UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

November 7, 2018

 

Commission File Number 1-10167

 

WESTPAC BANKING CORPORATION

(Translation of registrant’s name into English)

 

275 KENT STREET, SYDNEY, NEW SOUTH WALES 2000, AUSTRALIA

(Address of principal executive office)

 

 

Indicate by check mark whether the registrant files or will file annual reports

under cover of Form 20-F or Form 40-F.

 

Form 20-F               x                        Form 40-F                         

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  __________

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ___________

 


 

Incorporation by Reference

 

 

The information contained in Exhibit No. 1 to this Report on Form 6-K shall be incorporated by reference in the prospectuses relating to the Registrant’s securities contained in the Registrant’s Registration Statements on Form F-3 (File Nos. 333-207931 and 333-220373), as such prospectuses may be amended or supplemented from time to time.

 

 

Index to Exhibits

 

Exhibit
No.

 

Description

 

 

 

1

 

Westpac Banking Corporation 2018 Pillar 3 Report: Incorporating the requirements of APS330

 


 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

WESTPAC BANKING CORPORATION

 

(Registrant)

 

 

 

 

 

 

 

Date:    November 7, 2018

By:   /s/ Sean Crellin                            

 

Sean Crellin

 

Director – Corporate, Legal and
Secretariat

 


Exhibit 1

 

 


 

Pillar 3 report

Table of contents

 

 

 

Structure of Pillar 3 report

 

Executive summary

3

Introduction

5

Risk appetite and risk types

6

Controlling and managing risk

7

Group structure

13

Capital overview

15

Leverage ratio

19

Credit risk management

21

Credit risk exposures

29

Credit risk mitigation

54

Counterparty credit risk

57

Securitisation

60

Market risk

70

Liquidity risk management

74

Liquidity coverage ratio

75

Net stable funding ratio

76

Operational risk

78

Equity risk

80

Interest Rate Risk in the Banking Book

82

Remuneration

84

Appendices

 

Appendix I – Regulatory capital reconciliation

91

Appendix II – Entities included in regulatory consolidation

97

Appendix III – Level 3 entities’ asset and liabilities

100

Appendix IV – Regulatory expected loss

101

Appendix V – APS330 quantitative requirements

102

Glossary

105

Disclosure regarding forward-looking statements

110

 

 

 

 

 

In this report references to ‘Westpac’, ‘Westpac Group’, ‘the Group’, ‘we’, ‘us’ and ‘our’ are to Westpac Banking Corporation and its controlled entities (unless the context indicates otherwise).

 

In this report, unless otherwise stated or the context otherwise requires, references to ‘$’, ‘AUD’ or ‘A$’ are to Australian dollars.

 

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

 

In this report, unless otherwise stated, disclosures reflect the Australian Prudential Regulation Authority’s (APRA) implementation of Basel III.

 

Information contained in or accessible through the websites mentioned in this report does not form part of this report unless we specifically state that it is incorporated by reference and forms part of this report.  All references in this report to websites are inactive textual references and are for information only.

 

 

 

2 | Westpac Group September 2018 Pillar 3 report

 

 


 

Pillar 3 report

Executive summary

 

 

 

 

30 September 2018

31 March 2018

30 September 2017

The Westpac Group at Level 2

 

 

 

Common equity Tier 1 (CET1) capital after deductions $m

45,239

43,639

42,670

Risk weighted assets (RWA) $m

425,384

415,744

404,235

Common equity Tier 1  capital ratio %

10.63

10.50

10.56

Additional Tier 1 capital %

2.15

2.31

2.10

Tier 1 capital ratio %

12.78

12.81

12.66

Tier 2 capital %

1.96

2.02

2.16

Total regulatory capital ratio %

14.74

14.83

14.82

APRA leverage ratio %

5.84

5.75

5.66

 

 

Westpac’s common equity Tier 1 (CET1) capital ratio was 10.63% at 30 September 2018, up 13 basis points from 31 March 2018. The increase was principally due to 20 basis points of organic capital growth and conversion of some preference shares (14 basis point increase), with these items partially offset by regulatory measurement changes of 30 basis points for mortgage risk weights and operational risk RWA.

 

 

 

 

Organic capital generation of 20 basis points included:

 

l        Second Half 2018 cash earnings of $3.8 billion (90 basis point increase);

 

l        The 2018 interim dividend payment, net of DRP share issuance (68 basis point decrease);

 

l        Ordinary RWA (before FX movements and regulatory measurement changes) fell slightly, with growth being offset by improvements in credit quality (3 basis point increase); and

 

l        A 5 basis point reduction from other capital movements.

 

Other items, in aggregate, reduced the CET1 capital ratio by 7 basis points. Regulatory measurement changes impacting mortgages and operational risk RWA (30 basis point decrease) were mostly offset by the conversion of $566 million of convertible preference shares to ordinary shares (14 basis point increase), the exit of Hastings and reduction in equity investments in Ascalon (5 basis point increase) and foreign currency translation impacts (4 basis point increase).

 

 

 

 $m

30 September 2018

31 March 2018

30 September 2017

Risk weighted assets

 

 

 

Credit risk

362,749

361,391

349,258

Market risk

6,723

7,406

8,094

Operational risk

39,113

30,866

31,229

Interest rate risk in the banking book

12,989

12,875

11,101

Other

3,810

3,206

4,553

Total RWA

425,384

415,744

404,235

Total Exposure at Default

1,021,926

1,013,355

990,853

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 3

 


 

Pillar 3 report

Executive summary

 

 

 

 

 

Risk Weighted Assets

 

Total RWA increased $9.6 billion this half:

 

§       Credit risk RWA increased $1.4 billion or 0.4% from:

 

-                     Regulatory modelling updates to mortgage probability of default models increased mortgage RWA by $4.1 billion;

 

-                     Portfolio growth (mostly mortgages) added $1.5 billion to RWA;

 

-                     Credit quality improvements, mainly for mortgages, decreased RWA by $3.4 billion;

 

-                     Foreign currency translation impacts, mainly related to NZ$ lending, decreased RWA by $0.4 billion; and

 

-                     Decrease in mark-to-market related credit risk RWA of $0.4 billion.

 

§              Non-credit RWA increased $8.2 billion or 15.2%, mostly from a $7.5 billion increase in operational risk RWA as we introduced a model overlay to approximate the standardised approach.

 

Exposure at Default

 

Over the half, exposure at default (EAD) increased $8.6 billion (up 0.8%), primarily due to growth in residential mortgage exposures of $5.7 billion and sovereign exposures associated with liquid assets of $2.7 billion.

 

Leverage Ratio

 

The leverage ratio represents the amount of Tier 1 capital relative to exposure 1 . At 30 September 2018, Westpac’s leverage ratio was 5.8%, up 9 basis points since 31 March 2018.

 

Liquidity Coverage Ratio (LCR)

 

The LCR requires banks to hold sufficient high-quality liquid assets (HQLA), as defined in APS210 Liquidity, to withstand 30 days under a regulatory-defined acute stress scenario.

 

Westpac’s LCR as at 30 September 2018 was 133% (31 March 2018: 134%) and the average LCR for the quarter ending 30 September 2018 was 131% 2 .

 

Net Stable Funding Ratio (NSFR)

 

Westpac is required to maintain a NSFR, designed to encourage longer-term funding resilience, of at least 100%. The NSFR came into effect for Australian ADIs on 1 January 2018. Westpac had a NSFR of 114% at 30 September 2018 (31 March 2018: 112%). Improvement in the ratio since 31 March 2018 mainly reflects growth in customer deposits and higher capital balances.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


1    As defined under Attachment D of APS110: Capital Adequacy

2    Calculated as a simple average of the daily observations over the 30 September 2018 quarter.

 

4 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Introduction

 

 

 

Westpac Banking Corporation is an Authorised Deposit-taking Institution (ADI) subject to regulation by APRA. APRA has accredited Westpac to apply advanced models permitted by the Basel III global capital adequacy regime to the measurement of its regulatory capital requirements. Westpac uses the Advanced Internal Ratings-Based approach (Advanced IRB) for credit risk and the Advanced Measurement Approach (AMA) for operational risk.

 

In accordance with APS330 Public Disclosure, financial institutions that have received this accreditation, such as Westpac, are required to disclose prudential information about their risk management practices on a semi-annual basis. A subset of this information must be disclosed quarterly.

 

This report describes Westpac’s risk management practices and presents the prudential assessment of Westpac’s capital adequacy as at 30 September 2018.

 

In addition to this report, the regulatory disclosures section of the Westpac website 1  contains the reporting requirements for:

 

·         Capital instruments under Attachment B of APS330; and

 

·         The identification of potential Global-Systemically Important Banks (G-SIB) under Attachment H of APS330 (disclosed annually).

 

Capital instruments disclosures are updated when:

 

·         A new capital instrument is issued that will form part of regulatory capital; or

 

·         A capital instrument is redeemed, converted into CET1 capital, written off, or its terms and conditions are changed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1    http://www.westpac.com.au/about-westpac/investor-centre/financial-information/regulatory-disclosures/

 

Westpac Group September 2018 Pillar 3 report | 5

 


 

Pillar 3 Report

Risk appetite and risk types

 

 

 

The Westpac Group’s vision is to be one of the world’s great service companies, helping our customers, communities and people to prosper and grow.

 

The Westpac Group’s appetite for risk is informed by our planned business strategy, regulatory rules and ratios, and the potential for adverse outcomes to result in material impacts on our customers, our staff, our reputation, our regulatory relationships and our financial position.

 

The Westpac Group distinguishes between different types of risk and takes an integrated approach toward identifying, assessing and managing all risks including through the annual review of the Westpac Group Risk Management Strategy and the establishment of additional controls through supporting frameworks and policies.

 

Overview of key risk types

 

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

 

·          liquidity risk - the risk that the Group will be unable to fund assets and meet obligations as they become due;

 

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

 

·          operational risk - the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition is aligned to the regulatory (Basel II) definition, including legal and regulatory risk but excluding strategic risk;

 

·          conduct risk - the risk that the provision of our services and products results in unsuitable or unfair outcomes for our stakeholders or undermines market integrity;

 

·          compliance risk - the risk of legal or regulatory sanction, financial or reputational loss, arising from our failure to abide by the compliance obligations required of us;

 

·          business risk - the risks arising from our strategic objectives and business plans;

 

·          sustainability risk - the risk of reputational or financial loss due to failure to recognise or address material existing or emerging sustainability related environmental, social or governance issues;

 

·          equity risk - the potential for financial loss arising from movements in equity values. Equity risk may be direct, indirect or contingent;

 

·          insurance risk - the risk in our insurance entities of claims costs being greater than expected, due to a failure in product design, underwriting, reinsurance arrangements or an increase in severity and frequency of insured events;

 

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

 

·          reputation risk - the risk of the loss of reputation, stakeholder confidence, or public trust and standing.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

We have adopted a Three Lines of Defence approach to risk management which reflects our culture of ‘risk is everyone’s business’ in which all employees are responsible for identifying and managing risk and operating within the Group’s desired risk profile. Effective risk management enables us to:

 

l        accurately measure our risk profile and balance risk and reward within our risk appetite, optimising financial growth opportunities and mitigating potential loss or damage;

 

l        protect Westpac Group’s depositors, policyholders and investors by maintaining a balance sheet with sound credit quality and buffers over regulatory minimums;

 

l        deliver suitable, fair and clear outcomes for our customers that support market integrity;

 

l        embed adequate controls to guard against excessive risk or undue risk concentration; and

 

l        meet our regulatory and compliance obligations.

 

The Board is responsible for approving the Westpac Group Risk Management Strategy and Westpac Group Risk Appetite Statement and for monitoring the effectiveness of risk management by the Westpac Group.

 

The Board has delegated to the Board Risk & Compliance Committee responsibility to review and recommend the Westpac Group Risk Management Strategy and Westpac Group Risk Appetite Statement to the Board for approval; set risk appetite consistent with the Westpac Group Risk Appetite Statement; approve frameworks, policies and processes for managing risk (consistent with the Westpac Group Risk Management Strategy and Westpac Group Risk Appetite Statement); and review and, where appropriate, approve risks beyond the approval discretion provided to management.

 

Risk management governance structure

 

Board

l        approves our overall Westpac Group Risk Management Strategy and the Westpac Group Risk Appetite Statement; and

 

l        makes annual declaration to APRA on risk management.

 

Board Risk & Compliance
Committee (BRCC)

l        reviews and recommends the Risk Management Strategy and Westpac Group Risk Appetite Statement to the Board for approval;

l        reviews and monitors the risk profile and controls of the Group consistent with the Westpac Group Risk Appetite Statement;

l        reviews and approves the frameworks, policies and processes for managing risk;

l        reviews and approves the limits and conditions that apply to credit risk approval authority delegated to the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Chief Risk Officer (CRO) and any other officers of the Westpac Group to whom the Board has delegated credit approval authority;

l        monitors the alignment of the Westpac Group’s risk profile and controls with risk appetite, and oversees the identification, management and reporting of our risks inherent in the Westpac Group’s operations;

l        monitors changes anticipated for the economic and business environment including consideration of emerging risks, and other factors considered relevant to our risk profile and risk appetite;

l        assists the Board to make its annual declaration to APRA on risk management under APRA prudential standard CPS220 Risk Management;

l        reviews and where appropriate approves risks beyond the approval discretion provided to management; and

l        assists the Board to oversee compliance management within the Group.

From the perspective of specific types of risk, the Board Risk & Compliance Committee’s role includes:

l        credit risk – approving key policies and limits supporting the Credit Risk Management Framework, and monitoring the risk profile, performance and management of our credit portfolio;

l        liquidity risk – approving key policies and limits supporting the Liquidity Risk Management Framework, including our annual funding strategy, recovery and resolution plans and monitoring the liquidity position and requirements;

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 7

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Risk management governance structure (continued)

 

 

l        market risk – approving key policies and limits supporting the Market Risk Management Framework, including, but not limited to, the Value at Risk limits and Net Interest Income at Risk limits and monitoring the market risk profile;

l        operational risk – approving key policies supporting both the Operational Risk Management Framework and the Financial Crime Risk Management Framework, and monitoring the performance of operational and financial crime risk management and controls;

l        conduct risk – reviewing and approving the Westpac Group Conduct Framework and reviewing and monitoring the performance of conduct risk management and controls;

l        reputation risk – reviewing and approving the Reputation Risk Management Framework, and reviewing and monitoring the performance of reputation risk management and controls; and

l        compliance risk – reviewing and approving the Westpac Group Compliance Risk Management Framework and reviewing compliance processes and 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 Board Risk & Compliance Committee also:

l        oversees and approves the Internal Capital Adequacy Assessment Process and in doing so reviews the outcomes of Westpac Group stress testing, sets the target capital ranges for regulatory capital and reviews and monitors capital levels for consistency with the Westpac Group’s risk appetite;

l        provides relevant periodic assurances and reports (as appropriate) to the Board Audit Committee;

l        reviews and approves other risk management frameworks 1  and the monitoring of performance under those frameworks (as appropriate);

l        forms a view on Westpac Group’s risk culture and oversees the identification of, and steps taken to address, any desirable changes to risk culture and periodically reports to the Board;

l        refers to the Board or any other Board Committees any matters that come to the attention of the Board Risk & Compliance Committee that are relevant for the Board or the respective Board Committees; and

l        in its capacity as the Westpac Group’s US Risk Committee, oversees the key risks, risk management framework and policies of Westpac Group’s US operations.

 

Board Committees with a
Risk Focus

Board Audit Committee (BAC)

l        oversees the integrity of financial statements and financial reporting systems and matters relating to taxation risks.

Board Remuneration Committee (BRC)

l        oversees remuneration policies and practices of the Westpac Group, in the context that these policies and practices reflect Westpac’s risk management framework, including making recommendations to the Board for the reduction or lapsing of incentive based equity grants to employees as a result of risk or compliance failures.

Board Technology Committee (BTC)

l        oversees the implementation of the Westpac Group’s technology strategy, including risks associated with major technology programs.

 

 

 

 

 

  Additional frameworks include the Sustainability Risk Management Framework, Equity Risk Management Framework, Related Entity Risk Management Framework, Financial Crime Risk Management Framework, and Insurance Risk Management Framework.

 

8 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Risk management governance structure (continued)

 

Executive Team

Westpac Executive Team (ET)

l        executes the Board-approved strategy;

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

l        monitors key risks within each business unit, capital adequacy and the Westpac Group’s reputation.

 

Executive risk committees

Westpac Group Executive Risk Committee (RISKCO)

l        leads the management and oversight of material risks across the Westpac Group within the context of the risk appetite approved by the Board;

l        oversees the embedding of the Risk Management Strategy in the Group’s approach to risk governance;

l        oversees risk-related management frameworks and key supporting policies;

l        oversees the Group’s material risks;

l        oversees reputation risk and sustainability risk management frameworks, compliance and conduct management frameworks and key supporting policies; and

l        identifies emerging credit, operational, compliance and market risks and allocates responsibility for assessing impacts and implementing appropriate actions to address these.

 

 

Westpac Group Asset & Liability Committee (ALCO)

l        leads the optimisation of funding and liquidity risk-reward across the Group;

l        reviews the level and quality of capital to ensure that it is commensurate with the Group’s risk profile, business strategy and risk appetite;

l        oversees the Liquidity Risk Management Framework and key policies;

l        oversees the funding and liquidity risk profile and balance sheet risk profile; and

l        identifies emerging funding and liquidity risks and appropriate actions to address these.

 

 

Westpac Group Credit Risk Committee (CREDCO)

l        leads the optimisation of credit risk-reward across the Group;

l        reviews and oversees the Credit Risk Management Framework and key supporting policies;

l        oversees Westpac’s credit risk profile; and

l        identifies emerging credit risks, allocates responsibility for assessing impacts, and responds as appropriate.

 

 

Westpac Group Market Risk Committee (MARCO)

l        leads the optimisation of market, equity and insurance risk across the Group;

l        reviews and oversees the Market Risk, Equity Risk and Insurance Risk Management Frameworks and key market risk management policies;

l        reviews policies and limits for managing traded and non-traded market risk; and

l        reviews and oversees the market risk, equity risk and insurance risk profile.

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 9

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Risk management governance structure (continued)

 

 

Westpac Group Operational Risk and Financial Crime Committee (OFCO)

l        leads the optimisation of operational risk across the Group;

l        reviews and oversees the Operational Risk and Financial Crime Risk Management Frameworks and key supporting policies;

l        oversees Westpac’s operational risk and financial crime risk profile; and

l        identifies emerging operational and financial crime risks, and appropriate actions to address these.

 

 

Westpac Group Remuneration Oversight Committee (ROC)

l        provides assurance that the remuneration arrangements across the Group are considered from a Human Resources, Risk, Finance, Legal and Compliance perspective in line with external requirements;

l        reviews and makes recommendations to the CEO for recommendation to the BRC on the Westpac Group Remuneration Policy and provides assurance that remuneration arrangements across the Group encourage behaviour that supports Westpac’s long-term financial soundness and the Risk Management Framework;

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

l        reviews and recommends to the CEO for recommendation to the BRC the criteria and rationale for determining the total quantum of the Group variable reward pool.

 

Risk and Compliance
functions

Risk Function

l        assists the Board, Board Committees and senior management to establish, maintain and review the Risk Management Strategy, supporting risk management frameworks and policies and risk appetite;

l        documents and monitors risk appetite across all risk types and classes (including financial crime), risk limits and authorities;

l        notifies the Board or Board Committees of any significant breach, or material deviation from the Risk Management Strategy, supporting risk management frameworks and policies or risk appetite;

l        monitors and provides advice on risk policies, procedures, incidents and issues including emerging risk issues;

l        monitors and provides assurance including testing risk controls as the 2nd Line of Defence;

l        monitors and maintains the required resources and capabilities (including Risk systems and Risk data) to support the Risk Management Strategy; and

l        oversees the management of credit risk and making credit decisions in accordance with delegations from the Board.

Compliance Function

l        assists the Board, Board Committees and senior management to establish, maintain and review the Compliance Management Framework;

l        designs, implements and monitors key compliance processes and controls in support of the Compliance Management Framework;

 

 

 

 

 

 

 

10 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Risk management governance structure (continued)

 

 

l        provides independent advice on the design, implementation, operating effectiveness and monitoring of controls to ensure compliance with internal, regulatory and legislative requirements;

l        directs the review and development of compliance policies, compliance plans, controls and procedures;

l        reports on the performance of the Compliance Management Framework; and

l        maintains resources with the skills and tools required to fulfill their compliance responsibilities and supports the strategy.

 

Independent internal review

Group Audit

l        reviews the adequacy and effectiveness of management controls over risk.

 

Divisional business units

Business Units

l        responsible for identifying, evaluating and managing the risks that they originate within approved risk appetite and policies; and

l        establish and maintain appropriate risk management and compliance controls, resources and self-assessment processes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 11

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Roles and responsibilities

 

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

 

The 1st Line of Defence – Risk identification, risk management and self-assessment

 

Divisional business units are responsible for identifying, evaluating and managing the risks that they originate within approved risk appetite and policies. They are required to establish and maintain appropriate risk management controls, resources and self-assessment processes.

 

The 2nd Line of Defence – Establishment of risk management frameworks and policies and risk management oversight

 

Risk and compliance advisory, control assurance, and monitoring functions establish frameworks, policies, limits, and processes for the management, monitoring, and reporting of risk. The 2nd Line evaluates and provides assurance over the adequacy and effectiveness of 1st Line controls and application of frameworks and policies and monitors the 1st Line’s progress toward remediation of identified deficiencies. The 2 nd  Line can also approve certain risks outside the authorities granted to the 1 st  Line.

 

The 3rd Line of Defence – Independent assurance

 

Group Audit is an independent assurance function that evaluates and opines on the adequacy and effectiveness of both 1st and 2nd Line risk management approaches and tracks remediation progress, with the aim of providing the Board, and senior executives with comfort that the Group’s governance, risk management and internal controls are operating effectively.

 

Our overall risk management approach is summarised in the following diagram:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Group Structure

 

 

 

Westpac seeks to ensure that it is adequately capitalised at all times. APRA applies a tiered approach to measuring Westpac’s capital adequacy 1  by assessing financial strength at three levels:

 

l      Level 1, comprising Westpac Banking Corporation and its subsidiary entities that have been approved by APRA as being part of a single ‘Extended Licensed Entity’ (ELE) for the purposes of measuring capital adequacy;

 

l      Level 2, the consolidation of Westpac Banking Corporation and all its subsidiary entities except those entities specifically excluded by APRA regulations. The head of the Level 2 group is Westpac Banking Corporation; and

 

l      Level 3, the consolidation of Westpac Banking Corporation and all its subsidiary entities.

 

Unless otherwise specified, all quantitative disclosures in this report refer to the prudential assessment of Westpac’s financial strength on a Level 2 basis 2 .

 

The Westpac Group

 

The following diagram shows the Level 3 conglomerate group and illustrates the different tiers of regulatory consolidation.

 

 

Accounting consolidation 3

 

The consolidated financial statements incorporate the assets and liabilities of all subsidiaries (including structured entities) controlled by Westpac. Westpac and its subsidiaries are referred to collectively as the ‘Group’. The effects of all transactions between entities in the Group are eliminated. Control exists when the parent entity is exposed to, or has rights to, variable returns from its involvement with an entity, and has the ability to affect those returns through its power over that entity. Subsidiaries are fully consolidated from the date on which control commences and they are no longer consolidated from the date that control ceases.

 

Group entities excluded from the regulatory consolidation at Level 2

 

Regulatory consolidation at Level 2 covers the global operations of Westpac and its subsidiary entities, including other controlled banking, securities and financial entities, except for those entities involved in the following business activities:

 

l      insurance;

 

l      acting as manager, responsible entity, approved trustee, trustee or similar role in relation to funds management;

 

l      non-financial (commercial) operations; or

 

l      special purpose entities to which assets have been transferred in accordance with the requirements of APS120 Securitisation.

 

Retained earnings and equity investments in subsidiary entities excluded from the consolidation at Level 2 are deducted from capital, with the exception of securitisation special purpose entities.

 

 

1   APS110 Capital Adequacy outlines the overall framework adopted by APRA for the purpose of assessing the capital adequacy of an ADI.

