external third party insurance companies. Disclosures are made in marketing material that the products are underwritten by those companies and
that the Bank does not guarantee the obligations of, or any products issued by, those companies.
Arrangements to ensure no adverse impacts arising from the above activities
The Banking Group’s risk management strategy (refer to Note 32) will help minimise the possibility that any difficulties arising from the above activities
would adversely impact the Banking Group.
Financial services provided to entities conducting the above activities
Financial services provided by any member of the Banking Group to entities which conduct the trust, custodial, securitisation, funds management and
other fiduciary activities described above, or on whose behalf insurance products are marketed or distributed, have been provided at arm’s length
terms and conditions and at fair value.
Assets purchased from entities conducting the above activities
Assets purchased by any member of the Banking Group from entities which conduct the trust, custodial, securitisation, funds management and other
fiduciary activities specified above, or on whose behalf insurance products are marketed or distributed, have been purchased on arm’s length terms
and conditions and at fair value.
Funding provided to entities in aggregate and individually
During the year ended 30 September 2019, the Banking Group did not provide any funding to entities conducting funds management and other
fiduciary activities, securitisation activities or insurance product marketing and distribution activities described in this note (30 September 2018:
nil).
Registered bank disclosures
Westpac New Zealand Limited 105
viii. Risk management policies
Information about risk
Risk management strategy
The Banking Group regards the management of risk to be a fundamental management activity performed at all levels of its business. The Banking
Group’s risk management strategy includes a sound risk culture and sets out minimum standards for risk management across all risk types (‘Risk
Management Strategy’). The Banking Group adopts a ‘Three Lines of Defence’ approach to risk management which reflects our culture of ‘risk is
everyone’s business’ in which all employees are responsible for identifying and managing risk and operating within the Banking Group’s desired risk
profile.
The 1st Line of Defence – Risk identification, risk management and self-assurance
Divisional business units and corporate core functions are responsible for identifying, evaluating and managing the risks that originate within approved
risk appetite and policies. They are required to establish and maintain appropriate risk management controls, resources and self-assurance
processes.
The 2nd Line of Defence – Establishment of risk management frameworks and policies and risk management oversight
The 2nd Line of Defence comprises separate risk and compliance advisory, control, assurance and monitoring functions which establish frameworks,
policies, limits and processes for the management, monitoring and reporting of risk. The 2nd Line of Defence may approve risks outside the authorities
granted to the 1st Line and also evaluate and provide assurance over the adequacy and effectiveness of 1st Line controls and application of frameworks
and policies and, where necessary, require improvement and monitor the 1st Line’s progress toward remediation of identified deficiencies.
The 3rd Line of Defence – Independent assurance
The audit function independently evaluates, and opines on, the adequacy and effectiveness of the overall risk management framework and controls to
the Board and senior executives.
Financial risks
Refer to Note 32 Financial risk management for a discussion of the financial risks faced by the Banking Group.
Other key material risks
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The definition is
aligned to the regulatory (Basel II) definition, including legal and regulatory risk but excluding strategic and reputation risk.
Operational risk has the potential, as a result of the way business objectives are pursued, to negatively impact the Banking Group’s financial
performance, customer service and/or reputation in the community or cause other damage to the business.
The Banking Group has an Operational Risk Management Framework, which is aligned to the Ultimate Parent Bank’s Operational Risk Framework and
outlines the business requirements for managing operational risk with respect to governance, risk and control assessments, incident management,
and reporting and monitoring. This Framework is approved by the BRCC.
The AMA methodology for calculating operational risk capital has been implemented which takes into account internal and external factors and
scenario analysis. An allocation methodology is in place for the economic capital calculated.
Compliance risk
Compliance risk is the risk of legal or regulatory sanction, financial loss or reputation loss arising from the Banking Group’s failure to abide by the
compliance obligations required of the Banking Group.
The Bank has a Compliance Management Framework and a dedicated compliance function to assist the business in managing its compliance risks.
The Bank’s RISKCO, chaired by the Bank’s Chief Risk Officer, is responsible for overseeing the effectiveness and implementation of the Operational Risk
and Compliance Frameworks. RISKCO monitors the operational risk profiles and the action plans, and has the discretion to escalate material matters
to the Bank’s BRCC and/or the relevant Ultimate Parent Bank Group Risk Committee.
The Bank is subject to regulation and regulatory oversight. Any significant regulatory developments could have an adverse effect on how business is
conducted and on the results of operations. Business and earnings are also affected by the fiscal or other policies that are adopted by various
regulatory authorities of the New Zealand Government, foreign governments and international agencies. The nature and impact of future changes in
such policies are not predictable and are beyond the Bank’s control.
Effective compliance risk management enables the Bank to identify emerging issues and, where necessary, put in place preventative measures.
Registered bank disclosures
106 Westpac New Zealand Limited
viii. Risk management policies (continued)
Other risk classes include:
Conduct risk: the risk that the Banking Group’s services and products do not deliver clear, fair and suitable outcomes for the Banking Group’s
customers or undermines market integrity;
Business risk: the risk associated with the vulnerability of a line of business to changes in the business environment;
Equity risk: the potential for financial loss arising from movements in equity values. Equity risk may be direct, indirect or contingent;
Reputation risk: the risk of loss of reputation, stakeholder confidence, or public trust and standing; and
Sustainability risk: the risk of reputation or financial loss due to failure to recognise or address material existing or emerging sustainability related
environmental, social or governance issues.
Capital adequacy
Refer to Note 31 Capital management for the Banking Group’s approach to assessing the adequacy of its capital to support current and future
activities and the role that directors and senior management take in the capital management process.
Reviews of the Banking Group’s risk management systems
The Ultimate Parent Bank Group Audit’s Credit Portfolio Review function has a rolling programme of credit and model risk reviews throughout the
financial year. The Banking Group’s independent assurance unit (‘New Zealand Audit’), with support from the Ultimate Parent Bank's Group Audit
unit, also periodically reviews the Bank’s Operational, Compliance, Market, Funding and Liquidity Risk Frameworks.
The reviews discussed above in this section are not conducted by a party which is external to the Banking Group or the Ultimate Parent Bank, though
they are independent and have no direct authority over the activities of management.
Various external reviews of the Bank’s risk management system have been conducted during the year ended 30 September 2019 as part of ongoing
compliance with regulatory requirements.
Internal audit function of the Banking Group
New Zealand Audit comprises a New Zealand based audit team, supported by the Ultimate Parent Bank Credit Portfolio Review (including Model Risk)
functions, which report to the Bank’s BAC, as well as to the Ultimate Parent Bank.
