Exhibit 99.1

 

 

 

The Consolidated Financial Report and Dividend Announcement contains information required by Appendix 4D of the Australian Securities Exchange (ASX) Listing Rules. It should be read in conjunction with ANZ’s 2015 Annual Report, and is lodged with the ASX under listing rule 4.2A.

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RESULTS FOR ANNOUNCEMENT TO THE MARKET		APPENDIX 4D

 

 

 

 

Name of Company:		Australia and New Zealand Banking Group Limited ABN 11 005 357 522

 

Dividend Reinvestment Plan and Bonus Option Plan

Australia and New Zealand Banking Group Limited (ANZ) has a Dividend Reinvestment Plan (DRP) and a Bonus Option Plan (BOP) that will operate in respect of the 2016 interim dividend. For the 2016 interim dividend, ANZ intends to provide shares under the DRP and BOP through the issue of new shares. The ‘Acquisition Price’ to be used in determining the number of shares to be provided under the DRP and BOP will be calculated by reference to the arithmetic average of the daily volume weighted average sale price of all fully paid ANZ ordinary shares sold in the ordinary course of trading on the ASX during the ten trading days commencing on 13 May 2016, and then rounded to the nearest whole cent. Shares provided under the DRP and BOP will rank equally in all respects with existing fully paid ANZ ordinary shares. Election notices from shareholders wanting to commence, cease or vary their participation in the DRP or BOP for the 2016 interim dividend must be received by ANZ’s Share Registrar by 5.00pm (Australian Eastern Standard Time) on 11 May 2016. Subject to receiving effective contrary instructions from the shareholder, dividends payable to shareholders with a registered address in the United Kingdom (including the Channel Islands and the Isle of Man) or New Zealand will be converted to Pounds Sterling or New Zealand Dollars respectively at an exchange rate calculated on 13 May 2016.

 

1	Unless otherwise noted, all comparisons are to the half year ended 31 March 2015.

 

2

Cash profit excludes non-core items included in statutory profit and is provided to assist readers in understanding the result of the ongoing business activities of the Group. The non-core items are calculated consistently period on period so as not to discriminate between positive and negative adjustments and fall into one of the three categories: gains or losses included in earnings arising from changes in tax, legal or accounting legislation or other non-core items not associated with ongoing operations of the Group; treasury shares, revaluation of policy liabilities, economic hedging and similar accounting items that represent timing differences that will reverse through earnings in the future; and accounting reclassifications between individual line items that do not impact reported results, such as policy holder gross up. Cash profit is not a measure of cash flow or profit determined on a cash basis. The net after tax adjustment was an addition to statutory profit of $44 million made up of several items. Refer pages 91 to 96 for further details.

 

3	There is no foreign conduit income attributed to the dividends.

 

4	It is proposed that the interim dividend will be fully franked for Australian tax purposes (30% tax rate) and carry New Zealand imputation credits of NZD 10 cents per ordinary share.

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AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED		ABN 11 005 357 522

 

 

CONSOLIDATED FINANCIAL REPORT, DIVIDEND ANNOUNCEMENT AND APPENDIX 4D

Half year ended 31 March 2016

 

CONTENTS		PAGE
Section 1 – News Release		5
Section 2 – Summary		9
Section 3 – Strategic Review		19
Section 4 – Group Results		21
Section 5 – Divisional Results		49
Section 6 – Geographic Results		83
Section 7 – Profit Reconciliation		91
Section 8 – Condensed Consolidated Financial Statements		97
Section 9 – Supplementary Information		129
Definitions		148
ASX Appendix 4D Cross Reference Index		151
Alphabetical Index		152

 

This Consolidated Financial Report, Dividend Announcement and Appendix 4D has been prepared for Australia and New Zealand Banking Group Limited (the “Company” or “Parent Entity”) together with its subsidiaries which are variously described as “ANZ”, “Group”, “ANZ Group”, “the consolidated entity” “the Bank”, “us”, “we” or “our”.

All amounts are in Australian dollars unless otherwise stated. The information on which the Condensed Consolidated Financial Statements are based have been reviewed by the Group’s auditors, KPMG. The Company has a formally constituted Audit Committee of the Board of Directors. The signing of the Condensed Consolidated Financial Statements was approved by resolution of a Committee of the Board of Directors on 2 May 2016.

When used in this Results Announcement the words “estimate”, “project”, “intend”, “anticipate”, “believe”, “expect”, “should” and similar expressions, as they relate to ANZ and its management, are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. ANZ does not undertake any obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED		ABN 11 005 357 522

 

 

 

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AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED		ABN 11 005 357 522

 

 

 

News Release

ANZ reports 2016 Half Year Result¹

ANZ today announced a statutory profit after tax for the half year ended 31 March 2016 of $2.7 billion down 22% and a cash profit² of $2.8 billion down 24%, following a $717 million net charge primarily related to initiatives to reposition the Group for stronger profit before provisions growth in the future.

Excluding these Specified Items (see page 3), allowing for better comparison with previous periods, adjusted pro-forma cash profit³ was $3.5 billion down 4% and profit before provisions was up 5%.

The Interim Dividend of 80 cents per share fully franked is down 7% reflecting a move to gradually consolidate ANZ’s dividend payout ratio within its historic range of 60-65% of annual cash profit⁴ which provides a conservative, sustainable and fully franked dividend base for the future. The Final Dividend for FY16 is expected to be at least the same as the Interim Dividend in cents per share.

The result reflects a strong performance in ANZ’s Australian and New Zealand consumer and small business franchises and challenging market conditions in Institutional Banking including higher provisions in the resources sector and in related industries.

Significant progress was also made in streamlining and simplifying ANZ to ensure the bank is future ready. This included a particularly strong expense management outcome, improved capital efficiency and initiatives to accelerate momentum and deliver future benefits including a restructuring charge and a change to the application of accounting policy to accelerate software amortisation.

 

Selected Group Financial Information
Earnings ($m)		1H15				2H15				1H16
Statutory basis
Profit before credit impairment and tax			5,637				6,075				4,786
Statutory Profit			3,506				3,987				2,738
Cash basis
Profit before credit impairment and tax			5,592				5,567				4,837
Cash Profit			3,676				3,540				2,782
Earnings Per Share (cents)			134				127				96
Return on Equity (%)			14.7				13.3				9.7
Adjusted Pro-forma3
Profit before credit impairment and tax			5,468				5,459				5,737
Adjusted Pro-forma Profit			3,638				3,507				3,499
Operating expenses to income (CTI, %)			45.5				46.4				45.0
Net Interest Margin (%)			2.02				2.02				2.01
Earnings Per Share (cents)			132				126				121
Return on Equity (%)			14.5				13.2				12.2
Balance sheet ($b)			1H15				2H15				1H16
Gross Loans and Advances (GLAs)			562				574				566
Total Risk Weighted Assets			387				402				388
Customer Deposits			436				445				447
Leverage Ratio (%)			NA5				5.1				5.1
Common Equity Tier 1 Ratio (%)			8.7				9.6				9.8
Common Equity Tier 1 Ratio Internationally Comparable Basel 3 (%)			12.1				13.2				14.0
Asset Quality			1H15				2H15				1H16
Total Credit Impairment Charge as a % of avg GLAs (%)			0.19				0.24				0.32
Collective Provision as a % of Credit RWAs (%)			0.86				0.85				0.86
Gross impaired assets as a % of GLAs (%)			0.48				0.47				0.51
Other			1H15				2H15				1H16
Full time equivalent staff (FTE)			51,243				50,152				48,896

 

5

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AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED		ABN 11 005 357 522

 

 

 

ANZ Chief Executive Officer Shayne Elliott said: “This result reflects a challenging period for banking and we have taken the opportunity to move decisively and adapt to the changing environment by building a simpler, better capitalised and more balanced bank.

“We have strong underlying drivers in our Australia and New Zealand consumer and small business franchise and we have seen good early progress in transforming Institutional Banking. This has been supported by prudent capital management and tight control of costs with total expenses, excluding the impact of Specified Items, being lower for the first time in seven halves.

“Banking is however continuing to experience rapid shifts in technology, customer expectations and regulation against a backdrop of low economic growth, volatile financial markets and rising credit costs. Our priority is to take bold action to ensure ANZ is fit and ready for this future.

“This means for the immediate future we are in a period of consolidation, simplification and transition. We have a clear plan and we have made significant progress this half through a focus on four strategic priorities,” Mr Elliott said.

 

Strategic Priorities						1H16 Progress Highlights
1.		Create a simpler, better capitalised, better balanced and more agile bank.   Reduce operating costs and risks by removing product and management complexity, exiting low return and non-core businesses and reducing our reliance on low-return aspects of Institutional banking in particular. Further strengthen the balance sheet by rebalancing our portfolio.				•		Reduced 1H16 dividend providing foundation for a conservative, sustainable, fully franked pay-out ratio of 60-65% of cash profit4
						•		Lower absolute operations costs (-2% pcp) and lower FTE (-5% pcp).
						•		Reduced Risk Weighted Assets by 3% ($14 billion) - primarily low return Institutional Asia lending.
						•		Sold Esanda dealer finance portfolio and Oasis.
						•		Taken $138 million restructuring charge to underpin further simplification and productivity.
						•		Repositioned minority investments in Asia as Group assets, valuation adjustments made.
						•		Supported Bank of Tianjin listing and subsequent dilution in holding to ~12%.
						•		Merged Asia Wealth with Asia Retail and commenced a strategic review.
2.		Focus our efforts on attractive areas where we can carve out a winning position.   Make buying and owning a home or starting, running and growing a small business in Australia and New Zealand easy. Be the best bank in the world for customers driven by the movement of goods and capital in our region.				•		New organisation structure and Executive Committee aligned with focus areas.
						•		Merged Wealth distribution activities with core Retail to align priority segments.
						•		Simplified and re-focused Institutional.
						•		Established new Digital Banking Division to support growth in priority areas.
						•		Moved to #3 market share in Australian Home Loans.
3.		Drive a purpose and values led transformation of the Bank.   Creating a stronger sense of core purpose, ethics and fairness, investing in leaders who can help sense and navigate a rapidly changing environment.				•		Signed up to ABA conduct review.
						•		Launched review of recruitment and remuneration.
						•		Invested in MIT Digital Leadership Program.
						•		Uncompromising approach to enforcing ANZ’s Code of Conduct.
4.		Build a superior everyday experience for our people and customers in order to compete in the digital age.   Build more convenient, engaging banking solutions to simplify the lives of customers and our own people.				•		Maile Carnegie appointed from Google to lead Digital.
						•		First Australian bank to launch Apple Pay, augmenting existing Android Pay plans.
						•		New software capitalisation treatment recognises the nature and speed of digital change and supports innovation.
						•		Implementation of multi-channel digital platform for Australian Retail banking to support improved customer experience.

 

6

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AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED		ABN 11 005 357 522

 

 

 

Capital and Dividend. The actions being taken to simplify the business, rebalance our portfolio, divest non-core assets and increase capital efficiency in the Institutional loan book assisted the Group to generate 76 basis points of capital during the half. Further benefits are expected in future periods.

The Interim Dividend is 7% lower than the prior comparable period 1H15, reflecting actions undertaken to reshape ANZ and a normalisation of the credit cycle. The dividend payout ratio during the half of 84% primarily reflects the impact of specified items. On an adjusted pro-forma basis the ratio is 67%.

Consistent with ANZ’s normal practice, it is expected the Final Dividend for FY16 will be at least the same as the Interim Dividend in cents per share terms.

ANZ recognises the stability of the Group’s payout ratio and ability to fully frank dividends are critical considerations for shareholders. Following a period of dividend payout ratio expansion in the Australian banking sector, ANZ will gradually consolidate to its historic range of 60-65% of annual cash profit. This setting better reflects the changed banking environment in which we operate and the greater demands for capital.

Specified Items. During the half the Group sold the Esanda Dealer Finance portfolio and also recognised the impact of a number of items collectively referred to as ‘Specified Items’ which form part of the Group’s cash profit.

These specified items are (on an after tax basis): an accounting change to the application of the Group’s software capitalisation policy ($441 million), impairment of the Group’s investment in AmBank ($260 million), a net gain in relation to Bank of Tianjin ($29 million) and Group restructuring expenses ($101 million), as well as the Esanda dealer finance sale ($56 million). An information pack on these changes is on anz.com within the 1H16 results materials.

ANZ, by lifting the software capitalisation threshold and directly expensing more project related costs, has introduced a greater level of discipline into the management of technology investment. The change, effective from 1 October 2015, of itself does not impact the Group’s total spend on technology but better aligns the application of ANZ’s policy with the rapidly changing technology landscape, increased pace of innovation in financial services and the Group’s own evolving digital strategy. These changes bring forward the recognition of software expense resulting in lower amortisation charges in future years.

A restructuring charge of $138 million (pre-tax) was recognised in the half which will underpin further productivity in the second half and future years, through reducing complexity and aligning the Group to the changing emphasis on Institutional and International businesses.

Credit Quality. The total provision charge of $918 million ($892 million individual provision charge $26 million collective provision charge) is consistent with ANZ’s ASX disclosure of 24 March and equates to a 32 basis point loss rate. The loss rate is trending towards the long term average from historically low levels. Gross impaired assets were $2.9 billion up 6%, with new impaired assets flat compared to the prior half.

While the overall credit environment remains broadly stable, ANZ has continued to see pockets of weakness associated with low commodity prices in the resources sector and in related industries. Increased provision charges in the first half include charges related to a small number of Australian and multi-national resources related exposures.

Video interviews with Shayne Elliott and Acting Chief Financial Officer Graham Hodges regarding today’s 2016 Half Year result announcement are available at www.bluenotes.anz.com.

 

For media enquiries contact:		For investor and analyst enquiries contact:
Paul Edwards + 61-434-070101		Jill Campbell, Tel: +61-412-047448
Stephen Ries +61-409-655551		Cameron Davis, Tel: +61-421-613819

Footnotes:

1.	All comparisons are First Half Financial Year 2016 compared to First Half Financial Year 2015.

2.	Cash profit excludes non-core items included in statutory profit and is provided to assist readers in understanding the results of the ongoing business activities of the Group. The net after tax adjustment was an addition to statutory profit of $44 million comprised of several items.

3.

Pro-forma refers to Cash Profit adjusted to remove the impact of ‘Specified items’ including the impact of software capitalisation policy changes, Asia Partnership impairment charge (AmBank) and gain of cessation of equity accounting (Bank of Tianjin), restructuring expenses, sale of Esanda Dealer Finance portfolio. Further detail provided in the ANZ Half Year 2016 consolidated Financial Report p14.

4.	Previously 65 to 70 per cent of cash profit.

5.	APRA introduced amendments in May 2015 to enable calculation of the leverage ratio.

 

7

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AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED		ABN 11 005 357 522

 

 

 

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8

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SUMMARY

 

 

CONTENTS

Section 2 – Summary

Statutory Profit Results

Cash Profit Results

Key Balance Sheet Metrics

Cash Profit Results - FX Adjusted

Cash Profit Results - Adjusted Pro-forma, FX adjusted

Other Non-financial Information

 

9

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SUMMARY

 

 

 

Statutory Profit Results

 

		Half Year										Movement
		Mar 16 $M		Sep 15 $M				Mar 15 $M				Mar 16 v. Sep 15				Mar 16 v. Mar 15
Net interest income		7,568			7,478			7,138					1%			6%
Other operating income		2,697			3,372			3,102					-20%			-13%
Operating income		10,265			10,850			10,240					-5%			0%
Operating expenses		(5,479)			(4,775)			(4,603)					15%			19%
Profit before credit impairment and income tax		4,786			6,075			5,637					-21%			-15%
Credit impairment charge		(904)			(685)			(494)					32%			83%
Profit before income tax		3,882			5,390			5,143					-28%			-25%
Income tax expense		(1,140)			(1,397)			(1,629)					-18%			-30%
Non-controlling interests		(4)			(6)			(8)					-33%			-50%
Profit attributable to shareholders of the Company		2,738			3,987			3,506					-31%			-22%

 

Earnings per ordinary share (cents)						Half Year										Movement
		Reference Page				Mar 16		Sep 15				Mar 15				Mar 16 v. Sep 15				Mar 16 v. Mar 15
Basic		109				94.8			143.4			128.0					-34%			-26%
Diluted		109				89.7			134.9			124.6					-34%			-28%

 

								Half Year
		Reference     Page						Mar 16		Sep 15		Mar 15
Ordinary share dividends (cents)
Interim - 100% franked1			108					80		-		86
Final - 100% franked1			108					-		95		-
Total - 100% franked1			108					80		95		86
Ordinary share dividend payout ratio2			108					85.2%		69.2%		67.9%
Preference share dividend ($M)
Dividend paid3			108					-		-		1
Profitability ratios
Return on average ordinary shareholders’ equity4								9.5%		15.0%		14.0%
Return on average assets								0.61%		0.91%		0.85%
Net interest margin								2.01%		2.04%		2.04%
Efficiency ratios
Operating expenses to operating income								53.4%		44.0%		45.0%
Operating expenses to average assets								1.22%		1.09%		1.11%
Credit impairment charge/(release)
Individual credit impairment charge ($M)								878		645		439
Collective credit impairment charge/(release) ($M)								26		40		55
Total credit impairment charge ($M)			113					904		685		494
Individual credit impairment charge as a % of average gross loans & advances5								0.31%		0.23%		0.16%
Total credit impairment charge as a % of average gross loans & advances5								0.31%		0.24%		0.18%

 

 

1.	Fully franked for Australian tax purposes and carry New Zealand imputation credits of NZ 10 cents per ordinary share for the proposed 2016 interim dividend (2015 final dividend: NZ 11 cents, 2015 interim dividend: NZ 10 cents).

 

2.	Dividend payout ratio is calculated using the proposed 2016 interim, 2015 final and 2015 interim dividends.

 

3.	Represents dividends paid on Euro Trust Securities (preference shares) issued on 13 December 2004. The Euro Trust Securities were bought back by ANZ for cash at face value and cancelled on 15 December 2014.

 

4.	Average ordinary shareholders’ equity excludes non-controlling interests and preference shares.

 

5.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

10

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SUMMARY

 

 

 

Cash Profit Results¹

 

				Half Year								Movement
				Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16         v. Sep 15		Mar 16 v. Mar 15
Net interest income				7,568		7,478		7,138				1%		6%
Other operating income				2,748		2,864		3,057				-4%		-10%
Operating income				10,316		10,342		10,195				0%		1%
Operating expenses				(5,479)		(4,775)		(4,603)				15%		19%
Profit before credit impairment and income tax				4,837		5,567		5,592				-13%		-14%
Credit impairment charge				(918)		(695)		(510)				32%		80%
Profit before income tax				3,919		4,872		5,082				-20%		-23%
Income tax expense				(1,133)		(1,326)		(1,398)				-15%		-19%
Non-controlling interests				(4)		(6)		(8)				-33%		-50%
Cash profit				2,782		3,540		3,676				-21%		-24%
Earnings per ordinary share (cents)
				Half Year								Movement
		Reference                 Page		Mar 16		Sep 15		Mar 15				Mar 16 v. Sep 15		Mar 16     v. Mar 15
Basic		39		95.9		126.8		133.6				-24%		-28%
Diluted		39		90.7		119.8		129.9				-24%		-30%

 

				Half Year
		Reference                         Page		Mar 16		Sep 15		Mar 15
Ordinary share dividends
Ordinary share dividend payout ratio2		40		83.9%		77.9%		64.7%
Profitability ratios
Return on average ordinary shareholders’ equity3				9.7%		13.3%		14.7%
Return on average assets				0.62%		0.81%		0.89%
Net interest margin		24		2.01%		2.04%		2.04%
Profit per average FTE ($)				55,889		69,214		72,421
Efficiency ratios
Operating expenses to operating income				53.1%		46.2%		45.1%
Operating expenses to average assets				1.22%		1.09%		1.11%
Credit impairment charge/(release)
Individual credit impairment charge ($M)		33		892		655		455
Collective credit impairment charge/(release) ($M)		34		26		40		55
Total credit impairment charge ($M)		33		918		695		510
Individual credit impairment charge as a % of average gross loans & advances4				0.31%		0.23%		0.17%
Total credit impairment charge as a % of average gross loans & advances4				0.32%		0.24%		0.19%

 

Cash profit/(loss) by division/geography (in AUD)		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16     v. Sep 15		Mar 16     v. Mar 15
Australia		1,753		1,706		1,650				3%		6%
Institutional		632		893		1,071				-29%		-41%
New Zealand		578		561		566				3%		2%
Wealth		261		346		263				-25%		-1%
Asia Retail & Pacific		53		45		99				18%		-46%
TSO and Group Centre		(495)		(11)		27				large		large
Cash profit by division		2,782		3,540		3,676				-21%		-24%
Australia		1,830		2,269		2,147				-19%		-15%
Asia Pacific, Europe & America		259		492		743				-47%		-65%
New Zealand		693		779		786				-11%		-12%
Cash profit by geography		2,782		3,540		3,676				-21%		-24%

 

1.	Cash profit excludes non-core items included in statutory profit and is provided to assist readers in understanding the result of the ongoing business activities of the Group. Refer to page 91 for the reconciliation between statutory and cash profit.

 

2.	Dividend payout ratio is calculated using the proposed 2016 interim, 2015 final and 2015 interim dividends.

 

3.	Average ordinary shareholders’ equity excludes non-controlling interests and preference shares.

 

4.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

11

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SUMMARY

 

 

 

Key Balance Sheet Metrics

 

				As at								Movement
		Reference   Page		Mar 16		Sep 15		Mar 15				Mar 16     v. Sep 15		Mar 16     v. Mar 15
Capital adequacy
Common Equity Tier 1
- APRA Basel 3		44		9.8%		9.6%		8.7%
- Internationally Comparable Basel 31		44		14.0%		13.2%		12.1%
Credit risk weighted assets ($B)		132		334.3		349.8		339.7				-4%		-2%
Total risk weighted assets ($B)		132		388.3		401.9		386.9				-3%		0%
Balance Sheet: Key Items
Gross loans & advances ($B)2				565.9		574.3		562.2				-1%		1%
Net loans & advances ($B)2				561.8		570.2		558.2				-1%		1%
Total assets ($B)				895.3		889.9		860.1				1%		4%
Customer deposits ($B)				446.8		444.6		436.1				0%		2%
Total equity ($B)				56.5		57.4		52.1				-2%		8%
Leverage Ratio		46		5.1%		5.1%		n/a				0%		n/a
				Half Year Average								Movement
Balance Sheet: Key Items				Mar 16		Sep 15		Mar 15				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Liquidity Coverage Ratio		42		126%		124%		118%				2%		7%
				As at								Movement
		Reference   Page		Mar 16		Sep 15		Mar 15				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Impaired assets
Gross impaired assets ($M)		35		2,883		2,719		2,708				6%		6%
Gross impaired assets as a % of gross loans & advances2				0.51%		0.47%		0.48%
Net impaired assets ($M)		35		1,645		1,658		1,594				-1%		3%
Net impaired assets as a % of shareholders’ equity				2.9%		2.9%		3.1%
Individual provision ($M)		113		1,238		1,061		1,114				17%		11%
Individual provision as a % of gross impaired assets				42.9%		39.0%		41.1%
Collective provision ($M)		113		2,862		2,956		2,914				-3%		-2%
Collective provision as a % of credit risk weighted assets				0.86%		0.85%		0.86%
Net Assets
Net tangible assets attributable to ordinary shareholders ($B)				48.8		48.9		43.6				0%		12%
Net tangible assets per ordinary share ($)				16.77		16.86		15.75				-1%		6%

 

1.	See page 45 for further details regarding the differences between APRA Basel 3 and Internationally Comparable Basel 3 standards.

 

2.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

Net loans and advances by division/geography		As at								Movement
		Mar 16 $B		Sep 15 $B		Mar 15 $B				Mar 16     v. Sep 15		Mar 16     v. Mar 15
Australia		320.0		313.7		297.6				2%		8%
Institutional		125.6		142.2		144.9				-12%		-13%
New Zealand		97.2		95.2		97.7				2%		-1%
Wealth		7.3		7.1		6.9				3%		6%
Asia Retail & Pacific		11.9		12.5		11.6				-5%		3%
TSO and Group Centre		(0.2)		(0.5)		(0.5)				-60%		-60%
Net loans and advances by division3		561.8		570.2		558.2				-1%		1%
Australia		386.8		381.2		362.8				1%		7%
Asia Pacific, Europe & America		69.1		85.1		88.4				-19%		-22%
New Zealand		105.9		103.9		107.0				2%		-1%
Net loans and advances by geography3		561.8		570.2		558.2				-1%		1%

 

3.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

12

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SUMMARY

 

 

 

Cash Profit Results – FX Adjusted

The following tables present the Group’s cash profit results neutralised for the impact of foreign currency translation. Comparative data has been adjusted to remove the translation impact of foreign exchange movements by retranslating prior period comparatives at current period foreign exchange rates. Refer to page 37 for further details on the impact of exchange rate movements.

Cash Profit - March 2016 Half Year vs March 2015 Half Year

 

		Half Year										Movement
		Actual		FX     unadjusted		FX     impact		FX     adjusted				FX     unadjusted		FX     impact		FX     adjusted
		Mar 16 $M		Mar 15 $M		Mar 15 $M		Mar 15 $M				Mar 16 v. Mar 15		Mar 16     v. Mar 15		Mar 16     v. Mar 15
Net interest income		7,568		7,138		77		7,215				6%		1%		5%
Other operating income		2,748		3,057		149		3,206				-10%		4%		-14%
Operating income		10,316		10,195		226		10,421				1%		2%		-1%
Operating expenses		(5,479)		(4,603)		(115)		(4,718)				19%		3%		16%
Profit before credit impairment and income tax		4,837		5,592		111		5,703				-14%		1%		-15%
Credit impairment charge		(918)		(510)		(5)		(515)				80%		2%		78%
Profit before income tax		3,919		5,082		106		5,188				-23%		1%		-24%
Income tax expense		(1,133)		(1,398)		(25)		(1,423)				-19%		1%		-20%
Non-controlling interests		(4)		(8)		(2)		(10)				-50%		10%		-60%
Cash profit		2,782		3,676		79		3,755				-24%		2%		-26%

Cash Profit - March 2016 Half Year vs September 2015 Half Year

 

		Half Year										Movement
		Actual		FX     unadjusted		FX     impact		FX     adjusted				FX     unadjusted		FX     impact		FX     adjusted
		Mar 16 $M		Sep 15 $M		Sep 15 $M		Sep 15 $M				Mar 16 v. Sep 15		Mar 16     v. Sep 15		Mar 16     v. Sep 15
Net interest income		7,568		7,478		32		7,510				1%		0%		1%
Other operating income		2,748		2,864		103		2,967				-4%		3%		-7%
Operating income		10,316		10,342		135		10,477				0%		2%		-2%
Operating expenses		(5,479)		(4,775)		(37)		(4,812)				15%		1%		14%
Profit before credit impairment and income tax		4,837		5,567		98		5,665				-13%		2%		-15%
Credit impairment charge		(918)		(695)		(8)		(703)				32%		1%		31%
Profit before income tax		3,919		4,872		90		4,962				-20%		1%		-21%
Income tax expense		(1,133)		(1,326)		(28)		(1,354)				-15%		1%		-16%
Non-controlling interests		(4)		(6)		1		(5)				-33%		-13%		-20%
Cash profit		2,782		3,540		63		3,603				-21%		2%		-23%

 

13

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SUMMARY

 

 

 

Cash Profit Results – Adjusted Pro-forma, FX adjusted

During the March 2016 half, the Group sold the Esanda Dealer Finance portfolio and recognised the impact of a number of items collectively referred to as ‘specified items’ which form part of the Group’s cash profit. The tables on the following pages present the Group’s FX adjusted cash profit adjusted for these items to assist readers to understand the estimated growth rates of the ongoing business performance of the Group. The “Cash Profit Results - Adjusted Pro-forma, FX adjusted” are not subject to review or audit by the external auditor.

 

¡

Esanda Dealer Finance divestment

On 1 November 2015, the Group sold the Esanda Dealer Finance portfolio with the majority of the business transferred by 31 December 2015. Pro-forma results have been prepared on the assumption that the sale which occurred during the March 2016 half took effect from 1 October 2014, effectively restating the Group’s cash profit for each of the March 2015, September 2015 and March 2016 halves.

 

¡

Software capitalisation changes

During the March 2016 half, the Board resolved to amend the application of the Group’s software capitalisation policy by increasing the threshold for capitalisation of software development costs to $20 million, reflecting the increasingly shorter useful life of smaller items of software, and directly expensing more project related costs.

For software assets at 1 October 2015 with an original cost below the revised threshold, the carrying values were expensed through an accelerated amortisation charge of $556 million (recognised in TSO & Group Centre). Of this, $88 million would otherwise have been amortised in the March 2016 half (i.e. the half year amortisation charge increased by $468 million).

In addition, application of the software capitalisation changes also increased other operating expenses by $161 million for the March 2016 half relating to software development costs that would otherwise have been capitalised and amortised in future periods.

Going forward, these changes will result in higher project expenditure being expensed in the profit and loss which will be offset by lower amortisation charges.

 

		March 2016 Half Year
		Accelerated amortisation $M		Amortisation benefit $M		Application of policy to new project expenditure $M		Total impact $M
Operating expense increase/(decrease) by division
Australia		-		(13)		49		36
Institutional		-		(26)		30		4
New Zealand		-		(7)		17		10
Wealth		-		(14)		19		5
Asia Retail & Pacific		-		(4)		-		(4)
TSO and Group Centre		556		(24)		46		578
Total		556		(88)		161		629

 

¡

Asian minority investment adjustments

During the March 2016 half, the Group recognised a $260 million impairment to its equity accounted investment in AMMB Holdings Berhad (Ambank) bringing the carrying value in line with value-in-use calculations (refer Note 1 (v) of the Condensed Consolidated Financial Statements).

On 30 March 2016, Bank of Tianjin (BoT), an equity accounted investment, completed a capital raising and listing on the Hong Kong Stock Exchange through an Initial Public Offering (IPO). As the Group did not participate in the capital raising, its ownership interest decreased from 14% to 12%. As a consequence, the Group ceased equity accounting the investment in BoT and commenced accounting for the investment as for as an available-for-sale asset. A net gain of $29 million was recognised in relation to the remeasurement of the investment to fair value and recycling the associated equity accounted reserves.

 

¡

Restructuring

The Group is in the process of evolving its strategy, including reshaping of the workforce to reduce complexity and duplication, and to align with its changing emphasis on Institutional and Wealth businesses, restructure of Retail Asia and Pacific and delayering and simplification in TSO and Group Centre. A restructuring expense of $138 million was recognised in the March 2016 half.

 

		Half Year
Restructuring expense by division		Mar 16 $M		Sep 15 $M		Mar 15 $M
Australia		22		2		-
Institutional		51		6		2
New Zealand		2		1		2
Wealth		13		-		1
Asia Retail & Pacific		12		-		-
TSO and Group Centre		38		12		5
Total		138		21		10

 

14

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SUMMARY

 

 

 

Cash Profit Results - Adjusted Pro-forma, FX adjusted

 

		March 2016 Half Year														March 2015 Half Year												Mar 16 v. Mar 15
		Cash profit		Software capitalisation changes		Asian minority investment adjust		Restructuring		Esanda Dealer Finance		Adjusted pro-forma				Cash profit		Restructuring		Esanda Dealer Finance		FX impact		Adjusted pro-forma, FX adj				Adjusted pro- forma, FX unadj		Adjusted pro-forma, FX adj
Cash Profit - March 2016 v March 2015
Net interest income		7,568		-		-		-		(31)		7,537				7,138		-		(130)		77		7,085				8%		6%
Other operating income		2,748		-		231		-		(78)		2,901				3,057		-		(25)		149		3,181				-4%		-9%
Operating income		10,316		-		231		-		(109)		10,438				10,195		-		(155)		226		10,266				4%		2%
Operating expenses		(5,479)		629		-		138		11		(4,701)				(4,603)		10		21		(115)		(4,687)				3%		0%
Profit before credit impairment and income tax		4,837		629		231		138		(98)		5,737				5,592		10		(134)		111		5,579				5%		3%
Credit impairment charge		(918)		-		-		-		13		(905)				(510)		-		69		(5)		(446)				large		large
Profit before income tax		3,919		629		231		138		(85)		4,832				5,082		10		(65)		106		5,133				-4%		-6%
Income tax expense		(1,133)		(188)		-		(37)		29		(1,329)				(1,398)		(3)		20		(25)		(1,406)				-4%		-5%
Non-controlling interests		(4)		-		-		-		-		(4)				(8)		-		-		(2)		(10)				-50%		-60%
Cash profit		2,782		441		231		101		(56)		3,499				3,676		7		(45)		79		3,717				-4%		-6%
		March 2016 Half Year														March 2015 Half Year												Mar 16 v. Mar 15
		Cash profit		Software capitalisation changes		Asian minority investment adjust		Restructuring		Esanda Dealer Finance		Adjusted pro-forma				Cash profit		Restructuring		Esanda Dealer Finance		FX impact		Adjusted pro-forma, FX adj				Adjusted pro- forma, FX unadj		Adjusted pro-forma, FX adj
Profit before income tax by division - March 2016 v March 2015
Australia		2,505		36		-		22		(19)		2,544				2,359		-		(65)		-		2,294				11%		11%
Institutional		880		4		-		51		-		935				1,497		2		-		50		1,549				-38%		-40%
New Zealand		804		10		-		2		-		816				787		2		-		(10)		779				3%		5%
Wealth		359		5		-		13		-		377				368		1		-		(1)		368				2%		2%
Asia Retail & Pacific		67		(4)		-		12		-		75				128		-		-		8		136				-41%		-45%
TSO and Group Centre1		(696)		578		231		38		(66)		85				(57)		5		-		59		7				large		large
Profit before income tax		3,919		629		231		138		(85)		4,832				5,082		10		(65)		106		5,133				-4%		-6%
Income tax expense & non-controlling interests		(1,137)		(188)		-		(37)		29		(1,333)				(1,406)		(3)		20		(27)		(1,416)				-4%		-6%
Cash profit		2,782		441		231		101		(56)		3,499				3,676		7		(45)		79		3,717				-4%		-6%

 

1.	Cash profit for TSO and Group Centre in the March 2016 half includes the accelerated amortisation for all divisions resulting from the software capitalisation changes and the net gain on divestment of the Esanda Dealer Finance portfolio.

 

15

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SUMMARY

 

 

 

Cash Profit Results - Adjusted Pro-forma, FX adjusted

 

		March 2016 Half Year														September 2015 Half Year												Mar 16 v. Sep 15
		Cash profit		Software capitalisation changes		Asian minority investment adjust		Restructuring		Esanda Dealer Finance		Adjusted pro-forma				Cash profit		Restructuring		Esanda Dealer Finance		FX impact		Adjusted pro-forma, FX adj				Adjusted pro-forma, FX unadj		Adjusted pro-forma, FX adj
Cash Profit - March 2016 v September 2015
Net interest income		7,568		-		-		-		(31)		7,537				7,478		-		(125)		32		7,385				3%		2%
Other operating income		2,748		-		231		-		(78)		2,901				2,864		-		(26)		103		2,941				2%		-1%
Operating income		10,316		-		231		-		(109)		10,438				10,342		-		(151)		135		10,326				2%		1%
Operating expenses		(5,479)		629		-		138		11		(4,701)				(4,775)		21		22		(37)		(4,769)				-1%		-1%
Profit before credit impairment and income tax		4,837		629		231		138		(98)		5,737				5,567		21		(129)		98		5,557				5%		3%
Credit impairment charge		(918)		-		-		-		13		(905)				(695)		-		61		(8)		(642)				43%		41%
Profit before income tax		3,919		629		231		138		(85)		4,832				4,872		21		(68)		90		4,915				0%		-2%
Income tax expense		(1,133)		(188)		-		(37)		29		(1,329)				(1,326)		(6)		20		(28)		(1,340)				1%		-1%
Non-controlling interests		(4)		-		-		-		-		(4)				(6)		-		-		1		(5)				-33%		-20%
Cash profit		2,782		441		231		101		(56)		3,499				3,540		15		(48)		63		3,570				0%		-2%
		March 2016 Half Year														September 2015 Half Year												Mar 16 v. Sep 15
		Cash profit		Software capitalisation changes		Asian minority investment adjust		Restructuring		Esanda Dealer Finance		Adjusted pro-forma				Cash profit		Restructuring		Esanda Dealer Finance		FX impact		Adjusted pro-forma, FX adj				Adjusted pro-forma, FX unadj		Adjusted pro-forma, FX adj
Profit before income tax by division - Mar 2016 v Sep 2015
Australia		2,505		36		-		22		(19)		2,544				2,427		2		(68)		-		2,361				8%		8%
Institutional		880		4		-		51		-		935				1,256		6		-		1		1,263				-26%		-26%
New Zealand		804		10		-		2		-		816				779		1		-		4		784				5%		4%
Wealth		359		5		-		13		-		377				399		-		-		-		399				-6%		-6%
Asia Retail & Pacific		67		(4)		-		12		-		75				68		-		-		(1)		67				10%		12%
TSO and Group Centre1		(696)		578		231		38		(66)		85				(57)		12		-		86		41				large		large
Profit before income tax		3,919		629		231		138		(85)		4,832				4,872		21		(68)		90		4,915				0%		-2%
Income tax expense & non-controlling interests		(1,137)		(188)		-		(37)		29		(1,333)				(1,332)		(6)		20		(27)		(1,345)				1%		-1%
Cash profit		2,782		441		231		101		(56)		3,499				3,540		15		(48)		63		3,570				0%		-2%

 

1.	Cash profit for TSO and Group Centre in the March 2016 half includes the accelerated amortisation for all divisions resulting from the software capitalisation changes and the net gain on divestment of the Esanda Dealer Finance portfolio.

 

16

---

SUMMARY

 

 

 

Other Non-financial Information

		As at										Movement
		Mar 16		Sep 15				Mar 15				Mar 16 v. Sep 15				Mar 16 v. Mar 15
Full time equivalent staff information
Full time equivalent staff (FTE)		48,896			50,152			51,243					-3%			-5%
Assets per FTE ($M)		18.3			17.7			16.8					3%			9%
		Half Year										Movement
		Mar 16		Sep 15				Mar 15				Mar 16 v. Sep 15				Mar 16 v. Mar 15
Shareholder value - ordinary shares
Share price ($)
- high		29.17			37.25			37.19					-22%			-22%
- low		21.86			26.38			30.47					-17%			-28%
- closing		23.46			27.08			36.64					-13%			-36%
Closing market capitalisation of ordinary shares ($B)		68.4			78.6			101.3					-13%			-32%
Total shareholder returns (TSR)		-10.2%			-21.9%			19.9%					-53%			large
								As at Mar 16
Credit Ratings								Short-Term				Long-Term				Outlook
Moody’s Investor Services								P-1					Aa2			Stable
Standard & Poor’s								A-1+					AA-			Stable
Fitch Ratings								F1+					AA-			Stable

 

17

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SUMMARY

 

 

 

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18

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STRATEGIC REVIEW

 

 

 

Strategic Review¹

Our strategy is to use the strength of our Australian and New Zealand foundations, regional connectivity and a focus on providing market-leading service and insights, to better meet the needs of our customers and capture opportunities linked to trade and capital flows.

The strategy has three key elements – creating the best bank in Australia and New Zealand for home owners and small businesses, building the best bank in the world for clients driven by trade and capital flows between Australia and New Zealand and Asia, and establishing common, digital-ready infrastructure to provide great customer experience, agility, scale and control. The strategy is underpinned by disciplined resource allocation, strong leaders and an engaged workforce. ANZ is committed to maintaining high standards of ethics and conduct in the way it deals with customers, stakeholders and its own staff.

ANZ’s approach to sustainability supports the achievement of our business strategy by guiding the way we make decisions and conduct business in all of the markets in which we operate. Our decision making processes take into account the social and environmental impacts of ANZ’s operations and prioritise building trust and respect amongst all of our stakeholders. Details of ANZ’s approach to sustainability, including the identification and management of material issues and sustainability risks and opportunities, are available in the Corporate Sustainability review. The 2015 review was published on anz.com in December 2015, and an update on our progress in 2016 will be released on 3 May 2016.

In the first half of financial year 2016 cash profit decreased by 24%. A number of items impacted the result this half, excluding these, Cash Profit - Adjusted Pro-forma, FX adjusted² decreased 6% to $3.5 billion, with income growth of 2% and flat expenses being offset by a $459 million increase in the credit impairment charge. The increase in the credit impairment charge was mainly due to an increase in the individual provision charge resulting from a small number of Australian and multi-national resources related exposures. The collective impairment charge remained low in absolute terms at $29 million. Loss rates increased from historic lows and are in line with the long term average.

The Common Equity Tier 1 (CET1) ratio on an APRA basis was 9.8% at 31 March, up 22 basis points (bps), which equates to 14.0% on an Internationally Comparable Basel 3 basis, placing ANZ within the top quartile of international peer banks. We declared a fully franked dividend of 80 cents per share, 7% lower than the March 2015 interim dividend. The resetting of the dividend better reflects the changing banking environment in which we operate and the greater demands for capital.

Strategic Progress

Over the course of the half, ANZ delivered strong growth in retail banking in Australia and steady growth across most portfolios in New Zealand, while the Institutional business was once again impacted by challenging market conditions.

 

•

Retail banking in Australia and New Zealand continued to deliver market share gains and strong earnings growth, with income up 15% and 5% (NZD) respectively and costs were well contained resulting in lower cost to income ratios (CTI). Provisions were up slightly in both markets. In Australia, we continued to invest in NSW and our digital capabilities, with our Multi-Channel Platform program going live during the half.

 

•

With the exception of Small Business, conditions were more challenging for our Corporate & Commercial Banking segments in both key geographies, with revenues falling 5% in Australia and 2% in New Zealand due to ongoing margin compression and the Esanda Dealer Finance divestment in Australia. Costs were well contained in response, but increasing provisions saw cash profits fall in both markets.

 

•

We are the leading Institutional bank in Australia and New Zealand (Source: Peter Lee) and the number four Corporate bank in Asia (Source: Greenwich Associates). However, challenging economic conditions saw lending margins fall a further 4 bps driven by margin compression in Loans and Specialised Finance. Trade Finance revenues were down as a consequence of active risk weighted asset (RWA) management. Credit impairment charges increased by $235 million, impacted by small number of Australian and multi-national resources related exposures. In response, we have accelerated the restructure of the division, simplifying the business and prioritising the use of our balance sheet. FTE reduced 6%, while RWAs reduced by $14 billion through targeted reduction of assets that were dilutive to returns. We anticipate this trend to continue into the second half.

 

•

Our in-house regional delivery network is a source of ongoing competitive advantage. The network is enabling the transformation of key business activities and delivery of productivity improvements while driving a more consistent, higher quality experience for our customers. The regional delivery centres provide full service regional coverage across our operating time zones helping to drive lower unit costs, improve quality and lower risk.

 

•

Since the September 2015 half, ANZ’s generated $3.1 billion of net organic capital and paid out $3 billion (net of reinvestment) in dividends. The Group CET1 ratio increased by 22 bps to 9.8% or 14% on an internationally comparable basis at 31 March, which is within the top-quartile of Basel Group 1 Banks. We expect our APRA CET1 ratio to remain around 9% post implementing the mortgage RWA change in July 2016.

 

1.	Unless otherwise noted, the Strategic Review is reported on a cash profit basis. All comparisons are to the half year ended 31 March 2015 and not adjusted for the impact of foreign currency translation.

 

2.

Adjusted Pro-forma, FX adjusted includes the following specified items: software capitalisation changes, impairment of investment in Ambank, gain on cessation of equity accounting for BoT, restructuring costs, and the Esanda Dealership Finance divestment. Comparative data is adjusted to remove the translation impacts of foreign exchange movements.

 

19

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STRATEGIC REVIEW

 

 

 

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20

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GROUP RESULTS

 

 

CONTENTS

Section 4 – Group Results

Group performance

Net interest income

Other operating income

Operating expenses

Technology infrastructure spend

Software capitalisation

Credit risk

Income tax expense

Impact of foreign currency translation

Earnings related hedges

Earnings per share

Dividends

Economic profit

Condensed balance sheet

Liquidity risk

Capital management

Leverage ratio

Other regulatory developments

 

21

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GROUP RESULTS

 

 

 

Non-IFRS information

The Group provides additional measures of performance in the Consolidated Financial Report & Dividend Announcement which are prepared on a basis other than in accordance with accounting standards. The guidance provided in Australian Securities and Investments Commission (ASIC) Regulatory Guide RG230 has been followed when presenting this information.

Cash profit

Cash profit represents ANZ’s preferred measure of the result of the ongoing business activities of the Group, enabling readers to assess Group and Divisional performance against prior periods and against peer institutions. To calculate cash profit, the Group excludes non-core items from statutory profit (refer to Definitions for further details). The adjustments made in arriving at cash profit are included in statutory profit which is subject to review within the context of the external auditor’s review of the Condensed Consolidated Financial Statements. Cash profit is not subject to review or audit by the external auditor, however, the external auditor has informed the Audit Committee that the adjustments have been determined on a consistent basis across each period presented.

The Group Results section is reported on a cash profit basis.

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Statutory profit attributable to shareholders of the Company		2,738		3,987		3,506				-31%		-22%
Adjustments between statutory profit and cash profit1
Treasury shares adjustments		(29)		(95)		79				-69%		large
Revaluation of policy liabilities		(14)		(6)		(67)				large		-79%
Economic hedges		128		(165)		(14)				large		large
Revenue and net investment hedges		(39)		(179)		176				-78%		large
Structured credit intermediation trades		(2)		(2)		(4)				0%		-50%
Total adjustments between statutory profit and cash profit1		44		(447)		170				large		-74%
Cash Profit		2,782		3,540		3,676				-21%		-24%

 

1.	Refer to pages 91 to 96 for analysis of the adjustments between statutory profit and cash profit.

 

Group Performance		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Net interest income		7,568		7,478		7,138				1%		6%
Other operating income		2,748		2,864		3,057				-4%		-10%
Operating income		10,316		10,342		10,195				0%		1%
Operating expenses		(5,479)		(4,775)		(4,603)				15%		19%
Profit before credit impairment and income tax		4,837		5,567		5,592				-13%		-14%
Credit impairment charge		(918)		(695)		(510)				32%		80%
Profit before income tax		3,919		4,872		5,082				-20%		-23%
Income tax expense		(1,133)		(1,326)		(1,398)				-15%		-19%
Non-controlling interests		(4)		(6)		(8)				-33%		-50%
Cash profit		2,782		3,540		3,676				-21%		-24%
		Half Year								Movement
Cash profit/(loss) by division		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Australia		1,753		1,706		1,650				3%		6%
Institutional		632		893		1,071				-29%		-41%
New Zealand		578		561		566				3%		2%
Wealth		261		346		263				-25%		-1%
Asia Retail & Pacific		53		45		99				18%		-46%
TSO and Group Centre		(495)		(11)		27				large		large
Cash profit		2,782		3,540		3,676				-21%		-24%

 

22

---

GROUP RESULTS

 

 

 

Group Cash Profit – March 2016 Half Year v March 2015 Half Year

 

 

¡

March 2016 v March 2015

Cash profit decreased 24% compared to the March 2015 half mainly due to a number of specified items: software capitalisation changes, Asian minority investment adjustments, restructuring expenses, and the Esanda Dealer Finance divestment. Excluding these items, and the impact of foreign currency translation, cash profit decreased 6%.

 

•

Net interest income increased $430 million (6%) with 7% growth in average interest earning assets, partly offset by a 3 basis point decrease in net interest margin. $77 million of the increase in net interest income was due to foreign currency translation impact. The $52.2 billion increase in average interest earning assets reflected a $17.0 billion foreign currency translation impact and lending growth of $20.5 billion, primarily in Australia and New Zealand home loans.

 

•

Other operating income decreased $309 million (10%) with foreign currency translation having a $149 million favourable impact. Adjusting for this, other operating income decreased by $458 million. The decrease was mainly due to a $331 million reduction in Markets other operating income and a $260 million impairment of the investment in Ambank, partially offset by $82 million increase in net foreign exchange earnings, the $66 million gain on Esanda Dealer Finance divestment, and $29 million gain on cessation of equity accounting for BoT.

 

•

Operating expenses increased $876 million (19%) mainly due to $629 million increase relating to the software capitalisation changes, $128 million increase in restructuring charges and a $115 million foreign currency translation impact. Adjusting for these items, operating expenses were flat.

 

•

Credit impairment charges increased $408 million (80%) due to a $437 million (96%) increase in the individual credit impairment charge, mainly from a small number of Australian and multinational resource related exposures, increases in Small Business Banking and Regional Business Banking together with lower recoveries, partially offset by a $29 million decrease in the collective impairment charge.