2    Impaired assets and provisions held in Level 3 entities are excluded from the tables in this report.

3   Refer to Note 35 of Westpac’s 2018 Annual Report for further details.

 

Westpac Group September 2018 Pillar 3 report | 13

 


 

Pillar 3 report

Group structure

 

 

 

Subsidiary banking entities

 

Westpac New Zealand Limited (WNZL), a wholly owned subsidiary entity, is a registered bank incorporated in New Zealand and regulated by the Reserve Bank of New Zealand. WNZL uses the Advanced IRB approach for credit risk and the AMA for operational risk. Other subsidiary banking entities in the Group include Westpac Bank-PNG-Limited and Westpac Europe Limited. For the purposes of determining Westpac’s capital adequacy subsidiary banking entities are consolidated at Level 2.

 

Restrictions and major impediments on the transfer of funds or regulatory capital within the Group

 

Minimum capital (‘thin capitalisation’) rules

 

Tax legislation in most jurisdictions in which the Group operates prescribes minimum levels of capital that must be retained in that jurisdiction to avoid a portion of the interest costs incurred in the jurisdiction ceasing to be tax deductible. Capital for these purposes includes both contributed capital and non-distributed retained earnings. Westpac seeks to maintain sufficient capital/retained earnings to comply with these rules.

 

Tax costs associated with repatriation

 

Repatriation of retained earnings (and capital) may result in tax being payable in either the jurisdiction from which the repatriation occurs or Australia on receipt of the relevant amounts. This cost would reduce the amount actually repatriated.

 

Intra-group exposure limits

 

Exposures to related entities are managed within the prudential limits prescribed by APRA in APS222 Associations with Related Entities 1 . Westpac has an internal limit structure and approval process governing credit exposures to related entities. This limit structure and approval process, combined with APRA’s prudential limits, is designed to reduce the potential for unacceptable contagion risk.

 

Prudential regulation of subsidiary entities

 

Certain subsidiary banking, insurance and trustee entities are subject to local prudential regulation in their own right, including capital adequacy requirements and investment or intra-group exposure limits. Westpac seeks to ensure that its subsidiary entities are adequately capitalised and adhere to regulatory requirements at all times. There are no capital deficiencies in subsidiary entities excluded from the regulatory consolidation at Level 2.

 

On 15 November 2017, the RBNZ advised WNZL of changes to its conditions of registration resulting from its review of WNZL’s compliance with the RBNZ’s ‘Capital Adequacy Framework (Internal Models Based Approach) (BS2B). The changes to WNZL’s conditions of registration came into effect on 31 December 2017 and increase the minimum Total Capital ratio, Tier 1 Capital ratio and Common Equity Tier 1 Capital ratio of WNZL and its controlled entities by 2%. WNZL has also undertaken to the RBNZ to maintain the Total Capital ratio of WNZL and its controlled entities above 15.1%. WNZL and its controlled entities retain an appropriate amount of capital to comply with the increased minimum ratios.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1   For the purposes of APS222, subsidiaries controlled by Westpac, other than subsidiaries that form part of the ELE, represent ‘related entities’. Prudential and internal limits apply to intra-group exposures between the ELE and related entities, both on an individual and aggregate basis.

 

14 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Capital overview

 

 

 

Capital Structure

 

This table shows Westpac’s capital resources under APS111 Capital Adequacy: Measurement of Capital.

 

 

30 September

31 March

30 September

$m

2018

2018

2017

 

 

 

 

Common equity Tier 1 capital

 

 

 

Paid up ordinary capital

36,054

35,168

34,889

Treasury shares

(507)

(506)

(436)

Equity based remuneration

1,441

1,414

1,356

Foreign currency translation reserve

(379)

(522)

(558)

Accumulated other comprehensive income

(11)

(14)

15

Non-controlling interests - other

55

50

54

Retained earnings

27,883

27,122

26,100

Less retained earnings in life and general insurance, funds management and securitisation entities

(1,218)

(1,238)

(1,153)

Deferred fees

258

254

253

Total common equity Tier 1 capital

63,576

61,728

60,520

Deductions from common equity Tier 1 capital

 

 

 

Goodwill (excluding funds management entities)

(8,644)

(8,656)

(8,670)

Deferred tax assets

(1,169)

(1,116)

(1,110)

Goodwill in life and general insurance, funds management and securitisation entities

(942)

(1,032)

(1,065)

Capitalised expenditure

(1,838)

(1,867)

(1,913)

Capitalised software

(1,792)

(1,628)

(1,603)

Investments in subsidiaries not consolidated for regulatory purposes

(1,567)

(1,532)

(1,589)

Regulatory expected loss in excess of eligible provisions 1

(1,312)

(1,192)

(861)

General reserve for credit losses adjustment

(356)

(339)

(332)

Securitisation

-

-

-

Equity investments

(570)

(680)

(679)

Defined benefit superannuation fund surplus

(78)

-

-

Regulatory adjustments to fair value positions

(68)

(46)

(27)

Other Tier 1 deductions

(1)

(1)

(1)

Total deductions from common equity Tier 1 capital

(18,337)

(18,089)

(17,850)

Total common equity Tier 1 capital after deductions

45,239

43,639

42,670

Additional Tier 1 capital

 

 

 

Basel III complying instruments

9,144

9,041

7,315

Basel III transitional instruments

-

566

1,190

Total Additional Tier 1 capital

9,144

9,607

8,505

Net Tier 1 regulatory capital

54,383

53,246

51,175

 

 

 

 

Tier 2 capital

 

 

 

Basel III complying instruments

8,025

8,102

7,375

Basel III transitional instruments

486

473

1,526

Eligible general reserve for credit loss

54

55

51

Basel III transitional adjustment

-

-

-

Total Tier 2 capital

8,565

8,630

8,952

Deductions from Tier 2 capital

 

 

 

Investments in subsidiaries not consolidated for regulatory purposes

(140)

(140)

(140)

Holdings of own and other financial institutions Tier 2 capital instruments

(93)

(83)

(77)

Total deductions from Tier 2 capital

(233)

(223)

(217)

Net Tier 2 regulatory capital

8,332

8,407

8,735

Total regulatory capital

62,715

61,653

59,910

 

 

 

 

 

 

 

 

 

 

1      An explanation of the relationship between this deduction, regulatory expected loss and provisions for impairment charges is contained in Appendix IV.

 

Westpac Group September 2018 Pillar 3 report | 15

 


 

Pillar 3 report

Capital overview

 

 

 

Capital management strategy

 

Westpac’s approach to capital management seeks to balance the fact that capital is an expensive form of funding with the need to be adequately capitalised as an ADI. Westpac considers the need to balance efficiency, flexibility and adequacy when determining sufficiency of capital and when developing capital management plans.

 

Westpac evaluates these considerations through an Internal Capital Adequacy Assessment Process (ICAAP), the key features of which include:

 

l           the development of a capital management strategy, including consideration of regulatory minimums, capital buffers and contingency plans;

 

l        consideration of both economic and regulatory capital requirements;

 

l          a stress testing framework that challenges the capital measures, coverage and requirements including the impact of adverse economic scenarios; and

 

l       consideration of the perspectives of external stakeholders including rating agencies and equity and debt investors.

 

In light of APRA’s announcement on ‘unquestionably strong’ capital benchmarks on 19 July 2017, Westpac will seek to operate with a CET1 capital ratio of at least 10.5% in March and September as measured under the existing capital framework. This also takes into consideration:

 

l             current regulatory capital minimums and the capital conservation buffer (“CCB”), which together are the total CET1 requirement. In line with the above, the total CET1 requirement for Westpac is at least 8.0%, based upon an industry minimum CET1 requirement of 4.5% plus a capital buffer of at least 3.5% applicable to domestic systemically important banks (D-SIBs) 1 ;

 

l       stress testing to calibrate an appropriate buffer against a downturn; and

 

l       quarterly volatility of capital ratios due to the half yearly cycle of ordinary dividend payments.

 

 

Should the CET1 ratio fall below the total CET1 requirement restrictions on the distribution of earnings will apply. This includes restrictions on the amount of earnings that can be distributed through dividends, Additional Tier 1 capital distributions and discretionary staff bonuses.

 

Westpac will revise its target capital level once APRA finalises its review of the capital adequacy framework.

 

Westpac’s capital adequacy ratios

 

%

30 September 2018

31 March 2018

30 September 2017

The Westpac Group at Level 2

Common equity Tier 1 capital ratio

10.6

10.5

10.6

Additional Tier 1 capital

2.2

2.3

2.1

Tier 1 capital ratio

12.8

12.8

12.7

Tier 2 capital

1.9

2.0

2.1

Total regulatory capital ratio

14.7

14.8

14.8

 

 

 

 

The Westpac Group at Level 1

 

 

 

Common equity Tier 1 capital ratio

10.5

10.4

10.4

Additional Tier 1 capital

2.3

2.4

2.2

Tier 1 capital ratio

12.8

12.8

12.6

Tier 2 capital

2.0

2.1

2.4

Total regulatory capital ratio

14.8

14.9

15.0

 

Westpac New Zealand Limited’s capital adequacy ratios

 

%

30 September 2018

31 March 2018

30 September 2017

Westpac New Zealand Limited

Common equity Tier 1 capital ratio

11.7

11.8

11.1

Additional Tier 1  capital

2.8

2.8

2.9

Tier 1 capital ratio

14.5

14.6

14.0

Tier 2 capital

2.1

2.0

2.1

Total regulatory capital ratio

16.6

16.6

16.1

 

 

 

 

 

1    Noting that APRA may apply higher CET1 requirements for an individual ADI.

16 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Capital overview

 

 

 

Capital requirements

 

This table shows risk weighted assets and associated capital requirements 1  for each risk type included in the regulatory assessment of Westpac’s capital adequacy. Westpac’s approach to managing these risks, and more detailed disclosures on the prudential assessment of capital requirements, are presented in the following sections of this report .

 

30 September 2018

IRB

Standardised

Total Risk

Total Capital

$m

Approach

Approach 2

Weighted Assets

Required 1

Credit risk

 

 

 

 

Corporate

69,584

1,807

71,391

5,711

Business lending

35,417

1,052

36,469

2,918

Sovereign

1,644

962

2,606

208

Bank

6,606

57

6,663

533

Residential mortgages

132,734

5,460

138,194

11,056

Australian credit cards

6,313

-

6,313

505

Other retail

13,777

993

14,770

1,182

Small business

16,329

-

16,329

1,306

Specialised lending

57,043

447

57,490

4,599

Securitisation

5,918

-

5,918

473

Mark-to-market related credit risk 3

-

6,606

6,606

528

Total

345,365

17,384

362,749

29,019

Market risk

 

 

6,723

538

Operational risk

 

 

39,113

3,129

Interest rate risk in the banking book

 

 

12,989

1,039

Other assets 4

 

 

3,810

305

Total

 

 

425,384

34,030

 

 

 

 

 

31 March 2018

IRB

Standardised

Total Risk

Total Capital

$m

Approach

Approach 2

Weighted Assets

Required 1

Credit risk

 

 

 

 

Corporate

71,590

1,861

73,451

5,876

Business lending

34,872

996

35,868

2,869

Sovereign

1,536

841

2,377

190

Bank

6,253

46

6,299

504

Residential mortgages

129,748

5,470

135,218

10,817

Australian credit cards

6,553

-

6,553

524

Other retail

14,056

1,013

15,069

1,205

Small business

16,017

-

16,017

1,281

Specialised lending

57,239

412

57,651

4,612

Securitisation

5,869

-

5,869

470

Mark-to-market related credit risk 3

-

7,019

7,019

562

Total

343,733

17,658

361,391

28,911

Market risk

 

 

7,406

592

Operational risk

 

 

30,866

2,469

Interest rate risk in the banking book

 

 

12,875

1,030

Other assets 4

 

 

3,206

256

Total

 

 

415,744

33,258

 

 

 

 

 

 

 

 

 

 

 

 

1       Total capital required is calculated as 8% of total risk weighted assets.

2       Westpac’s Standardised risk weighted assets are categorised based on their equivalent IRB categories.

3       Mark-to-market related credit risk is measured under the standardised approach. It is also known as Credit Valuation Adjustment (CVA) risk.

4       Other assets include cash items, unsettled transactions, fixed assets and other non-interest earning assets.

 

Westpac Group September 2018 Pillar 3 report | 17

 


 

Pillar 3 report

Capital overview

 

 

 

30 September 2017

IRB

Standardised

Total Risk

Total Capital

$m

Approach

Approach 2

Weighted Assets

Required 1

Credit risk

 

 

 

 

Corporate

71,160

1,663

72,823

5,826

Business lending

34,638

1,036

35,674

2,854

Sovereign

1,505

960

2,465

197

Bank

5,905

89

5,994

480

Residential mortgages

127,825

4,785

132,610

10,609

Australian credit cards

5,665

-

5,665

453

Other retail

13,250

1,028

14,278

1,142

Small business

11,708

-

11,708

937

Specialised lending

57,081

385

57,466

4,597

Securitisation

4,167

-

4,167

333

Mark-to-market related credit risk 3

-

6,408

6,408

513

Total

332,904

16,354

349,258

27,941

Market risk

 

 

8,094

648

Operational risk

 

 

31,229

2,498

Interest rate risk in the banking book

 

 

11,101

888

Other assets 4

 

 

4,553

364

Total

 

 

404,235

32,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1       Total capital required is calculated as 8% of total risk weighted assets.

2       Westpac’s Standardised risk weighted assets are categorised based on their equivalent IRB categories.

3       Mark-to-market related credit risk is measured under the standardised approach. It is also known as Credit Valuation Adjustment (CVA) risk.

4       Other assets include cash items, unsettled transactions, fixed assets and other non-interest earning assets.

 

18 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Leverage ratio

 

 

 

Leverage ratio

 

The following table summarises Westpac’s leverage ratio at 30 September 2018. This has been determined using APRA’s definition of the leverage ratio as specified in APS110 Capital Adequacy.

 

$ billion

30 September 2018

30 June 2018

31 March 2018

31 December 2017

Tier 1 Capital

54.4

52.6

53.2

50.0

Total Exposures

931.1

935.1

925.2

909.7

Leverage ratio

5.8%

5.6%

5.8%

5.5%

 

Leverage ratio disclosure

 

$m

 

30 September
2018

On-balance sheet exposures

 

1

On-balance sheet items (excluding derivatives and securities financing transactions (SFTs), but including collateral)

845,181

2

(Asset amounts deducted in determining Tier 1 capital)

(18,337)

3

Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of rows 1 and 2)

826,844

 

 

Derivative exposures

 

4

Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)

10,370

5

Add-on amounts for potential future credit exposure (PFCE) associated with all derivatives transactions

16,617

6

Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the Australian Accounting Standards

-

7

(Deductions of receivables assets for cash variation margin provided in derivatives transactions)

(3)

8

(Exempted central counterparty (CCP) leg of client-cleared trade exposures)

-

9

Adjusted effective notional amount of written credit derivatives

6,491

10

(Adjusted effective notional offsets and add-on deductions for written credit derivatives)

(6,325)

11

Total derivative exposures (sum of rows 4 to 10)

27,150

SFT exposures

 

12

Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions

1,379

13

(Netted amounts of cash payables and cash receivables of gross SFT assets)

-

14

Counterparty credit risk exposure for SFT assets

4

15

Agent transaction exposures

-

16

Total SFT exposures (sum of rows 12 to 15)

1,383

Other off-balance sheet exposures

 

17

Off-balance sheet exposure at gross notional amount

202,128

18

(Adjustments for conversion to credit equivalent amounts)

(126,376)

19

Other off-balance sheet exposures (sum of rows 17 and 18)

75,752

Capital and total exposures

 

20

Tier 1 Capital

54,383

21

Total exposures (sum of rows 3, 11, 16 and 19)

931,129

 

 

Leverage ratio %

 

22

Leverage ratio

5.8%

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 19

 


 

Pillar 3 report

Leverage ratio

 

 

 

Summary comparison of accounting assets versus leverage ratio exposure measure

 

$m

 

30 September
2018

1

Total consolidated assets as per published financial statements

879,592

2

Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation

(8,931)

 

-

3

Adjustment for assets held on the balance sheet in a fiduciary capacity pursuant to the Australian Accounting Standards but excluded from the leverage ratio exposure measure

-

 

-

4

Adjustments for derivative financial instruments

3,049

5

Adjustment for SFTs (i.e. repos and similar secured lending)

4

6

Adjustment for off-balance sheet exposures (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)

75,752

 

-

7

Other adjustments

(18,337)

8

Leverage ratio exposure

931,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk management

 

 

 

Credit risk is the potential for financial loss where a customer or counterparty fails to meet their financial obligations to Westpac. Westpac maintains a credit risk management framework and a number of supporting policies, processes and controls governing the assessment, approval and management of customer and counterparty credit risk. These incorporate the assignment of risk grades, the quantification of loss estimates in the event of default, and the segmentation of credit exposures.

 

Structure and organisation

 

The Chief Risk Officer (CRO) is responsible for the effectiveness of overall risk management throughout Westpac, including credit risk. Authorised credit officers have delegated authority to approve credit risk exposures, including customer risk grades, other credit parameters and their ongoing review. Our largest exposures are approved by our most experienced authorised credit officers. Line business management is responsible for managing credit risks accepted in their business and for managing risk adjusted returns from their business credit portfolios, within the approved risk appetite, risk management framework and policies.

 

Credit risk management framework and policies

 

Westpac maintains a credit risk management framework and supporting policies that are designed to clearly define roles and responsibilities, acceptable practices, limits and key controls.

 

The Credit Risk Management Framework describes the principles, methodologies, systems, roles and responsibilities, reports and controls that exist for managing credit risk in Westpac. The Credit Risk Rating System policy describes the credit risk rating system philosophy, design, key features and uses of rating outcomes.

 

Concentration risk policies cover individual counterparties, specific industries (e.g. property) and individual countries. In addition, we have policies covering risk appetite statements, environmental, social and governance (ESG) risk, credit risks and the delegation of credit approval authorities.

 

At the divisional level, credit manuals embed the Group’s framework requirements for application in line businesses. These manuals include policies covering the origination, evaluation, approval, documentation, settlement and on-going management of credit risks, and sector policies to guide the extension of credit where industry-specific guidelines are considered necessary.

 

Credit approval limits govern the extension of credit and represent the formal delegation of credit approval authority to responsible individuals throughout the organisation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 21

 


 

Pillar 3 report

Credit risk management

 

 

 

Approach

 

Westpac adopts two approaches to managing credit risk depending upon the nature of the customer and the product.

 

Transaction-managed approach

 

For larger customers, Westpac evaluates credit requests by undertaking detailed individual customer and transaction risk analysis (the ‘transaction-managed’ approach). Such customers are assigned a customer risk grade (CRG) representing Westpac’s estimate of their probability of default (PD). Each facility is assigned a loss given default (LGD). The Westpac credit risk rating system has 20 risk grades for non-defaulted customers and 10 risk grades for defaulted customers. Non-defaulted CRGs down to the level of normally acceptable risk (i.e. D grade – see table below) are mapped to Moody’s and Standard & Poor’s (S&P) external senior ranking unsecured ratings. This mapping is reviewed annually and allows Westpac to integrate the rating agencies’ default history with internal historical data when calculating PDs.

 

The final assignment of CRGs and LGDs is approved by authorised credit approvers with appropriate delegated approval authority. All material credit exposures are approved by authorised Credit Officers who are part of the risk management stream and operate independently of the areas originating the credit risk proposals. Authorised Credit Officer decisions are subject to reviews to ensure consistent quality and confirm compliance with approval authority. Separate teams are responsible for maintaining accurate and timely recording of all credit risk approvals and changes to customer and facility data. These teams also operate independently of both the areas originating the credit risk proposals and the credit risk approvers. Appropriate segregation of functions is one of the key requirements of our credit risk management framework.

 

Mapping of Westpac risk grades

 

The table below shows the current alignment between Westpac’s CRGs and the corresponding external rating. Note that only high-level CRG groupings are shown.

 

Westpac customer

risk grade

Standard & Poor’s

rating

Moody’s

rating

 

 

 

 

 

A

AAA to AA–

Aaa to Aa3

 

B

A+ to A–

A1 to A3

 

C

BBB+ to BBB–

Baa1 to Baa3

 

D

BB+ to B+

Ba1 to B1

 

 

Westpac Rating

 

 

E

Watchlist

 

 

F

Special mention

 

 

G

Substandard/default

 

 

H

Default

 

 

 

For Specialised Lending Westpac maps exposures to the appropriate supervisory slot based on an assessment that takes into account borrower strength and security quality, as required by APS 113.

 

Program-managed approach

 

High-volume retail customer credit portfolios with homogenous credit risk characteristics are managed on a statistical basis according to pre-determined objective criteria (the ‘program-managed’ approach). Program-managed exposure to a consumer customer may exceed $1 million. Business customer exposures may be program managed for exposure up to $3 million. Quantitative scorecards are used to assign application and behavioural scores to enable risk-based decision making within these portfolios. The scorecard outcomes and decisions are regularly monitored and validated against subsequent customer performance and scorecards are recalibrated or rebuilt when required. For capital estimation and other purposes, risk-based customer segments are created based upon modelled expected PD, Exposure At Default (EAD) and LGD. Accounts are then assigned to respective segments based on customer and account characteristics. Each segment is assigned a quantified measure of its PD, LGD and EAD.

 

For both transaction-managed and program-managed approaches, CRGs, PDs and LGDs are reviewed at least annually.

 

 

 

22 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk management

 

 

 

Mapping of Basel categories to Westpac portfolios

 

APS113 Capital Adequacy: Internal Ratings-Based Approach to Credit Risk, states that under the Advanced IRB approach to credit risk, an ADI must categorise banking book exposures into six broad IRB asset classes and apply the prescribed treatment for those classes to each credit exposure within them for the purposes of deriving its regulatory capital requirement. Standardised and Securitised portfolios are subject to treatment under APS112 Capital Adequacy: Standardised Approach to Credit Risk and APS120 Securitisation respectively.

 

APS Asset Class

 

 

Sub-asset class

 

 

Westpac category

 

 

Segmentation criteria

 

Corporate

 

Corporate

 

Corporate

 

All transaction-managed customers not elsewhere classified where annual turnover exceeds $50 million 1 .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SME Corporate

 

Business Lending

 

All transaction-managed customers not elsewhere classified where annual turnover is $50 million or less .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Project Finance

 

Specialised Lending-Project Finance

 

Applied to transaction-managed customers where the primary source of debt service, security and repayment is derived from the revenue generated by a completed project (e.g. infrastructure such as toll roads or railways).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income-producing Real Estate

 

Specialised Lending- Property Finance

 

Applied to transaction-managed customers where the primary source of debt service, security and repayment is derived from either the sale of a property development or income produced by one or more investment properties 2 .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sovereign

 

 

 

Sovereign

 

Applied to transaction-managed exposures backed by governments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

Bank

 

Applied to transaction-managed exposures to deposit-taking institutions and foreign equivalents.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

 

Residential Mortgages

 

Exposures secured by residential mortgages not elsewhere classified.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qualifying Revolving Retail

 

 

 

Australian Credit Cards

 

Program-managed credit cards with low volatility in loss rates. The New Zealand cards portfolio is not eligible for Qualifying Revolving Retail treatment and is classified in Other Retail.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Retail

 

 

 

Small Business

 

Program-managed business lending exposures under $1 million where complex products are not utilised by the customer.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Retail

 

All other program-managed lending to retail customers, including New Zealand credit cards.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1    Includes all NZ agribusiness loans, regardless of turnover.

2    Excludes large diversified property groups and property trusts, which appear in the Corporate asset class.

 

Westpac Group September 2018 Pillar 3 report | 23

 


 

Pillar 3 report

Credit risk management

 

 

 

Mapping of Credit risk approach to Basel categories and exposure types

 

Approach

 

APS asset class

 

Types of exposures

 

 

 

 

 

Transaction-Managed
Portfolios

 

Corporate

Sovereign

Bank

 

Direct lending

Contingent lending

Derivative counterparty

Asset warehousing

Underwriting

Secondary market trading

Foreign exchange settlement

Other intra-day settlement obligations

 

 

 

 

 

Program-Managed
Portfolios

 

 

 

 

 

Residential mortgage

 

 

Mortgages

Equity access loans

 

 

 

 

 

 

 

 

 

 

 

 

Qualifying revolving retail

 

Australian credit cards

 

 

 

 

 

 

 

 

 

 

 

 

Other retail

 

Personal loans

Overdrafts

New Zealand credit cards

Auto and equipment finance

Business development loans

Business overdrafts

Other term products

 

 

Internal ratings process for transaction-managed portfolios

 

The process for assigning and approving individual customer PDs and facility LGDs involves:

 

l       Business unit representatives recommend the CRG and facility LGDs under the guidance of criteria set out in established credit policies. Each CRG is associated with an estimated PD;

 

l       Authorised credit officers evaluate the recommendations and approve the final CRG and facility LGDs. Authorised credit officers may override line business unit recommendations;

 

l       An expert judgement decisioning process is employed to evaluate CRG and the outputs of various risk grading models are used as one of several inputs into that process; and

 

l       Authorised credit officers’ decisions are subject to reviews to ensure consistent quality and confirm compliance with approval authority.