New Zealand Audit, as an independent function, has no direct authority over the activities of management. It has unlimited access to all of the Banking
Group’s activities, records, property and employees. The scope of responsibility of New Zealand Audit covers systems of management control across
all business activities and support functions at all levels of management within the Banking Group. The level of risk across all material risk classes
determines the scope and frequency of individual audits. The audit methodology aims at achieving a review of the very high risk areas annually and the
high risk areas bi-annually, medium risk areas every 3 years and low risk areas every 4 years. The Head of New Zealand Audit reports on a quarterly
basis, or more often as deemed appropriate, to the Bank’s BAC, to agree the budget and the annual audit plan and to report its findings. In addition,
the Bank’s BAC has private sessions with the Head of New Zealand Audit. Furthermore, the Head of New Zealand Audit reports to the Chair of the
Bank’s BAC, and for administrative purposes to the Bank’s Chief Financial Officer and the Ultimate Parent Bank’s General Manager Group Audit.
The Bank’s BAC assists the Board in fulfilling its responsibilities in relation to:
external reporting of financial information, internal control of operational risk, the efficiency and effectiveness of audit and compliance with
regulatory and statutory reporting requirements; and
the review of the interim and annual financial statements, the activities of the Banking Group's internal auditors and monitoring of the
relationship between management and the external auditors.
Registered bank disclosures
Westpac New Zealand Limited 107
viii. Risk management policies (continued)
Measurement of impaired assets
Impaired assets are measured on a monthly basis. Refer to Note 6 Impairment charges/(benefits) and Note 12 Provisions for expected credit losses
which describe the approaches the Banking Group follows for assessing asset impairment.
Total net loans represent the estimated recoverable amounts which are net of provisions for impairment.
Credit risk mitigation
Refer to Note 32.2.2 Credit risk mitigation, collateral and other credit enhancements and Note 25 Offsetting financial assets and financial liabilities for
the policies and processes the Banking Group follows to mitigate credit risk.
Where the effect of credit risk mitigation through eligible collateral is used to reduce our measure of risk, the Banking Group, as an Advanced Internal
Ratings Based (‘AIRB’) Bank, uses the comprehensive method to measure the mitigating effects of the collateral or eligible guarantees.
Additional information about credit risk
Classification of Banking Group exposures according to rating approach
The Banking Group reports capital adequacy under BS2B. Under the IRB approach for the measurement of credit risk, banks use their own tools to
calculate both expected and unexpected loss probabilities for their customers and exposures. For exposures classified under specialised lending, the
Banking Group uses slotting tables supplied by the Reserve Bank rather than internal estimates. The Banking Group has some minor portfolios that,
due to system or other constraints, are not assessed under an IRB approach. Risk weights for these exposures are assessed for capital adequacy under
the standardised approach as set out in the Reserve Bank document Capital Adequacy Framework (Standardised Approach) (‘BS2A’).
Asset Class
Banking Group
CategorySegmentation Criteria
Rating
Approach
CorporateCorporateAll transaction-managed customers not elsewhere classified where annual
turnover exceeds $50 million.
IRB
Business lendingAll transaction-managed customers not elsewhere classified where annual
turnover is $50 million or less.
IRB
Specialised lending -
property
Applied to transaction-managed customers where the primary source of debt
service, security and repayment is derived from either the sale of a property
development or income produced by one or more investment properties.
IRB - Slotting
Specialised lending -
project finance
Applied to transaction-managed customers where the primary source of debt
service, repayment and security is revenues generated by a project.
IRB - Slotting
SovereignSovereignApplied to transaction-managed customers identified by ANZSIC code.IRB
BankBankApplied to transaction-managed customers identified by ANZSIC code and
public sector entities.
IRB
Residential
mortgages
Residential mortgagesAll program-managed exposures secured by residential mortgages defined as
housing lending.
IRB
Other retailSmall businessProgram-managed business lending.IRB
Other retailAll other program-managed lending to retail customers, including New
Zealand credit cards, personal loans and personal overdrafts.
IRB
EquityEquityAll equity items that have not been deducted from capital and meet the
definition of equity exposures in paragraph 4.8 of BS2B.
IRB
Other assetsOther assetsAll other assets not falling within the above classes.Standardised
Registered bank disclosures
108 Westpac New Zealand Limited
viii. Risk management policies (continued)
Overview of the internal credit risk ratings process by portfolio
(a) Transaction-managed approach (including business lending, corporate, Sovereign and bank)
The process for assignment and approval of individual PDs and LGDs involves business unit representatives recommending the CRGs and LGDs
under criteria guidelines. Credit Officers then independently evaluate the recommendations and approve the final outcomes. An expert judgement
decision-making process is employed to evaluate the CRG. The following represent the types of business lending, corporate, sovereign and banking
exposures included within the transaction-managed portfolio approach:
direct lending exposures;
contingent lending exposures;
pre-settlement exposures;
foreign exchange settlement exposures; and
transaction exposures.
All of the above exposure categories also apply to Specialised Lending, which is a sub-asset class of Corporate and in the Banking Group comprises
Property Finance and Project Finance. Regulatory risk-weights are also applied to Specialised Lending.
Definitions, methods and data for estimation and validation of PD, LGD and EAD
PD
The PD is a through-the-cycle assessment of the likelihood of a customer defaulting on its financial obligations within one year. The Banking Group
reflects its PD estimate in a CRG.
LGD
The LGD represents an estimate of the expected severity of a loss to the Banking Group should a customer default occur during an economic
downturn. The Banking Group assigns an LGD to each credit facility, assuming an event of default has occurred, and taking into account a
conservative estimate of the net realisable value of assets to which the Banking Group has recourse and over which it has security. LGDs also reflect
the seniority of exposures in the customer’s capital and debt structure.
LGD estimates are benchmarked against observed historical LGDs from internal and external data and are calibrated to reflect losses expected in an
economic downturn. The calculation of historical LGDs is based on an economic loss and includes allowances for workout costs and the discounting
of future cash flows to the date of default.
LGD values range from 5% to 100%. The range of LGD values ensures that the risk of loss is differentiated across many credit facilities extended
to customers.
EAD and Credit Conversion Factor (‘CCF’)
EAD represents an estimate of the amount of committed exposure expected to be drawn by the customer at the time of default. To calculate EAD,
historical data is analysed to determine what proportion of undrawn commitments are ultimately utilised by customers who end up in default. The
proportion of undrawn commitments ultimately utilised by customers is termed the CCF. EAD therefore consists of the initial outstanding balances
plus the CCF multiplied by undrawn commitments. For transaction-managed exposures CCF’s are all 100%.
(b) Retail (program-managed) asset class approach (including residential mortgages, small business and other retail)
Each customer is rated using details of their account performance or application details and segmented into pools of similar risk. These segments
are created by analysing characteristics that have historically proven predictive in determining if an account is likely to go into default. Customers
are then grouped according to these predictive characteristics of default. The retail (program-managed) portfolio is divided into a number of
segments per product with each segment assigned a quantified measurement of its PD, LGD and EAD.
Retail asset class exposures included in the retail (program-managed) portfolio approach are split into the following categories of products:
Asset sub-classesProduct categories
Residential mortgages
Mortgages
Small business
Equipment finance
Business overdrafts
Business term loans
Business credit cards
Other retail
Credit cards
Personal loans
Overdrafts
Registered bank disclosures
Westpac New Zealand Limited 109
viii. Risk management policies (continued)
PD
PDs are assigned at the retail segment level and reflect the likelihood of accounts within that segment to default. A long-run average is used to
assign a PD to each account in a segment based on the segment’s characteristics. The PD estimate for each segment is based on internal data.
