UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 20-F

 

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
Or
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2008
Or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Or
o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 1-10167

 

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

 

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

 

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

 

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

 

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

 

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

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: 4.625% Subordinated Notes Due 2018

 

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

 

Ordinary shares                                                                         1,894,285,984 fully paid

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o     No x

 

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

Yes o     No x

 

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

Yes x     No o

 

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

Large accelerated filer x        Accelerated Filer o        Non-accelerated filer o

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

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

Other o

 

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

Yes o     No x

 

 

 

2008 Annual Report

 

 

Information contained in or otherwise accessible through the web sites mentioned in this Annual Report does not form part of the report unless we specifically state that the information is incorporated by reference thereby forming part of the report.  All references in this report to web sites are inactive textual references and are for information only.

 

 

 

Annual Report
Form 20-F cross-reference index		2
Guide 3 cross-reference index		4
Section 1		7
Information on Westpac		10
Corporate governance		21
Directors’ report		38
Directors and Group Executives		63
Section 2		67
Four year summary		68
Key information		69
Financial review		70
Overview of performance		78
Income statement review		79
Balance sheet review		85
Asset quality		86
Business group results		88
Liquidity and funding		96
Capital resources		99
Risk management		101
Additional financial information (prepared in accordance with AGAAP)		107
Selected consolidated financial and operating data		107
Section 3		119
Financial report		120
Section 4		277
Shareholding information		278
Additional information		286
Glossary of abbreviations		293

 

In this Annual Report references to ‘Westpac’, ‘Group’, ‘we’, ‘us’ and ‘our’ are to Westpac Banking Corporation ABN 33 007 457 141 and its subsidiaries unless they clearly mean just Westpac Banking Corporation.

 

1

 

Form 20-F cross-reference index

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

 

20-F item number and description			Page
Part I
Item 1.	Identity of directors, senior management and advisers		Not applicable
Item 2.	Offer statistics and expected timetable		Not applicable
Item 3.	Key information
	Selected financial data		9, 11, 69-72
	Capitalisation and indebtedness		Not applicable
	Reasons for the offer and use of proceeds		Not applicable
	Risk factors		72-76
Item 4.	Information on Westpac
	History and development of Westpac		10, 13-16
	Business overview		10-20
	Organisational structure		10
	Property, plant and equipment		13-14
Item 4A.	Unresolved staff comments		Not applicable
Item 5.	Operating and financial review and prospects
	Critical accounting estimates		77-78
	Operating results		78-95
	Liquidity and capital resources		96-100
	Research and development, patents, licences etc.		Not applicable
	Trend information		78-95
	Off-balance sheet arrangements		98
	Tabular disclosure of contractual obligations		99
	Safe harbor		8
Item 6.	Directors, senior management and employees
	Directors and senior management		22-25, 38-39, 63-66
	Compensation		18-19, 44-60, 258-266
	Board practices		22-26, 29-35, 38-39, 63
	Employees		18
	Share ownership		40-41, 258-266
Item 7.	Major equity holders and related party transactions
	Major equity holders		278-281
	Related party transactions		78, 258
	Interests of experts and counsel		Not applicable
Item 8.	Financial information
	Consolidated statements and other financial information		119-274
	Significant changes		14-16, 268-269
Item 9.	The offer and listing		281
Item 10.	Additional information
	Share capital		Not applicable
	Memorandum and articles of association		286-289
	Material contracts		14-16
	Exchange controls		282-283
	Taxation		283-285
	Dividends and paying agents		Not applicable
	Statements by experts		Not applicable
	Documents on display		289
	Subsidiary information		Not applicable
Item 11.	Quantitative and qualitative disclosures about market risk		101-106
Item 12.	Description of securities other than equity securities		Not applicable

 

2

 

Part II
Item 13.	Defaults, dividend arrearages and delinquencies		Not applicable
Item 14.	Material modifications to the rights of security holders and use of proceeds		Not applicable
Item 15.	Controls and procedures		106, 271, 274
Item 16A.	Audit committee financial expert		29-30
Item 16B.	Code of ethics		26-28
Item 16C.	Principal accountant fees and services		78, 244
Item 16D.	Exemptions from the Listing Standards for audit committees		Not applicable
Item 16E.	Purchases of equity securities by the issuer and affiliated purchasers		100, 172-173, 184
Part III
Item 17 & 18	Financial statements		119-269
Item 19.	Exhibits
Consolidated income statements for the years ended 30 September 2008, 2007 and 2006			121
Consolidated balance sheets as at 30 September 2008 and 2007			122
Consolidated statements of recognised income and expense for the years ended 30 September 2008, 2007 and 2006			123
Consolidated statements of cash flows for the years ended 30 September 2008, 2007 and 2006			124
Notes to the financial statements			125-269
Management’s report on the internal control over financial reporting			271
Report of independent registered public accounting firm			272-274

 

3

 

Guide 3 cross-reference index

 

		Page
Part I Distribution of assets, liabilities and stockholder’s equity: interest rates and interest differential
Average balance sheets		71, 185-188
Analysis of net interest earnings		79-81, 185-188
Volume and rate movement		79-81, 185-188
Part II Investment portfolio
Book value of investments		147-148
Maturity profile		149, 218
Book value and market value > 10% of shareholders		148
Part III Loan portfolio
Types of loans		111, 115, 151
Maturities and sensitivities of loans to changes in interest rates		152
Risk elements
Non-accrual, past due and restructured loans		114, 209-210
Potential problem loans		87
Foreign outstandings		103
Loan concentrations		Not applicable
Other interest bearing assets		146
Part IV Summary of loan loss experience
Analysis of the allowance for loan losses		112-113, 116-117, 154-156
Allocation of the allowance for loan losses		112-113, 116-117, 154-156
Part V Deposits		163-164
Part VI Return on equity and assets		68, 72
Part VII Short-term borrowings		168

 

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5

 

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6

 

Section 1

 

Information on Westpac

Corporate governance

Directors’ report

Directors and Group Executives

 

7

 

Disclosure regarding forward-looking statements

 

This Annual Report contains statements that constitute ‘forward-looking statements’ within the meaning of section 21E of the US Securities Exchange Act of 1934. The US Private Securities Litigation Reform Act of 1995 provides a ‘safe harbor’ for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as the information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information.

 

Forward-looking statements are statements about matters that are not historical facts. Forward-looking statements appear in a number of places in this Annual Report and include statements regarding our intent, belief or current expectations with respect to our business and operations, market conditions, results of operations and financial condition, including, without limitation, future loan loss provisions and financial support to certain borrowers. We use words such as ‘will’, ‘may’, ‘expect’, ‘intend’, ‘seek’, ‘would’, ‘should’, ‘could’, ‘continue’, ‘plan’, ‘estimate’, ‘anticipate’, ‘believe’, ‘probability’, ‘risk’, or other similar words to identify forward-looking statements. These statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of the risks or uncertainties materialise, or should underlying assumptions prove incorrect, actual results may vary materially from the plans, objectives, expectations, estimates and intentions described in this Annual Report as currently anticipated, believed, estimated, expected or intended.

 

The factors that may impact on forward-looking statements made by us include but are not limited to:

 

·                   adverse conditions in global debt and equity markets;

 

·                   the impact of the announced changes to our organisational structure and division of frontline personnel and senior management;

 

·                   our ability to successfully integrate St.George Bank Limited (St.George) into Westpac, including our ability to realise anticipated synergies and the costs of achieving those synergies;

 

·                   inflation, interest rate, exchange rate, market and monetary fluctuations;

 

·                   market liquidity and investor confidence;

 

·                   the effect of, and changes in, laws, regulations, taxation or accounting standards or practices and government policy;

 

·                   changes in consumer spending, saving and borrowing habits in Australia, New Zealand and in other countries in which we conduct our operations;

 

·                   the effects of competition in the geographic and business areas in which we conduct operations;

 

·                   the ability to maintain or to increase market share and control expenses;

 

·                   the timely development of and acceptance of new products and services and the perceived overall value of these products and services by users;

 

·                   technological changes;

 

·                   macroeconomic conditions in the global debt and equity markets;

 

·                   demographic changes and changes in political, social or economic conditions in any of the major markets in which we operate;

 

·                   stability of Australian and international financial systems and disruptions to financial markets and any losses we may experience as a result;

 

·                   our ability to complete, integrate or process acquisitions and dispositions; and

 

·                   various other factors beyond our control.

 

The above list is not exhaustive. For certain other factors that may impact on forward-looking statements made by us, refer to the section on ‘Risk factors’ in this Annual Report. When relying on forward-looking statements to make decisions with respect to us, investors and others should carefully consider the foregoing factors and other uncertainties and events.

 

We are under no obligation, and do not intend, to update any forward-looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise, after the date of this Annual Report.

 

Financial information

 

The financial statements and other financial information for the years ended 30 September 2008, 2007, 2006 and 2005 included elsewhere in this Annual Report, unless otherwise indicated, have been prepared and presented in accordance with the requirements of the Australian Equivalents to International Financial Reporting Standards (A-IFRS) and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) for the first time in preparing financial statements for the year ended 30 September 2006. Westpac applied the transition rules upon first time adoption of A-IFRS.

 

Previously published financial statements for our financial year ended 30 September 2005, as well as all prior financial periods, were prepared in accordance with accounting principles generally accepted in Australia at the time those financial statements were prepared Australian Generally Accepted Accounting Principles (AGAAP). A-IFRS differs in certain material respects from AGAAP and, accordingly, financial statements for our financial years ended 30 September 2008, 2007, 2006 and 2005 prepared in accordance with A-IFRS are not comparable to the financial statements for 2005 and prior years prepared in accordance with AGAAP.

 

Under applicable United States (US) disclosure requirements, we are required to include in this Annual Report certain financial and operating data covering a period of five years. Due to the transition to A-IFRS, such information prepared in accordance with A-IFRS is only available for the financial years ended 30 September 2008, 2007, 2006 and 2005. Accordingly, we have included in a separate section of this Annual Report under the caption ‘Additional financial information’ required data as of and for the financial years ended 30 September 2005 and 2004 derived from our previously published financial statements prepared in accordance with AGAAP. For a more complete understanding of the financial and operating data prepared in accordance with AGAAP, see our Annual Report for the financial year ended 30 September 2005, a copy of which is available on our web site at ‘www.westpac.com.au’ or on the web site maintained by the US Securities and Exchange Commission (SEC) at ‘www.sec.gov’.

 

Our financial statements for the three years ended 30 September 2008 comply with IFRS as issued by the IASB.

 

8

 

Accordingly, we are no longer required to include reconciliations of A-IFRS to US Generally Accepted Accounting Principles (US GAAP) for net profit and equity attributable to equity holders of Westpac, total assets and total liabilities in our filings with the SEC.

 

Currency of presentation, exchange rates and certain definitions

 

‘Financial statements’ means our audited consolidated balance sheet as at 30 September 2008 and 30 September 2007 and consolidated income statement, cash flows and recognised income and expense for each of the three years ended 30 September 2008, 2007 and 2006 together with accompanying notes which are included in this Annual Report.

 

We publish our consolidated financial statements in Australian dollars. In this Annual Report, unless otherwise stated or the context otherwise requires, references to ‘dollar amounts’, ‘$’, ‘AUD’ or ‘A$’ are to Australian dollars, references to ‘US$’, ‘USD’ or ‘US dollars’ are to United States dollars and references to ‘NZ$’, ‘NZD’ ‘or NZ dollars’ are to New Zealand dollars. Solely for the convenience of the reader, certain Australian dollar amounts have been translated into US dollars at specified rates. These translations should not be construed as representations that the Australian dollar amounts actually represent such US dollar amounts or have been or could be converted into US dollars at the rate indicated. Unless otherwise stated, the translations of Australian dollars into US dollars have been made at the rate of A$1.00 = US$0.7904 (2007 US$0.8855), the noon buying rate in New York City for cable transfers in Australian dollars as certified for customs purposes by the Federal Reserve Bank of New York (the ‘Noon Buying Rate’) as of 30 September 2008. Unless otherwise stated, the translation of Australian dollars into NZ dollars has been made at the rate of A$1.00 = NZ$1.1935 (2007 NZ$1.1672), being the closing spot exchange rate on 30  September 2008 used in the financial statements. Refer to ‘Exchange rates’ for information regarding the rates of exchange between the Australian dollar and the US dollar for the financial years ended 30 September 2004 to 30 September 2008 and for the period to 21 October 2008.

 

Our financial year ends on 30 September. As used throughout this Annual Report, the financial year ended 30 September 2008 is referred to as 2008 and other financial years are referred to in a corresponding manner.

 

Any discrepancies between totals and sums of components in tables contained in this Annual Report are due to rounding.

 

Exchange rates

 

For each of the years indicated, the high, low, average and year end Noon Buying Rates for Australian dollars were:

 

Year ended 30 September		2009(1)		2008		2007		2006		2005		2004
		(US$ per A$ 1.00)
High		0.7937		0.9797		0.8855		0.7781		0.7974		0.7979
Low		0.6531		0.7831		0.7434		0.7056		0.7207		0.6395
Average(2)		n/a		0.9065		0.8163		0.7473		0.7685		0.7287
Close (on 28 September)(3)		n/a		0.7904		0.8855		0.7461		0.7643		0.7244

 

For each of the months indicated, the high and low Noon Buying Rates for Australian dollars were:

 

		October		September		August		July		June
Month		2008(1)		2008		2008		2008		2008
		(US$ per A$ 1.00)
High		0.7937		0.8441		0.9317		0.9797		0.9610
Low		0.6531		0.7831		0.8553		0.9415		0.9342

 

(1)	Through to 21 October 2008. On 21 October 2008, the Noon Buying Rate was A$1.00 = US$0.6813.
(2)	The average is calculated by using the average of the exchange rates on the last day of each month during the period.
(3)	The Noon Buying Rate at such date may differ from the rate used in the preparation of our consolidated financial statements at such date. Refer to Note 1(a)(v) to the financial statements.