 

For on-going exposures to transaction-managed customers, risk grades and facility LGDs are required to be reviewed at least annually, but also whenever material changes occur.

 

No material deviations from the reference definition of default are permitted.

 

Internal ratings process for program-managed portfolios

 

The process for assigning PDs, LGDs and EADs to the program-managed portfolio involves dividing the portfolio into a number of pools per product. These pools are created by analysing similar risk characteristics that have historically predicted that an account is likely to go into default.

 

No material deviations from the reference definition of default are permitted.

 

Internal credit risk ratings system

 

In addition to using the credit risk estimates as the basis for regulatory capital purposes, they are also used for the purposes described below:

 

Economic capital - Westpac calculates economic capital for all exposures. Economic capital includes both credit and non-credit components. Economic credit capital is calculated using a framework that considers estimates of PD, LGD, EAD, total committed exposure and loan tenor, as well as measures of portfolio composition not reflected in regulatory capital formulae.

 

Provisioning - Impairment provisions are held by Westpac to cover credit losses that are incurred in the loan portfolio. Provisioning includes both individual and collective components. Individual provisions are calculated on impaired loans taking into account management’s best estimate of the present value of future cashflows.

 

24 | Westpac Group September 2018 Pillar 3 report

 

 


 

Pillar 3 report

Credit risk management

 

 

 

Collective provisions are established on a portfolio basis using a framework that considers PD, LGD, EAD, total committed exposure, emergence periods, level of arrears and recent past experience.

 

Risk-adjusted performance measurement - Business performance is measured using allocated capital, which incorporates charges for economic capital and regulatory capital, including credit capital and capital for other risk types.

 

Pricing - Westpac prices loans to produce an acceptable return on the capital allocated to the loan. Returns include interest income and fees after expected credit losses and other costs.

 

Credit approval - For transaction-managed facilities, approval authorities are tiered based on the CRG, with lower limits applicable for customers with a higher PD. Program-managed facilities are approved on the basis of application scorecard outcomes and product based approval authorities.

 

Control mechanisms for the credit risk rating system include:

 

l      Westpac’s credit risk rating system is reviewed annually to confirm that the rating criteria and procedures are appropriate given the current portfolio and external conditions;

 

l      All models materially impacting the risk rating process are periodically reviewed in accordance with Westpac’s model risk policy;

 

l      Specific credit risk estimates (including PD, LGD and EAD levels) are overseen, reviewed annually and supported by the Credit Risk Estimates Committee (a sub-committee of CREDCO) for approval by General Manager, Risk Analytics and Insights;

 

l      Credit Risk Assurance undertake an independent annual end-to-end technical and operational review of the overall process; and

 

l      CREDCO, RISKCO and BRCC monitor the risk profile, performance and management of Westpac’s credit portfolio and the development and review of key credit risk policies.

 

Risk reporting

 

A comprehensive report on Westpac’s credit risk portfolio is provided to CREDCO, RISKCO and BRCC quarterly. It details the current level of impairment losses, stressed exposures, delinquency trends, provisions, impaired assets and key performance metrics. It also reports on portfolio concentrations and large exposures.

 

Credit risk and asset quality are also reported to the Board each month, including details of impairment losses, stressed exposures, delinquency trends and key performance metrics.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 25

 

 


 

 

Pillar 3 report

Credit risk management

 

 

 

Summary credit risk disclosure

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

Expected

 

Specific

Actual

 

 

Risk

Regulatory

Loss for

 

Provisions

Losses for

30 September 2018

Exposure

Weighted

Expected

non-defaulted

Impaired

for Impaired

the 12 months

$m

at Default

Assets

Loss 1

exposures

Loans

Loans

ended

Corporate

128,819

69,584

552

471

112

54

22

Business lending

53,853

35,417

657

442

294

173

99

Sovereign

79,030

1,644

2

2

-

-

-

Bank

23,648

6,606

8

8

-

-

-

Residential mortgages

553,358

132,734

1,272

1,048

309

103

89

Australian credit cards

19,639

6,313

358

304

87

50

273

Other retail

17,114

13,777

604

465

284

137

332

Small business

33,221

16,329

453

339

165

77

112

Specialised Lending

67,430

57,043

836

588

141

47

20

Securitisation

27,648

5,918

-

-

-

-

-

Standardised 2

18,166

17,384

-

-

24

12

1

Total

1,021,926

362,749

4,742

3,667

1,416

653

948

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

Expected

 

Specific

Actual

 

 

Risk

Regulatory

Loss for

 

Provisions

Losses for

31 March 2018

Exposure

Weighted

Expected

non-defaulted

Impaired

for Impaired

the 6 months

$m

at Default

Assets

Loss 1

exposures

Loans

Loans

ended

Corporate

129,865

71,590

585

455

164

94

-

Business lending

53,750

34,872

623

415

317

176

26

Sovereign

76,316

1,536

1

1

-

-

-

Bank

23,866

6,253

8

8

-

-

-

Residential mortgages

547,681

129,748

1,206

998

310

98

47

Australian credit cards

19,640

6,553

371

319

95

47

134

Other retail

17,695

14,056

607

472

290

135

173

Small business

32,904

16,017

443

329

169

77

52

Specialised Lending

66,993

57,239

855

609

167

60

1

Securitisation

26,562

5,869

-

-

-

-

-

Standardised 2

18,083

17,658

-

-

23

12

1

Total

1,013,355

361,391

4,699

3,606

1,535

699

434

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

Expected

 

Specific

Actual

 

 

Risk

Regulatory

Loss for

 

Provisions

Losses for

30 September 2017

Exposure

Weighted

Expected

non-defaulted

Impaired

for Impaired

the 12 months

$m

at Default

Assets

Loss 1

exposures

Loans

Loans

ended

Corporate

126,747

71,160

594

458

215

93

384

Business lending

52,525

34,638

637

417

307

166

150

Sovereign

71,471

1,505

1

1

-

-

-

Bank

21,142

5,905

7

7

-

-

-

Residential mortgages

542,687

127,825

1,173

968

271

105

87

Australian credit cards

19,723

5,665

298

227

108

55

330

Other retail

17,929

13,250

527

380

296

139

395

Small business

27,421

11,708

300

191

118

51

73

Specialised Lending

67,109

57,081

849

600

208

94

68

Securitisation

26,712

4,167

-

-

-

-

-

Standardised 2

17,387

16,354

-

-

19

11

1

Total

990,853

349,258

4,386

3,249

1,542

714

1,488

 

 

 

 

 

 

1        Includes regulatory expected losses for defaulted and non-defaulted exposures.

2        Includes mark-to-market related credit risk.

 

26 | Westpac Group September 2018 Pillar 3 report

 


 

 

Pillar 3 report

Credit risk management

 

 

 

Loan impairment provisions

 

Provisions for loan impairment losses represent management’s best estimate of the losses incurred in the loan portfolios as at the balance date. There are two components of Westpac’s loan impairment provisions: individually assessed provisions (IAPs) and collectively assessed provisions (CAPs).

 

In determining IAPs, relevant considerations that have a bearing on the expected future cash flows are taken into account, for example:

 

l                   the business prospects of the customer;

 

l                   the realisable value of collateral;

 

l                   Westpac’s position relative to other claimants;

 

l                   the reliability of customer information; and

 

l                   the likely cost and duration of the work-out process.

 

These judgements and estimates can change with time as new information becomes available or as work-out strategies evolve, resulting in revisions to the impairment provision as individual decisions are made.

 

CAPs are established on a portfolio basis taking into account:

 

l                   the level of arrears;

 

l                   collateral;

 

l                   past loss experience;

 

l                   expected defaults based on portfolio trends; and

 

l                   the economic environment.

 

The most significant factors in establishing these provisions are estimated loss rates and the related emergence periods. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ from reported loan impairment provisions. These uncertainties include:

 

l                   differences between the expected and actual economic environment;

 

l                   interest rates and unemployment levels;

 

l                   repayment behaviour; and

 

l                   bankruptcy rates.

 

The Australian Accounting Standards Board (AASB) has introduced AASB 9 Financial Instruments with implementation for Westpac on 1 October 2018. AASB 9 introduces a new expected credit loss (ECL) and staged approach to credit provisioning. This represents a significant change from the current incurred loss model.

 

Regulatory classification of loan impairment provisions

 

APS220 Credit Quality requires that Westpac report specific provisions and a General Reserve for Credit Loss (GRCL). All IAPs raised under Australian Accounting Standards (AAS) are classified as specific provisions. All CAPs raised under AAS are either classified into specific provisions or a GRCL.

 

A GRCL adjustment is made for the amount of GRCL that Westpac reports for regulatory purposes under APS220 in addition to provisions reported by Westpac under AAS. For capital adequacy purposes the GRCL adjustment is deducted from CET1 capital. Eligible GRCL is included in Tier 2 capital.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 27

 


 

 

Pillar 3 report

Credit risk management

 

 

 

Loan impairment provisions

 

30 September 2018

 

       AAS Provisions

 

GRCL

 

Total Regulatory

 

$m

 

IAPs

 

CAPs

 

Total

 

Adjustment

 

Provisions

 

Specific Provisions

 

 

 

 

 

 

 

 

 

 

 

for impaired loans

 

422

 

231

 

653

 

NA

 

653

 

for defaulted but not impaired loans

 

NA

 

205

 

205

 

NA

 

205

 

General Reserve for Credit Loss

 

NA

 

2,195

 

2,195

 

356

 

2,551

 

Total provisions for impairment charges

 

422

 

2,631

 

3,053

 

356

 

3,409

 

 

31 March 2018

 

        AAS Provisions

 

GRCL

 

Total Regulatory

 

$m

 

IAPs

 

CAPs

 

Total

 

Adjustment

 

Provisions

 

Specific Provisions

 

 

 

 

 

 

 

 

 

 

 

for impaired loans

 

471

 

228

 

699

 

NA

 

699

 

for defaulted but not impaired loans

 

NA

 

190

 

190

 

NA

 

190

 

General Reserve for Credit Loss

 

NA

 

2,276

 

2,276

 

339

 

2,615

 

Total provisions for impairment charges

 

471

 

2,694

 

3,165

 

339

 

3,504

 

 

30 September 2017

 

        AAS Provisions

 

GRCL

 

Total Regulatory

 

$m

 

IAPs

 

CAPs

 

Total

 

Adjustment

 

Provisions

 

Specific Provisions

 

 

 

 

 

 

 

 

 

 

 

for impaired loans

 

480

 

234

 

714

 

NA

 

714

 

for defaulted but not impaired loans

 

NA

 

175

 

175

 

NA

 

175

 

General Reserve for Credit Loss

 

NA

 

2,230

 

2,230

 

332

 

2,562

 

Total provisions for impairment charges

 

480

 

2,639

 

3,119

 

332

 

3,451

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

The following tables segment the portfolio by characteristics that provide an insight into the assessment of credit risk concentration.

 

Exposure at Default by major type

 

30 September 2018

On balance

                Off-balance sheet

Total Exposure

Average

$m

sheet

Non-market related

Market related

at Default

12 months ended 1

Corporate

62,298

54,574

11,947

128,819

128,848

Business lending

40,961

12,892

-

53,853

53,639

Sovereign

74,906

1,864

2,260

79,030

76,376

Bank

14,012

2,246

7,390

23,648

23,263

Residential mortgages

477,270

76,088

-

553,358

547,108

Australian credit cards

9,623

10,016

-

19,639

19,667

Other retail

13,536

3,578

-

17,114

17,583

Small business

26,140

7,081

-

33,221

31,858

Specialised lending

53,799

12,754

877

67,430

67,363

Securitisation 2

22,437

5,089

122

27,648

27,045

Standardised

13,926

1,190

3,050

18,166

17,985

Total

808,908

187,372

25,646

1,021,926

1,010,735

 

 

 

 

 

 

31 March 2018

On balance

                Off-balance sheet

Total Exposure

Average

$m

sheet

Non-market related

Market related

at Default

6 months ended 3

Corporate

62,625

54,926

12,314

129,865

128,758

Business lending

40,236

13,514

-

53,750

53,386

Sovereign

72,069

1,770

2,477

76,316

73,561

Bank

14,322

1,612

7,932

23,866

22,560

Residential mortgages

469,967

77,714

-

547,681

543,616

Australian credit cards

9,787

9,853

-

19,640

19,724

Other retail

14,049

3,646

-

17,695

17,795

Small business

25,820

7,084

-

32,904

31,016

Specialised lending

53,317

12,718

958

66,993

67,333

Securitisation 2

20,892

5,549

121

26,562

26,920

Standardised

13,909

1,215

2,959

18,083

17,907

Total

796,993

189,601

26,761

1,013,355

1,002,576

 

 

 

 

 

 

30 September 2017

On balance

                Off-balance sheet

Total Exposure

Average

$m

sheet

Non-market related

Market related

at Default

12 months ended 4

Corporate

60,844

56,098

9,805

126,747

130,130

Business lending

38,784

13,741

-

52,525

51,174

Sovereign

67,083

1,895

2,493

71,471

73,758

Bank

13,386

1,794

5,962

21,142

20,992

Residential mortgages

463,363

79,324

-

542,687

531,347

Australian credit cards

9,794

9,929

-

19,723

19,960

Other retail

14,288

3,641

-

17,929

18,405

Small business

22,039

5,382

-

27,421

27,424

Specialised lending

51,847

14,308

954

67,109

67,310

Securitisation 2

20,399

6,182

131

26,712

25,029

Standardised

13,738

1,163

2,486

17,387

16,499

Total

775,565

193,457

21,831

990,853

982,028

 

 

 

 

 

 

 

1   Average is based on exposures as at 30 September 2018, 30 June 2018, 31 March 2018, 31 December 2017, and 30 September 2017.

2   EAD associated with securitisations is for the banking book only.

3   Average is based on exposures as at 31 March 2018, 31 December 2017, and 30 September 2017.

4   Average is based on exposures as at 30 September 2017, 30 June 2017, 31 March 2017, 31 December 2016, and 30 September 2016.

 

Westpac Group September 2018 Pillar 3 report | 29

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Exposure at Default by measurement method

 

30 September 2018

IRB

Standardised

Total Exposure

$m

Approach

Approach

at Default

Corporate

128,819

5,471

134,290

Business lending

53,853

1,047

54,900

Sovereign

79,030

962

79,992

Bank

23,648

57

23,705

Residential mortgages

553,358

7,946

561,304

Australian credit cards

19,639

-

19,639

Other retail

17,114

2,244

19,358

Small business

33,221

-

33,221

Specialised lending

67,430

439

67,869

Securitisation

27,648

-

27,648

Total

1,003,760

18,166

1,021,926

 

 

 

 

31 March 2018

IRB

Standardised

Total Exposure

$m

Approach

Approach

at Default

Corporate

129,865

5,579

135,444

Business lending

53,750

989

54,739

Sovereign

76,316

841

77,157

Bank

23,866

46

23,912

Residential mortgages

547,681

7,946

555,627

Australian credit cards

19,640

-

19,640

Other retail

17,695

2,271

19,966

Small business

32,904

-

32,904

Specialised lending

66,993

411

67,404

Securitisation

26,562

-

26,562

Total

995,272

18,083

1,013,355

 

 

 

 

30 September 2017

IRB

Standardised

Total Exposure

$m

Approach

Approach

at Default

Corporate

126,747

4,846

131,593

Business lending

52,525

1,029

53,554

Sovereign

71,471

960

72,431

Bank

21,142

89

21,231

Residential mortgages

542,687

7,777

550,464

Australian credit cards

19,723

-

19,723

Other retail

17,929

2,303

20,232

Small business

27,421

-

27,421

Specialised lending

67,109

383

67,492

Securitisation

26,712

-

26,712

Total

973,466

17,387

990,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30 | Westpac Group September 2018 Pillar 3 report

 


 

 

Pillar 3 report

Credit risk exposures

 

 

 

Exposure at Default by industry classification

 

30 September 2018
$m

Accommodation,
cafes &
restaurants

Agriculture,
forestry &
fishing

Construction

Finance &
insurance

Government
administration
& defence

Manufacturing

Mining

Property

Property
services &
business
services

Services 1

Trade 2

Transport &
storage

Utilities 3

Retail
lending

Other

Total
Exposure
at Default

Corporate

2,625

9,574

2,729

15,084

75

21,978

7,327

6,524

10,634

10,438

21,321

9,859

9,679

-

972

128,819

Business lending

6,002

7,631

4,143

2,556

4

4,666

571

594

6,664

6,269

9,204

2,690

422

-

2,437

53,853

Sovereign

-

-

-

22,874

54,729

134

93

-

259

469

-

228

242

-

2

79,030

Bank

-

-

-

23,506

42

-

-

-

100

-

-

-

-

-

-

23,648

Residential mortgages

-

-

-

-

-

-

-

-

-

-

-

-

-

553,358

-

553,358

Australian credit cards

-

-

-

-

-

-

-

-

-

-

-

-

-

19,639

-

19,639

Other retail

-

-

-

-

-

-

-

-

-

-

-

-

-

17,114

-

17,114

Small business

1,025

2,469

4,006

1,959

517

1,597

281

2,340

5,133

3,675

3,403

1,824

288

-

4,704

33,221

Specialised lending

609

6

40

17

-

14

1,229

57,361

135

1,931

18

3,615

2,254

-

201

67,430

Securitisation

-

-

-

26,297

-

-

-

-

930

-

421

-

-

-

-

27,648

Standardised

114

20

183

4,634

962

257

12

443

159

81

865

185

28

10,192

31

18,166

Total

10,375

19,700

11,101

96,927

56,329

28,646

9,513

67,262

24,014

22,863

35,232

18,401

12,913

600,303

8,347

1,021,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1    Includes education, health & community services, cultural & recreational services and personal & other services.

2    Includes wholesale trade and retail trade.

3    Includes electricity, gas & water, and communication services.

 

Westpac Group September 2017 Pillar 3 report | 31

 


 

Pillar 3 report

Credit risk exposures

 

 

 

31 March 2018

$m

Accommodation,
cafes &
restaurants

Agriculture,
forestry &
fishing

Construction

Finance &
insurance

Government
administration
& defence

Manufacturing

Mining

Property

Property
services &
business
services

Services 1

Trade 2

Transport &
storage

Utilities 3

Retail lending

Other

Total
Exposure
at Default

Corporate

2,950

9,846

3,266

15,014

112

21,201

6,666

6,589

9,958

11,110

20,691

10,448

10,958

-

1,056

129,865

Business lending

5,958

7,236

4,028

2,369

9

4,638

608

328

6,373

5,965

9,186

2,651

427

-

3,974

53,750

Sovereign

-

-

-

18,525

56,398

148

88

-

150

548

-

125

332

-

2

76,316

Bank

-

-

-

23,683

133

-

-

-

50

-

-

-

-

-

-

23,866

Residential mortgages

-

-

-

-

-

-

-

-

-

-

-

-

-

547,681

-

547,681

Australian credit cards

-

-

-

-

-

-

-

-

-

-

-

-

-

19,640

-

19,640

Other retail

-

-

-

-

-

-

-

-

-

-

-

-

-

17,695

-

17,695

Small business

997

2,488

3,863

1,837

462

1,551

271

2,010

4,851

3,455

3,361

1,792

284

-

5,682

32,904

Specialised lending

639

6

21

83

-

14

1,140

57,399

104

1,945

13

3,191

1,981

-

457

66,993

Securitisation

-

-

-

25,348

-

35

-

-

733

-

446

-

-

-

-

26,562

Standardised

104

13

188

4,707

842

250

16

415

162

91

842

187

17

10,217

32

18,083

Total

10,648

19,589

11,366

91,566

57,956

27,837

8,789

66,741

22,381

23,114

34,539

18,394

13,999

595,233

11,203

1,013,355

 

 

 

 

 

 

 

 

 

 

 

 

1    Includes education, health & community services, cultural & recreational services and personal & other services.

2    Includes wholesale trade and retail trade.

3    Includes electricity, gas & water, and communication services.

 

32 | Westpac Group September 2017 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

30 September 2017

$m

Accommodation,
cafes &
restaurants

Agriculture,
forestry &
fishing

Construction

Finance &
insurance

Government
administration
& defence

Manufacturing

Mining

Property

Property
services &
business
services

Services 1

Trade 2

Transport &
storage

Utilities 3

Retail lending

Other

Total
Exposure
at Default

Corporate

2,778

9,394

3,208

13,228

115

21,031

7,246

6,753

8,465

10,940

20,040

10,750

11,725

-

1,074

126,747

Business lending

5,985

7,361

3,858

2,543

8

4,605

629

248

6,623

6,036

9,522

2,726

435

-

1,946

52,525

Sovereign

-

-

-

15,996

53,908

148

87

-

6

782

-

125

418

-

1

71,471

Bank

-

-

-

21,067

25

-

-

-

50

-

-

-

-

-

-

21,142

Residential mortgages

-

-

-

-

-

-

-

-

-

-

-

-

-

542,687

-

542,687

Australian credit cards

-

-

-

-

-

-

-

-

-

-

-

-

-

19,723

-

19,723

Other retail

-

-

-

-

-

-

-

-

-

-

-

-

-

17,929

-

17,929

Small business

876

2,260

3,654

1,645

379

1,412

238

1,662

4,243

2,705

3,021

1,741

267

-

3,318

27,421

Specialised lending

704

6

21

14

-

15

1,179

56,741

103

2,033

8

3,985

2,134

-

166

67,109

Securitisation

-

-

-

25,656

-

50

-

-

733

-

273

-

-

-

-

26,712

Standardised

102

5

165

4,082

960

209

14

387

164

88

835

236

27

10,080

33

17,387

Total

10,445

19,026

10,906

84,231

55,395

27,470

9,393

65,791

20,387

22,584

33,699

19,563

15,006

590,419

6,538

990,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1    Includes education, health & community services, cultural & recreational services and personal & other services.