 

¡

March 2016 v September 2015

Cash profit decreased 21% compared to the September 2015 half year mainly due to the specified items outlined above. Excluding these items, and the impact of foreign currency translation, cash profit decreased 2%.

 

•

Net interest income increased $90 million (1%) with 3% growth in average interest earning assets, partly offset by a 3 basis point contraction in net interest margin. $32 million of the increase in net interest income was due to foreign currency translation impact. The $22.7 billion increase in average interest earning assets reflected a $5.7 billion foreign currency translation impact and lending growth of $4.6 billion, primarily in Australia and New Zealand home loans.

 

•

Other operating income decreased by $116 million (4%) with foreign currency translation having a $103 million favourable impact. Adjusting for this, other operating income decreased by $219 million (7%). The decrease was mainly due to the $260 million impairment of the investment in Ambank, partially offset by a $75 million increase in net foreign exchange earnings, $66 million gain on Esanda Dealer Finance divestment and $29 million gain on cessation of equity accounting for BoT.

 

•

Operating expenses increased $704 million (15%) mainly due to the $629 million increase relating to the software capitalisation changes, $117 million increase in restructuring charges and $37 million increase due to foreign currency translation impact. Adjusting for these items, operating expenses decreased by $79 million (1%) reflecting the 3% decrease in FTE.

 

•

Credit impairment charges increased $223 million (32%) due to a $237 million (36%) increase in individual credit impairment charges mainly from a small number of Australian and multinational resource related exposures, partially offset by a $14 million decrease in the collective credit impairment charge.

 

23

---

GROUP RESULTS

 

 

 

Net interest income

 

		Half Year								Movement
Group		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Cash net interest income		7,568		7,478		7,138				1%		6%
Average interest earning assets		754,391		731,739		702,203				3%		7%
Average deposits and other borrowings		587,235		567,709		551,805				3%		6%
Net interest margin (%) - cash		2.01		2.04		2.04				-3 bps		-3 bps
Group (excluding Markets)
Cash net interest income		7,006		6,878		6,631				2%		6%
Average interest earning assets		556,107		546,007		529,707				2%		5%
Average deposits and other borrowings		453,137		436,702		420,878				4%		8%
Net interest margin (%) - cash		2.52		2.51		2.51				1 bps		1 bps
		Half Year								Movement
Cash net interest margin by major division		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Australia
Net interest margin (%)		2.54		2.53		2.54				1 bps		0 bps
Average interest earning assets		317,540		306,816		294,368				3%		8%
Average deposits and other borrowings		172,779		164,732		162,688				5%		6%
Institutional
Net interest margin (%)		1.15		1.20		1.19				-5 bps		-4 bps
Average interest earning assets		312,961		305,902		292,914				2%		7%
Average deposits and other borrowings		233,729		231,655		227,460				1%		3%
New Zealand
Net interest margin (%)		2.37		2.44		2.52				-7 bps		-15 bps
Average interest earning assets		98,741		94,624		92,395				4%		7%
Average deposits and other borrowings		67,540		63,996		62,314				6%		8%

Group net interest margin – March 2016 Half Year v March 2015 Half Year

 

 

¡

March 2016 v March 2015

Net interest margin (-3 bps)

 

•

Asset mix and funding mix (0 bp): favourable mix impact from a higher proportion of capital and run-off of lower margin trade loans offset by the adverse asset mix impact from the Esanda Dealer Finance divestment.

 

•

Funding costs (1 bp): favourable wholesale funding costs.

 

•

Deposit competition (2 bps): benefit from deposit repricing, particularly term deposits.

 

•

Asset competition and risk mix (0 bp): improved Australian Home Loan margins following repricing offset by lending margin compression in New Zealand and lower spreads within Institutional and Commercial lending.

 

•

Markets and treasury (-6 bps): adverse impact of lower earnings on capital from lower interest rates and growth in lower margin liquidity portfolios in Markets.

 

24

---

GROUP RESULTS

 

 

 

Average interest earning assets (+$52.2 billion or +7%)

 

•

Average gross loans and advances (+$29.0 billion or +5%): excluding the impact of foreign currency translation, growth was $20.5 billion or +4% driven by growth in Australia and New Zealand home loans as well as growth in New Zealand Commercial lending. This was slightly offset by a decline in Trade loans due to active portfolio reduction and strategic repositioning of that business, as well as the Esanda Dealer Finance divestment.

 

•

Average trading and available-for-sale assets (+$10.9 billion or +12%): excluding the impact of foreign currency translation, growth was $8.4 billion or +9% driven by growth in the liquidity portfolio.

 

•

Average cash (+$5.6 billion or +12%): excluding the impact of foreign currency translation, growth was $2.0 billion or +4% driven by management of liquidity requirements.

 

•

Average collateral paid (+$3.2 billion or +42%): excluding the impact of foreign currency translation, growth was $2.6 billion or +33%.

Average deposits and other borrowings (+$35.4 billion or +6%)

 

•

Average deposits and other borrowings (+$35.4 billion or +6%): excluding the impact of foreign currency translation, growth was $17.7 billion or +3% driven by growth in Retail and Commercial customer deposits across both Australia and New Zealand.

Group net interest margin – March 2016 Half Year v September 2015 Half Year

 

 

¡

March 2016 v September 2015

Net interest margin (-3 bps)

 

•

Asset mix and funding mix (0 bp): favourable mix impact from higher proportion of capital and run-off of lower margin trade loans offset by the adverse asset mix impact from the Esanda Dealer Finance divestment.

 

•

Funding costs (-1 bps): adverse impact of increased wholesale funding costs.

 

•

Deposit competition (1 bp): benefit from deposit repricing, particularly in Australia and Asia.

 

•

Asset competition and risk mix (2 bps): improved margins, particularly in Home Loans following repricing, partly offset by lower Commercial and Institutional lending spreads.

 

•

Markets and treasury (-5 bps): adverse impact of lower earnings on capital from lower interest rates and growth in lower margin liquidity portfolio in Markets.

Average interest earning assets (+$22.7 billion or +3%)

 

•

Average gross loans and advances (+$7.3 billion or +1%): excluding the impact of foreign currency translation, growth was $4.6 billion or +1% driven by growth in Australia and New Zealand home loans as well as growth in New Zealand Commercial lending. This was slightly offset by the Esanda Dealer Finance divestment and a decline in Trade loans due to active portfolio reduction and strategic repositioning of that business.

 

•

Average trading and available-for-sale assets (+$6.9 billion or +8%): excluding the impact of foreign currency translation, growth was $6.1 billion or +7% driven by growth in the liquidity portfolio.

 

•

Average cash (+$4.6 billion or +10%): excluding the impact of foreign currency translation, growth was $3.7 billion or +8% driven by management of liquidity requirements.

 

•

Average collateral paid (+$1.7 billion or +19%): excluding the impact of foreign currency translation, growth was $1.4 billion or +15%.

Average deposits and other borrowings (+$19.5 billion or +3%)

 

•

Average deposits and other borrowings (+$19.5 billion or +3%): excluding the impact of foreign currency translation, growth was $13.7 billion or +2% driven by growth in Retail and Commercial customer deposits across both Australia and New Zealand, partially offset by a small decline in Institutional cash management deposits.

 

25

---

GROUP RESULTS

 

 

 

Other operating income

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16     v. Sep 15		Mar 16     v. Mar 15
Net fee and commission income1		1,194		1,232		1,212				-3%		-1%
Net funds management and insurance income		771		772		732				0%		5%
Markets other operating income		433		423		716				2%		-40%
Share of associates profit1		301		311		314				-3%		-4%
Net foreign exchange earnings1		141		64		59				large		large
Other1,2		(92)		62		24				large		large
Cash other operating income		2,748		2,864		3,057				-4%		-10%
1.     Excluding Markets.   2.     Other income for the March 2016 half includes the $260 million impairment of investment in Ambank, $29 million gain on cessation of equity accounting of BoT and $66 million gain on Esanda Dealer Finance divestment.
		Half Year								Movement
Markets income		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16     v. Sep 15		Mar 16     v. Mar 15
Net interest income		562		600		507				-6%		11%
Other operating income		433		423		716				2%		-40%
Cash Markets income		995		1,023		1,223				-3%		-19%
		Half Year								Movement
Other operating income by division		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16     v. Sep 15		Mar 16     v. Mar 15
Australia		594		606		580				-2%		2%
Institutional		911		948		1,229				-4%		-26%
New Zealand		201		185		183				9%		10%
Wealth		779		790		762				-1%		2%
Asia Retail & Pacific		231		236		221				-2%		5%
TSO and Group Centre1		32		99		82				-68%		-61%
Cash other operating income		2,748		2,864		3,057				-4%		-10%

 

1.	Other income for the March 2016 half includes the $260 million impairment of investment in Ambank, $29 million gain on cessation of equity accounting of BoT and $66 million gain on Esanda Dealer Finance divestment.

Other operating income – March 2016 Half Year v March 2015 Half Year

 

 

¡

March 2016 v March 2015

Other operating income decreased $309 million (10%). Excluding the specified items (impairment of investment in Ambank, gain on cessation of equity accounting of BoT, and gain on Esanda Dealer Finance divestment) and the impact of foreign currency translation, other operating income decreased by 9%.

Net fee and commission income

Decreased by $18 million (1%). Key factors include:

 

•

$21 million positive impact due to foreign currency translation.

 

•

Decrease in fee income of $35 million in Institutional due to lower customer demand and competitive pricing pressure.

 

•

$5 million decrease in fees in Australia resulting from the Esanda Dealer Finance divestment, partially offset by growth in Small Business Banking lending fee income.

 

26

---

GROUP RESULTS

 

 

 

Net funds management and insurance income

Increased by $39 million (5%). Key factors include:

 

•

$4 million positive impact of foreign currency translation.

 

•

Improved lapse experience in the life insurance business, partially offset by adverse claims experience and a shift in business towards lower margin products.

Markets operating income

Decreased by $283 million (40%). Key factors include:

 

•

$48 million positive impact of foreign currency translation.

 

•

Balance Sheet income decreased $116 million (45%) due to widening credit spreads.

 

•

Rates income decreased $85 million (27%) as a result of lower customer demand for interest rate hedging products.

 

•

Commodities income decreased $20 million (21%) due to declining demand for gold from Asian customers.

Refer to page 66 for further information.

Share of associates’ profit

Decreased by $13 million (4%) with foreign currency translation impact driving an increase of $19 million and the remaining movement driven by:

 

•

Ambank decreased $30 million due to margin contraction and subdued Malaysian economic conditions.

 

•

P.T. Bank Pan Indonesia decreased $19 million due to higher credit provisions.

 

•

BoT decreased $5 million mainly due to higher credit provisions and increased operating expenses.

 

•

Shanghai Rural Commercial Bank increased $20 million with higher investment income.

Net foreign exchange earnings

Increased by $82 million (large %). Key factors include:

 

•

Lower realised losses on earnings related hedges in TSO and Group Centre ($61 million) compared with the March 2015 half, these offset translation gains elsewhere in the Group.

 

•

Higher unrealised gains on foreign currency balances held in Institutional ($6 million).

Other

Decreased by $116 million (large %). Key factors include:

 

•

$3 million positive impact due to foreign currency translation.

 

•

$260 million impairment of investment in Ambank.

 

•

$66 million gain on Esanda Dealer Finance divestment.

 

•

$29 million gain on cessation of equity accounting for BoT.

 

¡

March 2016 v September 2015

Other operating income decreased by $116 million (4%). Excluding the specified items (impairment of investment in Ambank, gain on cessation of equity accounting of BoT, and gain on Esanda Dealer Finance divestment), and the impact of foreign currency translation, other operating income decreased by 1%.

Net fee and commission income

Decreased by $38 million (3%). Key factors include:

 

•

$6 million positive impact of foreign currency translation.

 

•

Decrease in fee income of $26 million in Institutional due to lower customer demand and competitive pricing pressure.

 

•

$13 million decrease in fees in Australia resulting from the Esanda Dealer Finance divestment, partially offset by growth in Deposits and Payments.

Net funds management and insurance income

Decreased by $1 million (0%). Key factors include:

 

•

$2 million positive impact of foreign currency translation.

 

•

Decrease in funds management income partially offset by improved lapse experience and in-force premium growth.

 

27

---

GROUP RESULTS

 

 

 

Markets operating income

Increased by $10 million (2%). Key factors include:

 

•

Foreign Exchange income increased $63 million (15%) due to increased customer demand as a depreciating Chinese Yuan resulted in customers seeking to hedge their foreign exchange exposures.

 

•

Commodities income decreased $19 million (20%) due to declining demand for gold from Asian customers. Refer to page 66 for further information.

Share of associates’ profit

Decreased by $10 million (3%) with foreign currency translation impact driving a decrease of $1 million and the remaining movement driven by:

 

•

Ambank decreased $14 million due to margin contraction.

 

•

P.T. Bank Pan Indonesia decreased $28 million due to higher credit provisions.

 

•

Shanghai Rural Commercial Bank increased $24 million with higher investment income.

 

•

BoT increased $10 million due asset growth.

Net foreign exchange earnings

Increased by $77 million (large %). Key factors include:

 

•

Lower realised losses on earnings related hedges in TSO and Group Centre ($90 million) compared with the September 2015 half, these offset translation gains elsewhere in the Group.

 

•

Higher unrealised losses on foreign currency balances held in Institutional ($7 million).

Other

Decreased by $154 million (large %). Key factors include:

 

•

$2 million positive impact due to foreign currency translation

 

•

$260 million impairment of investment in Ambank.

 

•

$15 million decrease on credit default swaps hedging lending exposures in Loans and Specialised Finance.

 

•

$66 million gain on Esanda Dealer Finance divestment.

 

•

$29 million gain on cessation of equity accounting for BoT.

 

28

---

GROUP RESULTS

 

 

 

Operating Expenses

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16      v. Mar 15
Personnel expenses1		2,801		2,764		2,715				1%		3%
Premises expenses		458		467		455				-2%		1%
Technology expenses1		1,324		761		701				74%		89%
Restructuring expenses		138		21		10				large		large
Other expenses1		758		762		722				-1%		5%
Total cash operating expenses		5,479		4,775		4,603				15%		19%
Total full time equivalent staff (FTE)		48,896		50,152		51,243				-3%		-5%

 

1.	The $629 million charge associated with the software capitalisation changes included in the March 2016 half comprises $98 million of personnel expenses, $513 million technology expenses, and $18 million other expenses. Refer to page 32 for further details.

 

		Half Year												Movement
Expenses by division		Mar 16 $M		Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15		Mar 16  v. Mar 15
Australia		1,665			1,618				1,556					3%		7%
Institutional		1,510			1,425				1,385					6%		9%
New Zealand		527			525				539					0%		-2%
Wealth		521			481				484					8%		8%
Asia Retail & Pacific		401			395				374					2%		7%
TSO and Group Centre		855			331				265					large		large
Total cash operating expenses		5,479			4,775				4,603					15%		19%

Operating expenses – March 2016 Half Year v March 2015 Half Year

 

 

¡

March 2016 v March 2015

Operating expenses increased 19% compared to the March 2015 half year due to the inclusion of specified items (software capitalisation changes and restructuring). Excluding these and the impact of foreign currency translation, operating expenses were flat.

 

•

Personnel expenses increased $86 million (3%), with $81 million due to the impact of foreign currency translation and $98 million due to the software capitalisation changes (personnel expenses that would otherwise have been capitalised). Excluding these, personnel expenses decreased $93 million (3%) due to a 5% decrease in FTE, primarily managed through natural attrition, and lower incentive costs.

 

•

Premises expenses increased $3 million (1%) with a $10 million increase due to the impact of foreign currency translation. Adjusting for this, premises expense decreased $7 million (2%) due to premises consolidation benefits offsetting annual rent increases.

 

•

Technology expenses increased $623 million (89%). $513 million of the increase was due to the software capitalisation changes comprising $468 million of increased amortisation for software assets and $45 million due to software expenditure which would otherwise have been capitalised. Excluding this, technology expenses increased $110 million (16%) from higher licensing, outsourced services and data communication costs, along with $9 million due to the impact of foreign currency translation.

 

•

Restructuring expenses increased $128 million reflecting the reshaping of the workforce in response to the Group evolving its strategy, including the simplification of the Institutional and Wealth businesses, restructure of Retail Asia and Pacific and delayering and simplification in TSO and Group Centre.

 

•

Other expenses increased $36 million (5%), with $15 million due to the impact of foreign currency translation and $18 million due to the software capitalisation changes. Excluding these, other expenses were flat with higher compliance and remediation spend being offset by decreased travel, entertainment and advertising expenses.

 

29

---

GROUP RESULTS

 

 

 

¡

March 2016 v September 2015

Operating expenses increased 15% compared to the September 2015 half year due to the inclusion of specified items (software capitalisation changes and restructuring). Excluding these items and the impact of foreign currency translation expenses were down 1%.

 

•

Personnel expenses increased $37 million (1%), with $25 million due to the impact of foreign currency translation and $98 million due to the software capitalisation changes (personnel expenses that would otherwise have been capitalised). Excluding these, personnel expenses decreased $86 million (3%) due to a 3% decrease in FTE, primarily managed through natural attrition, and lower incentive costs.

 

•

Premises expenses decreased $9 million (2%), with a $3 million increase due to the impact of foreign currency translation and a $12 million decrease driven by premises consolidation benefits which more than offset annual rent increases.

 

•

Technology expenses increased $563 million (74%). $513 million of the increase was due to the software capitalisation changes comprising $468 million of increased amortisation for software assets and $45 million due to software expenditure which would otherwise have been capitalised. Excluding these, technology expenses increased $50 million (7%) driven by higher licensing costs and outsourced services, and $4 million due to the impact of foreign currency translation.

 

•

Restructuring expenses increased $117 million, reflecting the reshaping of the workforce in response to the Group evolving its strategy, including the simplification of the Institutional and Wealth businesses, restructure of Retail Asia and Pacific and delayering and simplification in TSO and Group Centre.

 

•

Other expenses decreased $4 million (1%), with a $5 million increase due to the impact of foreign currency translation and $18 million due to the software capitalisation changes. Excluding these, other expenses decreased $28 million (4%) due to decreased travel and entertainment expenses and lower advertising spend.

 

30

---

GROUP RESULTS

 

 

 

Technology infrastructure spend

Technology infrastructure spend includes expenditure that develops and enhances the Group’s technology infrastructure to meet business and strategic objectives and to improve capability and efficiency.

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16       v. Sep 15		Mar 16     v. Mar 15
Expensed investment spend		272		135		123				large		large
Capitalised investment spend		197		425		314				-54%		-37%
Technology infrastructure spend		469		560		437				-16%		7%

 

Comprising		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16       v. Sep 15		Mar 16     v. Mar 15
Growth		190		242		204				-21%		-7%
Productivity		83		114		102				-27%		-19%
Risk and compliance		115		141		82				-18%		40%
Infrastructure and other		81		63		49				29%		65%
Technology infrastructure spend		469		560		437				-16%		7%

 

Technology infrastructure spend by division		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16       v. Sep 15		Mar 16     v. Mar 15
Australia		143		158		136				-9%		5%
Institutional		96		147		98				-35%		-2%
New Zealand		37		39		28				-5%		32%
Asia Retail & Pacific		4		4		3				0%		33%
Wealth		45		49		35				-8%		29%
TSO and Group Centre		144		163		137				-12%		5%
Technology infrastructure spend		469		560		437				-16%		7%

Digitisation is becoming central to ANZ’s business operations by reshaping how ANZ works and providing technology that enables better solutions for customers. The Group’s aim is to create a digital bank; one that allows us to streamline operations such that we deliver fast, easy and innovative solutions for our customers while also reducing the operational complexity of the organisation and thereby improving productivity and reducing risk. ANZ has invested in digital across the Group, delivering multichannel platforms that have globally extensible capabilities covering aspects like employee mobility, products (goMoney™ and MobilePay), security systems and more intuitive internet banking.

Australia division has delivered key foundations with the go-live of multi-channel platforms during the March 2016 half to enable a consistent digital experience and will now focus on continuous delivery of digital channels to improve both customer and banker experience. Investment is also continuing in simplification initiatives such as Banker Desktop which is simplifying key common branch processes through digitisation to enhance banker productivity.

Institutional continues to invest in risk and compliance projects to meet increasing regulatory requirements across the region. Institutional investment focused primarily on the Markets business globally; Transaction Banking in China; and on banking and data management systems in Singapore and Indonesia. The division recently concluded a number of projects aimed at establishing businesses in Thailand and Myanmar, with the condensed growth agenda now focusing on key digital infrastructure in Markets and Payments Application Consolidation in Transaction Banking.

New Zealand has introduced new digital services for customers including goMoney™ Wallet for Android users and self-service funds transfers for KiwiSavers on internet banking.

Wealth investment has focused on strategic growth initiatives to help customers better connect with, protect and grow their financial well-being. These initiatives include digital platforms, such as Grow by ANZ™, that better connect customers to their wealth.

TSO and Group Centre is investing in common platforms to drive transformation of key business activities, improve customer experience and drive down cost to serve. Investment continues in Payments Transformation to provide competitive payment services for our customers, and our Global Loan Management System to further transform wholesale lending capabilities.

 

¡

March 2016 v March 2015

During the March 2016 half, the Group continued to invest strongly with spend of $469 million. The $32 million (7%) increase compared to the March 2015 half was driven by Australia (Small Business Origination System and Global Asset Finance), New Zealand (RBNZ Payments Industry Compliance, Deposits Remediation and Teradata Pan-bank Data Platform), Wealth (Superannuation Transition, Smart Choice, and E*Trade Rebranding) and TSO and Group Centre (transforming wholesale lending capabilities).

 

¡

March 2016 v September 2015

The $91 million decrease (16%) in March 2016 reflects the completion of a number of programs at the end of September 2015, such as Thailand business mobilisation, over the counter (OTC) derivative reform program and China data centre expansion in Institutional, anz.com redesign and ANZ Mobile Pay in Australia, and insurance on Grow™ in Wealth.

 

31

---

GROUP RESULTS

 

 

 

Software capitalisation

As at 31 March 2016, the Group’s intangible assets included $2,249 million in relation to costs incurred in acquiring and developing software. Details are set out in the table below:

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16       v. Sep 15		Mar 16     v. Mar 15
Balance at start of period		2,893		2,689		2,533				8%		14%
Software capitalised during the period		209		457		350				-54%		-40%
Amortisation during the period
- Current period amortisation		(245)		(275)		(267)				-11%		-8%
- Accelerated amortisation		(556)		-		-				n/a		n/a
Software impaired/written-off		(2)		(13)		(4)				-85%		-50%
Foreign exchange differences		(50)		35		77				large		large
Total capitalised software		2,249		2,893		2,689				-22%		-16%

 

Capitalised cost analysis by Division		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16       v. Sep 15		Mar 16     v. Mar 15
Australia		56		121		93				-54%		-40%
Institutional		40		87		90				-54%		-56%
New Zealand		4		28		14				-86%		-71%
Wealth		-		35		21				-100%		-100%
Asia Retail & Pacific		9		4		10				large		-10%
TSO and Group Centre		100		182		122				-45%		-18%
Total		209		457		350				-54%		-40%

 

Net book value by Division		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16       v. Sep 15		Mar 16     v. Mar 15
Australia		514		628		580				-18%		-11%
Institutional		847		1,059		1,014				-20%		-16%
New Zealand		19		68		51				-72%		-63%
Wealth		28		121		101				-77%		-72%
Asia Retail & Pacific		62		74		77				-16%		-19%
TSO and Group Centre		779		943		866				-17%		-10%
Total		2,249		2,893		2,689				-22%		-16%

During the March 2016 half, the Group changed the application of its accounting policy for the capitalisation of expenditure on internally generated software assets effective from 1 October 2015. The change aligns the accounting policy for software assets with the rapidly changing technology landscape and the Group’s evolving digital strategy by increasing the threshold for capitalisation of software development costs reflecting the increasingly shorter useful life of smaller items of software and directly expensing more project related costs.

The change does not affect the total investment in technology but does affect the timing of recognition of costs in the income statement. The impact of the change on the March 2016 half was:

 

•

Accelerated amortisation of $556 million relating to software assets where the original cost was below the revised threshold at 1 October 2015. This brings forward amortisation which otherwise would have been recognised in future periods, of which $88 million would have been recognised in the March 2016 half (i.e. the half year amortisation charge increased by $468 million).

 

•

Higher operating expenses of $161 million relating to software development costs which otherwise would have been capitalised and amortised in future periods.

The change in capitalised software treatment has no impact on regulatory capital ratios.

The table below shows the capitalised costs and net book values by division at 31 March 2016 had the changes not taken place:

 

		Capitalised costs $M		Net book value $M
Australia		105		652
Institutional		70		983
New Zealand		21		81
Wealth		19		119
Asia Retail & Pacific		9		70
TSO and Group Centre		146		973
Total		370		2,878

 

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GROUP RESULTS

 

 

 

Credit risk

 

		Half Year										Movement
		Mar 16				Sep 15		Mar 15				Mar 16		Mar 16
Credit impairment charge/(release)		$M				$M		$M				v. Sep 15		v. Mar 15
Individual credit impairment charge			892			655		455				36%		96%
Collective credit impairment charge			26			40		55				-35%		-53%
Total credit impairment charge			918			695		510				32%		80%
		Half Year										Movement
		Mar 16				Sep 15		Mar 15				Mar 16		Mar 16
Credit impairment charge/(release)		$M				$M		$M				v. Sep 15		v. Mar 15
Australia			462			458		395				1%		17%
Institutional			323			111		88				large		large
New Zealand			42			36		19				17%		large
Wealth			-			1		(1)				-100%		-100%
Asia Retail & Pacific			91			87		10				5%		large
TSO and Group Centre			-			2		(1)				-100%		-100%
Total credit impairment charge			918			695		510				32%		80%
Individual credit impairment charge
		Half Year										Movement
		Mar 16				Sep 15		Mar 15				Mar 16		Mar 16
Individual credit impairment charge by division		$M				$M		$M				v. Sep 15		v. Mar 15
Australia			429			427		334				0%		28%
Institutional			339			114		92				large		large
New Zealand			43			32		22				34%		95%
Wealth			(1)			1		(1)				large		0%
Asia Retail & Pacific			82			78		8				5%		large
TSO and Group Centre			-			3		-				-100%		n/a
Total individual credit impairment charge			892			655		455				36%		96%
New and increased individual credit impairments
Australia			600			573		530				5%		13%
Institutional			354			187		127				89%		large
New Zealand			96			100		90				-4%		7%
Wealth			-			1		-				-100%		n/a
Asia Retail & Pacific			101			99		75				2%		35%
TSO and Group Centre			-			1		-				-100%		n/a
New and increased individual credit impairments			1,151			961		822				20%		40%
Recoveries and write-backs
Australia			(171)			(146)		(196)				17%		-13%
Institutional			(15)			(73)		(35)				-79%		-57%
New Zealand			(53)			(68)		(68)				-22%		-22%
Wealth			(1)			-		(1)				n/a		0%
Asia Retail & Pacific			(19)			(22)		(67)				-14%		-72%
TSO and Group Centre			-			3		-				-100%		n/a
Recoveries and write-backs			(259)			(306)		(367)				-15%		-29%
Total individual credit impairment charge			892			655		455				36%		96%

 

¡

March 2016 v March 2015

The individual credit impairment charge increased $437 million (96%) driven by increases in new and existing provisions of $329 million, combined with a $108 million reduction in write-backs. The main driver of the increase in new and existing provisions was in the Institutional division from a small number of Australian and multi-national resource related exposures and continued commodity sector weakness. In Australia division, the increases were in Small Business Banking, Cards & Personal Loans and Regional Business Banking, partially offset by the Esanda Dealer Finance divestment. Lower write-backs reflected a large write-back in Asia Retail & Pacific that occurred in the March 2015 half.

 

¡

March 2016 v September 2015

The individual credit impairment charge increased by $237 million (36%) driven by an increase in new and existing provisions of $190 million combined with a $47 million reduction in write-backs. The main driver of the increase in new and existing provisions was in the Institutional division from a small number of Australian and multi-national resource related exposures and continued commodity sector weakness.

 

33

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GROUP RESULTS

 

 

 

Collective credit impairment charge

 

		Half Year										Movement
		Mar 16				Sep 15		Mar 15				Mar 16		Mar 16
Collective credit impairment charge/(release) by source		$M				$M		$M				v. Sep 15		v. Mar 15
Lending growth			56			50		54				12%		4%
Risk profile			(30)			65		5				large		large
Portfolio mix			-			(3)		3				-100%		-100%
Economic cycle and concentration risk adjustment			-			(72)		(7)				-100%		-100%
Total collective credit impairment charge			26			40		55				-35%		-53%
		Half Year										Movement
		Mar 16				Sep 15		Mar 15				Mar 16		Mar 16
Collective credit impairment charge/(release) by division		$M				$M		$M				v. Sep 15		v. Mar 15
Australia			33			31		61				6%		-46%
Institutional			(16)			(3)		(4)				large		large
New Zealand			(1)			4		(3)				large		-67%
Wealth			1			-		-				n/a		n/a
Asia Retail & Pacific			9			9		2				0%		large
TSO and Group Centre			-			(1)		(1)				-100%		-100%
Total collective credit impairment charge			26			40		55				-35%		-53%

 

¡

March 2016 v March 2015

The collective credit impairment charge decreased $29 million (53%) driven by a number of customer downgrades in the Institutional division and subsequent migration of provisioning from collective to individual provision.

 

¡

March 2016 v September 2015

The collective credit impairment charge decreased $14 million (35%) driven by a number of customer downgrades in the Institutional division and subsequent migration of provisioning from collective to individual provision, and releases from the economic cycle overlay in September 2015.

Provision for credit impairment balance

 

		As at										Movement
		Mar 16				Sep 15		Mar 15				Mar 16		Mar 16
		$M				$M		$M				v. Sep 15		v. Mar 15
Collective provision1			2,862			2,956		2,914				-3%		-2%
Individual provision			1,238			1,061		1,114				17%		11%
Total provision for credit impairment			4,100			4,017		4,028				2%		2%

 

1.

The collective provision includes amounts for off-balance sheet credit exposures of $663 million at 31 Mar 2016 (Sep 2015: $677 million; Mar 2015: $646 million). The impact on the income statement for the half year ended 31 March 2016 was a $3 million charge (Sep 2015 half: $20 million charge; Mar 2015 half: $7 million charge).

 

34

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GROUP RESULTS

 

 

 

Gross Impaired Assets

 

		As at										Movement
		Mar 16				Sep 15		Mar 15				Mar 16		Mar 16
		$M				$M		$M				v. Sep 15		v. Mar 15
Impaired loans			2,564			2,441		2,466				5%		4%
Restructured items			226			184		146				23%		55%
Non-performing commitments and contingencies			93			94		96				-1%		-3%
Gross impaired assets			2,883			2,719		2,708				6%		6%
Individual provisions
Impaired loans			(1,209)			(1,038)		(1,081)				16%		12%
Non-performing commitments and contingencies			(29)			(23)		(33)				26%		-12%
Net impaired assets			1,645			1,658		1,594				-1%		3%
Gross impaired assets by division
Australia			1,093			1,193		1,245				-8%		-12%
Institutional			1,281			960		826				33%		55%
New Zealand			273			338		434				-19%		-37%
Wealth			4			5		8				-20%		-50%
Asia Retail & Pacific			232			223		195				4%		19%
Gross impaired assets			2,883			2,719		2,708				6%		6%
Gross impaired assets by size of exposure
Less than $10 million			1,597			1,748		1,903				-9%		-16%
$10 million to $100 million			970			708		607				37%		60%
Greater than $100 million			316			263		198				20%		60%
Gross impaired assets			2,883			2,719		2,708				6%		6%

 

¡

March 2016 v March 2015

Gross impaired assets increased $175 million (6%) driven by Institutional ($455 million), partially offset by decreases in Australia division ($152 million) and New Zealand division ($161 million). The increase in Institutional relates to impairments on a small number of Australian and multi-national resource related exposures due to continued weakness in the commodity sector. The Australia division decrease is driven by the Esanda Dealer Finance divestment. In the New Zealand division, the decrease is due to repayments and transfers out of the impaired category. The Group’s individual provision coverage ratio on impaired assets was 42.9% at 31 March 2016, up from 41.1% at 31 March 2015.

 

¡

March 2016 v September 2015

Gross impaired assets increased $164 million (6%) driven by Institutional ($321 million), partially offset by decreases in Australia division ($100 million) and New Zealand division ($65 million). The increase in Institutional relates to impairments on a small number of Australian and multi-national resource related exposures due to continued weakness in the commodity sector. The Australia division decrease is due to the Esanda Dealer Finance divestment. In the New Zealand division, the decrease is due to repayments and transfers out of the impaired category. The Group’s individual provision coverage ratio on impaired assets was 42.9% at 31 March 2016, up from 39.0% at 30 September 2015.

New Impaired Assets

 

		Half Year										Movement
		Mar 16				Sep 15		Mar 15				Mar 16		Mar 16
		$M				$M		$M				v. Sep 15		v. Mar 15
Impaired loans			1,657			1,707		1,141				-3%		45%
Restructured items			81			4		26				large		large
Non-performing commitments and contingencies			46			72		30				-36%		53%
Total new impaired assets			1,784			1,783		1,197				0%		49%
New impaired assets by division
Australia			777			840		778				-8%		0%
Institutional			652			614		146				6%		large
New Zealand			194			203		165				-4%		18%
Wealth			-			-		18				n/a		-100%
Asia Retail & Pacific			161			126		90				28%		79%
Total new impaired assets			1,784			1,783		1,197				0%		49%

 

35

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GROUP RESULTS

 

 

 

¡

March 2016 v March 2015

New impaired assets increased $587 million (49%) with increases in Institutional ($506 million). The increase in Institutional related to a small number of Australian and multi-national resource related exposures due to continued weakness in the commodity sector.

 

¡

March 2016 v September 2015

New impaired assets increased $1 million (0%) with increases in Institutional ($38 million) and Asia Retail & Pacific ($36 million), offset by a decrease in Australia division ($63 million). The increase in Institutional related to a small number of Australian and multi-national resource related exposures due to continued weakness in the commodity sector, offset by the Esanda Dealer Finance divestment in the Australia Division.

 

		As at										Movement
Ageing analysis of net loans and advances		Mar 16				Sep 15		Mar 15				Mar 16		Mar 16
that are past due but not impaired		$M				$M		$M				v. Sep 15		v. Mar 15
1-5 days			2,926			2,621		3,323				12%		-12%
6-29 days			5,942			5,235		5,271				14%		13%
30-59 days			2,222			1,674		2,069				33%		7%
60-89 days			1,263			1,050		1,160				20%		9%
>90 days			2,573			2,378		2,248				8%		14%
Total			14,926			12,958		14,071				15%		6%

 

¡

March 2016 v March 2015

The 90 days past due but not impaired increased by $325 million (14%) primarily within Australia division due to growth in the mortgage portfolio and portfolio deterioration mainly in Western Australia and Queensland.

 

¡

March 2016 v September 2015

The 90 days past due but not impaired increased by $195 million (8%) primarily within Australia division due to growth in the mortgage portfolio and portfolio deterioration predominantly in Western Australia and Queensland.

Income tax expense

 

		Half Year								Movement
		Mar 16		Sep 15		Mar 15				Mar 16		Mar 16
		$M		$M		$M				v. Sep 15		v. Mar 15
Income tax expense on cash profit		1,133		1,326		1,398				-15%		-19%
Effective tax rate (cash profit)		28.9%		27.2%		27.5%				1.7%		1.4%

 

¡

March 2016 v March 2015

The effective tax rate increased from 27.5% to 28.9%. The increase of 140 bps is primarily due to the impairment of our investment in Ambank and lower average tax rate on decreased offshore earnings during the March 2016 half.

 

¡

March 2016 v September 2015

The effective tax rate increased from 27.2% to 28.9%. The increase of 170 bps is primarily due to the impairment of our investment in Ambank and a one off favourable Wealth tax consolidation benefit recognised in the September 2015 half, partially offset by a release of tax provisions.

 

36

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GROUP RESULTS

 

 

 

Impact of foreign currency translation

The following tables present the Group’s cash profit results and net loans and advances neutralised for the impact of foreign currency translation. Comparative data has been adjusted to remove the translation impact of foreign currency movements by retranslating prior period comparatives at current period foreign exchange rates.

Cash Profit - March 2016 Half Year vs March 2015 Half Year

 

		Half Year										Movement
		Actual		FX     unadjusted		FX     impact		FX     adjusted				FX     unadjusted		FX     impact		FX     adjusted
		Mar 16 $M		Mar 15 $M		Mar 15 $M		Mar 15 $M				Mar 16 v. Mar 15		Mar 16     v. Mar 15		Mar 16     v. Mar 15
Net interest income		7,568		7,138		77		7,215				6%		1%		5%
Other operating income		2,748		3,057		149		3,206				-10%		4%		-14%
Operating income		10,316		10,195		226		10,421				1%		2%		-1%
Operating expenses		(5,479)		(4,603)		(115)		(4,718)				19%		3%		16%
Profit before credit impairment and income tax		4,837		5,592		111		5,703				-14%		1%		-15%
Credit impairment charge		(918)		(510)		(5)		(515)				80%		2%		78%
Profit before income tax		3,919		5,082		106		5,188				-23%		1%		-24%
Income tax expense		(1,133)		(1,398)		(25)		(1,423)				-19%		1%		-20%
Non-controlling interests		(4)		(8)		(2)		(10)				-50%		10%		-60%
Cash profit		2,782		3,676		79		3,755				-24%		2%		-26%

Cash Profit by Division and Geography - March 2016 Half Year vs March 2015 Half Year

 

		Half Year										Movement
		Actual		FX     unadjusted		FX     impact		FX     adjusted				FX     unadjusted		FX     impact		FX     adjusted
		Mar 16 $M		Mar 15 $M		Mar 15 $M		Mar 15 $M				Mar 16 v. Mar 15		Mar 16     v. Mar 15		Mar 16     v. Mar 15
Australia		1,753		1,650		-		1,650				6%		0%		6%
Institutional		632		1,071		36		1,107				-41%		2%		-43%
New Zealand		578		566		(7)		559				2%		-1%		3%
Wealth		261		263		(1)		262				-1%		-1%		0%
Asia Retail & Pacific		53		99		6		105				-46%		4%		-50%
TSO and Group Centre		(495)		27		45		72				large		large		large
Cash profit by division		2,782		3,676		79		3,755				-24%		2%		-26%
Australia		1,830		2,147		35		2,182				-15%		1%		-16%
Asia Pacific, Europe & America		259		743		54		797				-65%		3%		-68%
New Zealand		693		786		(10)		776				-12%		-1%		-11%
Cash profit by geography		2,782		3,676		79		3,755				-24%		2%		-26%

Net loans and advances by division and geography - March 2016 Half Year vs March 2015 Half Year

 

		As at										Movement
		Actual		FX     unadjusted		FX     impact		FX     adjusted				FX     unadjusted		FX     impact		FX     adjusted
		Mar 16 $B		Mar 15 $B		Mar 15 $B		Mar 15 $B				Mar 16 v. Mar 15		Mar 16     v. Mar 15		Mar 16     v. Mar 15
Australia		320.0		297.6		-		297.6				8%		0%		8%
Institutional		125.6		144.9		(1.4)		143.5				-13%		-1%		-12%
New Zealand		97.2		97.7		(8.0)		89.7				-1%		-9%		8%
Wealth		7.3		6.9		(0.2)		6.7				6%		-3%		9%
Asia Retail & Pacific		11.9		11.6		(0.1)		11.5				3%		0%		3%
TSO and Group Centre		(0.2)		(0.5)		-		(0.5)				-60%		0%		-60%
Net loans and advances by division1		561.8		558.2		(9.7)		548.5				1%		-1%		2%
Australia		386.8		362.8		-		362.8				7%		0%		7%
Asia Pacific, Europe & America		69.1		88.4		(1.0)		87.3				-22%		-1%		-21%
New Zealand		105.9		107.0		(8.7)		98.3				-1%		-9%		8%
Net loans and advances by geography1		561.8		558.2		(9.7)		548.5				1%		-1%		2%

 

1.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

37

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GROUP RESULTS

 

 

 

Cash Profit - March 2016 Half Year vs September 2015 Half Year

 

		Half Year										Movement
		Actual		FX     unadjusted		FX     impact		FX     adjusted				FX     unadjusted		FX     impact		FX     adjusted
		Mar 16 $M		Sep 15 $M		Sep 15 $M		Sep 15 $M				Mar 16 v. Sep 15		Mar 16     v. Sep 15		Mar 16     v. Sep 15
Net interest income		7,568		7,478		32		7,510				1%		0%		1%
Other operating income		2,748		2,864		103		2,967				-4%		3%		-7%
Operating income		10,316		10,342		135		10,477				0%		2%		-2%
Operating expenses		(5,479)		(4,775)		(37)		(4,812)				15%		1%		14%
Profit before credit impairment and income tax		4,837		5,567		98		5,665				-13%		2%		-15%
Credit impairment charge		(918)		(695)		(8)		(703)				32%		1%		31%
Profit before income tax		3,919		4,872		90		4,962				-20%		1%		-21%
Income tax expense		(1,133)		(1,326)		(28)		(1,354)				-15%		1%		-16%
Non-controlling interests		(4)		(6)		1		(5)				-33%		-13%		-20%
Cash profit		2,782		3,540		63		3,603				-21%		2%		-23%

Cash Profit by Division and Geography - March 2016 Half Year vs September 2015 Half Year

 

		Half Year										Movement
		Actual		FX     unadjusted		FX     impact		FX     adjusted				FX     unadjusted		FX     impact		FX     adjusted
		Mar 16 $M		Sep 15 $M		Sep 15 $M		Sep 15 $M				Mar 16 v. Sep 15		Mar 16     v. Sep 15		Mar 16     v. Sep 15
Australia		1,753		1,706		-		1,706				3%		0%		3%
Institutional		632		893		1		894				-29%		0%		-29%
New Zealand		578		561		3		564				3%		1%		2%
Wealth		261		346		-		346				-25%		0%		-25%
Asia Retail & Pacific		53		45		(1)		44				18%		-2%		20%
TSO and Group Centre		(495)		(11)		60		49				large		large		large
Cash profit by division		2,782		3,540		63		3,603				-21%		2%		-23%
Australia		1,830		2,269		64		2,333				-19%		3%		-22%
Asia Pacific, Europe & America		259		492		(4)		488				-47%		0%		-47%
New Zealand		693		779		3		782				-11%		0%		-11%
Cash profit by geography		2,782		3,540		63		3,603				-21%		2%		-23%

Net loans and advances by division and geography - March 2016 Half Year vs September 2015 Half Year

 

		As at										Movement
		Actual		FX     unadjusted		FX     impact		FX     adjusted				FX     unadjusted		FX     impact		FX     adjusted
		Mar 16 $B		Sep 15 $B		Sep 15 $B		Sep 15 $B				Mar 16 v. Sep 15		Mar 16     v. Sep 15		Mar 16     v. Sep 15
Australia		320.0		313.7		-		313.7				2%		0%		2%
Institutional		125.6		142.2		(5.5)		136.7				-12%		-4%		-8%
New Zealand		97.2		95.2		(0.8)		94.4				2%		-1%		3%
Wealth		7.3		7.1		(0.2)		6.9				3%		-3%		6%
Asia Retail & Pacific		11.9		12.5		(0.8)		11.7				-5%		-7%		2%
TSO and Group Centre		(0.2)		(0.5)		-		(0.5)				-60%		0%		-60%
Net loans and advances by division1		561.8		570.2		(7.3)		562.9				-1%		-1%		0%
Australia		386.8		381.2		-		381.2				1%		0%		1%
Asia Pacific, Europe & America		69.1		85.1		(6.4)		78.6				-19%		-7%		-12%
New Zealand		105.9		103.9		(0.9)		103.0				2%		-1%		3%
Net loans and advances by geography1		561.8		570.2		(7.3)		562.9				-1%		-1%		0%

 

1.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

38

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GROUP RESULTS

 

 

 

Earnings related hedges

The Group has taken out economic hedges against larger foreign exchange denominated revenue streams (primarily New Zealand Dollar, US Dollar and US Dollar correlated). New Zealand dollar exposure relates to the New Zealand geography and USD exposure relates to APEA. Details of these hedges are set out below.

 

		Half Year
NZD Economic hedges		Mar 16 $M		Sep 15 $M		Mar 15 $M
Net open NZD position (notional principal)1		3,119		3,567		2,375
Amount taken to income (pre-tax statutory basis)2		(2)		168		(220)
Amount taken to income (pre-tax cash basis)3		(2)		(34)		(51)
USD Economic hedges
Net open USD position (notional principal)1		85		352		823
Amount taken to income (pre-tax statutory basis)2		24		(41)		(129)
Amount taken to income (pre-tax cash basis)3		(34)		(92)		(46)

 

1.	Value in AUD at contracted rate.

 

2.	Unrealised valuation movement plus realised revenue from closed hedges.

 

3.	Realised revenue from closed hedges.

As at 31 March 2016, the following hedges are in place to partially hedge future earnings against adverse movements in exchange rates:

 

•

NZD 3.4 billion at a forward rate of approximately NZD 1.09 / AUD.

 

•

USD 0.1 billion at a forward rate of approximately USD 0.95 / AUD.

During the March 2016 half:

 

•

NZD 1.0 billion of economic hedges matured and a realised loss of $2 million (pre-tax) was recorded in cash profit.

 

•

USD 0.1 billion of economic hedges matured and a realised loss of $34 million (pre-tax) was recorded in cash profit.

 

•

An unrealised gain of $58 million (pre-tax) on the outstanding NZD and USD economic hedges was recorded in the statutory income statement during the half. This unrealised gain has been treated as an adjustment to statutory profit in calculating cash profit as these are hedges of future NZD and USD revenues.

Earnings per share

 

		Half Year								Movement
		Mar 16		Sep 15		Mar 15				Mar 16       v. Sep 15		Mar 16       v. Mar 15
Cash earnings per share (cents)
Basic		95.9		126.8		133.6				-24%		-28%
Diluted		90.7		119.8		129.9				-24%		-30%
Cash weighted average number of ordinary shares (M)1
Basic		2,901.4		2,792.7		2,750.0				4%		6%
Diluted		3,229.5		3,077.4		2,926.8				5%		10%
Cash profit ($M)		2,782		3,540		3,676				-21%		-24%
Preference share dividends ($M)		-		-		(1)				n/a		-100%
Cash profit less preference share dividends ($M)		2,782		3,540		3,675				-21%		-24%
Diluted cash profit less preference share dividends ($M)		2,929		3,687		3,802				-21%		-23%

 

1.	Includes Treasury shares held in Wealth as the associated gains and losses are included in cash profit.

 

39

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GROUP RESULTS

 

 

 

Dividends

 

		Half Year								Movement
										Mar 16		Mar 16
Dividend per ordinary share (cents)		Mar 16		Sep 15		Mar 15				v. Sep 15		v. Mar 15
Interim (fully franked)1		80		-		86				n/a		-7%
Final (fully franked)		-		95		-				n/a		n/a
Total (fully franked)		80		95		86				-16%		-7%
Ordinary share dividends used in payout ratio ($M)2		2,334		2,758		2,379				-15%		-2%
Cash profit ($M)		2,782		3,540		3,676				-21%		-24%
Less: Preference share dividends paid		-		-		(1)				n/a		-100%
Ordinary share dividend payout ratio (cash basis)2		83.9%		77.9%		64.7%

 

1.	2016 interim dividend is proposed.

 

2.

Dividend payout ratio is calculated using proposed 2016 interim dividend of $2,334 million, which is based on the forecast number of ordinary shares on issue at the dividend record date. Dividend payout ratios for the September 2015 half and March 2015 half year are calculated using actual dividend paid of $2,758 million and $2,379 million respectively. Dividend payout ratio is calculated by adjusting profit attributable to shareholders of the company by the amount of preference share dividends paid.

The Directors propose that an interim dividend of 80 cents be paid on each eligible fully paid ANZ ordinary share on 1 July 2016. The proposed 2016 interim dividend will be fully franked for Australian tax purposes, and New Zealand imputation credits of NZ 10 cents per ordinary share will also be attached.