 

9

 

Information on Westpac

 

We are one of the four major banking organisations in Australia and, through our New Zealand operations, we are also one of the largest banking organisations in New Zealand. We provide a broad range of banking and financial services in these markets, including retail, business and institutional banking and wealth management services.

 

We were founded in 1817 and were the first bank to be established in Australia. In 1850 we were incorporated as the Bank of New South Wales by an Act of the New South Wales Parliament. In 1982 we changed our name to Westpac Banking Corporation. On 23 August 2002, we were registered as a public company limited by shares under the Australian Corporations Act 2001 (Corporations Act). Our principal office is located at 275 Kent Street, Sydney, New South Wales, 2000, Australia. Our telephone number for calls within Australia is 132 032 and our international telephone number is (+61) 2 9293 9270.

 

We have branches, affiliates and controlled entities (1)  throughout Australia, New Zealand and the Pacific region and maintain offices in some of the key financial centres around the world. As at 30 September 2008, our market capitalisation was $40.7 billion (2)  and we had total assets of $439.5 billion.

 

In July 2008, we reorganised our business into four key customer-facing divisions serving around 6.9 million customers (3) . These businesses are:

 

·                   Westpac Retail and Business Banking, which we refer to as WRBB: responsible for sales, marketing and customer service for all consumer and small-to-medium enterprise customers within Australia. WRBB offers a broad range of financial products, including savings and check accounts, demand and term deposits, credit cards, personal and housing loans, and business specific working capital, transactional, cash flow and trade finance facilities;

 

·                   BT Financial Group Australia, which we refer to as BTFG: Westpac’s wealth management business. BTFG manufactures and distributes financial products that are designed to help our customers accumulate, manage and protect their wealth. These products include retail investments, personal and business superannuation (pensions), life and general insurance and client portfolio administration (Wrap and master trust platforms). BTFG also provides financial planning advice and private banking services;

 

·                   Westpac Institutional Bank, which we refer to as WIB: provides financial services to the corporate, institutional and government customer base, assisting and advising in the management of cash, funding, capital and market risk for companies and institutions in Australia and New Zealand; and

 

·                   New Zealand Banking: provides a full range of retail and commercial services to customers throughout New Zealand.

 

These customer-facing divisions are supported by a number of corporate level functions and divisions, including:

 

·                   Product and Operations, which is responsible for all consumer and business product development, management and operations; and

 

·                   Technology, which is responsible for developing and maintaining reliable and flexible technology capabilities and technology strategies.

 

However, as we adopted this new organisational structure in July 2008, our results for the 12 months ended 30 September 2008 are reported in this Annual Report in accordance with our organisational structure as it existed prior to July 2008 (see the description of this structure under ‘Assets’ below). We will transition to our new reporting structure before publication of our interim results for the six months ending 31 March 2009.

 

Business strategy

 

Our vision is to become the leading integrated financial services company in Australia and New Zealand.

 

We see our fundamental purpose as helping every customer achieve all their financial goals. Our aspiration is to earn all our customers’ business by delighting them with the service and support that we provide and by serving them as a single team. We expect that their advocacy will drive our growth in a highly competitive market.

 

This customer-centric strategy focuses on customers in our core markets of Australia, New Zealand and the near Pacific region and is based on:

 

·                   developing a deep understanding of our customers’ needs;

 

·                   providing value-added solutions that seek to meet these needs;

 

·                   deepening and building long-term customer relationships; and

 

·                   dramatically improving the experience they have with us.

 

We have strong values which are well embedded into our culture. We believe that the following values will help us deliver our strategy:

 

·                   delighting customers;

 

·                   working as one team;

 

·                   integrity; and

 

·                   achievement.

 

Our strategic priorities are particularly centred on improving our distribution and customer offerings, specifically to:

 

(i)                    Put the customer at the centre of everything we do

 

·                   drive a strong customer culture;

 

·                   develop and implement compelling customer segment strategies, bringing banking and wealth together for the customer; and

 

·                   significantly improve our customer experience.

 

(ii)                 Further develop our people capabilities

 

·                   strengthen skills and depth of talent, particularly in distribution businesses;

 

·                   strengthen collaboration and teamwork; and

 

·                   encourage boldness and promote achievement.

 

(1)	Refer to Note 39 to the financial statements for a list of our controlled entities as at 30 September 2008.
(2)	Our market capitalisation is based on the closing share price of our Ordinary Shares on the Australian Securities Exchange as at 30 September 2008.
(3)	All customers, primary and secondary, with an active relationship (excludes channel only and potential relationships).

 

10

 

(iii)              Transform our distribution model

 

·                   establish and drive locally empowered businesses, very close to the communities they serve; and

 

·                   continue to invest in Business Banking and Wealth.

 

(iv)             Invest in Operations improvements

 

·                   focus on being easy to deal with;

 

·                   transform service delivery, redesigning processes end-to-end from a customer perspective; strengthen technology capabilities to increase the reliability and consistency of service and develop a long run architecture; and

 

·                   focus on driving productivity, eliminating duplication to provide headroom for additional investment.

 

(v)                Lead in sustainability matters

 

·                   embed sustainability concepts in all elements of the business; and

 

·                   continue to develop risk management as a competitive advantage.

 

We believe that our track record of executing strategies, our bold approach to addressing challenges, and our pursuit of delighting customers and earning all of their business will create sustainable, long-term value for all our key stakeholders — our customers, employees, shareholders, and the community — and will realise our vision of becoming the leading integrated financial services company in Australia and New Zealand.

 

Net profit attributable to our equity holders (1)

 

The following tables present, for each of the key areas of our business, as it was organised prior to our adoption of our new organisational structure in July 2008, the net profit attributable to equity holders for, and total assets at the end of the financial years ended 30 September 2008, 2007 and 2006. Refer to ‘Significant developments — Westpac organises around customers’ for further discussion of this new organisational structure. Refer to Note 33 to the financial statements for detailed financial disclosure of our geographic and business segments.

 

Years ended 30 September		2008		2007		2006
		$m		$m		$m
Business Financial Services		1,085		979		885
Consumer Financial Services		913		839		689
BT Financial Group Australia		389		442		367
Westpac Institutional Bank		566		588		499
New Zealand Banking		405		403		408
Other(1)		501		200		223
Net profit attributable to equity holders of Westpac Banking Corporation		3,859		3,451		3,071

 

(1)	Other includes the results of Business and Technology Solutions and Services, Group Treasury, Pacific Banking and Head Office functions.

 

Assets

 

As at 30 September		2008		2007		2006
		$bn		$bn		$bn
Business Financial Services		64		54		47
Consumer Financial Services		158		138		123
BT Financial Group Australia		15		17		14
Westpac Institutional Bank		97		79		56
New Zealand Banking		40		38		34
Other(1)		66		51		28
Total assets		440		377		302

 

(1)	Other includes the results of Business and Technology Solutions and Services, Group Treasury, Pacific Banking and Head Office functions.

 

Westpac Retail and Business Banking

 

WRBB is responsible for sales, marketing and customer service for all consumer and small-to-medium enterprise customers within Australia. WRBB offers a broad range of financial products, including savings and cheque accounts, demand and term deposits, credit cards, personal and housing loans, and business specific working capital, transactional, cash flow and trade finance facilities.

 

WRBB conducts sales and servicing activities through our branch network (839 including in-store branches as at 30 September 2008), RAMS franchise outlets, home finance managers, specialised consumer relationship managers, call centres, automatic teller machines (ATMs) and internet banking services. For business customers, these activities are conducted by specialised relationship managers, with the support of cash flow, financial markets and wealth specialists, via the branch network, business banking centres, internet and telephone channels.

 

WRBB is also responsible for the management of our third party retail and business distribution relationships.

 

Prior to our reorganisation in July 2008, these activities were separately managed by Consumer Financial Services (CFS) for consumer customers, and Business Financial Services (BFS) for small-to-medium enterprise and commercial customers.

 

In the year ended 30 September 2008, total deposits for CFS increased by 22% to $72.7 billion (2007 $59.7 billion).

 

WRBB is a significant presence in the retail deposits and working capital market in Australia. In the year ended 30 September 2008 total business deposits increased by 5% to $48.8 billion (2007 $46.5 billion) and total consumer deposits increased by 22% to $72.7 billion (2007 $59.7 billion).

 

WRBB is also a significant lender in the housing finance market in Australia. In the year ended 30 September 2008, our residential mortgage loan portfolio increased 14% to $145.5 billion (2007 $128.0 billion) (inclusive of securitised loans) from 30 September 2007, with variable interest rate loans comprising 79% of the portfolio. A significant portion of our housing finance sales are through independent mortgage brokers. In the year ended 30 September 2008, approximately 38% (2007 38%) of mortgage loan drawdowns were arranged via this channel. In addition, we are a major provider of credit card finance in Australia. Our total credit card outstandings as at 30 September 2008 increased by 3% to $7.5 billion (2007 $7.3 billion).

 

We are also a major lender in the business finance market in Australia. In the year ended 30 September 2008, our total lending portfolio increased by 17% to $62.3 billion (2007

 

(1)	Internal charges and transfer pricing adjustments have been reflected in the net profit reported for each of our business groups.

 

11

 

$53.1 billion) with term lending increasing 20%, bill acceptances increasing 16%, and equipment finance increasing 12%. The balance of the portfolio comprises revolving cash management facilities and trade finance.

 

BT Financial Group Australia

 

BTFG is Westpac’s wealth management business. BTFG designs, manufactures and distributes financial products that are designed to help our customers accumulate, manage and protect their wealth. These products include retail investments, personal and business superannuation (pensions), life and general insurance, client portfolio administration (wrap and master trust platforms) and portfolio management. BTFG also provides financial planning advice and private banking services.

 

BTFG’s retail, institutional and wholesale Funds Under Management (FUM) totalled $32.3 billion (2007 $38.7 billion) and Funds Under Administration (FUA) totalled $41.6 billion (2007 $46.2 billion) as at 30 September 2008.

 

BTFG’s Wrap product reached $34.4 billion in FUA as at 30 September 2008 and continues to be one of BTFG’s fastest growing products. According to the latest Morningstar data as of 30 June 2008, we were second with a market share of 13% of the platforms market (including wrap) in Australia.

 

BTFG’s Life Insurance business held $312 million of in-force premiums as at 30 September 2008.

 

In December 2007, we completed a partial sale of BTFG’s investment management business, BT Investment Management Limited, which we refer to as BTIM, through an initial public offering (IPO). BTFG retained a 60% shareholding in BTIM, which continues to manage the funds for many of BTFG’s investment products in addition to its own and third party, investment products. BTFG continues to distribute its other financial products.

 

Westpac Institutional Bank

 

Westpac Institutional Bank (WIB) services the financial needs of corporate, institutional and government customers either based in, or with interests in, Australia and New Zealand. This is achieved through dedicated industry teams supported by specialist knowledge in financial and debt capital markets, transactional banking, specialised capital, margin lending, broking and alternative investment solutions.

 

The products and services WIB offers include:

 

Financial Markets

 

·                   foreign exchange

·                   interest rate, currency and equity derivatives

·                   energy

·                   commodities

·                   debt and hybrid securities secondary market

·                   trade finance

 

Specialised Capital

 

·                   alternative assets

·                   structured products

·                   institutional funds management

 

Debt Markets

 

·                   debt securities

·                   securitisation

·                   hybrid and structured capital

·                   project finance

·                   loans and syndications

·                   asset finance

·                   leverage and acquisition finance

 

Transactional Services

 

·                   domestic cash management and transactional services

·                   working capital solutions

·                   international cash management

·                   interna tional payments

 

Within the institutional banking sector in Australia, WIB is a current market leader in debt capital markets(1), syndications(2) and transactional banking(3). In the global financial markets, WIB primarily focuses on Australian and New Zealand dollar-denominated financial products and risk management.

 

WIB supports its customers through our branches and subsidiaries located in Australia, New Zealand, New York, London and Asia.

 

New Zealand Banking

 

Westpac has a long standing commitment to New Zealand, dating from 1861, when it commenced operating as the Bank of New South Wales.

 

Westpac conducts its New Zealand banking business through two banks in New Zealand: Westpac New Zealand Limited (WNZL) which is incorporated in New Zealand; and Westpac Banking Corporation (NZ Division), a branch of Westpac Banking Corporation, which is incorporated in Australia.

 

WNZL provides financial services to consumers and to small, medium and corporate business customers, agricultural businesses, and property investment and development customers, while Westpac’s New Zealand branch operates our wholesale banking and financial markets businesses in New Zealand.

 

WNZL continues to implement its customer growth strategy based on product offerings that earn all its customer’s business, more customer-facing staff in consumer and business banking, increasing its branch and ATM footprint in key strategic locations, and the implementation of new technology to assist its front line in providing high quality customer service.

 

WNZL provides a full range of financial services for its retail and business banking customers, including savings and

 

(1)	No. 1 Public Domestic ABS (excluding self-led deals) (Insto, Bond Markets Digest, Jan-Sep 2008).
(2)	No. 1 Australian syndicated loans (Thomson Financial, Jan-Sep 2008).
(3)	No. 1 lead domestic transactional bank (Peter Lee Associates Transactional Banking survey, Australia 2004-08).

 

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transaction accounts, demand and term deposits, credit cards and personal and housing loans.  It is a leading provider of finance, including term loans, bill acceptances, equipment finance and revolving cash management.

 

Customers can do business with WNZL nationwide in New Zealand.  As at 30 September 2008, WNZL had approximately 5,600 staff, 197 branches (including 45 in New Zealand’s largest market of Auckland), 508 Westpac branded ATMs operating throughout the country, 24 hour Phone Banking and Phone Assist call centres, and Online Banking.