2    Includes wholesale trade and retail trade.

3    Includes electricity, gas & water, and communication services.

 

Westpac Group September 2017 Pillar 3 report | 33

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Exposure at Default by geography 1

 

30 September 2018

 

 

 

 

 

 

Total Exposure

$m

Australia

New Zealand

Americas

Asia

Europe

Pacific

at Default

Corporate

83,580

20,663

6,984

14,861

2,731

-

128,819

Business lending

49,582

4,271

-

-

-

-

53,853

Sovereign

56,682

5,760

15,854

734

-

-

79,030

Bank

18,546

732

111

4,216

43

-

23,648

Residential mortgages

501,569

51,480

-

309

-

-

553,358

Australian credit cards

19,639

-

-

-

-

-

19,639

Other retail

13,493

3,621

-

-

-

-

17,114

Small business

30,838

2,381

-

2

-

-

33,221

Specialised lending

60,046

7,384

-

-

-

-

67,430

Securitisation

24,090

3,111

-

447

-

-

27,648

Standardised

14,830

-

-

352

-

2,984

18,166

Total

872,895

99,403

22,949

20,921

2,774

2,984

1,021,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 March 2018

 

 

 

 

 

 

Total Exposure

$m

Australia

New Zealand

Americas

Asia

Europe

Pacific

at Default

Corporate

85,656

21,513

6,649

13,301

2,746

-

129,865

Business lending

49,513

4,237

-

-

-

-

53,750

Sovereign

59,824

6,137

9,885

470

-

-

76,316

Bank

17,149

1,927

104

4,677

9

-

23,866

Residential mortgages

495,426

51,891

-

364

-

-

547,681

Australian credit cards

19,640

-

-

-

-

-

19,640

Other retail

13,903

3,792

-

-

-

-

17,695

Small business

30,495

2,409

-

-

-

-

32,904

Specialised lending

59,707

7,286

-

-

-

-

66,993

Securitisation

22,801

3,244

-

517

-

-

26,562

Standardised

14,936

-

-

393

-

2,754

18,083

Total

869,050

102,436

16,638

19,722

2,755

2,754

1,013,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30 September 2017

 

 

 

 

 

 

Total Exposure

$m

Australia

New Zealand

Americas

Asia

Europe

Pacific

at Default

Corporate

85,598

20,352

6,333

11,614

2,850

-

126,747

Business lending

48,415

4,110

-

-

-

-

52,525

Sovereign

57,909

6,465

7,009

88

-

-

71,471

Bank

16,056

1,014

102

3,969

1

-

21,142

Residential mortgages

492,478

49,839

-

370

-

-

542,687

Australian credit cards

19,723

-

-

-

-

-

19,723

Other retail

14,227

3,702

-

-

-

-

17,929

Small business

25,088

2,333

-

-

-

-

27,421

Specialised lending

60,254

6,855

-

-

-

-

67,109

Securitisation

23,154

3,210

-

348

-

-

26,712

Standardised

14,054

-

-

430

-

2,903

17,387

Total

856,956

97,880

13,444

16,819

2,851

2,903

990,853

 

 

 

1    Geographic segmentation of exposures is based on the location of the office in which these items were booked.

 

34 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Exposure at Default by residual contractual maturity

 

30 September 2018

 

 

 

 

 

Total Exposure

$m

On demand

< 12 months

1 to < 3 years

3 to < 5 years

> 5 years

at Default

Corporate

15,278

29,795

53,809

23,009

6,928

128,819

Business lending

3,241

12,847

24,267

6,129

7,369

53,853

Sovereign

992

28,069

15,876

16,409

17,684

79,030

Bank

3,838

6,709

9,926

2,377

798

23,648

Residential mortgages

36,980

4,464

19,329

2,914

489,671

553,358

Australian credit cards

19,639

-

-

-

-

19,639

Other retail

3,264

355

6,013

4,821

2,661

17,114

Small business

4,748

2,638

9,052

8,333

8,450

33,221

Specialised lending

565

24,178

29,924

7,672

5,091

67,430

Securitisation

2

5,159

8,914

2,002

11,571

27,648

Standardised

1,340

749

6,198

741

9,138

18,166

Total

89,887

114,963

183,308

74,407

559,361

1,021,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 March 2018

 

 

 

 

 

Total Exposure

$m

On demand

< 12 months

1 to < 3 years

3 to < 5 years

> 5 years

at Default

Corporate

14,578

31,263

55,491

22,139

6,394

129,865

Business lending

2,841

12,182

25,406

6,116

7,205

53,750

Sovereign

936

26,734

12,413

15,495

20,738

76,316

Bank

4,101

8,727

7,858

2,586

594

23,866

Residential mortgages

37,184

4,405

21,693

3,355

481,044

547,681

Australian credit cards

19,640

-

-

-

-

19,640

Other retail

3,399

318

6,124

4,979

2,875

17,695

Small business

4,141

2,443

9,409

8,491

8,420

32,904

Specialised lending

453

22,331

31,432

8,518

4,259

66,993

Securitisation

2

5,364

5,404

4,868

10,924

26,562

Standardised

1,382

662

6,214

741

9,084

18,083

Total

88,657

114,429

181,444

77,288

551,537

1,013,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30 September 2017

 

 

 

 

 

Total Exposure

$m

On demand

< 12 months

1 to < 3 years

3 to < 5 years

> 5 years

at Default

Corporate

14,764

27,975

55,334

23,266

5,408

126,747

Business lending

3,175

12,384

25,215

6,506

5,245

52,525

Sovereign

868

22,979

16,116

12,431

19,077

71,471

Bank

2,975

6,967

7,539

3,131

530

21,142

Residential mortgages

38,048

4,456

24,023

4,017

472,143

542,687

Australian credit cards

19,723

-

-

-

-

19,723

Other retail

3,312

312

6,182

5,061

3,062

17,929

Small business

3,626

2,053

7,699

8,209

5,834

27,421

Specialised lending

454

21,679

32,091

8,256

4,629

67,109

Securitisation

84

9,434

4,003

2,909

10,282

26,712

Standardised

1,413

565

5,998

727

8,684

17,387

Total

88,442

108,804

184,200

74,513

534,894

990,853

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 35

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Impaired and past due loans

 

The following tables disclose the crystallisation of credit risk as impairment and loss. Analysis of exposures 90 days past due not impaired, impaired loans, related provisions and actual losses are broken down by concentrations reflecting Westpac’s asset categories, industry and geography.

 

Impaired and past due loans by portfolio

 

 

Items

 

Specific

Specific

Actual

30 September 2018

past 90 days

Impaired

Provisions for

Provisions to

Losses for the

$m

not impaired

Loans

Impaired Loans

Impaired Loans

12 months ended

Corporate

87

112

54

48%

22

Business lending

313

294

173

59%

99

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

Residential mortgages

3,121

309

103

33%

89

Australian credit cards

-

87

50

57%

273

Other retail

-

284

137

48%

332

Small business

158

165

77

47%

112

Specialised lending

309

141

47

33%

20

Securitisation

-

-

-

-

-

Standardised

29

24

12

50%

1

Total

4,017

1,416

653

46%

948

 

 

 

 

 

 

 

Items

 

Specific

Specific

Actual

31 March 2018

past 90 days

Impaired

Provisions for

Provisions to

Losses for the

$m

not impaired

Loans

Impaired Loans

Impaired Loans

6 months ended

Corporate

80

164

94

57%

-

Business lending

251

317

176

56%

26

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

Residential mortgages

2,988

310

98

32%

47

Australian credit cards

-

95

47

49%

134

Other retail

-

290

135

47%

173

Small business

137

169

77

46%

52

Specialised lending

295

167

60

36%

1

Securitisation

-

-

-

-

-

Standardised

18

23

12

52%

1

Total

3,769

1,535

699

46%

434

 

 

 

 

 

 

 

Items

 

Specific

Specific

Actual

30 September 2017

past 90 days

Impaired

Provisions for

Provisions to

Losses for the

$m

not impaired

Loans

Impaired Loans

Impaired Loans

12 months ended

Corporate

57

215

93

43%

384

Business lending

238

307

166

54%

150

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

Residential mortgages

2,761

271

105

39%

87

Australian credit cards

-

108

55

51%

330

Other retail

-

296

139

47%

395

Small business

122

118

51

43%

73

Specialised lending

261

208

94

45%

68

Securitisation

-

-

-

-

-

Standardised

19

19

11

58%

1

Total

3,458

1,542

714

46%

1,488

 

 

 

 

 

 

36 | Westpac Group September 2018 Pillar 3 report

 

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Impaired and past due loans by industry classification

 

 

Items

 

Specific

Specific

Actual

30 September 2018

past 90 days

Impaired

Provisions for

Provisions to

Losses for the

$m

not impaired

Loans

Impaired Loans

Impaired Loans

12 months ended

Accommodation, cafes & restaurants

30

22

12

55%

13

Agriculture, forestry & fishing

107

64

27

42%

12

Construction

52

53

28

53%

23

Finance & insurance

14

34

26

76%

3

Government administration & defence

-

-

-

-

-

Manufacturing

44

104

59

57%

12

Mining

6

18

9

50%

5

Property

182

158

54

34%

45

Property services & business services

40

72

42

58%

43

Services 1

240

55

32

58%

24

Trade 2

148

92

44

48%

52

Transport & storage

25

35

19

54%

16

Utilities 3

2

2

-

-

1

Retail lending

3,121

680

290

43%

694

Other

6

27

11

41%

5

Total

4,017

1,416

653

46%

948

 

 

 

 

 

 

 

Items

 

Specific

Specific

Actual

31 March 2018

past 90 days

Impaired

Provisions for

Provisions to

Losses for the

$m

not impaired

Loans

Impaired Loans

Impaired Loans

6 months ended

Accommodation, cafes & restaurants

27

28

17

61%

4

Agriculture, forestry & fishing

85

77

32

42%

2

Construction

63

41

21

51%

11

Finance & insurance

16

31

23

74%

2

Government administration & defence

-

-

-

-

-

Manufacturing

27

104

45

43%

8

Mining

8

29

16

55%

-

Property

148

186

71

38%

14

Property services & business services

32

115

67

58%

17

Services 1

216

67

45

67%

3

Trade 2

137

100

57

57%

9

Transport & storage

14

32

15

47%

8

Utilities 3

1

3

-

-

-

Retail lending

2,988

695

280

40%

354

Other

7

27

10

37%

2

Total

3,769

1,535

699

46%

434

 

 

 

 

 

 

 

Items

 

Specific

Specific

Actual

30 September 2017

past 90 days

Impaired

Provisions for

Provisions to

Losses for the

$m

not impaired

Loans

Impaired Loans

Impaired Loans

12 months ended

Accommodation, cafes & restaurants

31

31

16

52%

35

Agriculture, forestry & fishing

46

52

21

40%

10

Construction

56

45

24

53%

29

Finance & insurance

14

18

6

33%

5

Government administration & defence

-

-

-

-

-

Manufacturing

56

135

45

33%

103

Mining

11

42

19

45%

45

Property

92

247

95

38%

67

Property services & business services

48

124

88

71%

200

Services 1

215

45

32

71%

98

Trade 2

77

73

44

60%

56

Transport & storage

37

36

17

47%

16

Utilities 3

3

2

-

-

-

Retail lending

2,761

675

299

44%

812

Other

11

17

8

47%

12

Total

3,458

1,542

714

46%

1,488

 

 

 

 

1      Includes education, health & community services, cultural & recreational services and personal & other services.

2      Includes wholesale trade and retail trade.

3       Includes electricity, gas & water, and communication services.

 

Westpac Group September 2018 Pillar 3 report | 37

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Impaired and past due loans by geography 1

 

 

Items

 

Specific

Specific

Actual

30 September 2018

past 90 days

Impaired

Provisions for

Provisions to

Losses for the

$m

not impaired

Loans

Impaired Loans

Impaired Loans

12 months ended

Australia

3,861

1,249

602

48%

902

New Zealand

127

150

43

29%

45

Americas

-

-

-

-

Asia

-

1

-

-

Europe

-

-

-

-

Pacific

29

16

8

50%

1

Total

4,017

1,416

653

46%

948

 

 

 

 

 

 

 

Items

 

Specific

Specific

Actual

31 March 2018

past 90 days

Impaired

Provisions for

Provisions to

Losses for the

$m

not impaired

Loans

Impaired Loans

Impaired Loans

6 months ended

Australia

3,596

1,302

620

48%

425

New Zealand

155

217

72

33%

8

Americas

-

-

-

-

Asia

-

1

-

-

Europe

-

-

-

-

Pacific

18

15

7

47%

1

Total

3,769

1,535

699

46%

434

 

 

 

 

 

 

 

Items

 

Specific

Specific

Actual

30 September 2017

past 90 days

Impaired

Provisions for

Provisions to

Losses for the

$m

not impaired

Loans

Impaired Loans

Impaired Loans

12 months ended

Australia

3,322

1,349

654

48%

1,453

New Zealand

117

178

54

30%

34

Americas

-

-

-

-

Asia

-

2

-

-

Europe

-

-

-

-

Pacific

19

13

6

46%

1

Total

3,458

1,542

714

46%

1,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1       Geographic segmentation of exposures is based on the location of the office in which these items were booked.

 

38 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Movement in provisions for impairment

 

 

For the

For the

For the

 

6 months

6 months

6 months

 

ended

ended

ended

 

30 September

31 March

30 September

$m

2018

2018

2017

Individually assessed provisions

 

 

 

Balance at beginning of the period

471

480

787

Provisions raised

198

173

246

Write-backs

(83)

(67)

(144)

Write-offs

(165)

(104)

(399)

Interest adjustment

(4)

(7)

(10)

Exchange rate and other adjustments

5

(4)

-

Closing balance

422

471

480

 

 

 

 

Collectively assessed provisions

 

 

 

Balance at beginning of the period

2,694

2,639

2,726

Provisions raised

281

387

342

Write-offs

(428)

(430)

(525)

Interest adjustment

90

89

93

Exchange rate and other adjustments

(6)

9

3

Closing balance

2,631

2,694

2,639

 

 

 

 

Total provisions for impairment losses on loans and credit commitments

3,053

3,165

3,119

General reserve for credit losses adjustment

356

339

332

Total provisions plus general reserve for credit losses

3,409

3,504

3,451

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 39

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Portfolios subject to the standardised approach

 

This table presents exposures subject to the standardised approach for the calculation of risk weighted assets.

 

As at 30 September 2018, exposures subject to the standardised approach and categorised by risk weight are primarily Westpac Pacific, Asian retail exposures, the margin lending portfolio, self-managed superannuation fund exposures and some other small portfolios. Mark-to-market related credit risk and qualifying central clearing counterparties exposure 1  is also included in the standardised approach.

 

30 September 2018

Total Exposure

Risk Weighted

Risk Weight %

at Default $m

Assets $m

0%

1,213

-

2%

3,167

63

20%

1,558

312

35%

760

266

50%

1,349

675

75%

5,271

3,953

100%

4,676

4,676

150%

31

46

Default fund contributions 1

141

787

Mark-to-market related credit risk

-

6,606

Total

18,166

17,384

 

 

 

31 March 2018

Total Exposure

Risk Weighted

Risk Weight %

at Default $m

Assets $m

0%

674

-

2%

3,742

75

20%

1,563

313

35%

787

275

50%

1,313

657

75%

5,235

3,926

100%

4,569

4,569

150%

21

31

Default fund contributions 1

179

793

Mark-to-market related credit risk

-

7,019

Total

18,083

17,658

 

 

 

30 September 2017

Total Exposure

Risk Weighted

Risk Weight %

at Default $m

Assets $m

0%

648

-

2%

3,158

63

20%

1,584

317

35%

807

282

50%

3,533

1,767

75%

2,802

2,102

100%

4,701

4,701

150%

23

34

Default fund contributions 1

131

680

Mark-to-market related credit risk

-

6,408

Total

17,387

16,354

 

 

 

 

 

 

 

 

 

1       Portfolios subject to the standardised approach include exposures to qualifying central clearing counterparties used to clear derivative transactions. Derivative counterparty exposure and initial margin are risk weighted at 2%. Default fund contributions to qualifying central clearing counterparties are shown separately and are subject to higher risk weights.

 

40 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Portfolios subject to supervisory risk-weights in the IRB approach

 

Exposures subject to supervisory risk-weights in the IRB approach include assets categorised as specialised lending, where a regulatory capital ‘slotting’ approach applies.

 

Westpac has property finance and project finance credit risk exposures categorised as specialised lending. The ‘Credit Risk Management’ section of this report describes the mapping of Westpac risk grades to both external rating equivalents and regulatory capital ‘slots’.

 

Property finance

 

30 September 2018

 

Exposure at

Regulatory

Risk Weighted

$m

Risk Weight

Default

Expected Loss

Assets

Strong

70%

22,702

90

15,891

Good

90%

29,543

236

26,589

Satisfactory

115%

5,264

147

6,053

Weak

250%

747

60

1,868

Default

NA

323

163

-

Total

 

58,579

696

50,401

 

 

 

 

 

31 March 2018

 

Exposure at

Regulatory

Risk Weighted

$m

Risk Weight

Default

Expected Loss

Assets

Strong

70%

22,920

92

16,044

Good

90%

29,361

234

26,425

Satisfactory

115%

5,385

151

6,193

Weak

250%

867

69

2,168

Default

NA

317

159

-

Total

 

58,850

705

50,830

 

 

 

 

 

30 September 2017

 

Exposure at

Regulatory

Risk Weighted

$m

Risk Weight

Default

Expected Loss

Assets

Strong

70%

21,826

87

15,278

Good

90%

29,371

235

26,434

Satisfactory

115%

5,471

153

6,292

Weak

250%

556

45

1,391

Default

NA

318

159

-

Total

 

57,542

679

49,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 41

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Project finance

 

30 September 2018

 

Exposure at

Regulatory

Risk Weighted

$m

Risk Weight

Default

Expected Loss

Assets

Strong

70%

6,927

28

4,849

Good

90%

1,320

11

1,188

Satisfactory

115%

356

10

410

Weak

250%

78

6

195

Default

NA

170

85

-

Total

 

8,851

140

6,642

 

 

 

 

 

31 March 2018

 

Exposure at

Regulatory

Risk Weighted

$m

Risk Weight

Default

Expected Loss

Assets

Strong

70%

6,293

25

4,405

Good

90%

1,272

10

1,145

Satisfactory

115%

108

3

124

Weak

250%

294

24

735

Default

NA

176

88

-

Total

 

8,143

150

6,409

 

 

 

 

 

30 September 2017

 

Exposure at

Regulatory

Risk Weighted

$m

Risk Weight

Default

Expected Loss

Assets

Strong

70%

7,649

30

5,354

Good

90%

1,191

10

1,072

Satisfactory

115%

76

2

87

Weak

250%

469

38

1,173

Default

NA

181

90

-

Total

 

9,566

170

7,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42 | Westpac Group September 2018 Pillar 3 report

 


 

 

Pillar 3 report

Credit risk exposures

 

 

 

Portfolios subject to IRB approaches

 

Westpac has classified its transaction-managed exposures by the external credit rating to which the internally assigned credit risk grade aligns, as outlined in the ‘Credit Risk Management’ section of this report. Westpac’s internal rating system consists of more risk grades than does the range of external grades, and as a result PD will vary from portfolio to portfolio for the same external grade. Westpac’s program-managed exposures are classified by PD band. The average PD within a band likewise varies from portfolio to portfolio.

 

For non-defaulted exposures, regulatory expected loss is defined as the product of PD, LGD and EAD. For defaulted exposures, regulatory expected loss is based upon best estimates of loss. Regulatory expected loss is calculated at the facility level and then aggregated. However, multiplying the aggregates of the PD, LGD and EAD, as reported in the tables below (e.g. $128,610 million x 0.90% x 46%), does not always equal the aggregate regulatory expected loss ($471 million) because the product of two averages does not equal the average of a product.

 

EAD does not necessarily align with outstandings plus committed undrawn because conversion factors are applied to undrawns to determine EAD.

 

Corporate portfolio by external credit rating

 

 

 

 

 

 

 

 

Risk

Average

30 September 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

105

-

105

0.01%

42%

-

17

16%

AA

2,871

1,051

3,924

0.03%

48%

1

539

14%

A

19,206

12,285

31,523

0.07%

52%

12

9,405

30%

BBB

32,649

22,387

54,739

0.22%

48%

58

26,414

48%

BB

26,221

8,503

34,674

1.15%

38%

147

26,330

76%

B

1,141

139

1,279

4.06%

42%

22

1,722

135%

Other

1,885

477

2,366

24.03%

39%

231

4,846

205%

Subtotal

84,078

44,842

128,610

0.90%

46%

471

69,273

54%

Default

159

26

209

NA

37%

81

311

149%

Total

84,237

44,868

128,819

1.07%

46%

552

69,584

54%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

31 March 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

62

-

62

0.01%

52%

-

9

15%

AA

2,812

904

3,717

0.03%

48%

1

477

13%

A

18,000

11,506

29,535

0.07%

54%

12

9,089

31%

BBB

32,905

22,429

55,381

0.22%

49%

60

26,204

47%

BB

27,303

10,045

37,321

1.14%

39%

161

28,945

78%

B

1,027

126

1,162

4.08%

42%

20

1,588

137%

Other

1,913

483

2,411

21.16%

39%

201

4,910

204%

Subtotal

84,022

45,493

129,589

0.87%

47%

455

71,222

55%

Default

205

27

276

NA

46%

130

368

133%

Total

84,227

45,520

129,865

1.08%

47%

585

71,590

55%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

30 September 2017

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

33

28

61

0.01%

56%

-

11

18%

AA

2,413

1,022

3,436

0.03%

50%

1

486

14%

A

15,627

11,961

27,609

0.07%

54%

11

8,359

30%

BBB

31,865

23,591

55,497

0.22%

49%

60

26,680

48%

BB

25,986

10,036

35,973

1.13%

40%

155

28,083

78%

B

1,240

131

1,372

4.09%

41%

23

1,818

133%

Other

2,029

451

2,481

21.53%

38%

208

4,962

200%

Subtotal

79,193

47,220

126,429

0.90%

47%

458

70,399

56%

Default

245

28

318

NA

49%

136

761

239%

Total

79,438

47,248

126,747

1.15%

47%

594

71,160

56%

 

 

 

1   Outstandings are balances that were drawn down as at the reporting date and include certain off-balance sheet items.

2   Committed undrawn balances are committed exposures that were not drawn down as at the reporting date.

 

Westpac Group September 2018 Pillar 3 report |  43

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Business lending portfolio by external credit rating

 

 

 

 

 

 

 

 

Risk

Average

30 September 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

-

-

-

-

 

-

-

-

AA

-

7

7

0.03%

56%

-

1

14%

A

107

38

145

0.08%

57%

-

34

23%

BBB

1,469

529

1,996

0.21%

27%

1

464

23%

BB

37,307

10,490

47,707

1.58%

31%

230

29,055

61%

B

1,193

146

1,339

4.44%

32%

19

1,112

83%

Other

1,797

225

2,022

23.75%

39%

192

3,629

179%

Subtotal

41,873

11,435

53,216

2.44%

31%

442

34,295

64%

Default

593

29

637

NA

38%

215

1,122

176%

Total

42,466

11,464

53,853

3.59%

31%

657

35,417

66%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

31 March 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

-

-

-

-

-

-

-

-

AA

1

7

9

0.03%

56%

-

1

11%

A

116

37

153

0.08%

60%

-

38

25%

BBB

1,362

566

1,926

0.22%

26%

1

440

23%

BB

36,798

11,140

47,813

1.57%

31%

228

28,927

61%

B

1,214

173

1,388

4.45%

32%

20

1,152

83%

Other

1,655

188

1,844

22.73%

39%

166

3,197

173%

Subtotal

41,146

12,111

53,133

2.33%

31%

415

33,755

64%

Default

584

28

617

NA

39%

208

1,117

181%

Total

41,730

12,139

53,750

3.45%

31%

623

34,872

65%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

30 September 2017

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

-

-

-

-

-

-

-

-

AA

-

9

9

0.03%

56%

-

2

22%

A

112

42

154

0.08%

59%

-

40

26%

BBB

1,449

569

2,016

0.21%

27%

1

472

23%

BB

35,379

11,096

46,325

1.53%

31%

225

28,490

62%

B

1,454

217

1,671

4.47%

34%

25

1,473

88%

Other

1,591

192

1,783

22.96%

39%

166

3,169

178%

Subtotal

39,985

12,125

51,958

2.30%

31%

417

33,646

65%

Default

506

23

567

NA

44%

220

992

175%

Total

40,491

12,148

52,525

3.36%

31%

637

34,638

66%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1   Outstandings are balances that were drawn down as at the reporting date and include certain off-balance sheet items.

2   Committed undrawn balances are committed exposures that were not drawn down as at the reporting date.

 

44 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Sovereign portfolio by external credit rating

 

 

 

 

 

 

 

 

Risk

Average

30 September 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

31,905

138

34,592

0.01%

6%

1

492

1%

AA

40,788

962

42,590

0.02%

7%

1

716

2%

A

967

358

1,329

0.05%

37%

-

250

19%

BBB

393

77

471

0.24%

29%

-

138

29%

BB

17

30

46

1.94%

40%

-

45

98%

B

2

-

2

-

64%

-

3

150%

Other

-

-

-

-

-

-

-

-

Subtotal

74,072

1,565

79,030

0.02%

7%

2

1,644

2%

Default

-

-

-

NA

-

-

-

-

Total

74,072

1,565

79,030

0.02%

7%

2

1,644

2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

31 March 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

29,301

158

31,673

0.01%

7%

-

458

1%

AA

40,942

1,027

43,006

0.02%

7%

1

784

2%

A

1,030

280

1,313

0.05%

35%

-

183

14%

BBB

286

10

296

0.25%

27%

-

83

28%

BB

15

11

26

2.06%

39%

-

25

96%

B

2

-

2

-

60%

-

3

150%

Other

-

-

-

-

-

-

-

-

Subtotal

71,576

1,486

76,316

0.02%

8%

1

1,536

2%

Default

-

-

-

NA

-

-

-

-

Total

71,576

1,486

76,316

0.02%

8%

1

1,536

2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

30 September 2017

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

27,965

199

30,114

0.01%

7%

-

428

1%

AA

37,752

1,053

39,773

0.02%

7%

1

801

2%

A

946

302

1,251

0.05%

36%

-

165

13%

BBB

222

76

298

0.25%

27%

-

81

27%

BB

19

16

35

1.86%

38%

-

30

86%

B

-

-

-

-

-

-

-

-

Other

-

-

-

-

-

-

-

-

Subtotal

66,904

1,646

71,471

0.02%

8%

1

1,505

2%

Default

-

-

-

NA

-

-

-

-

Total

66,904

1,646

71,471

0.02%

8%

1

1,505

2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1   Outstandings are balances that were drawn down as at the reporting date and include certain off-balance sheet items.