Economic profit

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16       v. Sep 15		Mar 16       v. Mar 15
Statutory profit attributable to shareholders of the Company		2,738		3,987		3,506				-31%		-22%
Adjustments between statutory profit and cash profit		44		(447)		170				large		-74%
Cash Profit		2,782		3,540		3,676				-21%		-24%
Economic credit cost adjustment		(71)		(203)		(290)				-65%		-76%
Imputation credits		568		663		657				-14%		-14%
Economic return		3,279		4,000		4,043				-18%		-19%
Cost of capital		(2,876)		(2,660)		(2,508)				8%		15%
Economic profit		403		1,340		1,535				-70%		-74%

Economic profit is a risk adjusted profit measure used to evaluate business unit performance and is considered in determining the variable component of remuneration packages. This is used for internal management purposes and is not subject to review or audit by the external auditor.

Economic profit is calculated via a series of adjustments to cash profit. The economic credit cost adjustment replaces the actual credit loss charge with internal expected loss based on the average loss per annum on the portfolio over an economic cycle. The benefit of imputation credits to our shareholders is recognised, measured at 70% of Australian tax. The cost of capital is a major component of economic profit. At an ANZ Group level, this is calculated using average ordinary shareholders’ equity (excluding non-controlling interests), multiplied by a cost of capital rate (10% applied across all reporting periods) plus the dividend on preference shares. At a business unit level, capital is allocated based on economic capital, whereby higher risk businesses attract higher levels of capital. This method is designed to help drive appropriate risk management and ensure business returns align with the relevant risk. Key risks covered include credit risk, operating risk, market risk and other risks.

Economic profit decreased 74% on the March 2015 half due to a 24% decrease in cash profit and a 15% increase in cost of capital partially offset by a lower economic credit cost adjustment reflecting higher credit impairment charges.

Economic profit decreased 70% on the September 2015 half due to a 21% decrease in cash profit and an 8% increase in cost of capital partially offset by a lower economic credit cost adjustment reflecting higher credit impairment charges.

 

40

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GROUP RESULTS

 

 

 

Condensed balance sheet

 

 

		As at								Movement
Assets		Mar 16 $B		Sep 15 $B		Mar 15 $B				Mar 16       v. Sep 15		Mar 16       v. Mar 15
Cash / Settlement balances owed to ANZ / Collateral paid		88.0		82.5		79.3				7%		11%
Trading and available-for-sale assets		100.5		92.7		89.7				8%		12%
Derivative financial instruments		88.7		85.6		73.6				4%		21%
Net loans and advances1		561.8		570.2		558.2				-1%		1%
Investment backing policy liabilities		34.5		34.8		36.5				-1%		-5%
Other		21.8		24.1		22.8				-10%		-4%
Total assets		895.3		889.9		860.1				1%		4%
Liabilities
Settlement balances owed by ANZ / Collateral received		20.2		19.1		12.6				6%		60%
Deposits and other borrowings		578.1		570.8		567.2				1%		2%
Derivative financial instruments		91.7		81.3		73.2				13%		25%
Debt issuances		81.9		93.7		85.7				-13%		-4%
Policy liabilities and external unit holder liabilities		38.4		38.7		40.3				-1%		-5%
Other		28.5		28.9		29.0				-1%		-2%
Total liabilities		838.8		832.5		808.0				1%		4%
Total equity		56.5		57.4		52.1				-2%		8%

 

1.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

¡

March 2016 v March 2015

 

•

Cash, settlement balances and collateral paid increased by $9 billion primarily due to increased cash held by Markets ($3 billion), increased settlement balances with central banks held by Treasury ($3 billion) and increased collateral paid by Markets on derivative transactions ($2 billion).

 

•

Trading and available-for-sale assets increased $11 billion. Adjusting for foreign currency translation, the $12 billion increase is due to purchases of government and semi government securities as part of the liquidity portfolio and the reclassification of the BoT investment as an available-for- sale asset upon cessation of equity accounting.

 

•

Derivative financial assets and liabilities increased by $15 billion and $19 billion respectively as foreign exchange rate and interest rate movements resulted in higher derivative fair values.

 

•

Net loans and advances increased $4 billion. Adjusting for a $10 billion decrease due to foreign currency translation, the $14 billion increase comprised a $25 billion increase in Australia division home loans and a $7 billion increase in New Zealand term loans, partially offset by a $2 billion decrease in non-housing loans and a $16 billion decrease in Institutional lending given the strategic reorganisation of that business.

 

•

Deposits and other borrowings increased $11 billion. Adjusting for a $8 billion decrease due to foreign currency translation, the $19 billion increase comprised a $25 billion increase in interest bearing deposits across all divisions (primarily $11 billion in Australia and $7 billion in Institutional division), $6 billion growth in Group Treasury certificates of deposit, partially offset by a $10 billion decrease in term deposits mainly in Institutional.

 

•

Total equity increased $4 billion primarily due to $7 billion of profits generated over the year, $3 billion from an institutional share placement and retail share purchase plan in the 2015 September half, offset by the payment (net of reinvestment) of the 2015 interim and 2015 final dividends of $5 billion.

¡ March 2016 v September 2015

 

•

Cash, settlement balances and collateral paid increased by $5 billion. Adjusting for a decrease of $4 billion from foreign currency translation, the $9 billion increase is primarily due to increased settlement balances with central banks held by Treasury ($8 billion) and increased collateral paid held by Markets on derivative transactions ($3 billion), offset by reduced cash held by Markets ($2 billion).

 

•

Net loans and advances decreased $8 billion. Adjusting for a $7 billion decrease due to foreign currency translation, the net $1 billion decrease comprised a $12 billion increase in Australia division home loans, a $2 billion increase in New Zealand, and a $15 billion decrease in Institutional lending following a heightened focus on returns.

 

•

Deposits and other borrowings increased $7 billion. Adjusting for a $13 billion decrease due to foreign currency translation, the $20 billion increased comprised a $7 billion increase in interest bearing deposits primarily in Australia and New Zealand, $2 billion growth in Group Treasury certificates of deposit, $7 billion increase in deposits from banks in Institutional, a $5 billion increase in term deposits mainly in Australia, partly offset by a $2 billion decrease in commercial paper.

 

•

Derivative financial assets and liabilities increased by $3 billion and $10 billion respectively as foreign exchange rate and interest rate movements resulted in higher derivative fair values.

 

•

Debt issuances decreased $12 billion mainly due to a foreign currency translation impact of $9 billion and maturing debt rolling off.

 

•

Total equity decreased by $1 billion primarily due to $3 billion of profits generated over the half year, offset by the payment (net of reinvestment) of the 2015 final dividend of $3 billion and a reduction in foreign currency translation reserves of $1 billion.

 

41

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GROUP RESULTS

 

 

 

Liquidity risk

Liquidity risk is the risk that the Group is unable to meet its payment obligations as they fall due, including repaying depositors or maturing wholesale debt, or that the Group has insufficient capacity to fund increases in assets. The timing mismatch of cash flows and the related liquidity risk is inherent in all banking operations and is closely monitored by the Group and managed in accordance with the risk appetite set by the Board.

The Group’s approach to liquidity risk management incorporates two key components:

 

¡

Scenario modelling of funding sources

ANZ’s liquidity risk appetite is defined by the ability to meet a range of regulatory requirements and internal liquidity metrics mandated by the Board. The metrics cover a range of scenarios of varying duration and level of severity. This framework:

 

•

Provides protection against shorter-term extreme market dislocations and stresses.

 

•

Maintains structural strength in the balance sheet by ensuring an appropriate amount of longer-term assets are funded with longer-term funding.

 

•

Ensures no undue timing concentrations exist in the Group’s funding profile.

A key component of this framework is the Liquidity Coverage Ratio (LCR), which is a severe short term liquidity stress scenario mandated under APRA regulatory requirements. As part of meeting the LCR requirements, ANZ has a Committed Liquidity Facility (CLF) with the Reserve Bank of Australia (RBA). The CLF has been established as a solution to a High Quality Liquid Asset (HQLA) shortfall in the Australian marketplace and provides an alternative form of RBA-qualifying liquid assets. The total amount of the CLF available to a qualifying ADI is set annually by APRA.

 

¡

Liquid assets

The Group holds a portfolio of high quality unencumbered liquid assets in order to protect the Group’s liquidity position in a severely stressed environment, as well as to meet regulatory requirements. High quality liquid assets comprise three categories, with the definitions consistent with Basel 3 LCR:

 

•

Highest-quality liquid assets (HQLA1): Cash, highest credit quality government, central bank or public sector securities eligible for repurchase with central banks to provide same-day liquidity.

 

•

High-quality liquid assets (HQLA2): High credit quality government, central bank or public sector securities, high quality corporate debt securities and high quality covered bonds eligible for repurchase with central banks to provide same-day liquidity.

 

•

Alternative liquid assets (ALA): Assets qualifying as collateral for the CLF and eligible securities listed by the Reserve Bank of New Zealand (RBNZ).

The Group monitors and manages the composition of liquid assets to ensure diversification by asset class, counterparty, currency and tenor. Minimum levels of liquid assets held are set annually based on a range of ANZ specific and general market liquidity stress scenarios such that potential cash flow obligations can be met over the short to medium term, and holdings are appropriate to existing and future business activities, regulatory requirements and in line with the approved risk appetite.

 

Market Values Post Discount2		Half Year Average						Movement
		Mar 16 $B		Sep 15 $B		Mar 15 $B1		Mar 16     v. Sep 15		Mar 16     v. Mar 15
HQLA13		117.2		98.2		95.7		19%		22%
HQLA2		3.3		3.1		3.4		6%		-3%
Internal Residential Mortgage Backed Securities (Australia)3		35.1		37.9		40.6		-7%		-14%
Internal Residential Mortgage Backed Securities (New Zealand)		1.5		1.3		3.6		15%		-58%
Other ALA4		18.6		17.4		13.4		7%		39%
Total Liquid Assets		175.7		157.9		156.7		11%		12%
Cash flows modelled under stress scenario
Cash outflows		181.0		170.2		176.1		6%		3%
Cash inflows		42.1		42.6		43.4		-1%		-3%
Net cash outflows		138.9		127.6		132.7		9%		5%
Liquidity Coverage Ratio5		126%		124%		118%		2%		7%

 

1.	Based on Mar 2015 quarter given LCR implementation on 1 January 2015.

2.	Half year average basis, calculated as prescribed per APRA Prudential Regulatory Standard (APS 210 Liquidity) and consistent with APS 330 requirements.

3.	RBA open arrangement netted down from CLF, with corresponding HQLA inflow.

4.	Comprised of assets qualifying as collateral for the CLF, excluding internal RMBS, up to approved facility limit; and any liquid assets contained in the RBNZ’s Liquidity Policy - Annex: Liquidity Assets - Prudential Supervision Department Document BS13A12.

5.	All currency Group LCR.

 

42

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GROUP RESULTS

 

 

 

Funding

ANZ targets a diversified funding base, avoiding undue concentrations by investor type, maturity, market source and currency.

$12.5 billion of term wholesale debt (with a remaining term greater than one year as at 31 March 2016) was issued during the half year ended 31 March 2016. The weighted average tenor of new term debt was 5.0 years (Sep 15: 4.9 years).

 

The following tables show the Group’s total funding composition:		As at								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Customer deposits and other liabilities1
Australia		175,772		169,280		162,587				4%		8%
Institutional		176,126		183,040		183,345				-4%		-4%
New Zealand		62,327		59,703		60,293				4%		3%
Wealth		18,945		18,467		17,357				3%		9%
Asia Retail & Pacific		19,005		19,455		17,779				-2%		7%
TSO and Group Centre1		(5,397)		(5,361)		(5,214)				1%		4%
Customer deposits		446,778		444,584		436,147				0%		2%
Other funding liabilities2		16,127		14,346		12,315				12%		31%
Total customer liabilities (funding)		462,905		458,930		448,462				1%		3%
Wholesale funding3
Debt issuances4		81,947		93,347		84,859				-12%		-3%
Subordinated debt		17,557		17,009		16,463				3%		7%
Certificates of deposit		65,077		63,446		59,646				3%		9%
Commercial paper		21,065		22,989		22,729				-8%		-7%
Other wholesale borrowings5,6		56,391		44,556		53,625				27%		5%
Total wholesale funding		242,037		241,347		237,322				0%		2%
Shareholders’ Equity (excl. preference shares)		56,464		57,353		52,051				-2%		8%
Total Funding		761,406		757,630		737,835				0%		3%
		As at								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Funded Assets
Other short term assets & trade finance assets7		68,015		78,879		87,755				-14%		-22%
Liquids6		147,419		135,496		123,835				9%		19%
Short term funded assets		215,434		214,375		211,590				0%		2%
Lending & fixed assets8		545,972		543,255		526,245				1%		4%
Total Funded Assets		761,406		757,630		737,835				0%		3%
Funding Liabilities3,4,6
Other short term liabilities		40,360		27,863		30,858				45%		31%
Short term funding		65,204		59,850		60,394				9%		8%
Term funding < 12 months		30,579		41,549		31,860				-26%		-4%
Other customer and central bank deposits1,9		87,632		88,288		101,223				-1%		-13%
Total short term funding liabilities		223,775		217,550		224,335				3%		0%
Stable customer deposits1,10		392,150		387,988		370,331				1%		6%
Term funding > 12 months		81,589		87,316		83,665				-7%		-2%
Shareholders’ equity and hybrid debt		63,891		64,776		59,504				-1%		7%
Total Stable Funding		537,631		540,080		513,500				0%		5%
Total Funding		761,406		757,630		737,835				0%		3%

1.	Includes term deposits, other deposits and an adjustment recognised in Group Centre to eliminate Wealth investments in ANZ deposit products.

 

2.	Includes interest accruals, payables and other liabilities, provisions and net tax provisions, excluding other liabilities in Wealth.

 

3.	Excludes liability for acceptances as they do not provide net funding.

 

4.	Excludes term debt issued externally by Wealth which matured during the March 2016 half.

 

5.	Includes borrowings from banks, net derivative balances, special purpose vehicles and other borrowings.

 

6.	RBA open-repo arrangement netted down by the exchange settlement account cash balance.

 

7.	Includes short-dated assets such as trading securities, available-for-sale securities, trade dated assets and trade finance loans.

 

8.	Excludes trade finance loans.

 

9.	Total customer liabilities (funding) plus Central Bank deposits less Stable customer deposits.

 

10.	Stable customer deposits represent operational type deposits or those sourced from retail / business / corporate customers and the stable component of Other funding liabilities.

 

43

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GROUP RESULTS

 

 

 

Capital Management

 

		As at
		APRA Basel 3								Internationally Comparable Basel 31
		Mar 16		Sep 15		Mar 15				Mar 16		Sep 15		Mar 15
Capital Ratios
Common Equity Tier 1		9.8%		9.6%		8.7%				14.0%		13.2%		12.1%
Tier 1		11.6%		11.3%		10.6%				16.2%		15.3%		14.4%
Total capital		13.7%		13.3%		12.6%				18.7%		17.8%		16.8%
Risk weighted assets ($B)		388.3		401.9		386.9				317.8		332.1		319.3

 

1.	Internationally Comparable methodology aligns with APRA’s information paper entitled International Capital Comparison Study (13 July 2015).

APRA Basel 3 Common Equity Tier 1 (CET1) – March 2016 v September 2015

 

1.	Excludes the impact from the software capitalisation changes and impact from the Asian minority investment adjustments which have gone through Cash Profit as they are neutral on CET1.

 

2.	Capital Deductions represents the movement in retained earnings in deconsolidated entities, capitalised software (excluding accounting changes relating to the threshold for capitalising internally generated software assets) and other intangibles in the period.

 

3.	9.7 million ordinary shares were issued under the Dividend Reinvestment Plan and Bonus Option Plan for the 2015 final dividend.

 

¡

March 2016 v September 2015

ANZ’s CET1 ratio increased 22 bps to 9.8% in the March 2016 half. Key drivers of the CET1 ratio were:

 

•

Net organic capital generation is 76 bps or $3.1 billion. Cash profit and net RWA reduction during the half provided 88 bps to the CET1 ratio, which was partially offset by capital usage and other business capital deductions. The net RWA reduction resulted from strong balance sheet discipline and RWA reduction initiatives in the Institutional division.

 

•

Payment of the September 2015 Final Dividend (net of shares issued under the DRP) reduced the CET1 ratio by 62 bps.

 

•

Other impacts of 8 bps were mainly due to capital benefits arising from the divestment of the Esanda Dealer Finance portfolio (16 bps), partly offset by the impact from repayment of the remaining tranche of debt ($400 million) issued by ANZ Wealth Australia Limited (ANZWA) in March 2016 (-10 bps) and other net impacts from RWA measurement changes, restructuring costs, movement in non-cash earnings and net foreign currency translation.

 

44

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GROUP RESULTS

 

 

 

APRA to Internationally Comparable¹ Common Equity Tier 1 (CET1) as at 31 March 2016

 

1.

ANZ’s interpretation of the regulations documented in the Basel Committee publications; “Basel 3: A global regulatory framework for more resilient banks and banking systems” (June 2011) and “International Convergence of Capital Measurement and Capital Standards” (June 2006). Also includes differences identified in APRA’s information paper entitled International Capital Comparison Study (13 July 2015).

The above provides a reconciliation of the CET1 ratio under APRA’s Basel 3 prudential capital standards to Internationally Comparable Basel 3 standards. APRA views the Basel 3 reforms as a minimum requirement and hence has not incorporated some of the concessions proposed in the Basel 3 rules and has also set higher requirements in other areas. As a result, Australian banks’ Basel 3 reported capital ratios will not be directly comparable with international peers. The International Comparable Basel 3 CET1 ratio incorporates differences between APRA and both the Basel Committee Basel 3 framework (including differences identified in the March 2014 Basel Committee’s Regulatory Consistency Assessment Programme (RCAP) on Basel 3 implementation in Australia) and its application in major offshore jurisdictions.

The material differences in APRA’s Basel 3 and Internationally Comparable Basel 3 ratios include:

Deductions

 

•

Investment in insurance and banking associates – APRA requires full deduction against CET1. On an Internationally Comparable basis, these investments are subject to a concessional threshold before a deduction is required.

 

•

Deferred tax assets – A full deduction is required from CET1 for deferred tax assets (DTA) relating to temporary differences. On an Internationally Comparable basis, this is first subject to a concessional threshold before the deduction is required.

Risk Weighted Assets (RWA)

 

•

IRRBB RWA – APRA requires inclusion of Interest Rate Risk in the Banking Book (IRRBB) within the RWA base for the CET1 ratio calculation. This is not required on an Internationally Comparable basis.

 

•

Mortgages RWA – APRA imposes a floor of 20% on the downturn Loss Given Default (LGD) used in credit RWA calculations for residential mortgages. The Internationally Comparable Basel 3 framework only requires downturn LGD floor of 10%.

 

•

Specialised Lending - APRA requires the supervisory slotting approach be used in determining credit RWA for specialised lending exposures. The Internationally Comparable basis allows for the advanced internal ratings based approach to be used when calculating RWA for these exposures.

 

•

Unsecured Corporate Lending LGD – Adjustment to align ANZ’s unsecured corporate lending LGD to 45% to be consistent with banks in other jurisdictions. The 45% LGD rate is also used in the Foundation Internal Ratings-Based approach (FIRB).

 

•

Undrawn Corporate Lending Exposure at Default (EAD) – To adjust ANZ’s credit conversion factors (CCF) for undrawn corporate loan commitments to 75% (used in FIRB approach) to align with banks in other jurisdictions.

 

45

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GROUP RESULTS

 

 

 

Leverage Ratio

At 31 March 2016, the Group’s APRA Leverage Ratio was 5.1% which is above the 3% minimum currently proposed by the BCBS. APRA has not finalised a minimum leverage ratio requirement for Australians ADIs. The following table summarises the Group’s Leverage Ratio calculation:

 

		As at						Movement
		Mar 16 $M		Sep 15 $M				Mar 16       v. Sep 15
Tier 1 Capital (net of capital deductions)		45,062		45,484				-1%
On-balance sheet exposures (excluding derivatives and securities financing transaction exposures)		733,935		733,756				0%
Derivative exposures		30,542		38,115				-20%
Securities financing transaction (SFT) exposures		21,420		17,297				24%
Other off-balance sheet exposures		102,953		107,817				-5%
Total exposure measure		888,850		896,985				-1%
APRA Leverage Ratio1		5.1%		5.1%				0%
Internationally Comparable Leverage Ratio1		5.7%		5.7%				0%

 

1.	Leverage ratios include Additional Tier 1 securities subject to Basel 3 transitional relief, net of any transitional adjustments.

 

¡

March 2016 v September 2015

ANZ’s leverage ratio remained stable during the March 2016 half. An increase in the leverage ratio arising from capital generation from cash earnings were offset by the impact from payment of the 2015 final dividend (net of DRP) and increased holdings of High Quality Liquid Assets (HQLA) which contributed to growth in the exposure measure.

Other regulatory developments

 

¡

Financial System Inquiry (FSI)

The FSI final report into Australia’s financial system was released on 7 December 2014. The contents of the final FSI report are wide-ranging and key recommendations that may have an impact on regulatory capital levels include:

 

¡

Setting capital standards ensuring that capital ratios of Australian Authorised Deposit-taking Institutions (ADIs) are unquestionably strong;

 

¡

Raising the average internal ratings-based (IRB) mortgage risk weight to narrow the difference between average mortgage risk-weight for ADIs using IRB models and those using standardised risk weights in order to increase competition in mortgage lending;

 

¡

Implementing a framework for minimum loss absorbing and recapitalisation capacity in line with emerging international practice;

 

¡

Developing a common reporting template that improves the transparency and comparability of capital ratios of ADIs; and

 

¡

Introducing a leverage ratio that acts as a backstop to ADI’s risk-based capital requirements, in line with Basel framework.

APRA responded to key recommendations of the FSI inquiry in July 2015 with the following announcements:

 

¡

APRA released an information paper entitled “International capital comparison study” (“APRA Study”) which supports the FSI’s recommendation that the capital ratios of ADIs should be unquestionably strong. The APRA Study confirmed that the major ADIs are well-capitalised and acknowledged the challenges and complexity of comparing capital ratios between ADIs and international peers given the varied national discretions exercised by some jurisdictions when implementing the global capital adequacy framework (Basel framework). The APRA Study did not confirm the definition of ‘unquestionably strong’ and stated that APRA does not intend to directly link Australian capital requirements to a continually moving benchmark. The results of the APRA Study will only inform but will not determine APRA’s approach for setting capital adequacy requirements.

 

¡

Effective from 1 July 2016, APRA requires increased capital requirements for Australian residential mortgage exposures by ADIs accredited to use the internal ratings-based (IRB) approach to credit risk. These new requirements are expected to increase the average risk weighting for mortgage portfolios to approximately 25%. The impact on ANZ is an approximate 60 bps reduction in CET1 on implementation of this change. In response to this, ANZ raised $3.2 billion of ordinary share capital via a fully underwritten Institutional Placement in August 2015 ($2.5 billion raised) and a Share Purchase Plan offer to eligible Australian and New Zealand shareholders in September 2015 ($0.7 billion raised). APRA has indicated that further changes may be required once greater clarity on the deliberations of the Basel Committee is available, particularly in relation to revisions to the standardised approach for credit risk and capital floors.

The Australian Government released its response to the FSI in October 2015 and it agrees with all of the above capital-related recommendations. The Australian Government supports and endorses APRA to implement the recommendations, including the initial actions to raise the capital requirements for Australian residential mortgage exposures and to take additional steps to ensure that the major banks have unquestionably strong capital ratios by the end of 2016.

Apart from the July 2015 announcements, APRA has not made any determination on the other key recommendations to date. Therefore, the final outcomes from the FSI, including any impacts and the timing of these impacts on ANZ, remain uncertain.

In addition, there are several Government inquiries and proposals for new inquiries, the impact of which is indeterminate at this stage.

 

46

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GROUP RESULTS

 

 

 

¡

Liquidity Ratios

The Basel 3 Liquidity changes include the introduction of two liquidity ratios to measure liquidity risk: (i) the Liquidity Coverage Ratio (LCR) which became effective on 1 January 2015 and (ii) the Net Stable Funding Ratio (NSFR).

The final Basel 3 revised NSFR standard was released in October 2014. APRA released a consultation paper in March 2016 which confirmed NSFR will become a minimum requirement on 1 January 2018. As part of managing future liquidity requirements, ANZ monitors the NSFR in its internal reporting and believe the Group is well placed to meet this requirement by the implementation date.

 

¡

Domestic Systemically Important Bank (D-SIB) Framework

APRA’s D-SIB requirements for ANZ and the other three major Australian banks deemed to be domestic systemically important banks (Australian D-SIBs) came into effect on 1 January 2016. As a result, the Capital Conservation Buffer (CCB) requirements for the Australian D-SIBs have increased by 100 bps, further strengthening their capital position. ANZ’s current position as at 31 March 2016 is already in excess of APRA’s requirements including the D-SIB overlay.

 

¡

Composition of Level 2 ADI Group

In May 2014, APRA provided further clarification to the definition of the Level 2 Authorised Deposit-Taking Institution (ADI) group, where subsidiary intermediate holding companies are now considered part of the Level 2 Group.

The above clarification results in the phasing out, over time, of capital benefits arising from debt issued by its subsidiary, ANZ Wealth Australia Limited (ANZWA). Following the repayment of the last tranche of the ANZWA debt ($400 million or approximately 10 bps on CET1) in March 2016, ANZ had fully repaid all debt affected by this change as at 31 March 2016. APRA is still providing implementation guidance on certain aspects of the changes with any impact on ANZ not expected to be material.

 

¡

Level 3 Conglomerates (“Level 3”)

In March 2016, APRA announced a revised implementation timetable for the Level 3 framework taking into consideration the Australian Government response to the FSI recommendations. The Level 3 framework is meant to supervise Conglomerates Groups (Level 3) and includes updated Level 3 capital adequacy standards which will regulate a bancassurance group such as ANZ as a single economic entity with minimum capital requirements and additional monitoring on risk exposure levels.

APRA has deferred finalising the capital components of the Level 3 framework (minimum capital requirements for Conglomerates Group) until 2019 at the earliest, to allow the final form of the capital requirements arising from FSI recommendations and international initiatives that are already in progress to be determined.

The non-capital components of the Level 3 framework however, covering group governance, risk exposures, intragroup transactions and other risk management and compliance requirements will become effective on 1 July 2017. As part of the March 2016 announcement, APRA has released updated draft prudential standards in relation to these requirements and is currently consulting with the industry on the changes. ANZ is not expecting any material impact on its operations based upon the current draft of these standards.

 

¡

Current Proposals from the Basel Committee on Banking Supervision on Risk Weighted Assets (RWA)

As part of BCBS agenda to simplify RWA measurement and reduce their variability amongst banks, the BCBS has issued a number of consultation documents associated with:

 

•

Standardised approach to RWA for credit risk;

 

•

Revisions to Standardised Measurement Approach to Operational Risk;

 

•

Fundamental Review of the Trading Book;

 

•

Interest Rate Risk in the Banking Book;

 

•

Framework on imposition of capital floors based on standardised RWA approaches; and

 

•

Additional constraints on the use of internal models in Credit RWA.

The impact of any changes arising from the above on ANZ cannot be accurately determined until BCBS and APRA finalise their proposals.

 

¡

Basel 3 Securitisation Framework

In November 2015, APRA released a second consultation paper outlining proposed revisions to the prudential framework for securitisation (APS 120). The release of this paper follows BCBS finalisation of the revised Basel 3 securitisation framework in December 2014. The revised framework is proposed to take effect from January 2018. The impact of any changes on ANZ arising from a revised APS 120 standard cannot be determined until APRA finalises their proposal.

 

47

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GROUP RESULTS

 

 

 

This page has been left blank intentionally

 

48

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DIVISIONAL RESULTS

 

 

 

CONTENTS

Section 5 – Divisional Results

Divisional performance

Australia

Institutional

New Zealand

Wealth

Asia Retail & Pacific

Technology, Services and Operations (TSO) and Group Centre

 

49

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DIVISIONAL RESULTS

 

 

 

Divisional Performance

During the March 2016 half, the Group announced changes to the organisation’s structure to better meet the needs of our retail, commercial and institutional customers. As a result of these organisational changes there are six reported divisions: Australia, New Zealand, Institutional, Asia Retail & Pacific, Wealth and Technology, Services & Operations (“TSO”) and Group Centre. These divisions were created by removing the Asia Retail & Pacific business from the former International & Institutional Banking (“IIB”) division, and repositioning minority investments in Asia from IIB to the Group Centre. The residual IIB business has been renamed Institutional.

The Wealth changes announced during the March 2016 half will not take effect until 1 April 2016. For further information on the composition of the divisions refer to the Definitions on page 150.

Other than those described above, there have been no significant structural changes. However, certain prior period comparatives have been restated to align with current period presentation as a result of changes to customer segmentation and the continued realignment of support functions.

The Divisional Results section is reported on a cash profit basis.

March 2016 Half Year

 

AUD M		Australia				Institutional				New Zealand				Wealth				Asia Retail & Pacific				TSO & Group Centre				Group
Net interest income			4,038				1,802				1,172				101				328				127				7,568
Other operating income			594				911				201				779				231				32				2,748
Operating income			4,632				2,713				1,373				880				559				159				10,316
Operating expenses			(1,665)				(1,510)				(527)				(521)				(401)				(855)				(5,479)
Profit before credit impair’t and income tax			2,967				1,203				846				359				158				(696)				4,837
Credit impairment (charge)/release			(462)				(323)				(42)				-				(91)				-				(918)
Profit before income tax			2,505				880				804				359				67				(696)				3,919
Income tax expense and non-controlling interests			(752)				(248)				(226)				(98)				(14)				201				(1,137)
Cash profit/(loss)			1,753				632				578				261				53				(495)				2,782
March 2015 Half Year
AUD M		Australia				Institutional				New Zealand				Wealth				Asia Retail & Pacific				TSO & Group Centre				Group
Net interest income			3,730				1,741				1,162				89				291				125				7,138
Other operating income			580				1,229				183				762				221				82				3,057
Operating income			4,310				2,970				1,345				851				512				207				10,195
Operating expenses			(1,556)				(1,385)				(539)				(484)				(374)				(265)				(4,603)
Profit before credit impair’t and income tax			2,754				1,585				806				367				138				(58)				5,592
Credit impairment (charge)/release			(395)				(88)				(19)				1				(10)				1				(510)
Profit before income tax			2,359				1,497				787				368				128				(57)				5,082
Income tax expense and non-controlling interests			(709)				(426)				(221)				(105)				(29)				84				(1,406)
Cash profit			1,650				1,071				566				263				99				27				3,676
March 2016 Half Year vs March 2015 Half Year
AUD M		Australia				Institutional				New Zealand				Wealth				Asia Retail & Pacific				TSO & Group Centre				Group
Net interest income			8%				4%				1%				13%				13%				2%				6%
Other operating income			2%				-26%				10%				2%				5%				-61%				-10%
Operating income			7%				-9%				2%				3%				9%				-23%				1%
Operating expenses			7%				9%				-2%				8%				7%				large				19%
Profit before credit impair’t and income tax			8%				-24%				5%				-2%				14%				large				-14%
Credit impairment (charge)/release			17%				large				large				-100%				large				-100%				80%
Profit before income tax			6%				-41%				2%				-2%				-48%				large				-23%
Income tax expense and non-controlling interests			6%				-42%				2%				-7%				-52%				large				-19%
Cash profit			6%				-41%				2%				-1%				-46%				large				-24%

 

50

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DIVISIONAL RESULTS

 

 

 

Cash profit by division – March 2016 v March 2015

 

March 2016 Half Year
AUD M		Australia				Institutional				New Zealand				Wealth				Asia Retail & Pacific				TSO & Group Centre				Group
Net interest income			4,038				1,802				1,172				101				328				127				7,568
Other operating income			594				911				201				779				231				32				2,748
Operating income			4,632				2,713				1,373				880				559				159				10,316
Operating expenses			(1,665	)			(1,510	)			(527	)			(521	)			(401	)			(855	)			(5,479	)
Profit before credit impairment and income tax			2,967				1,203				846				359				158				(696	)			4,837
Credit impairment (charge)/release			(462	)			(323	)			(42	)			-				(91	)			-				(918	)
Profit before income tax			2,505				880				804				359				67				(696	)			3,919
Income tax expense and non-controlling interests			(752	)			(248	)			(226	)			(98	)			(14	)			201				(1,137	)
Cash profit/(loss)			1,753				632				578				261				53				(495	)			2,782
September 2015 Half Year
AUD M		Australia				Institutional				New Zealand				Wealth				Asia Retail & Pacific				TSO & Group Centre				Group
Net interest income			3,897				1,844				1,155				91				314				177				7,478
Other operating income			606				948				185				790				236				99				2,864
Operating income			4,503				2,792				1,340				881				550				276				10,342
Operating expenses			(1,618	)			(1,425	)			(525	)			(481	)			(395	)			(331	)			(4,775	)
Profit before credit impairment and income tax			2,885				1,367				815				400				155				(55	)			5,567
Credit impairment (charge)/release			(458	)			(111	)			(36	)			(1	)			(87	)			(2	)			(695	)
Profit before income tax			2,427				1,256				779				399				68				(57	)			4,872
Income tax expense and non-controlling interests			(721	)			(363	)			(218	)			(53	)			(23	)			46				(1,332	)
Cash profit/(loss)			1,706				893				561				346				45				(11	)			3,540
March 2016 Half Year vs September 2015 Half Year
AUD M		Australia				Institutional				New Zealand				Wealth				Asia Retail & Pacific				TSO & Group Centre				Group
Net interest income			4%				-2%				1%				11%				4%				-28%				1%
Other operating income			-2%				-4%				9%				-1%				-2%				-68%				-4%
Operating income			3%				-3%				2%				0%				2%				-42%				0%
Operating expenses			3%				6%				0%				8%				2%				large				15%
Profit before credit impairment and income tax			3%				-12%				4%				-10%				2%				large				-13%
Credit impairment (charge)/release			1%				large				17%				-100%				5%				-100%				32%
Profit before income tax			3%				-30%				3%				-10%				-1%				large				-20%
Income tax expense and non-controlling interests			4%				-32%				4%				85%				-39%				large				-15%
Cash profit			3%				-29%				3%				-25%				18%				large				-21%

 

51

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DIVISIONAL RESULTS

 

 

 

Australia

Fred Ohlsson

Cash profit – March 2016 Half Year v March 2015 Half Year

 

1.

The Esanda Dealer Finance divestment had a negative impact of $46 million on Australia division’s profit before income tax. This amount is comprised of -$99 million of net interest income, -$13 million of other operating income, $10 million of operating expenses and $56 million of credit impairment charges. Refer to page 58 for further details.

 

 

52

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DIVISIONAL RESULTS

 

 

 

Australia

Fred Ohlsson

 

		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Net interest income			4,038				3,897				3,730						4%				8%
Other operating income			594				606				580						-2%				2%
Operating income			4,632				4,503				4,310						3%				7%
Operating expenses			(1,665	)			(1,618	)			(1,556	)					3%				7%
Profit before credit impairment and income tax			2,967				2,885				2,754						3%				8%
Credit impairment charge			(462	)			(458	)			(395	)					1%				17%
Profit before income tax			2,505				2,427				2,359						3%				6%
Income tax expense and non-controlling interests			(752	)			(721	)			(709	)					4%				6%
Cash profit			1,753				1,706				1,650						3%				6%
Consisting of:
Retail			1,169				1,080				981						8%				19%
Corporate & Commercial Banking			584				626				669						-7%				-13%
Cash profit			1,753				1,706				1,650						3%				6%
Balance Sheet
Net loans & advances			320,023				313,672				297,642						2%				8%
Other external assets			3,060				2,911				2,885						5%				6%
External assets			323,083				316,583				300,527						2%				8%
Customer deposits			175,772				169,280				162,587						4%				8%
Other external liabilities			11,354				11,408				11,422						0%				-1%
External liabilities			187,126				180,688				174,009						4%				8%
Risk weighted assets			129,168				128,428				116,386						1%				11%
Average gross loans and advances			317,542				306,820				294,357						3%				8%
Average deposits and other borrowings			172,779				164,732				162,688						5%				6%
Ratios
Return on assets			1.10%				1.11%				1.12%
Net interest margin			2.54%				2.53%				2.54%
Operating expenses to operating income			35.9%				35.9%				36.1%
Operating expenses to average assets			1.04%				1.05%				1.06%
Individual credit impairment charge/(release)			429				427				334						0%				28%
Individual credit impairment charge/(release) as a % of average GLA			0.27%				0.28%				0.23%
Collective credit impairment charge/(release)			33				31				61						6%				-46%
Collective credit impairment charge/(release) as a % of average GLA			0.02%				0.02%				0.04%
Gross impaired assets			1,093				1,193				1,245						-8%				-12%
Gross impaired assets as a % of GLA			0.34%				0.38%				0.42%
Total full time equivalent staff (FTE)			8,791				8,766				9,018						0%				-3%

 

53

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DIVISIONAL RESULTS

 

 

 

Australia

Fred Ohlsson

 

Individual credit impairment charge/(release)		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Retail			200				196				158						2%				27%
Home Loans			17				10				6						70%				large
Cards and Personal Loans			172				174				144						-1%				19%
Deposits and Payments1			11				12				8						-8%				38%
Corporate & Commercial Banking			229				231				176						-1%				30%
Corporate Banking			19				-				(18)						n/a				large
Esanda			44				93				100						-53%				-56%
Regional Business Banking			53				35				20						51%				large
Business Banking			20				22				24						-9%				-17%
Small Business Banking			93				81				50						15%				86%
Individual credit impairment charge			429				427				334						0%				28%
Collective credit impairment charge/(release)		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Retail			23				7				37						large				-38%
Home Loans			15				15				11						0%				36%
Cards and Personal Loans			5				(12)				25						large				-80%
Deposits and Payments2			3				4				1						-25%				large
Corporate & Commercial Banking			10				24				24						-58%				-58%
Corporate Banking			-				17				(29)						-100%				-100%
Esanda			2				(6)				27						large				-93%
Regional Business Banking			(3)				(6)				12						-50%				large
Business Banking			3				9				(1)						-67%				large
Small Business Banking			8				10				15						-20%				-47%
Collective credit impairment charge			33				31				61						6%				-46%
Total credit impairment charge			462				458				395						1%				17%

 

1.	Represents individual credit impairment charge/(release) on Overdraft balances.

 

2.	Represents collective credit impairment charge/(release) on Overdraft balances.

 

54

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DIVISIONAL RESULTS

 

 

 

Australia

Fred Ohlsson

 

Net loans and advances		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Retail			254,103				242,333				229,211						5%				11%
Home Loans			242,861				231,206				217,977						5%				11%
Cards and Personal Loans			11,151				11,049				11,139						1%				0%
Deposits and Payments1			91				78				95						17%				-4%
Corporate & Commercial Banking			65,920				71,339				68,431						-8%				-4%
Corporate Banking			12,800				12,996				12,024						-2%				6%
Esanda2			8,802				15,917				15,776						-45%				-44%
Regional Business Banking			13,879				13,827				13,142						0%				6%
Business Banking			15,375				14,249				14,004						8%				10%
Small Business Banking			15,064				14,350				13,485						5%				12%
Net loans and advances			320,023				313,672				297,642						2%				8%
Customer deposits		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Retail			123,085				118,433				112,906						4%				9%
Home Loans3			23,619				21,861				19,211						8%				23%
Cards and Personal Loans			228				258				230						-12%				-1%
Deposits and Payments			99,238				96,314				93,465						3%				6%
Corporate & Commercial Banking			52,687				50,847				49,681						4%				6%
Corporate Banking4			3,067				3,162				3,047						-3%				1%
Regional Business Banking			6,209				5,739				5,648						8%				10%
Business Banking			10,941				10,157				10,134						8%				8%
Small Business Banking			32,470				31,789				30,852						2%				5%
Customer deposits			175,772				169,280				162,587						4%				8%

 

1.	Net loans and advances for the Deposits and Payments business represent amounts in overdraft.

 

2.	Includes $766 million of Esanda Dealer Finance bailment facilities which are due to migrate to Macquarie during the third quarter of 2016.

 

3.	Customer deposit amounts for the Home Loans business represent balances in offset accounts.

 

4.	Institutional division also holds $12 billion of Corporate Banking deposits.

 

55

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DIVISIONAL RESULTS

 

 

 

Australia

Fred Ohlsson

March 2016 Half Year

 

AUD M		Retail				C&CB1				Australia Total
Net interest income			2,665				1,373				4,038
Other operating income			381				213				594
Operating income			3,046				1,586				4,632
Operating expenses			(1,154)				(511)				(1,665)
Profit before credit impairment and income tax			1,892				1,075				2,967
Credit impairment (charge)/release			(223)				(239)				(462)
Profit before income tax			1,669				836				2,505
Income tax expense and non-controlling interests			(500)				(252)				(752)
Cash profit			1,169				584				1,753
Individual credit impairment charge/(release)			200				229				429
Collective credit impairment charge/(release)			23				10				33
Net loans & advances			254,103				65,920				320,023
Customer deposits			123,085				52,687				175,772
Risk weighted assets			64,546				64,622				129,168
March 2015 Half Year
Net interest income			2,278				1,452				3,730
Other operating income			364				216				580
Operating income			2,642				1,668				4,310
Operating expenses			(1,046)				(510)				(1,556)
Profit before credit impairment and income tax			1,596				1,158				2,754
Credit impairment (charge)/release			(195)				(200)				(395)
Profit before income tax			1,401				958				2,359
Income tax expense and non-controlling interests			(420)				(289)				(709)
Cash profit			981				669				1,650
Individual credit impairment charge/(release)			158				176				334
Collective credit impairment charge/(release)			37				24				61
Net loans & advances			229,211				68,431				297,642
Customer deposits			112,906				49,681				162,587
Risk weighted assets			57,310				59,076				116,386
March 2016 Half Year vs March 2015 Half Year
Net interest income			17%				-5%				8%
Other operating income			5%				-1%				2%
Operating income			15%				-5%				7%
Operating expenses			10%				0%				7%
Profit before credit impairment and income tax			19%				-7%				8%
Credit impairment (charge)/release			14%				20%				17%
Profit before income tax			19%				-13%				6%
Income tax expense and non-controlling interests			19%				-13%				6%
Cash profit			19%				-13%				6%
Individual credit impairment charge/(release)			27%				30%				28%
Collective credit impairment charge/(release)			-38%				-58%				-46%
Net loans & advances			11%				-4%				8%
Customer deposits			9%				6%				8%
Risk weighted assets			13%				9%				11%

 

1.	The March 2016 half includes the contribution from Esanda Dealer Finance portfolio to the date of divestment which was substantially completed by 31 December 2015.

 

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Australia

Fred Ohlsson

March 2016 Half Year

 

AUD M		Retail				C&CB1				Australia Total
Net interest income			2,665				1,373				4,038
Other operating income			381				213				594
Operating income			3,046				1,586				4,632
Operating expenses			(1,154)				(511)				(1,665)
Profit before credit impairment and income tax			1,892				1,075				2,967
Credit impairment (charge)/release			(223)				(239)				(462)
Profit before income tax			1,669				836				2,505
Income tax expense and non-controlling interests			(500)				(252)				(752)
Cash profit			1,169				584				1,753
Individual credit impairment charge/(release)			200				229				429
Collective credit impairment charge/(release)			23				10				33
Net loans & advances			254,103				65,920				320,023
Customer deposits			123,085				52,687				175,772
Risk weighted assets			64,546				64,622				129,168
September 2015 Half Year
Net interest income			2,439				1,458				3,897
Other operating income			382				224				606
Operating income			2,821				1,682				4,503
Operating expenses			(1,088)				(530)				(1,618)
Profit before credit impairment and income tax			1,733				1,152				2,885
Credit impairment (charge)/release			(203)				(255)				(458)
Profit before income tax			1,530				897				2,427
Income tax expense and non-controlling interests			(450)				(271)				(721)
Cash profit			1,080				626				1,706
Individual credit impairment charge/(release)			196				231				427
Collective credit impairment charge/(release)			7				24				31
Net loans & advances			242,333				71,339				313,672
Customer deposits			118,433				50,847				169,280
Risk weighted assets			61,878				66,550				128,428
March 2016 Half Year vs September 2015 Half Year
Net interest income			9%				-6%				4%
Other operating income			0%				-5%				-2%
Operating income			8%				-6%				3%
Operating expenses			6%				-4%				3%
Profit before credit impairment and income tax			9%				-7%				3%
Credit impairment (charge)/release			10%				-6%				1%
Profit before income tax			9%				-7%				3%
Income tax expense and non-controlling interests			11%				-7%				4%
Cash profit			8%				-7%				3%
Individual credit impairment charge/(release)			2%				-1%				0%
Collective credit impairment charge/(release)			large				-58%				6%
Net loans & advances			5%				-8%				2%
Customer deposits			4%				4%				4%
Risk weighted assets			4%				-3%				1%

 

1.	The March 2016 half includes the contribution from Esanda Dealer Finance portfolio to the date of divestment which was substantially completed by 31 December 2015.

 

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Australia

Fred Ohlsson

Cash Profit Results – Esanda Dealer Finance divestment

During the March 2016 half, the Group sold the Esanda Dealer Finance portfolio to Macquarie Group Limited. The tables below show the Australia division and C&CB excluding the contribution of the divested Esanda portfolio from current and prior period earnings. The divestment gain was recognised in TSO and Group Centre. $766 million of Esanda Dealer Finance bailment facilities remain on ANZ’s balance sheet at 31 March 2016 which are scheduled to transition to Macquarie during the third quarter of 2016. As these assets were not subject to equitable assignment and ANZ continues to receive profits prior to migration, the transfer of these residual facilities will not impact the divestment gain.

Australia division excluding Esanda Dealer Finance divestment

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Net interest income		4,007		3,772		3,600				6%		11%
Other operating income		582		580		555				0%		5%
Operating income		4,589		4,352		4,155				5%		10%
Operating expenses		(1,654)		(1,596)		(1,535)				4%		8%
Profit before credit impairment and income tax		2,935		2,756		2,620				6%		12%
Credit impairment charge		(449)		(397)		(326)				13%		38%
Profit before income tax		2,486		2,359		2,294				5%		8%
Income tax expense and non-controlling interests		(746)		(701)		(689)				6%		8%
Cash profit		1,740		1,658		1,605				5%		8%
Individual credit impairment charge/(release)		415		367		274				13%		51%
Collective credit impairment charge/(release)		34		30		52				13%		-35%
Net loans and advances		319,257		305,607		289,462				4%		10%

C&CB excluding Esanda Dealer Finance divestment

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v.Sep 15		Mar 16 v. Mar 15
Net interest income		1,342		1,333		1,322				1%		2%
Other operating income		201		198		191				2%		5%
Operating income		1,543		1,531		1,513				1%		2%
Operating expenses		(500)		(508)		(489)				-2%		2%
Profit before credit impairment and income tax		1,043		1,023		1,024				2%		2%
Credit impairment charge		(226)		(194)		(131)				16%		73%
Profit before income tax		817		829		893				-1%		-9%
Income tax expense and non-controlling interests		(246)		(251)		(269)				-2%		-9%
Cash profit		571		578		624				-1%		-8%
Individual credit impairment charge/(release)		215		171		116				26%		85%
Collective credit impairment charge/(release)		11		23		15				-52%		-27%
Net loans and advances		65,154		63,274		60,251				3%		8%

Esanda Dealer Finance divestment

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Net interest income		31		125		130				-75%		-76%
Other operating income		12		26		25				-54%		-52%
Operating income		43		151		155				-72%		-72%
Operating expenses		(11)		(22)		(21)				-50%		-48%
Profit before credit impairment and income tax		32		129		134				-75%		-76%
Credit impairment charge		(13)		(61)		(69)				-79%		-81%
Profit before income tax		19		68		65				-72%		-71%
Income tax expense and non-controlling interests		(6)		(20)		(20)				-70%		-70%
Cash profit		13		48		45				-73%		-71%
Individual credit impairment charge/(release)		14		60		60				-77%		-77%
Collective credit impairment charge/(release)		(1)		1		9				large		large
Net loans and advances1		766		8,065		8,180				-91%		-91%

 

1.	Includes $766 million of Esanda Dealer Finance bailment facilities which are due to migrate to Macquarie during the third quarter of 2016.