Models are used to help determine or establish the appropriate internal rating for program-managed portfolios.
LGD
LGD measures the proportion of the exposure that will be lost if default occurs. LGD is measured as a percentage of EAD. The approach to LGD
varies depending on whether the retail product is secured or unsecured. A downturn period is used to reflect the effect on the collateral for secured
products. For unsecured products, a long-run estimate is used for LGD.
EAD
EAD represents an estimate of the amount of committed exposure expected to be drawn by the customer at the time of default. To calculate EAD,
historical data is analysed to determine what proportion of undrawn commitments are ultimately utilised by customers who end up in default.
Additional information about operational risk
Calculating operational risk capital
Operational risk regulatory capital is calculated on a quarterly basis.
The Banking Group operational risk capital is based on three data sources:
Internal Loss Data – operational risk losses experienced by the Banking Group;
External Loss Data – operational risk losses experienced by other financial institutions; and
Scenario Data – potential losses from extreme but plausible events relevant to the Banking Group.
These data sources together represent the internal and external operational risk profile, across the spectrum of operational risk losses, from both
historical and forward-looking perspectives. The model combines these data sources to produce a loss distribution.
No adjustments or deductions are currently made to the Banking Group’s measurement of operational risk regulatory capital for the mitigating impacts
of insurance or expected operational risk losses.
Controls surrounding credit risk rating systems
Refer to Note 32.1 Risk management frameworks and Note 32.2.1 Credit risk ratings system for a discussion of the control mechanisms for the rating
systems the Banking Group uses to measure credit risk.
Conditions of registration
110 Westpac New Zealand Limited
Conditions of registration for Westpac New Zealand Limited
The registration of the Bank in New Zealand is subject to the following
conditions, which applied on and after 1 January 2019:
The registration of the Bank as a registered bank is subject to the
following conditions:
1.That:
(a) the Total capital ratio of the Banking Group is not less than
10%;
(b) the Tier 1 capital ratio of the Banking Group is not less than
8%;
(c) the Common Equity Tier 1 capital ratio of the Banking Group is
not less than 6.5%;
(d) the Total capital of the Banking Group is not less than $30
million;
(e) the bank must not include the amount of an Additional Tier 1
capital instrument or Tier 2 capital instrument issued after 1
January 2013 in the calculation of its capital ratios unless it has
received a notice of non-objection to the instrument from the
Reserve Bank; and
(f) the bank meets the requirements of Part 3 of the Reserve Bank
of New Zealand document ‘Application requirements for
capital recognition or repayment and notification
requirements in respect of capital’ (‘BS16’) dated November
2015 in respect of regulatory capital instruments.
For the purposes of this condition of registration:
the scalar referred to in the Reserve Bank of New Zealand
document ‘Capital Adequacy Framework (Internal Models Based
Approach)’ (‘BS2B’) dated November 2015 is 1.06;
‘Total capital ratio’, ‘Tier 1 capital ratio’, and ‘Common Equity Tier 1
capital ratio’ have the same meaning as in Part 3 of the Reserve
Bank of New Zealand document ‘Capital Adequacy Framework
(Internal Models Based Approach)’ (BS2B) dated November 2015;
‘Total capital’ has the same meaning as in Part 2 of the Reserve
Bank of New Zealand document ‘Capital Adequacy Framework
(Internal Models Based Approach)’ (BS2B) dated November 2015;
an Additional Tier 1 capital instrument is an instrument that meets
the requirements of subsection 2.13(a) or (c) of the Reserve Bank of
New Zealand document ‘Capital Adequacy Framework (Internal
Models Based Approach)’ (BS2B) dated November 2015;
a Tier 2 capital instrument is an instrument that meets the
requirements of subsection 2.16(a) or (c) of the Reserve Bank of
New Zealand document ‘Capital Adequacy Framework (Internal
Models Based Approach)’ (BS2B) dated November 2015.
1A.That:
(a) the bank has an internal capital adequacy assessment process
(‘ICAAP’) that accords with the requirements set out in the
document ‘Guidelines on a bank’s internal capital adequacy
assessment process (‘ICAAP’)’ (‘BS12’) dated December 2007;
(b) under its ICAAP the bank identifies and measures its ‘other
material risks’ defined as all material risks of the Banking
Group that are not explicitly captured in the calculation of the
Common Equity Tier 1 capital ratio, the Tier 1 capital ratio and
the Total capital ratio under the requirements set out in the
document ‘Capital Adequacy Framework (Internal Models
Based Approach)’ (BS2B) dated November 2015; and
(c) the bank determines an internal capital allocation for each
identified and measured ‘other material risk’.
1B.That the bank complies with the minimum requirements set out in
the following sections of the Reserve Bank of New Zealand
document ‘Capital Adequacy Framework (Internal Models Based
Approach)’ (BS2B) dated November 2015:
(a) the model approval requirements in section 1.3A;
(b) the compendium requirements in section 1.3B;
(c) the minimum requirements for the IRB approach in sections
4.217 to 4.324 (that is, Subpart 4C of BS2B); and
(d) the minimum requirements for using the AMA approach for
operational risk set out in sections 8.4 to 8.34.
1C.That, if the buffer ratio of the Banking Group is 2.5% or less, the
bank must:
(a) according to the following table, limit the aggregate
distributions of the bank’s earnings to the percentage limit to
distributions that corresponds to the Banking Group’s buffer
ratio:
Banking Group’s
buffer ratio
Percentage limit to distributions
of the Bank’s earnings
0% – 0.625%0%
>0.625 – 1.25%20%
>1.25 – 1.875%40%
>1.875 – 2.5%60%
(b) prepare a capital plan to restore the Banking Group’s buffer
ratio to above 2.5% within any timeframe determined by the
Reserve Bank for restoring the buffer ratio; and
(c) have the capital plan approved by the Reserve Bank.
For the purposes of this condition of registration:
‘buffer ratio’, ‘distributions’, and ‘earnings’ have the same meaning
as in Part 3 of the Reserve Bank of New Zealand document: ‘Capital
Adequacy Framework (Internal Models Based Approach)’ (BS2B)
dated November 2015.
the scalar referred to in the Reserve Bank of New Zealand
document ‘Capital Adequacy Framework (Internal Models Based
Approach)’ (BS2B) dated November 2015 is 1.06.
2.That the Banking Group does not conduct any non-financial
activities that in aggregate are material relative to its total
activities.
In this condition of registration, the meaning of ‘material’ is based
on generally accepted accounting practice.
3.That the Banking Group’s insurance business is not greater than
1% of its total consolidated assets.