 

WNZL is the third (1)  largest lender of housing finance in New Zealand.  As at 30 September 2008, WNZL’s mortgage loan portfolio was NZ$31.7 billion (A$26.5 billion) (2007 NZ$29.7 billion (A$25.4 billion)) including securitised loans of NZ$0.6 billion (A$0.5 billion) (2007 NZ$0.6 billion (A$0.5 billion)).  In addition, WNZL is a major provider of wealth management services, with NZ$2.0 billion (A$1.7 billion) (2007 NZ$1.9 billion (A$1.6 billion)) in FUM as at 30 September 2008.

 

Other

 

Technology

 

Technology is responsible for developing and maintaining reliable and flexible technology capabilities and technology strategies.

 

Prior to our reorganisation in July 2008, these activities were managed by Business and Technology Solutions and Services (BTSS).  Technology provides functional infrastructure support and software systems enhancement services to front line businesses.  It comprises the following areas: Chief Technology Office (CTO), Enterprise Channels & Infrastructure (ECI), IT Sourcing, IT Risk and IT Strategy.

 

·                   CTO provides enterprise oversight and defines our overall information technology architecture.

 

·                   ECI manages enterprise infrastructure applications and owns the major technology outsourcing relationships.

 

·                   IT Sourcing manages relationships with third party suppliers for the Bank.  In particular, it manages the IT and telecommunications contracts that we have entered into with external providers.

 

Group Treasury, Pacific Banking and Head Office

 

In addition to BTSS, our financial business segment results disclosed under ‘Other’ include Group Treasury, Pacific Banking and Head Office functions.  Group Treasury operations are primarily focused on management of our interest rate risk and funding requirements.  Pacific Banking comprises our presence in the near Pacific, including Papua New Guinea and Fiji.  Head Office includes those functions performed centrally including finance, risk, legal and human resources, with expenses incurred charged back to business units.  It also includes the management of the Group’s capital.

 

Property

 

We occupy premises primarily in Australia, New Zealand and the Pacific Islands including 1,089 branches (2007 1,073) as at 30 September 2008.  As at 30 September 2008, we owned approximately 4% of the premises we occupied in Australia and none in New Zealand.  The remainder of premises are held under commercial lease with terms generally averaging five years.  As at 30 September 2008, the carrying value of our directly owned premises and sites was approximately $89 million.

 

Westpac Place

 

We consolidated our ten existing Sydney Central Business District offices into just two primary locations throughout 2006 and 2007, being Westpac Place and our existing office at 60 Martin Place.

 

Westpac Place consists of two office towers of 21 and 32 levels linked by a common foyer and includes two levels of retail space, a retail branch, childcare facilities, an urban park, and both tenant and public parking.  We have signed a 12 year lease on the building with three six year options to extend.  The initial 12 year lease commitment commenced in November 2006 and is included in the lease commitment table in Note 35 to the financial statements.

 

Westpac Place is one of a portfolio of properties owned by the Westpac Office Trust (Trust).  The Trust and its securities are listed on the Australian Securities Exchange (ASX).

 

Westpac Funds Management Limited, a wholly owned subsidiary of Westpac, is the Responsible Entity of the Trust.

 

Westpac New Zealand Head Office

 

Construction of WNZL’s new Head Office premises is well underway.  On 4 October 2006 we executed agreements to build and lease with members of the Britomart Group of companies in respect of approximately 16,000m(2) of office space across two buildings to be developed at the eastern end of Britomart Precinct near Customs Street in Auckland, New Zealand.  The project involves the fitout of the building and relocation of approximately 1,200 staff to the new site.  The first building, Charter House, is due for completion in November 2008.  The second building (East 1) commenced in July 2008 and is scheduled for completion in March 2011.  Building fitout works in Charter House have been integrated into the base build as part of Westpac’s focus on cost effectiveness and environmental sustainability.  Construction is on budget and forecast to meet or exceed timelines at overall completion.

 

Occupation of Charter House will commence in late 2008 with a progressive migration timetable.  The Auckland Call Centre teams will consolidate from a number of distributed sites, and other Auckland and Wellington operational teams will also centralise their current locations into the building.  The East 1 building will be occupied by the Corporate and Head Office staff upon completion in 2011.  This building will also have integrated fitout as part of the base build works.

 

When complete, this will be Westpac’s flagship New Zealand Head Office, located in the heart of Auckland’s CBD, surrounded by shopping centres, restaurants and cafes, the main waterfront and ferries, the Vector Entertainment Arena, and the Viaduct Harbour.  It has a central position overlooking Takutai Square and the wider Britomart precinct which is a core focus for Auckland City’s regeneration of its Heritage Buildings.

 

In this project WNZL continues its pro-active focus on environmental sustainability through proscribed construction and fitout methods and operational implementation such as: low VOC materials, energy efficient building systems, water conservation, optimum resource management systems, and integrated waste management.  The building’s location within Auckland City’s main transport hub - the Britomart Transport Centre - promotes

 

(1)	Based on Residential Mortgage holdings information in June 2008 General Disclosure Statements of major New Zealand banks.

 

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the use of public transport by staff, thereby reducing carbon emissions.

 

Significant developments

 

Proposed Merger with St.George Bank Limited

 

On 13 May 2008, Westpac and St.George Bank Limited (St.George) jointly announced the terms of a proposed merger of the two companies (the ‘Transaction’).  On 8 September 2008, Westpac and St.George entered into an amended and restated merger implementation agreement that reflected the key commercial terms of the merger.

 

In the Transaction, holders of St.George ordinary shares would be entitled to receive 1.31 Westpac ordinary shares for each St.George ordinary share held on the record date.  Based on the closing price of Westpac ordinary shares on the Australian Securities Exchange on 28 October 2008 of $20.50 per ordinary share and adjusted to remove the value of Westpac’s final dividend of 72 cents per share, the total value of the Westpac ordinary shares to be issued to St.George ordinary shareholders in the Transaction is approximately $15 billion (1) .

 

The merger implementation agreement specifies the circumstances in which St.George would be required to pay a break fee of $100 million (plus GST, if applicable) to Westpac, including a change in the St.George Board’s unanimous recommendation of the merger proposal.  The merger implementation agreement also contains Westpac’s agreement to the payment by St.George of a special dividend in relation to St.George shares.  On 29 October 2008, St.George announced that the special dividend of 31 cents, together with the final dividend of 94 cents would be paid on 18 December 2008 to St.George shareholders as of the record date.

 

On 29 September 2008, St.George released the Scheme Booklet for the Transaction in which St.George’s board of directors unanimously recommended that St.George’s shareholders vote in favour of the Transaction in the absence of a superior proposal.  St.George’s shareholders are scheduled to vote on the Transaction on 13 November 2008.  If St.George shareholders approve the Transaction by the requisite majority, St.George is expected to make application to the Federal Court of Australia to approve the Transaction on 17 November 2008.  If all relevant conditions to the Transaction are satisfied, Westpac and St.George expect the Transaction to close on 1 December 2008.

 

As a result of the proposed merger of Westpac and St.George, we expect to increase our sales by offering a broader range of products and services to an expanded customer base through the combined distribution system.  The key revenue opportunities of the combined business are expected to be a broader distribution base, the sharing of best practice in products and services and benefits from an expanded capability in wealth, insurance and institutional banking.  Westpac’s proposed operating model aims to preserve existing customer relationships across both Westpac and St.George in order to minimise customer attrition.

 

If the proposed merger is completed, it is expected that shareholders and other stakeholders in the combined business will have the opportunity to benefit from the enhanced positioning and scale of the combined business, which will be (based on information available as at 29 September 2008): Australia’s largest branch network with almost 1,200 branches; Australia’s second largest ATM network with more than 2,700 ATMs; a leading Australian provider of home lending; Australia’s largest provider of wealth platforms by funds under administration; Australia’s second largest business banking lender; and Australia’s second largest bank by assets.

 

Westpac estimates pre-tax savings as a result of the merger to be approximately 20% to 25% of St.George’s total operating expenses (excluding interest expense and loan impairment charges) by the third year after the completion of the merger.  We believe that these cost savings will be generated primarily through aligning product processing operations and investment in technology, through synergies generated from combining various support functions, potential savings by merging procurement and service contracts, and by combining the head offices of Westpac and St.George.

 

In order to achieve these synergies we estimate that we will incur approximately $700 million in one off integration costs before the end of the two year period following completion of the merger.  These integration costs include systems integration costs, corporate head office and back office integration costs, and other transaction costs, including stamp duty, communication and documentary costs and advisers’ fees.

 

Based on publicly available information, as at 30 September 2008, St.George is Australia’s fifth largest bank in terms of lending assets and one of the top 20 publicly listed companies in Australia, with a market capitalisation of approximately $16.2 billion as at 30 September 2008 and over 8,400 employees.

 

St.George’s operations span various aspects of the financial industry including retail banking, institutional and business banking and wealth management.  In its profit announcement for the financial year ended 30 September 2008, St.George reported that it had, as of 30 September 2008, total assets of $147.4 billion and total liabilities of $140.4 billion and had a net profit after tax and preference dividends of $1,174 million for the year ended 30 September 2008.  St.George has a national presence in Australia with a significant proportion of operations and customers in New South Wales and South Australia.  St.George had 404 branches as at 30 September 2008 and also distributes its products through third parties such as mortgage brokers and financial planners.

 

Based on publicly available information, St.George is structured around four main business divisions:

 

(i)       Retail Banking manages retail branches, call centres, electronic channels and agency networks.  The division is responsible for the provision of residential and consumer lending, personal financial services including transaction services, call and term deposits, small business banking and financial planning.

 

(ii)      Institutional and Business Banking services the financial needs of corporations, institutions and government customers including services and advice in the areas of liquidity management, treasury market activities corporate and business relationship banking, international and trade finance facilities, leasing, hire purchase, automotive finance, commercial property lending and cash flow financing.

 

(1)	Assumes approximately 745 million Westpac ordinary shares are issued in exchange for St.George ordinary shares upon implementation of the merger.

 

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(iii)            Wealth Management is responsible for providing superannuation and wealth management administration platforms, investment management and packaging, dealer group services, margin lending, private banking services and general and life insurance.  This division includes St.George’s funds management subsidiaries, ASGARD Wealth Solutions Limited and Advance Asset Management Limited.

 

(iv)            BankSA provides retail banking, private banking and business banking products including agribusiness through operations based in South Australia and the Northern Territory.

 

Head Office and support functions are provided by Finance, Risk and Strategy, Group Technology and Operations, Human Resources and Group Legal and Secretariat.

 

Australian and New Zealand guarantee schemes

 

The Australian Government announced on 12 October 2008 that it will guarantee the deposits in eligible Australian authorised deposit-taking institutions (ADIs) (including Westpac) for a period of three years from 12 October 2008.  The deposit guarantee applies to deposits held in eligible ADIs (including foreign branches of eligible ADIs) by all types of legal entities, regardless of where the depositor resides.  It will apply to deposits held in any currency.

 

For deposits of or under $1 million, the deposit guarantee will be free.  From 28 November 2008, for deposits over $1 million, the first $1 million would be guaranteed for free and an eligible ADI will be able to obtain coverage under the deposit guarantee for amounts over $1 million, in return for a fee.  The $1 million threshold applies to the total amount of funds held by a depositor in (separate) deposit accounts with an eligible ADI.

 

The Financial System Legislation Amendment (Financial Claims Scheme and other Measures) Act 2008 has been enacted to facilitate the deposit guarantee.  The Financial Claims Scheme (ADIs) Levy Act 2008 provides for the imposition of a levy to fund the excess of the Australian Prudential Regulation Authority’s (APRA) financial claims scheme costs.  The levy is imposed on liabilities of ADIs to their depositors and cannot be more than 0.5% of the amount of those liabilities.

 

The Australian Government has also announced that it will guarantee the wholesale term funding of eligible ADIs.  The wholesale funding guarantee facility will be extended, by application, on an issue by issue basis for senior unsecured debt instruments in all major currencies with a term of up to 60 months issued domestically or off-shore.  The Australian Government has announced that it will withdraw the facility once market conditions have normalised.

 

Fees will apply to the wholesale term funding guarantee and the guarantee for deposits above the $1 million threshold.  A different fee will apply to eligible ADIs based on their credit rating.  The fee which will apply to Westpac, based on its current rating by Standard and Poor’s of AA, is 70 basis points (or 0.70%) per annum.  The fees will be levied on a monthly or quarterly basis depending on the liability.

 

The Australian Government has announced that the deposit and wholesale funding guarantee scheme will be reviewed on an ongoing basis and revised if necessary.

 

The New Zealand Government announced on 12 October 2008 an opt-in deposit guarantee scheme under which it will guarantee deposits with participating New Zealand registered banks and non-bank deposit taking entities, with effect from 12 October 2008.  The guarantee will be for a period of two years from the announcement date.

 

The guarantee extends to all debt securities issued by participating entities in any currency (which includes deposits and other amounts lent to participating entities), other than debt securities issued to related parties of a participating entity or to financial institutions.  It also does not extend to subordinated debt obligations.  Financial institutions include persons who carry on the business of borrowing and lending money, or providing financial services (and extends to registered banks).  There is a limit on the amount of the debt securities covered by the guarantee of NZ$1 million per creditor per participating entity.

 

In addition, in relation to registered banks incorporated outside New Zealand (as is the case with Westpac) the guarantee extends to debt securities issued by the New Zealand branch of the registered bank only, and there is a separate overall limit on the amount guaranteed for creditors of the branch that are not New Zealand citizens or New Zealand tax residents.

 

Participating New Zealand registered banks with debt security amounts owing to qualifying creditors exceeding NZ$5 billion as of 12 October 2008 (which would include WNZL if it opts into the scheme) are required to pay a fee of 10 basis points (or 0.1%) on the amounts owing to qualifying creditors to the extent that the amount owing exceeds NZ$5 billion as of that date.  A similar additional fee is payable in respect of the position as of 12 October 2009.