 

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59

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Institutional

Mark Whelan

Cash profit – March 16 Half Year v March 15 Half Year

 

 

 

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Institutional

Mark Whelan

 

		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Net interest income			1,802				1,844				1,741						-2%				4%
Other operating income			911				948				1,229						-4%				-26%
Operating income			2,713				2,792				2,970						-3%				-9%
Operating expenses			(1,510)				(1,425)				(1,385)						6%				9%
Profit before credit impairment and income tax			1,203				1,367				1,585						-12%				-24%
Credit impairment charge			(323)				(111)				(88)						large				large
Profit before income tax			880				1,256				1,497						-30%				-41%
Income tax expense and non-controlling interests			(248)				(363)				(426)						-32%				-42%
Cash profit			632				893				1,071						-29%				-41%
Consisting of:
Transaction Banking			184				290				296						-37%				-38%
Loans & Specialised Finance			252				379				390						-34%				-35%
Markets			202				255				398						-21%				-49%
Central Functions			(6)				(31)				(13)						-81%				-54%
Cash profit			632				893				1,071						-29%				-41%
Balance Sheet
Net loans & advances			125,610				142,196				144,850						-12%				-13%
Other external assets			275,658				261,308				241,935						5%				14%
External assets			401,268				403,504				386,785						-1%				4%
Customer deposits			176,126				183,040				183,345						-4%				-4%
Other deposits and borrowings			48,991				41,855				51,676						17%				-5%
Deposits and other borrowings			225,117				224,895				235,021						0%				-4%
Other external liabilities			121,768				109,584				93,790						11%				30%
External liabilities			346,885				334,479				328,811						4%				5%
Risk weighted assets			181,889				197,880				195,486						-8%				-7%
Average gross loans and advances			138,972				147,515				142,195						-6%				-2%
Average deposits and other borrowings			233,729				231,655				227,460						1%				3%
Ratios
Return on assets			0.31%				0.45%				0.58%
Net interest margin			1.15%				1.20%				1.19%
Net interest margin (excluding Markets)			2.16%				2.06%				2.06%
Operating expenses to operating income			55.7%				51.0%				46.6%
Operating expenses to average assets			0.74%				0.72%				0.75%
Individual credit impairment charge/(release)			339				114				92						large				large
Individual credit impairment charge/(release) as a % of average GLA			0.49%				0.15%				0.13%
Collective credit impairment charge/(release)			(16)				(3)				(4)						large				large
Collective credit impairment charge/(release) as a % of average GLA			(0.02%)				(0.00%)				(0.01%)
Gross impaired assets			1,281				960				826						33%				55%
Gross impaired assets as a % of GLA			1.01%				0.67%				0.56%
Total full time equivalent staff (FTE)			4,056				4,231				4,319						-4%				-6%

 

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Institutional

Mark Whelan

Institutional by Geography

 

		Half Year														Movement
Australia		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Net interest income			987				1,020				967						-3%				2%
Other operating income			308				331				445						-7%				-31%
Operating income			1,295				1,351				1,412						-4%				-8%
Operating expenses			(665)				(587	)			(603	)					13%				10%
Profit before credit impairment and income tax			630				764				809						-18%				-22%
Credit impairment (charge)/release			(112)				17				(34	)					large				large
Profit before income tax			518				781				775						-34%				-33%
Income tax expense and non-controlling interests			(156)				(232	)			(232	)					-33%				-33%
Cash profit			362				549				543						-34%				-33%
Individual credit impairment charge/(release)			124				(1	)			41						large				large
Collective credit impairment charge/(release)			(12)				(16	)			(7	)					-25%				71%
Net loans & advances			63,867				64,785				62,491						-1%				2%
Customer deposits			66,634				65,876				62,610						1%				6%
Asia Pacific, Europe, and America
Net interest income			657				670				644						-2%				2%
Other operating income			543				466				601						17%				-10%
Operating income			1,200				1,136				1,245						6%				-4%
Operating expenses			(756)				(750	)			(695	)					1%				9%
Profit before credit impairment and income tax			444				386				550						15%				-19%
Credit impairment (charge)/release			(207)				(121	)			(44	)					71%				large
Profit before income tax			237				265				506						-11%				-53%
Income tax expense and non-controlling interests			(57)				(74	)			(134	)					-23%				-57%
Cash profit			180				191				372						-6%				-52%
Individual credit impairment charge/(release)			212				113				39						88%				large
Collective credit impairment charge/(release)			(5)				8				5						large				large
Net loans & advances			55,244				70,488				74,807						-22%				-26%
Customer deposits			96,168				104,906				107,455						-8%				-11%
New Zealand
Net interest income			158				154				130						3%				22%
Other operating income			60				151				183						-60%				-67%
Operating income			218				305				313						-29%				-30%
Operating expenses			(89)				(88	)			(87	)					1%				2%
Profit before credit impairment and income tax			129				217				226						-41%				-43%
Credit impairment (charge)/release			(4)				(7	)			(10	)					-43%				-60%
Profit before income tax			125				210				216						-40%				-42%
Income tax expense and non-controlling interests			(35)				(57	)			(60	)					-39%				-42%
Cash profit			90				153				156						-41%				-42%
Individual credit impairment charge/(release)			3				2				12						50%				-75%
Collective credit impairment charge/(release)			1				5				(2	)					-80%				large
Net loans & advances			6,499				6,923				7,552						-6%				-14%
Customer deposits			13,324				12,258				13,280						9%				0%

 

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Institutional

Mark Whelan

Individual credit impairment charge/(release)

 

		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Transaction Banking			103				42				19						large				large
Loans & Specialised Finance			223				63				34						large				large
Markets			11				9				38						22%				-71%
Central Functions			2				-				1						n/a				100%
Individual credit impairment charge			339				114				92						large				large
Collective credit impairment charge/(release)
		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Transaction Banking			2				(29)				(1)						large				large
Loans & Specialised Finance			(19)				23				(5)						large				large
Markets			1				1				-						0%				n/a
Central Functions			-				2				2						-100%				-100%
Collective credit impairment charge			(16)				(3)				(4)						large				large
Total credit impairment charge			323				111				88						large				large
Net loans and advances
		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Transaction Banking			17,036				26,175				32,683						-35%				-48%
Loans & Specialised Finance			86,849				92,317				89,634						-6%				-3%
Markets			21,487				23,367				22,152						-8%				-3%
Central Functions			238				337				381						-29%				-38%
Net loans and advances			125,610				142,196				144,850						-12%				-13%
Customer deposits
		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Transaction Banking			90,231				94,188				91,066						-4%				-1%
Loans & Specialised Finance			977				785				762						24%				28%
Markets			84,540				87,621				91,064						-4%				-7%
Central Functions			378				446				453						-15%				-17%
Customer deposits			176,126				183,040				183,345						-4%				-4%

 

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Institutional

Mark Whelan

March 2016 Half Year

 

AUD M		Transaction Banking				Loans & Specialised Finance				Markets				Central Functions				Institutional Total
Net interest income			458				764				562				18				1,802
Other operating income			394				58				433				26				911
Operating income			852				822				995				44				2,713
Operating expenses			(477)				(271)				(712)				(50)				(1,510)
Profit before credit impairment and income tax			375				551				283				(6)				1,203
Credit impairment (charge)/release			(105)				(204)				(12)				(2)				(323)
Profit before income tax			270				347				271				(8)				880
Income tax expense and non-controlling interests			(86)				(95)				(69)				2				(248)
Cash profit			184				252				202				(6)				632
Individual credit impairment charge/(release)			103				223				11				2				339
Collective credit impairment charge/(release)			2				(19)				1				-				(16)
Net loans & advances			17,036				86,849				21,487				238				125,610
Customer deposits			90,231				977				84,540				378				176,126
Risk weighted assets			28,889				96,902				54,584				1,514				181,889
March 2015 Half Year
Net interest income			468				750				507				16				1,741
Other operating income			423				64				716				26				1,229
Operating income			891				814				1,223				42				2,970
Operating expenses			(460)				(254)				(647)				(24)				(1,385)
Profit before credit impairment and income tax			431				560				576				18				1,585
Credit impairment (charge)/release			(18)				(29)				(38)				(3)				(88)
Profit before income tax			413				531				538				15				1,497
Income tax expense and non-controlling interests			(117)				(141)				(140)				(28)				(426)
Cash profit			296				390				398				(13)				1,071
Individual credit impairment charge/(release)			19				34				38				1				92
Collective credit impairment charge/(release)			(1)				(5)				-				2				(4)
Net loans & advances			32,683				89,634				22,152				381				144,850
Customer deposits			91,066				762				91,064				453				183,345
Risk weighted assets			41,211				94,601				59,072				602				195,486
March 2016 Half Year vs March 2015 Half Year
Net interest income			-2%				2%				11%				13%				4%
Other operating income			-7%				-9%				-40%				0%				-26%
Operating income			-4%				1%				-19%				5%				-9%
Operating expenses			4%				7%				10%				large				9%
Profit before credit impairment and income tax			-13%				-2%				-51%				large				-24%
Credit impairment (charge)/release			large				large				-68%				-33%				large
Profit before income tax			-35%				-35%				-50%				large				-41%
Income tax expense and non-controlling interests			-26%				-33%				-51%				large				-42%
Cash profit			-38%				-35%				-49%				-54%				-41%
Individual credit impairment charge/(release)			large				large				-71%				100%				large
Collective credit impairment charge/(release)			large				large				n/a				-100%				large
Net loans & advances			-48%				-3%				-3%				-38%				-13%
Customer deposits			-1%				28%				-7%				-17%				-4%
Risk weighted assets			-30%				2%				-8%				large				-7%

 

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Institutional

Mark Whelan

March 2016 Half Year

 

AUD M		Transaction Banking				Loans & Specialised Finance				Markets				Central Functions				Institutional Total
Net interest income			458				764				562				18				1,802
Other operating income			394				58				433				26				911
Operating income			852				822				995				44				2,713
Operating expenses			(477)				(271)				(712)				(50)				(1,510)
Profit before credit impairment and income tax			375				551				283				(6)				1,203
Credit impairment (charge)/release			(105)				(204)				(12)				(2)				(323)
Profit before income tax			270				347				271				(8)				880
Income tax expense and non-controlling interests			(86)				(95)				(69)				2				(248)
Cash profit			184				252				202				(6)				632
Individual credit impairment charge/(release)			103				223				11				2				339
Collective credit impairment charge/(release)			2				(19)				1				-				(16)
Net loans & advances			17,036				86,849				21,487				238				125,610
Customer deposits			90,231				977				84,540				378				176,126
Risk weighted assets			28,889				96,902				54,584				1,514				181,889
September 2015 Half Year
Net interest income			467				769				600				8				1,844
Other operating income			411				90				423				24				948
Operating income			878				859				1,023				32				2,792
Operating expenses			(467)				(264)				(662)				(32)				(1,425)
Profit before credit impairment and income tax			411				595				361				-				1,367
Credit impairment (charge)/release			(13)				(86)				(10)				(2)				(111)
Profit before income tax			398				509				351				(2)				1,256
Income tax expense and non-controlling interests			(108)				(130)				(96)				(29)				(363)
Cash profit			290				379				255				(31)				893
Individual credit impairment charge/(release)			42				63				9				-				114
Collective credit impairment charge/(release)			(29)				23				1				2				(3)
Net loans & advances			26,175				92,317				23,367				337				142,196
Customer deposits			94,188				785				87,621				446				183,040
Risk weighted assets			35,381				101,376				59,738				1,385				197,880
March 2016 Half Year vs September 2015 Half Year
Net interest income			-2%				-1%				-6%				large				-2%
Other operating income			-4%				-36%				2%				8%				-4%
Operating income			-3%				-4%				-3%				38%				-3%
Operating expenses			2%				3%				8%				56%				6%
Profit before credit impairment and income tax			-9%				-7%				-22%				n/a				-12%
Credit impairment (charge)/release			large				large				20%				0%				large
Profit before income tax			-32%				-32%				-23%				large				-30%
Income tax expense and non-controlling interests			-20%				-27%				-28%				large				-32%
Cash profit			-37%				-34%				-21%				-81%				-29%
Individual credit impairment charge/(release)			large				large				22%				n/a				large
Collective credit impairment charge/(release)			large				large				0%				-100%				large
Net loans & advances			-35%				-6%				-8%				-29%				-12%
Customer deposits			-4%				24%				-4%				-15%				-4%
Risk weighted assets			-18%				-4%				-9%				9%				-8%

 

65

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Institutional

Mark Whelan

Analysis of Markets operating income

 

		Half Year														Movement
Composition of Markets operating income by business activity		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Sales1			549				577				668						-5%				-18%
Trading2			303				307				296						-1%				2%
Balance sheet3			143				139				259						3%				-45%
Markets operating income			995				1,023				1,223						-3%				-19%

1.	Sales represents direct client flow business on core products such as fixed income, foreign exchange, commodities and capital markets.

2.	Trading primarily represents management of the Group’s strategic positions and those taken as part of direct client sales flow.

3.	Balance sheet represents hedging of interest rate risk on the Group’s loan and deposit books and the management of the Group’s liquidity portfolio.

 

		Half Year														Movement
Composition of Markets operating income by geography		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Australia			373				405				461						-8%				-19%
Asia Pacific, Europe & America			549				458				594						20%				-8%
New Zealand			73				160				168						-54%				-57%
Markets operating income			995				1,023				1,223						-3%				-19%

 

 

66

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DIVISIONAL RESULTS

 

 

 

Institutional

Mark Whelan

Market risk

Traded market risk

Below are aggregate Value at Risk (VaR) exposures at 99% confidence level covering both physical and derivative trading positions for ANZ’s principal trading centres. All figures are in AUD.

99% confidence level (1 day holding period)

 

		As at				High for period				Low for period				Avg for period						As at				High for year				Low for year				Avg for year
		Mar 16 $M				Mar 16 $M				Mar 16 $M				Mar 16 $M						Sep 15 $M				Sep 15 $M				Sep 15 $M				Sep 15 $M
Value at Risk at 99% confidence
Foreign exchange			5.9				11.4				2.6				5.6						5.0				18.2				2.8				7.9
Interest rate			9.0				20.1				6.9				11.3						10.1				20.2				4.8				9.3
Credit			2.7				4.6				2.4				3.0						3.5				5.4				2.9				3.8
Commodities			1.2				2.5				1.0				1.7						1.6				3.6				1.3				2.4
Equity			0.1				2.0				0.1				0.2						2.5				6.3				0.1				1.1
Diversification benefit			(8.0)				n/a				n/a				(6.2)						(6.0)				n/a				n/a				(13.2)
Total VaR			10.9				25.4				8.7				15.6						16.7				19.7				6.9				11.3

Non-traded interest rate risk

Non-traded interest rate risk is managed by Markets and relates to the potential adverse impact of changes in market interest rates on future net interest income for the Group. Interest rate risk is reported using various techniques including VaR and scenario analysis to a 1% rate shock.

99% confidence level (1 day holding period)

 

		As at				High for period				Low for period				Avg for period						As at				High for year				Low for year				Avg for year
		Mar 16 $M				Mar 16 $M				Mar 16 $M				Mar 16 $M						Sep 15 $M				Sep 15 $M				Sep 15 $M				Sep 15 $M
Value at Risk at 99% confidence
Australia			31.9				31.9				28.0				29.7						25.4				38.5				21.2				27.2
New Zealand			8.8				11.0				8.8				9.6						9.7				11.4				8.9				10.2
Asia Pacific, Europe & America			16.1				17.3				15.1				16.2						14.4				14.4				7.9				10.4
Diversification benefit			(23.0)				n/a				n/a				(22.3)						(16.8)				n/a				n/a				(14.8)
Total VaR			33.8				35.4				31.3				33.2						32.7				37.4				28.6				33.0

Impact of 1% rate shock on the next 12 months’ net interest income

 

		As at
		Mar 16				Sep 15
As at period end			0.27%				0.61%
Maximum exposure			0.48%				1.36%
Minimum exposure			0.00%				0.45%
Average exposure (in absolute terms)			0.28%				0.93%

 

67

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DIVISIONAL RESULTS

 

 

 

New Zealand

David Hisco

New Zealand’s result and commentary are reported in NZD. AUD results are shown on page 73.

Cash profit – March 2016 Half Year v March 2015 Half Year

 

 

 

68

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New Zealand

David Hisco

Table reflects NZD for New Zealand

AUD results shown on page 73

 

		Half Year														Movement
		Mar 16 NZD M				Sep 15 NZD M				Mar 15 NZD M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Net interest income			1,270				1,257				1,242						1%				2%
Other operating income			217				201				196						8%				11%
Operating income			1,487				1,458				1,438						2%				3%
Operating expenses			(571)				(572)				(576)						0%				-1%
Profit before credit impairment and income tax			916				886				862						3%				6%
Credit impairment (charge)/release			(46)				(39)				(20)						18%				large
Profit before income tax			870				847				842						3%				3%
Income tax expense and non-controlling interests			(244)				(237)				(236)						3%				3%
Cash profit			626				610				606						3%				3%
Consisting of:
Retail			395				369				365						7%				8%
Commercial			221				237				242						-7%				-9%
Central Functions			10				4				(1)						large				large
Cash profit			626				610				606						3%				3%
Balance Sheet
Net loans & advances			107,845				104,756				99,518						3%				8%
Other external assets			3,536				3,514				3,699						1%				-4%
External assets			111,381				108,270				103,217						3%				8%
Customer deposits			69,140				65,689				61,427						5%				13%
Other deposits and borrowings			5,451				4,963				6,273						10%				-13%
Deposits and other borrowings			74,591				70,652				67,700						6%				10%
Other external liabilities			19,356				21,503				19,749						-10%				-2%
External liabilities			93,947				92,155				87,449						2%				7%
Risk weighted assets			60,134				59,024				55,006						2%				9%
Average gross loans and advances			106,705				102,629				98,262						4%				9%
Average deposits and other borrowings			73,170				69,602				66,622						5%				10%
Ratios
Return on assets			1.14%				1.15%				1.20%
Net interest margin			2.37%				2.44%				2.52%
Operating expenses to operating income			38.4%				39.2%				40.1%
Operating expenses to average assets			1.04%				1.08%				1.14%
Individual credit impairment charge/(release)			47				35				23						34%				large
Individual credit impairment charge/(release) as a % of average GLA			0.09%				0.07%				0.05%
Collective credit impairment charge/(release)			(1)				4				(3)						large				-67%
Collective credit impairment charge/(release) as a % of average GLA			(0.00%)				0.01%				(0.01%)
Gross impaired assets			302				372				443						-19%				-32%
Gross impaired assets as a % of GLA			0.28%				0.35%				0.44%
Total full time equivalent staff (FTE)			5,022				5,074				5,096						-1%				-1%

 

69

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New Zealand

David Hisco

 

Individual credit impairment charge/(release)		Half Year														Movement
		Mar 16 NZD M				Sep 15 NZD M				Mar 15 NZD M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Retail			26				29				25						-10%				4%
Home Loans			(2)				4				2						large				large
Other			28				25				23						12%				22%
Commercial			21				6				(2)						large				large
Individual credit impairment charge			47				35				23						34%				large
Collective credit impairment charge/(release)		Half Year														Movement
		Mar 16 NZD M				Sep 15 NZD M				Mar 15 NZD M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Retail			2				7				(3)						-71%				large
Home Loans			(2)				(3)				(2)						-33%				0%
Other			4				10				(1)						-60%				large
Commercial			(3)				(3)				-						0%				n/a
Collective credit impairment charge/(release)			(1)				4				(3)						large				-67%
Total credit impairment charge			46				39				20						18%				large
Net loans and advances		As at														Movement
		Mar 16 NZD M				Sep 15 NZD M				Mar 15 NZD M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Retail			67,708				65,422				61,917						4%				9%
Home Loans			63,794				61,508				58,152						4%				10%
Other			3,914				3,914				3,765						0%				4%
Commercial			40,137				39,334				37,601						2%				7%
Net loans and advances			107,845				104,756				99,518						3%				8%
Customer deposits		As at														Movement
		Mar 16 NZD M				Sep 15 NZD M				Mar 15 NZD M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Retail			55,994				53,407				49,834						5%				12%
Commercial			13,146				12,282				11,593						7%				13%
Customer deposits			69,140				65,689				61,427						5%				13%

 

70

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New Zealand

David Hisco

March 2016 Half Year

 

NZD M			Retail				Commercial				Central Functions				New Zealand Total
Net interest income			818				445				7				1,270
Other operating income			195				8				14				217
Operating income			1,013				453				21				1,487
Operating expenses			(436)				(128)				(7)				(571)
Profit before credit impairment and income tax			577				325				14				916
Credit impairment (charge)/release			(28)				(18)				-				(46)
Profit before income tax			549				307				14				870
Income tax expense and non-controlling interests			(154)				(86)				(4)				(244)
Cash profit			395				221				10				626
Individual credit impairment charge/(release)			26				21				-				47
Collective credit impairment charge/(release)			2				(3)				-				(1)
Net loans & advances			67,708				40,137				-				107,845
Customer deposits			55,994				13,146				-				69,140
Risk weighted assets			29,117				30,452				565				60,134
March 2015 Half Year
Net interest income			781				452				9				1,242
Other operating income			187				9				-				196
Operating income			968				461				9				1,438
Operating expenses			(440)				(126)				(10)				(576)
Profit before credit impairment and income tax			528				335				(1)				862
Credit impairment (charge)/release			(22)				2				-				(20)
Profit before income tax			506				337				(1)				842
Income tax expense and non-controlling interests			(141)				(95)				-				(236)
Cash profit			365				242				(1)				606
Individual credit impairment charge/(release)			25				(2)				-				23
Collective credit impairment charge/(release)			(3)				-				-				(3)
Net loans & advances			61,917				37,601				-				99,518
Customer deposits			49,834				11,593				-				61,427
Risk weighted assets			27,914				26,403				689				55,006
March 2016 Half Year vs March 2015 Half Year
Net interest income			5%				-2%				-22%				2%
Other operating income			4%				-11%				n/a				11%
Operating income			5%				-2%				large				3%
Operating expenses			-1%				2%				-30%				-1%
Profit before credit impairment and income tax			9%				-3%				large				6%
Credit impairment (charge)/release			27%				large				n/a				large
Profit before income tax			8%				-9%				large				3%
Income tax expense and non-controlling interests			9%				-9%				n/a				3%
Cash profit			8%				-9%				large				3%
Individual credit impairment charge/(release)			4%				large				n/a				large
Collective credit impairment charge/(release)			large				n/a				n/a				-67%
Net loans & advances			9%				7%				n/a				8%
Customer deposits			12%				13%				n/a				13%
Risk weighted assets			4%				15%				-18%				9%

 

71

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New Zealand

David Hisco

 

March 2016 Half Year
NZD M			Retail				Commercial				Central Functions				New Zealand Total
Net interest income			818				445				7				1,270
Other operating income			195				8				14				217
Operating income			1,013				453				21				1,487
Operating expenses			(436)				(128)				(7)				(571)
Profit before credit impairment and income tax			577				325				14				916
Credit impairment (charge)/release			(28)				(18)				-				(46)
Profit before income tax			549				307				14				870
Income tax expense and non-controlling interests			(154)				(86)				(4)				(244)
Cash profit			395				221				10				626
Individual credit impairment charge/(release)			26				21				-				47
Collective credit impairment charge/(release)			2				(3)				-				(1)
Net loans & advances			67,708				40,137				-				107,845
Customer deposits			55,994				13,146				-				69,140
Risk weighted assets			29,117				30,452				565				60,134
September 2015 Half Year
Net interest income			794				453				10				1,257
Other operating income			195				8				(2)				201
Operating income			989				461				8				1,458
Operating expenses			(439)				(130)				(3)				(572)
Profit before credit impairment and income tax			550				331				5				886
Credit impairment (charge)/release			(36)				(3)				-				(39)
Profit before income tax			514				328				5				847
Income tax expense and non-controlling interests			(145)				(91)				(1)				(237)
Cash profit			369				237				4				610
Individual credit impairment charge/(release)			29				6				-				35
Collective credit impairment charge/(release)			7				(3)				-				4
Net loans & advances			65,422				39,334				-				104,756
Customer deposits			53,407				12,282				-				65,689
Risk weighted assets			29,029				29,224				771				59,024
March 2016 Half Year vs September 2015 Half Year
Net interest income			3%				-2%				-30%				1%
Other operating income			0%				0%				large				8%
Operating income			2%				-2%				large				2%
Operating expenses			-1%				-2%				large				0%
Profit before credit impairment and income tax			5%				-2%				large				3%
Credit impairment (charge)/release			-22%				large				n/a				18%
Profit before income tax			7%				-6%				large				3%
Income tax expense and non-controlling interests			6%				-5%				large				3%
Cash profit			7%				-7%				large				3%
Individual credit impairment charge/(release)			-10%				large				n/a				34%
Collective credit impairment charge/(release)			-71%				0%				n/a				large
Net loans & advances			4%				2%				n/a				3%
Customer deposits			5%				7%				n/a				5%
Risk weighted assets			0%				4%				-27%				2%

 

72

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New Zealand

David Hisco

Table reflects AUD for New Zealand

NZD results shown on page 69

 

		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Net interest income			1,172				1,155				1,162						1%				1%
Other operating income			201				185				183						9%				10%
Operating income			1,373				1,340				1,345						2%				2%
Operating expenses			(527)				(525)				(539)						0%				-2%
Profit before credit impairment and income tax			846				815				806						4%				5%
Credit impairment (charge)/release			(42)				(36)				(19)						17%				large
Profit before income tax			804				779				787						3%				2%
Income tax expense and non-controlling interests			(226)				(218)				(221)						4%				2%
Cash profit			578				561				566						3%				2%
Consisting of:
Retail			365				340				341						7%				7%
Commercial			204				217				226						-6%				-10%
Central Functions			9				4				(1)						large				large
Cash profit			578				561				566						3%				2%
Balance Sheet
Net loans & advances			97,217				95,211				97,679						2%				0%
Other external assets			3,187				3,194				3,631						0%				-12%
External assets			100,404				98,405				101,310						2%				-1%
Customer deposits			62,327				59,703				60,293						4%				3%
Other deposits and borrowings			4,913				4,511				6,157						9%				-20%
Deposits and other borrowings			67,240				64,214				66,450						5%				1%
Other external liabilities			17,449				19,545				19,384						-11%				-10%
External liabilities			84,689				83,759				85,834						1%				-1%
Risk weighted assets			54,208				53,646				53,990						1%				0%
Average gross loans and advances			98,495				94,362				91,908						4%				7%
Average deposits and other borrowings			67,540				63,996				62,314						6%				8%
Ratios
Return on assets			1.14%				1.15%				1.20%
Net interest margin			2.37%				2.44%				2.52%
Operating expenses to operating income			38.4%				39.2%				40.1%
Operating expenses to average assets			1.04%				1.08%				1.14%
Individual credit impairment charge/(release)			43				32				22						34%				95%
Individual credit impairment charge/(release) as a % of average GLA			0.09%				0.07%				0.05%
Collective credit impairment charge/(release)			(1)				4				(3)						large				-67%
Collective credit impairment charge/(release) as a % of average GLA			(0.00%)				0.01%				(0.01%)
Gross impaired assets			273				338				434						-19%				-37%
Gross impaired assets as a % of GLA			0.28%				0.35%				0.44%
Total full time equivalent staff (FTE)			5,022				5,074				5,096						-1%				-1%

 

73

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Wealth

Alexis George, David Hisco & Fred Ohlsson

Cash profit – March 2016 Half Year v March 2015 Half Year

 

 

 

74

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DIVISIONAL RESULTS

 

 

 

Wealth
Alexis George, David Hisco & Fred Ohlsson
		Half Year														Movement
		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Net interest income			101				91				89						11%				13%
Other operating income			52				60				63						-13%				-17%
Net funds management and insurance income			727				730				699						0%				4%
Operating income			880				881				851						0%				3%
Operating expenses			(521)				(481)				(484)						8%				8%
Profit before credit impairment and income tax			359				400				367						-10%				-2%
Credit impairment (charge)/release			-				(1)				1						-100%				-100%
Profit before income tax			359				399				368						-10%				-2%
Income tax expense and non-controlling interests			(98)				(53)				(105)						85%				-7%
Cash profit			261				346				263						-25%				-1%
Consisting of:
Business Units
Insurance			151				155				144						-3%				5%
Funds Management			58				79				79						-27%				-27%
Private Wealth			53				51				44						4%				20%
Corporate and Other1			(1)				61				(4)						large				-75%
Total Wealth			261				346				263						-25%				-1%
Australia			194				285				202						-32%				-4%
New Zealand			63				64				62						-2%				2%
Asia Pacific, Europe & America			4				(3)				(1)						large				large
Total Wealth			261				346				263						-25%				-1%
Income from invested capital2			65				59				55						10%				18%
Key metrics
In-force premiums3			2,071				2,217				2,154						-7%				-4%
Funds under management			66,522				65,392				68,405						2%				-3%
Average funds under management			66,810				66,993				64,615						0%				3%
Net loans and advances			6,573				6,468				6,163						2%				7%
Customer deposits			18,945				18,467				17,357						3%				9%
Average gross loans and advances			6,654				6,157				5,725						8%				16%
Average customer deposits			19,096				17,922				15,639						7%				22%
Risk weighted assets			4,391				4,291				4,174						2%				5%
Ratios
Operating expenses to operating income			59.2%				54.6%				56.9%
Insurance expenses to in-force premiums
Australia			12.1%				9.9%				10.3%
New Zealand			35.2%				35.4%				32.1%
Retail Insurance lapse rates
Australia4			13.0%				14.0%				12.6%
New Zealand			14.8%				16.8%				14.3%
Funds Management expenses to average FUM5
Australia			0.58%				0.51%				0.51%
New Zealand			0.27%				0.28%				0.31%
Total full time equivalent staff (FTE)			2,385				2,481				2,530						-4%				-6%
Aligned adviser numbers6			1,785				1,819				1,823						-2%				-2%

 

1.	Corporate and Other includes a one-off tax consolidation benefit of $56 million in September 2015.

 

2.

Income from invested capital represents after tax revenue generated from investing all Insurance and Funds Management business’s capital balances held for regulatory purposes. The invested capital as at 31 March 2016 was $3.7 billion (Sep 15 & Mar 15: $3.6 billion), which comprises fixed interest securities of 47% and cash deposits of 53% (Sep 15 & Mar 15: 49% fixed interest securities and 51% cash deposits).

 

3.	In-force premiums reflect the impact of ceasing the underwriting of new home, content, travel and motor insurance in the September 2015 half and the disposal of the New Zealand medical business in the March 2016 half.

 

4.	A definition change to the retail insurance lapse rate was implemented in the Sep 15 half to reflect the inclusion of partial premium reductions within the policy renewal period. Comparatives have been restated to align with the revised methodology.

 

5.	Funds Management expense and FUM only relates to Pensions & Investments business.

 

6.	Includes corporate authorised representatives of dealer groups wholly or partially owned by ANZ Wealth Australia and ANZ employed financial planners.

 

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Wealth
Alexis George, David Hisco & Fred Ohlsson
Major business units
		Half Year														Movement
Insurance		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Net interest income			15				15				17						0%				-12%
Other operating income			(9)				-				-						n/a				n/a
Insurance income			493				500				469						-1%				5%
Insurance volume related expenses			(150)				(167)				(154)						-10%				-3%
Operating income			349				348				332						0%				5%
Operating expenses			(144)				(134)				(132)						7%				9%
Profit before income tax			205				214				200						-4%				3%
Income tax expense and non-controlling interests			(54)				(59)				(56)						-8%				-4%
Cash profit			151				155				144						-3%				5%
		Half Year														Movement
Funds Management		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Net interest income			16				15				15						7%				7%
Other operating income			36				35				37						3%				-3%
Funds management income			409				437				431						-6%				-5%
Funds management volume related expenses			(185)				(197)				(199)						-6%				-7%
Operating income			276				290				284						-5%				-3%
Operating expenses			(194)				(181)				(171)						7%				13%
Profit before income tax			82				109				113						-25%				-27%
Income tax expense and non-controlling interests			(24)				(30)				(34)						-20%				-29%
Cash profit			58				79				79						-27%				-27%
		Half Year														Movement
Private Wealth		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Net interest income			90				81				79						11%				14%
Other operating income			20				17				19						18%				5%
Net funds management income			29				28				26						4%				12%
Operating income			139				126				124						10%				12%
Operating expenses			(64)				(52)				(63)						23%				2%
Profit before credit impairment and income tax			75				74				61						1%				23%
Credit impairment charge			-				(1)				1						-100%				-100%
Profit before income tax			75				73				62						3%				21%
Income tax expense and non-controlling interests			(22)				(22)				(18)						0%				22%
Cash profit			53				51				44						4%				20%

 

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Wealth

Alexis George, David Hisco & Fred Ohlsson

 

		Half Year														Movement
Operating expenses by business unit		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Insurance			144				134				132						7%				9%
Funds Management			194				181				171						7%				13%
Private Wealth			64				52				63						23%				2%
Corporate and Other			119				114				118						4%				1%
Total			521				481				484						8%				8%
		Half Year														Movement
Operating expenses by geographic region		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Australia			423				381				387						11%				9%
New Zealand			68				68				65						0%				5%
Asia Pacific, Europe & America			30				32				32						-6%				-6%
Total			521				481				484						8%				8%
		Half Year														Movement
Insurance operating margin		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Life Insurance Planned profit margin Group & Individual			72				78				66						-8%				9%
Experience profit/(loss)1			4				1				4						large				0%
General Insurance operating profit margin			51				50				47						2%				9%
Australia			127				129				117						-2%				9%
Life Insurance Planned profit margin Individual			20				23				24						-13%				-17%
Experience profit/(loss)1			4				3				3						33%				33%
New Zealand			24				26				27						-8%				-11%
Total			151				155				144						-3%				5%

 

1.	Experience profit/(loss) variations are gains or losses arising from actual experience differing from plan.

 

		As at														Movement
Insurance annual in-force premiums		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Group			439				423				390						4%				13%
Individual			1,297				1,284				1,246						1%				4%
General Insurance			335				510				518						-34%				-35%
Total			2,071				2,217				2,154						-7%				-4%
Insurance annual in-force premiums by region
Australia			1,904				2,026				1,955						-6%				-3%
New Zealand			167				191				199						-13%				-16%
Total			2,071				2,217				2,154						-7%				-4%

 

Insurance in-force book movement		Sep 15 $M				New business $M2				Lapses $M				Mar 16 $M
Group			423				31				(15	)			439
Individual3			1,284				108				(95	)			1,297
General Insurance3			510				53				(228	)			335
Total			2,217				192				(338	)			2,071
Insurance in-force book movement by region
Australia3			2,026				179				(301	)			1,904
New Zealand3			191				13				(37	)			167
Total			2,217				192				(338	)			2,071

 

2.	New business includes the impact of foreign currency gains/ (losses) on translation.

 

3.	Lapses for General Insurance and Australia include the impact of ceasing the underwriting new home, content, travel and motor insurance in Sep 15 half. Lapses for Individual and New Zealand include the impact of the disposal of the New Zealand medical business in the Mar 16 half.

 

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Wealth

Alexis George, David Hisco & Fred Ohlsson

 

		As at														Movement
Funds under management		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Funds under management - average			66,810				66,993				64,615						0%				3%
Funds under management - end of period			66,522				65,392				68,405						2%				-3%
Composed of:
Australian equities			15,955				16,124				18,040						-1%				-12%
International equities			17,001				17,596				18,533						-3%				-8%
Cash and fixed interest			29,136				27,653				27,583						5%				6%
Property and infrastructure			4,430				4,019				4,249						10%				4%
Total			66,522				65,392				68,405						2%				-3%
		As at														Movement
Funds under management by region		Mar 16 $M				Sep 15 $M				Mar 15 $M						Mar 16 v. Sep 15				Mar 16 v. Mar 15
Australia			48,828				48,874				51,369						0%				-5%
New Zealand			17,694				16,518				17,036						7%				4%
Total			66,522				65,392				68,405						2%				-3%

 

Funds Management cash flows by product		Sep 15 $M				In-   flows				Out-   flows				Other1				Mar 16 $M
OneAnswer Frontier			8,677				818				(475	)			146				9,166
ANZ Smart Choice			4,254				1,183				(489	)			4,862				9,810
Oasis Voyage			1,708				205				(72	)			51				1,892
Private Wealth - Australia			2,073				293				(133	)			(35	)			2,198
KiwiSaver			6,817				732				(260	)			221				7,510
Private Wealth - New Zealand			4,976				529				(294	)			68				5,279
Other New Zealand			4,725				833				(699	)			46				4,905
Retail			20,223				430				(1,317	)			(32	)			19,304
Employer Super			11,939				109				(806	)			(4,784	)			6,458
Total			65,392				5,132				(4,545	)			543				66,522

1.

Other includes investment income net of taxes, fees and charges, distributions and the impact of foreign currency translations. It also includes the transition of funds under management from Employer Super to ANZ Smart Choice of approximately $5 billion, as a result of regulatory changes in the industry.

 

Embedded value and value of new business (insurance and investments only)			Australia $M				New Zealand $M				Total $M
Embedded value as at September 20151			4,012				554				4,566
Value of new business2			62				14				76
Expected return3			162				24				186
Experience deviations and assumption changes4			29				-				29
Embedded value before economic assumption changes and net transfer			4,265				592				4,857
Economic assumptions change			(4	)			7				3
Net transfer5			206				(91	)			115
Embedded value as at March 2016			4,467				508				4,975

1.

Embedded value represents the present value of future profits and releases of capital arising from the business in-force at the valuation date, and adjusted net assets. It is determined using best estimate assumptions with franking credits included at 70% of face value. Projected cash flows have been discounted using capital asset pricing model risk discount rates of 7.50%-9.25%. ANZ Lenders Mortgage Insurance business is not included in the valuation.

 

2.	Value of new business represents the present value of future profits less the cost of capital arising from new business written over the period.

 

3.	Expected return represents the expected increase in value over the period.

 

4.

Experience deviations and assumption changes arise from deviations and changes to best estimate assumptions underlying the prior period embedded value. Improvement in retention in Insurance business has led to favourable results for the Australian business partially offset by adverse movement from the investment market.

 

5.

Net transfer represents the net capital movements over the period including capital injections, transfer of cash dividends and value of franking credits. There was a $400 million capital injection from the parent entity, partially offset by $238 million of cash dividends and $47 million of franking credits transferred to the parent entity.

 

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DIVISIONAL RESULTS

 

 

 

Asia Retail & Pacific

David Hisco

Cash Profit – March 2016 Half Year v March 2015 Half Year

 

 

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DIVISIONAL RESULTS

 

 

 

Asia Retail & Pacific

David Hisco

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Net interest income		328		314		291				4%		13%
Other operating income		231		236		221				-2%		5%
Operating income		559		550		512				2%		9%
Operating expenses		(401)		(395)		(374)				2%		7%
Profit before credit impairment and income tax		158		155		138				2%		14%
Credit impairment (charge)/release		(91)		(87)		(10)				5%		large
Profit before income tax		67		68		128				-1%		-48%
Income tax expense and non-controlling interests		(14)		(23)		(29)				-39%		-52%
Cash profit/(loss)		53		45		99				18%		-46%
Balance Sheet
Net loans & advances		11,909		12,545		11,667				-5%		2%
Customer deposits		19,005		19,455		17,779				-2%		7%
Risk weighted assets		11,617		11,945		10,767				-3%		8%
Ratios
Return on assets		0.55%		0.48%		1.15%
Net interest margin		3.51%		3.46%		3.49%
Operating expenses to operating income		71.7%		71.8%		73.0%
Operating expenses to average assets		4.18%		4.20%		4.33%
Individual credit impairment charge/(release)		82		78		8				5%		large
Individual credit impairment charge/(release) as a % of average GLA		1.30%		1.27%		0.14%
Collective credit impairment charge/(release)		9		9		2				0%		large
Collective credit impairment charge/(release) as a % of average GLA		0.14%		0.15%		0.04%
Gross impaired assets		232		223		195				4%		19%
Gross impaired assets as a % of GLA		1.92%		1.75%		1.64%
Total full time equivalent staff (FTE)		3,183		3,313		3,437				-4%		-7%

 

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Technology, Services & Operations and Group Centre

 

		Half Year								Movement
		Mar 16  $M		Sep 15  $M		Mar 15  $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Operating income (minority investments in Asia)		73		304		311				-76%		-77%
Operating income (excluding minority investments in Asia)		86		(28)		(104)				large		large
Operating income		159		276		207				-42%		-23%
Operating expenses		(855)		(331)		(265)				large		large
Profit before credit impairment and income tax		(696)		(55)		(58)				large		large
Credit impairment (charge)/release		-		(2)		1				-100%		-100%
Profit before income tax		(696)		(57)		(57)				large		large
Income tax expense and non-controlling interests		201		46		84				large		large
Cash profit/(loss)		(495)		(11)		27				large		large
Risk weighted assets		6,264		4,739		4,979				32%		26%
Total full time equivalent staff (FTE)		25,459		26,287		26,843				-3%		-5%

 

 

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CONTENTS

Section 6 – Geographic Results

Geographic performance

Australia geography

Asia Pacific, Europe & America geography

New Zealand geography

 

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Geographic Performance

 

The	Group’s divisions operate across multiple geographies with components of the following divisional results reflected in each geography:

 

¡	Australia - comprises the Australia division and the Australian operations of Institutional, Wealth and TSO & Group Centre divisions;

 

¡	Asia, Pacific, Europe & America (APEA) - comprises the Asia Retail & Pacific division and the APEA components of Institutional, Wealth and TSO & Group Centre divisions; and

 

¡	New Zealand - comprises the New Zealand division and the New Zealand components of Institutional, Wealth and TSO & Group Centre divisions.

 

		Half Year								Movement
Statutory Profit		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Australia		1,797		2,674		1,964				-33%		-9%
Asia Pacific, Europe & America		237		490		722				-52%		-67%
New Zealand		704		823		820				-14%		-14%
Total statutory profit		2,738		3,987		3,506				-31%		-22%

 

 

		Half Year								Movement
Cash Profit		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Australia		1,830		2,269		2,147				-19%		-15%
Asia Pacific, Europe & America		259		492		743				-47%		-65%
New Zealand		693		779		786				-11%		-12%
Total cash profit		2,782		3,540		3,676				-21%		-24%

 

		Half Year								Movement
Net loans & advances		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Australia		386,734		381,222		362,830				1%		7%
Asia Pacific, Europe & America		69,140		85,062		88,356				-19%		-22%
New Zealand		105,894		103,954		107,017				2%		-1%
Total net loans & advances1		561,768		570,238		558,203				-1%		1%

 

		Half Year								Movement
Customer deposits		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Australia		245,810		238,184		227,560				3%		8%
Asia Pacific, Europe & America		119,704		129,263		129,733				-7%		-8%
New Zealand		81,264		77,137		78,854				5%		3%
Total customer deposits		446,778		444,584		436,147				0%		2%

 

		Half Year								Movement
Risk weighted assets		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Australia		225,273		224,830		209,981				0%		7%
Asia Pacific, Europe & America		95,870		109,842		108,953				-13%		-12%
New Zealand		67,192		67,265		67,929				0%		-1%
Total risk weighted assets		388,335		401,937		386,863				-3%		0%

 

1.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

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Australia geography

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Net interest income		5,197		5,151		4,882				1%		6%
Other operating income		1,514		1,393		1,454				9%		4%
Operating income		6,711		6,544		6,336				3%		6%
Operating expenses		(3,490)		(2,871)		(2,792)				22%		25%
Profit before credit impairment and income tax		3,221		3,673		3,544				-12%		-9%
Credit impairment charge		(573)		(444)		(428)				29%		34%
Profit before income tax		2,648		3,229		3,116				-18%		-15%
Income tax expense and non-controlling interests		(818)		(960)		(969)				-15%		-16%
Cash profit		1,830		2,269		2,147				-19%		-15%
Adjustments between statutory profit and cash profit		(33)		405		(183)				large		-82%
Statutory profit		1,797		2,674		1,964				-33%		-9%
Balance Sheet
Net loans & advances1		386,734		381,222		362,830				1%		7%
Other external assets		191,212		180,742		174,729				6%		9%
External assets		577,946		561,964		537,559				3%		8%
Customer deposits		245,810		238,184		227,560				3%		8%
Other deposits and borrowings		96,805		92,771		87,669				4%		10%
Deposits and other borrowings		342,615		330,955		315,229				4%		9%
Other external liabilities		186,711		188,877		179,420				-1%		4%
External liabilities		529,326		519,832		494,649				2%		7%
Risk weighted assets		225,273		224,830		209,981				0%		7%
Average gross loans and advances1		388,023		377,090		358,774				3%		8%
Average deposits and other borrowings		341,850		327,871		318,382				4%		7%
Ratios
Net interest margin - cash		2.27%		2.30%		2.29%
Operating expenses to operating income - cash		52.0%		43.9%		44.1%
Operating expenses to average assets - cash		1.23%		1.04%		1.07%
Individual credit impairment charge/(release) - cash		552		430		375				28%		47%
Individual credit impairment charge/(release) as a % of average GLA1 - cash		0.28%		0.23%		0.21%
Collective credit impairment charge/(release) - cash		21		14		53				50%		-60%
Collective credit impairment charge/(release) as a % of average GLA1 - cash		0.01%		0.01%		0.03%
Gross impaired assets		1,635		1,528		1,589				7%		3%
Gross impaired assets as a % of GLA1		0.42%		0.40%		0.43%
Total full time equivalent staff (FTE)		20,808		21,138		22,096				-2%		-6%

 

1.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

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Asia Pacific, Europe & America geography

Table reflects AUD results for the APEA regions

 

		Half Year								Movement
Statutory Profit		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Asia		79		338		571				-77%		-86%
Europe & America		64		77		65				-17%		-2%
Pacific		94		75		86				25%		9%
Total statutory profit		237		490		722				-52%		-67%

 

		Half Year								Movement
Cash Profit		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Asia		79		338		571				-77%		-86%
Europe & America		86		79		86				9%		0%
Pacific		94		75		86				25%		9%
Total cash profit		259		492		743				-47%		-65%

 

		Half Year								Movement
Net loans & advances		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Asia		57,532		73,236		76,459				-21%		-25%
Europe & America		7,882		7,697		8,006				2%		-2%
Pacific		3,726		4,129		3,891				-10%		-4%
Total net loans & advances		69,140		85,062		88,356				-19%		-22%

 

		Half Year								Movement
Customer deposits		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Asia		64,412		73,495		72,335				-12%		-11%
Europe & America		49,888		50,129		51,936				0%		-4%
Pacific		5,404		5,639		5,462				-4%		-1%
Total customer deposits		119,704		129,263		129,733				-7%		-8%

 

		Half Year								Movement
Risk weighted assets		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Asia		64,112		76,295		78,274				-16%		-18%
Europe & America		24,212		25,956		22,514				-7%		8%
Pacific		7,546		7,591		8,165				-1%		-8%
Total risk weighted assets		95,870		109,842		108,953				-13%		-12%

 

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Asia Pacific, Europe & America geography

Table reflects AUD for the APEA region

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Net interest income		993		987		926				1%		7%
Other operating income		862		1,016		1,127				-15%		-24%
Operating income		1,855		2,003		2,053				-7%		-10%
Operating expenses		(1,236)		(1,224)		(1,120)				1%		10%
Profit before credit impairment and income tax		619		779		933				-21%		-34%
Credit impairment charge		(299)		(209)		(53)				43%		large
Profit before income tax		320		570		880				-44%		-64%
Income tax expense and non-controlling interests		(61)		(78)		(137)				-22%		-55%
Cash profit1		259		492		743				-47%		-65%
Adjustments between statutory profit and cash profit		(22)		(2)		(21)				large		5%
Statutory profit		237		490		722				-52%		-67%
Balance Sheet
Net loans & advances		69,140		85,062		88,356				-19%		-22%
Other external assets		105,526		105,781		96,512				0%		9%
External assets		174,666		190,843		184,868				-8%		-6%
Customer deposits		119,704		129,263		129,733				-7%		-8%
Other deposits and borrowings		27,772		28,207		35,764				-2%		-22%
Deposits and other borrowings		147,476		157,470		165,497				-6%		-11%
Other external liabilities		37,267		37,698		30,025				-1%		24%
External liabilities		184,743		195,168		195,522				-5%		-6%
Risk weighted assets		95,870		109,842		108,953				-13%		-12%
Average gross loans and advances		79,132		86,886		86,172				-9%		-8%
Average deposits and other borrowings		156,569		156,228		151,272				0%		4%
Ratios
Net interest margin - cash		1.11%		1.12%		1.10%
Operating expenses to operating income - cash		66.6%		61.1%		54.6%
Operating expenses to average assets - cash		1.21%		1.23%		1.19%
Individual credit impairment charge/(release) - cash		294		191		46				54%		large
Individual credit impairment charge/(release) as a % of average GLA - cash		0.74%		0.44%		0.11%
Collective credit impairment charge/(release) - cash		5		18		7				-72%		-29%
Collective credit impairment charge/(release) as a % of average GLA - cash		0.01%		0.04%		0.02%
Gross impaired assets		939		811		609				16%		54%
Gross impaired assets as a % of GLA		1.32%		0.94%		0.68%
Total full time equivalent staff (FTE)		20,025		20,910		20,910				-4%		-4%

 

1.