For the purposes of this condition of registration, the Banking
Group’s insurance business is the sum of the following amounts for
entities in the Banking Group:
(a) if the business of an entity predominantly consists of
insurance business and the entity is not a subsidiary of
another entity in the Banking Group whose business
predominantly consists of insurance business, the amount of
the insurance business to sum is the total consolidated assets
of the group headed by the entity; and
Conditions of registration
Westpac New Zealand Limited 111
(b) if the entity conducts insurance business and its business does
not predominantly consist of insurance business and the
entity is not a subsidiary of another entity in the Banking Group
whose business predominantly consists of insurance business,
the amount of the insurance business to sum is the total
liabilities relating to the entity’s insurance business plus the
equity retained by the entity to meet the solvency or financial
soundness needs of its insurance business.
In determining the total amount of the Banking Group’s insurance
business:
(a) all amounts must relate to on balance sheet items only, and
must comply with generally accepted accounting practice;
and
(b) if products or assets of which an insurance business is
comprised also contain a non-insurance component, the
whole of such products or assets must be considered part of
the insurance business.
For the purposes of this condition of registration:
‘insurance business’ means the undertaking or assumption of
liability as an insurer under a contract of insurance:
‘insurer’ and ‘contract of insurance’ have the same meaning as
provided in sections 6 and 7 of the Insurance (Prudential
Supervision) Act 2010.
4.That the aggregate credit exposures (of a non-capital nature and
net of any allowances for impairment) of the Banking Group to all
connected persons do not exceed the rating-contingent limit
outlined in the following matrix:
Credit rating of the bank
Connected exposure limit (% of the Banking Group’s Tier 1 capital)
Credit rating of the Bank
1
Connected exposure limit
(% of the Banking Group’s Tier 1 capital)
AA/Aa2 and above75
AA-/Aa370
A+/A160
A/A240
A-/A330
BBB+/Baa1 and below15
1
This table uses the rating scales of S&P, Fitch Ratings and Moody’s (Fitch
Ratings’ scale is identical to S&P).
Within the rating-contingent limit, credit exposures (of a non-
capital nature and net of any allowances for impairment) to non-
bank connected persons shall not exceed 15% of the Banking
Group’s Tier 1 capital.
For the purposes of this condition of registration, compliance with
the rating-contingent connected exposure limit is determined in
accordance with the Reserve Bank of New Zealand document
entitled ‘Connected exposures policy’ (BS8) dated November 2015.
5.That exposures to connected persons are not on more favourable
terms (e.g. as relates to such matters as credit assessment, tenor,
interest rates, amortisation schedules and requirement for
collateral) than corresponding exposures to non-connected
persons.
6.That the bank complies with the following corporate governance
requirements:
(a) the board of the bank must have at least five directors;
(b) the majority of the board members must be non-executive
directors;
(c) at least half of the board members must be independent
directors;
(d) an alternate director:
(i) for a non-executive director must be non-executive; and
(ii) for an independent director must be independent;
(e) at least half of the independent directors of the bank must be
ordinarily resident in New Zealand;
(f) the chairperson of the board of the bank must be
independent; and
(g) the bank’s constitution must not include any provision
permitting a director, when exercising powers or performing
duties as a director, to act other than in what he or she
believes is the best interests of the company (i.e. the bank).
For the purposes of this condition of registration, ‘non-executive’
and ‘independent’ have the same meaning as in the Reserve Bank
of New Zealand document entitled ‘Corporate Governance’ (BS14)
dated July 2014.
7.That no appointment of any director, chief executive officer, or
executive who reports or is accountable directly to the chief
executive officer, is made in respect of the bank unless:
(a) the Reserve Bank has been supplied with a copy of the
curriculum vitae of the proposed appointee; and
(b) the Reserve Bank has advised that it has no objection to that
appointment.
8.That a person must not be appointed as chairperson of the board
of the bank unless:
(a) the Reserve Bank has been supplied with a copy of the
curriculum vitae of the proposed appointee; and
(b) the Reserve Bank has advised that it has no objection to that
appointment.
9.That the bank has a board audit committee, or other separate
board committee covering audit matters, that meets the following
requirements:
(a) the mandate of the committee must include: ensuring the
integrity of the bank’s financial controls, reporting systems
and internal audit standards;
(b) the committee must have at least three members;
(c) every member of the committee must be a non-executive
director of the bank;
(d) the majority of the members of the committee must be
independent; and
(e) the chairperson of the committee must be independent and
must not be the chairperson of the bank.
For the purposes of this condition of registration, ‘non-executive’
and ‘independent’ have the same meaning as in the Reserve Bank
of New Zealand document entitled ‘Corporate Governance’ (BS14)
dated July 2014.
10.That a substantial proportion of the bank’s business is conducted
in and from New Zealand.
11.That the bank has legal and practical ability to control and execute
any business, and any functions relating to any business, of the
bank that are carried on by a person other than the bank, sufficient
to achieve, under normal business conditions and in the event of
stress or failure of the bank or of a service provider to the bank, the
following outcomes:
Conditions of registration
112 Westpac New Zealand Limited
(a) that the bank’s clearing and settlement obligations due on a
day can be met on that day;
(b) that the bank’s financial risk positions on a day can be
identified on that day;
(c) that the bank’s financial risk positions can be monitored and
managed on the day following any failure and on subsequent
days; and
(d) that the bank’s existing customers can be given access to
payments facilities on the day following any failure and on
subsequent days.
This condition ceases to apply in respect of an existing outsourcing
arrangement on the earlier of either 1 October 2022 or when the
existing outsourcing arrangement becomes compliant with
condition 25, from which point in time condition 25 will apply to
that outsourcing arrangement.
For the purpose of this condition of registration:
(a) the term ‘legal and practical ability to control and execute’ is
explained in the Reserve Bank of New Zealand document
entitled ‘Outsourcing Policy’ (BS11) dated January 2006; and
(b) the term ‘existing outsourcing arrangement’ is defined in the
Reserve Bank of New Zealand document entitled ‘Outsourcing
Policy’ (BS11) dated September 2017.
12.That:
(a) the business and affairs of the bank are managed by, or under
the direction or supervision of, the board of the bank;
(b) the employment contract of the chief executive officer of the
bank or person in an equivalent position (together ‘CEO’) is
with the bank, and the terms and conditions of the CEO’s
employment agreement are determined by, and any decisions
relating to the employment or termination of employment of
the CEO are made by, the board of the bank; and
(c) all staff employed by the bank have their remuneration
determined by (or under the delegated authority of) the board
or the CEO of the bank and are accountable (directly or
indirectly) to the CEO of the bank.
13.That, for the purposes of calculating the bank’s capital ratios on a
solo basis, a credit conversion factor of zero is only applied to a
guarantee of a financing subsidiary’s financial obligations if, in
substance, the guarantee does not create a risk of loss for the
bank.
14.That the Banking Group complies with the following quantitative
requirements for liquidity-risk management:
(a) the one-week mismatch ratio of the Banking Group is not less
than zero per cent at the end of each business day;
(b) the one-month mismatch ratio of the Banking Group is not
less than zero per cent at the end of each business day; and
(c) the one-year core funding ratio of the Banking Group is not
less than 75 per cent at the end of each business day.
For the purposes of this condition of registration, the ratios
identified must be calculated in accordance with the Reserve
Bank of New Zealand documents entitled ‘Liquidity Policy’
(BS13) dated January 2018 and ‘Liquidity Policy Annex: Liquid
Assets’ (BS13A) dated October 2018.