 

For participating New Zealand registered banks with debt security amounts owing to qualifying creditors below NZ$5 billion (which would include Westpac if it opts into the scheme), there is a fee on the growth in the amounts owing to qualifying creditors after 12 October 2008 (with a 10% allowance per year on the amount of that growth).  The fee depends on the credit rating of the relevant entity and would be 10 basis points (or 0.1%) for Westpac, based on its current credit rating.  The fee is calculated and levied monthly.

 

The New Zealand Government has also announced that it is considering a guarantee arrangement in respect of the wholesale term funding of registered banks.  Details of this are yet to be finalised.

 

Westpac is currently assessing the implications of both the Australian and New Zealand deposit guarantee schemes, along with the Australian wholesale funding guarantee scheme.

 

Bell Group of companies

 

A lengthy judgement was delivered on 28 October 2008 in relation to the proceedings concerning the Bell Group of companies, in which it has been found that each of the liquidators and the banks have been partially successful.  The ultimate financial impact for Westpac will depend on further analysis of the judgement and on its implications for a range of creditors, including the banks and the actual Court orders, when they are made.  See ‘Legal proceedings-Bell Group of companies’.

 

 

BT Investment Management Business

 

On 10 December 2007, Westpac completed a partial sale of its Australian investment management business, BTIM, through an IPO.  In the transaction, Westpac retained 60% of the ordinary share capital of BTIM, with the balance held by investment professionals employed by BTIM and other

 

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investors.  Westpac generated a profit before tax on the partial disposal of $141 million.  Westpac retained BTFG’s other wealth management businesses, including financial advice, insurance, private banking, customer solutions (which is responsible for wrap platforms) and its suite of retail investment, superannuation and retirement products.

 

Appointed new CEO

 

On 1 February 2008, Gail Kelly joined Westpac as Chief Executive Officer and Managing Director, succeeding David Morgan who retired.  Details of Mrs Kelly’s employment contract are disclosed in the Directors’ Report.

 

Acquisition of RAMS franchise distribution business

 

On 4 January 2008, we acquired the RAMS franchise distribution business for $140 million.  The business acquired includes the RAMS brand, franchise network and associated mortgage origination and servicing systems and contracts needed to run the distribution business.  The acquisition has added an additional retail channel and extended Westpac’s retail footprint by more than 10% via an additional 92 stores operated by 53 franchisees.   Westpac did not acquire the ASX listed RAMS Home Loans Group Ltd or its existing mortgage book.

 

Westpac organises around customers

 

In July 2008, Westpac announced an organisational restructuring to deliver on its customer service strategy by putting customers at the centre of the Westpac business.  The core of this strategy is the enhancement of our customer segmentation capabilities and strengthening our consumer and business banking distribution by building strong, locally empowered businesses.  Other key priorities are to redesign our product processes and operations to make it easier for our customers to do business with us, and ensuring robust and sustainable technology infrastructure and capabilities.

 

These changes relate primarily to the CFS, BFS and BTSS divisions.  These divisions have been reorganised into:

 

·                   Westpac Retail and Business Banking – the customer facing activities of CFS and BFS have been brought together into the WRBB division, with responsibility for all consumers, small-to-medium enterprises and commercial customers.  It is responsible for the sales and service interactions with these customers via branches, call centres and business banking centres.

 

·                   Product and Operations – all consumer and business product development and management, together with the underlying operational processes, have been brought together into the Product and Operations division.  It will focus on streamlining and simplifying the way our customers do business with us.

 

·                   Technology – a dedicated Technology division has been created in recognition of the strategic importance of information technology in delivering on the customer experience.

 

The remaining key operating divisions of BTFG, WIB and WNZL are unchanged.

 

Should the proposed merger with St.George proceed, it is our intention to maintain the St.George brand, branches and culture.  To achieve this, St.George will become a separate operating division within Westpac, referred to as St.George Retail and Business Banking.  We will begin reporting under the new structure effective from 1 October 2008.

 

Outsourcing contracts

 

On 1 January 2008 Westpac entered into a three year Enterprise Master Services agreement with HCL Australia Services, for the provision of IT related services.

 

On 3 November 2006 Westpac entered into a five year Master Relationship agreement with Genpact U.S. LLC for the provision of back office administrative support services.

 

On 17 September 2006, Westpac renewed its agreement with Cash Services Australia (CSA) for a term of five years nine months.  CSA will continue to provide key operational services as well as commercial and operational governance of cash-in-transit providers.

 

On 3 September 2006, Westpac entered into a three year agreement with Stream Solution (Holdings Pty Ltd) to provide Westpac’s end to end print management services.

 

On 1 December 2005, Westpac renewed its Managed Network Service agreement with Telstra Corporation for a further five year term.  Under this agreement Telstra will provide voice, data and video services for corporate and retail banking in Australia and the Pacific Region.

 

On 4 February 2005, Westpac, in conjunction with the National Australia Bank and the Commonwealth Bank of Australia, entered into a 12 year arrangement with Fiserv Solutions Australia Pty Limited for the provision of voucher (cheque) processing services.  As a result of this ‘utility’ style agreement, Westpac’s existing agreement with Unisys Payment Services Limited for cheque processing will be terminated progressively as services are transitioned to the new provider.

 

On 10 May 2004, Westpac entered into a five year agreement with Keycorp Payment Services (Keycorp) for Electronic Funds Transfer Point of Sale (EFTPoS) terminals in Australia.  Keycorp assumed responsibility for fleet services (including the provision of support and maintenance) of the EFTPoS terminals as well as all asset management functions.  Keycorp is also responsible for the supply and management of the EFTPoS terminals and the Terminal Operating System and the integration with a new Terminal Application Management system.  Westpac retains control over the merchant base (including contractual terms, fees and direct contact by Keycorp) as well as the decision as to what software applications are to be loaded on the EFTPoS fleet.

 

On 30 September 2002, Westpac entered into a ten year agreement with First Data Resources (FDR) Australia Limited to provide a managed service for our cards processing.  This involves managing the application within the Westpac/IBM environment.  FDR assumed responsibility for the Group’s Australasian cards processing in phases from October 2002.  Westpac retains control of its cards sales, credit, collections and customer service functions.

 

On 1 October 2001, Westpac entered into a ten year agreement with EDS (Business Process Administration) Pty Limited whereby they will provide mortgage and other processing services in connection with the mortgage loan portfolio.

 

On 3 December 2000, Westpac entered into a ten year contract with IBM Global Services Australia relating to the management of the core banking technology operations in Australia, New Zealand and the Pacific Bank.  The exact amount of the contract commitment is unable to be reliably measured as Westpac’s obligations are dependent upon business volumes over the period of the contract.

 

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Legal proceedings

 

We have contingent liabilities in respect of actual and potential claims and proceedings that have not been determined.  An assessment of likely losses is made on a case-by-case basis for the purposes of the financial statements and specific provisions have been made where appropriate, as described in Note 37 to the financial statements.

 

Our entities are defendants from time-to-time in legal proceedings arising from the conduct of our business.

 

Bell Group of companies

 

Westpac is one of 20 defendant banks named in proceedings concerning the Bell Group of companies.  The proceedings have been brought by the liquidators of several Bell Group companies and seek to challenge the defendant banks’ entitlement to receive the proceeds of realisation of Bell Group assets in the early 1990s.  A lengthy judgement was delivered on 28 October 2008 in which it has been found that each of the liquidators and the banks have been partially successful.  The ultimate financial impact for Westpac will depend on further analysis of the judgement and on its implications for a range of creditors, including the banks and the actual Court orders, when they are made.

 

New Zealand Commerce Commission

 

The New Zealand Commerce Commission’s (NZCC) proceedings against Westpac New Zealand Limited and The Warehouse Financial Services Limited (members of the Westpac Group) are ongoing.  Visa International, Cards NZ Limited, MasterCard International and all New Zealand issuers of Visa and MasterCard credit cards are also defendants.  The proceedings allege that the setting of interchange rates and rules (relating to honour all cards, no surcharge, access and no discrimination) amount to price fixing or alternatively have the effect of substantially lessening competition in the New Zealand market in breach of the Commerce Act 1986.  The proceedings seek to declare the conduct illegal and impose unspecified monetary penalties.

 

In addition, similar proceedings issued by a number of New Zealand retailers against the same defendants are also ongoing.  These proceedings also seek to declare the conduct illegal and an enquiry into damages.  Damages awarded, if any, would be in addition to any penalties imposed under the Commerce Act 1986 in the event the Commerce Commission is successful in the proceedings described above.  Westpac is considering its position in relation to both proceedings and at this stage does not consider it necessary to raise a provision in relation to this matter.

 

New Zealand Inland Revenue Department

 

The New Zealand Inland Revenue Department (NZIRD) has reviewed a number of structured finance transactions undertaken in New Zealand.  Following the review, the NZIRD issued amended assessments for the 1999 to 2005 tax years in relation to nine transactions undertaken between 1999 and 2002.  The overall primary tax in dispute is approximately NZ$588 million (A$493 million).  With interest (net of tax) this increases to approximately NZ$882 million (A$739 million) (calculated to 30 September 2008).

 

Proceedings disputing all amended assessments have been commenced.  Westpac is confident that the tax treatment applied in all cases is correct.  A ruling was sought from the NZIRD on an early transaction in 1999.  Following extensive review by the NZIRD, the ruling was issued in 2001.  The principles underlying that ruling are applicable to, and have been followed in, all other transactions.

 

There are no further transactions or tax years subject to the review (other than the transaction in relation to which Westpac received the binding ruling).

 

Competition

 

The last 12 months have seen significant changes in the financial services landscape and in the competitive conditions Westpac faces.  The crisis that started in the US sub-prime mortgages has extended to a broader financial markets crisis and global economic downturn.

 

These conditions have competitively favoured institutions with larger balance sheets, more diverse funding sources and conservative and rigorous risk management.  Westpac has been at a competitive advantage in these conditions.  Westpac has also benefited from some international banks winding back their activities in Australian as they have sought to focus more on their home markets.

 

In New Zealand, more substantive economic slowdown paired with the impact of the global credit crisis has also affected the financial services landscape.  A large number of smaller, non-bank competitors, particularly finance companies, have ceased operating.  Strong balance sheets helped some of the larger institutions improve their market positions even though economic conditions have provided a brake on overall financial performance.

 

Overall, competition within our markets remains strong and that will continue into the coming year, particularly for the collection of retail deposits.

 

Outlook (1)

 

The global financial crisis has dominated events over the last financial year, significantly impacting banks globally through asset write downs, tighter funding and increased market volatility.  Through the year, the crisis also began to significantly affect the global economy.

 

We believe that more recently, the actions of governments, central banks and regulators around the world has begun to restore confidence to the financial system and improved access to funding.  However, it is likely to be some time before debt markets operate more normally.

 

While these measures may be potentially effective at restoring financial market stability, these initiatives are unlikely to avert a more severe and prolonged slowdown in global growth.  In Australia, growth is also expected to slow although the significant policy flexibility of the Australian authorities is expected to see GDP growth hold up at around 2% in calendar 2009.  We believe that the Reserve Bank of Australia (RBA) and the Federal Government have responded in a timely and decisive fashion.  A budget package worth 1% of GDP has already been announced for 2008/09, with scope for further stimulus.  Also, fundamental to Australia’s prospects is the expectation of growth resilience in the emerging economies, particularly China.

 

Given these conditions, we anticipate lower loan growth in the year ahead as consumers and businesses seek to strengthen their balance sheets in the tougher operating environment.  We also expect impairment charges to rise as unemployment moves modestly higher.  Market volatility is also likely to remain high as some financial market uncertainty persists.

 

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

 

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Westpac has responded to the global financial crisis by seeking to proactively manage market conditions, and to ensure both a conservative risk profile and a healthy capital position.

 

At the same time, Westpac has continued and will continue to implement its new strategy to significantly improve the customer experience and better support customers.  This strategy, and the strength of the franchise, has positioned the Group for the more challenging year ahead.  The proposed merger with St.George is expected to further strengthen that position.

 

Employees

 

The number of employees in each area of business as at 30 September(1):

 

		2008		2007		2006
Business Financial Services		3,767		3,447		3,119
Consumer Financial Services		9,132		8,870		8,466
BT Financial Group Australia		2,906		3,173		3,093
Westpac Institutional Bank		1,818		1,674		1,558
New Zealand Retail		4,674		4,538		4,952
Other		6,005		6,316		6,036
Total employees		28,302		28,018		27,224

 

(1)	The number of employees includes core and implied full time equivalent (FTE) staff. Core FTE includes overtime and pro-rata part time staff. Implied FTE includes temporary and contract staff.

 

2008 v 2007

 

Group FTE increased by 284 compared to 30 September 2007.  This was driven by an increase of 353 customer serving employees in the Institutional Bank, CFS and BFS, offset by reductions in BTFG and various support functions across the Group.  Specific changes included:

 

·                   262 additional FTE in CFS with increases of 38 across the branch network and 132 from the RAMS franchise distribution business acquisition;

 

·                   320 additional FTE in BFS including 219 customer serving employees, reflecting the increase in specialist relationship bankers;

 

·                   144 additional FTE in WIB, primarily customer serving employees;

 

·                   136 additional FTE in New Zealand, including 57 customer serving employees in the consumer and business banking segments and call centres and non-customer serving employees associated with the increased focus on credit management and the planning and coordination of the new Auckland head office.

 

Partially offset by:

 

·                   a reduction of 267 FTE in BTFG as the business responded to lower revenue growth due to the change in market conditions; and

 

·                   a reduction of 351 FTE in support functions, driven by productivity initiatives during the year.

 

2007 v 2006

 

Total full time equivalent (FTE) employees increased 794 compared to 2006 to 28,018.  This was largely driven by increases in customer serving employees across a number of businesses:

 

·                   194 additional customer serving employees in BFS to drive growth and expand our representation in the business banking segment;

 

·                   325 additional customer serving employees in CFS, including 150 within the Premium Financial Services segment and a 161 increase in branch staff;

 

·                   69 new staff in BT Financial Group to support higher product growth and increased demand following changes to superannuation legislation; and

 

·                   87 additional customer serving employees in Westpac Institutional Bank.