2   Committed undrawn balances are committed exposures that were not drawn down as at the reporting date.

 

Westpac Group September 2018 Pillar 3 report | 45

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Bank portfolio by external credit rating

 

 

 

 

 

 

 

 

Risk

Average

30 September 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

432

5

438

0.01%

13%

-

22

5%

AA

8,524

244

8,814

0.03%

58%

2

2,189

25%

A

12,049

316

12,377

0.06%

53%

4

3,250

26%

BBB

1,763

161

1,928

0.20%

53%

2

1,083

56%

BB

71

18

89

1.26%

35%

-

60

67%

B

2

-

2

3.70%

45%

-

2

100%

Other

-

-

-

-

-

-

-

-

Subtotal

22,841

744

23,648

0.06%

54%

8

6,606

28%

Default

-

-

-

NA

-

-

-

-

Total

22,841

744

23,648

0.06%

54%

8

6,606

28%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

31 March 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

450

-

451

0.01%

13%

-

24

5%

AA

7,198

9

7,252

0.03%

57%

1

1,773

24%

A

14,101

284

14,398

0.06%

54%

5

3,594

25%

BBB

1,455

82

1,540

0.21%

46%

1

673

44%

BB

205

18

223

0.79%

50%

1

188

84%

B

-

1

2

3.70%

10%

-

1

50%

Other

-

-

-

-

-

-

-

-

Subtotal

23,409

394

23,866

0.07%

54%

8

6,253

26%

Default

-

-

-

NA

-

-

-

-

Total

23,409

394

23,866

0.07%

54%

8

6,253

26%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

30 September 2017

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

AAA

510

-

511

0.01%

13%

-

28

5%

AA

7,752

1

7,809

0.03%

58%

1

2,051

26%

A

10,932

235

11,187

0.06%

53%

4

2,940

26%

BBB

1,507

34

1,547

0.21%

52%

2

819

53%

BB

67

19

86

1.33%

35%

-

66

77%

B

2

-

2

3.70%

10%

-

1

50%

Other

-

-

-

-

-

-

-

-

Subtotal

20,770

289

21,142

0.06%

54%

7

5,905

28%

Default

-

-

-

NA

-

-

-

-

Total

20,770

289

21,142

0.06%

54%

7

5,905

28%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1       Outstandings are balances that were drawn down as at the reporting date and include certain off-balance sheet items.

2       Committed undrawn balances are committed exposures that were not drawn down as at the reporting date.

 

46 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Residential mortgages portfolio by PD band

 

 

 

 

 

 

 

 

Risk

Average

30 September 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

0.0 to 0.10

148,007

39,407

187,698

0.06%

20%

23

10,481

6%

0.10 to 0.25

72,746

10,881

83,386

0.21%

20%

36

11,703

14%

0.25 to 1.0

177,313

23,486

200,182

0.54%

20%

218

51,643

26%

1.0 to 2.5

45,973

3,641

49,055

1.41%

20%

139

20,757

42%

2.5 to 10.0

18,010

435

18,411

4.62%

20%

173

15,789

86%

10.0 to 99.99

11,107

78

11,203

20.47%

20%

459

15,319

137%

Subtotal

473,156

77,928

549,935

0.95%

20%

1,048

125,692

23%

Default

3,411

13

3,423

NA

20%

224

7,042

206%

Total

476,567

77,941

553,358

1.56%

20%

1,272

132,734

24%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

31 March 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

0.0 to 0.10

142,666

39,278

182,248

0.05%

20%

18

8,521

5%

0.10 to 0.25

71,452

11,386

82,615

0.21%

20%

34

11,223

14%

0.25 to 1.0

174,003

24,339

197,803

0.53%

20%

212

50,507

26%

1.0 to 2.5

49,003

3,993

52,429

1.44%

20%

152

22,646

43%

2.5 to 10.0

20,530

456

20,958

5.05%

20%

214

18,641

89%

10.0 to 99.99

8,295

64

8,376

22.00%

20%

368

11,516

137%

Subtotal

465,949

79,516

544,429

0.91%

20%

998

123,054

23%

Default

3,243

16

3,252

NA

20%

208

6,694

206%

Total

469,192

79,532

547,681

1.50%

20%

1,206

129,748

24%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

30 September 2017

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

0.0 to 0.10

143,314

39,710

183,320

0.05%

20%

18

8,578

5%

0.10 to 0.25

70,377

11,272

81,441

0.21%

20%

33

11,077

14%

0.25 to 1.0

168,317

25,542

193,390

0.53%

20%

207

49,460

26%

1.0 to 2.5

49,420

3,924

52,786

1.44%

20%

153

23,034

44%

2.5 to 10.0

20,147

454

20,585

4.94%

20%

207

18,172

88%

10.0 to 99.99

7,919

69

8,005

21.85%

20%

350

11,004

137%

Subtotal

459,494

80,971

539,527

0.89%

20%

968

121,325

22%

Default

3,151

16

3,160

NA

20%

205

6,500

206%

Total

462,645

80,987

542,687

1.47%

20%

1,173

127,825

24%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1       Outstandings are balances that were drawn down as at the reporting date.

2       Committed undrawn balances are committed exposures that were not drawn down as at the reporting date.

 

Westpac Group September 2018 Pillar 3 report | 47

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Australian credit cards portfolio by PD band

 

 

 

 

 

 

 

 

Risk

Average

30 September 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

0.0 to 0.10

1,771

9,792

6,207

0.05%

70%

2

146

2%

0.10 to 0.25

1,218

6,039

4,306

0.16%

73%

5

300

7%

0.25 to 1.0

1,342

1,631

2,294

0.46%

73%

8

378

16%

1.0 to 2.5

3,035

1,549

4,096

1.69%

73%

51

1,786

44%

2.5 to 10.0

1,455

455

1,819

6.24%

73%

83

1,950

107%

10.0 to 99.99

745

158

820

26.45%

71%

155

1,550

189%

Subtotal

9,566

19,624

19,542

2.15%

72%

304

6,110

31%

Default

97

15

97

NA

72%

54

203

209%

Total

9,663

19,639

19,639

2.63%

72%

358

6,313

32%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

31 March 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

0.0 to 0.10

1,816

9,710

6,219

0.05%

70%

2

146

2%

0.10 to 0.25

1,272

5,985

4,335

0.16%

73%

5

301

7%

0.25 to 1.0

1,397

1,578

2,307

0.46%

73%

8

380

16%

1.0 to 2.5

2,924

1,491

3,944

1.70%

73%

49

1,726

44%

2.5 to 10.0

1,504

423

1,840

6.29%

73%

85

1,981

108%

10.0 to 99.99

811

161

887

26.81%

71%

170

1,687

190%

Subtotal

9,724

19,348

19,532

2.26%

72%

319

6,221

32%

Default

107

13

108

NA

72%

52

332

307%

Total

9,831

19,361

19,640

2.79%

72%

371

6,553

33%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

30 September 2017

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

Risk

$m

Outstandings 1

Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

0.0 to 0.10

2,302

11,074

7,417

0.04%

74%

2

161

2%

0.10 to 0.25

1,339

5,479

4,169

0.14%

76%

4

269

6%

0.25 to 1.0

1,460

1,329

2,253

0.40%

76%

7

349

15%

1.0 to 2.5

2,790

1,259

3,683

1.53%

77%

43

1,547

42%

2.5 to 10.0

1,239

296

1,463

5.81%

76%

65

1,555

106%

10.0 to 99.99

553

69

586

23.73%

75%

106

1,187

203%

Subtotal

9,683

19,506

19,571

1.52%

75%

227

5,068

26%

Default

152

15

152

NA

76%

71

597

393%

Total

9,835

19,521

19,723

2.28%

75%

298

5,665

29%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1       Outstandings are balances that were drawn down as at the reporting date.

2       Committed undrawn balances are committed exposures that were not drawn down as at the reporting date.

 

48 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Other retail portfolio by PD band

 

 

 

 

 

 

 

 

Risk

Average

30 September 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

 Risk

$m

Outstandings 1

 Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

0.0 to 0.10

24

21

37

0.07%

65%

-

5

14%

0.10 to 0.25

360

942

1,082

0.18%

56%

1

245

23%

0.25 to 1.0

3,957

2,428

5,573

0.60%

58%

20

2,636

47%

1.0 to 2.5

4,169

1,034

5,061

1.75%

65%

61

4,264

84%

2.5 to 10.0

3,277

302

3,569

4.82%

68%

123

3,768

106%

10.0 to 99.99

1,414

73

1,495

25.86%

64%

260

2,153

144%

Subtotal

13,201

4,800

16,817

4.06%

63%

465

13,071

78%

Default

295

9

297

NA

63%

139

706

238%

Total

13,496

4,809

17,114

5.73%

63%

604

13,777

81%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

31 March 2018

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

 Risk

$m

Outstandings 1

 Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

0.0 to 0.10

25

18

38

0.07%

65%

-

5

13%

0.10 to 0.25

1,157

952

1,886

0.21%

53%

2

440

23%

0.25 to 1.0

3,305

2,455

4,932

0.53%

60%

16

2,284

46%

1.0 to 2.5

5,214

1,069

6,132

1.71%

63%

68

4,956

81%

2.5 to 10.0

2,743

312

3,045

5.44%

71%

119

3,437

113%

10.0 to 99.99

1,271

83

1,357

29.16%

67%

267

2,118

156%

Subtotal

13,715

4,889

17,390

4.00%

63%

472

13,240

76%

Default

304

12

305

NA

65%

135

816

268%

Total

14,019

4,901

17,695

5.66%

63%

607

14,056

79%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk

Average

30 September 2017

 

Committed

Exposure

Probability

Loss Given

Regulatory

Weighted

 Risk

$m

Outstandings 1

 Undrawn 2

at Default

of Default

Default

Expected Loss

Assets

Weight

0.0 to 0.10

167

273

429

0.07%

75%

-

65

15%

0.10 to 0.25

1,331

1,046

2,155

0.19%

56%

2

484

22%

0.25 to 1.0

3,984

2,189

5,355

0.54%

62%

18

2,544

48%

1.0 to 2.5

5,254

1,027

6,118

1.68%

63%

67

4,891

80%

2.5 to 10.0

2,092

286

2,361

5.51%

69%

90

2,566

109%

10.0 to 99.99

1,117

72

1,191

26.27%

65%

203

1,845

155%

Subtotal

13,945

4,893

17,609

3.29%

63%

380

12,395

70%

Default

316

9

320

NA

65%

147

855

267%

Total

14,261

4,902

17,929

5.01%

63%

527

13,250

74%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


1   Outstandings are balances that were drawn down as at the reporting date.

2   Committed undrawn balances are committed exposures that were not drawn down as at the reporting date.

 

Westpac Group September 2018 Pillar 3 report | 49

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Small business portfolio by PD band

 

 

 

 

 

 

 

Regulatory

Risk

Average

30 September 2018

 

Committed

Exposure

Probability

Loss Given

Expected

Weighted

 Risk

$m

Outstandings 1

 Undrawn 2

at Default

of Default

Default

Loss

Assets

Weight

0.0 to 0.10

290

543

598

0.05%

58%

-

61

10%

0.10 to 0.25

114

110

224

0.23%

20%

-

21

9%

0.25 to 1.0

5,503

3,254

8,781

0.45%

28%

11

1,759

20%

1.0 to 2.5

15,585

2,057

17,545

1.67%

38%

109

8,770

50%

2.5 to 10.0

3,529

363

3,897

5.26%

33%

70

2,577

66%

10.0 to 99.99

1,543

101

1,648

25.01%

36%

149

1,801

109%

Subtotal

26,564

6,428

32,693

2.91%

35%

339

14,989

46%

Default

508

17

528

NA

36%

114

1,340

254%

Total

27,072

6,445

33,221

4.45%

35%

453

16,329

49%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

Risk

Average

31 March 2018

 

Committed

Exposure

Probability

Loss Given

Expected

Weighted

 Risk

$m

Outstandings 1

 Undrawn 2

at Default

of Default

Default

Loss

Assets

Weight

0.0 to 0.10

289

563

611

0.05%

56%

-

60

10%

0.10 to 0.25

127

126

253

0.23%

20%

-

24

9%

0.25 to 1.0

5,514

3,306

8,846

0.45%

27%

11

1,764

20%

1.0 to 2.5

15,338

2,029

17,256

1.67%

38%

106

8,599

50%

2.5 to 10.0

3,429

338

3,771

5.13%

32%

65

2,442

65%

10.0 to 99.99

1,555

99

1,657

24.93%

36%

147

1,808

109%

Subtotal

26,252

6,461

32,394

2.89%

34%

329

14,697

45%

Default

490

13

510

NA

36%

114

1,320

259%

Total

26,742

6,474

32,904

4.39%

34%

443

16,017

49%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

Risk

Average

30 September 2017

 

Committed

Exposure

Probability

Loss Given

Expected

Weighted

 Risk

$m

Outstandings 1

 Undrawn 2

at Default

of Default

Default

Loss

Assets

Weight

0.0 to 0.10

308

813

901

0.08%

49%

-

88

10%

0.10 to 0.25

2,355

1,619

3,962

0.18%

25%

2

407

10%

0.25 to 1.0

5,673

1,425

7,122

0.46%

39%

12

1,983

28%

1.0 to 2.5

11,117

1,011

11,983

1.41%

42%

70

6,134

51%

2.5 to 10.0

2,055

170

2,222

5.13%

34%

39

1,383

62%

10.0 to 99.99

842

19

862

21.35%

36%

68

876

102%

Subtotal

22,350

5,057

27,052

1.88%

38%

191

10,871

40%

Default

332

5

369

NA

41%

109

837

227%

Total

22,682

5,062

27,421

3.20%

38%

300

11,708

43%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


1   Outstandings are balances that were drawn down as at the reporting date and include certain off-balance sheet items.

2   Committed undrawn balances are committed exposures that were not drawn down as at the reporting date.

 

50 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Credit Quality

 

Credit quality remained sound over Second Half 2018 with total stressed exposures increasing modestly and remaining low relative to historical experience. The rise in stressed assets relates to an increase in 90 days past due and not impaired facilities due to an increase in mortgage 90+ day delinquencies and a small increase in business lending facilities.

 

Actual losses

 

30 September 2018

Write-offs

Legal and

Write-offs from

 

Actual Losses for the

$m

direct

recovery costs

provisions 1

Recoveries

12 months ended

Corporate

-

-

34

(12)

22

Business lending

37

2

71

(11)

99

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

Residential mortgages

10

-

82

(3)

89

Australian credit cards

320

-

-

(47)

273

Other retail

415

13

5

(101)

332

Small business

53

-

60

(1)

112

Specialised lending

2

5

17

(4)

20

Securitisation

-

-

-

-

-

Standardised

1

-

-

-

1

Total

838

20

269

(179)

948

 

 

 

 

 

 

31 March 2018

Write-offs

Legal and

Write-offs from

 

Actual Losses for the

$m

direct

recovery costs

provisions 1

Recoveries

6 months ended

Corporate

-

-

11

(11)

-

Business lending

9

1

18

(2)

26

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

Residential mortgages

6

-

44

(3)

47

Australian credit cards

161

-

-

(27)

134

Other retail

220

6

2

(55)

173

Small business

24

-

28

-

52

Specialised lending

-

2

1

(2)

1

Securitisation

-

-

-

-

-

Standardised

1

-

-

-

1

Total

421

9

104

(100)

434

 

 

 

 

 

 

30 September 2017

Write-offs

Legal and

Write-offs from

 

Actual Losses for the

$m

direct

recovery costs

provisions 1

Recoveries

12 months ended

Corporate

3

-

387

(6)

384

Business lending

33

2

139

(24)

150

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

Residential mortgages

13

-

76

(2)

87

Australian credit cards

374

-

-

(44)

330

Other retail

470

14

-

(89)

395

Small business

47

-

27

(1)

73

Specialised lending

3

8

59

(2)

68

Securitisation

-

-

-

-

-

Standardised

1

-

-

-

1

Total

944

24

688

(168)

1,488

 

 

 

 

 

 

 

 

1       Write-offs from individually assessed provisions.

 

Westpac Group September 2018 Pillar 3 report | 51

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Regulatory loss estimates and actual losses

 

The table below compares regulatory credit risk estimates used in the calculation of risk weighted assets to the average of actual outcomes observed since the time of Advanced IRB accreditation for each portfolio.

 

Predicted parameters represent average internally predicted long-run probabilities of default for non-defaulted obligors at the start of each year, as well as downturn estimates of loss (or the regulatory minimum where required). They are averaged using data from the financial years beginning at the time of Advanced IRB accreditation (2008 for most portfolios) and compared to observed outcomes over the same period 1 .

 

Predicted parameters are updated annually and utilise observed outcomes from prior periods as a key input.

 

Default rates

 

At the start of each year, a predicted default probability is assigned to all non-defaulted obligors. This is averaged over the portfolio and reported as the predicted default rate. This is compared to the actual default rate for the year. Both predicted and observed annual default rates are then averaged over the observation period.

 

Loss Given Default (LGD)

 

The LGD analysis excludes recent defaults in order to allow sufficient time for the full workout of the facility and hence an accurate LGD to be determined. The workout period varies by portfolio: a two year workout period is assumed for transaction-managed and residential mortgage lending; and a one year period for other program-managed portfolios.

 

Exposure at Default (EAD)

 

The EAD variance compares the observed EAD to the predicted EAD one year prior to default. For transaction-managed portfolios, predicted EAD is currently mandated to be 100% of committed exposures. The observed EAD is averaged for all obligors that defaulted over the observation period .

 

 

 

 

 

 

 

Observed EAD

30 September 2018

Regulatory

         Default rate

         Loss Given Default

variance to

$m

Expected  Loss 2

Predicted

Observed

Predicted

Observed

Predicted 3

Corporate

552

2.24%

0.99%

47%

37%

(23%)

Business lending

657

2.24%

1.52%

34%

17%

(13%)

Sovereign

2

0.23%

-

-

-

-

Bank

8

0.46%

0.16%

-

-

-

Residential mortgages

1,272

0.63%

0.49%

20%

2%

(1%)

Australian credit cards

358

1.70%

1.66%

75%

57%

(2%)

Other retail

604

4.90%

3.83%

69%

48%

(8%)

Small business

453

2.85%

1.93%

39%

14%

(8%)

Specialised lending

836

NA

1.94%

NA

22%

(7%)

Securitisation

NA

NA

NA

NA

NA

NA

Standardised

NA

NA

NA

NA

NA

NA

Total

4,742

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1    Predicted parameters are not available for specialised lending, securitisation or standardised exposures because risk weights for these portfolios do not rely on credit estimates and are shown as NA in the tables above.

2    Includes regulatory expected losses for defaulted and non-defaulted exposures.

3    A negative outcome indicates observed EAD was lower than predicted EAD, which can happen because exposures were managed down prior to default or off-balance sheet items or undrawn limits were not fully drawn prior to default.

 

52 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

 

 

 

 

 

 

Observed EAD

31 March 2018

Regulatory

         Default rate

         Loss Given Default

variance to

$m

Expected Loss 2

Predicted

Observed

Predicted

Observed

Predicted 3

Corporate

585

2.23%

0.98%

47%

37%

(23%)

Business lending

623

2.24%

1.50%

34%

18%

(12%)

Sovereign

1

0.23%

-

-

-

-

Bank

8

0.46%

0.16%

-

-

-

Residential mortgages

1,206

0.62%

0.49%

20%

2%

(1%)

Australian credit cards

371

1.72%

1.67%

75%

58%

(2%)

Other retail

607

4.95%

3.81%

70%

50%

(9%)

Small business

443

2.52%

1.83%

39%

15%

(8%)

Specialised lending

855

NA

1.95%

NA

22%

(7%)

Securitisation

NA

NA

NA

NA

NA

NA

Standardised

NA

NA

NA

NA

NA

NA

Total

4,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Observed EAD

30 September 2017

Regulatory

Default rate

 

         Loss Given Default

 variance to

$m

Expected Loss 1

Predicted

Observed

Predicted

Observed

Predicted 2

Corporate

594

2.08%

1.04%

47%

37%

(23%)

Business lending

637

2.10%

1.53%

34%

18%

(12%)

Sovereign

1

0.21%

-

-

-

-

Bank

7

0.48%

0.18%

-

-

-

Residential mortgages

1,173

0.64%

0.48%

20%

2%

(1%)

Australian credit cards

298

1.73%

1.67%

76%

57%

(2%)

Other retail

527

4.88%

3.78%

70%

51%

(11%)

Small business

300

2.23%

1.77%

39%

15%

(10%)

Specialised lending

849

NA

2.02%

NA

22%

(8%)

Securitisation

NA

NA

NA

NA

NA

NA

Standardised

NA

NA

NA

NA

NA

NA

Total

4,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1    Includes regulatory expected losses for defaulted and non-defaulted exposures

2    A negative outcome indicates observed EAD was lower than predicted EAD, which can happen because exposures were managed down prior to default or off-balance sheet items or undrawn limits were not fully drawn prior to default.

 

Westpac Group September 2018 Pillar 3 report | 53

 


 

Pillar 3 report

Credit risk mitigation

 

 

 

This section describes the way in which Westpac reduces its credit risk by using financial collateral, guarantees or credit derivatives for the Corporate, Sovereign and Bank asset classes.

 

Approach

 

Westpac recognises credit risk mitigation only when formal legal documentation is held that establishes Westpac’s direct, irrevocable and unconditional recourse to the collateral or to an unrelated credit risk mitigation provider. The minimum standards to be met so that credit risk mitigation can be recognised are embodied in Westpac’s credit rules and policies. All proposals for risk mitigation require a formal submission confirming compliance with these standards, for approval by an authorised credit officer. Authorised credit officer approval is also required for existing risk mitigation to be discontinued or withdrawn.

 

The amount of credit risk mitigation recognised is the face value of the mitigation instrument, which is adjusted by the application of discounts for any maturity and/or currency mismatch with the underlying obligation, so that a discounted amount is recognised when calculating the residual exposure after mitigation.

 

For regulatory capital purposes Westpac addresses credit risk mitigation as follows:

 

l      exposures secured by cash, eligible financial collateral or where protection is bought via credit linked notes, provided the proceeds are invested in either cash or eligible financial collateral, are included at the gross value, with risk weighted assets for the portion thus secured calculated by applying a 5% LGD 1 ;

 

l      exposures that are mitigated by way of eligible guarantees, standby letters of credit or similar instruments, where Westpac has direct recourse to an unrelated third party on default or non-payment by the customer, or credit protection bought via credit default swaps where Westpac is entitled to recover either full principal or credit losses on occurrence of defined credit events, are treated under double default rules where the protection provider is a financial firm rated A/A2 or better; and

 

l      exposures that are mitigated by way of guarantees, letters of credit, credit default swaps or similar instruments, where the eligibility criteria for double default treatment are not met, are treated under the substitution approach.

 

Structure and organisation

 

Westpac Institutional Bank is responsible for managing the overall risk in Westpac’s corporate, sovereign and bank credit portfolios, and uses a variety of instruments, including securitisation and single name credit default swaps, to manage loan and counterparty risk. Divisions within Westpac Institutional Bank are responsible for actively monitoring the underlying exposure and the offsetting hedge book. Westpac Institutional Bank has a dedicated portfolio trading desk with the specific mandate to execute hedge transactions and monitor the underlying exposure.

 

Risk reporting

 

Monthly reports are issued, which detail risk mitigated facilities where the mitigation instruments mature within 30 to 90 days. Following decisions by the relevant business and credit risk management units, an independent operational unit ensures necessary actions are implemented in a timely fashion.

 

Specific reporting is maintained and monitored on the matching of hedges with underlying facilities, with any adjustments to hedges (e.g. unwinds or extensions) managed dynamically.

 

Netting

 

Risk reduction by way of current account set-offs is recognised for exposures to creditworthy customers domiciled in Australia and New Zealand only. Customers are required to enter into formal agreements giving Westpac the unfettered right to set-off gross credit and debit balances in their nominated accounts to determine Westpac’s net exposure within each of these two jurisdictions. Cross-border set-offs are not permitted.