15.That the bank has an internal framework for liquidity risk
management that is adequate in the bank’s view for managing the
bank’s liquidity risk at a prudent level, and that, in particular:
(a) is clearly documented and communicated to all those in the
organisation with responsibility for managing liquidity and
liquidity risk;
(b) identifies responsibility for approval, oversight and
implementation of the framework and policies for liquidity risk
management;
(c) identifies the principal methods that the bank will use for
measuring, monitoring and controlling liquidity risk; and
(d) considers the material sources of stress that the bank might
face, and prepares the bank to manage stress through a
contingency funding plan.
16.That no more than 10% of total assets may be beneficially owned
by a SPV.
For the purposes of this condition,:
‘total assets’ means all assets of the Banking Group plus any assets
held by any SPV that are not included in the Banking Group’s
assets:
‘SPV’ means a person:
(a) to whom any member of the Banking Group has sold,
assigned, or otherwise transferred any asset;
(b) who has granted, or may grant, a security interest in its assets
for the benefit of any holder of any covered bond; and
(c) who carries on no other business except for that necessary or
incidental to guarantee the obligations of any member of the
Banking Group under a covered bond:
‘covered bond’ means a debt security issued by any member of the
Banking Group, for which repayment to holders is guaranteed by a
SPV, and investors retain an unsecured claim on the issuer.
17. That:
(a) no member of the Banking Group may give effect to a
qualifying acquisition or business combination that meets the
notification threshold, and does not meet the non-objection
threshold, unless:
(i) the bank has notified the Reserve Bank in writing of the
intended acquisition or business combination and at
least 10 working days have passed; and
(ii) at the time of notifying the Reserve Bank of the intended
acquisition or business combination, the bank provided
the Reserve Bank with the information required under
the Reserve Bank of New Zealand Banking Supervision
Handbook document ‘Significant Acquisitions Policy’
(BS15) dated December 2011; and
(b) no member of the Banking Group may give effect to a
qualifying acquisition or business combination that meets the
non-objection threshold unless:
(i) the bank has notified the Reserve Bank in writing of the
intended acquisition or business combination;
(ii) at the time of notifying the Reserve Bank of the intended
acquisition or business combination, the bank provided
the Reserve Bank with the information required under
the Reserve Bank of New Zealand Banking Supervision
Handbook document ‘Significant Acquisitions Policy’
(BS15) dated December 2011; and
(iii) the Reserve Bank has given the bank a notice of non
objection to the significant acquisition or business
combination.
For the purposes of this condition of registration, ‘qualifying
acquisition or business combination’, ‘notification threshold’ and
‘non-objection threshold’ have the same meaning as in the
Reserve Bank of New Zealand Banking Supervision Handbook
document ‘Significant Acquisitions Policy’ (BS15) dated December
2011.
Conditions of registration
Westpac New Zealand Limited 113
18.That the bank is pre-positioned for Open Bank Resolution and in
accordance with a direction from the Reserve Bank, the bank can:
(a) close promptly at any time of the day and on any day of the
week and that effective upon the appointment of the statutory
manager:
(i)all liabilities are frozen in full; and
(ii) no further access by customers and counterparties to
their accounts (deposits, liabilities or other obligations)
is possible;
(b) apply a de minimis to relevant customer liability accounts;
(c) apply a partial freeze to the customer liability account
balances;
(d) reopen by no later than 9am the next business day following
the appointment of a statutory manager and provide
customers access to their unfrozen funds;
(e) maintain a full freeze on liabilities not pre-positioned for open
bank resolution; and
(f) reinstate customers’ access to some or all of their residual
frozen funds.
For the purposes of this condition of registration, ‘de minimis’,
‘partial freeze’, ‘customer liability account’, and ‘frozen and
unfrozen funds’ have the same meaning as in the Reserve Bank of
New Zealand document ‘Open Bank Resolution (OBR) Pre-
positioning Requirements Policy’ (BS17) dated September 2013.
19.That the bank has an Implementation Plan that:
(a) is up-to-date; and
(b) demonstrates that the bank’s prepositioning for Open Bank
Resolution meets the requirements set out in the Reserve
Bank document: ‘Open Bank Resolution Pre-positioning
Requirements Policy’ (BS 17) dated September 2013.
For the purposes of this condition of registration, ‘Implementation
Plan’ has the same meaning as in the Reserve Bank of New Zealand
document ‘Open Bank Resolution (OBR) Pre-positioning
Requirements Policy’ (BS17) dated September 2013.
20.That the bank has a compendium of liabilities that:
(a) at the product-class level lists all liabilities, indicating which
are:
(i) pre-positioned for Open Bank Resolution; and
(ii)not pre-positioned for Open Bank Resolution;
(b) is agreed to by the Reserve Bank; and
(c) if the Reserve Bank’s agreement is conditional, meets the
Reserve Bank’s conditions.
For the purposes of this condition of registration, ‘compendium of
liabilities’, and ‘pre-positioned and non pre-positioned liabilities’
have the same meaning as in the Reserve Bank of New Zealand
document ‘Open Bank Resolution (OBR) Pre-positioning
Requirements Policy’ (BS17) dated September 2013.
21.That on an annual basis the bank tests all the component parts of
its Open Bank Resolution solution that demonstrates the bank’s
prepositioning for Open Bank Resolution as specified in the bank’s
Implementation Plan.
For the purposes of this condition of registration, ‘Implementation
Plan’ has the same meaning as in the Reserve Bank of New Zealand
document ‘Open Bank Resolution (OBR) Pre-positioning
Requirements Policy’ (BS17) dated September 2013.
That, for a loan-to-valuation measurement period, the total of the
bank’s qualifying new mortgage lending amount in respect of
property-investment residential mortgage loans with a loan-to-
valuation ratio of more than 70%, must not exceed 5% of the total
of the qualifying new mortgage lending amount in respect of
property-investment residential mortgage loans arising in the
loan-to-valuation measurement period.
23.That, for a loan-to-valuation measurement period, the total of the
bank’s qualifying new mortgage lending amount in respect of non
property-investment residential mortgage loans with a loan-to-
valuation ratio of more than 80%, must not exceed 20% of the
total of the qualifying new mortgage lending amount in respect of
non property-investment residential mortgage loans arising in the
loan-to-valuation measurement period.
24.That the bank must not make a residential mortgage loan unless
the terms and conditions of the loan contract or the terms and
conditions for an associated mortgage require that a borrower
obtain the registered bank’s agreement before the borrower can
grant to another person a charge over the residential property
used as security for the loan.
25That the bank must comply with the Reserve Bank of New Zealand
document ‘Outsourcing Policy’ (BS11) dated September 2017.
In these conditions of registration,:
-‘Banking Group’ means Westpac New Zealand Limited (as
reporting entity) and all other entities included in the group as
defined in section 6(1) of the Financial Markets Conduct Act 2013
for the purposes of Part 7 of that Act.