 

Partially offset by:

 

·                   a decline in FTE in New Zealand due to investment in business banking employees which was more than offset by productivity savings elsewhere in the business.

 

We operate under a number of enterprise agreements which were certified by the Australian Industrial Relations Commission (AIRC) in 2002.  These agreements have passed their nominal term however they remain in force until they are replaced or terminated by the AIRC.  We continue to improve employees’ terms and conditions of employment through policy.

 

In New Zealand, we maintain both Individual Employment Agreements (IEAs) with employees who are not union members and a Collective Employment Agreement (CEA) with the Finance and Information Union (Finsec).  The current CEA was ratified with a vote of more than 80% in favour, and came into effect on 1 August 2008; this agreement expires on 31 July 2009.  The new CEA includes a competency based pay system that is being rolled out across the business.

 

There has been no industrial action in Australia and New Zealand in the financial year ended 30 September 2008.  We continue to have a business-like and professional relationship with the Finance Sector Union (FSU) in Australia and Finsec in New Zealand.

 

Remuneration policies

 

The application of all remuneration practices across the Bank is consistent with the principles underlying our executive remuneration structures (refer to the remuneration report for further information), acknowledging the complexity and diversity of our businesses.

 

Fixed remuneration is market aligned, and reviewed annually with appropriate reference to our industrial agreements.  Our employees have the opportunity to participate in short term incentive schemes, with specific reference to their role and to market competitiveness.  A range of short term incentive schemes has been designed in recognition of our business needs - from highly formulated incentive schemes for roles with a strong sales focus, to discretionary arrangements for roles such as corporate support, based on performance against individual and business objectives.

 

We offer employee share plans for permanent employees in Australia, which are designed to provide tangible recognition for improvements in our performance and gain greater staff commitment.  For further details refer to Note 26 to the financial statements.

 

We also provide superannuation (pension) plans for our employees in Australia, New Zealand and certain other countries in which we operate.  Plan members are entitled

 

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to benefits on retirement, resignation, permanent disability or death.  Refer to Note 36 to the financial statements for further information.

 

Group Executives and General Managers receive performance securities which vest after a set period of service and subject to performance hurdles being met.  Group Executives, General Managers and other select employees are also required to defer a portion of their short term incentive, receiving it as Westpac securities which vest after a service requirement.  Other key employees below General Manager level also receive Westpac securities which vest after a service requirement.

 

The Board Remuneration Committee oversees the remuneration practices across our Group, and approves total expenditure for performance recognition.

 

Supervision and regulation

 

Australia

 

Within Australia we are subject to supervision and regulation by five principal agencies: the Australian Prudential Regulation Authority (APRA); the Reserve Bank of Australia (RBA); the Australian Securities and Investments Commission (ASIC); the Australian Securities Exchange (ASX); and the Australian Competition and Consumer Commission (ACCC).

 

APRA is responsible for the prudential supervision of ADIs, life and general insurance companies and most superannuation (pension) funds.  One of its roles is to protect the interests of depositors, insurance policyholders and superannuation fund members.

 

As an ADI, we report prudential information to APRA in relation to, but not limited to, capital adequacy, large exposures, credit quality and liquidity.  Our controlled entities in Australia which are authorised insurers and trustees of superannuation funds are also subject to the regulatory regime of APRA.  Reporting is supplemented by consultations, on-site inspections and targeted reviews.  Our external auditors also have an obligation to report on compliance with certain statutory and regulatory banking requirements, and on any matters that in their opinion may have the potential to materially prejudice the interests of depositors.

 

Australia’s risk-based capital adequacy guidelines are generally consistent with the approach agreed upon by the Basel Committee on Banking Supervision.  Refer to ‘Basel Capital Accord’ below.

 

The RBA is responsible for monetary policy, maintaining financial system stability and promoting the safety and efficiency of the payments system.  The RBA is an active participant in the financial markets, manages Australia’s foreign reserves, issues Australian currency notes and serves as banker to the Australian Government.

 

ASIC is the sole national regulator of Australian companies.  Its primary responsibility is for regulation and enforcement of company, financial markets and financial services laws that protect consumers, investors and creditors.  With respect to financial services, it promotes honesty and fairness through the provision of consumer protection, using as necessary its regulatory powers to enforce laws relating to deposit-taking activities, general insurance, life insurance, superannuation, retirement savings accounts, securities (such as shares, debentures and managed investments) and futures contracts.

 

The ASX operates Australia’s primary national market for securities issued by listed companies.  Some of our securities (including our ordinary shares) are listed on the ASX and we therefore have a contractual obligation to comply with the ASX Listing Rules that have statutory backing in the Corporations Act.  Oversight of listed companies’ compliance with the ASX Listing Rules is shared between the ASX and ASIC.

 

The ACCC is an independent statutory authority responsible for the regulation and prohibition of anti-competitive and unfair market practices, and mergers and acquisitions by Australian corporations.  Its objectives are to ensure that corporations do not act in a way that may have the effect of eliminating or reducing competition, and to oversee product safety and liability issues, pricing practices and third party access to facilities of national significance.  The ACCC’s role in consumer protection complements that of State and Territory consumer affairs agencies that administer the unfair trading legislation of their jurisdictions.

 

The Australian government’s present policy, known as the ‘four pillar policy’, is that there should be no fewer than four major banks to maintain appropriate levels of competition in the banking sector.  Under the Financial Sector (Shareholding) Act the Australian government’s Treasurer must approve an entity acquiring a stake in a particular financial sector company of more than 15%.

 

Proposals for foreign acquisitions of Australian banks are subject to approval by the government under the Australian Foreign Acquisitions and Takeovers Act 1975.

 

New Zealand

 

The Reserve Bank of New Zealand (RBNZ) is responsible for the supervision of the New Zealand banking industry.  This is primarily achieved through an extensive disclosure regime that requires all banks to publish financial statements on a quarterly basis, which also incorporates director attestation on the Bank’s risk management disciplines.

 

It is a policy of the RBNZ that all systemically important banks must incorporate as a local entity rather than operate through a branch structure.  Until 1 November 2006 we conducted our New Zealand business through a branch (NZ Branch), however, the NZ Branch was deemed to be a systemically important bank and therefore required to incorporate locally.

 

The RBNZ allows an overseas bank to operate in New Zealand as both a branch of its overseas parent and through a subsidiary.  We have determined that this type of ‘dual registration’ is the most effective option for us to comply with RBNZ policy, while minimising disruption to the NZ Branch’s investors and customers.

 

Accordingly, we established Westpac New Zealand Limited to assume and carry on the New Zealand consumer and business banking operations of our NZ Branch.  Westpac New Zealand Limited commenced operating as a registered bank under the Reserve Bank of New Zealand Act 1989 on 1 November 2006.  The NZ Branch continues to operate in New Zealand, retaining the New Zealand wholesale and financial markets business.

 

The reorganisation of our business was facilitated by legislation, which was the only means by which our New Zealand consumer and business banking operations could be vested in the Bank efficiently, economically and without affecting the continuity of the provision of those banking services.  The Westpac New Zealand Act 2006

 

19

 

provided for the vesting of designated NZ Branch assets and liabilities in Westpac New Zealand Limited on 1 November 2006.

 

The Banking Act 1959 (Australia) gives priority over our Australian assets to Australian depositors.  Accordingly, unsecured creditors and depositors of the remaining NZ Branch will rank after our Australian depositors in relation to claims against Westpac Banking Corporation’s Australian assets.

 

Based on the statement of financial position as at 30 September 2008, the carrying value of the New Zealand assets of the NZ Branch of Westpac Banking Corporation was greater than its New Zealand deposit liabilities.

 

United States

 

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

 

A federal branch must maintain, with a US Federal Reserve member bank, a capital equivalency deposit as prescribed by the US Comptroller of the Currency in an amount which is the greater of:

 

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

 

·                   5% of the total liabilities (excluding, among other things, liabilities to affiliates and liabilities of any international banking facilities) of the federal branch.

 

In addition, a federal branch is examined by the US Comptroller of the Currency at least once each calendar year and periodically by the US Federal Reserve.  The examination covers risk management, operations, credit and asset quality and compliance with the record-keeping and reporting requirements that apply to national banks, including the maintenance of its accounts and records separate from those of the foreign bank and any additional requirements prescribed by the US Comptroller of the Currency.

 

A federal branch of a foreign bank is, by virtue of the IBA, subject to the receivership powers exercisable by the US Comptroller of the Currency.

 

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

 

USA PATRIOT Act

 

The USA PATRIOT Act requires US financial institutions, including the US branches of foreign banks, to take certain steps to prevent, detect and report individuals and entities involved in international money laundering and the financing of terrorism.  The required actions include verifying the identity of financial institutions, terminating correspondent accounts for foreign ‘shell banks’ and obtaining information about the owners of foreign bank clients and the identity of the foreign bank’s agent for service of process in the US.  Many of the new anti-money laundering compliance requirements of the USA PATRIOT Act are consistent with the anti-money laundering compliance obligations previously imposed on US financial institutions, including the US branches of foreign banks, under the Bank Secrecy Act and under regulations of the applicable US bank regulatory agency such as the US Comptroller of the Currency.  These include requirements to adopt and implement an effective anti-money laundering program, report suspicious transactions or activities, and implement due diligence procedures for correspondent and other customer accounts.  The USA PATRIOT Act and other recent events have resulted in heightened scrutiny of Bank Secrecy Act and anti-money laundering compliance programs by federal bank regulatory and law enforcement authorities.

 

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Corporate governance

 

Introduction

 

Date of statement

 

This statement reflects our corporate governance framework, policies and procedures as at 30 October 2008.

 

Access to information on the website

 

This statement and, where indicated, the documents referred to in the statement are available for viewing on our website (unless otherwise stated) at ‘www.westpac.com.au/corpgov’.

 

Framework and approach to corporate governance

 

Our approach to corporate governance is based on a set of values and behaviours that underpin everyday activities, ensure transparency and fair dealing, and protect stakeholder interests.

 

This approach includes a commitment to the highest standards of governance, which our Board sees as fundamental to the sustainability of our business and performance.  In pursuing this commitment, the Board monitors local and global developments in corporate governance and their implications for us.

 

In Australia, we take into account the revised ‘Corporate Governance Principles and Recommendations’ (ASXCGC’s Recommendations) published in August 2007 by the ASX Corporate Governance Council (ASXCGC), and the Corporations Act 2001 (Corporations Act).

 

In the international arena, we respond to a range of relevant corporate governance principles in developing our corporate governance framework.

 

Compliance with the ASXCGC’s Recommendations

 

We believe that our governance practices complied with the ASXCGC’s Recommendations over the past financial year, as set out in this corporate governance statement.  A checklist summarising our compliance is included after this statement and is also available on our website.

 

Compliance with the New York Stock Exchange listing rules

 

Westpac has American Depositary Shares quoted on the New York Stock Exchange (NYSE).  Under the NYSE listing rules, foreign private issuers are permitted to follow home country practice in lieu of the NYSE listing rules.  However, we are still required to comply with certain audit committee and additional notification requirements.

 

We are in compliance with all NYSE listing rules in all material respects.

 

Under the NYSE listing rules, foreign private issuers are required to disclose any significant ways in which their corporate governance practices differ from those followed by domestic United States companies.  We have compared our corporate governance practices to the corporate governance requirements of the NYSE listing rules and note the following potential significant differences:

 

(i)                    Equity compensation plans

 

The NYSE listing rules require that shareholders be given the opportunity to vote on equity compensation plans and material revisions thereto, with limited exemptions.

 

We comply with the requirement for shareholder approval in relation to all equity-based incentive plans introduced since 2006, including our:

 

•                   Westpac Reward Plan (WRP);

 

•                   Restricted Share Plan (RSP); and

 

•                   CEO’s equity-based remuneration.

 

However (other than awards to the CEO) individual grants under the plans have not been approved by shareholders.  The details of all grants of shares under our equity-based incentive plans have been disclosed in Note 26 to our consolidated financial statements for the year ended 30 September 2008.  The employee equity plans introduced in 2002 were not required to be approved by shareholders under Australian law or stock exchange listing requirements.  These plans include:

 

•                   the Westpac Performance Plan (which is currently only used for incentive awards to a small number of employees based outside Australia and the USA);

 

•                   the Employee Share Plan (ESP); and

 

•                   the Deferral Share Plan.

 

These three plans have been disclosed in each Annual Report from 2003, including in the Remuneration Report each year since 2005.  Each year since 2005, the Remuneration Report has been subject to a non-binding shareholder vote and has been approved by shareholders for adoption.

 

(ii)                 Board candidates for re-election

 

The NYSE listing rules provide that the Nominations Committee’s responsibilities should include selecting, or recommending that the Board select, the Director nominees for the next annual meeting for shareholders.

 

Our Constitution states that at each Annual General Meeting (AGM) one-third of our Directors (excluding the CEO) and any Director who has held office for three or more years since their last election, must retire.  In 2008, none of our Directors met this three-year threshold, so a determination needed to be made regarding which two Directors would retire and seek re-election at the 2008 AGM.  Westpac considered that it was appropriate for the full Board, rather than the Nominations Committee, to determine the Board candidates for retirement under the rotation policy, and to review and recommend their re-election by shareholders at the 2008 AGM.

 

Compliance with the New Zealand Stock Exchange corporate governance rules and principles

 

Westpac also has ordinary shares quoted on the New Zealand Stock Exchange (NZX).  As an overseas listed issuer, we are deemed to satisfy and comply with the NZX listing rules, provided that we remain listed on the ASX.  The ASX, through the ASXCGC’s Recommendations, and the NZX have adopted a similar ‘comply or explain’ general Corporate governance Corporate governance approach to corporate governance.  However, the ASXCGC’s Recommendations may materially differ from the NZX’s corporate governance rules and the principles of the NZX Corporate Governance Best Practice Code.