Includes the Asia Retail & Pacific division (Mar 16 half: $53 million, Sep 15 half: $45 million; Mar 15 half: $99 million), and the APEA components of Institutional (Mar 16 half: $180 million, Sep 15 half: $191 million; Mar 15 half: $372 million), Wealth (Mar 16 half: $4 million; Sep 15 half: -$3 million; Mar 15 half: -$1 million), and TSO & Group Centre (Mar 16 half: $22 million, Sep 15 half: $259 million; Mar 15 half: $273 million).

 

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Asia Pacific, Europe & America geography

Table reflects USD for the APEA region

 

		Half Year								Movement
		Mar 16 USD M		Sep 15 USD M		Mar 15 USD M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Net interest income		716		740		759				-3%		-6%
Other operating income		621		755		924				-18%		-33%
Operating income		1,337		1,495		1,683				-11%		-21%
Operating expenses		(892)		(920)		(918)				-3%		-3%
Profit before credit impairment and income tax		445		575		765				-23%		-42%
Credit impairment charge		(216)		(161)		(44)				34%		large
Profit before income tax		229		414		721				-45%		-68%
Income tax expense and non-controlling interests		(43)		(55)		(112)				-22%		-62%
Cash profit		186		359		609				-48%		-69%
Adjustments between statutory profit and cash profit		(15)		(1)		(17)				large		-12%
Statutory profit		171		358		592				-52%		-71%
Balance Sheet
Net loans & advances		52,899		59,654		67,451				-11%		-22%
Other external assets		80,738		74,184		73,677				9%		10%
External assets		133,637		133,838		141,128				0%		-5%
Customer deposits		91,585		90,653		99,038				1%		-8%
Other deposits and borrowings		21,249		19,781		27,303				7%		-22%
Deposits and other borrowings		112,834		110,434		126,341				2%		-11%
Other external liabilities		28,513		26,437		22,921				8%		24%
External liabilities		141,347		136,871		149,262				3%		-5%
Risk weighted assets		73,350		77,032		83,175				-5%		-12%
Average gross loans and advances		57,070		65,013		70,659				-12%		-19%
Average deposits and other borrowings		112,916		117,030		124,040				-4%		-9%
Ratios
Net interest margin - cash		1.11%		1.12%		1.10%
Operating expenses to operating income - cash		66.6%		61.5%		54.6%
Operating expenses to average assets - cash		1.21%		1.23%		1.19%
Individual credit impairment charge/(release) - cash		211		148		38				43%		large
Individual credit impairment charge/(release) as a % of average GLA - cash		0.74%		0.44%		0.11%
Collective credit impairment charge/(release) - cash		5		13		6				-62%		-17%
Collective credit impairment charge/(release) as a % of average GLA - cash		0.01%		0.04%		0.02%
Gross impaired assets		710		570		466				25%		52%
Gross impaired assets as a % of GLA		1.32%		0.94%		0.68%
Total full time equivalent staff (FTE)		20,025		20,910		20,910				-4%		-4%

 

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GEOGRAPHIC REVIEW

 

 

 

New Zealand geography

Table reflects AUD results for the New Zealand geography

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Net interest income		1,378		1,341		1,330				3%		4%
Other operating income		372		455		476				-18%		-22%
Operating income		1,750		1,796		1,806				-3%		-3%
Operating expenses		(753)		(680)		(691)				11%		9%
Profit before credit impairment and income tax		997		1,116		1,115				-11%		-11%
Credit impairment charge		(46)		(42)		(29)				10%		59%
Profit before income tax		951		1,074		1,086				-11%		-12%
Income tax expense and non-controlling interests		(258)		(295)		(300)				-13%		-14%
Cash profit		693		779		786				-11%		-12%
Adjustments between statutory profit and cash profit		11		44		34				-75%		-68%
Statutory profit		704		823		820				-14%		-14%
Balance Sheet
Net loans & advances		105,894		103,954		107,017				2%		-1%
Other external assets		36,771		33,139		30,637				11%		20%
External assets		142,665		137,093		137,654				4%		4%
Customer deposits		81,264		77,137		78,854				5%		3%
Other deposits and borrowings		6,716		5,232		7,635				28%		-12%
Deposits and other borrowings		87,980		82,369		86,489				7%		2%
Other external liabilities		36,764		35,178		31,375				5%		17%
External liabilities		124,744		117,547		117,864				6%		6%
Risk weighted assets		67,192		67,265		67,929				0%		-1%
Average gross loans and advances		107,761		103,633		100,920				4%		7%
Average deposits and other borrowings		88,816		83,610		82,150				6%		8%
Ratios
Net interest margin - cash		2.19%		2.22%		2.27%
Operating expenses to operating income - cash		43.0%		37.8%		38.3%
Operating expenses to average assets - cash		1.03%		0.97%		1.05%
Individual credit impairment charge/(release) - cash		46		34		34				35%		35%
Individual credit impairment charge/(release) as a % of average GLA - cash		0.09%		0.07%		0.07%
Collective credit impairment charge/(release) - cash		-		8		(5)				-100%		-100%
Collective credit impairment charge/(release) as a % of average GLA - cash		0.00%		0.02%		(0.01%)
Gross impaired assets		309		379		510				-18%		-39%
Gross impaired assets as a % of GLA		0.29%		0.36%		0.48%
Total full time equivalent staff (FTE)		8,063		8,104		8,237				-1%		-2%

 

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New Zealand geography

Table reflects NZD results for the New Zealand geography

 

		Half Year								Movement
		Mar 16 NZD M		Sep 15 NZD M		Mar 15 NZD M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Net interest income		1,493		1,458		1,422				2%		5%
Other operating income		402		496		509				-19%		-21%
Operating income		1,895		1,954		1,931				-3%		-2%
Operating expenses		(815)		(739)		(739)				10%		10%
Profit before credit impairment and income tax		1,080		1,215		1,192				-11%		-9%
Credit impairment charge		(50)		(45)		(31)				11%		61%
Profit before income tax		1,030		1,170		1,161				-12%		-11%
Income tax expense and non-controlling interests		(279)		(324)		(320)				-14%		-13%
Cash profit		751		846		841				-11%		-11%
Adjustments between statutory profit and cash profit		12		48		36				-75%		-67%
Statutory profit		763		894		877				-15%		-13%
Balance Sheet
Net loans & advances		117,470		114,376		109,031				3%		8%
Other external assets		40,792		36,460		31,214				12%		31%
External assets		158,262		150,836		140,245				5%		13%
Customer deposits		90,148		84,870		80,338				6%		12%
Other deposits and borrowings		7,450		5,756		7,778				29%		-4%
Deposits and other borrowings		97,598		90,626		88,116				8%		11%
Other external liabilities		40,783		38,705		31,966				5%		28%
External liabilities		138,381		129,331		120,082				7%		15%
Risk weighted assets		74,537		74,008		69,208				1%		8%
Average gross loans and advances		116,743		112,712		107,898				4%		8%
Average deposits and other borrowings		96,219		90,942		87,830				6%		10%
Ratios
Net interest margin - cash		2.19%		2.22%		2.27%
Operating expenses to operating income - cash		43.0%		37.8%		38.3%
Operating expenses to average assets - cash		1.03%		0.97%		1.05%
Individual credit impairment charge/(release) - cash		50		36		37				39%		35%
Individual credit impairment charge/(release) as a % of average GLA - cash		0.09%		0.07%		0.07%
Collective credit impairment charge/(release) - cash		-		9		(6)				-100%		-100%
Collective credit impairment charge/(release) as a % of average GLA - cash		0.00%		0.02%		(0.01%)
Gross impaired assets		343		419		523				-18%		-34%
Gross impaired assets as a % of GLA		0.29%		0.36%		0.48%
Total full time equivalent staff (FTE)		8,063		8,104		8,237				-1%		-2%

 

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PROFIT RECONCILIATION

 

 

CONTENTS

Section 7 – Profit Reconciliation

Adjustments between statutory profit and cash profit

Explanation of adjustments between statutory profit and cash profit

Other reclassifications between statutory profit and cash profit

Reconciliation of statutory profit to cash profit

 

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Non-IFRS information

The Group provides additional measures of performance in the Consolidated Financial Report & Dividend Announcement which are prepared on a basis other than in accordance with accounting standards. The guidance provided in ASIC’s RG230 has been followed when presenting this information.

Adjustments between statutory profit and cash profit

Cash profit represents ANZ’s preferred measure of the result of the ongoing business activities of the Group, enabling readers to assess Group and Divisional performance against prior periods and against peer institutions. To calculate cash profit, the Group excludes non-core items from statutory profit (refer to Definitions for further details). The adjustments made in arriving at cash profit are included in statutory profit which is subject to review within the context of the external auditor’s review of the Condensed Consolidated Financial Statements. Cash profit is not subject to review or audit by the external auditor, however, the external auditor has informed the Audit Committee that the adjustments have been determined on a consistent basis across each period presented.

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Statutory profit attributable to shareholders of the Company		2,738		3,987		3,506				-31%		-22%
Adjustments between statutory profit and cash profit
Treasury shares adjustments		(29)		(95)		79				-69%		large
Revaluation of policy liabilities		(14)		(6)		(67)				large		-79%
Economic hedges		128		(165)		(14)				large		large
Revenue and net investment hedges		(39)		(179)		176				-78%		large
Structured credit intermediation trades		(2)		(2)		(4)				0%		-50%
Total adjustments between statutory profit and cash profit		44		(447)		170				large		-74%
Cash Profit		2,782		3,540		3,676				-21%		-24%

Explanation of adjustments between statutory profit and cash profit

 

•

Treasury shares adjustment

ANZ shares held by the Group in the Wealth business are deemed to be Treasury shares for accounting purposes. Dividends and realised and unrealised gains and losses from these shares are reversed as these are not permitted to be recognised as income for statutory reporting purposes. In deriving cash profit, these earnings are included to ensure there is no asymmetrical impact on the Group’s profits because the Treasury shares are held to support policy liabilities which are revalued through the Income Statement. Accordingly, the half year loss of $29 million after tax ($34 million pre-tax) reversed for statutory accounting purposes has been added back to cash profit.

 

•

Revaluation of policy liabilities

When calculating policy liabilities, the projected future cash flows on insurance contracts are discounted to reflect the present value of the obligation, with the impact of changes in the market discount rate each period being reflected in the income statement. ANZ includes the impact on the re-measurement of the insurance contract attributable to changes in market discount rates as an adjustment to statutory profit to remove the volatility attributable to changes in market interest rates which reverts to zero over the life of the insurance contract.

 

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•

Economic hedging and Revenue and net investment hedges

The Group enters into economic hedges to manage its interest rate and foreign exchange risk. The application of “AASB 139: Financial Instruments – Recognition and Measurement” results in fair value gains and losses being recognised within the income statement. ANZ removes the mark-to-market adjustments from cash profit as the profit or loss resulting from the hedge transactions will reverse over time to match with the profit or loss from the economically hedged item as part of cash profit. This includes gains and losses arising from approved classes of derivatives not designated in accounting hedge relationships but which are considered to be economic hedges, including hedges of larger foreign exchange denominated revenue and expense streams, primarily NZD and USD (and USD correlated), as well as ineffectiveness from designated accounting hedges.

Economic hedging comprises:

 

–

Funding related swaps (primarily cross currency interest rate swaps) that are being used to convert the proceeds of foreign currency debt issuances into floating rate Australian dollar and New Zealand dollar debt. As these swaps do not qualify for hedge accounting, movements in the fair values are recorded in the income statement. The main drivers of these fair values are currency basis spreads and the Australian dollar and New Zealand dollar fluctuations against other major funding currencies.

 

–

Economic hedges of select structured finance and specialised leasing transactions that do not qualify for hedge accounting. The main drivers of these fair value adjustments are Australian and New Zealand yield curve movements.

 

–

Ineffectiveness from designated accounting hedge relationships.

The majority of the half year gain/loss in economic hedging is related to funding related swaps that were impacted by the significant strengthening in the AUD across a number of major currencies, most notably the USD and EUR.

Gains/losses on revenue and net investment hedges in the March 2016 half were principally attributable to the recycling of the impact of prior period losses on USD positions that settled during the half.

 

		Half Year
Adjustments to the income statement		Mar 16 $M		Sep 15 $M		Mar 15 $M
Timing differences where IFRS results in asymmetry between the hedge and hedged items
Economic hedging		181		(236)		(20)
Revenue and net investment hedges		(55)		(256)		252
Increase/(decrease) to cash profit before tax		126		(492)		232
Increase/(decrease) to cash profit after tax		89		(344)		162
		As at
Cumulative increase/(decrease) to cash profit pre-tax		Mar 16 $M		Sep 15 $M		Mar 15 $M
Timing differences where IFRS results in asymmetry between the hedge and hedged items
Economic hedging1		443		294		530
Revenue and net investment hedges		(23)		32		288
		420		326		818

 

1.	A reduction of $32 million was made to the cumulative economic hedging balance on 1 October 2015. The reduction related to balances not recycled into cash profit between 2008 and 2014.

 

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•

Structured credit intermediation trades

ANZ entered into a series of structured credit intermediation trades with US financial guarantors from 2004 to 2007. The underlying structures involved credit default swaps (CDSs) over synthetic collateralised debt obligations (CDOs), portfolios of external collateralised loan obligations (CLOs) or specific bonds/floating rate notes (FRNs). ANZ sold protection using CDSs over these structures and then to mitigate risk, purchased protection via CDSs over the same structures from eight US financial guarantors.

Being derivatives, both the sold protection and purchased protection are measured at fair value and marked-to-model. Prior to the commencement of the global financial crisis, movements in valuations of these positions were not significant and largely offset each other in income. Following the onset of the global financial crisis, the purchased protection has provided only a partial offset against movements in valuation of the sold protection because:

 

–

one of the counterparties to the purchased protection defaulted and many of the remaining counterparties were downgraded; and

 

–

a credit valuation adjustment is applied to the remaining counterparties to the purchased protection reflecting changes to their credit worthiness.

ANZ is actively monitoring this portfolio with a view to reducing the exposures via termination and restructuring of both the bought and sold protection if and when ANZ deems it cost effective relative to the perceived risk associated with a specific trade or counterparty. As at 31 March 2016, ANZ’s remaining exposure is against two financial guarantors.

The bought and sold protection trades are by nature largely offsetting, with the notional amount on the outstanding bought CDSs and outstanding sold CDSs at 31 March 2016 each amounting to $0.7 billion (Sep 15: $0.7 billion; Mar 15: $0.8 billion).

The profit and loss impact of credit risk on structured credit derivatives is driven by market movements in credit spreads and AUD/USD and NZD/USD rates.

The (gain)/loss on structured credit intermediation trades is included as an adjustment to cash profit as it relates to a legacy business where, unless terminated early, the fair value movements are expected to reverse to zero in future periods.

 

		Half Year								Movement
Increase/(decrease) to cash profit		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Profit before income tax		(3)		(3)		(5)				0%		-40%
Income tax expense		1		1		1				0%		0%
Profit after income tax		(2)		(2)		(4)				0%		-50%
		As at								Movement
Financial impacts of credit intermediation trades		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Mark-to-market exposure to financial guarantors		63		69		78				-9%		-19%
Cumulative costs relating to financial guarantors1
CVA for outstanding transactions		14		17		19				-18%		-26%
Realised close out and hedge costs		372		372		373				0%		0%
Cumulative life to date charges		386		389		392				-1%		-2%

 

1.	The cumulative costs in managing the positions include realised losses relating to restructuring of trades in order to reduce risks and realised losses on termination of sold protection trades. It also includes foreign exchange hedging losses.

Other reclassifications between statutory profit and cash profit

 

•

Credit risk on impaired derivatives (nil profit after tax impact)

The charge to income for credit valuation adjustments of $14 million on defaulted and impaired derivative exposures has been reclassified to cash credit impairment charges in the March 2016 half year (Sep 15 half: $10 million charge; Mar 15 half: $16 million charge). The reclassification has been made to reflect the manner in which the defaulted and impaired derivatives are managed.

 

•

Policyholders tax gross up (nil profit after tax impact)

For statutory reporting purposes, policyholder income tax and other related taxes paid on behalf of policyholders are included in both net funds management and insurance income and the Group’s income tax expense. The gross up of $32 million for the March 2016 half year (Sep 15 half: $91 million net down; Mar 15 half: $277 million gross up) has been excluded from the cash results as it does not reflect the underlying performance of the business which is assessed on a net of policyholder tax basis.

 

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		Statutory   profit				Adjustments to statutory profit																																Cash profit
						Treasury shares adjustment				Policy-holders tax gross up				Revaluation of policy liabilities				Economic hedging				Revenue and net investment hedges				Structured credit intermediation trades				Credit risk on impaired derivatives				Total adjustments to statutory profit
		$M				$M				$M				$M				$M				$M				$M				$M				$M				$M
March 2016 Half Year
Net interest income			7,568				-				-				-				-				-				-				-				-				7,568
Net fee and commission income			1,268				-				-				-				-				-				-				-				-				1,268
Net foreign exchange earnings			602				-				-				-				(5)				(55)				-				-				(60)				542
Profit on trading instruments			(86)				-				-				-				50				-				(3)				14				61				(25)
Net funds management and insurance income			857				(34)				(32)				(20)				-				-				-				-				(86)				771
Other			56				-				-				-				136				-				-				-				136				192
Other operating income			2,697				(34)				(32)				(20)				181				(55)				(3)				14				51				2,748
Operating income			10,265				(34)				(32)				(20)				181				(55)				(3)				14				51				10,316
Operating expenses			(5,479)				-				-				-				-				-				-				-				-				(5,479)
Profit before credit impairment and tax			4,786				(34)				(32)				(20)				181				(55)				(3)				14				51				4,837
Credit impairment charge			(904)				-				-				-				-				-				-				(14)				(14)				(918)
Profit before income tax			3,882				(34)				(32)				(20)				181				(55)				(3)				-				37				3,919
Income tax expense			(1,140)				5				32				6				(53)				16				1				-				7				(1,133)
Non-controlling interests			(4)				-				-				-				-				-				-				-				-				(4)
Profit			2,738				(29)				-				(14)				128				(39)				(2)				-				44				2,782
September 2015 Half Year
Net interest income			7,478				-				-				-				-				-				-				-				-				7,478
Net fee and commission income			1,328				-				-				-				-				-				-				-				-				1,328
Net foreign exchange earnings			747				-				-				-				3				(256)				-				-				(253)				494
Profit on trading instruments			(219)				-				-				-				(21)				-				(3)				10				(14)				(233)
Net funds management and insurance income			795				(107)				91				(7)				-				-				-				-				(23)				772
Other			721				-				-				-				(218)				-				-				-				(218)				503
Other operating income			3,372				(107)				91				(7)				(236)				(256)				(3)				10				(508)				2,864
Operating income			10,850				(107)				91				(7)				(236)				(256)				(3)				10				(508)				10,342
Operating expenses			(4,775)				-				-				-				-				-				-				-				-				(4,775)
Profit before credit impairment and tax			6,075				(107)				91				(7)				(236)				(256)				(3)				10				(508)				5,567
Credit impairment charge			(685)				-				-				-				-				-				-				(10)				(10)				(695)
Profit before income tax			5,390				(107)				91				(7)				(236)				(256)				(3)				-				(518)				4,872
Income tax expense			(1,397)				12				(91)				1				71				77				1				-				71				(1,326)
Non-controlling interests			(6)				-				-				-				-				-				-				-				-				(6)
Profit			3,987				(95)				-				(6)				(165)				(179)				(2)				-				(447)				3,540

 

95

---

PROFIT RECONCILIATION

 

 

 

		Statutory   profit				Adjustments to statutory profit																																Cash   profit
						Treasury shares adjustment				Policy-holders tax gross up				Revaluation of policy liabilities				Economic hedging				Revenue and net investment hedges				Structured credit intermediation trades				Credit risk on impaired derivatives				Total adjustments to statutory profit
		$M				$M				$M				$M				$M				$M				$M				$M				$M				$M
March 2015 Half Year
Net interest income			7,138				-				-				-				-				-				-				-				-				7,138
Net fee and commission income			1,303				-				-				-				-				-				-				-				-				1,303
Net foreign exchange earnings			258				-				-				-				-				252				-				-				252				510
Profit on trading instruments			99				-				-				-				12				-				(5)				16				23				122
Net funds management and insurance income			1,020				86				(277)				(97)				-				-				-				-				(288)				732
Other			422				-				-				-				(32)				-				-				-				(32)				390
Other operating income			3,102				86				(277)				(97)				(20)				252				(5)				16				(45)				3,057
Operating income			10,240				86				(277)				(97)				(20)				252				(5)				16				(45)				10,195
Operating expenses			(4,603)				-				-				-				-				-				-				-				-				(4,603)
Profit before credit impairment and tax			5,637				86				(277)				(97)				(20)				252				(5)				16				(45)				5,592
Credit impairment charge			(494)				-				-				-				-				-				-				(16)				(16)				(510)
Profit before income tax			5,143				86				(277)				(97)				(20)				252				(5)				-				(61)				5,082
Income tax expense			(1,629)				(7)				277				30				6				(76)				1				-				231				(1,398)
Non-controlling interests			(8)				-				-				-				-				-				-				-				-				(8)
Profit			3,506				79				-				(67)				(14)				176				(4)				-				170				3,676

 

96

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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – TABLE OF CONTENTS

 

 

 

CONTENTS		PAGE
Directors’ Report			98
Condensed Consolidated Income Statement			99
Condensed Consolidated Statement of Comprehensive Income			100
Condensed Consolidated Balance Sheet			101
Condensed Consolidated Cash Flow Statement			102
Condensed Consolidated Statement of Changes in Equity			103
Notes to Condensed Consolidated Financial Statements			104
Directors’ Declaration and Responsibility Statement			127
Auditor’s Review Report and Independence Declaration			128

 

97

---

DIRECTORS’ REPORT

 

 

The Directors present their report on the Condensed Consolidated Financial Statements for the half year ended 31 March 2016.

Directors

The names of the Directors of the Company who held office during and since the end of the half year are:

 

Mr DM Gonski, AC		Chairman
Mr SC Elliott		Director and Chief Executive Officer, since 1 January 2016
Ms IR Atlas		Director
Ms PJ Dwyer		Director
Mr Lee Hsien Yang		Director
Mr GR Liebelt		Director
Mr IJ Macfarlane, AC		Director
Mr JT Macfarlane		Director
Mr MRP Smith, OBE		Director, retired on 31 December 2015

Result

The consolidated profit attributable to shareholders of the Company was $2,738 million. Further details are contained in Group Results on pages 21 to 47 which forms part of this report, and in the Condensed Consolidated Financial Statements.

Review of operations

A review of the operations of the Group during the half year and the results of those operations are contained in the Group Results on pages 21 to 47 which forms part of this report.

Lead auditor’s independence declaration

The lead auditor’s independence declaration given under section 307C of the Corporations Act 2001 (as amended) is set out on page 128 which forms part of this report.

Rounding of amounts

The amounts contained in these Condensed Consolidated Financial Statements have been rounded to the nearest million dollars, except where otherwise indicated, as permitted by ASIC Class Order 98/100.

Significant events since balance date

There have been no significant events from 31 March 2016 to the date of this report.

Signed in accordance with a resolution of the Directors.

 

/s/ David M Gonski, AC		/s/ Shayne C Elliott
David M Gonski, AC Chairman		Shayne C Elliott Director

2 May 2016

 

98

---

CONDENSED CONSOLIDATED INCOME STATEMENT

 

 

Australia and New Zealand Banking Group Limited

 

				Half Year								Movement
		Note		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16             v. Sep 15		Mar 16         v. Mar 15
Interest income				15,090		15,132		15,394				0%		-2%
Interest expense				(7,522)		(7,654)		(8,256)				-2%		-9%
Net interest income		2		7,568		7,478		7,138				1%		6%
Other operating income1		2		1,539		2,266		1,768				-32%		-13%
Net funds management and insurance income1		2		857		795		1,020				8%		-16%
Share of associates’ profit		2,18		301		311		314				-3%		-4%
Operating income				10,265		10,850		10,240				-5%		0%
Operating expenses1		3		(5,479)		(4,775)		(4,603)				15%		19%
Profit before credit impairment and income tax				4,786		6,075		5,637				-21%		-15%
Credit impairment charge		10		(904)		(685)		(494)				32%		83%
Profit before income tax				3,882		5,390		5,143				-28%		-25%
Income tax expense		4		(1,140)		(1,397)		(1,629)				-18%		-30%
Profit for the period				2,742		3,993		3,514				-31%		-22%
Comprising:
Profit attributable to non-controlling interests				4		6		8				-33%		-50%
Profit attributable to shareholders of the Company				2,738		3,987		3,506				-31%		-22%
Earnings per ordinary share (cents)
Basic		6		94.8		143.4		128.0				-34%		-26%
Diluted		6		89.7		134.9		124.6				-34%		-28%
Dividend per ordinary share (cents)		5		80		95		86				-16%		-7%

 

1.	Comparatives have changed; refer Note 2 Income and Note 3 Operating expenses for further details.

The notes appearing on pages 104 to 126 form an integral part of the Condensed Consolidated Financial Statements.

 

99

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CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

Australia and New Zealand Banking Group Limited

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16         v. Sep 15		Mar 16         v. Mar 15
Profit for the period		2,742		3,993		3,514				-31%		-22%
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Remeasurement gain/(loss) on defined benefit plans		(4)		(4)		(2)				0%		100%
Fair value gain/(loss) attributable to changes in own credit risk of financial liabilities designated at fair value		11		39		13				-72%		-15%
Income tax on items that will not be reclassified subsequently to profit or loss
Remeasurement gain/(loss) on defined benefit plans		1		1		3				0%		-67%
Fair value gain/(loss) attributable to changes in own credit risk of financial liabilities designated at fair value		(3)		(11)		(4)				-73%		-25%
Items that may be reclassified subsequently to profit or loss
Foreign currency translation reserve
Exchange differences taken to equity1		(1,015)		(445)		2,181				large		large
Exchange differences transferred to income statement		(126)		(4)		-				large		n/a
Available-for-sale revaluation reserve
Valuation gain/(loss) taken to equity		(11)		(157)		117				-93%		large
Transferred to income statement		(31)		(21)		(50)				48%		-38%
Cash flow hedge reserve
Valuation gain/(loss) taken to equity		(60)		(77)		237				-22%		large
Transferred to income statement		14		(3)		(12)				large		large
Income tax on items that may be reclassified subsequently to profit or loss
Available-for-sale assets revaluation reserve		16		53		(17)				-70%		large
Cash flow hedge reserve		16		24		(69)				-33%		large
Share of associates’ other comprehensive income2		(6)		9		50				large		large
Other comprehensive income net of tax		(1,198)		(596)		2,447				large		large
Total comprehensive income for the period		1,544		3,397		5,961				-55%		-74%
Comprising total comprehensive income attributable to:
Non-controlling interests		(4)		12		18				large		large
Shareholders of the Company		1,548		3,385		5,943				-54%		-74%

 

1.	Includes foreign currency translation differences attributable to non-controlling interests of $8 million loss (Sep 15 half: $6 million gain; Mar 15 half: $10 million gain).

 

2.

Share of associates other comprehensive income includes the following items that may be reclassified subsequently to profit and loss: an Available-for-sale revaluation reserve loss of $11 million (Sep 15 half: $6 million gain; Mar 15 half: $47 million gain) and a Foreign currency translation reserve gain of $5 million (Sep 15 half: $5 million gain; Mar 15 half: $3 million gain), as well as items that will not be reclassified subsequently to profit or loss comprised of the remeasurement gain or loss on defined benefit plans of nil (Sep 15 half: $2 million loss; Mar 15 half: nil).

The notes appearing on pages 104 to 126 form an integral part of the Condensed Consolidated Financial Statements.

 

100

---

CONDENSED CONSOLIDATED BALANCE SHEET

 

 

Australia and New Zealand Banking Group Limited

 

				As at								Movement
Assets		Note		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16     v. Sep 15		Mar 16     v. Mar 15
Cash				49,144		53,903		46,004				-9%		7%
Settlement balances owed to ANZ				26,048		18,596		22,570				40%		15%
Collateral paid				12,783		9,967		10,707				28%		19%
Trading securities				50,073		49,000		51,386				2%		-3%
Derivative financial instruments				88,747		85,625		73,580				4%		21%
Available-for-sale assets				50,377		43,667		38,336				15%		31%
Net loans and advances		9		561,768		562,173		558,203				0%		1%
Regulatory deposits				2,135		1,773		1,804				20%		18%
Investment in associates				4,213		5,440		5,315				-23%		-21%
Current tax assets				289		90		38				large		large
Deferred tax assets				578		402		162				44%		large
Goodwill and other intangible assets				7,585		8,312		8,384				-9%		-10%
Investments backing policy liabilities				34,541		34,820		36,495				-1%		-5%
Premises and equipment				2,188		2,221		2,203				-1%		-1%
Other assets				4,809		5,846		4,900				-18%		-2%
Esanda dealer finance assets held for sale		9		-		8,065		-				-100%		n/a
Total assets				895,278		889,900		860,087				1%		4%
Liabilities
Settlement balances owed by ANZ				13,626		11,250		7,759				21%		76%
Collateral received				6,615		7,829		4,844				-16%		37%
Deposits and other borrowings		11		578,071		570,794		567,215				1%		2%
Derivative financial instruments				91,706		81,270		73,210				13%		25%
Current tax liabilities				129		267		123				-52%		5%
Deferred tax liabilities				286		249		322				15%		-11%
Policy liabilities				35,159		35,401		36,820				-1%		-5%
External unit holder liabilities (life insurance funds)				3,265		3,291		3,489				-1%		-6%
Provisions				1,202		1,074		1,128				12%		7%
Payables and other liabilities				9,251		10,366		10,999				-11%		-16%
Debt issuances				81,947		93,747		85,664				-13%		-4%
Subordinated debt		12		17,557		17,009		16,463				3%		7%
Total liabilities				838,814		832,547		808,036				1%		4%
Net assets				56,464		57,353		52,051				-2%		8%
Shareholders’ equity
Ordinary share capital				28,625		28,367		24,152				1%		19%
Reserves				377		1,571		2,188				-76%		-83%
Retained earnings				27,361		27,309		25,616				0%		7%
Share capital and reserves attributable to shareholders of the Company		16		56,363		57,247		51,956				-2%		8%
Non-controlling interests				101		106		95				-5%		6%
Total shareholders’ equity		16		56,464		57,353		52,051				-2%		8%

The notes appearing on pages 104 to 126 form an integral part of the Condensed Consolidated Financial Statements.

 

101

---

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

 

 

Australia and New Zealand Banking Group Limited

 

				Half Year
				Inflows     (Outflows)		Inflows     (Outflows)		Inflows     (Outflows)
		Note		Mar 16 $M		Sep 15 $M		Mar 15 $M
Cash flows from operating activities
Interest received				14,977		15,269		15,398
Interest paid				(7,657)		(7,145)		(8,313)
Dividends received				12		202		29
Other operating income received				1,848		6,862		11,374
Other operating expenses paid				(4,373)		(4,322)		(4,270)
Income taxes paid				(1,555)		(1,433)		(1,649)
Net cash flows from funds management and insurance business
Premiums, other income and life investment deposits received				3,396		4,023		3,622
Investment income and policy deposits received				107		95		191
Claims and policy liability payments				(2,800)		(2,949)		(3,006)
Commission expense paid				(281)		(308)		(303)
Cash flows from operating activities before changes in operating assets and liabilities				3,674		10,294		13,073
Changes in operating assets and liabilities arising from cash flow movements
(Increase)/decrease in operating assets
Collateral paid				(3,462)		920		(4,505)
Trading securities				(2,160)		2,460		410
Net loans and advances				(6,440)		(15,554)		(16,726)
Net cash flows from investments backing policy liabilities
Purchase of insurance assets				(7,255)		(3,484)		(3,581)
Proceeds from sale/maturity of insurance assets				7,660		3,501		3,738
Increase/(decrease) in operating liabilities
Deposits and other borrowings				20,283		(533)		30,583
Settlement balances owed by ANZ				2,517		3,476		(2,695)
Collateral received				(744)		2,437		(1,364)
Payables and other liabilities				(2,638)		(1,406)		432
Change in operating assets and liabilities arising from cash flow movements				7,761		(8,183)		6,292
Net cash provided by operating activities				11,435		2,111		19,365
Cash flows from investing activities
Available-for-sale assets
Purchases				(21,486)		(9,033)		(15,203)
Proceeds from sale or maturity				13,457		5,384		10,321
Controlled entities and associates
Proceeds on sale of businesses				-		-		4
Premises and equipment
Purchases				(186)		(202)		(119)
Proceeds from sale				37		-		-
Esanda Dealer Finance divestment				6,682		-		-
Other assets				305		(781)		(147)
Net cash (used in) investing activities				(1,191)		(4,632)		(5,144)
Cash flows from financing activities
Debt issuances
Issue proceeds				10,611		8,040		8,597
Redemptions				(16,816)		(6,834)		(9,132)
Subordinated debt
Issue proceeds				943		186		2,497
Dividends paid				(2,485)		(1,453)		(2,310)
Share capital issues				-		3,207		-
Preference shares bought back				-		-		(755)
Net cash (used in) / provided by financing activities				(7,747)		3,146		(1,103)
Net increase in cash and cash equivalents				2,497		625		13,118
Cash and cash equivalents at beginning of period				69,278		65,462		48,229
Effects of exchange rate changes on cash and cash equivalents				(3,064)		3,191		4,115
Cash and cash equivalents at end of period		8		68,711		69,278		65,462

The notes appearing on pages 104 to 126 form an integral part of the Condensed Consolidated Financial Statements.

 

102

---

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

Australia and New Zealand Banking Group Limited

 

		Ordinary share capital   $M				Preference share capital   $M				Reserves1   $M				Retained   earnings   $M				Share capital and reserves attributable to shareholders of the Company   $M				Non-   controlling interests   $M				Total   Shareholders’ equity   $M
As at 1 October 2014			24,031				871				(239)				24,544				49,207				77				49,284
Profit or loss			-				-				-				3,506				3,506				8				3,514
Other comprehensive income for the period			-				-				2,427				10				2,437				10				2,447
Total comprehensive income for the period			-				-				2,427				3,516				5,943				18				5,961
Transactions with equity holders in their capacity as equity holders:
Dividends paid			-				-				-				(2,579)				(2,579)				-				(2,579)
Dividend income on treasury shares held within the Group’s life insurance statutory funds			-				-				-				12				12				-				12
Dividend reinvestment plan			257				-				-				-				257				-				257
Preference shares bought back			-				(871)				-				-				(871)				-				(871)
Other equity movements:
Share based payments			-				-				7				-				7				-				7
Treasury shares Wealth adjustment			(39)				-				-				-				(39)				-				(39)
Group employee share acquisition scheme			(97)				-				-				-				(97)				-				(97)
Transfer of options/rights lapsed			-				-				(7)				7				-				-				-
Foreign exchange gains on preference share capital bought back			-				-				-				116				116				-				116
As at 31 March 2015			24,152				-				2,188				25,616				51,956				95				52,051
Profit or loss			-				-				-				3,987				3,987				6				3,993
Other comprehensive income for the period			-				-				(625)				23				(602)				6				(596)
Total comprehensive income for the period			-				-				(625)				4,010				3,385				12				3,397
Transactions with equity holders in their capacity as equity holders:
Dividends paid			-				-				-				(2,328)				(2,328)				(1)				(2,329)
Dividend income on treasury shares held within the Group’s life insurance statutory funds			-				-				-				10				10				-				10
Dividend reinvestment plan			865				-				-				-				865				-				865
Other equity movements:
Share based payments			-				-				9				-				9				-				9
Share Placement and Purchase Plan			3,206				-				-				-				3,206				-				3,206
Group share option scheme			2				-				-				-				2				-				2
Treasury shares Wealth adjustment			44				-				-				-				44				-				44
Group employee share acquisition scheme			98				-				-				-				98				-				98
Transfer of options/rights lapsed			-				-				(1)				1				-				-				-
As at 30 September 2015			28,367				-				1,571				27,309				57,247				106				57,353
Profit or loss			-				-				-				2,738				2,738				4				2,742
Other comprehensive income for the period			-				-				(1,195)				5				(1,190)				(8)				(1,198)
Total comprehensive income for the period			-				-				(1,195)				2,743				1,548				(4)				1,544
Transactions with equity holders in their capacity as equity holders:
Dividends paid			-				-				-				(2,711)				(2,711)				(1)				(2,712)
Dividend income on treasury shares held within the Group’s life insurance statutory funds			-				-				-				12				12				-				12
Dividend reinvestment plan			215				-				-				-				215				-				215
Other equity movements:																			-								-
Share based payments			-				-				9				-				9				-				9
Treasury shares Wealth adjustment			(13)				-				-				-				(13)				-				(13)
Group employee share acquisition scheme			56				-				-				-				56				-				56
Transfer of options/rights lapsed			-				-				(8)				8				-				-				-
As at 31 March 2016			28,625				-				377				27,361				56,363				101				56,464

 

1.	Further information on reserves is disclosed in Note 16.

The notes appearing on pages 104 to 126 form an integral part of the Condensed Consolidated Financial Statements.

 

103

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

1.	Basis of preparation

These Condensed Consolidated Financial Statements:

 

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have been prepared in accordance with the recognition and measurement requirements of Australian Accounting Standards (“AASs”);

 

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should be read in conjunction with ANZ’s Annual Financial Statements for the year ended 30 September 2015 and any public announcements made by the Parent Entity and its controlled entities (the Group) for the half year ended 31 March 2016 in accordance with the continuous disclosure obligations under the Corporations Act 2001 and the ASX Listing Rules;

 

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do not include all notes of the type normally included in ANZ’s Annual Financial Statements;

 

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are presented in Australian dollars unless otherwise stated; and

 

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were approved by the Board of Directors on 2 May 2016.

 

i)	Statement of Compliance

These Condensed Consolidated Financial Statements have been prepared in accordance with the Corporations Act 2001 and AASB 134 which ensures compliance with IAS 34 Interim Financial Reporting.

 

ii)	Accounting policies

These Condensed Consolidated Financial Statements have been prepared on the basis of accounting policies and using methods of computation consistent with those applied in the 2015 ANZ Annual Financial Statements.

 

iii)

Software

In the current period the Group made a number of changes to the way in which it applies its accounting policy relating to the capitalisation of internally generated software assets by increasing the threshold for capitalisation of software development spend, reflecting the increasingly shorter useful life of smaller items of software, and direct expensing of more project related costs. The impact of the change was an accelerated amortisation charge of $556 million relating to previously capitalised software balances (of this, $88 million would otherwise have been amortised during the March 2016 half) and higher operating expenses during the period of $161 million relating to development costs that would otherwise have been capitalised. These costs would otherwise have been amortised to the Income Statement in future periods of up to 5 years.

 

iv)	Basis of measurement

The financial information has been prepared in accordance with the historical cost basis except that the following assets and liabilities are stated at their fair value:

 

¡

derivative financial instruments as well as, in the case of fair value hedging, the fair value adjustment on the underlying hedged exposure;

 

¡

available-for-sale financial assets;

 

¡

financial instruments held for trading; and

 

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assets and liabilities designated at fair value through profit and loss.

In accordance with AASB 1038 Life Insurance Contracts, life insurance liabilities are measured using the Margin on Services model.

In accordance with AASB 119 Employee Benefits, defined benefit obligations are measured using the Projected Unit Credit method.

 

v)	Use of estimates, assumptions and judgments

The preparation of these Condensed Consolidated Financial Statements requires the use of management judgement, estimates and assumptions that affect reported amounts and the application of accounting policies. Discussion of the critical accounting estimates and judgements, which include complex or subjective decisions or assessments are covered in Note 2 of the 2015 Annual Financial Statements. Such estimates and judgements are reviewed on an ongoing basis.

At 31 March 2016, the impairment assessment of non-lending assets identified that two of the Group’s associate investments (AMMB Holdings Berhad (Ambank) and PT Bank Pan Indonesia (PT Panin)) had indicators of impairment; specifically their market value (based on share price) was below their carrying value. The Group performed value in use (VIU) calculations to assess if the carrying value of the investments were impaired.

The VIU calculation is sensitive to a number of key assumptions, including discount rate, long term growth rates, future profitability and capital levels. The key assumptions used in the value in use calculations are outlined below:

 

		As at 31 Mar 16
		Ambank				PT Panin
Pre-tax discount rate			10.1%				13.7%
Terminal growth rate			5.0%				5.7%
Expected NPAT growth (compound annual growth rate – 5 years)			3.4%				5.0%
Core equity tier 1 rate			10% to 12.2%				11.3%

The VIU calculation continued to support the carrying value of the investment in PT Panin, however the VIU did not support the carrying value of the Group’s investment in Ambank. As a consequence the Group recorded an impairment charge of $260 million in the half year. The associate investment in Ambank forms part of the TSO and Group Centre operating segment.

 

104

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

vi)	Rounding of amounts

The amounts contained in these Condensed Consolidated Financial Statements have been rounded to the nearest million dollars, except where otherwise indicated, as permitted by Australian Securities and Investments Commission Class Order 98/100.

 

vii)	Comparatives

Certain amounts in the comparative information have been reclassified to conform to current period financial statement presentation.

 

vii)	New accounting standards not yet effective

The following accounting standards relevant to the Group have been issued but are not yet effective and have not been applied in these Condensed Consolidated Financial Statements:

AASB 9 Financial Instruments (‘AASB 9’)

The Australian Accounting Standards Board (AASB) issued the final version of AASB 9 in December 2014. When operative, this standard will replace AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 addresses recognition and measurement requirements for financial assets and financial liabilities, impairment requirements that introduce an expected credit loss impairment model and general hedge accounting requirements which more closely align with risk management activities undertaken when hedging financial and non-financial risks.

AASB 9 is not mandatorily effective for the Group until 1 October 2018. The Group is in the process of assessing the impact of application of AASB 9 and is not yet able to reasonably estimate the impact on its financial statements.

The Group early adopted, in isolation, the part of AASB 9 relating to gains and losses attributable to changes in own credit risk of financial liabilities designated as fair value through profit or loss in the financial year ended 30 September 2014.

AASB 15 Revenue from Contracts with Customers (‘AASB 15’)

The AASB issued the final version of AASB 15 in December 2014. The standard is not mandatorily effective for the Group until 1 October 2018. AASB 15 contains new requirements for the recognition of revenue and additional disclosures about revenue.

While it is expected that a significant proportion of the Group’s revenue will be outside the scope of AASB 15, the Group is in the process of assessing the impact of application of AASB 15 and is not yet able to reasonably estimate the impact on its financial statements.

AASB 16 Leases (‘AASB 16’)

The AASB issued the final version of AASB 16 in February 2016. The standard is not mandatorily effective for the Group until 1 October 2019. AASB 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. AASB 16 substantially carries forward the lessor accounting requirements in AASB 117 Leases. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.

The Group is in the process of assessing the impact of AASB 16 and is not yet able to reasonably estimate the impact on its financial statements.

 

105

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

2.

Income

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Interest income		15,090		15,132		15,394				0%		-2%
Interest expense		(7,522)		(7,654)		(8,256)				-2%		-9%
Net interest income		7,568		7,478		7,138				1%		6%
i) Fee and commission income
Lending fees1		391		411		422				-5%		-7%
Non-lending fees and commissions2		1,451		1,464		1,421				-1%		2%
Total fee and commission income2		1,842		1,875		1,843				-2%		0%
Fee and commission expense2,3		(574)		(547)		(540)				5%		6%
Net fee and commission income2,3		1,268		1,328		1,303				-5%		-3%
ii) Net funds management and insurance income
Funds management income2		446		458		484				-3%		-8%
Investment income		470		(1,301)		3,149				large		-85%
Insurance premium income2		780		865		768				-10%		2%
Commission (expense)		(192)		(213)		(239)				-10%		-20%
Claims2		(358)		(387)		(356)				-7%		1%
Changes in policy liabilities4		(323)		1,266		(2,700)				large		-88%
Elimination of treasury share (gain)/loss		34		107		(86)				-68%		large
Total net funds management and insurance income2		857		795		1,020				8%		-16%
iii) Share of associates’ profit		301		311		314				-3%		-4%
iv) Other income
Net foreign exchange earnings2		602		747		258				-19%		large
Net gain/(loss) from trading securities and derivatives2		(85)		(220)		95				-61%		large
Credit risk on credit intermediation trades		3		3		5				0%		-40%
Movement on financial instruments measured at fair value through profit & loss5		(155)		209		32				large		large
Brokerage income		25		24		34				4%		-26%
Impairment of Ambank		(260)		-		-				n/a		n/a
Gain on cessation of equity accounting of investment in Bank of Tianjin (BoT)		29		-		-				n/a		n/a
Gain on Esanda Dealer Finance divestment		66		-		-				n/a		n/a
Other2		46		175		41				-74%		12%
Total other income2,5		271		938		465				-71%		-42%
Total other operating income2,6		2,697		3,372		3,102				-20%		-13%
Total income2		17,787		18,504		18,496				-4%		-4%

 

1.	Lending fees exclude fees treated as part of the effective yield calculation in interest income.

 

2.

Certain insurance related income and card related fees have been reclassified within other operating income and operating expenses in the current period to better reflect the nature of the items. Comparatives have been restated. For the Sep 15 half, insurance and other wealth related income of $38 million was reclassified from other operating income to net funds management and insurance income (Mar 15: $41 million) and $9 million of card related fees were reclassified from other operating income to operating expenses (Mar 15: $10 million).

 

3.	Includes interchange fees paid.

 

4.	Includes policyholder tax gross up, which represents contribution tax (recovered at 15% on the super contributions made by members) debited to the policyholder account once a year in July when the statement is issued to the members at the end of the 30 June financial year.

 

5.

Includes fair value movements (excluding realised and accrued interest) on derivatives not designated as accounting hedges entered into to manage interest rate and foreign exchange risk on funding instruments, ineffective portions of cash flow hedges, and fair value movements in financial assets and liabilities designated at fair value through profit and loss.

 

6.	Total other operating income includes external dividend income of nil (Sep 15 half: $0.8 million; Mar 15 half: nil).

 

106

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

3.	Operating expenses

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Personnel
Employee entitlements and taxes		133		170		155				-22%		-14%
Salaries and wages		2,024		1,867		1,852				8%		9%
Superannuation costs - defined benefit plans		-		4		3				-100%		-100%
Superannuation costs - defined contribution plans		169		169		155				0%		9%
Equity-settled share-based payments		92		108		108				-15%		-15%
Other		383		446		442				-14%		-13%
Total personnel expenses		2,801		2,764		2,715				1%		3%
Premises
Depreciation and amortisation		97		95		97				2%		0%
Rent		245		241		238				2%		3%
Utilities and other outgoings		84		93		87				-10%		-3%
Other		32		38		33				-16%		-3%
Total premises expenses		458		467		455				-2%		1%
Technology
Data communications		68		65		50				5%		36%
Depreciation and amortisation1		870		343		332				large		large
Licences and outsourced services		275		238		209				16%		32%
Rentals and repairs		89		80		78				11%		14%
Software impairment		2		13		4				-85%		-50%
Other		20		22		28				-9%		-29%
Total technology expenses		1,324		761		701				74%		89%
Restructuring		138		21		10				large		large
Other
Advertising and public relations2		132		181		144				-27%		-8%
Audit and other fees		10		10		11				0%		-9%
Non-lending losses, frauds and forgeries		62		31		35				100%		77%
Professional fees		186		182		142				2%		31%
Travel and entertainment expenses		86		105		100				-18%		-14%
Amortisation and impairment of other intangible assets		43		44		44				-2%		-2%
Freight, stationery, postage and telephone		135		136		127				-1%		6%
Other2		104		73		119				42%		-13%
Total other expenses2		758		762		722				-1%		5%
Total operating expenses2		5,479		4,775		4,603				15%		19%

 

1.	The March 2016 half includes a $556 million charge for accelerated amortisation associated with the software capitalisation changes.

 

2.

Certain cards related fees that are integral to the generation of income were reclassified from operating expenses to other operating income to better reflect the nature of the items and comparatives were restated. For the September 15 half $9 million of card related fees were reclassified from other operating income to operating expenses (Mar 15: $10 million).