-‘generally accepted accounting practice’ has the same meaning as
in section 8 of the Financial Reporting Act 2013.
In conditions of registration 22 to 24,:
-‘loan-to-valuation ratio’, ‘non property-investment residential
mortgage loan’, ‘property-investment residential mortgage loan’,
‘qualifying new mortgage lending amount in respect of property-
investment residential mortgage loans’, ‘qualifying new mortgage
lending amount in respect of non property-investment residential
mortgage loans’, and ‘residential mortgage loan’ have the same
meaning as in the Reserve Bank of New Zealand document entitled
‘Framework for Restrictions on High-LVR Residential Mortgage
Lending’ (BS19) dated January 2019:
- ‘loan-to-valuation measurement period’ means:
(a) the three calendar month period ending on the last day of
March 2019; and
(b) thereafter a period of three calendar months ending on the
last day of the third calendar month, the first of which ends on
the last day of April 2019.
Non-compliance with conditions of registration
In June 2019, in response to a review under section 95 of the Reserve
Bank Act of the Bank’s compliance with advanced internal rating based
aspects of the Reserve Bank's 'Capital Adequacy Framework (Internal
Models Based Approach)’ (‘BS2B’), the Bank presented the Reserve
Bank with a submission providing an overview of its credit risk rating
system and activities undertaken since FY17 to address compliance
issues and enhance risk management practices.
On 30 October 2019, the Reserve Bank informed the Bank that it had
accepted the submission and measures undertaken by the Bank to
achieve satisfactory compliance with BS2B, and that the Bank would
retain its accreditation to use internal models for credit risk in the
calculation of its regulatory capital requirements.
22.
Conditions of registration
114 Westpac New Zealand Limited
It also advised the Bank that, with effect from 31 December 2019, the
Reserve Bank will remove the requirement imposed on the Bank since
31 December 2017 to maintain minimum regulatory capital ratios which
are two percentage points higher than the ratios applying to other
locally incorporated banks.
During the reporting period, the Bank was non-compliant with
condition of registration 1B (which requires the Bank to comply with
aspects of BS2B) in relation to the matters disclosed below.
It operated versions of various capital models which were not
approved by the Reserve Bank, in some cases since December
2008, and it failed to meet the Reserve Bank’s requirements in
relation to model documentation and associated model
documentation policies. On 30 October 2019, the Reserve Bank
confirmed its approval of all unapproved models, other than a
PD model for a small number of corporate exposures. Work is
underway to address this issue.
The Model Compendium required under 1.3B of BS2B
(‘Compendium’) was not accurate. Further to the Reserve Bank’s
determination, an updated Compendium has been submitted to
the Reserve Bank for review and final approval.
It is not fully compliant with paragraph 4.246 of BS2B in that, with
the exception of wholesale property development and
investment customers, non-retail risk grade credit policy
overrides are not captured and monitored. A new system to
capture relevant non-retail customer credit data has been built,
is in use and will address this issue.
It is not fully compliant with paragraph 4.248 of BS2B in that not
all historical origination data for non-retail customers is
maintained in a format that allows easy accessibility to key data
used to derive the original risk rating. A new system to capture
relevant non-retail customer credit data has been built, is in use
and will address this issue.
During the first quarter of the reporting period, 1 October 2018 to 31
December 2018, the Bank was also non-compliant with condition of
registration 1B in effect during that period in relation to the matters
below. These matters do not result in non-compliance with the version
of condition of registration 1B in effect from 1 January 2019.
It was not fully compliant with paragraph 4.5 of BS2B in that
certain Corporate asset exposures were incorrectly classified as
Sovereign asset exposures. The error has been corrected and the
capital calculations adjusted accordingly. The amount is not
assessed to be material.
It was not fully compliant with paragraph 4.61A of BS2B in that, in
respect of a small number of agricultural customers, it used the
customer limit rather than the current balance for calculating
loan-to-value ratio (‘LVR’). This resulted in an understatement of
Risk Weighted Assets (‘RWA’). The amount is not assessed to be
material.
It was not fully compliant with paragraph 4.210 of BS2B in that
the factor of 8% was not applied in respect of a small number of
exposures in the specialised lending asset class as is required by
that paragraph. This resulted in an understatement of the total
capital ratio by 0.03%. The error has been corrected and the
capital calculations adjusted accordingly. The amount is not
assessed to be material.
For less than one percent of its residential mortgages by loan
value, its use of total committed exposure rather than EAD for
calculating LVR for capital adequacy purposes does not meet the
minimum LGD requirements of paragraph 4.150 A of BS2B.
Additionally, for less than 5% of accounts by number, the
security value utilised within the calculation of LVR is an updated
valuation and not the origination value as required by that
paragraph.
For a small number of corporate customers, certain committed
credit facilities have been incorrectly recorded as uncommitted.
This has been corrected and capital calculations adjusted
accordingly. The aggregate amount is not assessed to be
material.
It was not fully compliant with paragraph 4.156 of BS2B in that an
incorrect EAD factor of 100% (rather than the approved 20%) is
used within the EAD calculations for the retail SME portfolio. This
resulted in an over-statement of RWA. This has been corrected
and capital calculations adjusted accordingly.
It is not fully compliant with paragraphs 4.86-4.97 of BS2B in that
for some exposures where the maturity measure is missing, the
default maturity applied is not a conservative measure. The
amount is not assessed to be material.
As disclosed in Note iv. of the Registered bank disclosures, the
Bank considers its current internal credit model methodologies
result in the retention of an appropriate amount of capital to
reflect its credit risk. Any effect of the non-compliance with
condition of registration 1B on the information relating to capital
adequacy disclosed in Note iv. of the Registered bank disclosures
was not considered by the Bank to be material.
The Bank has identified non-compliance with condition of
registration 25, which requires compliance with the Reserve Bank
Outsourcing Policy (‘BS11’). The Bank renewed three existing
outsourcing arrangements (as defined in BS11) for licensing and
support of software applications (and related dedicated hardware
for one application) and did not have in place the required risk
mitigants for the arrangements as required by BS11. Work is
underway to amend the outsourcing arrangements to include the
requisite risk mitigants.
Westpac New Zealand Limited 115
Independent auditor’s report
To the shareholder of Westpac New Zealand Limited
This report is for the Banking Group, comprising Westpac New Zealand Limited (the ‘Bank’) and the entities it controlled at
30 September 2019 or from time to time during the financial year.
This report includes our:
audit opinion on the financial statements prepared in accordance with Clause 24 of the Registered Bank Disclosure
Statements (New Zealand Incorporated Registered Banks) Order 2014 (as amended) (the ‘Order’), New Zealand
Equivalents to International Financial Reporting Standards (‘NZ IFRS’) and International Financial Reporting Standards
(‘IFRS’);
audit opinion on the supplementary information prepared in accordance with Schedules 4, 7, 13, 14, 15 and 17 of the
Order;
audit opinion on other legal and regulatory requirements in accordance with Clauses 2(1)(d) and 2(1)(e) of Schedule 1 of
the Order; and
review conclusion on the supplementary information relating to capital adequacy and regulatory liquidity requirements
prepared in accordance with Schedule 11 of the Order.