 

Close-out netting is undertaken for off-balance sheet financial market transactions with counterparties with whom Westpac has entered into master netting agreements which allow such netting in specified jurisdictions. Close-out netting effectively aggregates pre-settlement risk exposure at time of default, thus reducing overall exposure.

 

Collateral valuation and management

 

Westpac revalues financial markets and associated collateral positions on a daily basis to monitor the net risk position, and has formal processes in place so that calls for collateral top-up or exposure reduction are made promptly. An independent operational unit has responsibility for monitoring these positions. The collateralisation arrangements are documented via the Credit Support Annex of the International Swaps and Derivatives Association (ISDA) master agreement for derivatives transactions and Global Master Repurchase Agreement (GMRA) for repurchase transactions and Clearing Agreements for cleared trades.

 

 

 

 

1       Excludes collateralised derivative transactions.

 

54 | Westpac Group September 2018 Pillar 3 report

 

 


 

Pillar 3 report

Credit risk mitigation

 

 

 

Types of collateral taken

 

Westpac recognises the following as eligible collateral for credit risk mitigation by way of risk reduction:

 

l                   cash (primarily in Australian dollars (AUD), New Zealand dollars (NZD), US dollars (USD), Canadian dollars (CAD), British pounds (GBP), or Euro (EUR));

 

l                   bonds issued by Australian Commonwealth, State and Territory governments or their Public Sector Enterprises, provided these attract a zero risk-weighting under APS112;

 

l                   securities issued by other specified AA-/Aa3 or better rated sovereign governments; and

 

l                   protection bought via credit-linked notes (provided the proceeds are invested in cash or other eligible collateral described above).

 

Guarantor/credit derivative counterparties

 

For mitigation by risk transfer, Westpac only recognises unconditional irrevocable guarantees, standby letters of credit or equivalent eligible instruments issued by, or eligible credit derivative protection bought from, the following entities provided they are not related to the underlying obligor:

 

l                   sovereign entities;

 

l                   public sector entities in Australia and New Zealand;

 

l                   authorised deposit taking institutions and overseas banks with a minimum risk grade equivalent of A-/A3. The Group Chief Credit Officer (GCCO)  has the authority to approve exceptions to the A-/A3 minimum; and

 

l                   other entities with a minimum risk grade equivalent of A-/A3. The GCCO has the authority to approve exceptions to the A-/A3 minimum.

 

Market and/or credit risk concentrations

 

When Westpac uses credit risk mitigation techniques to reduce counterparty exposure, limits are applied to both gross (i.e. pre-mitigation) and net exposure.

 

Furthermore, exposure is recorded against the provider of any credit risk mitigation and a limit framework prevents excessive concentration to such counterparties.

 

All exposures to risk transfer counterparties are separately approved under Westpac’s usual credit approval process, with the amount and tenor of mitigation recorded against the counterparty in Westpac’s exposure management systems. The credit quality of mitigation providers is reviewed regularly in accordance with Westpac’s usual periodic review processes.

 

Market risks arising from credit risk mitigation activities are managed similarly to market risks arising from any other trading activities.

 

These risks are managed under either the market risk banking book or trading book frameworks as appropriate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 55

 


 

Pillar 3 report

Credit risk mitigation

 

 

 

Total exposure covered by collateral, credit derivatives and guarantees

 

 

 

Impact

 

Total exposure for

Credit Risk Mitigants

30 September 2018

Total before

of credit

Total after

which some credit

Eligible Financial

Covered by

Covered by

$m

mitigation

mitigation 1

mitigation

risk is mitigated

Collateral

Guarantees

Credit Derivatives

Corporate

129,044

(225)

128,819

2,856

1,648

353

18

Sovereign

79,136

(106)

79,030

369

106

226

-

Bank

25,068

(1,421)

23,648

3,838

1,421

-

-

Standardised

18,166

-

18,166

2,663

-

-

-

Total

251,414

(1,752)

249,663

9,726

3,175

579

18

 

 

 

 

 

 

 

 

 

 

Impact

 

Total exposure for

Credit Risk Mitigants

31 March 2018

Total before

of credit

Total after

which some credit

Eligible Financial

Covered by

Covered by

$m

mitigation

mitigation 1

mitigation

risk is mitigated

Collateral

Guarantees

Credit Derivatives

Corporate

130,424

(559)

129,865

3,433

1,528

458

44

Sovereign

76,508

(192)

76,316

465

192

235

-

Bank

25,997

(2,130)

23,867

6,144

2,130

-

-

Standardised

18,105

(22)

18,083

2,760

22

-

-

Total

251,034

(2,903)

248,131

12,802

3,872

693

44

 

 

 

 

 

 

 

 

 

 

Impact

 

Total exposure for

Credit Risk Mitigants

30 September 2017

Total before

of credit

Total after

which some credit

Eligible Financial

Covered by

Covered by

$m

mitigation

mitigation 1

mitigation

risk is mitigated

Collateral

Guarantees

Credit Derivatives

Corporate

127,268

(521)

126,747

3,079

1,351

308

115

Sovereign

71,475

(4)

71,471

242

4

234

-

Bank

22,736

(1,595)

21,141

4,519

1,595

-

-

Standardised

17,387

(14)

17,373

2,226

14

-

-

Total

238,866

(2,134)

236,732

10,066

2,964

542

115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1     Impact of credit mitigation under the substitution approach.

 

56 | Westpac Group September 2018 Pillar 3 report

 

 


 

Pillar 3 report

Counterparty credit risk

 

 

 

This section describes Westpac’s exposure to credit risk arising from derivative and treasury products.

 

Approach

 

Westpac’s process for managing derivatives and counterparty credit risk is based on its assessment of the potential future credit risk Westpac is exposed to when dealing in derivatives products and securities financing transactions. Westpac simulates future market rates by imposing shocks on market prices and rates, and assessing the effect these shocks have on the mark-to-market value of Westpac’s positions. These simulated exposure numbers are then checked against pre-settlement risk limits that are set at the counterparty level.

 

Structure and organisation

 

The Financial Markets Credit management team is charged with managing the counterparty credit exposure arising from derivatives and treasury products.

 

Risk reporting

 

Westpac actively assesses and manages the counterparty credit exposure arising from derivatives business. A daily simulation of potential future counterparty credit exposure taking into account movements in market rates is conducted. This simulation quantifies credit exposure using the Derivative Risk Equivalent (DRE) methodology and exposure is loaded into a credit limit management system. Limit excesses are reported to credit managers and actioned within strict timeframes .

 

Market related credit risk

 

There are two components to the regulatory capital requirements for credit risk arising from derivative products:

 

l        capital to absorb losses arising from the default of derivative counterparties; and

 

l        capital to absorb losses arising from mark-to-market valuation movements resulting from changes in the credit quality of derivative counterparties. These valuation movements are referred to as credit valuation adjustments and this risk is sometimes labelled as credit valuation adjustment (CVA) risk. Westpac refers to this requirement as mark-to-market related credit risk.

 

Risk mitigation

 

Mitigation is achieved in a number of ways:

 

l        the limit system monitors for excesses of the pre-determined limits, with any excesses being immediately notified to authorised credit officers;

 

l        Westpac has collateral agreements with its largest counterparties. The market value of the counterparty’s portfolio is used to recalculate the credit position at each end of day, with collateral being called for when certain pre-set limits are met or exceeded; and

 

l        credit derivatives are used to mitigate credit exposure against certain counterparties.

 

In addition, the following approaches are also used as appropriate to mitigate credit risk:

 

l        incorporating right-to-break in Westpac’s contracts, effectively reducing the tenor of the risk;

 

l        signing netting agreements, allowing the exposure across a portfolio of trades to be netted;

 

l        regular marking to market and settling of the foreign exchange components of foreign exchange reset contracts; and

 

l        downgrade triggers in documentation that, if breached, require the counterparty to provide collateral.

 

Counterparty derivative exposures and limits

 

The risk management methodology for counterparty derivatives exposures is similar to the credit methodology for transaction-managed loans. The main difference is in the estimation of the exposure for derivatives which is based on the DRE methodology. DRE is a credit exposure measure for derivative trades which is calibrated to a ‘loan-equivalent’ exposure.

 

Counterparty credit limits are approved on an uncommitted and unadvised basis by authorised credit officers. This follows an evaluation of each counterparty’s credit worthiness and establishing an agreed credit risk appetite for the nature and extent of prospective business.

 

 

 

 

 

 Westpac Group September 2018 Pillar 3 report | 57

 


 

Pillar 3 report

Counterparty credit risk

 

 

 

Wrong-way risk exposures

 

Westpac defines wrong-way risk as exposure to a counterparty which is adversely correlated with the credit quality of that counterparty. With respect to credit derivatives, wrong-way risk refers to credit protection purchased from a counterparty highly correlated to the reference obligation.

 

Wrong-way risk exposures using credit derivatives are controlled by only buying protection from highly rated counterparties. These transactions are assessed by an authorised credit officer who has the right to decline any transaction where they feel there is an unacceptably high correlation between the ability to perform under the trade and the performance of the underlying counterparty.

 

Consequences of a downgrade in Westpac’s credit rating

 

Where an outright threshold and minimum transfer amount are agreed, there will not be any impact on the amount of collateral posted by Westpac in the event of a credit rating downgrade. Where the threshold and minimum transfer amount are tiered according to credit rating, the impact of Westpac being downgraded below its current credit rating would be: for a one notch downgrade, postings of $65 million; while for a two notch downgrade, postings would be $90 million 1 .

 

Counterparty credit risk summary

 

 

30 September

31 March

30 September

 

 

$m

2018

2018

2017

 

 

Gross positive fair value of contracts

63,908

67,051

60,276

 

 

Netting benefits

(36,362)

(37,239)

(36,151)

 

 

Netted current credit exposure

27,546

29,812

24,125

 

 

 

 

 

 

 

 

Collateral held

(1,752)

(2,903)

(2,134)

 

 

Mark-to-market credit related risk reduction

(99)

(113)

(116)

 

 

Net derivatives credit exposure

25,695

26,796

21,875

 

 

 

 

 

 

 

 

Exposure at default

 

 

 

 

 

Gross credit exposure amount of credit derivative hedges

-

-

-

 

 

Credit exposure

-

-

-

 

 

Interest rate contracts

7,989

8,393

7,426

 

 

Foreign exchange contracts

10,697

11,519

8,374

 

 

Equity contracts

395

336

287

 

 

Credit derivatives

465

305

241

 

 

Commodity contracts

4,821

4,521

3,643

 

 

Other

1,338

1,722

1,904

 

 

Total

25,705

26,796

21,875

 

 

 

Credit derivative transactions that create exposures to counterparty credit risk

 

30 September 2018

         Westpac Portfolio

   Intermediation activities

 

Credit derivatives products used ($m)

Bought

Sold

Bought

Sold

 

Credit Default Swaps

216

244

2

4

 

Total Return Swaps

-

-

-

-

 

Credit options

-

-

-

-

 

Credit linked notes

-

-

-

-

 

Collateralised Loan Obligations

-

-

-

-

 

Other

-

-

-

-

 

Total

216

244

2

4

 

 

 

 

 

 

 

31 March 2018

         Westpac Portfolio

   Intermediation activities

 

Credit derivatives products used ($m)

Bought

Sold

Bought

Sold

 

Credit Default Swaps

146

150

4

5

 

Total Return Swaps

-

-

-

-

 

Credit options

-

-

-

-

 

Credit linked notes

-

-

-

-

 

Collateralised Loan Obligations

-

-

-

-

 

Other

-

-

-

-

 

Total

146

150

4

5

 

 

 

 

 

1       Credit rating downgrade postings are cumulative.

 

58 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Counterparty credit risk

 

 

 

30 September 2017

Westpac Portfolio

Intermediation activities

 

Credit derivatives products used ($m)

Bought

Sold

Bought

Sold

 

Credit Default Swaps

128

101

4

8

 

Total Return Swaps

-

-

-

-

 

Credit options

-

-

-

-

 

Credit linked notes

-

-

-

-

 

Collateralised Loan Obligations

-

-

-

-

 

Other

-

-

-

-

 

Total

128

101

4

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Westpac Group September 2018 Pillar 3 report | 59

 


 

Pillar 3 report

Securitisation

 

 

 

A securitisation is a financial structure where the cash flow from a pool of assets is used to service obligations to at least two different tranches or classes of creditors (typically holders of debt securities), with each class or tranche reflecting a different degree of credit risk (i.e. one class of creditors is entitled to receive payments from the pool before another class of creditors).

 

Securitisation transactions are generally grouped into two broad categories:

 

l                   traditional or true sale securitisations, which involve the transfer of ownership of the underlying asset pool to a third party; and

 

l                   synthetic transactions, where the ownership of the pool remains with the originator and only the credit risk of the pool is transferred to a third party, using credit derivatives or guarantees.

 

Covered bond transactions, in which bonds issued by Westpac are guaranteed by assets held in a special purpose vehicle, are not considered to be securitisation transactions.

 

Approach

 

Westpac’s involvement in securitisation activities ranges from a seller of its own assets to an investor in third-party transactions and includes the arranging of transactions, the provision of securitisation services and the provision of funding for clients, including clients requiring access to capital markets.

 

Securitisation of Westpac originated assets - Securitisation is a funding, liquidity and capital management tool. It allows Westpac the ability to liquefy a pool of assets and increase Westpac’s wholesale funding capacity. Westpac may provide arm’s length facilities to the securitisation vehicles. The facilities entered into typically include the provision of liquidity, funding, underwriting and derivative contracts.

 

Westpac has entered into on balance sheet securitisation transactions whereby loans originated by Westpac are transformed into stocks of saleable mortgage backed securities and held in the originating bank’s liquid asset portfolio. These ‘self securitisations’ do not change risk weighted assets 1 . No securitisation transactions for Westpac originated assets are classified as a resecuritisation.

 

Securitisation in the management of Westpac’s credit portfolio - Westpac uses securitisation, including portfolio credit default swaps, to manage its corporate and institutional loan and counterparty credit risk portfolios. Single name credit default swaps are not treated as securitisations but as credit risk mitigation facilities. Transactions are entered into to manage counterparty credit risk or concentration risks.

 

Provision of securitisation services, including funding and management of conduit vehicles - Westpac provides services to clients wishing to access asset-backed financing through securitisation. Those services include access to the Asset Backed Commercial Paper market through the Waratah conduit, which is the Westpac-sponsored securitisation conduit; the provision of warehouse and term funding of securitised assets on Westpac’s balance sheet; and arranging asset-backed bond issues. Westpac provides facilities to the Waratah securitisation conduit including liquidity, funding, underwriting, credit enhancement and derivative contracts. Se curitisation facilities provided by Westpac include resecuritisation exposures which are securitisation exposures in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is itself a securitisation exposure. Westpac also buys and sells securitisation exposures in the secondary market to facilitate portfolio management activity by its institutional customers who hold asset backed bonds.

 

Westpac’s role in the securitisation process

 

Securitisation activity

 

 

Role played by Westpac

 

 

Securitisation of Westpac originated assets

 

l                   Arranger

l                   Asset originator

l                   Bond distributor

l                   Facility provider

 

 

l                   Note holder

l                   Trust manager

l                   Swap provider

l                   Servicer

Securitisation in the management of Westpac’s credit portfolio

 

l                   Hedger - protection purchaser

l                   Investor - protection seller

l                   Investor - purchaser of securitisation exposures

 

 

 

 

 

 


1       The credit exposures of the underlying loans are measured in accordance with APS113.

 

60 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Securitisation

 

 

 

Provision of securitisation services including funding and management of conduit vehicle

 

l                   Arranger

l                   Bond distributor

l                   Credit enhancement provider

l                   Funder

 

 

l                   Liquidity facility provider

l                   Swap counterparty servicer

l                   Market maker and broker for distributed bonds

 

Key Objectives

 

Securitisation of Westpac originated assets - The securitisation of Westpac’s own assets provides funding diversity, and is a core tool of liquidity management.

 

Securitisation in the management of Westpac’s credit portfolio - Westpac acts as principal in transactions and will buy and sell protection in order to meet its portfolio management objectives. Westpac also purchases securitisation exposures in order to earn income. All securitisation activity must follow Westpac’s credit policies and approval processes.

 

Provision of securitisation services including funding and management of conduit vehicles - Westpac receives market-based fees in return for its services as servicer, swap counterparty, arranger and facility provider and program fees, interest margins and bond distribution fees on warehouse and term funding facilities.  Westpac facilitates portfolio management activity by its institutional customers by buying and selling securitisation exposures in the secondary market and is compensated through an interest margin and bid-offer spread on the transactions.

 

Structure and organisation

 

Securitisation of Westpac originated assets - Westpac’s Treasury operations are responsible for all Westpac originated securitisation activity including funding, liquidity and capital management.

 

Securitisation in the management of Westpac’s credit portfolio - Westpac’s exposure arising from securitisation, including portfolio hedging, is managed by Westpac Institutional Bank (WIB) and integrated within Westpac’s standard risk reporting and management systems.

 

Provision of securitisation services including funding and management of conduit vehicles - These services are provided by WIB and include the provision of liquidity, credit enhancement, funding and derivative facilities, servicer and arranger services, and market-making and broking of asset-backed bonds.

 

Risk reporting

 

Credit exposure - Funding, liquidity, credit enhancement and redraw facilities, swap arrangements and counterparty exposures are captured and monitored in key source systems along with other facilities/derivatives entered into by Westpac.

 

Operational risk exposure - The operational risk review process for Westpac includes the identification of risks, controls and key performance indicators in relation to all securitisation activity and services provided by Westpac or any of its subsidiaries.

 

Market risk exposure - Exposures arising from transactions with the securitisation conduit and other counterparties are captured as part of Westpac’s traded and non-traded market risk reporting and limit management framework.

 

Liquidity risk exposure - Exposure to, and the impact of, securitisation transactions are managed under the Liquidity Risk Management Framework and are integrated into routine reporting for capital and liquidity positions, net interest margin analysis, balance sheet forecasting and funding scenario testing. The annual funding plan incorporates consideration of overall liquidity risk limits and the securitisation of Westpac originated assets.

 

Risk mitigation

 

Securitisation of Westpac originated assets - The interest rate and basis risks generated by Westpac’s hedging arrangements to each securitisation trust are captured and managed within Westpac’s asset and liability management framework. The liquidity risk generated by Westpac’s liquidity and redraw facilities to each securitisation trust is captured and managed in accordance with Westpac’s liquidity management policies along with all other contingent liquidity facilities.

 

Securitisation in the management of Westpac’s credit portfolio - Transactions are approved in accordance with Westpac’s credit risk mitigation approach (see pages 54 and 55).

 

Provision of securitisation services including funding and management of conduit vehicles - All securitisation transactions are approved within the context of a securitisation credit policy that sets detailed

 

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transaction-specific guidelines that regulate servicer counterparty risk appetite, transaction tenor, asset class, third party credit support and portfolio quality. This policy is applied in conjunction with other credit and market risk policies that governs the provision of derivative and other services that support securitisation transactions. In particular, credit hedging transactions are subject to Westpac’s credit risk mitigation approach (see pages 54 and 55). Any interest rate or currency hedging is subject to counterparty credit risk management (see pages 57 and 58) and market risk management (see pages 70 and 71) policies and processes.

 

Regulatory capital approaches

 

The regulatory capital treatment of all securitisation exposures is measured in accordance with APS120 1 .  APS120 specifies that securitisation exposures held in the trading book are subject to the requirements of Prudential Standard APS 116 Capital Adequacy: Market Risk.

 

Under APS120 the approaches employed include the External Rating Based Approach (ERBA) and the Supervisory Formula Approach (SFA). Under the ERBA, APRA provides risk-weights that are matched to external credit ratings and takes into account tranche maturity and tranche thickness. The SFA applicable to unrated exposures dynamically looks at the type and performance of underlying asset pools funded by the securitisation exposure as well as the structural features of the transaction to determine capital requirements. The Internal Assessment Approach (IAA) is not permitted under APS120.

 

Securitisation of Westpac originated assets - The assets sold by Westpac to a securitisation trust are excluded from Westpac’s calculation of credit risk weighted assets if capital relief is sought and the requirements of APS120 are satisfied 2 . Westpac cannot rely on external rating when risk weighting its exposure to these trusts and must use the SFA instead.

 

In instances where insufficient risk transfer is achieved by the transaction for regulatory purposes, the capital calculation is performed on the underlying asset pool while the facilities provided to such securitisation vehicles do not attract regulatory capital charges.

 

Securitisation in the management of Westpac’s credit portfolio - Unless Westpac makes an election under APS120, the underlying assets subject to synthetic securitisation are excluded from Westpac’s calculation of credit risk weighted assets. They are replaced with the credit risk weight of the applicable securitisation instrument, usually credit default swaps or underlying cash collateral. Westpac applies the ERBA and the SFA when determining regulatory capital treatments for securitisation exposures arising from the management of its credit portfolio.

 

Provision of securitisation services including funding - Westpac uses the ERBA and the SFA methodology when determining regulatory capital requirements for warehouse and term funding facilities related to securitised assets on Westpac’s balance sheet.

 

The External Credit Assessment Institutions that can be used by Westpac for securitisations are Standard & Poor’s, Moody’s and Fitch.

 

Westpac’s accounting policies for securitisation activities

 

Securitisation of Westpac originated assets - The assets sold by Westpac to a securitisation trust remain on Westpac’s balance sheet for accounting purposes.

 

Securitisation in the management of Westpac’s credit portfolio - For risk mitigation using synthetic securitisation, the underlying assets remain on Westpac’s balance sheet for accounting purposes. The accounting treatment of the assets will depend on their nature. They could include loans and receivables, available for sale securities or derivatives. The most common form of synthetic securitisation is via a credit default swap, which is treated as a derivative and recognised in the profit and loss statement at fair value.

 

For investment in securitisation exposures, if the instrument has been designated on initial recognition at fair value (including instruments containing a credit default swap), the exposure will be measured at fair value through the Income Statement.  All other investments in securitisation exposures will be classified as available-for-sale (AFS) and measured at fair value through Other Comprehensive Income (within the AFS securities reserve).

 

Provision of securitisation services including funding and management of conduit vehicles - Fee income from these services is recognised on an accrual basis. Liquidity and funding facilities are treated as commitments to provide finance, with fee and margin income recognised on an accrual basis. Warehouse and term funding facilities are treated as loans.

 

 

 

 

 

1       The latest version of APS120 came into effect from 1 January 2018.

2       Including the requirements to achieve capital relief.

 

62 | Westpac Group September 2018 Pillar 3 report

 


 

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Banking book summary of assets securitised by Westpac

 

This table shows outstanding banking book securitisation assets and assets intended to be securitised 1   for Westpac originated assets by underlying asset type. It includes the amount of impaired and past due assets, along with any losses recognised by Westpac during the current period.

 

Securitised assets are held in securitisation trusts. Trusts which meet requirements to achieve capital relief do not form part of the Level 2 consolidated group. Self securitisation trusts remain consolidated at Level 2 and the assets transferred to these trusts are risk weighted in accordance with APS113.

 

 

Total outstanding securitised by ADI

Assets

 

 

Westpac

30 September 2018

Traditional 

Synthetic

intended to be

Impaired

Past due

recognised

$m

Securitisation 2

Securitisation

securitised

loans

assets

losses

Residential mortgages

88,846

-

-

48

681

-

Credit cards

-

-

-

-

-

-

Auto and equipment finance

3,838

-

-

41

-

-

Business lending

-

-

-

-

-

-

Investments in ABS

-

-

-

-

-

-

Other

-

-

-

-

-

-

Total

92,684

-

-

89

681

-

 

 

 

 

 

 

 

 

Total outstanding securitised by ADI

Assets

 

 

Westpac

31 March 2018

Traditional 

Synthetic

intended to be

Impaired

Past due

recognised

$m

Securitisation 2

Securitisation

securitised

loans

assets

losses

Residential mortgages

88,102

-

-

17

646

1

Credit cards

-

-

-

-

-

-

Auto and equipment finance

3,692

-

-

37

-

-

Business lending

-

-

-

-

-

-

Investments in ABS

-

-

-

-

-

-

Other

-

-

-

-

-

-

Total

91,794

-

-

54

646

1

 

 

 

 

 

 

 

 

Total outstanding securitised by ADI

Assets

 

 

Westpac

30 September 2017

Traditional 

Synthetic

intended to be

Impaired

Past due

recognised

$m

Securitisation 2

Securitisation

securitised

loans

assets

losses

Residential mortgages

86,130

-

-

13

628

1

Credit cards

-

-

-

-

-

-

Auto and equipment finance

3,273

-

-

26

-

-

Business lending

-

-

-

-

-

-

Investments in ABS

-

-

-

-

-

-

Other

-

-

-

-

-

-

Total

89,403

-

-

39

628

1

 

Banking book summary of total Westpac sponsored third party assets securitised

 

This table represents banking book third party assets where Westpac acts as a sponsor.