 

Further details about the ASXCGC’s Recommendations can be found on the ASX website ‘www.asx.com.au’.

 

This statement addresses each of the eight ASXCGC’s Recommendations.  Each Recommendation is set out and followed with an explanation of our corporate governance practices, demonstrating our compliance with the requirements of the Recommendations.

 

21

 

Principle 1 – Lay solid foundations for management and oversight

 

Companies should establish and disclose the respective roles and responsibilities of Board and management.

 

1.1              Companies should establish the functions reserved to the Board and those delegated to senior executives and disclose those functions.

 

1.2              Companies should disclose the process for evaluating the performance of senior executives.

 

The role and responsibilities of the Board

 

The Board Charter outlines the roles and responsibilities of the Board and, in conjunction with the Constitution, allows the Board to determine those matters to be delegated to its Committees and management.

 

The Board is accountable to shareholders for our performance, and its responsibilities include, in summary:

 

•                   providing strategic direction;

 

•                   evaluating Board performance and determining Board size and composition;

 

•                   appointing and determining the duration, remuneration and other terms of appointment of the CEO and approving the appointments of other senior executives;

 

•                   evaluating the performance of the CEO and monitoring the performance of other senior executives;

 

•                   Board and Executive succession planning;

 

•                   annual approval of the budget and monitoring performance against that budget;

 

•                   determining the dividend policy;

 

•                   making determinations concerning our capital structure;

 

•                   appointing our external auditors and maintaining an on-going dialogue with them;

 

•                   financial reporting;

 

•                   approving our risk management strategy and frameworks and monitoring their effectiveness;

 

•                   considering the social, ethical and environmental impact of our activities and monitoring compliance with our sustainability policies and practices;

 

•                   maintaining a constructive and ongoing relationship with the exchanges and regulators and ensuring that the market and our shareholders are continuously informed of material developments; and

 

•                   internal governance, including delegated authorities, policies for appointments to our controlled entity Boards and monitoring resources available to senior executives.

 

The Board has delegated a number of these responsibilities to its Committees, as set out in the ‘Westpac Governance Framework’ chart in the Principle 2 section of this statement.

 

Our Constitution and Board Charter can be found at ‘www.westpac.com.au/corpgov’.

 

Board delegation to management and Committees

 

The Board has delegated to the CEO, and through the CEO to other senior executives, responsibility for the everyday management of our business.  The scope of and limitations to that delegated authority is clearly documented.

 

The Board has five Committees, namely the:

 

•                   Audit Committee;

 

•                   Risk Management Committee;

 

•                   Nominations Committee;

 

•                   Remuneration Committee; and

 

•                   Sustainability Committee.

 

In 2009, it is proposed that an Information Technology Committee also be established.

 

The responsibility delegated to the Committees is set out in the ‘Westpac Governance Framework’ chart in the Principle 2 section.

 

Management performance evaluation

 

The Board, in conjunction with its Remuneration Committee, is responsible for approving the performance objectives and measures for the CEO and other senior executives and providing input into the evaluation of performance against them.  The management performance evaluations for the 2007 financial year were conducted in November 2007.

 

Management performance evaluations for the 2008 financial year will be conducted at the end of the 2008 calendar year.

 

To ensure they are able to meet their performance objectives, all new senior executives are provided with extensive briefing about our strategies and operations and the respective roles and responsibilities of the Board and senior management.

 

Principle 2 – Structure the Board to add value

 

Companies should have a Board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.

 

2.1              A majority of the Board should be independent Directors.

 

2.2              The chair should be an independent Director.

 

2.3              The roles of chair and chief executive should not be exercised by the same individual.

 

2.4              The Board should establish a nomination committee.

 

2.5              Companies should disclose the process for evaluating the performance of the Board, its committees and individual Directors.

 

Together, the Board members have a broad range of relevant financial and other skills, extensive experience and knowledge necessary to guide our business.  Our Board comprises a majority of Non-executive Directors who satisfy our criteria for independence.  The current Board Corporate governance composition and the composition of each of the Board’s Committees is set out in the table below.  The skills, experience and expertise of each Director, as well as the period of office held by each Director, are set out in the Directors’ Report in the 2008 Annual Report.

 

The 2008 Annual Report can be found at ‘www.westpac.com.au/investorcentre’.

 

Director independence

 

The Board regularly assesses the independence of our Directors.

 

Directors are considered to be independent if they are independent of management and free from any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the exercise of their unfettered and independent judgment.  Materiality is assessed on a case-by-case basis by reference to each Director’s individual circumstances rather than by applying general materiality thresholds.

 

22

 

Each Director is expected to disclose any business or other relationship which he or she has directly or as a partner, shareholder or officer of a company or other entity that has an interest, or a business or other relationship, with Westpac or a related entity.

 

The Board considers information about any such interests or relationships, including any related financial or other details, when it assesses the Directors’ independence.

 

The Board assesses Directors’ independence on appointment and annually.  Each Director provides an annual attestation of his or her interests and independence.

 

The Westpac Definition of Independence can be found at ‘www.westpac.com.au/corpgov’.

 

The Board and Committees size and composition

 

Elizabeth Bryan

Gordon Cairns

Ted Evans

Carolyn Hewson

Gail Kelly

Lindsay Maxsted

Peter Wilson

Board membership/ position title

Non- executive, Independent

Non- executive, Independent

Chairman, Non- executive, Independent

Non-executive, Independent

CEO, executive

Non- executive, Independent

Non- executive, Independent

Audit Committee

ü

ü

ü

ü

Chair ü

ü

Risk Management Committee

ü

ü

ü

Chair ü

ü

ü

Nominations Committee

ü

Chair ü

ü

ü

ü

Remuneration Committee

Chair ü

ü

ü

Sustainability Committee

ü

ü

Chair ü

 

The charts below demonstrate that our Board comprises a majority of independent Directors, and the tenure of our current Directors.

 

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

The selection and role of the Chairman

 

The Board elects one of the independent Non-executive Directors to be the Chairman.  Our current Chairman is Ted Evans.  His role is separate to that of our CEO, Gail Kelly.  The Chairman’s role includes:

 

•                   providing effective leadership to the Board in relation to all Board matters;

 

•                   representing the views of the Board to the public;

 

•                   convening regular Board meetings throughout the year, and ensuring that minutes of meetings accurately record decisions taken and, where appropriate, the views of individual Directors;

 

•                   guiding the agenda and conduct of all Board meetings;

 

•                   reviewing the performance of Non-executive Directors;

 

•                   overseeing Non-executive Director and CEO succession; and

 

•                   promoting constructive and respectful relations between the Board and management.

 

Meetings of the Board

 

The Board has 11 scheduled meetings each year and meets in the intervening periods when warranted.  In July each year

 

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the Board discusses our strategic plan and sets our overall strategic direction.  The Board also conducts a half year review of our strategy.  The Board conducts workshops on specific subjects throughout the year.  Directors are always encouraged to participate in meetings, with a robust exchange of views and to bring their experience and independent judgment to bear on the issues and decisions at hand.

 

Senior executives are invited to attend all Board meetings and are also available to be contacted by Directors between meetings.  The Board, however, usually meets without executive management (other than the CEO) at the commencement and conclusion of each meeting.  The Board meets without the CEO or any senior executives at least once a year, or as required.

 

Meetings attended by Directors for the past financial year are reported in the Directors’ Report in the 2008 Annual Report.

 

The Nominations Committee

 

The Nominations Committee is responsible for:

 

•                   developing and reviewing policies on Board composition, strategic function and size;

 

•                   the performance review process of the Board, its Committees and individual Directors;

 

•                   succession planning for the Board;

 

•                   developing and implementing induction programs for new Directors and ongoing education for existing Directors;

 

•                   developing eligibility criteria for nominating Directors;

 

•                   recommending appointment of Directors to the Board;

 

•                   considering candidates for appointment to the Boards of relevant subsidiaries; and

 

•                   reviewing our corporate governance policies to meet international corporate governance standards.

 

The composition of the Nominations Committee is set out in the table entitled ‘The Board and Committees size and composition’ earlier in this section of the statement.

 

The Nominations Committee Charter can be found at ‘www.westpac.com.au/corpgov’.

 

Nomination and appointment of new Directors

 

The Nominations Committee makes recommendations for the nomination of new Directors to the Board as a whole.

 

The Nominations Committee assesses nominations against a range of criteria including the candidate’s background, experience, professional skills, personal qualities, whether their skills and experience will complement the existing Board and their availability to commit themselves to the Board’s activities.  External consultants have been used to access a wide base of potential Directors.

 

New Directors receive a letter of appointment, which sets out the expectations of the role, conditions of appointment Corporate governance including expected term of appointment, and remuneration.  This letter conforms to the ASXCGC’s Recommendations.

 

If the Board appoints a new Director during the year, that person will stand for election by shareholders at the next AGM.  Shareholders are provided with relevant information on the candidates for election.

 

The Board also makes recommendations concerning the re-election of any Director by shareholders.  In considering whether to support the re-election of a Director, the Board takes into account the results of the Board performance evaluation conducted during the year.

 

The Director appointment policy, Board tenure policy, principles for appointment of Directors to subsidiary companies and the Non-executive standard letter of appointment can be found at ‘www.westpac.com.au/corpgov’.

 

Term in office and retirement and re-election of Directors

 

Our Constitution states that at each AGM one-third of our Directors (excluding the CEO) and any Director who has held office for three or more years since their last election must retire.

 

Eligible Directors who retire may offer themselves for re-election by shareholders at the next AGM and are invited to give a short presentation to the AGM in support of re-election.

 

The Board has a Tenure Policy which limits the number of terms of office that any Non-executive Director may serve to the longer of three consecutive terms or nine years.  The maximum tenure of the Chairman is to be no more than the longer of four terms or twelve years (inclusive of any term as a Director prior to being elected as Chairman), from the date of first election by shareholders.

 

Director education

 

On appointment, all Directors are offered an induction program appropriate to their experience to familiarise them with matters relating to our business, strategy and any current issues before the Board.  The induction program includes meetings with the Chairman, the CEO, the Chairman of each of the Board Committees, each Group Executive, the Group Secretary & General Counsel and the Chief Strategy Officer.

 

The Board encourages Directors to continue their education by participating in workshops that are held throughout the year, attending relevant site visits and undertaking relevant external education.

 

Our Group Secretary & General Counsel provides Directors with ongoing guidance on matters such as corporate governance, our Constitution and the law.

 

Board access to information and advice

 

All Directors have unrestricted access to company records and information and receive regular detailed financial and operational reports from executive management.  Each Director also enters into an access and indemnity agreement ensuring seven year access to documents after their retirement as a Director.

 

The Chairman and other Non-executive Directors regularly consult with the CEO, the Chief Financial Officer (CFO), senior executives, the Group Secretary & General Counsel, the General Manager Group Assurance,  the Chief Risk Officer (CRO), the Chief Strategy Officer and the General Manager Sustainability, Brand and Communications and may consult with, and request additional information from, any of our employees.

 

The Board collectively, and each Director individually, has the right to seek independent professional advice, at our expense, to help them carry out their responsibilities.  While the Chairman’s prior approval is needed, it may not be unreasonably withheld and, in the Chairman’s absence, Board approval may be sought.

 

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Company Secretaries

 

The Board is responsible for the appointment of our Company Secretaries, of which there are two.  The Group Secretary & General Counsel, Richard Willcock, attends all Board and Committee meetings and is responsible for providing Directors with ongoing guidance and advice on legal and corporate governance issues.  The Head of Group Secretariat, Alex Crompton (formerly Anna O’Connell from 1 October 2007 to 4 February 2008) is responsible for the operation of the secretarial function, including providing advice to Directors and officers on corporate governance and regulatory matters, developing and implementing our governance framework and, in conjunction with management, giving practical effect to the Board’s decisions.

 

All Directors have access to advice from the Group Secretary & General Counsel and Head of Group Secretariat.

 

Profiles of our Company Secretaries are set out in the Directors’ Report in the 2008 Annual Report.

 

Review of Board performance

 

The Board undertakes ongoing self-assessment as well as an annual performance review of its activities, the Committees and individual Directors.

 

The performance review process conducted in 2008 was facilitated by an external consultant and included written surveys of and interviews with Directors, senior executives and the Group Secretary & General Counsel.  The performance reviews were wide-ranging and included, among other considerations, each Director’s contributions to Board discussions.  The survey results were independently collated and presented to the Board.  The Chairman discussed the results with individual Directors and Committee Chairs.

 

The full Board (excluding the Chairman) reviewed the results of the performance review of the Board Chairman.  The results were then privately discussed by the Chairman of the Risk Management Committee with the Board Chairman.

 

Board Committees and membership

 

We have five standing Board Committees.  The Committee charters describe their roles and powers, as approved by the Board.

 

The Committees and their membership at 30 October 2008 are set out in the table entitled ‘The Board and Committee size and composition’ earlier in this section of the statement.  The areas of oversight for each Committee are set out in the ‘Westpac Governance Framework’ chart at the end of this section.  Directors’ attendance at Committee meetings is set out in the Directors’ Report in the 2008 Annual Report.

 

The Board establishes other Committees from time to time to consider matters of special importance or to exercise the delegated authority of the Board.

 

Composition and independence of the Committees

 

Committee members are chosen for the skills and experience they can contribute to the respective Committees.  All of the Committees comprise independent Non-executive Directors, with the exception of the Sustainability Committee, on which the CEO sits.

 

Operation of the Committees and reporting to the Board

 

The Board Committees meet quarterly, with the exception of the Sustainability Committee, which meets three times a year, and at other times as necessary.  Each Committee is entitled to the resources and information it requires and has direct access to our employees and advisers.  The CEO attends all Committee meetings, except where she has a material personal interest in a matter being considered.  Senior executives and other selected employees are invited to attend Committee meetings as required.  All Directors receive all Committee papers and can attend any Committee meeting, provided there is no conflict of interest.

 

How Committees’ performance is evaluated

 

The performance of each Committee is reviewed as part of the Board’s overall performance review.