Report on the audit of the financial statements and supplementary information (excluding the supplementary information
relating to capital adequacy and regulatory liquidity requirements)
We have audited the Banking Group’s financial statements required by Clause 24 of the Order and the supplementary
information required by Schedules 4, 7, 13, 14, 15 and 17 of the Order which comprises:
the balance sheet as at 30 September 2019;
the income statement for the year then ended;
the statement of comprehensive income for the year then ended;
the statement of changes in equity for the year then ended;
the statement of cash flows for the year then ended;
the notes to the financial statements, which include the principal accounting policies; and
the supplementary information required by Schedules 4, 7, 13, 14, 15 and 17 of the Order.
Our opinion
In our opinion:
the Banking Group’s financial statements (excluding the supplementary information disclosed in accordance with
Schedules 4, 7, 11, 13, 14, 15 and 17 of the Order and included within notes ii to viii of the registered bank disclosures):
i.comply with generally accepted accounting practice in New Zealand;
ii.comply with NZ IFRS and IFRS; and
iii.give a true and fair view of the financial position of the Banking Group as at 30 September 2019, and its financial
performance and cash flows for the year then ended.
the supplementary information disclosed in accordance with Schedules 4, 7, 13, 14, 15 and 17 of the Order and included
within notes ii, iii and v to viii of the registered bank disclosures:
i.has been prepared, in all material respects, in accordance with the guidelines issued under section 78(3) of the
Reserve Bank of New Zealand Act 1989 or any conditions of registration;
ii.is in accordance with the books and records of the Banking Group; and
iii.fairly states, in all material respects, the matters to which it relates in accordance with those Schedules.
PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand
T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz
116 Westpac New Zealand Limited
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs (NZ)) and International
Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities
for the audit of the financial statements and supplementary information (excluding the supplementary information relating
to capital adequacy and regulatory liquidity requirements) section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Our audit approach
Overview
An audit is designed to obtain reasonable assurance about whether the financial statements are
free from material misstatement.
The overall Banking Group materiality: $66.0 million, which represents approximately 5% of
profit before income tax.
We chose profit before income tax as the basis for our benchmark because, in our view, it is the
benchmark against which the performance of the Banking Group is most commonly measured by
users, and is a generally accepted benchmark. We chose 5% based on our professional judgement,
noting that it is also within the range of commonly accepted profit-related thresholds.
We have determined that there are two key audit matters:
Provision for expected credit losses
Operation of IT systems and controls
Materiality
The scope of our audit was influenced by our application of materiality.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall
Banking Group materiality for the financial statements as a whole as set out above. These, together with qualitative
considerations, helped us to determine the scope of our audit, the nature, timing and extent of our audit procedures and to
evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
Audit scope
We designed our audit by assessing the risks of material misstatement in the financial statements and our application of
materiality. As in all of our audits, we also addressed the risk of management override of internal controls including among
other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to
fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial
statements as a whole, taking into account the structure of the Banking Group, the accounting processes and controls, and the
industry in which the Banking Group operates. Certain operational processes which are critical to financial reporting for the
Banking Group are undertaken outside of New Zealand. We worked with a PwC member firm engaged in the Westpac Banking
Corporation group audit to understand certain processes that supported material balances, classes of transactions and
disclosures within the Banking Group’s financial statements. This enabled us to evaluate the effectiveness of the controls over
those processes and consider the implications for the remainder of our audit work.
Westpac New Zealand Limited 117
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements for the current year. These matters were addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key Audit MatterHow our audit addressed the Key Audit Matter
Provision for expected credit losses
(Refer to Notes 6 and 12 of the financial statements)
The provision for expected credit losses (ECL) on loans and
credit commitments was $352m for the Banking Group at 30
September 2019.
ECL are a probability-weighted estimate of the cash shortfalls
expected to result from defaults over the relevant timeframe
determined by evaluating a range of possible outcomes and
taking into account the time value of money, past events,
current conditions and forecasts of future economic
conditions. The model to determine the ECL includes
significant judgement in assumptions used to determine
when a significant increase in credit risk (SICR) has occurred,
and in estimating forward looking multiple economic
scenarios (MES) and applying a probability weighting to
different scenarios. There is also a significant volume of data
used in the ECL model, which is sourced from relevant IT
systems.
The principal considerations for our determination that
performing procedures relating to the provision for ECL on
loans and credit commitments is a key audit matter are:
(i) there was significant judgement by the Banking Group in
determining the ECL, which in turn led to a high degree
of auditor subjectivity in performing procedures related
to the ECL model and assumptions used to estimate the
ECL;
(ii) there was significant judgement and effort in evaluating
audit evidence related to the model and assumptions
used to determine the provision for ECL on loans and
credit commitments;
(iii) the audit effort involved the use of professionals with
specialised skill and knowledge;
(iv) the nature and extent of audit testing involved in
evaluating audit evidence related to critical data elements
used in the model; and
(v) the nature and extent of audit testing related to IT general
controls for the relevant IT systems used in determining
the provision for ECL on loans and credit commitments.
Our audit procedures included performing tests of the
effectiveness of controls relating to the ECL estimation
process, which included controls over the data, model and
assumptions used in determining the provision for ECL on
loans and credit commitments, as well as IT general
controls related to the relevant IT systems.
Other significant audit procedures included:
the involvement of our credit risk modelling specialists
to assess the reasonableness of the models and the
assumptions applied within SICR and MES, and to
evaluate management’s model monitoring controls
undertaken during the year;
the involvement of our economics experts to assist in
evaluating the reasonableness of the assumptions,
economic variables and data applied in determining
MES;
consideration of the methodology inherent within the
models for SICR and MES against the requirements of
NZ IFRS 9;
observing the review, challenge and approval by an
internal governance committee of MES and of critical
data elements used in the ECL model and assessing the
reasonableness of decisions;
controls and substantive testing on a sample basis of
the input of critical data elements into source systems,
and the flow and transformation of those critical data
elements from source systems to the ECL model; and
for a sample of loans not identified as impaired, we
considered the latest financial information provided to
the Banking Group, to test the Credit Risk grade rating
that has been allocated to the borrower and inspected
the valuation of collateral (where applicable) to test the
loss given default factor, two critical data elements
which involve significant management judgement.
118 Westpac New Zealand Limited
Key Audit MatterHow our audit addressed the Key Audit Matter
Operation of IT systems and controls
We focused on this area because the Banking Group is heavily
dependent on complex IT systems for the capture, processing,
storage and extraction of significant volumes of transactions.
There are some areas of the audit where we seek to place
reliance on system functionality including certain automated
controls, system calculations and reports. Our reliance on
these is dependent on the Banking Group’s IT General
Control (ITGC) environment, in particular, user access
maintenance and that changes to IT systems are authorised
and made in an appropriate manner.
For significant financial statement line items, we gained an
understanding of the business processes, key controls and
IT systems used to generate and support those line items.
Where relevant to our planned audit approach, we assessed
the design and tested the operating effectiveness of the key
ITGCs which support the continued integrity of the in-
scope IT systems.