 

$m

30 September
2018

31 March
2018

30 September
2017

Residential mortgages

-

-

392

Credit cards

-

-

-

Auto and equipment finance

-

-

-

Business lending

-

-

-

Investments in ABS

-

-

-

Other

-

-

-

Total

-

-

392

 

 

1    Represents securitisation activity from the end of the reporting period to the disclosure date of this report.

2    Includes self-securitisation assets of $83,733 million at 30 September  2018 ($82,430 million at 31 March 2018 and $79,835 million at 30 September 2017).

 

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Banking book summary of securitisation activity by asset type

 

This table shows assets transferred into securitisation schemes by underlying asset type (ADI originated) for the relevant period.

 

For the 12 months ended

 

 

30 September 2018

Amount

Recognised gain or

$m

securitised

loss on sale

Residential mortgages

21,298

-

Credit cards

-

-

Auto and equipment finance

2,493

-

Business lending

-

-

Investments in ABS

-

-

Other

-

-

Total

23,791

-

 

 

 

For the 6 months ended

 

 

31 March 2018

Amount

Recognised gain or

$m

securitised

loss on sale

Residential mortgages

11,074

-

Credit cards

-

-

Auto and equipment finance

1,436

-

Business lending

-

-

Investments in ABS

-

-

Other

-

-

Total

12,510

-

 

 

 

For the 12 months ended

 

 

30 September 2017

Amount

Recognised gain or

$m

securitised

loss on sale

Residential mortgages

14,732

-

Credit cards

-

-

Auto and equipment finance

2,508

-

Business lending

-

-

Investments in ABS

-

-

Other

-

-

Total

17,240

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64 | Westpac Group September 2018 Pillar 3 report

 


 

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Banking book summary of on and off-balance sheet securitisation by exposure type

 

30 September 2018

On balance sheet

Off-balance

Total Exposure

$m

Securitisation retained

Securitisation purchased

sheet

at Default

Securities

-

9,341

32

9,373

Liquidity facilities

-

-

212

212

Funding facilities

3,220

-

1,341

4,561

Underwriting facilities

-

-

-

-

Lending facilities

11

-

5

16

Warehouse facilities

9,865

-

3,621

13,486

Total

13,096

9,341

5,211

27,648

 

 

 

 

 

31 March 2018

On balance sheet

Off-balance

Total Exposure

$m

Securitisation retained

Securitisation purchased

sheet

at Default

Securities

-

9,253

33

9,286

Liquidity facilities

40

-

266

306

Funding facilities

4,428

-

2,576

7,004

Underwriting facilities

-

-

-

-

Lending facilities

441

-

75

516

Warehouse facilities

6,711

-

2,739

9,450

Total

11,620

9,253

5,689

26,562

 

 

 

 

 

30 September 2017

On balance sheet

Off-balance

Total Exposure

$m

Securitisation retained

Securitisation purchased

sheet

at Default

Securities

-

8,717

-

8,717

Liquidity facilities

-

-

1,016

1,016

Funding facilities

11,682

-

5,084

16,766

Underwriting facilities

-

-

82

82

Lending facilities

-

-

131

131

Warehouse facilities

-

-

-

-

Total

11,682

8,717

6,313

26,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Banking book securitisation exposure at default by risk weight band

 

30 September 2018

Exposure

Total Exposure

Risk Weighted Assets

Total Risk

$m

Securitisation

Resecuritisation

at Default

Securitisation

Resecuritisation

Weighted Assets

Less than or equal to 10%

-

-

-

-

-

-

Greater than 10 - 20%

22,941

-

22,941

3,968

-

3,968

Greater than 20 - 30%

1,470

-

1,470

368

-

368

Greater than 30 - 50%

2,627

-

2,627

1,011

-

1,011

Greater than 50 - 75%

281

-

281

181

-

181

Greater than 75 - 100%

274

-

274

257

-

257

Greater than 100 - 250%

37

-

37

43

-

43

Greater than 250 - 425%

-

-

-

-

-

-

Greater than 425 - 650%

18

-

18

90

-

90

Other

-

-

-

-

-

-

Deductions

-

-

-

-

-

-

Total

27,648

-

27,648

5,918

-

5,918

 

 

 

 

 

 

 

31 March 2018

Exposure

Total Exposure

Risk Weighted Assets

Total Risk

$m

Securitisation

Resecuritisation

at Default

Securitisation

Resecuritisation

Weighted Assets

Less than or equal to 10%

-

-

-

-

-

-

Greater than 10 - 20%

21,314

-

21,314

3,814

-

3,814

Greater than 20 - 30%

1,546

-

1,546

403

-

403

Greater than 30 - 50%

2,959

-

2,959

1,076

-

1,076

Greater than 50 - 75%

350

-

350

198

-

198

Greater than 75 - 100%

377

-

377

363

-

363

Greater than 100 - 250%

13

-

13

15

-

15

Greater than 250 - 425%

-

-

-

-

-

-

Greater than 425 - 650%

-

-

-

-

-

-

Other

3

-

3

-

-

-

Deductions

-

-

-

-

-

-

Total

26,562

-

26,562

5,869

-

5,869

 

 

 

 

 

 

 

30 September 2017

Exposure

Total Exposure

Risk Weighted Assets

Total Risk

$m

Securitisation

Resecuritisation

at Default

Securitisation

Resecuritisation

Weighted Assets

Less than or equal to 10%

10,207

-

10,207

738

-

738

Greater than 10 - 20%

14,326

-

14,326

2,219

-

2,219

Greater than 20 - 30%

-

-

-

-

-

-

Greater than 30 - 50%

1,134

-

1,134

419

-

419

Greater than 50 - 75%

43

735

778

32

478

510

Greater than 75 - 100%

182

82

264

182

82

264

Greater than 100 - 250%

-

-

-

-

-

-

Greater than 250 - 425%

-

-

-

-

-

-

Greater than 425 - 650%

3

-

3

17

-

17

Other

-

-

-

-

-

-

Deductions

-

-

-

-

-

-

Total

25,895

817

26,712

3,607

560

4,167

 

Banking book securitisation exposure deducted from capital

 

This table shows securitisation exposures deducted (which excludes set up costs) from common equity Tier 1 capital.

 

$m

30 September 2018

31 March 2018

30 September 2017

Securities

-

-

-

Liquidity facilities

-

-

-

Funding facilities

-

3

-

Underwriting facilities

-

-

-

Credit enhancements

-

-

-

Derivative transactions

-

-

-

Total

-

3

-

 

 

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Securitisation

 

 

 

Banking book securitisation subject to early amortisation treatment

 

There is no securitisation exposure in the banking book that is subject to early amortisation treatment as at 30 September 2018 (nil as at 31 March 2018 ) .

 

Banking book resecuritisation exposure subject to credit risk mitigation (CRM)

 

As at 30 September 2018 resecuritisation exposures subject to CRM was nil (nil at 31 March 2018).

 

Banking book resecuritisation exposure to guarantors

 

Westpac has no third party guarantors providing guarantees for securitised assets, principal or interest repayments as at 30 September 2018 (nil as at 31 March 2018 ) .

 

Trading book summary of assets securitised by Westpac

 

As at 30 September 2018 there was nil in outstanding securitisation exposures for Westpac originated assets held in the trading book (nil as at 31 March 2018).

 

Trading book summary of total Westpac sponsored third party assets securitised

 

There are no third party assets held in the trading book where Westpac is responsible for the establishment of the securitisation program and subsequent management as at 30 September 2018 (nil as at 31 March 2018 ) .

 

Trading book summary of securitisation activity by asset type

 

There is no originated securitisation activity in the trading book for the 12 months to 30 September 2018 (nil for the 6 months to 31 March 2018 ) .

 

Trading book aggregated amount of exposure securitised by Westpac and subject to APS116 Capital Adequacy: Market Risk

 

As at 30 September 2018 there is no Westpac originated outstanding securitisation exposure held in the trading book subject to APS116 Capital Adequacy: Market Risk (nil as at 31 March 2018 ) .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Trading book summary of on and off-balance sheet securitisation by exposure type 1

 

30 September 2018

On balance sheet

Off-balance

Total Exposure

$m

Securitisation retained

Securitisation purchased

sheet

at Default

Securities

-

76

-

76

Liquidity facilities

-

-

-

-

Funding facilities

-

-

-

-

Underwriting facilities

-

-

-

-

Lending facilities

-

-

-

-

Warehouse facilities

-

-

-

-

Credit enhancements

-

-

-

-

Basis swaps

-

-

51

51

Other derivatives

-

-

36

36

Total

-

76

87

163

 

 

 

 

 

31 March 2018

On balance sheet

Off-balance

Total Exposure

$m

Securitisation retained

Securitisation purchased

sheet

at Default

Securities

-

150

-

150

Liquidity facilities

-

-

-

-

Funding facilities

-

-

-

-

Underwriting facilities

-

-

-

-

Lending facilities

-

-

-

-

Warehouse facilities

-

-

-

-

Credit enhancements

-

-

-

-

Basis swaps

-

-

54

54

Other derivatives

-

-

37

37

Total

-

150

91

241

 

 

 

 

 

30 September 2017

On balance sheet

Off-balance

Total Exposure

$m

Securitisation retained

Securitisation purchased

sheet

at Default

Securities

-

130

-

130

Liquidity facilities

-

-

-

-

Funding facilities

-

-

-

-

Underwriting facilities

-

-

-

-

Lending facilities

-

-

-

-

Warehouse facilities

-

-

-

-

Credit enhancements

-

-

-

-

Basis swaps

-

-

54

54

Other derivatives

-

-

56

56

Total

-

130

110

240

 

Trading book securitisation exposure subject to specific risk

 

There is no trading book securitisation exposure subject to specific risk for 30 September 2018 (nil for 31 March 2018).

 

Trading book securitisation exposure subject to APS120 Securitisation specific risk by risk weight band

 

There is no trading book securitisation exposure subject to APS120 specific risk for 30 September 2018 (nil for 31 March 2018).

 

Trading book capital requirements for securitisation exposures subject to internal models approach (IMA) by risk classification

 

There is no trading book capital requirement for securitisation subject to IMA for 30 September 2018 (nil for 31 March 2018).

 

Trading book capital requirements for securitisation regulatory capital approaches by risk weight band

 

There is no trading book capital requirement for securitisation subject to regulatory capital approaches for 30 September 2018 (nil for 31 March 2018).

 

 

 

1      EAD associated with trading book securitisation is not included in the EAD by Major Type on page 29. Trading book securitisation exposure is captured and risk weighted under APS116.

 

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Trading book securitisation exposure deducted from capital

 

There is no trading book capital deduction for 30 September 2018 (nil for 31 March 2018).

 

Trading book securitisation subject to early amortisation treatment

 

There is no securitisation exposure in the trading book that is subject to early amortisation treatment for 30 September 2018 (nil for 31 March 2018).

 

Trading book resecuritisation exposure subject to CRM

 

Westpac has no resecuritisation exposure subject to CRM at 30 September 2018 (nil for 31 March 2018).

 

Trading book resecuritisation by guarantor creditworthiness

 

Westpac has no third party guarantors providing guarantees for securitised assets, principal or interest repayments for 30 September 2018 (nil for 31 March 2018).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Market risk

 

 

 

Westpac’s exposure to market risk arises out of its Financial Markets and Treasury trading activities. This is quantified for regulatory capital purposes using both the standard method and the internal model approach, details of which are provided below.

 

Approach

 

Trading activities are managed within a BRCC approved market risk framework that incorporates BRCC approved value at risk (VaR) and stressed value at risk (SVaR) limits. VaR and SVaR are the primary mechanisms for measuring and managing market risk. Market risk is managed using VaR, SVaR and structural risk limits (including volume limits and basis point value limits) in conjunction with scenario analysis and stress testing. Market risk limits are allocated to business management based upon business strategies and experience, in addition to the consideration of market liquidity and concentration risk.

 

All trades are fair valued daily using rates that have been captured automatically from an independent market data source that has been approved by the Revaluation Committee (RC). Where there is no source of independent rates, data will either be derived using a methodology approved by the RC or sourced from dealer contributions. Where dealer-sourced rates/inputs are applied, the RC will meet monthly to review the results of independent price verification performed by the valuation function. In addition, valuation adjustments may be made as deductions from Common Equity Tier 1 Capital for exposures which are not be captured through the fair valuation framework.

 

The current valuation adjustment considers the impact of the volatility smile in foreign exchange exotic options based on an assessment of the average of at-the-money and non-at-the-money volatilities. The resulting adjustment is not material. Rates that have limited independent sources are reviewed at least on a monthly basis.

 

Financial Markets’ trading activity represents dealings that encompass book running and distribution activity. The types of market risk arising from these activities include interest rate, foreign exchange, commodity, equity price, credit spread and volatility risk.

 

Treasury’s trading activity represents dealings that include the management of interest rate, foreign exchange and credit spread risks associated with the wholesale funding book, liquid asset portfolios and foreign exchange repatriations. Treasury also manages banking book risk which is discussed in the Interest Rate Risk in the Banking Book section.

 

VaR and SVaR limits

 

Market risk arising from trading book activities is primarily measured using VaR based on an historical simulation methodology. Westpac estimates VaR as the potential loss in earnings from adverse market movements and is calculated to a 99% confidence level using the most recent 12 months of historical market data. SVaR is an additional VaR measure which uses 12 months of historical market data that includes a period of significant financial stress. VaR and SVaR take account of all material market variables that may cause a change in the value of the trading portfolio, including interest rates, foreign exchange rates, price changes, volatility, and the correlation between these variables.

 

In addition to the BRCC approved market risk VaR and SVaR limits for trading activities, MARCO has approved separate VaR and SVaR sub-limits for the trading activities of Financial Markets and Treasury.

 

Backtesting

 

Daily backtesting of VaR results is performed to ensure that model integrity is maintained. A review of both the actual and potential profit and loss outcomes is also undertaken to monitor any skew created by the historical data.

 

Stress testing

 

Daily stress testing against pre-determined scenarios is carried out to analyse potential losses beyond the 99% confidence level. An escalation framework around selective stress tests is approved by the Head of Market Risk.

 

Profit and loss notification framework

 

The BRCC has approved a profit and loss notification framework. Included in this framework are levels of escalation in accordance with the size of the profit or loss. Triggers are applied to both a 1-day and a rolling 20-day cumulative total.

 

 

 

 

 

 

 

 

 

70 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Market risk

 

 

 

Risk reporting

 

Daily monitoring of current exposure and limit utilisation is conducted independently by risk managers in the Market Risk team, who monitor market risk exposures against VaR, SVaR and structural limits. Daily VaR and SVaR position reports are produced by risk type, by product lines and by geographic region. These are supplemented by structural risk reporting, advice of profit and loss trigger levels and stress test escalation trigger points. Model accreditation has been granted by APRA for the use of an internal model for the determination of regulatory capital for the key classes of interest rate (general market), foreign exchange, commodity and equity risks (including equity specific risk). Under the model, regulatory capital is derived from both the current VaR window (based upon the most recent 12 months of historical market data) and a SVaR window (12 months of market data that includes a period of significant financial stress), where these VaR measures are calculated over a 10-day time horizon to a 99th percentile, one-tailed confidence interval. Specific risk refers to the variations in individual security prices that cannot be explained by general market movements, and event and default risk. Interest rate specific risk capital (specific issuer risk) is calculated using the Standard method and is added to the VaR regulatory capital measure.

 

Risk mitigation

 

Market risk positions are managed by the trading desks consistent with delegated trading and product authorities. Risks are consolidated into portfolios based on product and risk type. Risk management is carried out by qualified personnel with varying levels of seniority commensurate with the nature and scale of market risks under management.

 

The following controls allow monitoring by management:

 

l          trading authorities and responsibilities are clearly delineated at all levels;

 

l          a structured system of limits and reporting of risk exposures, including stress testing;

 

l          surveillance of dealing room conduct;

 

l          all new products and significant product variations undergo a rigorous approval process to identify business risks prior to launch;

 

l          models that are used to determine risk or profit and loss for Westpac’s accounts are independently reviewed;

 

l          duties are segregated so that employees involved in the origination, processing and valuation of transactions operate under separate reporting lines, minimising the opportunity for collusion; and

 

l          legal personnel review documentation for compliance with relevant laws and regulations. In addition, internal audit independently reviews compliance with policies, procedures and limits.

 

In addition, Group Audit independently reviews compliance with policies, procedures and limits.

 

Market risk regulatory capital and risk weighted assets

 

The Internal model approach uses VaR and Stressed VaR, while the Standard approach is used for interest rate specific risk.

 

$m

30 September 2018

31 March 2018

30 September 2017

Internal model approach

476

527

587

Standard approach

62

65

61

Total capital required

538

592

648

Risk weighted assets

6,723

7,406

8,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 71

 


 

Pillar 3 report

Market risk

 

 

 

VaR by risk type

 

30 September 2018

 

       For the 6 months ended

 

$m

High

Low

Average

Period end

Interest rate risk

15.6

5.3

10.2

13.8

Foreign exchange risk

6.6

1.3

3.2

2.9

Equity risk

0.2

0.0

0.0

0.0

Commodity risk

24.3

1.7

6.6

10.0

Other market risks

5.8

1.7

4.7

5.5

Diversification benefit

NA

NA

(9.4)

(14.3)

Net market risk 1

28.1

10.1

15.5

17.9

 

 

 

 

 

31 March 2018

 

       For the 6 months ended

 

$m

High

Low

Average

Period end

Interest rate risk

11.0

5.1

6.9

6.1

Foreign exchange risk

6.9

0.7

2.8

2.3

Equity risk

1.0

0.0

0.1

0.4

Commodity risk

15.0

3.1

6.4

9.0

Other market risks

4.5

1.4

2.9

1.7

Diversification benefit

NA

NA

(7.8)

(8.9)

Net market risk 1

19.3

6.7

11.3

10.7

 

 

 

 

 

30 September 2017

 

       For the 6 months ended

 

$m

High

Low

Average

Period end

Interest rate risk

14.4

5.4

8.7

10.4

Foreign exchange risk

7.2

0.6

3.0

1.1

Equity risk

0.4

0.0

0.1

0.1

Commodity risk

14.1

3.5

8.1

10.7

Other market risks

4.7

3.6

3.9

3.6

Diversification benefit

NA

NA

(9.0)

(8.8)

Net market risk 1

18.3

11.0

14.7

17.1

 

 

Stressed VaR by risk type

 

30 September 2018

 

       For the 6 months ended

 

$m

High

Low

Average

Period end

Interest rate risk

99.4

49.4

64.4

58.8

Foreign exchange risk

37.6

1.8

10.0

14.8

Equity risk

0.6

0.1

0.2

0.2

Commodity risk

77.3

2.7

15.3

26.0

Other market risks

13.2

7.8

11.5

11.9

Diversification benefit

NA

NA

(38.1)

(44.2)

Net market risk 1

94.1

46.0

63.3

67.4

 

 

 

 

 

31 March 2018

 

       For the 6 months ended

 

$m

High

Low

Average

Period end

Interest rate risk

114.9

41.3

63.6

62.6

Foreign exchange risk

18.0

1.0

6.4

6.8

Equity risk

3.4

0.0

0.2

1.4

Commodity risk

25.9

2.4

8.9

14.7

Other market risks

13.2

7.1

9.6

8.1

Diversification benefit

NA

NA

(23.2)

(33.9)

Net market risk 1

114.4

40.8

65.4

59.7

 

 

 

 

 

 

1           VaR and SVaR measures shown here use a 1 day time horizon. The net market risk measure reflects the aggregate diversified risk position for the period. Therefore, individual risk factors will not sum to this total.

 

72 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Market risk

 

 

 

30 September 2017

 

       For the 6 months ended

 

$m

High

Low

Average

Period end

Interest rate risk

96.4

49.8

66.4

80.3

Foreign exchange risk

20.4

0.5

5.8

1.7

Equity risk

1.2

0.1

0.2

0.2

Commodity risk

28.3

5.6

11.9

14.5

Other market risks

13.6

9.4

11.2

10.1

Diversification benefit

NA

NA

(28.9)

(19.7)

Net market risk 1

95.1

41.7

66.7

87.2

 

Back-testing results

 

The following graph gives a comparison of actual profit and loss to VaR over the 6 months ended 30 September 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1       The net market risk measure reflects the aggregate diversified risk position for the period. Therefore, individual risk factors will not sum to this total .

 

Westpac Group September 2018 Pillar 3 report | 73

 


 

Pillar 3 report

Liquidity risk management

 

 

 

Liquidity risk is the risk that Westpac will be unable to fund assets and meet obligations as they become due. This type of risk is inherent in all banks through their role as intermediaries between depositors and borrowers.

 

Approach

 

Liquidity risk is measured and managed in accordance with the policies and processes defined in the Board approved Liquidity Risk Management Framework.

 

Responsibility for managing the Group’s liquidity and funding positions in accordance with the Group’s Liquidity Risk Management Framework is delegated to Treasury, under the oversight of ALCO.

 

Liquidity Risk Management Framework

 

Westpac’s Liquidity Risk Management Framework sets out the Group’s liquidity risk appetite, roles and responsibilities of key people managing liquidity risk within the Group, risk reporting and control processes, limits and targets used to manage the Group’s balance sheet. Key components of Westpac’s approach to liquidity risk management are listed below.

 

Funding strategy

 

Treasury undertakes an annual funding review that outlines the Group’s balance sheet funding strategy over a three year period. This review encompasses trends in global markets, peer analysis, wholesale funding capacity, expected funding requirements and a funding risk analysis. This strategy is continuously reviewed to take account of changing market conditions, investor sentiment and estimations of asset and liability growth rates.

 

The Group monitors the composition and stability of its funding so that it remains within the Group’s funding risk appetite. This includes compliance with both the LCR and Net Stable Funding Ratio (NSFR). See also section 2.4.2 ‘Funding and Liquidity Risk Management’ in the Westpac Group 2018 Full Year Results Announcement for further detail.

 

Liquid asset holdings

 

Westpac holds a portfolio of liquid assets for several purposes, including as a buffer against unforeseen funding requirements. The level of liquid assets held takes into account the liquidity requirements of Westpac’s balance sheet under normal and stress conditions.

 

Liquidity modelling

 

In managing liquidity for the Group, Treasury utilises balance sheet forecasts and the maturity profile of the Group’s wholesale funding portfolio to project liquidity outcomes. Regional liquidity limits are also used by the Group to ensure liquidity is managed efficiently and prudently in other geographies.

 

In addition, the Group conducts regular stress testing to assess Westpac’s ability to meet cash flow obligations under a range of market conditions and scenarios. These scenarios inform liquidity limits and strategic planning.

 

Liquidity transfer pricing

 

Westpac has a liquidity transfer pricing framework which allocates liquidity costs across the Group.

 

Contingency planning

 

Treasury maintains a contingent funding plan that outlines the steps that should be taken by Westpac in the event of an emerging ‘funding crisis’. The plan is aligned with Westpac’s broader Liquidity Crisis Management Policy which is approved annually by the Board.

 

Liquidity reporting

 

Daily liquidity risk reports are reviewed by Treasury and the Group’s Liquidity Risk teams. Liquidity reports are presented to ALCO monthly and to the board quarterly.

 

 

 

 

 

 

 

 

 

 

 

 

74 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Liquidity risk coverage ratio

 

 

 

Liquidity Coverage Ratio

 

The Liquidity Coverage Ratio (LCR) requires banks to hold sufficient high-quality liquid assets, as defined by APRA, to withstand 30 days under a regulator-defined acute stress scenario. Westpac’s LCR as at 30 September 2018 was 133% 1  (31 March 2018: 134%) and the average LCR for the quarter was 131% 2  (31 March 2018: 128%).

 

Liquid assets included in the LCR comprise High Quality Liquid Assets (HQLA), the Committed Liquidity Facility (CLF) from the Reserve Bank of Australia and additional qualifying Reserve Bank of New Zealand securities. Westpac received approval from APRA for a CLF of $57.0 billion for the calendar year 2018 (2017 calendar year: $49.1 billion). Westpac maintains a portfolio of HQLA and these averaged $77.5 billion over the quarter 2 .