 

The Board Committee Membership and all of the Committee Charters can be found at ‘www.westpac.com.au/corpgov’.

 

Milestones in 2008

 

•                   David Morgan’s retirement as CEO and Director;

 

•                   Gail Kelly’s appointment as CEO and to the Board;

 

•                   Lindsay Maxsted’s appointment to the Board;

 

•                   participated in a detailed Board performance review;

 

•                   reviewed the skills required on the Board to assist with Board succession planning;

 

•                   considered various candidates for appointment to the Boards of relevant subsidiaries.

 

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Westpac Governance Framework

 

The diagram below sets out the Westpac Governance framework and the areas of responsibility for each Committee:

 

 

The Executive Office, Disclosure Committee and Executive Risk Committees sit beneath the Board and its Committees to implement Board approved strategies, policies and management of risk across the Group.

 

Principle 3 – Promote ethical and responsible decision-making

 

Companies should actively promote ethical and responsible decision-making.

 

3.1              Companies should establish a code of conduct and disclose the code or a summary of the code as to:

 

•                   the practices necessary to maintain confidence in the company’s integrity;

 

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

 

•                   the responsibility and accountability of individuals for reporting and investigating reports of unethical practices.

 

3.2              Companies should establish a policy concerning trading in company securities by Directors, senior executives and employees, and disclose the policy or a summary of that policy.

 

Principles for Doing Business and Code of Conduct

 

Our Principles for Doing Business (the Principles) set out how we aim to conduct ourselves across our business in the areas of:

 

•                   governance and ethics;

 

•                   employee practices;

 

•                   customer practices;

 

•                   care for the environment;

 

•                   community involvement; and

 

•                   supply chain management.

 

The Principles are also aligned with significant global initiatives that promote responsible business practices.  Our Principles apply to all Directors and employees and we report our performance against them annually.

 

Our Code of Conduct sets out seven values that we believe will maintain the trust and confidence placed in us by our customers, shareholders, suppliers and the community at large.  We recognise that this trust can only be retained by acting ethically and responsibly in all our dealings and by seeking to continually improve in all that we do.  The Code

 

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of Conduct applies to all of our employees and contractors and is supported by the Board.  The seven values are that:

 

•                   we act with honesty and integrity;

 

•                   we respect the law and act accordingly;

 

•                   we respect confidentiality and do not misuse information;

 

•                   we value and maintain our professionalism;

 

•                   we act as a team;

 

•                   we manage conflicts of interest responsibly; and

 

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

 

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

 

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

 

Our Principles for Doing Business and Code of Conduct can be found at ‘www.westpac.com.au/corpgov’.

 

Milestone in 2008

 

•                   Our Code of Conduct and the broader Principles for Doing Business were reviewed.

 

Code of ethics for senior finance officers

 

The Code of Accounting Practice and Financial Reporting (the Code) complements our Code of Conduct.  The Code is designed to assist the CEO, CFO and other principal financial officers in applying the highest ethical standards to the performance of their duties and responsibilities with respect to accounting practice and financial reporting.  The Code requires that those officers:

 

•                   act honestly and ethically, particularly with respect to conflicts of interest;

 

•                   provide full, fair, accurate and timely disclosure in reporting and other communications;

 

•                   comply with applicable laws and rules;

 

•                   promptly report violations of the Code; and

 

•                   be accountable for their actions.

 

Our code of Accounting Practice and Financial Reporting is available at ‘www.westpac.com.au/corpgov’.

 

Conflicts of interest

 

Westpac has a conflicts of interest framework which includes a Group policy supported by more specific policies and guidelines aimed at recognising and managing potential conflicts.

 

The Board

 

The Board is conscious of its obligations to ensure that Directors avoid conflicts of interest (both real and apparent) between their duty to the company and their own interests.  All Directors are required to disclose any actual or potential conflict of interest upon appointment and are required to keep these disclosures to the Board up-to-date.

 

Any Director with a material personal interest in a matter being considered by the Board must declare their interest and, unless the Board resolves otherwise, they may not participate in boardroom discussions or vote on matters on which they face a conflict.

 

Our employees

 

Our employees are not permitted to participate in activities which involve a conflict with their duties and responsibilities or which are prejudicial to our business.  We expect our employees to:

 

•                   avoid conflicts of interest;

 

•                   obtain consent from senior management before accepting a Directorship on the Board of a non-Westpac Group company;

 

•                   disclose any material interests they have with our customers to their manager and not be involved with customer relationships where they have such an interest;

 

•                   not participate in business activities outside their employment with us (whether as a principal, partner, Director, agent, guarantor, investor or employee) without approval or when it could adversely affect their ability to carry out their duties and responsibilities; and

 

•                   not solicit, accept or offer money, gifts, favours or entertainment which might influence, or might appear to influence, their business judgment.

 

Our Conflicts of Interest guidance can be found at ‘www.westpac.com.au/corpgov’.

 

Fit and proper person assessments

 

We assess the fitness and propriety of our Directors and also of those employees who perform specified roles.  The Nominations Committee and the Board are responsible for assessing the main Board Directors, Non-executive Directors on subsidiary Boards and senior executives.  An executive Fit and Proper Committee assesses other affected employees.  In all cases the individual is asked to provide a detailed declaration and background checks are undertaken.  Assessments are performed upon appointment to the relevant position and are re-assessed annually.

 

Concern reporting and whistleblowing

 

Our employees are encouraged to raise any concerns, including those arising out of activities or behaviour that may not be in accordance with the Principles and the Code of Conduct, any of our other policies or any other regulatory requirements, with either management, the human resources team (People & Performance), the compliance team or the Financial Crime Control business unit.

 

Employees can also raise concerns about breaches of our regulatory obligations or internal policies or procedures on an anonymous basis through either of our internal or external whistleblower reporting systems.  Our Whistleblower Protection Policy protects employees who raise concerns about suspected breaches of our policies through these channels.

 

Under the policy we provide mechanisms for employees to either log their report onto an internal reporting system (Concern Online), or telephone or email an external and independent professional services firm, with employees who are trained in confidential reporting and whistleblower protection (Employee Concern Hotline).  Employees may also choose to involve the Whistleblower Protection Officer,

 

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who is responsible for protecting the employee against disadvantage.

 

We investigate concerns raised in a manner that is fair, objective and affords natural justice to all people involved.  If the investigation shows that wrongdoing has occurred, we are committed to changing our processes and taking action in relation to employees who have behaved incorrectly.  Where illegal conduct has occurred, this may involve reporting the matter to relevant authorities and in some cases the police.

 

The concern reporting system meets all relevant Australian and New Zealand legislative requirements and the Australian Standard AS8004 (Whistleblower Protection Programs for Entities).  The system is monitored and reviewed annually and statistics about concerns raised are reported quarterly to both the Risk Management Committee and the Westpac Group Operational Risk & Compliance Committee.

 

A summary of our Whistleblower Protection Policy is available at ‘www.westpac.com.au/corpgov’.

 

Insider trading policy and trading in Westpac shares

 

Westpac Directors and all Westpac employees are restricted from dealing in our shares and certain other financial products if they are in possession of inside information, and from passing on that information to others.  In addition, Directors and any employees who, because of their seniority or the nature of their position, may have access to material non-public information about Westpac (Prescribed Employees), are subject to further restrictions.

 

The mechanisms we use to manage and monitor our obligations include:

 

•                   our Insider Trading Policy, which prohibits any dealing in any securities where an employee has access to inside information which may affect the price of those securities;

 

•                   our New Issues Policy, which places limitations upon employees participating in a new product issue where their position puts them in a real or perceived position of conflict with the interests of customers;

 

•                   restrictions limiting the periods in which the Directors and Prescribed Employees can trade in our shares or other company securities (Trading Windows);

 

•                   requiring Directors and Prescribed Employees to notify their intention to trade during those Trading Windows and confirm that they have no inside information;

 

•                   monitoring the trading of Westpac shares by Directors and Prescribed Employees on a daily basis; and

 

•                   maintaining a register of Prescribed Employees which is regularly updated.

 

General information on our Insider Trading Policy and New Issues Policy can be found at ‘www.westpac.com.au/corpgov’.

 

Corporate responsibility and sustainability

 

We view sustainable and responsible business practices as important for our business and to add shareholder value.  This means conducting our business in a responsible, trustworthy and ethical manner, while accepting our accountability for our impacts on society and the environment.

 

We are committed to transparency and fair dealing, treating employees and customers responsibly and having solid links with the community.

 

Reporting on our corporate responsibility and sustainability performance

 

We report on our social, ethical and environmental performance through our Stakeholder Impact Report and our website.  Where appropriate, we include what we believe are the most material environmental, social and governance metrics into our financial results announcements.

 

Our Stakeholder Impact Report and our management of sustainability aim to address the issues that we believe matter most to our customers, employees, shareholders and the community and follow the widely accepted reporting framework, the Global Reporting Initiative (GRI).

 

The Stakeholder Impact Report is also independently assured against the AA1000 Assurance Standard.  This goes beyond testing the integrity of the data, to the effectiveness of our underlying systems and processes and the extent to which corporate responsibility and sustainability policies and processes are embedded across our organisation.

 

In addition, we actively participate in various independent external assessments by authoritative sustainability and governance rating organisations benchmarking against the highest standards of governance.

 

Sustainability Committee

 

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

 

The Sustainability Committee, as delegated by the Board:

 

•                   reviews our social, environmental and ethical impacts, both direct and indirect;

 

•                   oversees initiatives to enhance our sustainability;

 

•                   agrees standards for our corporate responsibility and sustainability policies and practices and monitors compliance with these policies and practices;

 

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

 

•                   reviews and approves the independent assurance of our annual Stakeholder Impact Report.

 

Our Stakeholder Impact Report and performance in external sustainability assessments are available at ‘www.westpac.com.au/corporateresponsibility’.

 

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Milestones in 2008

 

Our recent external sustainability, governance ratings and key activities include:

 

•                   revised sustainability strategy with more ambitious targets and a focus on environmental markets and local social issues;

 

•                   formation of Westpac’s Sustainability Council comprising officers across the Group with explicit sustainability responsibilities;

 

•                   one of the leading performances in the 2008/09 Dow Jones Sustainability Index; and

 

•                   continued top-rating (10.0) in the fifteenth consecutive corporate governance assessment by Governance Metrics International.

 

Principle 4 – Safeguard integrity in financial reporting

 

Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.

 

4.1              The Board should establish an audit committee.

 

4.2              The audit committee should be structured so that it:

 

•                   consists only of Non-executive Directors;

 

•                   consists of a majority of independent Directors;

 

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

 

•                   has at least three members.

 

4.3              The audit committee should have a formal charter.

 

Approach to financial reporting

 

Our approach to financial reporting reflects three core principles:

 

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

 

•                   that our accounting methods are comprehensive and relevant and comply with applicable accounting rules and policies; and

 

•                   that our external auditor is independent and serves security holder interests.

 

The Board monitors Australian and international developments relevant to these principles and reviews our practices accordingly.

 

Audit Committee

 

The Board delegates oversight responsibility for risk management between the Audit Committee and the Risk Management Committee.

 

The Audit Committee oversees all matters concerning:

 

•                   the integrity of the financial statements and financial reporting systems;

 

•                   the external auditor’s qualifications, performance, independence and fees;

 

•                   oversight and performance of the internal audit function;

 

•                   compliance with financial reporting and related regulatory requirements (in conjunction with the Risk Management Committee, this includes an oversight of the APRA statutory reporting requirements); and

 

•                   procedures for the receipt, retention and treatment of financial complaints, including accounting, internal accounting controls or auditing matters and the confidential reporting by employees of concerns regarding accounting or auditing matters.

 

The Audit Committee charter is available at ‘www.westpac.com.au/corpgov’.

 

Integrity of the financial statements

 

The Audit Committee oversees the preparation of our financial statements.  The Audit Committee requires management to confirm that the accounting methods applied by management are consistent and comply with applicable accounting standards and concepts.

 

The Audit Committee reviews and assesses:

 

•                   any significant estimates and judgments in financial reports and monitors the methods used to account for unusual transactions;

 

•                   the processes used to monitor and comply with laws, regulations and other requirements relating to external reporting of financial and non financial information; and

 

•                   the major financial risk exposures and the process surrounding the disclosures made by the CEO and CFO in connection with their personal certifications of the half year and annual financial statements.

 

The Audit Committee conducts regular discussions with:

 

•                   the Risk Management Committee, the CRO, management and the external auditor about our major financial risk exposures and the steps management has taken to monitor and control such exposures;

 

•                   the external auditor concerning their audit and any significant findings and the adequacy of management’s responses;

 

•                   management and the external auditor concerning the half-yearly and annual financial statements, including disclosures in the ‘operating and financial review and prospects’ section of the Annual Report;

 

•                   management and the external auditor regarding any correspondence with regulators or government agencies and reports which raise issues of a material nature; and

 

•                   the Group Secretary & General Counsel regarding any legal matters that may have a material impact on the financial statements and/or our compliance with financial reporting and related regulatory policies.

 

The Audit Committee meets with the external auditor without management being present at each meeting.  Periodically the Audit Committee meets with the General Manager of Group Assurance (our internal audit function) without management.

 

Financial knowledge of Audit Committee members

 

The Audit Committee comprises six independent, Non-executive Director members.

 

All of the Audit Committee members have appropriate financial experience, an understanding of the financial services industry and satisfy the independence requirements under the ASXCGC’s Recommendations, the United States Securities Exchange Act of 1934 (as amended) and its related rules and the rules of the NYSE.

 

The Board has determined that Lindsay Maxsted, Chair of the Audit Committee, is an ‘audit committee financial expert’ and is independent as defined in the NYSE Listing Standards.

 

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Mr Maxsted is not an auditor or an accountant with respect to Westpac, does not perform ‘field work’ and is not an employee.  Under United States laws, an audit committee member who is designated as an ‘audit committee financial expert’ will not be deemed to be an ‘expert’ for any purpose other than as a result of being identified as an audit committee financial expert.