 

107

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

4.	Income tax expense

Reconciliation of the prima facie income tax expense on pre-tax profit with the income tax expense charged in the Income Statement

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Profit before income tax		3,882		5,390		5,143				-28%		-25%
Prima facie income tax expense at 30%		1,165		1,617		1,543				-28%		-24%
Tax effect of permanent differences:
Overseas tax rate differential		(25)		(36)		(59)				-31%		-58%
Rebateable and non-assessable dividends		-		(1)		(1)				-100%		-100%
Share of associates’ profit		(90)		(93)		(94)				-3%		-4%
Offshore Banking Unit		-		(1)		-				-100%		n/a
Wealth - Policyholder income and contributions tax		23		(64)		194				large		-88%
Wealth - Tax consolidation benefit		-		(56)		-				-100%		n/a
Impairment of Ambank		78		-		-				n/a		n/a
Gain on cessation of equity accounting for BoT		(9)		-		-				n/a		n/a
Tax provisions no longer required		(28)		-		(17)				n/a		65%
Interest on Convertible Instruments		35		35		37				0%		-5%
Other		1		(4)		26				large		-96%
		1,150		1,397		1,629				-18%		-29%
Income tax under/(over) provided in previous years		(10)		-		-				n/a		n/a
Total income tax expense charged in the income statement		1,140		1,397		1,629				-18%		-30%
Australia		799		972		1,171				-18%		-32%
Overseas		341		425		458				-20%		-26%
		1,140		1,397		1,629				-18%		-30%
Effective Tax Rate - Group		29.4%		25.9%		31.7%

 

5.

Dividends

 

		Half Year								Movement
Dividend per ordinary share (cents)		Mar 16		Sep 15		Mar 15				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Interim (fully franked)		80		-		86				n/a		-7%
Final (fully franked)		-		95		-				n/a		n/a
Total		80		95		86				-16%		-7%
Ordinary share dividend ($M)1
Interim dividend		-		2,379		-				n/a		n/a
Final dividend		2,758		-		2,619				n/a		5%
Bonus option plan adjustment		(47)		(51)		(41)				-8%		15%
Total2		2,711		2,328		2,578				16%		5%
Ordinary share dividend payout ratio (%)3		85.2%		69.2%		67.9%

 

1.	Dividends paid to ordinary equity holders of the Company. Excludes dividends paid by subsidiaries of the Group to non-controlling equity holders of $1.4 million (Sep 15 half: $1 million; Mar 15 half: nil).

 

2.	Dividends payable are not accrued and are recorded when paid.

 

3.

Dividend payout ratio is calculated using proposed 2016 interim dividend of $2,334 million (not shown in the above table). The proposed 2016 interim dividend of $2,334 million is based on the forecast number of ordinary shares on issue at the dividend record date. Dividend payout ratios for the September 2015 half and March 2015 half are calculated using actual dividends paid of $2,758 million and $2,379 million respectively. Dividend payout ratio is calculated by adjusting profit attributable to shareholders of the Company by the amount of preference share dividends paid.

Ordinary Shares

The Directors propose that an interim dividend of 80 cents be paid on each eligible fully paid ANZ ordinary share on 1 July 2016. The proposed 2016 interim dividend will be fully franked for Australian tax purposes, and New Zealand imputation credits of NZ 10 cents per ordinary share will also be attached.

ANZ has a Dividend Reinvestment Plan (DRP) and a Bonus Option Plan (BOP) that will operate in respect of the proposed 2016 interim dividend. For the 2016 interim dividend, ANZ intends to provide shares under the DRP and BOP through the issue of new shares. The “Acquisition Price” to be used in determining the number of shares to be provided under the DRP and BOP will be calculated by reference to the arithmetic average of the daily volume weighted average sale price of all fully paid ANZ ordinary shares sold in the ordinary course of trading on the ASX during the ten trading days commencing on 13 May 2016, and then rounded to the nearest whole cent. Shares provided under the DRP and BOP will rank equally in all respects with existing fully paid ANZ ordinary shares. Election notices from shareholders wanting to commence, cease or vary their participation in the DRP or BOP for the 2016 interim dividend must be received by ANZ’s Share Registrar by 5.00pm (Australian Eastern Standard Time) on 11 May 2016.

 

108

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Subject to receiving effective contrary instructions from the shareholder, dividends payable to shareholders with a registered address in the United Kingdom (including the Channel Islands and the Isle of Man) or New Zealand will be converted to Pounds Sterling or New Zealand Dollars respectively at an exchange rate calculated on 13 May 2016.

Preference Shares

The Euro Trust Securities were bought back by ANZ for cash at face value and cancelled on 15 December 2014. During the period from 1 October 2014 to 15 December 2014, $1 million of preference share dividends were paid to security holders (€1.88 per preference share).

 

6.	Earnings per share

 

		Half Year								Movement
		Mar 16		Sep 15		Mar 15				Mar 16       v. Sep 15		Mar 16     v. Mar 15
Number of fully paid ordinary shares on issue (M)1		2,917.6		2,902.7		2,766.0				1%		5%
Basic
Profit attributable to shareholders of the Company ($M)		2,738		3,987		3,506				-31%		-22%
Less Preference share dividends ($M)		-		-		(1)				n/a		-100%
Profit less preference share dividends ($M)		2,738		3,987		3,505				-31%		-22%
Weighted average number of ordinary shares (M)2		2,889.3		2,780.6		2,737.3				4%		6%
Basic earnings per share (cents)3		94.8		143.4		128.0				-34%		-26%
Diluted
Profit less preference share dividends ($M)		2,738		3,987		3,505				-31%		-22%
Interest on ANZ Convertible Preference Shares ($M)4		62		61		67				2%		-7%
Interest on ANZ Capital Notes ($M)5		73		74		60				-1%		22%
Interest on ANZ NZ Capital Notes ($M)6		12		12		-				0%		n/a
Profit less preference share dividends and interest on ANZ Convertible Preference Shares, ANZ Capital Notes and ANZ NZ Capital Notes ($M)		2,885		4,134		3,632				-30%		-21%
Weighted average number of shares on issue (M)2		2,889.3		2,780.6		2,737.3				4%		6%
Weighted average number of convertible options (M)		6.9		6.3		6.2				10%		11%
Weighted average number of ANZ Convertible Preference Shares (M)4		142.5		123.4		91.2				15%		56%
Weighted average number of convertible ANZ Capital Notes (M)5		159.3		138.0		79.3				15%		large
Weighted average number of convertible ANZ NZ Capital Notes (M)6		19.4		17.0		0.1				14%		large
Adjusted weighted average number of shares - diluted (M)		3,217.4		3,065.3		2,914.1				5%		10%
Diluted earnings per share (cents)3		89.7		134.9		124.6				-34%		-28%

 

1.

Number of fully paid ordinary shares on issue includes Treasury shares of 23.0 million at 31 March 2016 (Sep 15: 23.0 million; Mar 15: 24.6 million), comprised of 11.0 million in ANZEST Pty Ltd (Sep 15: 11.4 million; Mar 15: 11.5 million) and 12.0 million held in Wealth (Sep 15: 11.6 million; Mar 15: 13.1 million). Number of fully paid ordinary shares also includes 80.8 million resulting from the Institutional share placement on 13 August 2015 and 27.3 million resulting from the Retail share purchase plan on 17 September 2015.

 

2.

Weighted average number of ordinary shares excludes 10.7 million weighted average number of ordinary Treasury shares for the half year ended 31 March 2016 held in ANZEST Pty Ltd for the group employee share acquisition scheme (Sep 15: 11.4 million; Mar 15: 12.3 million) and excludes 12.1 million weighted average number of ordinary Treasury shares for the half year ended 31 March 2016 held in Wealth (Sep 15: 12.1 million; Mar 15: 12.7 million).

 

3.

Basic earnings per share was reduced by 3.6 cents for the half year ended 31 March 2016 (Sep 15: 1.2 cents per share) and Diluted earnings per share was reduced by 3.1 cents (Sep 15: 1.0 cents per share) as a result of the Institutional share placement and the Retail share purchase plan which increased the weighted average number of ordinary shares by 108.0 million for the half year ended 31 March 2016 (Sep 15: 23.7 million).

 

4.

There are two “tranches” of convertible preference shares. The first are convertible preference shares (CPS2) issued on 17 December 2009 that convert to ordinary shares on 15 December 2016 at the market price of ANZ ordinary shares less 1.0% (subject to certain conversion conditions). The second are convertible preference shares (CPS3) issued on 28 September 2011 that convert to ordinary shares on 1 September 2019 at the market price of ANZ ordinary shares less 1.0% (subject to certain conversion conditions).

 

5.

There are three “tranches” of ANZ Capital Notes. The first are ANZ Capital Notes 1 (CN1) issued on 7 August 2013 which convert to ANZ ordinary shares on 1 September 2023 at the market price of ANZ ordinary shares less 1.0% (subject to certain conversion conditions). The second are ANZ Capital Notes 2 (CN2) issued on 31 March 2014 which convert to ANZ ordinary shares on 24 March 2024 at the market price of ANZ ordinary shares less 1.0% (subject to certain conversion conditions). The third are ANZ Capital Notes 3 (CN3) issued on 5 March 2015 which convert to ANZ ordinary shares on 24 March 2025 at the market price of ANZ ordinary shares less 1.0% (subject to certain conversion conditions).

 

6.	ANZ Bank New Zealand Limited issued ANZ NZ Capital Notes on 31 March 2015 which convert to ANZ ordinary shares on 25 May 2022 at the market price of ANZ ordinary shares less 1.0% (subject to certain conversion conditions).

 

109

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

7.	Segment analysis

(i)   Description of segments

During the March 2016 half, the Group announced changes to the organisation’s structure to better meet the needs of our retail, commercial and institutional customers. As a result of these organisational changes there are six reported divisions; Australia, New Zealand, Institutional, Asia Retail & Pacific, Wealth and Technology, Services & Operations (“TSO”) and Group Centre. These divisions were created by removing the Asia Retail & Pacific business from the former International & Institutional Banking (“IIB”) division, and repositioning minority investments in Asia from IIB to the Group Centre. The residual IIB business has been renamed Institutional.

The Wealth changes designed to simplify the approach to the wealth management business will not take effect until 1 April 2016. For further information on the composition of the divisions refer to the Definitions on page 150.

Other than those described above, there have been no other significant structural change. However, certain prior period comparatives have been restated to align with current period presentation as a result of changes to customer segmentation and the continued realignment of support functions. The divisions reported below are consistent with internal reporting provided to the chief operating decision maker, being the Chief Executive Officer.

(ii)  Operating segments

 

				Half Year														Movement
Operating Income				Mar 16 $M		Sep 15 $M				Mar 15 $M								Mar 16     v. Sep 15		Mar 16     v. Mar 15
Australia				4,632			4,503			4,310								3%		7%
Institutional				2,713			2,792			2,970								-3%		-9%
New Zealand				1,373			1,340			1,345								2%		2%
Wealth				880			881			851								0%		3%
Asia Retail & Pacific				559			550			512								2%		9%
TSO and Group Centre1				159			276			207								-42%		-23%
Subtotal				10,316			10,342			10,195								0%		1%
Other2				(51)			508			45								large		large
Group total				10,265			10,850			10,240								-5%		0%
1.    Includes $260 million impairment of our investment in Ambank, $66 million gain arising from the Esanda Dealer Finance divestment, and the $29 million gain on cessation of equity accounting of BoT.   2.    In evaluating the performance of the operating divisions, certain items are removed from the operating division results where they are not considered integral to the ongoing performance of the segment and are evaluated separately.
				Half Year														Movement
Profit				Mar 16 $M		Sep 15 $M				Mar 15 $M								Mar 16       v. Sep 15		Mar 16     v. Mar 15
Australia				1,753			1,706			1,650								3%		6%
Institutional				632			893			1,071								-29%		-41%
New Zealand				578			561			566								3%		2%
Wealth				261			346			263								-25%		-1%
Asia Retail & Pacific				53			45			99								18%		-46%
TSO and Group Centre				(495)			(11)			27								large		large
Subtotal				2,782			3,540			3,676								-21%		-24%
Other1				(44)			447			(170)								large		-74%
Group total				2,738			3,987			3,506								-31%		-22%
1.    In evaluating the performance of the operating divisions, certain items are removed from the operating division results where they are not considered integral to the ongoing performance of the division and are evaluated separately. These items are set out in part (iii) of this note (refer pages 91 to 96 for further analysis).   (iii) Other items   The table below sets out the profit after tax impact of other items.
				Half Year														Movement
Item gains/(losses)		Related segment		Mar 16 $M		Sep 15 $M				Mar 15 $M								Mar 16 v. Sep 15		Mar 16 v. Mar 15
Treasury shares adjustment		Wealth		29			95			(79)								-69%		large
Revaluation of policy liabilities		Wealth		14			6			67								large		-79%
Economic hedging		Institutional		(128)			165			14								large		large
Revenue and net investment hedges		TSO and Group Centre		39			179			(176)								-78%		large
Structured credit intermediation trades		Institutional		2			2			4								0%		-50%
Total profit after tax				(44)			447			(170)								large		-74%

 

110

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

8.	Note to the Cash Flow Statement

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

 

		Half Year
		Inflows        (Outflows)		Inflows         (Outflows)				Inflows         (Outflows)
		Mar 16 $M		Sep 15 $M				Mar 15 $M
Profit after income tax		2,738			3,987			3,506
Adjustments to reconcile to net cash provided by/(used in) operating activities
Provision for credit impairment		904			685			494
Depreciation and amortisation		1,010			482			473
Profit on Esanda Dealer Finance divestment		(66)			-			-
(Profit)/loss on sale of premises and equipment		(10)			6			-
Net derivatives/foreign exchange adjustment		257			4,711			9,684
Equity-settled share-based payments expense1		65			107			(89)
Impairment of investment in AmBank		260			-			-
Other non-cash movements		(297)			(199)			(300)
Net (increase)/decrease in operating assets:
Trading securities		(2,160)			2,460			410
Collateral paid		(3,462)			920			(4,505)
Net loans and advances		(6,440)			(15,554)			(16,726)
Investments backing policy liabilities		(384)			1,335			(3,122)
Interest receivable		(113)			137			(31)
Accrued income		(128)			-			(44)
Net tax assets		(415)			(36)			(20)
Net increase/(decrease) in operating liabilities:
Deposits and other borrowings		20,283			(533)			30,583
Settlement balances owed by ANZ		2,517			3,476			(2,695)
Collateral received		(744)			2,437			(1,364)
Life insurance contract policy liabilities		355			(1,253)			2,760
Payables and other liabilities		(2,638)			(1,406)			432
Interest payable		(122)			507			(55)
Accrued expenses		(109)			(116)			(32)
Provisions including employee entitlements		134			(42)			6
Total adjustments		8,697			(1,876)			15,859
Net cash provided by/(used in) operating activities		11,435			2,111			19,365

 

1.	The equity settled share-based payments expense is net of on-market share purchases of $34 million (Sep 15 half: nil; Mar 15 half: $197 million) used to satisfy the obligation.

(ii) Reconciliation of cash and cash equivalents

Cash and cash equivalents at the end of the period as shown in the Cash Flow Statement are reflected in the related items in the Balance Sheet as follows:

		As at
		Mar 16 $M		Sep 15 $M				Mar 15 $M
Cash		49,144			53,903			46,004
Settlement balances owed to ANZ		19,567			15,375			19,458
		68,711			69,278			65,462
(iii) Non-cash financing and investing activities
		Half Year
Share capital issues		Mar 16 $M		Sep 15 $M				Mar 15 $M
Dividends satisfied by share issue		215			865			257
Dividends satisfied by bonus share issue		47			51			41
		262			916			298

(iv) Esanda Dealer Finance divestment

During the period, the Group received $6,682 million proceeds on the Esanda Dealer Finance divestment. The net assets sold of $6,540 million primarily included net loans and advances in the retail portfolio. This does not include the Esanda Dealer Finance bailment facilities that are progressively being transferred. No cash was included in the net assets sold.

 

111

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

9.	Net loans and advances

 

		As at								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16   v. Sep 15		Mar 16 v. Mar 15
Australia
Overdrafts		6,175		6,284		5,998				-2%		3%
Credit card outstandings		8,872		8,950		9,134				-1%		-3%
Commercial bills outstanding		10,439		10,420		10,859				0%		-4%
Term loans - housing		242,426		230,879		217,756				5%		11%
Term loans - non-housing1		118,456		124,051		118,027				-5%		0%
Lease receivables		1,255		1,346		1,345				-7%		-7%
Hire purchase		957		1,111		1,293				-14%		-26%
Other		255		114		489				large		-48%
		388,835		383,155		364,901				1%		7%
Asia Pacific, Europe & America
Overdrafts		1,175		1,616		1,643				-27%		-28%
Credit card outstandings		1,446		1,445		1,370				0%		6%
Commercial bills outstanding		2,692		3,781		3,286				-29%		-18%
Term loans - housing		7,226		7,846		7,430				-8%		-3%
Term loans - non-housing		56,429		69,669		74,041				-19%		-24%
Lease receivables		254		341		222				-26%		14%
Other		341		137		31				large		large
		69,563		84,835		88,023				-18%		-21%
New Zealand
Overdrafts		1,017		1,055		1,147				-4%		-11%
Credit card outstandings		1,517		1,535		1,609				-1%		-6%
Term loans - housing		63,649		61,743		63,311				3%		1%
Term loans - non-housing		39,003		38,973		40,259				0%		-3%
Lease receivables		206		214		250				-4%		-18%
Hire purchase		901		860		862				5%		5%
Other		-		-		123				n/a		-100%
		106,293		104,380		107,561				2%		-1%
Sub-total		564,691		572,370		560,485				-1%		1%
Unearned income		(596)		(739)		(803)				-19%		-26%
Capitalised brokerage/mortgage origination fees2		1,013		1,253		1,127				-19%		-10%
Customers’ liabilities for acceptances		760		1,371		1,422				-45%		-47%
Gross loans and advances (including assets classified as held for sale)		565,868		574,255		562,231				-1%		1%
Provision for credit impairment (refer Note 10)		(4,100)		(4,017)		(4,028)				2%		2%
Net loans and advances (including assets classified as held for sale)		561,768		570,238		558,203				-1%		1%
Assets classified as held for sale1		-		(8,065)		-				-100%		n/a
Net loans and advances		561,768		562,173		558,203				0%		1%

 

1.	Includes $766 million of Esanda Dealer Finance bailment facilities which are due to migrate to Macquarie Group Limited during the third quarter of 2016. These assets formed part of the $8,065 million classified as held for sale as at 30 September 2015.

 

2.	Capitalised brokerage/mortgage origination fees are amortised over the expected life of the loan.

 

112

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

10.	Provision for credit impairment

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Individual provision
Balance at start of period		1,061		1,114		1,176				-5%		-10%
New and increased provisions		1,137		951		806				20%		41%
Write-backs		(160)		(174)		(260)				-8%		-38%
Adjustment for exchange rate fluctuations		(26)		7		33				large		large
Discount unwind		(26)		(22)		(32)				18%		-19%
Bad debts written-off		(656)		(815)		(609)				-20%		8%
Esanda Dealer Finance divestment		(92)		-		-				n/a		n/a
Total individual provision		1,238		1,061		1,114				17%		11%
Collective provision
Balance at start of period		2,956		2,914		2,757				1%		7%
Charge/(release) to income statement		26		40		55				-35%		-53%
Adjustment for exchange rate fluctuations		(47)		2		102				large		large
Esanda Dealer Finance divestment		(73)		-		-				n/a		n/a
Total collective provision1		2,862		2,956		2,914				-3%		-2%
Total provision for credit impairment		4,100		4,017		4,028				2%		2%

 

1.

The collective provision includes amounts for off-balance sheet credit exposures of $663 million at March 2016 (Sep 15: $677 million; Mar 2015: $646 million). The impact on the income statement for the half year ended 31 March 2016 was a $3 million charge (Sep 2015 half: $20 million charge; Mar 2015 half: $7 million charge).

 

		Half Year								Movement
Provision movement analysis		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
New and increased individual provisions
Australia		738		616		587				20%		26%
Asia Pacific, Europe & America		299		227		116				32%		large
New Zealand		100		108		103				-7%		-3%
		1,137		951		806				20%		41%
Write-backs		(160)		(174)		(260)				-8%		-38%
		977		777		546				26%		79%
Recoveries of amounts previously written-off		(99)		(132)		(107)				-25%		-7%
Individual credit impairment charge		878		645		439				36%		100%
Collective credit impairment charge		26		40		55				-35%		-53%
Credit impairment charge		904		685		494				32%		83%
		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Individual provision balance
Australia		762		698		698				9%		9%
Asia Pacific, Europe & America		353		216		219				63%		61%
New Zealand		123		147		197				-16%		-38%
Total individual provision		1,238		1,061		1,114				17%		11%
Collective provision balance
Australia		1,844		1,895		1,882				-3%		-2%
Asia Pacific, Europe & America		597		636		582				-6%		3%
New Zealand		421		425		450				-1%		-6%
Total collective provision		2,862		2,956		2,914				-3%		-2%

 

113

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

11.	Deposits and other borrowings

 

		As at								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Australia
Certificates of deposit		56,513		57,390		55,857				-2%		1%
Term deposits		68,427		66,394		69,595				3%		-2%
On demand and short term deposits		169,268		164,009		150,832				3%		12%
Deposits not bearing interest		8,116		7,782		7,133				4%		14%
Deposits from banks		24,532		19,692		19,761				25%		24%
Commercial paper		15,106		15,511		11,446				-3%		32%
Securities sold under repurchase agreements		653		177		605				large		8%
		342,615		330,955		315,229				4%		9%
Asia Pacific, Europe & America
Certificates of deposit		6,888		5,379		2,354				28%		large
Term deposits		90,112		96,487		101,087				-7%		-11%
On demand and short term deposits		25,010		27,663		23,966				-10%		4%
Deposits not bearing interest		4,586		5,126		4,684				-11%		-2%
Deposits from banks		19,340		19,249		27,716				0%		-30%
Commercial paper		1,045		2,965		5,125				-65%		-80%
Securities sold under repurchase agreements		495		601		565				-18%		-12%
		147,476		157,470		165,497				-6%		-11%
New Zealand
Certificates of deposit		1,675		677		1,435				large		17%
Term deposits		33,871		31,795		34,211				7%		-1%
On demand and short term deposits		39,276		37,662		36,896				4%		6%
Deposits not bearing interest		6,552		6,103		6,148				7%		7%
Deposits from banks		127		43		43				large		large
Commercial paper		4,913		4,511		6,157				9%		-20%
Borrowing corporations’ debt		1,566		1,578		1,599				-1%		-2%
		87,980		82,369		86,489				7%		2%
Total deposits and other borrowings		578,071		570,794		567,215				1%		2%

 

114

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

12.	Subordinated debt

 

		Half Year								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Additional Tier 1 Capital1
Convertible Preference Shares (ANZ CPS)
ANZ CPS22		1,969		1,969		1,969				0%		0%
ANZ CPS33		1,338		1,336		1,335				0%		0%
ANZ Capital Notes (ANZ CN)
ANZ CN14		1,113		1,112		1,110				0%		0%
ANZ CN25		1,600		1,598		1,597				0%		0%
ANZ CN36		961		959		958				0%		0%
ANZ NZ Capital Notes7		446		449		484				-1%		-8%
Tier 2 Capital8
Perpetual subordinated notes		1,145		1,188		1,211				-4%		-5%
Term subordinated notes		8,985		8,398		7,799				7%		15%
Total subordinated debt		17,557		17,009		16,463				3%		7%

 

1.	ANZ Capital Notes and the ANZ NZ Capital Notes are Basel 3 compliant. APRA has granted transitional capital treatment for ANZ CPS2 and CPS3 until their first conversion date.

 

2.	On 17 December 2009, ANZ issued convertible preference shares (CPS2) which will convert into ANZ ordinary shares on 15 December 2016 at a 1% discount (subject to certain conditions being satisfied).

 

3.

On 28 September 2011, ANZ issued convertible preference shares (CPS3) which will convert into ANZ ordinary shares on 1 September 2019 at a 1% discount (subject to certain conditions being satisfied). If ANZ’s Common Equity Tier 1 capital ratio is equal to or less than 5.125% then the convertible preference shares will immediately convert into ANZ ordinary shares at a 1% discount subject to a maximum conversion number. Subject to certain conditions, on and from 1 September 2017 the convertible preference shares are redeemable or convertible into ANZ ordinary shares (on similar terms to the mandatory conversion) by ANZ.

 

4.

On 7 August 2013, ANZ issued convertible notes (ANZ Capital Notes 1 or CN1) which will convert into ANZ ordinary shares on 1 September 2023 at a 1% discount (subject to certain conditions being satisfied). If ANZ’s Common Equity Tier 1 capital ratio is equal to or less than 5.125%, or ANZ receives a notice of non-viability from APRA, then the notes will immediately convert into ANZ ordinary shares at a 1% discount subject to a maximum conversion number. Subject to certain conditions, on 1 September 2021 the notes are redeemable or convertible into ANZ ordinary shares (on similar terms to the mandatory conversion) by ANZ.

 

5.

On 31 March 2014, ANZ issued convertible notes (ANZ Capital Notes 2 or CN2) which will convert into ANZ ordinary shares on 24 March 2024 at a 1% discount (subject to certain conditions being satisfied). If ANZ’s Common Equity Tier 1 capital ratio is equal to or less than 5.125%, or ANZ receives a notice of non-viability from APRA, then the notes will immediately convert into ANZ ordinary shares at a 1% discount subject to a maximum conversion number. Subject to certain conditions, on 24 March 2022 the notes are redeemable or convertible into ANZ ordinary shares (on similar terms to the mandatory conversion) by ANZ.

 

6.

On 5 March 2015, ANZ acting through its New Zealand Branch issued convertible notes (ANZ Capital Notes 3 or CN3) which will convert into ANZ ordinary shares on 24 March 2025 at a 1% discount (subject to certain conditions being satisfied). If ANZ’s Common Equity Tier 1 capital ratio is equal to or less than 5.125%, or ANZ receives a notice of non-viability from APRA, then the notes will immediately convert into ANZ ordinary shares at a 1% discount subject to a maximum conversion number. Subject to certain conditions, on 24 March 2023 the notes are redeemable or convertible into ANZ ordinary shares (on similar terms to the mandatory conversion) by ANZ.

 

7.

On 31 March 2015, ANZ Bank New Zealand Limited (ANZ Bank NZ) issued convertible notes (ANZ NZ Capital Notes) which will convert into ANZ ordinary shares on 25 May 2022 at a 1% discount (subject to certain conditions being satisfied). If ANZ or ANZ Bank NZ’s Common Equity Tier 1 capital ratio is equal to or less than 5.125%, ANZ receives a notice of non-viability from APRA, ANZ Bank NZ receives a direction from RBNZ or a statutory manager is appointed to ANZ Bank NZ and makes a determination, then the notes will immediately convert into ANZ ordinary shares at a 1% discount subject to a maximum conversion number. Subject to certain conditions, on 25 May 2020 the notes are redeemable or convertible into ANZ ordinary shares (on similar terms to the mandatory conversion) by ANZ Bank NZ.

 

8.

The convertible subordinated notes are Basel 3 compliant. APRA has granted transitional capital treatment for all other outstanding subordinated notes until their first call date or, in the case of the perpetual subordinated notes the earlier of the end of the transitional period (December 2021) and the first call date when a step-up event occurs. If ANZ receives a notice of non-viability from APRA, then the convertible subordinated notes will immediately convert into ANZ ordinary shares at a 1% discount subject to a maximum conversion number.

 

115

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

13.  Credit

risk

Financial assets maximum exposure to credit risk

For financial assets recognised on the balance sheet, the maximum exposure to credit risk is the carrying amount. In certain circumstances, there may be differences between the carrying amounts reported on the balance sheet and the amounts reported in the tables below. Principally, these differences arise in respect of financial assets that are subject to risks other than credit risk, such as equity investments which are primarily subject to market risk. For contingent exposures, the maximum exposure to credit risk is the maximum amount the Group would have to pay if the instrument is called upon. For undrawn facilities, the maximum exposure to credit risk is the full amount of the committed facilities.

The following tables present the maximum exposure to credit risk of on-balance sheet and off-balance sheet financial assets before taking account of any collateral held or other credit enhancements.

 

		As at								Movement
Maximum exposure to credit risk		Mar 16 $M		Sep 15 $M1		Mar 15 $M				Mar 16   v. Sep 15		Mar 16 v. Mar 15
Net loans and advances2		561,768		570,238		558,203				-1%		1%
Other financial assets3		280,101		265,167		246,131				6%		14%
On-balance sheet sub total		841,869		835,405		804,334				1%		5%
Undrawn facilities		219,086		230,794		213,303				-5%		3%
Contingent facilities		38,750		40,335		41,018				-4%		-6%
Off-balance sheet sub total		257,836		271,129		254,321				-5%		1%
Total exposure to credit risk		1,099,705		1,106,534		1,058,655				-1%		4%

 

1.	The September 2015 half include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

2.	Includes individual and collective provisions for credit impairment held in respect of credit related commitments.

 

3.

Certain other financial assets totalling $37.1 billion (Sep 15 half: $36.6 billion; Mar 15 half: $38.2 billion) have been excluded. These are comprised of bank notes and coins within cash, equity instruments within available-for-sale financial assets and investments relating to the insurance business where the credit risk is passed onto the policy holder.

Distribution of financial assets by credit quality

 

		Net loans and advances1								Other financial assets								Credit related commitments1,2
		As at								As at								As at
		Mar 16 $M		Sep 15 $M3		Mar 15 $M				Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 $M		Sep 15 $M		Mar 15 $M
Neither past due nor impaired		545,953		556,393		543,280				280,082		265,130		246,104				257,099		270,395		253,606
Past due but not impaired		14,926		12,958		14,071				-		-		-				-		-		-
Restructured		226		184		146				-		-		-				-		-		-
Net impaired		1,355		1,403		1,385				19		37		27				45		34		36
Total		562,460		570,938		558,882				280,101		265,167		246,131				257,144		270,429		253,642

 

1.	Individual and collective provisions for credit impairment held in respect of credit related commitments have been reallocated to credit related commitments in this table.

 

2.	Comprises undrawn commitments and customer contingent liabilities net of collective and individual provisions.

 

3.	The September 2015 half include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

Credit quality of financial assets neither past due nor impaired

The credit quality of financial assets is managed by the Group using internal customer credit ratings (CCRs) based on their current probability of default. The Group’s masterscales are mapped to external rating agency scales, to enable wider comparisons.

 

		Net loans and advances								Other financial assets								Credit related commitments1
		As at								As at								As at
		Mar 16 $M		Sep 15 $M2		Mar 15 $M				Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 $M		Sep 15 $M		Mar 15 $M
Strong credit profile3		419,296		423,572		412,909				275,339		260,041		241,170				211,147		220,815		211,380
Satisfactory risk4		109,110		112,822		112,049				4,525		4,729		4,574				42,913		46,681		39,773
Sub-standard but not past due or impaired5		17,547		19,999		18,322				218		360		360				3,039		2,899		2,453
Total		545,953		556,393		543,280				280,082		265,130		246,104				257,099		270,395		253,606

 

1.	Comprises undrawn commitments and customer contingent liabilities net of collective provisions.

 

2.	The September 2015 half include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

3.

Customers that have demonstrated superior stability in their operating and financial performance over the long-term, and whose debt servicing capacity is not significantly vulnerable to foreseeable events. This rating broadly corresponds to ratings “Aaa” to “Baa3” and “AAA” to “BBB-” of Moody’s and Standard & Poor’s respectively.

 

4.

Customers that have consistently demonstrated sound operational and financial stability over the medium to long term, even though some may be susceptible to cyclical trends or variability in earnings. This rating broadly corresponds to ratings “Ba2” to “Ba3” and “BB” to “BB-” of Moody’s and Standard & Poor’s respectively.

 

5.

Customers that have demonstrated some operational and financial instability, with variability and uncertainty in profitability and liquidity projected to continue over the short and possibly medium term. This rating broadly corresponds to ratings “B1” to “Caa” and “B+” to “CCC” of Moody’s and Standard & Poor’s respectively.

 

116

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

13.	Credit Risk, cont’d

 

Ageing analysis of financial assets that are past due but not impaired

Ageing analysis of past due loans is used by the Group to measure and manage emerging credit risks. Financial assets that are past due but not impaired include those which are assessed, approved and managed on a portfolio basis within a centralised environment (for example credit cards and personal loans) that can be held on a productive basis until they are 180 days past due, as well as those which are managed on an individual basis.

A large portion of retail credit exposures, such as residential mortgages, are generally well secured. That is, the value of supporting collateral is sufficient to cover amounts outstanding.

 

		As at								Movement
Ageing analysis of net loans and advances that are past due but not impaired		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
1-5 days		2,926		2,621		3,323				12%		-12%
6-29 days		5,942		5,235		5,271				14%		13%
30-59 days		2,222		1,674		2,069				33%		7%
60-89 days		1,263		1,050		1,160				20%		9%
>90 days		2,573		2,378		2,248				8%		14%
Total		14,926		12,958		14,071				15%		6%

Financial assets that are individually impaired

ANZ regularly reviews its portfolio and monitors adherence to contractual terms. When doubt arises as to the collectability of a credit facility, the financial instrument (or ‘the facility’) is classified and reported as individually impaired and an individual provision is allocated against it.

As described in the summary of significant accounting policies in the 2015 Annual Financial Statements, impairment provisions are created for financial instruments that are reported on the balance sheet at amortised cost. For instruments reported at fair value, impairment provisions are treated as part of overall change in fair value and directly reduce the reported carrying amounts.

 

		Impaired instruments								Individual provision balances
		As at								As at
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 $M		Sep 15 $M		Mar 15 $M
Derivative financial instruments1		19		37		27				-		-		-
Net loans and advances		2,564		2,441		2,466				1,209		1,038		1,081
Credit related commitments2		74		57		69				29		23		33
Total		2,657		2,535		2,562				1,238		1,061		1,114

 

1.	Derivative financial instruments are net of credit valuation adjustments.

 

2.	Comprises undrawn commitments and customer contingent liabilities.

 

		As at								Movement
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Less than $10 million		1,597		1,748		1,903				-9%		-16%
$10 million to $100 million		970		708		607				37%		60%
Greater than $100 million		316		263		198				20%		60%
Gross impaired assets1		2,883		2,719		2,708				6%		6%
Less: Individual provision for credit impairment		(1,238)		(1,061)		(1,114)				17%		11%
Net impaired assets		1,645		1,658		1,594				-1%		3%

 

1.	Includes $226 million of restructured items (Sep 15: $184 million; Mar 15: $146 million).

 

117

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

14.	Fair Value Measurement

A significant number of financial instruments are carried on the balance sheet at fair value. The following disclosures set out the classification of financial assets and financial liabilities and, in respect of the fair value either recognised or disclosed, the various levels within which fair value measurements are categorised, and the valuation methodologies and techniques used. The fair value disclosure does not cover those instruments that are not considered financial instruments from an accounting perspective, such as intangible assets.

(i)   Financial assets and financial liabilities measured at fair value in the balance sheet

 

(a)	Valuation methodologies

ANZ has an established control framework that ensures fair value is either determined or validated by a function independent of the party that undertakes the transaction. The control framework ensures that all models are calibrated periodically to test that outputs reflect prices from observable current market transactions in the same instrument or other available observable market data.

Where quoted market prices are used, prices are independently verified from other sources. For fair values determined using a valuation model, the control framework may include, as applicable, independent development or validation of valuation models, any inputs to those models, any adjustments required outside the valuation model and, where possible, independent validation of model outputs. In this way, continued appropriateness of the valuations is ensured.

In instances where the Group holds offsetting risk positions, the Group uses the portfolio exemption in AASB 13 to measure the fair value of such groups of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (that is, an asset) for a particular risk exposure or to transfer a net short position (that is, a liability) for a particular risk exposure.

The Group categorises its fair value measurements on the basis of inputs used in measuring fair value using the fair value hierarchy below:

 

¡

Level 1 – Financial instruments that have been valued by reference to unadjusted quoted prices in active markets for identical financial instruments. This category includes financial instruments valued using quoted yields where available for specific debt securities.

 

¡

Level 2 – Financial instruments that have been valued through valuation techniques incorporating inputs other than quoted prices within Level 1 that are observable for a similar financial asset or liability, either directly or indirectly.

 

¡

Level 3 – Financial instruments that have been valued using valuation techniques which incorporate significant inputs that are not based on observable market data (unobservable inputs).

 

(b)	Valuation techniques and inputs used

In the event that there is no quoted market price for the instrument, fair value is based on valuation techniques. The valuation models incorporate the impact of bid/ask spreads, counterparty credit spreads, funding costs and other factors that would influence the fair value determined by market participants.

The majority of valuation techniques employ only observable market data. However, for certain financial instruments the valuation technique may employ some data (valuation inputs or components) which is not readily observable in the current market. In these cases valuation inputs (or components of the overall value) are derived and extrapolated from other relevant market data and tested against historic transactions and observed market trends. To the extent that valuation is based on models or inputs that are not observable in the market, the determination of fair value can be more subjective, dependent on the significance of the unobservable input to the overall valuation.

The following valuation techniques have been applied to determine the fair values of financial instruments where there is no quoted price for the instrument:

 

¡

For instruments classified as Trading security assets and Securities short sold, Derivative financial assets and liabilities, Available-for-sale assets, and Investments backing policy liabilities, fair value measurements are derived by using modelled valuation techniques (including discounted cash flow models) that incorporate market prices/yields for securities with similar credit risk, maturity and yield characteristics; and/or current market yields for similar instruments.

 

¡

For Net loans and advances, Deposits and other borrowings and Debt issuances, discounted cash flow techniques are used where contractual future cash flows of the instrument are discounted using discount rates incorporating wholesale market rates or market borrowing rates of debt with similar maturities or a yield curve appropriate for the remaining term to maturity.

 

¡

The fair value of external unit holder liabilities (life insurance funds) represents the external unit holder’s share of the net assets of the consolidated investment funds, which are carried at fair value. The fair value of policy liabilities, being liabilities of the insurance business is directly linked to the performance and value of the assets backing the liabilities. These liabilities are carried at fair value using observable inputs.

Further details of valuation techniques and significant unobservable inputs used in measuring fair values are described in (ii)(a) below.

There have been no substantial changes in the valuation techniques applied to different classes of financial instruments during the current half-year period.

 

(c)	Fair value measurements

The following table provides an analysis of financial instruments carried at fair value at reporting date categorised according to the lowest level input into a valuation model or a valuation component that is significant to the reported fair value. The significance of the input is assessed against the reported fair value of the financial instrument and considers various factors specific to the financial instrument. The fair value has been allocated in full to the category in the fair value hierarchy which most appropriately reflects the determination of the fair value.

 

118

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

		Fair value measurements
As at March 2016		Level 1 $M				Level 2 $M				Level 3 $M				Total  $M
Financial assets
Trading securities			46,988				3,080				5				50,073
Derivative financial instruments			519				88,143				85				88,747
Available-for-sale assets1			43,262				6,819				296				50,377
Net loans and advances (measured at fair value)			-				574				14				588
Investments backing policy liabilities1			17,550				16,473				518				34,541
Total			108,319				115,089				918				224,326
Financial liabilities
Deposits and other borrowings (designated at fair value)			-				4,986				-				4,986
Derivative financial instruments			635				90,988				83				91,706
Policy liabilities2			-				34,854				-				34,854
External unit holder liabilities (life insurance funds)			-				3,265				-				3,265
Payables and other liabilities3			2,761				201				-				2,962
Debt issuances (designated at fair value)			-				2,823				-				2,823
Total			3,396				137,117				83				140,596
As at September 2015
Financial assets
Trading securities			45,227				3,769				4				49,000
Derivative financial instruments			388				85,155				82				85,625
Available-for-sale assets			37,086				6,347				234				43,667
Net loans and advances (measured at fair value)			-				683				16				699
Investments backing policy liabilities			17,983				16,298				539				34,820
Total			100,684				112,252				875				213,811
Financial liabilities
Deposits and other borrowings (designated at fair value)			-				4,576				-				4,576
Derivative financial instruments			782				80,387				101				81,270
Policy liabilities2			-				35,029				-				35,029
External unit holder liabilities (life insurance funds)			-				3,291				-				3,291
Payables and other liabilities3			2,443				125				-				2,568
Debt issuances (designated at fair value)			-				3,165				-				3,165
Total			3,225				126,573				101				129,899
As at March 2015
Financial assets
Trading securities			48,091				3,295				-				51,386
Derivative financial instruments			432				73,027				121				73,580
Available-for-sale assets			31,502				6,514				320				38,336
Net loans and advances (designated at fair value)			-				695				-				695
Investments backing policy liabilities			19,141				16,615				739				36,495
Total			99,166				100,146				1,180				200,492
Financial liabilities
Deposits and other borrowings (designated at fair value)			-				6,278				-				6,278
Derivative financial instruments			688				72,397				125				73,210
Policy liabilities2			-				36,449				-				36,449
External unit holder liabilities (life insurance funds)			-				3,489				-				3,489
Payables and other liabilities3			3,905				158				-				4,063
Debt issuances (designated at fair value)			-				3,501				-				3,501
Total			4,593				122,272				125				126,990

1.

During the period there were transfers from Level 1 to Level 2 of $599 million (Sep 2015: $190 million, Mar 2015: $114 million) following a reassessment of available pricing information. Of the total transfers of $599 million in the current period, $486 million relates to Available-for-sale assets and $113 million relates to Investments backing policy liabilities. During the period there were also transfers from Level 2 to Level 1 of $14 million (Sep 2015: $114 million, Mar 2015: $127 million) following increased trading activity to support the quoted prices relating to Investments backing policy liabilities. Transfers into and out of Level 1 and Level 2 are deemed to have occurred as of the beginning of the reporting period in which the transfer occurred.

 

2.	Policy liabilities relate to life investment contract liabilities only as these are designated at fair value through profit or loss.

 

3.	Represents securities short sold.

 

119

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(ii)	Details of fair value measurements that incorporate unobservable market data

 

(a)	Composition of Level 3 fair value measurements

The following table presents the composition of financial instruments measured at fair value with significant unobservable inputs (Level 3 fair value measurements).

 

As at March 2016		Financial assets																				Financial liabilities
		Trading       securities $M				Derivatives $M				Available-for- sale $M				Net loans and advances $M				Investments     backing policy liabilities $M				Derivatives $M
Asset backed securities			-				-				1				-				192			-
Illiquid corporate bonds			5				-				260				14				6			-
Structured credit products			-				49				-				-				-			(62)
Alternative assets			-				-				35				-				320			-
Other derivatives			-				36				-				-				-			(21)
Total			5				85				296				14				518			(83)
As at September 2015
Asset backed securities			-				-				2				-				188			-
Illiquid corporate bonds			4				-				198				16				-			-
Structured credit products			-				52				-				-				-			(67)
Alternative assets			-				-				34				-				351			-
Other derivatives			-				30				-				-				-			(34)
Total			4				82				234				16				539			(101)
As at March 2015
Asset backed securities			-				-				1				-				191			-
Illiquid corporate bonds			-				-				289				-				5			-
Structured credit products			-				59				-				-				-			(77)
Managed funds (suspended)			-				-				-				-				5			-
Alternative assets			-				-				30				-				538			-
Other derivatives			-				62				-				-				-			(48)
Total			-				121				320				-				739			(125)

Structured credit products comprise the structured credit intermediation trades that the Group entered into from 2004 to 2007 whereby it sold protection using credit default swaps over certain structures, and mitigated risk by purchasing protection via credit default swaps from US financial guarantors over the same structures. These trades are valued using complex models with certain inputs relating to the reference assets and derivative counterparties not being observable in the market. Such unobservable inputs include credit spreads and default probabilities contributing from 16% to 25% of the valuation. The assets underlying the structured credit products are diverse instruments with a wide range of credit spreads and default probabilities relevant to the valuation.

The remaining Level 3 balances include Asset backed securities and Illiquid corporate bonds where the effect on fair value of issuer credit cannot be directly or indirectly observed in the market; managed funds (suspended) comprising fixed income and mortgage investments in managed funds that are illiquid and are not currently redeemable; Alternative assets that largely comprise investments in funds which are illiquid and are not currently redeemable, as well as various investments in unlisted equity securities for which no active market exists; and Other derivatives which predominantly include reverse mortgage swaps where the mortality rate cannot be observed and options over emissions certificates where the volatility input cannot be observed.

 

120

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(b)	Movements in Level 3 fair value measurements

The following table sets out movements in Level 3 fair value measurements. Derivatives are categorised on a portfolio basis and classified as either financial assets or financial liabilities based on whether the closing balance is an unrealised gain or loss. This could be different to the opening balance.

 

As at March 2016		Financial assets																				Financial liabilities
		Trading       securities $M				Derivatives $M				Available- for-sale $M				Net loans and advances $M				Investments  backing policy  liabilities  $M				Derivatives  $M
Opening balance			4				82				234				16				539				(101)
New purchases and issues			1				1				1				-				87				-
Disposals / (sales)			-				(1)				(4)				-				(98)				-
Cash settlements			-				-				-				-				-				1
Transfers:
Transfers into Level 3 category1			-				1				77				-				61				(1)
Transfers out of Level 3 category1			-				-				-				-				(20)				9
Fair value gain/(loss) recorded in other operating income in the income statement2			-				2				(1)				(2)				(51)				9
Fair value gain/(loss) recognised in reserves in equity			-				-				(11)				-				-				-
Closing balance			5				85				296				14				518				(83)
As at September 2015
Opening balance			-				121				320				-				739				(125)
New purchases and issues			-				-				4				21				56				-
Disposals / (sales)			-				-				(14)				-				(60)				-
Cash settlements			-				-				-				-				-				3
Transfers:
Transfers into Level 3 category			10				2				-				-				7				(2)
Transfers out of Level 3 category			-				(17)				(69)				-				(246)				8
Fair value gain/(loss) recorded in other operating income in the income statement2			(6)				(24)				1				(5)				43				15
Fair value gain/(loss) recognised in reserves in equity			-				-				(8)				-				-				-
Closing balance			4				82				234				16				539				(101)
As at March 2015
Opening balance			-				106				40				-				545				(105)
New purchases and issues			-				-				4				-				241				(1)
Disposals / (sales)			-				(8)				(6)				-				(293)				-
Cash settlements			-				-				-				-				-				5
Transfers:
Transfers into Level 3 category			-				-				267				-				172				-
Transfers out of Level 3 category							-				-				-				-				1
Fair value gain/(loss) recorded in other operating income in the income statement2			-				23				4				-				74				(25)
Fair value gain/(loss) recognised in reserves in equity			-				-				11				-				-				-
Closing balance			-				121				320				-				739				(125)

 

1.

Transfers into Level 3 for the Group relate principally to illiquid corporate bonds and asset backed securities where market activity has reduced resulting in pricing to no longer be observable. Transfers out of Level 3 for the Group relate principally to asset backed securities following an increase in trading activity to support observable pricing as well as derivative liabilities were the current valuation is now deemed to only include observable inputs which are significant to the valuation. Transfers into and out of Level 3 are deemed to have occurred as of the beginning of the reporting period in which the transfer occurred.

 

2.	Relating to assets and liabilities held at the end of the period.

 

(c)	Sensitivity to Level 3 data inputs

Where valuation techniques are employed and assumptions are required due to significant data inputs not being directly observed in the market place (Level 3 inputs), changing these assumptions changes the resultant estimate of fair value. The majority of transactions in this category are ‘back-to-back’ in nature where ANZ either acts as a financial intermediary or hedges the market risks. Similarly, the valuation of Investments backing policy liabilities directly impacts the associated life investment contracts they relate to. In these circumstances, changes in the assumptions generally have minimal impact on the income statement and net assets of ANZ. An exception to this is the ‘back-to-back’ structured credit intermediation trades which create significant exposure to credit risk.

Principal inputs used in the determination of fair value of financial instruments included in the structured credit portfolio include counterparty credit spreads, market-quoted CDS prices, recovery rates, default probabilities, correlation curves and other inputs, some of which may not be directly observable in the market. The potential effect of changing prevailing unobservable inputs to reasonably possible alternative assumptions for valuing those financial instruments could result in less than a (+/-) $3 million (Sep 2015 & Mar 2015: (+/-) $5 million) impact on profit. The ranges of reasonably possible alternative assumptions are established by application of professional judgement and analysis of the data available to support each assumption.

 

121

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(d)	Deferred fair value gains and losses

Where the fair value of a financial instrument at initial recognition is determined using unobservable data that is significant to the valuation of the instrument, the difference between the transaction price and the amount determined based on the valuation technique (day one gain or loss) is not immediately recognised in the income statement. Subsequently, the day one gain or loss is recognised in the income statement over the life of the transaction on a straight line basis or over the period until all inputs become observable.

The table below summarises the aggregate amount of day-one gains not yet recognised in the income statement and amounts which have been subsequently recognised.