Our procedures over ITGCs focused on user access and
change management and we also carried out tests, on a
sample basis, of system functionality that was key to our
audit approach.
Where we identified design or operating effectiveness
matters relating to ITGCs and system functionality relevant
to our audit, we performed alternative or additional audit
procedures.
Westpac New Zealand Limited 119
Information other than the financial statements, supplementary information and auditor’s report
The Directors of the Bank (the ‘Directors') are responsible for the other information included in the Annual Report and
Disclosure Statement. The other information includes the Annual Report and information required to be included in the
Disclosure Statement in accordance with Schedule 2 of the Order and is included on pages 5 to 7, 85 to 90 and 110 to 114. Our
opinion on the financial statements and supplementary information does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements and supplementary information, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the
work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that
there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this
regard.
Responsibilities of the Directors for the financial statements and supplementary information (excluding the supplementary
information relating to capital adequacy and regulatory liquidity requirements)
The Directors are responsible, on behalf of the Bank, for the preparation of the financial statements in accordance with Clause
24 of the Order, NZ IFRS and IFRS and that give a true and fair view of the matters to which they relate. The Directors are also
responsible for such internal control as the Directors determine is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud or error.
In addition, the Directors are responsible for the preparation and fair presentation of the supplementary information in the
Disclosure Statement which complies with Schedules 2, 4, 7, 13, 14, 15 and 17 of the Order.
In preparing the financial statements, the Directors are responsible for assessing the Banking Group’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless the Directors either intend to liquidate the Banking Group or to cease operations, or have no realistic alternative but to
do so.
Auditor’s responsibilities for the audit of the financial statements and supplementary information (excluding the
supplementary information relating to capital adequacy and regulatory liquidity requirements)
Our objectives are to obtain reasonable assurance about whether the financial statements and the supplementary information
(excluding the supplementary information relating to capital adequacy and regulatory liquidity requirements disclosed in note
iv of the registered bank disclosures) disclosed in accordance with Clause 24 and Schedules 4, 7, 13, 14, 15 and 17 of the Order,
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (NZ)
and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions
of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located at the External Reporting
Board’s website at:
https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-1/
This description forms part of our auditor’s report.
120 Westpac New Zealand Limited
Report on other legal and regulatory requirements (excluding the supplementary information relating to capital adequacy
and regulatory liquidity requirements)
We also report in accordance with the requirements of Clauses 2(1)(d) and 2(1)(e) of Schedule 1 of the Order. In relation to our
audit of the financial statements and supplementary information (excluding the supplementary information relating to capital
adequacy and regulatory liquidity requirements disclosed in note iv of the registered bank disclosures) for the year ended 30
September 2019:
i.we have obtained all the information and explanations that we have required; and
ii.in our opinion, proper accounting records have been kept by the Banking Group as far as appears from an examination of
those records.
Report on the review of the supplementary information relating to capital adequacy and regulatory liquidity requirements
We have examined the supplementary information relating to capital adequacy and regulatory liquidity requirements required
by Schedule 11 of the Order as disclosed in note iv of the registered bank disclosures for the year ended 30 September 2019.
Our conclusion
Based on our review, nothing has come to our attention that causes us to believe that the supplementary information relating
to capital adequacy and regulatory liquidity requirements disclosed in note iv of the registered bank disclosures, is not, in all
material respects, disclosed in accordance with Schedule 11 of the Order.
This conclusion is to be read in the context of what we say in the remainder of this report.
Emphasis of matter
Without modifying our conclusion, we draw attention to note iv of the registered bank disclosures and to the other information
on pages 113 to 114 of the Annual Report and Disclosure Statement, which disclose certain matters of non-compliance with
condition of registration 1B by the Bank. This includes the fact that the Bank operated versions of certain internal models for
credit risk that had not been approved by the Reserve Bank of New Zealand. However, the Bank considers its current internal
credit model methodologies result in the retention of an appropriate amount of capital to reflect its credit risk and any effect of
the non-compliance with condition of registration 1B on the information relating to capital adequacy disclosed in note iv of the
registered bank disclosures and to the other information on pages 113 to 114 of the Annual Report and Disclosure Statement is
not considered to be material.
Basis for our conclusion
We conducted our review in accordance with the New Zealand Standard on Review Engagements 2410 Review of Financial
Statements Performed by the Independent Auditor of the Entity (NZ SRE 2410). Our responsibilities under this standard are
further described in the Auditor’s responsibilities for the review of the supplementary information relating to capital
adequacy and regulatory liquidity requirements section of our report.
Responsibilities of the Directors for the supplementary information relating to capital adequacy and regulatory liquidity
requirements
The Directors are responsible, on behalf of the Bank, for the preparation of the supplementary information relating to capital
adequacy and regulatory liquidity requirements disclosed in accordance with Schedule 11 of the Order. The Directors are also
responsible for such internal control as the Directors determine is necessary to enable the preparation of the supplementary
information relating to capital adequacy and regulatory liquidity requirements that is free from material misstatement,
whether due to fraud or error.
Westpac New Zealand Limited 121
Auditor’s responsibilities for the review of the supplementary information relating to capital adequacy and regulatory
liquidity requirements
Our responsibility is to express a conclusion, whether, based on our review, the supplementary information relating to capital
adequacy and regulatory liquidity requirements disclosed in note iv of the registered bank disclosures, is not, in all material
respects, disclosed in accordance with Schedule 11 of the Order.
A review of the supplementary information relating to capital adequacy and regulatory liquidity requirements disclosed in note
iv of the registered bank disclosures in accordance with NZ SRE 2410 is a limited assurance engagement. The auditor performs
procedures, primarily consisting of making enquiries, primarily of persons responsible for financial and accounting matters,
and applying analytical and other review procedures. The procedures performed in a review are substantially less than those
performed in an audit conducted in accordance with ISAs (NZ) and ISAs. Accordingly we do not express an audit opinion on
the supplementary information relating to capital adequacy and regulatory liquidity requirements disclosed in note iv of the
registered bank disclosures.
Auditor independence
We are independent of the Banking Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for
Assurance Practitioners (PES 1) issued by the New Zealand Auditing and Assurance Standards Board and the International
Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
Our firm carries out other services for the Banking Group in the areas of other audit related services, which relate to assurance
on certain financial information performed in the role of auditor (or where most appropriate to be performed by the auditor)
including the issue of comfort letters and agreed procedures reports in relation to debt issuance programmes. In addition,
certain partners and employees of our firm may deal with the Banking Group on normal terms within the ordinary course of
trading activities of the Banking Group. These matters have not impaired our independence as auditor of the Banking Group.
Who we report to
This report is made solely to the Bank’s shareholder. Our work has been undertaken so that we might state those matters which
we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the Bank and the Bank’s shareholder, for our work, for this report or
for the opinions and conclusion we have formed.
The engagement partner on the engagement resulting in this independent auditor’s report is Jonathan Freeman.
For and on behalf of:
Chartered AccountantsAuckland
25 November 2019
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.