 

While Mr Maxsted meets the requirements of an ‘audit committee financial expert’ pursuant to United States securities laws, he does not have any additional responsibilities beyond those of the other Audit Committee members.

 

The Audit Committee’s composition is set out in the table entitled ‘The Board and Committees size and composition’ in the Principle 2 section of this statement.  The full qualifications of the Audit Committee members and their attendance at Audit Committee meetings are set out in the Directors’ Report in the 2008 Annual Report.

 

External auditor

 

The role of the external auditor is to provide an independent opinion that our financial reports are true and fair and comply with applicable regulations.

 

Our external auditor is PricewaterhouseCoopers (PwC), appointed by shareholders at the 2002 AGM.  Our present PwC lead audit partner is Ian Hammond and the review audit partner is David Prothero.  Ian and David assumed responsibility for these roles in 2008 and 2005, respectively.

 

The external auditor receives all Audit Committee papers, attends all meetings and is available to Audit Committee members at any time.  The external auditor also attends the AGM to answer questions from shareholders regarding the conduct of PwC’s audit, the audit report and financial statements and PwC’s independence.

 

As our external auditor, PwC are quarterly required to confirm their independence and compliance with specified independence standards.

 

The roles of lead audit partner and review audit partner must be rotated every five years and cannot be resumed by the same person for a minimum of five years.

 

We strictly govern our relationship with the external auditor, including restrictions on employment, business relationships, financial interests and use of our financial products by the external auditor.

 

Restrictions on non-audit services by the external auditor

 

To avoid possible independence or conflict issues, the external auditor is not permitted to carry out certain types of non-audit services for Westpac, as specified in our Guidelines for Non-Audit Services (the Guidelines).

 

For permitted non-audit services and all other non-audit services, use of the external audit firm must be assessed and pre-approved by the Audit Committee, in accordance with the Guidelines.

 

The breakdown of the aggregate fees billed by the external auditor in respect of each of the two most recent financial years for audit, audit-related, tax and other services is provided in Note 34 to our consolidated financial statements for the year ended 30 September 2008.  A declaration regarding the Board’s satisfaction that the provision of non-audit services by PwC is compatible with the general standards of auditor independence is provided in the Non-Audit Services and Independence declaration in the Directors’ Report in the 2008 Annual Report.

 

The Guidelines for Non-Audit Services can be found at ‘www.westpac.com.au/corpgov’.

 

Internal audit

 

Group Assurance includes an independent and objective internal audit review function charged with evaluating, testing and reporting on the adequacy and effectiveness of management’s control of operational risk.  Group Assurance has access to all of our entities and conducts audits and reviews following a risk-based planning approach.

 

Group Assurance provides regular reports to both the Audit Committee and the Risk Management Committee and raises significant issues with the Audit Committee.  The General Manager Group Assurance has a reporting line to the Chairman of the Audit Committee.

 

Principle 5 – Make timely and balanced disclosure

 

Companies should promote timely and balanced disclosures of all material matters concerning the company.

 

5.1              Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies.

 

Market disclosure

 

We are committed to maintaining a level of disclosure that meets the highest standards and provides all investors with timely and equal access to information.  To achieve these standards we have a Board-approved Market Disclosure Policy, which governs how we communicate with our shareholders and with the investment community.

 

The Policy reflects the ASX continuous disclosure requirements and the requirements of other exchanges where we have disclosure obligations.  Under our Policy, information that a reasonable person would expect to have a material effect on the price of our securities must be immediately disclosed, subject to certain exceptions.

 

Our Disclosure Committee is responsible for determining what information should be disclosed publicly under the Policy, and for assisting employees in understanding what information may require disclosure to the market on the basis that it is price sensitive.  The Disclosure Committee is chaired by Phil Coffey, our CFO, and involves the CEO, senior executives, the Group Secretary & General Counsel and the General Manager Sustainability, Brand and Communications.

 

The Group Secretary & General Counsel, as the Disclosure Officer, has responsibility for ensuring compliance with the continuous disclosure requirements of the listing rules of the ASX, NZX, NYSE and other exchanges, relevant securities and corporations legislation, and overseeing and coordinating information disclosure to regulators, analysts, brokers, shareholders, the media and the public.

 

Westpac’s market announcements are released to each stock exchange where the company has securities listed in accordance with the rules of that exchange – ASX, NZX, NYSE, and the London, Singapore and Swiss stock exchanges.

 

To supplement the information already available to investors we publish investor discussion packs, containing presentations on and explanations about our financial results, on our website.  We also publish on our website the

 

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Annual Review, Annual Reports, profit announcements, CEO and executive briefings (including webcasts), Stakeholder Impact Reports, economic updates, notices of meetings, media releases and briefing transcripts.

 

The Market Disclosure policy can be found at ‘www.westpac.com.au/corpgov’.

 

Principle 6 – Respect the rights of shareholders

 

Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.

 

6.1              Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy.

 

Shareholder communications and participation

 

We are committed to giving all shareholders comprehensive, timely and equal access to balanced information about our activities so that they can make informed investment decisions and be actively involved and interested in our business.

 

We employ a wide range of communication approaches, which are regularly reviewed to ensure best use is made of new technologies to improve our communications.  These approaches include direct communications with shareholders, the publication of all relevant company information in the Investor Centre section of our website, and access to all market briefings and shareholder meetings via webcasting facilities.  Shareholders are given the option to receive information in print or electronic format.  One of our most important communications is our Shareholder Newsletter, which is sent to all of our shareholders with the half-year and annual dividend notices.  The Newsletter provides information on our performance and developments, details on accessing further information and contact numbers for both the Investor Relations Unit and the Share Registry.

 

We regard the AGM as an important opportunity for engaging and communicating with shareholders.  Shareholders are encouraged to attend and actively participate in our AGM, the proceedings of which are webcast and can also be viewed on demand at a later time from our website.

 

Shareholders are invited to put forward questions that they would like addressed at the AGM at the time of receipt of the Notice of Meeting.

 

Investors’ discussion pack, annual result presentation and other shareholder information can be accessed at ‘www.westpac.com.au/investorcentre’.

 

Milestone in 2008

 

·                   expanded the capture of email addresses from shareholders, enabling electronic communication with approximately 25% of our shareholders.

 

Principle 7 – Recognise and manage risk

 

Companies should establish a sound system of risk oversight and management and internal control.

 

7.1              Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.

 

7.2              The Board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively.  The Board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks.

 

7.3              The Board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.

 

Risk management roles and responsibilities

 

The Board is responsible for reviewing and approving our overall risk management strategy, including determining our appetite for risk.  The Board has delegated to the Risk Management Committee the responsibility for setting risk appetite, approving frameworks, policies and processes for managing risk and accepting risks beyond management’s approval discretion.

 

The Risk Management Committee monitors the alignment of our risk profile with our risk appetite, which is defined in the Board Risk Appetite Statement and with our current and future capital requirements.  The Committee receives regular reports from management on the effectiveness of our management of Westpac’s material business risks.  More detail about the role of the Risk Management Committee is set out later in this section under the heading ‘Risk Management Committee’.

 

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

 

Our Group Risk function is independent from the business units and reports to the CRO.

 

Our business model recognises that the responsibility for managing risks in our business lies with the various business units.  This responsibility includes developing business unit-specific policies, controls, procedures and monitoring and reporting capability that align to the frameworks approved by the Risk Management Committee.

 

Our Group Assurance function (internal audit) independently evaluates the adequacy and effectiveness of managements’ controls for risk.

 

Our overall risk management governance structure is set out in the table of the same name in this section of the statement.

 

Approach to risk management

 

We regard managing the risk that affects our business as a fundamental activity, as it influences our performance, reputation and future success.  Effective risk management involves achieving an integrated and balanced approach to risk and reward, and assists us in achieving our objectives of optimising financial growth opportunities and mitigating potential loss or damage.  Both optimisation and mitigation strategies are of equal importance.

 

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We distinguish four main types of risk:

 

·                   credit risk – the risk of financial loss where a customer or counterparty fails to meet their financial obligations;

 

·                   market risk – the risk to earnings from changes in market factors, such as foreign exchange rates, interest rates, commodity prices and equity prices.  This includes interest rate risk in the banking book – the risk to interest income from a mismatch between the duration of assets and liabilities that arises in the normal course of business activities;

 

·                   operational risk – the risk that arises from inadequate or failed internal processes, people and systems or from external events.  This includes compliance risk - the risk of legal or regulatory sanction, financial or reputation loss arising from our failure to apply the regulatory standards expected of us as a financial services group; and

 

·                   liquidity risk – the risk of not meeting our payment obligations, which could arise as a result of mismatched cash flows generated by our business.

 

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

 

·                   equity risk – the potential for financial loss arising from movements in the value of our direct and indirect equity investments;

 

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

 

·                   model risk – the risk of financial, reputation or operational losses arising because of a model;

 

·                   reputation risk – the risk to earnings or capital arising from negative public opinion resulting from the loss of reputation or public trust and standing.  This risk encompasses social, ethical and environmental risks arising out of areas such as people management, climate change governance and supply chain management;

 

·                   business risk – the risk associated with the vulnerability of a line of business to changes in the business environment; and

 

·                   contagion risk – the risk that problems arising in other Westpac Group members compromise the financial and operational position of the authorised deposit-taking institutions in the Westpac Group.

 

In December 2007 we received advanced accreditation from APRA and the RBNZ under the Basel II capital framework.  We were among the first banks in the world to receive advanced accreditation, which allows us to use the most advanced internal-ratings based approach for credit risk and the advanced measurement approach for operational risk to determine our regulatory capital position.

 

A summary of our risk management framework policies can be found at ‘www.westpac.com.au/corpgov’.

 

Risk Management Committee

 

The Risk Management Committee:

 

·                   reviews and approves the frameworks for managing our credit, market, liquidity and operational risk;

 

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

 

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

 

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

 

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

 

·                   reviews significant issues that may be raised by internal audit as well as the length of time and action taken to resolve such issues.

 

From the perspective of specific types of risk, the Risk Management Committee role includes:

 

·                   credit risk – monitoring the risk profile, performance and management of our credit portfolio and development and review of credit risk policies;

 

·                   market and liquidity risk – monitoring the market risk profile, approving the Group Value at Risk and Net Interest Income at Risk limits and reviewing our funding plan and liquidity requirements; and

 

·                   operational risk – monitoring the operational risk profile, the performance of operational risk management and controls and the development and ongoing review of operational risk policies; overseeing our compliance with applicable laws, regulations and regulatory requirements; discussing with management and the external auditor any material correspondence with regulators or government agencies and any published reports that raise material issues; and reviewing complaints and whistleblower concerns.

 

The Risk Management Committee provides relevant periodic assurances to and refers any relevant matters to the Audit Committee.

 

M ilestones in 2008

 

·                   one of the first banks globally to receive advanced accreditation from APRA and the RBNZ under the Basel II capital framework in December 2007;

 

·                   reviewed our risk management frameworks; and

 

·                   established an executive management committee focused on market dislocation.

 

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Our risk management governance structure is set out in the table below:

 

Board

 

Reviews and approves our overall risk management strategy, including our appetite for risk.

 

Board Risk Management Committee

 

The Board has delegated responsibility to the Board Risk Management Committee to set risk appetite, approve frameworks, policies and processes for managing risk and accept risks beyond the approval discretion provided to management.

 

In addition, the Board Risk Management Committee:

 

·		monitors the risk profile, performance, capital levels, exposures against limits and management and control of our risks;
·		monitors changes anticipated in the economic and business environment and other factors relevant to our risk profile;
·		oversees the development and ongoing review of appropriate policies that support our frameworks for managing risk; and
·		reviews significant issues that may be raised by internal audit as well as the length of time and action taken to resolve such issues.

 

Board committees with a risk focus

 

Board Audit Committee				Board Sustainability Committee
·		oversees the integrity of financial statements and financial reporting systems.		·		oversees environmental, social, governance and ethical performance and issues.

 

Executive risk committees

 

Executive management committee focused on market dislocation

 

·		proactively tracks and responds to emerging trends; and
·		maintains intensity of effort on risk management in the current environment.

 

Westpac Group Risk-Reward Committee (GRRC)

 

·		sets and leads the risk optimisation agenda for Westpac;
·		recommends to the Board Risk Management Committee the appropriate risk-reward positioning and integrates decisions on overall capital levels and earnings profile;
·		initiates and oversees strategies to align Westpac’s risk-reward profile with boundaries for risk appetite and earnings volatility within parameters set by the Board;
·		oversees the risk governance framework, including the performance, role and membership of the executive risk committees; and
·		approves any changes to Westpac’s measures of risk-adjusted performance and monitors their use.

 

Westpac Group Credit Risk Committee (CREDCO)				Westpac Group Market Risk Committee (MARCO)				Westpac Group Operational Risk & Compliance Committee (OPCO)
·		seeks to optimise credit risk-reward;		·		seeks to optimise market and		·		seeks to optimise operational risk-
·		oversees portfolio performance;				liquidity risk-reward;				reward;
·		oversees the establishment and		·		oversees portfolio performance;		·		oversees the governance of operational
		review of limits and authority levels		·		determines limits within Board-				risk and compliance, including the
		within Board-approved parameters;				approved parameters; and				framework and policies;
		and		·		monitors adherence to Board-		·		oversees the operational and reputation
·		monitors adherence to Board-				approved limits.				risk profile; and
		approved limits.						·		oversees the operational risk profile.

 

Group level risk management

 

Group Risk

 

·		develops the group-level risk management frameworks for approval by the Board Risk Management Committee;
·		directs the review and development of key policies related to the risk management frameworks;
·		establishes risk concentration limits and monitors risk concentrations; and
·		monitors compliance and regulatory obligations and emerging risk issues.

 

Independent internal review

 

Group Assurance

 

·

reviews the adequacy and effectiveness of management controls for risk.

 

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