 

		Half Year
		Mar 16		Sep 15		Mar 15
		$M		$M		$M
Opening balance		2		2		3
Deferral on new transactions		1		-		-
Amounts recognised in income statement during the period		(1)		-		(1)
Closing balance1		2		2		2

 

1.	The closing balance of unrecognised gains predominantly relates to derivative financial instruments.

(iii)   Financial assets and financial liabilities not measured at fair value

The table below reflects the carrying amounts of financial instruments not measured at fair value on the Group’s balance sheet and where the carrying amount is not considered a close approximation of fair value. The table also provides comparison of the carrying amount of these financial instruments to the Group’s estimate of their fair value.

 

		Carrying amount in the balance sheet														Fair Value
As at March 2016		At amortised cost $M				At fair value $M				Total  $M						$M
Financial assets
Net loans and advances1			561,180				588				561,768						562,545
Financial liabilities
Deposits and other borrowings			573,085				4,986				578,071						578,432
Debt issuances1			79,124				2,823				81,947						81,842
Subordinated debt1			17,557				-				17,557						17,545
			669,766				7,809				677,575						677,819
As at September 2015
Financial assets
Net loans and advances1			569,539				699				570,238						571,639
Financial liabilities
Deposits and other borrowings			566,218				4,576				570,794						571,212
Debt issuances1			90,582				3,165				93,747						93,871
Subordinated debt1			17,009				-				17,009						17,083
			673,809				7,741				681,550						682,166
As at March 2015
Financial assets
Net loans and advances1			557,508				695				558,203						559,400
Financial liabilities
Deposits and other borrowings			560,937				6,278				567,215						567,711
Debt issuances1			82,163				3,501				85,664						86,405
Subordinated debt1			16,463				-				16,463						16,657
			659,563				9,779				669,342						670,773

 

1.	Fair value hedging is applied to certain financial instruments within the amortised cost categories. The resulting fair value adjustments mean that the carrying value differs from the original amortised cost.

 

122

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

15.	Share capital

 

Issued and quoted securities		Half Year
Ordinary share capital		Mar 16 No.		Sep 15 No.		Mar 15 No.
Closing balance		2,917,560,098		2,902,714,361		2,765,980,222
Issued during the period1,2		14,845,737		136,734,139		9,352,451
Preference share capital
Bought back during the period3		-		-		500,000

 

1.

The company issued 9.7 million shares under the Dividend Reinvestment Plan and Bonus Option Plan for the 2015 final dividend (28.6 million shares for the 2015 interim dividend; 9.3 million shares for the 2014 final dividend) and 5.1 million shares to satisfy obligations under the Group’s Employee share acquisition plans (nil in prior periods).

 

2.	The company issued 80.8 million ordinary shares under the Institutional Share Placement and 27.3 million ordinary shares under the Retail Share Purchase Plan in the September half 2015.

 

3.	All 500,000 Euro Trust Securities on issue were bought back by ANZ for cash at face value (€1,000 per security) and cancelled on 15 December 2014.

 

16.	Shareholders’ equity

 

		Half Year										Movement
		Mar 16 $M		Sep 15 $M				Mar 15 $M				Mar 16   v. Sep 15				Mar 16  v. Mar 15
Share capital
Balance at start of period		28,367			24,152			24,902					17%			14%
Ordinary share capital movements
Dividend reinvestment plan		215			865			257					-75%			-16%
Share Placement and Purchase Plan		-			3,206			-					-100%			n/a
Group employee share acquisition scheme1		56			98			(97)					-43%			large
Treasury shares in Wealth2		(13)			44			(39)					large			-67%
Group share option scheme		-			2			-					-100%			n/a
Group share buyback		-			-			-					n/a			n/a
Preference share capital movements
Preference shares bought back3		-			-			(871)					n/a			-100%
Total share capital		28,625			28,367			24,152					1%			19%

 

1.

As at 31 March 2016, there were 11.0 million ANZEST Treasury shares outstanding (Sep 15: 11.4 million; Mar 15: 11.5 million). Shares in the Company which are purchased on-market by ANZEST Pty Ltd (trustee of ANZ employee share and option plans) or issued by the Company to ANZEST Pty Ltd are classified as Treasury shares (to the extent that they relate to unvested employee share-based awards).

 

2.	As at 31 March 2016, there were 12.0 million Wealth Treasury shares outstanding (Sep 15: 11.6 million; Mar 15: 13.1 million). Wealth purchases and holds shares in the Company to back policy liabilities. These shares are classified as Treasury shares.

 

3.	All 500,000 Euro Trust Securities on issue were bought back by ANZ for cash at face value (€1,000 per security) and cancelled on 15 December 2014.

 

123

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

16.	Shareholders’ equity, cont’d

 

		Half Year												Movement
		Mar 16 $M		Sep 15 $M				Mar 15 $M						Mar 16     v. Sep 15				Mar 16     v. Mar 15
Foreign currency translation reserve
Balance at start of period		1,119			1,569				(605)						-29%			large
Transfer to the income statement		(126)			(4)				-						large			n/a
Currency translation adjustments net of hedges		(1,002)			(446)				2,174						large			large
Total foreign currency translation reserve		(9)			1,119				1,569						large			large
Share option reserve4
Balance at start of period		68			60				60						13%			13%
Share based payments/(exercises)		9			9				7						0%			29%
Transfer of options/rights lapsed to retained earnings		(8)			(1)				(7)						large			14%
Total share option reserve		69			68				60						1%			15%
Available-for-sale revaluation reserve5
Balance at start of period		138			257				160						-46%			-14%
Gain /(loss) recognised		(9)			(105)				132						-91%			large
Transferred to income statement		(28)			(14)				(35)						100%			-20%
Total available-for-sale revaluation reserve		101			138				257						-27%			-61%
Cash flow hedge reserve6
Balance at start of period		269			325				169						-17%			59%
Gain /(loss) recognised		(40)			(53)				164						-25%			large
Transferred to income statement		10			(3)				(8)						large			large
Total hedging reserve		239			269				325						-11%			-26%
Transactions with non-controlling interests reserve
Balance at start of period		(23)			(23)				(23)						0%			0%
Transfer to the income statement		-			-				-						n/a			n/a
Total transactions with non-controlling interests reserve		(23)			(23)				(23)						0%			0%
Total reserves		377			1,571				2,188						-76%			-83%
Retained earnings
Balance at start of period		27,309			25,616				24,544						7%			11%
Profit attributable to shareholders of the Company		2,738			3,987				3,506						-31%			-22%
Transfer of options/rights lapsed from share option reserve		8			1				7						large			14%
Total available for appropriation		30,055			29,604				28,057						2%			7%
Remeasurement gain/(loss) on defined benefit plans		(3)			(5)				1						-40%			large
Fair value gain/(loss) attributable to changes in own credit risk of financial liabilities designated at fair value		8			28				9						-71%			-11%
Ordinary share dividend paid		(2,711)			(2,328)				(2,578)						16%			5%
Dividend income on Treasury shares held within the Group’s life insurance statutory funds		12			10				12						20%			0%
Preference share dividend paid		-			-				(1)						n/a			-100%
Foreign exchange gains on preference shares bought back7		-			-				116						n/a			-100%
Retained earnings at end of period		27,361			27,309				25,616						0%			7%
Share capital and reserves attributable to shareholders of the Company		56,363			57,247				51,956						-2%			8%
Non-controlling interests		101			106				95						-5%			6%
Total shareholders’ equity		56,464			57,353				52,051						-2%			8%

 

4.

The share option reserve arises on the grant of share options/deferred share rights/performance rights (“options and rights”) to selected employees under the ANZ Share Option Plan. Amounts are transferred from the share option reserve to other equity accounts when the options and rights are exercised and to retained earnings when lapsed or forfeited after vesting. Forfeited options and rights due to termination prior to vesting are credited to the income statement.

 

5.	The available-for-sale revaluation reserve arises on the revaluation of available-for-sale financial assets. Where a revalued financial asset is sold or impaired, that portion of the reserve which relates to that financial asset is recognised in the income statement.

 

6.	The cash flow hedge reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges. The cumulative deferred gain or loss on the hedge is recognised in the income statement when the hedged transaction impacts profit or loss.

 

7.	The Euro Trust Securities were bought back by ANZ for cash at face value and cancelled on 15 December 2014. The foreign exchange gain between the issue date and 15 December 2014 was recognised directly in retained earnings.

 

124

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

17.	Changes in composition of the Group

There were no material controlled entities incorporated, acquired, or disposed of during the half year ended 31 March 2016.

 

18.	Investments in Associates

 

Half Year

Movement

Mar 16 $M

Sep 15 $M

Mar 15 $M

Mar 16 v. Sep 15

Mar 16 v. Mar 15

Share of associates’ profit

301

311

314

-3%

-4%

 

Contributions to profit 1		Contribution to Group profit after tax								Ownership interest held by Group
Associates		Half Year								As at
		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 %		Sep 15 %		Mar 15 %
P.T. Bank Pan Indonesia		17		43		35				39		39		39
AMMB Holdings Berhad		43		61		77				24		24		24
Shanghai Rural Commercial Bank		137		112		106				20		20		20
Bank of Tianjin (up to 30 March 2016)2		86		75		80				12		14		14
Other associates		18		20		16				n/a		n/a		n/a
Share of associates’ profit		301		311		314

 

1.	Contributions to profit reflect the IFRS equivalent results adjusted to align with the Group’s financial year end which may differ from the published results of these entities. Excludes gains or losses on disposal or valuation adjustments.

 

2.

On 30 March 2016, the Bank of Tianjin (BoT) completed a capital raising and initial public offering (IPO) on the Hong Kong Stock Exchange. As a result, the Group’s equity interest reduced from 14% to 12% and the Group ceased equity accounting the investment due to losing the ability to appoint directors to the Board of BoT at this date. At 31 March 2016, the investment is classified as an available-for-sale asset on the balance sheet.

 

19.	Related party disclosure

There have been no significant changes to the arrangements with related parties.

 

20.	Contingent liabilities and contingent assets

There are outstanding court proceedings, claims and possible claims for and against the Group. Where relevant, expert legal advice has been obtained and, in the light of such advice, provisions and/or disclosures as deemed appropriate have been made. In some instances we have not disclosed the estimated financial impact of the individual items either because it is not practicable to do so or because such disclosure may prejudice the interests of the Group. Refer to Note 43 of the 2015 ANZ Annual Financial Statements for a description of contingent liabilities and contingent assets as at 30 September 2015.

A summary of some of those contingent liabilities is set out below.

 

–

Bank fees litigation

Litigation funder IMF Bentham Limited commenced a class action against ANZ in 2010, followed by a second similar class action in March 2013. Together the class actions are claimed to be on behalf of more than 40,000 ANZ customers. The customers currently involved in these class actions are only part of ANZ’s customer base for credit cards and transaction accounts.

The applicants contended that the relevant exception fees (honour, dishonour and non-payment fees on transaction accounts and late payment and overlimit fees on credit cards) were unenforceable penalties (at law and in equity) and that various of the fees were also unenforceable under statutory provisions governing unconscionable conduct, unfair contract terms and unjust transactions.

In April 2015, the Full Federal Court delivered judgment in respect of appeals by both parties in the second class action. The Full Federal Court found in ANZ’s favour in respect of all fees subject to appeal (in relation to both the penalty and statutory claims).

IMF Bentham Limited appealed the Full Federal Court’s decision to the High Court of Australia in respect of credit card late payment fees. It did not appeal the findings in relation to the other fees.

The High Court appeal on late payment fees was heard on 4 and 5 February 2016. We are waiting for the Court’s decision.

The first class action is on hold.

In August 2014, IMF Bentham Limited commenced a separate class action against ANZ for late payment fees charged to ANZ customers in respect of commercial credit cards and other ANZ products (at this stage not specified). The action is expressed to apply to all relevant customers, rather than being limited to those who have signed up with IMF Bentham Limited. The action is at an early stage and has been put on hold.

 

125

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

In June 2013, litigation funder Litigation Lending Services (NZ) commenced a representative action against ANZ for certain fees charged to New Zealand customers since 2007. This action is currently on hold.

There is a risk that further claims could emerge in Australia, New Zealand or elsewhere.

 

–

ASIC proceedings in relation to Bank Bill Swap Rate (BBSW)

On 4 March 2016, ASIC initiated proceedings against ANZ seeking declarations and civil penalties for alleged market manipulation, unconscionable conduct, and alleged breaches by ANZ of certain statutory obligations as a financial services licensee. ASIC has subsequently initiated similar proceedings against another Australian bank. ASIC’s case against ANZ concerns transactions in the Australian interbank BBSW market in the period from March 2010 to May 2012. ANZ is defending the proceedings. The potential civil penalty or other financial impact is uncertain.

 

–

Regulator investigations into foreign exchange trading

Since 2014, each of ASIC and the Australian Competition and Consumer Commission (ACCC) have been investigating foreign exchange trading conduct of various banks including ANZ. ASIC’s and the ACCC’s investigations are ongoing and the range of potential outcomes include civil penalties and other actions under the relevant legislation.

 

–

Security recovery actions

Various claims have been made or are anticipated, arising from security recovery actions taken to resolve impaired assets over recent years. ANZ will defend these claims.

 

21.	Subsequent events since balance date

There have been no subsequent events from 31 March 2016 to the date of this report.

 

126

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DIRECTORS’ DECLARATION AND RESPONSIBILITY STATEMENT

 

 

Directors’ Declaration

The Directors of Australia and New Zealand Banking Group Limited declare that:

 

1.	in the Directors’ opinion the Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements are in accordance with the Corporations Act 2001, including:

 

•

section 304, that they comply with the Australian Accounting Standards and any further requirements in the Corporations Regulations 2001; and

 

•

section 305, that they give a true and fair view of the financial position of the Group as at 31 March 2016 and of its performance for the half year ended on that date; and

 

2.	in the Directors’ opinion as at the date of this declaration there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

Signed in accordance with a resolution of the Directors.

 

/s/ David M Gonski, AC		/s/ Shayne C Elliott
David M Gonski, AC Chairman		Shayne C Elliott Director

2 May 2016

Responsibility statement of the Directors in accordance with the Disclosure and Transparency Rule 4.2.10(3)(b) of the United Kingdom Financial Conduct Authority

The Directors of Australia and New Zealand Banking Group Limited confirm to the best of their knowledge that:

the Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements for the half year ended 31 March 2016, Directors’ Report (including matters included by reference) and Directors’ Declaration as set out on pages 98 to 127 as well as the additional information on pages 139 to 147 includes a fair review of:

 

(i)	an indication of the important events that have occurred during the first six months of the financial year, and their impact on the Condensed Consolidated Financial Statements; and

 

(ii)	a description of the principal risks and uncertainties for the remaining six months of the financial year.

Signed in accordance with a resolution of the Directors.

 

/s/ David M Gonski, AC		/s/ Shayne C Elliott
David M Gonski, AC   Chairman		Shayne C Elliott   Director

 

2 May 2016

 

127

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AUDITOR’S REVIEW REPORT AND INDEPENDENCE DECLARATION

 

 

 

Independent auditor’s review report to the members of Australia and New Zealand Banking Group Limited

 

  

Report on the condensed consolidated financial statements

We have reviewed the accompanying half year condensed consolidated financial statements of Australia and New Zealand Banking Group Limited (the “Company”) which comprises the Group’s condensed consolidated balance sheet as at 31 March 2016, condensed consolidated income statement and condensed consolidated statement of comprehensive income, condensed consolidated statement of changes in equity and condensed consolidated cash flow statement for the half year ended on that date, notes 1 to 21 comprising a basis of preparation and other explanatory notes, and the directors’ declaration. The Group comprised the Company and the entities it controlled at the half year’s end or from time to time during the half year.

Directors’ responsibility for the half year condensed consolidated financial statements

The directors of the Company are responsible for the preparation of the half year condensed consolidated financial statements that give a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine is necessary to enable the preparation of the half year condensed consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibility

Our responsibility is to express a conclusion on the half year condensed consolidated financial statements based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the half year condensed consolidated financial statements are not in accordance with the Corporations Act 2001 including: giving a true and fair view of the Group’s financial position as at 31 March 2016 and its performance for the half year ended on that date; and complying with Australian Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001. As auditor of Australia and New Zealand Banking Group Limited, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual report.

A review of a half year condensed consolidated financial statements consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Independence

In conducting our review, we have complied with the independence requirements of the Corporations Act 2001.

Conclusion

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half year condensed consolidated financial statements of Australia and New Zealand Banking Group Limited is not in accordance with the Corporations Act 2001, including:

 

(a)	giving a true and fair view of the Group’s financial position as at 31 March 2016 and of its performance for the half year ended on that date; and

 

(b)	complying with Australian Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.

 

/s/ KPMG		/s/ Andrew Yates
Melbourne, Australia   2 May 2016		Andrew Yates Partner

Lead Auditor’s Independence Declaration under section 307C of the Corporations Act 2001

To:  the directors of Australia and New Zealand Banking Group Limited

I declare that, to the best of my knowledge and belief, in relation to the review for the half year ended 31 March 2016, there have been:

 

(i)	no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the review; and

 

(ii)	no contraventions of any applicable code of professional conduct in relation to the review.

 

/s/ KPMG		/s/ Andrew Yates
Melbourne, Australia 2 May 2016		Andrew Yates Partner

KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (”KPMG International”), a Swiss entity.

Liability limited by a scheme approved under Professional Standards Legislation.

 

128

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SUPPLEMENTARY INFORMATION

 

 

 

CONTENTS

Section 9 – Supplementary information

 

Capital management

Average balance sheet and related interest

Full time equivalent staff

Funds management and insurance income reconciliation

Exchange rates

Derivative financial instruments

Principal risks and uncertainties

Definitions

 

129

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SUPPLEMENTARY INFORMATION

 

 

 

Capital management

ANZ provides information as required under APRA’s prudential standard APS 330: Public Disclosure. This information is located in the Regulatory Disclosures section of ANZ’s website: shareholder.anz.com/pages/regulatory-disclosure.

This information includes disclosures detailed in the following sections of the standard, Attachment A: Capital disclosure template, Attachment B: Main features of Capital instruments, Attachment E: Leverage ratio disclosure requirements and Attachment F: Liquidity Coverage Ratio disclosure template.

 

								As at								Movement
Qualifying Capital								Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16     v. Sep 15		Mar 16     v. Mar 15
Tier 1
Shareholders’ equity and non-controlling interests								56,464		57,353		52,051				-2%		8%
Prudential adjustments to shareholders’ equity			Table 1					(584)		(387)		(519)				51%		13%
Gross Common Equity Tier 1 capital								55,880		56,966		51,532				-2%		8%
Deductions			Table 2					(17,778)		(18,440)		(17,796)				-4%		0%
Common Equity Tier 1 capital								38,102		38,526		33,736				-1%		13%
Additional Tier 1 capital			Table 3					6,960		6,958		7,352				0%		-5%
Tier 1 capital								45,062		45,484		41,088				-1%		10%
Tier 2 capital			Table 4					8,076		7,951		7,716				2%		5%
Total qualifying capital								53,138		53,435		48,804				-1%		9%
Capital adequacy ratios
Common Equity Tier 1								9.8%		9.6%		8.7%
Tier 1								11.6%		11.3%		10.6%
Tier 2								2.1%		2.0%		2.0%
Total								13.7%		13.3%		12.6%
Risk weighted assets			Table 5					388,335		401,937		386,863				-3%		0%

 

130

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SUPPLEMENTARY INFORMATION

 

 

 

Capital management, cont’d

 

								As at								Movement
								Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16     v. Sep 15		Mar 16     v. Mar 15
Table 1: Prudential adjustments to shareholders’ equity
Treasury shares attributable to ANZ Wealth policy holders								254		242		287				5%		-11%
Accumulated retained profits and reserves of insurance and funds management entities								(931)		(791)		(951)				18%		-2%
Deferred fee revenue including fees deferred as part of loan yields								290		380		397				-24%		-27%
Available-for-sale reserve attributable to deconsolidated subsidiaries								(98)		(113)		(150)				-13%		-35%
Other								(99)		(105)		(102)				-6%		-3%
Total								(584)		(387)		(519)				51%		13%
Table 2: Deductions from Common Equity Tier 1 capital
Unamortised goodwill & other intangibles (excluding ANZ Wealth Australia and New Zealand)								(3,767)		(4,109)		(4,369)				-8%		-14%
Intangible component of investments in ANZ Wealth Australia and New Zealand								(2,091)		(2,093)		(2,117)				0%		-1%
Capitalised software								(2,190)		(2,832)		(2,631)				-23%		-17%
Capitalised expenses including loan and lease origination fees								(1,078)		(1,320)		(1,197)				-18%		-10%
Applicable deferred net tax assets								(793)		(694)		(610)				14%		30%
Expected losses in excess of eligible provisions					Table 8			(600)		(479)		(374)				25%		60%
Investment in other insurance and funds management subsidiaries								(297)		(297)		(401)				0%		-26%
Investment in ANZ Wealth Australia and New Zealand								(1,749)		(1,349)		(990)				30%		77%
Investment in banking associates and minority interests								(4,708)		(4,734)		(4,499)				-1%		5%
Other deductions								(505)		(533)		(608)				-5%		-17%
Total								(17,778)		(18,440)		(17,796)				-4%		0%
Table 3: Additional Tier 1 capital
Convertible Preference Shares
ANZ CPS2								1,969		1,969		1,969				0%		0%
ANZ CPS3								1,338		1,336		1,335				0%		0%
ANZ Capital Notes 1								1,113		1,112		1,110				0%		0%
ANZ Capital Notes 2								1,600		1,598		1,597				0%		0%
ANZ Capital Notes 3								961		959		958				0%		0%
ANZ Bank NZ Capital Notes								446		449		484				-1%		-8%
Regulatory adjustments and deductions								(467)		(465)		(101)				1%		large
Total								6,960		6,958		7,352				0%		-5%
Table 4: Tier 2 capital
General reserve for impairment of financial assets								255		252		249				1%		2%
Perpetual subordinated notes								1,145		1,188		1,211				-4%		-5%
Subordinated debt								8,985		8,398		7,799				7%		15%
Regulatory adjustments and deductions								(660)		(717)		(336)				-8%		96%
Transitional adjustments								(1,649)		(1,170)		(1,207)				41%		37%
Total								8,076		7,951		7,716				2%		5%

 

131

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SUPPLEMENTARY INFORMATION

 

 

 

Capital management, cont’d

 

								As at								Movement
								Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16     v. Sep 15		Mar 16     v. Mar 15
Table 5: Risk weighted assets
On balance sheet								235,875		245,542		241,807				-4%		-2%
Commitments								62,223		61,965		56,683				0%		10%
Contingents								14,489		15,929		16,212				-9%		-11%
Derivatives								21,721		26,315		24,995				-17%		-13%
Total credit risk					Table 6			334,308		349,751		339,697				-4%		-2%
Market risk - Traded								6,059		6,868		6,042				-12%		0%
Market risk - IRRBB								10,280		7,433		7,690				38%		34%
Operational risk								37,688		37,885		33,434				-1%		13%
Total risk weighted assets								388,335		401,937		386,863				-3%		0%
								As at								Movement
								Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 v. Sep 15		Mar 16 v. Mar 15
Table 6: Credit risk weighted assets by Basel asset class
Subject to Advanced IRB approach
Corporate								139,643		150,165		140,451				-7%		-1%
Sovereign								6,185		6,664		5,385				-7%		15%
Bank								15,061		17,445		22,078				-14%		-32%
Residential mortgage								57,218		54,996		53,501				4%		7%
Qualifying revolving retail (credit cards)								7,744		7,546		7,775				3%		0%
Other retail								30,681		32,990		31,664				-7%		-3%
Credit risk weighted assets subject to Advanced IRB approach								256,532		269,806		260,854				-5%		-2%
Credit risk specialised lending exposures subject to slotting criteria								35,066		32,240		31,442				9%		12%
Subject to Standardised approach
Corporate								22,941		26,217		27,033				-12%		-15%
Residential mortgage								2,616		2,882		2,603				-9%		0%
Other retail (includes credit cards)								3,550		3,625		3,271				-2%		9%
Credit risk weighted assets subject to Standardised approach								29,107		32,724		32,907				-11%		-12%
Credit Valuation Adjustment and Qualifying Central Counterparties								8,355		10,170		9,630				-18%		-13%
Credit risk weighted assets relating to securitisation exposures								1,194		1,156		1,067				3%		12%
Other assets								4,054		3,655		3,797				11%		7%
Total credit risk weighted assets								334,308		349,751		339,697				-4%		-2%

 

132

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SUPPLEMENTARY INFORMATION

 

 

 

Capital management, cont’d

 

		Collective Provision and Individual Provision								Basel Expected Loss1
Table 7: Total provision for credit impairment and expected loss by division		Mar 16 $M		Sep 15 $M		Mar 15 $M				Mar 16 $M		Sep 15 $M		Mar 15 $M
Australia		1,746		1,828		1,796				2,600		2,635		2,563
Institutional		1,681		1,480		1,488				1,410		1,299		1,452
New Zealand		448		476		536				712		718		779
Asia Retail & Pacific		210		217		193				5		1		4
Wealth		12		13		12				13		12		12
TSO and Group Centre		3		3		3				-		-		-
Total provision for credit impairment and expected loss		4,100		4,017		4,028				4,740		4,665		4,810

 

1.	Only applicable to Advanced Internal Ratings based portfolios.

 

						As at						Movement
				Mar 16		Sep 15		Mar 15				Mar 16		March 16
Table 8: APRA Expected loss in excess of eligible provisions				$M		$M		$M				v. Sep 15		v. March 15
APRA Basel 3 expected loss: non-defaulted				2,894		2,850		2,735				2%		6%
Less: Qualifying collective provision
Collective provision				(2,862)		(2,956)		(2,914)				-3%		-2%
Non-qualifying collective provision				313		333		304				-6%		3%
Standardised collective provision				255		252		249				1%		2%
Non-defaulted excess included in deduction				600		479		374				25%		60%
APRA Basel 3 expected loss: defaulted				1,846		1,815		2,075				2%		-11%
Less: Qualifying individual provision
Individual provision				(1,238)		(1,061)		(1,114)				17%		11%
Additional individual provision for partial write offs				(528)		(633)		(859)				-17%		-39%
Standardised individual provision				171		107		103				60%		66%
Collective provision on advanced defaulted				(265)		(286)		(271)				-7%		-2%
				(14)		(58)		(66)				-76%		-79%
Shortfall in expected loss not included in deduction				14		58		66				-76%		-79%
Defaulted excess included in deduction				-		-		-				n/a		n/a
Gross deduction				600		479		374				25%		60%

Table 9: APRA Basel 3 Common Equity Tier 1

 

		Half Year
		Mar 16 vs Sep 15
APRA Basel 3 Common Equity Tier 1
Adjusted pro-forma Cash profit1		+87bps
Risk weighted assets
Portfolio growth and mix		+5bp
Risk migration and expected losses in excess of eligible provisions		-3bps
Non-credit risk		-1bps
Capital retention in insurance businesses and associates1		-10bps
Capitalised software and intangibles1		-2bps
Organic capital generation		+76bps
Ordinary share dividends (net of dividend reinvestment plan)		-62bps
Other		+8bps
Total Common Equity Tier 1 movement		+22bps
APRA Basel 3 Common Equity Tier 1 ratio		9.8%

 

1.	Excludes the impact from the software capitalisation changes and impact from the Asian minority investment adjustments which have gone through Cash Profit as they are neutral on CET1.

 

133

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SUPPLEMENTARY INFORMATION

 

 

 

Average balance sheet and related interest¹

 

		Half Year Mar 16								Half Year Sep 15								Half Year Mar 15
		Avg bal $M		Int $M		Rate %				Avg bal $M		Int $M		Rate %				Avg bal $M		Int $M		Rate %
Loans and advances2
Overdrafts and credit cards		20,539		1,062		10.3%				22,203		1,072		9.6%				20,901		1,060		10.2%
Commercial bills outstanding		13,237		112		1.7%				13,781		135		2.0%				14,168		137		1.9%
Term loans - housing		308,808		7,203		4.7%				292,206		6,934		4.7%				279,757		7,023		5.0%
Term loans - non-housing		221,728		4,890		4.4%				224,208		5,108		4.5%				219,047		5,243		4.8%
Lease financing		8,365		279		6.7%				9,374		343		7.3%				9,438		365		7.8%
Other loans and advances		2,239		26		2.3%				5,837		51		1.7%				2,555		45		3.5%
Individual provision for credit impairment		(988)		-		n/a				(1,104)		-		n/a				(1,166)		-		n/a
		573,928		13,572		4.7%				566,505		13,643		4.8%				544,700		13,873		5.1%
Other interest earning assets
Cash		51,054		247		1.0%				46,484		209		0.9%				45,498		276		1.2%
Settlement Balances owed to ANZ		18,521		34		0.4%				16,562		46		0.6%				15,268		21		0.3%
Collateral Paid		10,737		26		0.5%				9,033		29		0.6%				7,548		31		0.8%
Trading and available-for-sale assets		98,884		1,134		2.3%				91,971		1,166		2.5%				87,995		1,187		2.7%
Regulatory Deposits		1,259		7		1.1%				1,173		4		0.7%				1,183		4		0.7%
Other assets		8		70		n/a				11		35		n/a				11		2		n/a
		180,463		1,518		1.7%				165,234		1,489		1.8%				157,503		1,521		1.9%
Total interest earning assets3		754,391		15,090		4.0%				731,739		15,132		4.1%				702,203		15,394		4.4%
Non-interest earning assets
Derivatives		79,804								71,572								65,114
Premises and equipment		2,222								2,182								2,180
Insurance assets		34,846								36,380								34,092
Other assets		32,399								32,683								29,559
Collective provision for credit impairment		(2,914)								(2,951)								(2,795)
		146,357								139,866								128,150
Total average assets		900,748								871,605								830,353
Interest bearing deposits and other borrowings
Certificates of deposit		63,722		781		2.5%				64,616		806		2.5%				60,740		884		2.9%
Term deposits		197,297		1,942		2.0%				192,790		1,951		2.0%				196,891		2,259		2.3%
On demand and short term deposits		227,027		2,193		1.9%				215,001		2,216		2.1%				199,826		2,358		2.4%
Deposits from banks		51,307		327		1.3%				53,188		327		1.2%				54,063		356		1.3%
Commercial paper		25,783		288		2.2%				21,322		253		2.4%				21,135		262		2.5%
Securities sold under agreements to repurchase		1,191		4		0.7%				1,064		7		1.3%				675		5		1.5%
Borrowing corporations’ debt		1,576		33		4.2%				1,535		36		4.7%				1,474		34		4.6%
		567,903		5,568		2.0%				549,516		5,596		2.0%				534,804		6,158		2.3%
Other interest bearing liabilities
Settlement Balances owed by ANZ		4,478		15		0.7%				3,647		17		0.9%				3,134		18		1.2%
Collateral Received		5,806		14		0.5%				5,581		20		0.7%				5,339		9		0.3%
Debt issuances & subordinated debt		101,507		1,819		3.6%				95,591		1,847		3.9%				95,815		1,901		4.0%
Other liabilities		5,109		106		4.1%				9,782		174		3.5%				6,606		170		5.2%
		116,900		1,954		3.3%				114,601		2,058		3.6%				110,894		2,098		3.8%
Total interest bearing liabilities		684,803		7,522		2.2%				664,117		7,654		2.3%				645,698		8,256		2.6%
Non-interest bearing liabilities
Deposits		19,332								18,193								17,001
Derivatives		85,666								78,374								64,382
Insurance Liabilities		35,456								36,654								34,974
External unit holder liabilities (life insurance funds)		3,291								3,491								3,181
Other liabilities		14,735								17,811								14,620
		158,480								154,523								134,158
Total average liabilities		843,283								818,640								779,856

 

1.	Averages used are predominantly daily averages.

 

2.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

3.	During the period individual provisions for credit impairment were moved from non-interest earning assets to interest earning assets to more accurately reflect the yield on impaired loans and advances. Comparatives have been restated but there was no impact on the net interest margin ratios.

 

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Average balance sheet and related interest¹ (cont’d)

 

		Half Year Mar 16								Half Year Sep 15								Half Year Mar 15
		Avg bal $M		Int $M		Rate %				Avg bal $M		Int $M		Rate %				Avg bal $M		Int $M		Rate %
Loans and advances2
Australia		387,035		9,429		4.9%				375,986		9,257		4.9%				357,608		9,480		5.3%
Asia Pacific, Europe & America		79,132		1,296		3.3%				86,886		1,317		3.0%				86,172		1,238		2.9%
New Zealand		107,761		2,847		5.3%				103,633		3,069		5.9%				100,920		3,155		6.3%
		573,928		13,572		4.7%				566,505		13,643		4.8%				544,700		13,873		5.1%
Trading and available-for-sale assets
Australia		56,200		661		2.4%				53,152		720		2.7%				50,278		725		2.9%
Asia Pacific, Europe & America		29,199		233		1.6%				26,392		211		1.6%				25,134		212		1.7%
New Zealand		13,485		240		3.6%				12,427		235		3.8%				12,583		250		4.0%
		98,884		1,134		2.3%				91,971		1,166		2.5%				87,995		1,187		2.7%
Total interest earning assets3
Australia		466,032		10,292		4.4%				450,919		10,143		4.5%				427,470		10,422		4.9%
Asia Pacific, Europe & America		162,505		1,612		2.0%				160,210		1,584		2.0%				157,469		1,512		1.9%
New Zealand		125,854		3,186		5.1%				120,610		3,405		5.6%				117,264		3,460		5.9%
		754,391		15,090		4.0%				731,739		15,132		4.1%				702,203		15,394		4.4%
Total average assets
Australia		569,243								551,794								524,435
Asia Pacific, Europe & America		188,923								183,650								176,849
New Zealand		142,582								136,161								129,069
Total average assets		900,748								871,605								830,353
% of total average assets attributable to overseas activities		36.8%								36.7%								36.8%
Interest bearing deposits and other borrowings
Australia		333,740		3,789		2.3%				320,247		3,696		2.3%				311,454		4,243		2.7%
Asia Pacific, Europe & America		151,696		547		0.7%				151,508		507		0.7%				146,851		488		0.7%
New Zealand		82,467		1,232		3.0%				77,761		1,393		3.6%				76,499		1,427		3.7%
		567,903		5,568		2.0%				549,516		5,596		2.0%				534,804		6,158		2.3%
Total interest bearing liabilities3
Australia		409,816		5,138		2.5%				396,971		5,111		2.6%				387,583		5,706		3.0%
Asia Pacific, Europe & America		172,261		714		0.8%				168,686		628		0.7%				163,031		604		0.7%
New Zealand		102,726		1,670		3.3%				98,460		1,915		3.9%				95,084		1,946		4.1%
		684,803		7,522		2.2%				664,117		7,654		2.3%				645,698		8,256		2.6%
Total average liabilities
Australia		526,500								513,643								491,356
Asia Pacific, Europe & America		193,380								187,679								179,210
New Zealand		123,403								117,318								109,290
		843,283								818,640								779,856
% of total average liabilities attributable to overseas activities		37.6%								37.3%								37.0%
Total average shareholder’s equity
Ordinary share capital, reserves and retained earnings4		57,465								52,965								50,131
Preference share capital		-								-								366
		57,465								52,965								50,497
Total average liabilities and shareholder’s equity		900,748								871,605								830,353

 

1.	Averages used are predominantly daily averages.

 

2.	Loans & advances as at 30 September 2015 include Esanda Dealer Finance assets divested to Macquarie Group Limited in the March 2016 half.

 

3.	Intra-group interest earning assets and interest income and Intra-group interest earning liabilities and interest expense have been eliminated.

 

4.	Average shareholders’ equity at 31 March 2016 includes $254 million of Wealth shares that are eliminated from the statutory shareholders’ equity balance (Sep 15: $242 million; Mar 15: $287 million).

 

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Average balance sheet and related interest (cont’d)

 

		Half Year
		Mar 16 %		Sep 15 %		Mar 15 %
Gross earnings rate1
Australia		4.51		4.58		4.98
Asia Pacific, Europe & America		1.91		1.84		1.82
New Zealand		5.06		5.63		5.92
Group		4.00		4.12		4.39
Interest spread and net interest margin may be analysed as follows:
		Half Year
		Mar 16 %		Sep 15 %		Mar 15 %
Australia1
Net interest spread		1.99		2.01		2.03
Interest attributable to net non-interest bearing items		0.28		0.29		0.26
Net interest margin - Australia		2.27		2.30		2.29
Asia Pacific, Europe & America1
Net interest spread		1.08		1.09		1.07
Interest attributable to net non-interest bearing items		0.03		0.03		0.03
Net interest margin - Asia Pacific, Europe & America		1.11		1.12		1.10
New Zealand1
Net interest spread		1.81		1.81		1.82
Interest attributable to net non-interest bearing items		0.38		0.41		0.45
Net interest margin - New Zealand		2.19		2.22		2.27
Group
Net interest spread		1.80		1.82		1.82
Interest attributable to net non-interest bearing items		0.21		0.22		0.22
Net interest margin		2.01		2.04		2.04
Net interest margin (excluding Markets)		2.52		2.51		2.51

 

1.	Geographic gross earnings rate, net interest spread and net interest margin are calculated gross of intra group items (Intra-group interest earning assets and associated interest income and intra-group interest bearing liabilities and associated interest expense).

 

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Full Time Equivalent Staff

At 31 March 2016, ANZ employed 48,896 people worldwide (Sep 15: 50,152; Mar 15: 51,243) on a full-time equivalent basis (“FTEs”).

Division

 

		As at								Movement
										Mar 16		Mar 16
		Mar 16		Sep 15		Mar 15				v Sep 15		v Mar 15
Australia		8,791		8,766		9,018				0%		-3%
Institutional		4,056		4,231		4,319				-4%		-6%
New Zealand		5,022		5,074		5,096				-1%		-1%
Wealth		2,385		2,481		2,530				-4%		-6%
Asia Retail & Pacific		3,183		3,313		3,437				-4%		-7%
TSO and Group Centre		25,459		26,287		26,843				-3%		-5%
Total		48,896		50,152		51,243				-3%		-5%
Average FTE		49,777		51,146		50,759				-3%		-2%
Geography		As at								Movement
										Mar 16		Mar 16
		Mar 16		Sep 15		Mar 15				v Sep 15		v Mar 15
Australia		20,808		21,138		22,096				-2%		-6%
Asia Pacific, Europe & America		20,025		20,910		20,910				-4%		-4%
New Zealand		8,063		8,104		8,237				-1%		-2%
Total		48,896		50,152		51,243				-3%		-5%

 

Funds Management and Insurance Income Reconciliation

 

				Half Year								Movement
		Reference		Mar 16		Sep 15		Mar 15				Mar 16		Mar 16
		Page		$M		$M		$M				v. Sep 15		v. Mar 15
Net funds management and insurance income - statutory basis		95		857		795		1,020				8%		-16%
Adjustments between cash and statutory profit
Treasury shares adjustment		95		(34)		(107)		86				-68%		large
Policyholders tax gross up		95		(32)		91		(277)				large		-88%
Revaluation of policy liabilities		95		(20)		(7)		(97)				large		-79%
Net funds management and insurance income - cash basis		95		771		772		732				0%		5%
Wealth - Net funds management and insurance income		74		727		730		699				0%		4%
Australia - Funds management and insurance income				19		19		20				0%		-5%
Asia Retail & Pacific - Funds management and insurance income				55		50		55				10%		0%
New Zealand - Funds management and insurance income				42		44		42				-5%		0%
Inter-divisional eliminations				(72)		(71)		(84)				1%		-14%
Net funds management and insurance income - cash basis		26		771		772		732				0%		5%

 

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Exchange rates

Major exchange rates used in the translation of foreign subsidiaries, branches, investments in associates and issued debt are as follows:

 

		Balance Sheet														Profit & Loss Average
		As at														Half Year
			Mar 16				Sep 15				Mar 15						Mar 16				Sep 15				Mar 15
Chinese Renminbi			4.9471				4.4573				4.7365						4.6622				4.6831				5.0786
Euro			0.6760				0.6229				0.7057						0.6558				0.6767				0.6909
Pound Sterling			0.5335				0.4625				0.5163						0.4886				0.4853				0.5295
Indian Rupee			50.741				46.142				47.759						48.101				48.141				50.911
Indonesian Rupiah			10,164				10,281				9,987						9,835				10,127				10,271
Japanese Yen			85.951				84.072				91.715						85.328				91.330				95.713
Malaysian Ringgit			3.0015				3.1176				2.8372						3.0565				2.8898				2.8623
New Taiwan Dollar			24.640				23.066				23.887						23.708				23.511				25.580
New Zealand Dollar			1.1093				1.1003				1.0188						1.0834				1.0878				1.0691
Papua New Guinean Kina			2.3724				2.0123				2.0439						2.1565				2.0649				2.1233
United States Dollar			0.7651				0.7013				0.7634						0.7212				0.7480				0.8200

Derivative financial instruments

Derivative financial instruments are contracts whose value is derived from one or more underlying variables or indices defined in the contract, require little or no initial net investment and are settled at a future date. Derivatives include contracts traded on registered exchanges and contracts agreed between counterparties. The use of derivatives and their sale to customers as risk management products is an integral part of the Group’s trading and sales activities. Derivatives are also used to manage the Group’s own exposure to fluctuations in foreign exchange and interest rates as part of its asset and liability management activities.

The following table provides an overview of the Group’s foreign exchange, interest rate, commodity and credit derivatives. They include all trading and balance sheet risk management contracts. The derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market rates relative to the terms of the derivative.

 

		Assets		Liabilities				Assets		Liabilities				Assets		Liabilities
		As at						As at						As at
Fair Values		Mar 16 $M		Mar 16 $M				Sep 15 $M		Sep 15 $M				Mar 15 $M		Mar 15 $M
Foreign exchange contracts
Spot and forward contracts		17,145		(16,911)				15,208		(13,964)				11,972		(10,515)
Swap agreements		18,000		(23,473)				20,967		(20,270)				15,369		(19,220)
Options purchased		1,388		-				2,441		-				2,539		-
Options sold		-		(1,087)				-		(2,081)				-		(2,333)
		36,533		(41,471)				38,616		(36,315)				29,880		(32,068)
Commodity contracts
Derivative contracts		2,424		(1,950)				2,750		(2,207)				2,232		(1,668)
Interest rate contracts
Forward rate agreements		35		(46)				37		(51)				10		(21)
Swap agreements		48,490		(46,127)				42,967		(40,747)				39,878		(37,062)
Futures contracts		31		(213)				28		(96)				49		(255)
Options purchased		907		-				944		-				1,140		-
Options sold		-		(1,557)				-		(1,573)				-		(1,722)
		49,463		(47,943)				43,976		(42,467)				41,077		(39,060)
Credit default swaps
Structured credit derivatives purchased		49		-				52		-				59		-
Other credit derivatives purchased		256		(268)				205		(194)				277		(323)
Total credit derivatives purchased		305		(268)				257		(194)				336		(323)
Structured credit derivatives sold		-		(62)				-		(67)				-		(77)
Other credit derivatives sold		22		(12)				26		(20)				55		(14)
Total credit derivatives sold		22		(74)				26		(87)				55		(91)
Total fair value		88,747		(91,706)				85,625		(81,270)				73,580		(73,210)

 

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Principal risks and uncertainties

 

1.	Introduction

The Group’s activities are subject to risks that can adversely impact its business, operations and financial condition. The risks and uncertainties described below are not the only ones that the Group may face. Additional risks and uncertainties that the Group is unaware of, or that the Group currently deems to be immaterial, may also become important factors that affect it. If any of the listed or unlisted risks actually occur, the Group’s business, operations, financial condition, or reputation could be materially and adversely affected, with the result that the trading price of the Group’s equity or debt securities could decline, and investors could lose all or part of their investment.

 

2.	Changes in general business and economic conditions, including disruption in regional or global credit and capital markets, may adversely affect the Group’s business, operations and financial condition

The Group’s financial performance is primarily influenced by the economic conditions and the level of business activity in the major countries and regions in which it operates or trades, i.e. Australia, New Zealand, Asia Pacific, Europe and the United States. The Group’s business, operations, and financial condition can be negatively affected by changes in economic and business conditions in these markets.

The economic and business conditions that prevail in the Group’s major operating and trading markets are affected by domestic and international economic events, political events and natural disasters, and by movements and events that occur in global financial markets.

For example, the global financial crisis saw a sudden and prolonged dislocation in credit and equity capital markets, a contraction in global economic activity and the emergence of many challenges for financial services institutions worldwide that still persist to some extent in many regions. Sovereign risk and its potential impact on financial institutions in Europe and globally subsequently emerged as a significant risk (see risk factor 5 “Sovereign risk may destabilise global financial markets adversely affecting all participants, including the Group”). The impact of the global financial crisis and its aftermath continue to affect regional and global economic activity, confidence and capital markets. Prudential authorities have implemented and continue to implement increased regulations to mitigate the risk of such events recurring, although there can be no assurance that such regulations will be effective.

Economic effects of the global financial crisis and European sovereign debt crisis have been widespread and far-reaching with unfavourable ongoing impacts on retail spending, personal and business credit growth, housing credit, and business and consumer confidence. While some of these economic factors have since improved, lasting impacts from the global financial crisis and the subsequent volatility in financial markets, the European sovereign debt crisis and the potential for escalation in geopolitical risks suggest ongoing vulnerability and potential adjustment of consumer and business behaviour.

Other current economic conditions impacting the Group and its customers include changes in the real estate markets in Australia and New Zealand (see risk factor 6 “Weakening of the real estate markets in Australia, New Zealand or other markets where the Group does business may adversely affect its business, operations and financial condition”) and a decline in natural resources demand and prices (see risk factor 20 “An increase in the failure of third parties to honour their commitments in connection with the Group’s trading, lending, derivatives and other activities may adversely affect its business, operations and financial condition”).

Should difficult economic conditions in the Group’s markets eventuate, asset values in the housing, commercial or rural property markets could decline, unemployment could rise and corporate and personal incomes could suffer. Also, deterioration in global markets, including equity, property, currency and other asset markets, could impact the Group’s customers and the security the Group holds against loans and other credit exposures, which may impact its ability to recover some loans and other credit exposures.

All or any of the negative economic and business impacts described above could cause a reduction in demand for the Group’s products and services and/or an increase in loan and other credit defaults and bad debts, which could adversely affect the Group’s business, operations, and financial condition.

The Group’s financial performance could also be adversely affected if it were unable to adapt cost structures, products, pricing or activities in response to a drop in demand or lower than expected revenues. Similarly, higher than expected costs (including credit and funding costs) could be incurred because of adverse changes in the economy, general business conditions or the operating environment in the countries in which it operates.

Geopolitical instability, such as threats of, potential for, or actual conflict, occurring around the world, such as the ongoing unrest and conflicts in the Ukraine, North Korea, Syria, Egypt, Afghanistan, Iraq and elsewhere, as well as the current high threat of terrorist activities, may also adversely affect global financial markets, general economic and business conditions and the Group’s ability to continue operating or trading in a country, which in turn may adversely affect the Group’s business, operations, and financial condition.

Natural and biological disasters such as, but not restricted to, cyclones, floods, droughts, earthquakes and pandemics, and the economic and financial market implications of such disasters on domestic and global conditions can adversely impact the Group’s ability to continue operating or trading in the country or countries directly or indirectly affected, which in turn may adversely affect the Group’s business, operations and financial condition. For more risks in relation to natural and biological disasters, refer to risk factor 22 “The Group may be exposed to the impact of future climate change, geological events, plant and animal diseases, and other extrinsic events which may adversely affect its business, operations and financial condition”.

Other economic and financial factors or events that may adversely affect the Group’s performance, and give rise to operational and markets risk are covered in risk factors 13 (“The Group is exposed to market risk, which may adversely affect its business, operations and financial condition”) and 14 (“Changes in exchange rates may adversely affect the Group’s business, operations and financial condition”).

 

3.	Competition may adversely affect the Group’s business, operations and financial conditions, in the markets in which it operates

The markets in which the Group operates are highly competitive and could become even more so. Factors that contribute to competition risk include industry regulation, mergers and acquisitions, changes in customers’ needs and preferences, entry of new participants, development of new distribution and service methods, increased diversification of products by competitors, and regulatory changes in the rules governing the operations of banks and non-bank competitors. For example, changes in the financial services sector in Australia and New Zealand have made it possible for non-banks to offer products and services traditionally provided by banks, such as payments, home loans, and credit cards. In addition, it is possible that existing companies from outside of the traditional financial services sector may seek to obtain banking licences to directly compete with the Group by offering products and services traditionally provided by banks. In addition, banks organised in jurisdictions outside Australia and

 

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New Zealand are subject to different levels of regulation and consequently some may have lower cost structures. Increasing competition for customers could also potentially lead to a compression in the Group’s net interest margins or increased advertising and related expenses to attract and retain customers.

Furthermore, increased competition for deposits could also increase the Group’s cost of funding and lead the Group to access other types of funding or reduce lending. The Group relies on bank deposits to fund a significant portion of its balance sheet and deposits have been a relatively stable source of funding. The group competes with banks and other financial services firms for such deposits. To the extent that the Group is not able to successfully compete for deposits, the Group would be forced to rely more heavily on other, potentially less stable or more expensive forms of funding, or reduce lending. This could adversely affect the Group’s business, prospects, financial performance or financial condition.

The impact on ANZ of an increase in competitive market conditions, especially in the Group’s main markets and products, would potentially lead to a material reduction in the market share and/or margins of the relevant Group business(es), which would adversely affect the Group’s financial performance and position.

 

4.	Changes in monetary policies may adversely affect the Group’s business, operations and financial condition

Central monetary authorities (including the RBA, the RBNZ, the United States Federal Reserve, the Bank of England and the monetary authorities in the Asian jurisdictions in which the Group operates) set official interest rates or take other measures to affect the demand for money and credit in their relevant jurisdictions. In some Asian jurisdictions, currency policy is also used to influence general business conditions and the demand for money and credit. These policies can significantly affect the Group’s cost of funds for lending and investing and the return that the Group will earn on those loans and investments. These factors impact the Group’s net interest margin and can affect the value of financial instruments it holds, such as debt securities and hedging instruments. The policies of the central monetary authorities can also affect the Group’s borrowers, potentially increasing the risk that they may fail to repay loans. Changes in such policies are difficult to predict.

 

5.	Sovereign risk may destabilise global financial markets adversely affecting all participants, including the Group

Sovereign risk is the risk that foreign governments will default on their debt obligations, be unable to refinance their debts as and when they fall due or nationalise parts of their economy. Sovereign risk remains in many economies, including the United States and Australia. Should one sovereign default, there could be a cascading effect to other markets and countries, the consequences of which, while difficult to predict, may be similar to or worse than those experienced during the global financial crisis and subsequent sovereign debt crises. Such events could destabilise global financial markets, adversely affecting all participants, including adversely affecting the Group’s liquidity, financial performance or financial condition.

 

6.	Weakening of the real estate markets in Australia, New Zealand or other markets where the Group does business may adversely affect its business, operations and financial condition

Residential and commercial property lending, together with real estate development and investment property finance, constitute important businesses to the Group. Major sub-segments within the Group’s lending portfolio include:

 

•

Residential housing loans, owner occupier and investment; and

 

•

Commercial real estate loans.

Declining asset prices could impact customers and counterparties and the value of the security (including residential and commercial property) we hold against loans which may impair our ability to recover amounts owing to us if customers or counterparties were to default.

A significant decrease in Australian and New Zealand housing valuations could adversely impact our home lending activities because borrowers with loans in excess of their property value show a higher propensity to default and, in the event of such defaults our security values would be eroded, causing us to incur higher credit losses which could adversely affect the Group’s financial performance and condition. The demand for our home lending products may also decline due to buyer concerns about decreases in values or concerns about rising interest rates, which could make our lending products less attractive to potential homeowners and investors.

A significant decrease in commercial property valuations or a significant slowdown in Australia, New Zealand or other commercial real estate markets where the Group does business could result in a decrease in the amount of new lending the Group is able to write and/or increase the losses that the Group may experience from existing loans, which, in either case, could materially and adversely impact the Group’s financial condition and operations. The Group’s portfolio of commercial property interest only loans, may be particularly susceptible to losses in the event of a decline in property prices as a result of refinance risk and deteriorating security values. A material decline in residential housing prices could also cause losses in our residential build to sell portfolio if customers who are pre-committed to purchase these dwellings are unable or unwilling to complete their contracts and we are forced to re-sell these dwellings at a loss.

 

7.	The Group is exposed to liquidity and funding risk, which may adversely affect its business, operations and financial condition

Liquidity risk is the risk that the Group is unable to meet its payment obligations as they fall due (including repaying depositors or maturing wholesale debt) or that the Group has insufficient capacity to fund increases in assets. Liquidity risk is inherent in all banking operations due to the timing mismatch between cash inflows and cash outflows.

Reduced liquidity could lead to an increase in the cost of the Group’s borrowings and constrain the volume of new lending, which could adversely affect the Group’s profitability. A deterioration in investor confidence in the Group could materially impact the Group’s cost of borrowing, and the Group’s ongoing operations and funding.

The Group raises funding from a variety of sources, including customer deposits and wholesale funding in Australia and offshore markets to meet its funding obligations and to maintain or grow its business generally. In times of liquidity stress, if there is damage to market confidence in the Group or if funding inside or outside of Australia is not available or constrained, the Group’s ability to access sources of funding and liquidity may be constrained and it will be exposed to liquidity risk. In any such cases, the Group may be forced to seek alternative funding. The availability of such alternative funding, and the terms on which it may be available, will depend on a variety of factors, including prevailing market conditions and the Group’s credit ratings (which are strongly influenced by Australia’s sovereign credit rating). Even if available, the cost of these funding alternatives may be more expensive or on unfavourable terms, which could adversely affect the Group’s financial performance, liquidity, capital resources and financial condition.

Since the advent of the global financial crisis in 2008, developments in the United States, European and Chinese markets have adversely affected the liquidity in global capital markets and increased funding costs compared with the period immediately preceding the global financial crisis.

 

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More recently, the provision of significant amounts of liquidity by major central banks globally has helped mitigate near term liquidity concerns, although no assurance can be given that such liquidity concerns will not return, particularly when the extraordinary liquidity is withdrawn by central banks. Future deterioration in market conditions may limit the Group’s ability to replace maturing liabilities and access funding in a timely and cost-effective manner necessary to fund and grow the Group’s businesses.

 

8.	Regulatory changes or a failure to comply with regulatory standards, law or policies may adversely affect the Group’s business, operations or financial condition

As a financial institution, the Group is subject to detailed laws and regulations in each of the jurisdictions in which it operates or obtains funding, including Australia, New Zealand, the United States, Europe and Asia Pacific. The Group is also supervised by a number of different regulatory and supervisory authorities.

The Group is responsible for ensuring that it complies with all applicable legal and regulatory requirements (including accounting standards) and industry codes of practice in the jurisdictions in which it operates or obtains funding.

Compliance risk arises from these legal, regulatory and internal- compliance requirements. If the Group, or an employee of the Group, fails to comply, the Group may be subject to fines, penalties or restrictions on its ability to do business and it may lose customer confidence and business, which could have a material adverse impact on the Group. In Australia, an example of the broad administrative power available to regulatory authorities is the power available to APRA under the Banking Act in certain circumstances to investigate the Group’s affairs and/or issue a direction to the Group (such as direction to comply with a prudential requirement, to conduct an audit, to remove a director, executive officer or employee or not to undertake a transaction). Other regulators also have the power to investigate the Group. In recent years, there have been significant increases in the nature and scale of regulatory investigations, enforcement actions (whether by court action or otherwise) and the quantum of fines issued by regulators. Recent public scrutiny of banking culture has also led to a proposal by the Opposition Australian Labor Party for a Royal Commission to investigate Australian banks. Regulatory investigations, fines, penalties or regulator imposed conditions could adversely affect the Group’s business, reputation, prospects, financial performance or financial condition.

As with other financial services providers, the Group faces increasing supervision and regulation in most of the jurisdictions in which the Group operates or obtains funding, particularly in the areas of funding, liquidity, product design and pricing, capital adequacy, conduct and prudential regulation, cyber-security, anti-bribery and corruption, anti-money laundering and counter-terrorism financing and trade sanctions.

In December 2010, the Basel Committee (BCBS) released capital reform packages known as Basel 3 to strengthen the resilience of the banking and insurance sectors, including proposals to strengthen capital and liquidity requirements for the banking sector. APRA released prudential standards implementing Basel 3 capital reforms with effect from 1 January 2013. With regards to Basel 3 liquidity reforms, APRA requires the Group to comply with the Liquidity Coverage Ratio (LCR) requirements with effect from 1 January 2015 and is currently consulting on the implementation of the Net Stable Funding Ratio (NSFR) requirements, which are expected to be implemented by 1 January 2018. Certain regulators in jurisdictions where the Group has a presence have also either implemented or are in the process of implementing Basel 3 and equivalent reforms.

Separately, since 2014, the BCBS has also released a number of consultation documents as part of its reforms aimed at simplifying the measurement of risk-weighted assets and reducing their variability across banks and jurisdictions. Consultation and finalisation of these reforms are current and on-going. Any impacts on the Group resulting from these reforms cannot be determined as final calibration is still to be finalised by the BCBS and they are also subject to the form of these proposals that APRA will implement in Australia.

In addition, there have also been a series of other regulatory releases from authorities in the various jurisdictions in which we operate or obtain funding proposing significant regulatory change for financial institutions. This includes new accounting and reporting standards, or implementing global OTC derivatives reform and the United States Dodd-Frank legislation, including the Volcker Rule promulgated thereunder.

In 2015, the Australian Government announced its response to the Financial System Inquiry (FSI). The response tasks APRA with implementation of a number of resilience-related FSI recommendations in line with emerging international regulatory practice. These FSI recommendations are intended to increase the strength of the financial system and may result in requirements to hold additional capital (such as Additional Tier 1 Capital, Tier 2 Capital or other forms of subordinated capital or senior debt that may be available to absorb loss) or additional liquid assets. The Australian Government response also endorses FSI recommendations relating to Australia’s superannuation system and retirement incomes, innovation-related issues, reforms to improve consumer outcomes when purchasing financial products, and the overall regulation of the financial sector. These are likely to result in changes to laws, regulations, codes of practice and policies that will impact the Group. The implementation of any recommendations could also result in changes to laws, regulations, codes of practice or policies which could adversely affect the Group in substantial and unpredictable ways.

Regulation is becoming increasingly extensive and complex. Some areas of potential regulatory change involve multiple jurisdictions seeking to adopt a coordinated approach. This may result in conflicts with specific requirements of the jurisdictions in which the Group operates and, in addition, such changes may be inconsistently introduced across jurisdictions. Changes may also occur in the oversight approach of regulators. It is possible for example that governments in jurisdictions in which we operate or obtain funding might revise their application of existing regulatory policies that apply to, or impact, the Group’s business, including for reasons relating to national interest and systemic stability.

Regulatory changes and the timing of their introduction continue to evolve. The nature and impact of future changes are not predictable and are beyond the Group’s control. Regulatory change may impact the Group in a range of ways, such as by requiring the Group to change its business mix, incur additional costs as a result of increased management attention, raise additional amounts of higher-quality capital (such as ordinary shares, Additional Tier 1 capital or Tier 2 capital instruments) or retain capital (through lower dividends), and hold significant levels of additional liquid assets and undertake further lengthening of the funding base. Further examples of ways in which regulatory change may impact the Group include: limiting the types, amount and composition of financial services and products the Group can offer, limiting the fees and interest that the Group may charge, increasing the ability of other banks or of non-banks to offer competing financial services or products and changes to accounting standards, taxation laws and prudential regulatory requirements. Regulatory change could adversely affect one or more of the Group’s businesses, restrict its flexibility, require it to incur substantial costs and impact the profitability of one or more business lines. Any such costs or restrictions could adversely affect the Group’s business, prospects, financial performance or financial condition.

 

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9.	The Group is exposed to the risk of receiving significant regulatory fines and sanctions in the event of breaches of regulation and law relating to anti-money laundering, counter-terrorism financing and sanctions

Anti-money laundering, counter-terrorist financing and sanctions compliance have been the subject of increasing regulatory change and enforcement in recent years. The increasingly complicated environment in which the Group operates across the Asia Pacific region has heightened these operational and compliance risks. Furthermore, the upward trend in compliance breaches by global banks and the related fines and settlement sums means that these risks continue to be an area of focus for the Group.

The Group maintains appropriate policies, and has invested in procedures and internal controls aimed to detect, prevent and report money laundering, terrorist financing, and sanctions breaches. The risk of non-compliance remains high given the scale and complexity of the Group. A failure to operate a robust program to combat money laundering, bribery and terrorist financing or to ensure compliance with economic sanctions could have serious legal and reputational consequences for the Group and its employees. Consequences can include fines, criminal and civil penalties, civil claims, reputational harm and limitations on doing business in certain jurisdictions. The Group’s foreign operations may place the Group under increased scrutiny by regulatory authorities, and may increase the risk of a member of the Group breaching applicable rules, regulations or laws.

 

10.	The Group may experience challenges in managing its capital base, which could give rise to greater volatility in capital ratios

The Group’s capital base is critical to the management of its businesses and access to funding. Prudential regulators of the Group include, but are not limited to, APRA, RBNZ and various regulators in the Asia Pacific, U.S. and U.K. The Group is required to maintain adequate regulatory capital.

Under current regulatory requirements, risk-weighted assets and expected loan losses increase as a counterparty’s risk grade worsens. These additional regulatory capital requirements compound any reduction in capital resulting from lower profits in times of stress. As a result, greater volatility in capital ratios may arise and may require the Group to raise additional capital. There can be no certainty that any additional capital required would be available or could be raised on reasonable terms.

The Group’s capital ratios may be affected by a number of factors, such as (i) lower earnings (including lower dividends from its deconsolidated subsidiaries such as those in the insurance and funds management businesses as well as from its investment in associates), (ii) increased asset growth, (iii) changes in the value of the Australian dollar against other currencies in which the Group operates (particularly the New Zealand dollar and United States dollar) that impact risk weighted assets or the foreign currency translation reserve and (iv) changes in business strategy (including acquisitions, divestments and investments or an increase in capital intensive businesses).

APRA’s Prudential Standards implementing Basel 3 are now in effect. Certain other regulators have either implemented or are in the process of implementing regulations, including Basel 3, which seek to strengthen, among other things, the liquidity and capital requirements of banks, funds management entities and insurance entities, though there can be no assurance that these regulations will have their intended effect. Some of these regulations, together with any risks arising from any regulatory changes (including those arising from the requirements of the BCBS or the Australian Government’s response to the FSI), are described in risk factor 8 “Regulatory changes or a failure to comply with regulatory standards, law or policies may adversely affect the Group’s business, operations or financial condition”.

 

11.	The Group is exposed to credit risk, which may adversely affect its business, operations and financial condition

As a financial institution, the Group is exposed to the risks associated with extending credit to other parties. Less favourable business or economic conditions, whether generally or in a specific industry sector or geographic region, or natural disasters, could cause customers or counterparties to fail to meet their obligations in accordance with agreed terms. For example, the Group’s customers and counterparties in the natural resources sector and the New Zealand dairy industry could be adversely impacted by a prolonged slowdown in the Chinese economy and current decline in commodity prices. Also, the Group’s customers and counterparties may be adversely impacted by more expensive imports due to the reduced strength of the Australian and New Zealand dollars relative to other currencies.

In addition, in assessing whether to extend credit or enter into other transactions with customers and/or counterparties, the Group relies on information provided by or on behalf of customers and/or counterparties, including financial statements and other financial information. The Group may also rely on representations of customers and independent consultants as to the accuracy and completeness of that information. The Group’s financial performance could be negatively impacted to the extent that it relies on information that is inaccurate or materially misleading.

The Group holds provisions for credit impairment. The amount of these provisions is determined by assessing the extent of impairment inherent within the current lending portfolio, based on current information. This process, which is critical to the Group’s financial condition and results, requires subjective and complex judgements, including forecasts of how current and future economic conditions might impair the ability of borrowers to repay their loans. However, if the information upon which the assessment is made proves to be inaccurate or if the Group fails to analyse the information correctly, the provisions made for credit impairment may be insufficient, which could have a material adverse effect on the Group’s business, operations and financial condition.

 

12.	The Group is exposed to the risk that its credit ratings could change, which could adversely affect its ability to raise capital and wholesale funding

The Group’s credit ratings have a significant impact on both its access to, and cost of, capital and wholesale funding. Credit ratings may be withdrawn, qualified, revised or suspended by credit rating agencies at any time. The methodologies by which they are determined may also be revised in response to legal or regulatory changes, market developments or for any other reason. A downgrade or potential downgrade to the Group’s credit rating may reduce access to capital and wholesale debt markets, leading to an increase in funding costs, as well as affecting the willingness of counterparties to transact with the Group.

In addition, the ratings of individual securities (including, but not limited to, certain Tier 1 capital and Tier 2 capital securities and covered bonds) issued by the Group (and other banks globally) could be impacted from time to time by changes in the regulatory requirements for those instruments as well as the ratings methodologies used by rating agencies. Further, the Group’s credit ratings could be revised at any time in response to a change in the credit rating of the Commonwealth of Australia.

Credit ratings are not a recommendation by the relevant rating agency to invest in securities offered by the Group.

 

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13.	The Group is exposed to market risk, which may adversely affect its business, operations and financial condition

The Group is subject to market risk, which is the risk to the Group’s earnings arising from changes in interest rates, foreign exchange rates, credit spreads, equity prices and indices, prices of commodities, debt securities and other financial contracts, such as derivatives. Losses arising from these risks may have a material adverse effect on the Group.

As the Group conducts business in several different currencies, its businesses may be affected by a change in currency exchange rates. Additionally, as the Group’s annual and interim reports are prepared and stated in Australian dollars, any appreciation in the Australian dollar against other currencies in which the Group earns revenues (particularly to the New Zealand dollar and United States dollar) may adversely affect the reported earnings.

The profitability of the Group’s funds management and insurance businesses is also affected by changes in investment markets and weaknesses in global securities markets.

 

14.	Changes in exchange rates may adversely affect the Group’s business, operations and financial condition

Movements in the Australian and New Zealand dollars in recent times illustrate the potential volatility in, and significance of global economic events to, the value of these currencies relative to other currencies. Depreciation of the Australian or New Zealand dollars relative to other currencies would increase the debt service obligations in the Group’s unhedged exposures denominated in Australian or New Zealand dollars. In contrast, any upward pressure on the Australian or New Zealand dollar could cause business conditions to deteriorate for certain portions of the Australian and New Zealand economies, including some agricultural exports, tourism, manufacturing, retailing subject to internet competition, and import-competing producers. In addition, appreciation of the Australian dollar against the New Zealand dollar, United States dollar and other currencies has a potential negative earnings translation effect on non-hedged exposures, and future appreciation could have a greater negative impact on the Group’s results from its other non-Australian businesses, particularly its New Zealand and Asian businesses, which are largely based on non-Australian dollar revenues. The relationship between exchange rates and commodity prices is volatile. The Group has put in place hedges to partially mitigate the impact of currency changes, but there can be no assurance that the Group’s hedges will be sufficient or effective, and any further appreciation could have an adverse impact upon the Group’s earnings.

 

15.	The Group is exposed to operational risk and reputational risk, which may adversely affect its business, operations and financial condition

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, and the risk of loss of reputation or damage arising from inadequate or failed internal processes, people and systems, but excludes strategic risk.

Loss from operational risk events could adversely affect the Group’s financial results. Such losses can include fines, penalties, loss or theft of funds or assets, legal costs, customer compensation, loss of shareholder value, reputation loss, loss of life or injury to people, and loss of property and/or information.

Operational risk is typically classified into the risk event type categories to measure and compare risks on a consistent basis. Examples of operational risk events according to category are as follows:

 

•

Internal Fraud: is associated with ANZ employees acting outside their normal employment conditions/procedures to create a financial advantage for themselves or others;

 

•

External Fraud: fraudulent acts or attempts which originate from outside the Group, more commonly associated with digital banking, lending, and cards products. Specific threats include ATM skimming, malware and phishing attacks and fraudulent applications, where financial advantage is obtained;

 

•

Employment Practices and Workplace Safety: employee relations, diversity and discrimination, and health and safety risks to the Group employees;

 

•

Clients, Products and Business Practices: risk of market manipulation, product defects, incorrect advice, money laundering and misuse or unauthorised disclosure of customer information;

 

•

Technology: the risk of loss resulting from inadequate or failed information technology;

 

•

Business Disruption (including systems failures): risk that the Group’s banking operating systems are disrupted or fail;

 

•

Damage to physical assets: risk that a natural disaster or terrorist or vandalism attack damages the Group’s buildings or property; and

 

•

Execution, Delivery and Process Management: is associated with losses resulting from, among other things, process errors made by ANZ employees caused by inadequate or poorly designed internal processes, or the poor execution of standard processes, vendor, supplier or outsource provider errors or failed mandatory reporting errors.

Direct or indirect losses that occur as a result of operational failures, breakdowns, omissions or unplanned events could adversely affect the Group’s financial results.

Reputation risk may arise as a result of an external event or the Group’s own actions, and adversely affect perceptions about the Group held by the public (including the Group’s customers), shareholders, investors, regulators or rating agencies. The impact of a risk event on the Group’s reputation may exceed any direct cost of the risk event itself and may adversely impact the Group’s business, operations and financial condition.

Damage to the Group’s reputation may also have wide-ranging impacts, including adverse effects on the Group’s profitability, capacity and cost of sourcing funding and availability of new business opportunities. The Group’s ability to attract and retain customers could also be adversely affected if the Group’s reputation is damaged, which could adversely affect the Group’s business prospects, financial performance or financial condition.

 

16.

The Group may be exposed to risks relating to the provision of advice, recommendations or guidance about financial products and services, or behaviours which do not appropriately consider the interests of consumers, the integrity of financial markets and the expectations of the community, in the course of its business activities

Such risks can include:

 

•

the provision of unsuitable or inappropriate advice (e.g., commensurate with a customer’s objectives and appetite for risk);

 

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•

the representation of, or disclosure about, a product or service which is inaccurate, or does not provide adequate information about risks and benefits to customers;

 

•

a failure to deliver product features and benefits in accordance with terms, disclosures, recommendations and/or advice;

 

•

a failure to appropriately avoid or manage conflicts of interest;

 

•

sales and/or promotion processes (including incentives and remuneration for staff engaged in promotion, sales and/or the provision of advice);

 

•

the provision of credit, outside of ANZ policies and standards; and

 

•

trading activities in financial markets, outside of ANZ policies and standards e.g., BBSW, LIBOR, rate fixing.

Exposure to such risks may increase during periods of declining investment asset values (such as during a period of economic downturn or investment market volatility), leading to sub-optimal performance of investment products and/or portfolios that were not aligned with the customer’s objectives and risk appetite.

The Group is regulated under various legislative mechanisms in the countries in which it operates that provide for consumer protection around advisory, marketing and sales practices. These may include, but are not limited to, appropriate management of conflicts of interest, appropriate accreditation standards for staff authorised to provide advice about financial products and services, disclosure standards, standards for ensuring adequate assessment of client/product suitability, quality assurance activities, adequate record keeping, and procedures for the management of complaints and disputes.

Inappropriate advice about financial products and services may result in material litigation (and associated financial costs) and together with failure to avoid or manage conflicts of interest, may expose the Group to regulatory actions, and/or reputational consequences.

 

17.	Disruption of information technology systems or failure to successfully implement new technology systems could significantly interrupt the Group’s business, which may adversely affect its business, operations and financial condition

The Group is highly dependent on information systems and technology. Therefore, there is a risk that these, or the services the Group uses or is dependent upon, might fail, including because of unauthorised access or use.

Most of the Group’s daily operations are computer-based and information technology systems are essential to maintaining effective communications with customers. The Group is also conscious that threats to information systems and technology are continuously evolving and that cyber threats and risk of attacks are increasing. The Group may not be able to anticipate or implement effective measures to prevent or minimise disruptions that may be caused by all cyber threats because the techniques used can be highly sophisticated and those perpetuating the attacks may be well resourced. The exposure to systems risks includes the complete or partial failure of information technology systems or data centre infrastructure, the inadequacy of internal and third-party information technology systems due to, among other things, failure to keep pace with industry developments and the capacity of the existing systems to effectively accommodate growth, prevent unauthorised access and integrate existing and future acquisitions and alliances.

To manage these risks, the Group has disaster recovery and information technology governance in place. However, there can be no guarantee that the steps the Group is taking in this regard will be effective and any failure of these systems could result in business interruption, customer dissatisfaction and ultimately loss of customers, financial compensation, damage to reputation and/or a weakening of the Group’s competitive position, which could adversely impact the Group’s business and have a material adverse effect on the Group’s financial condition and operations.

In addition, the Group has an ongoing need to update and implement new information technology systems, in part to assist it to satisfy regulatory demands, ensure information security, enhance computer-based banking services for the Group’s customers and integrate the various segments of its business. The Group may not implement these projects effectively or execute them efficiently, which could lead to increased project costs, delays in the ability to comply with regulatory requirements, failure of the Group’s information security controls or a decrease in the Group’s ability to service its customers. ANZ New Zealand relies on ANZBGL to provide a number of information technology systems, and any failure of ANZBGL systems could directly affect ANZ New Zealand.

 

18.	The Group is exposed to risks associated with information security, which may adversely affect its financial results and reputation

Information security means protecting information and information systems from unauthorised access, use, disclosure, disruption, modification, perusal, inspection, recording or destruction. As a bank, the Group handles a considerable amount of personal and confidential information about its customers and its own internal operations, including in Australia, New Zealand and India. The Group employs a team of information security experts who are responsible for the development and implementation of the Group’s Information Security Policy. The Group also uses third parties to process and manage information on its behalf, and any failure on their part could adversely affect its business. The Group is conscious that threats to information systems are continuously evolving and that cyber threats and risk of attacks are increasing, and as such the Group may be unable to develop policies and procedures to adequately address or mitigate such risks. Accordingly, information about the Group and/or our clients may be inadvertently accessed, inappropriately distributed or illegally accessed or stolen. The Group may not be able to anticipate or to implement effective measures to prevent or minimise damage that may be caused by all information security threats because the techniques used can be highly sophisticated and those perpetuating the attacks may be well resourced. Any unauthorised access of the Group’s information systems or unauthorised use of its confidential information could potentially result in disruption of the Group’s operations, breaches of privacy laws, regulatory sanctions, legal action, and claims for compensation or erosion to the Group’s competitive market position, which could adversely affect the Group’s financial position and reputation.

 

19.	Unexpected changes to the Group’s licence to operate in any jurisdiction may adversely affect its business, operations and financial condition

The Group is licenced to operate in various countries, states and territories. Unexpected changes in the conditions of the licences to operate by governments, administrations or regulatory agencies which prohibit or restrict the Group from trading in a manner that was previously permitted may adversely impact the Group’s operations and subsequent financial results.

 

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20.	An increase in the failure of third parties to honour their commitments in connection with the Group’s trading, lending, derivatives and other activities may adversely affect its business, operations and financial condition

The Group is exposed to the potential risk of credit-related losses that can occur as a result of a counterparty being unable or unwilling to honour its contractual obligations. As with any financial services organisation, the Group assumes counterparty risk in connection with its lending, trading, derivatives, insurance and other businesses where it relies on the ability of a third party (including reinsurers) to satisfy its financial obligations to the Group on a timely basis. The Group is also subject to the risk that its rights against third parties may not be enforceable in certain circumstances.

The risk of credit-related losses may also be increased by a number of factors, including deterioration in the financial condition of the economy, a sustained high level of unemployment, a deterioration of the financial condition of the Group’s counterparties, a reduction in the value of assets the Group holds as collateral, and a reduction in the market value of the counterparty instruments and obligations it holds.

The Group is directly and indirectly exposed to the natural resources sector, including contractors and related industries. Lower commodity prices, mining activity, demand for resources, or corporate investment in the natural resources sector may adversely affect the amount of new lending the Group is able to write, or lead to an increase in lending losses from this sector. Recently, crude oil prices have reached a 12 year low and a prolonged period of low oil prices, beyond 12 months, is likely to result in reduced investment and increased asset write downs. The suddenness and magnitude of oil price decline and the shift in sentiment towards this sector introduces challenges across the energy supply chain. Upstream exploration and production firms and related services operators are currently the most directly exposed as new project investment is wound back and operations rationalised. Services to mining customers are also subject to heightened oversight given the cautious outlook for the services sector. This industry-specific revenue decline may lead to a broader regional economic downturn with a long recovery period.

Credit losses can and have resulted in financial services organisations realising significant losses and in some cases failing altogether. Should material unexpected credit losses occur to the Group’s credit exposures, it could have an adverse effect on the Group’s business, operations and financial condition.

 

21.	The unexpected loss of key staff or inadequate management of human resources may adversely affect the Group’s business, operations and financial condition

The Group’s ability to attract and retain suitably qualified and skilled employees is an important factor in achieving its strategic objectives. The Chief Executive Officer and the management team of the Chief Executive Officer have skills and reputation that are critical to setting the strategic direction, successful management and growth of the Group, and whose unexpected loss due to resignation, retirement, death or illness may adversely affect its operations and financial condition. If the Group had difficulty retaining or attracting highly qualified people for important roles, this also could adversely affect its business, operations and financial condition.

 

22.	The Group may be exposed to the impact of future climate change, geological events, plant, animal and human diseases, and other extrinsic events which may adversely affect its business, operations and financial condition

The Group and its customers are exposed to climate related events, including climate change. These events include severe storms, drought, fires, cyclones, hurricanes, floods and rising sea levels. The Group and its customers may also be exposed to other events such as geological events (including volcanic seismic activity or tsunamis), plant and animal diseases or a pandemic.

Depending on their severity, events such as these may temporarily interrupt or restrict the provision of some local or Group services, and may also adversely affect the Group’s financial condition or collateral position in relation to credit facilities extended to customers.

 

23.	The Group is exposed to insurance risk, which may adversely affect its business, operations and financial condition

Insurance risk is the risk of loss due to unexpected changes in current and future insurance claim rates. In the Group’s life insurance business, insurance risk arises primarily through mortality (death) and morbidity (illness and injury) risks being greater than expected and, in the case of annuity business, should annuitants live longer than expected. In August 2015, ANZ ceased to issue home, car and travel insurance and became a distributer only of these products. The general insurance business now solely comprises a small amount of unemployment benefit. The Group has exposure to insurance risk in both its life insurance and general insurance business, which may adversely affect its businesses, operations and financial condition.

 

24.	The Group is exposed to increased compliance costs and the risk of penalties and regulatory scrutiny with respect to the significant obligations imposed by global tax reporting regimes which are still evolving

In 2010, the U.S. enacted the Foreign Account Tax Compliance Act (“FATCA”) that requires non-U.S. banks and other financial institutions to undertake specific customer due diligence and provide information on account holders who are U.S. citizens or residents to the United States Federal tax authority, the Internal Revenue Service (“IRS”). The United States has entered into intergovernmental agreements (“IGAs”) with a number of jurisdictions (including Australia and New Zealand) which generally require such jurisdictions to enact legislation or other binding rules pursuant to which local financial institutions and branches provide such information to their local revenue authority to then forward to the IRS. In countries that have not entered into such an agreement, the financial institution must enter into an agreement directly with the IRS to complete similar obligations and provide similar information directly to the United States. If the aforementioned customer due diligence and provision of account holder information is not undertaken and provided in a manner and form meeting the applicable requirements, the Group and/or persons owning assets in accounts with Group members may be subjected to a 30 percent withholding tax on certain amounts. While such withholding tax may currently apply only to certain payments derived from sources within the United States (and, beginning on 1 January 2019, certain gross proceeds from the disposition of assets that can give rise to such U.S. source payments), no such withholding tax will be imposed on any payments derived from sources outside the United States that are made prior to 1 January 2019, at the earliest. Australia and New Zealand have each signed an IGA with the United States and have enacted legislation to implement the respective IGAs. Local guidance in relation to the enacted legislation is still evolving.

In addition to FATCA, the U.S. may require the Group in certain circumstances to provide certain information to U.S. payors (withholding agents, custodians, etc.), and the Group may face adverse consequences in case it does not provide such information in compliance with the applicable rules and regulations.

The Organisation for Economic Co-operation and Development (“OECD”) has finalised a global Common Reporting Standard (“CRS”) for the Automatic Exchange Of (financial account) Information (“AEOI”) in tax matters. Over 90 jurisdictions have committed to implement the CRS in 2016 or 2017, with the first exchange of information to take place in 2017 or 2018. Countries with a start date of 1 January, 2016 include Cayman Islands, France, Germany, India, the United Kingdom and South Korea. On 3 June 2015, Australia signed the Multilateral Competent Authority Agreement

 

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(“MCAA”) that enables Common Reporting Standard information to be exchanged between countries’ tax authorities. Several countries, including Canada, New Zealand and India, also signed the MCAA on 3 June 2015. Australia has legislated for the CRS to apply from 1 July 2017 (with the government to government exchange of information to take place by September 2018). Australian financial institutions that do not fully comply with all the requirements of the CRS (as modified by the implementing legislation), will be subject to administrative penalties.

To date, no legislation has been introduced in the New Zealand Parliament to support implementation of the CRS although the New Zealand Government has recently released a media statement announcing that it intends for the CRS to apply from 1 July 2017 (with exchange of information to take place in September 2018) and preliminary consultation activities on an approach to CRS have commenced.

In countries where an entity of the Group (including certain trusts and branches) operates and which maintains financial accounts, there may be a requirement to collect customer information including customers’ tax residence and report it to local tax authorities. Even if an entity of the Group does not operate in a country that has adopted CRS, it will still be required to capture information on residents of that country who have an account with the Group. CRS requirements, though generally similar to FATCA, have significant differences and a higher standard of compliance in many aspects, including penalties for non-collection of prescribed customer information.

In addition to FATCA and CRS, there are an increasing number of tax reporting initiatives that require financial institutions to undertake due diligence and report customer information including the Annual Investment Income Report (Australia), UK Crown Dependency and Overseas Territory (“CDOT”) automatic exchange of information regime and many others that will require due diligence and reporting to the in-country revenue authority.

In line with other global financial institutions, ANZ has made and is expected to make significant investments in order to comply with, in all the countries that it operates in, the extensive requirements of FATCA, the CRS and the various other in-country tax reporting initiatives.

 

25.	The Group may experience changes in the valuation of some of its assets and liabilities that may have a material adverse effect on its earnings and/or equity

Under AASs, the Group recognises the following instruments at fair value with changes in fair value recognised in earnings or equity:

 

•

derivative instruments, including in the case of fair value hedging, the fair value adjustment on the underlying hedged exposure with changes in fair value recognised in earnings with the exception of derivatives designated in qualifying cash flow or net investment hedges where the change is recognised in equity and released to earnings together with the underlying hedged exposure;

 

•

assets and liabilities held for trading;

 

•

available-for-sale assets with changes in fair value recognised in equity unless the asset is impaired, in which case, the decline in fair value is recognised in earnings; and

 

•

assets and liabilities designated at fair value through profit and loss with changes recognised in earnings with the exception of changes in fair value attributable to the own credit component of liabilities that is recognised in equity.

Generally, in order to establish the fair value of these instruments, the Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently active, fair values are based on present value estimates or other accepted valuation techniques which incorporate the impact of factors that would influence the fair value as determined by a market participant. The fair value of these instruments is impacted by changes in market prices or valuation inputs which could have a material adverse effect on the Group’s earnings.

In addition, the Group may be exposed to a reduction in the value of non-lending related assets as a result of impairments loss which is recognised in earnings. The Group is required to assess the recoverability of the goodwill balances at least annually and other non-financial assets including Premises and Equipment, investment in associates, capitalised software and other intangible assets (including acquired portfolio of insurance and investment business and deferred acquisition costs) where there are indictors of impairment.

For the purpose of assessing the recoverability of the goodwill balances, the Group uses either a discounted cash flow or a multiple of earnings calculation. Changes in the assumptions upon which the calculation is based, together with expected changes in future cash flows, could materially impact this assessment, resulting in the potential write-off of a part or all of the goodwill balances.

In respect of other non-financial assets, in the event that an asset is no longer in use, or that the cash flows generated by the asset do not support the carrying value, impairment may be recorded.

 

26.	Changes to accounting policies may adversely affect the Group’s financial position or performance

The accounting policies and methods that the Group applies are fundamental to how it records and reports its financial position and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and methods so that they not only comply with generally accepted accounting principles but they also reflect the most appropriate manner in which to record and report on the Group’s financial position and results of operations. However, these accounting policies may be applied inaccurately, resulting in a misstatement of the Group’s financial position and results of operations. In addition, the application of new or revised generally accepted accounting principles could have a material adverse effect on the Group’s financial position and results of operations.

In some cases, management must select an accounting policy or method from two or more alternatives, any of which might comply with the generally accepted accounting principles applicable to the Group and be reasonable under the circumstances, yet might result in reporting materially different outcomes than would have been reported under another alternative.

 

27.	Litigation and contingent liabilities may adversely affect the Group’s business, operations and financial condition

From time to time, the Group may be subject to material litigation, regulatory actions, legal or arbitration proceedings and other contingent liabilities which, if they crystallise, may adversely affect the Group’s results.

The Group had contingent liabilities as at 31 March 2016 in respect of the matters outlined in Note 20 to the Condensed Consolidated Financial Statements for the half year ended 31 March 2016.

There is a risk that contingent liabilities may be larger than anticipated or that additional litigation or other contingent liabilities may arise.

 

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28.	The Group regularly considers acquisition and divestment opportunities, and there is a risk that the Group may undertake an acquisition or divestment that could result in a material adverse effect on its business, operations and financial condition

The Group regularly examines a range of corporate opportunities, including material acquisitions and disposals, with a view to determining whether those opportunities will enhance the Group’s strategic position and financial performance.

There can be no assurance that any acquisition (or divestment) would have the anticipated positive results, including results relating to the total cost of integration (or separation), the time required to complete the integration (or separation), the amount of longer-term cost savings, the overall performance of the combined (or remaining) entity, or an improved price for the Group’s securities. The Group’s operating performance, risk profile and capital structure may be affected by these corporate opportunities and there is a risk that the Group’s credit ratings may be placed on credit watch or downgraded if these opportunities are pursued.

Integration (or separation) of an acquired (or divested) business can be complex and costly, sometimes including combining (or separating) relevant accounting and data processing systems, and management controls, as well as managing relevant relationships with employees, customers, regulators, counterparties, suppliers and other business partners. Integration (or separation) efforts could create inconsistencies in standards, controls, procedures and policies, as well as diverting management attention and resources. This could adversely affect the Group’s ability to conduct its business successfully and impact the Group’s operations or results. Additionally, there can be no assurance that employees, customers, counterparties, suppliers and other business partners of newly acquired (or retained) businesses will remain post-acquisition (or post-divestment), and the loss of employees, customers, counterparties, suppliers and other business partners could adversely affect the Group’s operations or results.

 

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DEFINITIONS

 

 

 

AASB – Australian Accounting Standards Board. The term “AASB” is commonly used when identifying Australian Accounting Standards issued by the AASB.

 

ADI – Authorised Deposit-taking Institution.

 

APRA – Australian Prudential Regulation Authority.

 

APS – ADI Prudential Standard.

 

BCBS – Basel Committee on Banking Supervision.

 

Cash and cash equivalents comprise coins, notes, money at call, balances held with central banks, liquid settlement balances (readily convertible to known amounts of cash which are subject to insignificant risk of changes in value) and securities purchased under agreements to resell (“reverse repos”) in less than three months.

 

Cash profit is an additional measure of profit which is prepared on a basis other than in accordance with accounting standards. Cash profit represents ANZ’s preferred measure of the result of the ongoing business activities of the Group, enabling readers to assess Group and Divisional performance against prior periods and against peer institutions. To calculate cash profit, the Group excludes non-core items from statutory profit as noted below. These items are calculated consistently period on period so as not to discriminate between positive and negative adjustments.

Gains and losses are adjusted where they are significant, or have the potential to be significant in any one period, and fall into one of three categories:

 

1.

gains or losses included in earnings arising from changes in tax, legal or accounting legislation or other non-core items not associated with the ongoing operations of the Group;

 

2.

treasury shares, revaluation of policy liabilities, economic hedging impacts and similar accounting items that represent timing differences that will reverse through earnings in the future; and

 

3.

accounting reclassifications between individual line items that do not impact reported results, such as policyholder tax gross up.

Cash profit is not a measure of cash flow or profit determined on a cash accounting basis.

 

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

 

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

 

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

 

Credit valuation adjustment (CVA) – Over the life of a derivative instrument, ANZ uses a CVA model to adjust fair value to take into account the impact of counterparty credit quality. The methodology calculates the present value of expected losses over the life of the financial instrument as a function of probability of default, loss given default, expected credit risk exposure and an asset correlation factor. Impaired derivatives are also subject to a CVA.

 

Customer deposits represent term deposits, other deposits bearing interest, deposits not bearing interest and borrowing corporations’ debt excluding securitisation deposits.

 

Dividend payout ratio is the total ordinary dividend payment divided by profit attributable to shareholders of the Company, adjusted for the amount of preference share dividends paid.

 

Gross loans and advances (GLA) is made up of loans and advances, acceptances and capitalised brokerage/mortgage origination fees less unearned income.

 

IFRS – International Financial Reporting Standards.

 

Impaired assets are those financial assets where doubt exists as to whether the full contractual amount will be received in a timely manner, or where concessional terms have been provided because of the financial difficulties of the customer. Financial assets are impaired if there is objective evidence of impairment as a result of a loss event that occurred prior to the reporting date, and that loss event has had an impact, which can be reliably estimated, on the expected future cash flows of the individual asset or portfolio of assets.

 

Impaired loans comprise drawn facilities where the customer’s status is defined as impaired.

 

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

 

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

 

1.

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

 

2.

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

 

3.

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

 

Internationally comparable ratios are ANZ’s interpretation of the regulations documented in the Basel Committee publications; “Basel 3: A global regulatory framework for more resilient banks and banking systems” (June 2011) and “International Convergence of Capital Measurement and Capital Standards” (June 2006). They also include differences identified in APRA’s information paper entitled International Capital Comparison Study (13 July 2015).

 

Net interest margin (NIM) is net interest income as a percentage of average interest earning assets.

 

Net loans and advances represent gross loans and advances less provisions for credit impairment.

 

Net tangible assets equal share capital and reserves attributable to shareholders of the Company less preference share capital and unamortised intangible assets (including goodwill and software).

 

Operating expenses include personnel expenses, premises expenses, technology expenses, restructuring expenses, and other operating expenses (excluding credit impairment charges).

 

 

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DEFINITIONS

 

 

 

Operating income includes net interest income, net fee and commission income, net funds management and insurance income, share of associates’ profit and other income.

 

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

 

Return on average assets is the profit attributable to shareholders of the Company, adjusted for the amount of preference share dividends paid, divided by average total assets.

 

Return on average ordinary shareholders’ equity is the profit attributable to shareholders of the Company, adjusted for the amount of preference share dividends paid, divided by average ordinary shareholders’ equity.

 

Regulatory deposits are mandatory reserve deposits lodged with local central banks in accordance with statutory requirements.

 

Risk weighted assets (RWA) – Assets (both on and off-balance sheet) are risk weighted according to each asset’s inherent potential for default and what the likely losses would be in the case of default. In the case of non asset backed risks (i.e. market and operational risk), RWA is determined by multiplying the capital requirements for those risks by 12.5.

 

Settlement balances owed to / by ANZ represent financial assets and/or liabilities which are in the course of being settled. These may include trade dated assets and liabilities, nostro / vostro accounts and securities settlement accounts.

 

 

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DEFINITIONS

 

 

 

Description of divisions

During the March 2016 half, the Group announced changes to the organisation’s structure to better meet the needs of our retail, commercial and institutional customers. As a result of these organisational changes there are six reported divisions; Australia, New Zealand, Institutional, Asia Retail & Pacific, Wealth and Technology, Services & Operations (“TSO”) and Group Centre. These divisions were created by removing the Asia Retail & Pacific business from the former International & Institutional Banking (“IIB”) division, and repositioning minority investments in Asia from IIB to the Group Centre. The residual IIB business has been renamed Institutional.

The Wealth changes designed to simplify the approach to the wealth management business will not take effect until 1 April 2016.

Australia

The Australia division comprises the Retail and Corporate & Commercial Banking (C&CB) business units.

 

•

Retail provides products and services to consumer customers via the branch network, mortgage specialists, the contact centre and a variety of self-service channels (internet banking, phone banking, ATMs, website and mobile phone banking).

 

•

C&CB provides a full range of banking services including traditional relationship banking and sophisticated financial solutions; including asset financing through dedicated managers focusing on privately owned small, medium and large enterprises as well as the agricultural business segment.

Institutional

The Institutional division services global institutional and business customers across three product sets: Transaction Banking, Loans & Specialised Finance and Markets.

 

•

Transaction Banking provides working capital and liquidity solutions including documentary trade, supply chain financing, structured trade finance as well as cash management solutions, deposits, payments and clearing.

 

•

Loans & Specialised Finance provides specialised loan structuring and execution, loan syndication, project and export finance, debt structuring and acquisition finance, structured asset finance and corporate advisory.

 

•

Markets provide risk management services on foreign exchange, interest rates, credit, commodities, debt capital markets and wealth solutions in addition to managing the Group’s interest rate exposure and liquidity position.

New Zealand

The New Zealand division comprises the Retail and Commercial business units.

 

•

Retail provides products and services to consumer and small business banking customers via the branch network, mortgage specialists, business managers, the contact centre and a variety of self-service channels (internet banking, phone banking, ATMs, website and mobile phone banking).

 

•

Commercial provides a full range of banking services including traditional relationship banking and sophisticated financial solutions including asset financing through dedicated managers focusing on privately owned medium to large enterprises and the agricultural business segment.

Wealth

The Wealth division comprises Insurance, Funds Management and Private Wealth business units which provide insurance, investment, superannuation and private banking solutions to customers in the Asia Pacific region to make it easier for them to connect with, protect and grow their wealth.

 

•

Insurance includes life insurance, general insurance and ANZ Lenders Mortgage Insurance.

 

•

Funds Management includes the Pensions and Investments business and E*TRADE.

 

•

Private Wealth includes private banking business which specialises in assisting individuals and families to manage, grow and preserve their wealth.

Asia Retail & Pacific

The Asia Retail & Pacific division comprises the Asia Retail and Pacific business units, connecting customers to specialists for their banking needs.

 

•

Asia Retail provides general banking and wealth management services to affluent and emerging affluent retail customers across nine Asian countries via relationship managers, branches, contact centres and a variety of self-service digital channels (internet and mobile banking, phone and ATMs). Core products offered include deposits, credit cards, loans, investments and insurance.

 

•

Pacific provides products and services to retail customers and small to medium sized enterprises located in the Pacific Islands (excluding Papua New Guinea). Products and services include retail products provided to consumers, traditional relationship banking and sophisticated financial solutions provided to business customers through dedicated managers.

Technology, Services & Operations and Group Centre

TSO and Group Centre provide support to the operating divisions, including technology, operations, shared services, property, risk management, financial management, strategy, marketing, human resources and corporate affairs. The Group Centre includes Group Treasury, Shareholder Functions and minority investments in Asia.

 

 

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ASX APPENDIX 4D – CROSS REFERENCE INDEX

 

 

 

		Page
Details of the reporting period (4D Item 1)			After front cover
Results for Announcement to the Market (4D Item 2)			After front cover
Net Tangible Assets per security (4D Item 3)			12
Details of entities over which control has been gained or lost (4D Item 4)			125
Dividends and dividend dates (4D Item 5)			After front cover
Dividend Reinvestment Plan (4D Item 6)			After front cover
Details of associates and joint venture entities (4D Item 7)			125

 

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ALPHABETICAL INDEX

 

 

 

		PAGE
Appendix 4D Statement			2
Appendix 4D Cross Reference Index			151
Auditor’s Review Report and Independence Declaration			128
Basis of Preparation			104
Changes in Composition of the Group			125
Condensed Consolidated Balance Sheet			101
Condensed Consolidated Cash Flow Statement			102
Condensed Consolidated Income Statement			99
Condensed Consolidated Statement of Comprehensive Income			100
Condensed Statement of Changes in Equity			103
Contingent Liabilities and Contingent Assets			125
Credit Risk			116
Definitions			148
Deposits and Other Borrowings			114
Directors’ Declaration and Responsibility Statement			127
Directors’ Report			98
Dividends			108
Divisional Results			49
Earnings Per Share			109
Fair Value Measurement			118
Geographic Results			83
Group Results			21
Income			106
Income Tax Expense			108
Investments In Associates			125
Net Loans and Advances			112
News Release			5
Note to the Cash Flow Statement			111
Operating Expenses			107
Profit Reconciliation			91
Provision for Credit Impairment			113
Related Party Disclosures			125
Segment Analysis			110
Share Capital			123
Shareholders’ Equity			123
Strategic Review			19
Subordinated Debt			115
Subsequent Events Since Balance Date			126
Summary			9
Supplementary Information – Average Balance Sheet and Related Interest			134
Supplementary Information – Capital Management			130
Supplementary Information – Derivative Financial Instruments			138
Supplementary Information – Exchange Rates			138
Supplementary Information – Full Time Equivalent Staff			137
Supplementary Information – Funds Management and Insurance Income Reconciliation			137
Supplementary Information – Principal Risks and Uncertainties			139

 

152