 

Funding is sourced from retail, small business and institutional customer deposits and wholesale funding. Westpac seeks to minimise the outflows associated with this funding by targeting customer deposits with lower LCR outflow rates and actively manages the maturity profile of its wholesale funding portfolio. Westpac maintains a buffer over the regulatory minimum of 100%.

 

 

30 September 2018

30 June 2018

 

Total unweighted

Total weighted

Total unweighted

Total weighted

$m

value (average) 2

value (average) 2

value (average) 3

value (average) 3

Liquid assets, of which:

 

 

 

 

1  High-quality liquid assets (HQLA)

 

77,532

 

75,723

2  Alternative liquid assets (ALA)

 

50,992

 

50,773

3  Reserve Bank of New Zealand (RBNZ) securities

 

5,077

 

5,788

 

 

 

 

 

Cash Outflows

 

 

 

 

4  Retail deposits and deposits from small business customers, of which:

232,847

21,246

232,366

21,176

5  Stable deposits

113,369

5,668

113,097

5,655

6  Less stable deposits

119,478

15,578

119,269

15,521

 

 

 

 

 

7  Unsecured wholesale funding, of which:

125,689

63,733

121,470

60,263

8  Operational deposits (all counterparties) and deposits in networks for cooperative banks

43,499

10,808

42,203

10,484

9  Non-operational deposits (all counterparties)

68,999

39,734

69,774

40,286

10  Unsecured debt

13,191

13,191

9,493

9,493

 

 

 

 

 

11  Secured wholesale funding

 

-

 

-

 

 

 

 

 

12  Additional requirements, of which:

200,525

26,892

204,858

29,746

13  Outflows related to derivatives exposures and other collateral requirements

10,428

10,428

12,736

12,736

14  Outflows related to loss of funding on debt products

164

164

757

757

15  Credit and liquidity facilities

189,933

16,300

191,365

16,253

 

 

 

 

 

16  Other contractual funding obligations

508

508

1,383

1,383

17  Other contingent funding obligations

42,654

3,902

43,165

4,001

 

 

 

 

 

18  Total cash outflows

 

116,281

 

116,569

 

 

 

 

 

Cash inflows

 

 

 

 

19  Secured lending (e.g. reverse repos)

4,162

-

3,512

-

20  Inflows from fully performing exposures

17,897

11,288

18,526

11,826

21  Other cash inflows

3,080

3,080

3,195

3,195

22  Total cash inflows

25,139

14,368

25,233

15,021

 

 

 

 

 

23  Total liquid assets

 

133,601

 

132,284

24  Total net cash outflows

 

101,913

 

101,548

25  Liquidity Coverage Ratio (%)

 

131%

 

130%

Number of data points used

 

66

 

63

 

 

 

 

1   Calculated as total liquid assets divided by total net cash outflows for 30 September 2018.

2   Calculated as a simple average of the daily observations over the 30 September 2018 quarter.

3   Calculated as a simple average of the daily observations over the 30 June 2018 quarter.

 

Westpac Group September 2018 Pillar 3 report | 75

 


 

Pillar 3 report

Net stable funding ratio

 

 

 

Net Stable Funding Ratio (NSFR) disclosure

 

The NSFR is a structural measure which requires that a bank has sufficient Available Stable Funding (ASF) to cover its Required Stable Funding (RSF) over a one year horizon. Westpac’s NSFR as at 30 September was 114% 1  (31 March 2018 112%). Westpac maintains a buffer over the regulatory minimum of 100%.

 

 

 

Unweighted value by residual maturity

 

30 September 2018

No

< 6

6 months

> 1 year

Weighted

$m

maturity

months

to < 1yr

 

value

Available Stable Funding (ASF) Item

 

 

 

 

 

1                          Capital

72,727

-

-

7,016

79,743

2                                        Regulatory capital

72,727

-

-

7,016

79,743

3                                        Other capital instruments

-

-

-

-

-

 

 

 

 

 

 

4                          Retail deposits and deposits from small business customers

-

320,455

522

290

296,238

5                                        Stable deposits

-

141,373

1

-

134,306

6                                        Less stable deposits

-

179,081

521

290

161,932

 

 

 

 

 

 

7                          Wholesale funding

1,030

256,554

42,413

131,431

225,126

8                                        Operational deposits

-

47,283

-

-

23,641

9                                        Other wholesale funding

1,030

209,272

42,413

131,431

201,485

 

 

 

 

 

 

10                    Liabilities with matching interdependent assets

-

-

-

-

-

 

 

 

 

 

 

11                    Other liabilities

-

17,905

-

77

77

12                                  NSFR derivative liabilities

 

4,195

 

13                                  All other liabilities and equity not included in the above categories

-

13,710

-

77

77

 

 

 

 

 

 

14                    Total ASF

 

 

 

 

601,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1   Calculated as total available stable funding divided by total required stable funding for 30 September 2018.

 

76 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Net stable funding ratio

 

 

 

 

Unweighted value by residual maturity

 

30 September 2018

No

< 6

6 months

> 1 year

Weighted

$m

maturity

months

to < 1yr

 

value

Required Stable Funding (RSF) Item

 

 

 

 

 

15a)          Total NSFR (High quality liquid assets - HQLA)

 

 

 

 

8,457

15b)          Alternate Liquid Assets (ALA)

 

 

 

 

-

15c)          Reserve Bank of New Zealand (RBNZ) securities

 

 

 

 

277

 

 

 

 

 

 

16                    Deposits held at other financial institutions for operational purposes

-

-

-

-

-

 

 

 

 

 

 

17                    Performing loans and securities

71

55,427

38,693

578,319

474,052

18                                  Performing loans to financial institutions secured by Level 1 HQLA

-

-

-

-

-

 

 

 

 

 

 

19                                  Performing loans to financial institutions secured by non-Level 1 HQLA and unsecured performing loans to financial institutions

71

8,627

2,954

9,973

12,816

 

 

 

 

 

 

20                                  Performing loans to nonfinancial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and public sector entities (PSEs), of which:

-

40,094

29,517

131,683

146,551

21                                                        With a risk weight of less than or equal to 35% under APS 112

-

208

201

922

804

 

 

 

 

 

 

22                                  Performing residential mortgages, of which:

-

5,662

5,617

432,685

310,554

23                                                        With a risk weight equal to 35% under APS 112

-

5,138

5,094

373,267

258,384

 

 

 

 

 

 

24                                  Securities that are not in default and do not qualify as HQLA, including exchange-traded equities

-

1,045

605

3,978

4,131

 

 

 

 

 

 

25                    Assets with matching interdependent liabilities

-

-

-

-

-

 

 

 

 

 

 

26                    Other assets:

11,723

9,738

471

23,210

33,542

27                                  Physical traded commodities, including gold

-

 

 

 

-

28                                  Assets posted as initial margin for derivative contracts and contributions to default funds of central counterparties (CCPs)

 

1,379

1,172

29                                  NSFR derivative assets

 

6,528

2,333

30                                  NSFR derivative liabilities before deduction of variation margin posted

 

8,997

1,799

31                                  All other assets not included in the above categories

11,723

741

471

15,303

28,238

 

 

 

 

 

 

32                    Off-balance sheet items

 

 

 

193,065

13,135

 

 

 

 

 

 

33                    Total RSF

 

 

 

 

529,463

 

 

 

 

 

 

34                    Net Stable Funding Ratio (%)

 

 

 

 

113.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 77

 


 

Pillar 3 report

Operational risk

 

 

 

Operational risk is defined at Westpac as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal and regulatory risk but excludes strategic and reputation risk. Westpac’s operational risk definition is aligned to APS115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk (AMA).

 

Approach

 

Westpac has been accredited to use the AMA in accordance with APS115. Westpac’s operational risk is measured and managed in accordance with the policies and processes defined in its Operational Risk Management Framework.

 

Westpac’s Operational Risk Management Framework

 

The Operational Risk Management Framework outlines our approach to the:

 

·      identification, measurement and management of operational risks that may impede Westpac’s ability to achieve its strategic objectives and vision;

 

·      identification and escalation of operational risk and compliance incidents and issues in order to minimise potential financial losses, reputational damage and shareholder, community, employee and regulatory impacts; and

 

·      calculation of operational risk capital.

 

The key components of Westpac’s operational risk management framework are listed below:

 

Governance - The governance structure provides clearly defined roles and responsibilities for overseeing and reviewing operational risk exposure and its management.

 

The Board and BRCC are supported by committees, including RISKCO, that monitor operational risk profiles and the effectiveness of operational risk management practices, including operational risk capital.

 

Risk and Control Management (RCM) - The RCM process provides a structured approach both at a Divisional and Business Unit level for the identification, assessment and management of operational risks which could prevent us from meeting our strategic and business objectives, and the associated controls that help to mitigate those risks.

 

Issue and Action Management - The Issue and Action Management process encompasses the identification, recording and management of issues, which relate to control deficiencies or gaps, to ensure that they are effectively addressed through action plans.

 

Key Indicators (KIs) - The framework defines requirements and processes for KIs, which are objective measures used by management to monitor the operational risk and control environment.

 

Incident Management - Incident management involves identifying operational risk incidents, capturing them in the central operational risk system and escalating them to appropriate levels of management. Early identification and ownership supports the ability to minimise any immediate impacts of the incidents, address the root causes, and devise and monitor management actions required to strengthen the control environment.

 

Data - The framework includes principles and processes to ensure the integrity of operational risk data used to support management decision-making and calculate and allocate capital. The principles apply to the governance, input and capture, reconciliation and validation, correction, reporting and storage of operational risk data. Operational risk data is subject to independent validation on a regular basis.

 

Scenario Analysis - Scenario analysis is used to assess the impacts of severe but plausible loss events on Westpac and is an input to the calculation of operational risk capital.

 

Operational Risk in Projects - The framework defines requirements for understanding and managing the operational risk implications of projects.

 

Reporting - Regular reporting of operational risk information to governance bodies and senior management is used to support timely and proactive management of operational risk and enable transparent and formal oversight of the risk and control environment.

 

Controls Assurance - The framework defines the process and requirements for providing assurance over the effectiveness of the operational risk control environment, including the testing and assessment of the design and operating effectiveness of controls.

 

 

 

 

 

 

 

 

 

 

 

 

 

78 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Operational risk

 

 

 

AMA capital model overview

 

Operational risk regulatory capital is calculated on a quarterly basis. Westpac’s operational risk capital is based on three data sources:

 

·      Internal Loss Data – operational risk losses experienced by Westpac;

 

·      External Loss Data – operational risk losses experienced by other financial institutions; and

 

·      Scenario Data – potential losses from extreme but plausible events relevant to Westpac.

 

These data sources together represent the internal and external operational risk profile, across the spectrum of operational risk losses, from both historical and forward-looking perspectives. The model combines these data sources to produce a loss distribution.

 

Expected loss offsets and risk mitigation

 

No adjustments or deductions are currently made to Westpac’s measurement of operational risk regulatory capital for the mitigating impacts of insurance or expected operational risk losses.

 

Operational Risk regulatory capital and risk weighted assets

 

$m

30 September 2018

31 March 2018

30 September 2017

Advanced measurement approach 1

3,129

2,469

2,498

Standardised approach

Total capital required

3,129

2,469

2,498

Risk weighted assets

39,113

30,866

31,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1       At 30 September 2018, includes a $600 million model overlay to approximate standardised approach.

 

Westpac Group September 2018 Pillar 3 report | 79

 

 


 

Pillar 3 report

Equity risk

 

 

 

Equity risk is defined as the potential for financial loss arising from movements in equity values. The disclosures in this section exclude investments in equities made by Westpac subsidiaries outside the regulatory Level 2 group.

 

Structure and organisation

 

Any changes to the portfolio and transactional limits for Westpac’s direct equity investments are approved by the BRCC under delegated authority from the Westpac Board. The BRCC also approves the Equity Risk Management framework. MARCO approves sub-limits of the BRCC approved Trading Book VaR limit for Financial Markets, and Treasury. Any equity Trading Book activity is captured under these limits.

 

Approach

 

Westpac has established a comprehensive set of policies defining the management of equity risk. These policies are reviewed and approved periodically (in most cases annually).

 

Risk mitigation

 

Westpac does not use financial instruments to mitigate its exposure to equities in the banking book.

 

Banking book positions

 

Hybrid equity underwriting and equity warehousing risk - As a financial intermediary Westpac underwrites listed and unlisted hybrid equity securities. Equity warehousing activities require the acquisition of assets in anticipation of refinancing through a combination of senior, mezzanine and capital market debt and listed, unlisted and privately placed equity.

 

Investment securities - Westpac undertakes, as part of the ordinary course of business, certain investments in strategic equity holdings and over time the nature of underlying investments will vary.

 

Measurement of equity securities - Equity securities are generally carried at their fair value. Fair value for equities that have a quoted market price (in an active market) is determined based upon current bid prices. If a market for a financial asset is not active, fair value is determined based upon a valuation technique. This includes the use of recent arms-length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants to price similar instruments. In the event that the fair value of an unlisted security cannot be measured reliably, these investments are measured at cost.

 

Where the investment is held for long term strategic purposes, these investments are accounted for either as available for sale, with changes in fair value being recognised in equity, at fair value through profit and loss, or equity accounted for and recognised as a share in associates.

 

Other related matters

 

·         Fair value should not differ to the listed stock price. Should a listed stock price not be available, fair value is estimated using the valuation techniques referred to above. The book value of certain unlisted investments for which active markets do not exist are measured at cost because cost is considered to be a reasonable approximation of fair value.

 

·         The equity method of accounting is used for investments in Associates. Associates are entities in which the Group has significant influence, but not control, over the operating and financial policies.

 

Risk reporting

 

Westpac manages equity risk in two ways, VaR limits and investment limits:

 

·         A VaR limit (in conjunction with structural limits) is used to manage traded equity. This limit is a sub-limit of the RISKCO approved VaR limit for Financial Markets trading activities. Equity trading activity is overseen by the independent Market Risk function applying the same controls used for monitoring other trading book activities in Financial Markets and Treasury; and

 

·         Equity risk exposures are reported in management reporting and annually to the Westpac Board Risk and Compliance Committee.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Equity risk

 

 

 

Book value of equity exposures

 

 

30 September

31 March

30 September

$m

2018

2018

2017

Listed equity exposures (publicly traded)

353

369

386

Unlisted equity exposures (privately traded)

217

311

293

Total book value of equity exposures

570

680

679

 

 

Gains/losses

 

 

30 September

31 March

30 September

$m

2018

2018

2017

Cumulative realised gains (losses)

9

(2)

152

 

 

 

 

Total unrealised gains (losses) through profit & loss

(75)

-

110

Total unrealised gains (losses) through equity

-

(31)

(35)

Total latent revaluation gains (losses)

-

-

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 81

 

 


 

Pillar 3 report

Interest rate risk in the banking book (IRRBB)

 

 

 

Interest Rate Risk in the Banking Book (IRRBB) is the risk to interest income arising from a mismatch between the duration of assets and liabilities that arises in the normal course of banking activities.

 

Approach

 

The banking book activities that give rise to market risk include lending activities, balance sheet funding and capital management. Interest rate risk, basis risk, currency risk and funding and liquidity risk are inherent in these activities. Treasury’s Asset & Liability Management (ALM) unit is responsible for managing market risk arising from Westpac’s banking book activity.

 

All material regions, business lines and legal entities are included in Westpac’s IRRBB framework.

 

Model accreditation has been granted by APRA for the use of an internal model for the determination of IRRBB regulatory capital. Under the model, regulatory capital is primarily derived from a VaR measure using 6 years of historical data with a scaled 1 year, 99th percentile, one-tailed confidence interval. A standardised calculation of credit spread risk is added to the VaR regulatory capital measure.

 

Asset and liability management

 

The ALM unit manages the structural interest rate mismatch associated with the transfer priced balance sheet, including the investment of Westpac’s capital to its agreed benchmark duration. A key risk management objective is to achieve reasonable stability of Net Interest Income (NII) over time. These activities are performed under the oversight of RISKCO and the Market Risk team.

 

Net Interest Income sensitivity

 

NII sensitivity is managed in terms of the net interest income-at-risk (NaR) modelled over a three year time horizon to a 99% confidence interval for movements in wholesale market interest rates. A simulation model is used to calculate Westpac’s potential NaR. The NII simulation framework combines the underlying statement of financial position data with assumptions about runoff and new business, expected repricing behaviour and changes in wholesale market interest rates. Simulations using a range of interest rate scenarios are used to provide a series of potential future NII outcomes. The interest rate scenarios modelled include those projected using historical market interest rate volatility as well as 100 and 200 basis point shifts up and down from current market yield curves. Additional stressed interest rate scenarios are also considered and modelled.

 

A comparison between the NII outcomes from these modelled scenarios indicates the sensitivity to interest rate changes. On and off-balance sheet instruments are then used to manage this interest rate risk.

 

NaR limit

 

The BRCC has approved a NaR limit. This limit is managed by the Group Treasurer and is expressed as a deviation from benchmark hedge levels over a one-year rolling time frame, to a 99% level of confidence. This limit is monitored by the Market Risk team.

 

VaR limit

 

The BRCC has also approved an interest rate VaR limit for ALM activities. This limit is managed by the Group Treasurer and monitored by the Market Risk team. Additionally, the BRCC and the Market Risk team set structural risk limits to prevent undue concentration of risk

 

Structural foreign exchange rate risk

 

Structural foreign exchange rate risk results from the generation of foreign currency denominated earnings and from Westpac’s capital deployed in offshore branches and subsidiaries, where it is denominated in currencies other than Australian dollars. The Australian dollar equivalent of offshore earnings and capital is subject to change as exchange rates fluctuate, which could introduce significant variability to Westpac’s reported financial results. ALCO provides oversight of the appropriateness of foreign exchange hedges on earnings and capital.

 

Risk reporting

 

Interest rate risk in the banking book risk measurement systems include front office product systems, which capture all treasury funding and derivative transactions; the transfer pricing system, which captures all retail and other business transactions; and non-traded Interest Rate Risk systems, which calculate amongst other things, ALM VaR and NaR.

 

Daily monitoring of market risk exposure against VaR and structural risk limits is conducted independently by the Market Risk team, with NaR monitored on a monthly basis. Management reports detailing structural positions and VaR are produced and distributed daily for use by dealers and management across all stakeholder groups. Quarterly reports are produced for the senior management market risk forums of RISKCO and BRCC to provide transparency of material market risks and issues.

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2017 Pillar 3 report | 82

 

 

 


 

Pillar 3 report

Interest rate risk in the banking book (IRRBB)

 

 

 

Risk mitigation

 

Market risk arising in the banking book stems from the ordinary course of banking activities, including structural interest rate risk (the mismatch between the duration of assets and liabilities) and capital management. Hedging Westpac’s exposure to interest rate risk is undertaken using derivatives. The hedge accounting strategy adopted utilises a combination of the cash flow, fair value and net investment hedge approaches. Some derivatives held for economic hedging purposes do not meet the criteria for hedge accounting as defined under AASB 139 Financial Instruments: Recognition and Measurement and therefore are accounted for in the same way as derivatives held for trading.

 

The same controls used to monitor traded market risk allow for continuous monitoring by management.

 

Change in economic value of a sudden upward and downward movement in interest rates

 

30 September 2018

200bp parallel

200bp parallel

 

$m

increase

decrease

 

AUD

(104.5)

122.4

 

NZD

(28.5)

31.6

 

USD

20.7

(29.7)

 

Total

(112.3)

124.3

 

 

 

 

 

31 March 2018

200bp parallel

200bp parallel

 

$m

increase

decrease

 

AUD

(27.7)

51.4

 

NZD

(1.1)

0.5

 

USD

22.1

(31.7)

 

Total

(6.7)

20.2

 

 

 

 

 

30 September 2017

200bp parallel

200bp parallel

 

$m

increase

decrease

 

AUD

73.8

(38.8)

 

NZD

(22.8)

22.3

 

USD

6.2

(8.5)

 

Total

57.2

(25.0)

 

 

VaR results for non-traded interest rate risk 1

 

 

6 months ended

6 months ended

6 months ended

 

30 September

31 March

30 September

$m

2018

2018

2017

High

30.8

57.0

57.3

Low

23.2

27.9

27.0

Average

28.4

36.5

36.1

Period end

23.2

29.0

57.3

 

Interest rate risk in the banking book regulatory capital and risk weighted assets

 

 

30 September

31 March

30 September

$m

2018

2018

2017

Total capital required

1,039

1,030

888

Risk weighted assets

12,989

12,875

11,101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1      IRRBB VaR includes interest rate risk, credit spread risk in liquid assets and other basis risks as used for internal management purposes.

 

 

Westpac Group September 2017 Pillar 3 report | 83

 

 


 

Pillar 3 report

Remuneration

 

 

 

Employees subject to the remuneration disclosure requirements under APS 330 Attachment G are:

 

l         Senior managers 1 : There are 29 employees identified by the Westpac Group Fit & Proper Policy as responsible persons. These employees are the most senior executives of Westpac and are also considered material risk takers. Their activities can materially affect a substantial part of Westpac or its financial standing, either directly or indirectly; and

 

l         Material risk takers: In addition to the senior managers, there are 10 employees who have been assessed as having the ability to affect the financial soundness of Westpac as an Authorised Deposit-taking Institution. These are employees who can influence Westpac’s capital and/or liquidity, influence insurance risk, take market risk positions, and/or approve large credit exposures or programs.

 

All employees are subject to the Westpac Group Remuneration Policy (the Policy) and Westpac’s reward governance framework.

 

Qualitative disclosures

 

Westpac Group Remuneration Policy

 

The objective of the Policy is to attract and retain talented employees, by rewarding them for achieving high performance and delivering superior long term results for our shareholders, while adhering to sound risk management and governance principles. The Policy applies to all legal entities, business units and employees of Westpac and its related bodies corporate 2  (except temporary and casual employees).

 

The Policy is reviewed by the Board Remuneration Committee (BRC) on a regular basis. As a result of the BRC review in 2018, changes were made to reflect the Banking Executive Accountability Regime, to clarify entitlement to variable reward and to update references to related Group policies. The Policy was approved by the Westpac Board in May 2018.

 

Reward strategy and framework

 

Senior managers and material risk takers are rewarded based on a total reward framework which is designed to:

 

l         align remuneration with customer and shareholder interests;

 

l         support an appropriate risk culture and employee conduct;

 

l         differentiate pay for behaviour and performance in line with our strategy and vision;

 

l         provide market competitive and fair remuneration;

 

l         enable recruitment and retention of talented employees;

 

l         provide the ability to risk adjust remuneration; and

 

l         be simple, flexible and transparent.

 

For senior managers and material risk takers at or above the General Manager level, the total reward framework has three components: fixed remuneration, Short Term Variable Reward (STVR) and Long Term Variable Reward (LTVR), as outlined in the table below. The total reward framework is benchmarked against financial services competitors both in Australia and internationally, as relevant.

 

 

 

Fixed
remuneration

Variable reward

 

 

STVR

LTVR

 

 

 

 

Purpose

Attract and retain employees.

Reward financial and non-financial performance in line with Westpac’s strategic priorities. The deferred component supports alignment with shareholders over the medium term.

Align executive accountability and remuneration with the interests of shareholders by rewarding the delivery of sustained Group performance.

 

 

 

 

Delivery

Fixed remuneration comprises cash salary, salary sacrificed items, and employer superannuation contributions.

STVR is awarded in cash and restricted shares 3  based on an assessment of performance over the preceding year . Performance is assessed against a balanced scorecard containing financial and non-financial measures tied to the Group’s strategic priorities. Restricted shares vest in equal portions subject to continued service and malus.

Maximum opportunity = 150% of target STVR (for employees on target based plans).

LTVR comprises:

l         for Group Executives, performance share rights which vest after four years subject to the achievement of Total Shareholder Return (TSR) and Return on Equity (ROE) performance hurdles, continued service and malus; and

l         for General Managers, restricted shares or share rights without performance hurdles, subject to continued service and malus.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1    The senior manager definition utilised in these disclosures reflects the APRA definition of “responsible person” under paragraph 57(a) of Prudential Standard CPS 510 Governance. The Westpac equivalent is the CEO, Group Executives and certain General Managers designated as responsible persons.

2    This policy does not extend to any related bodies corporate which are separately listed on the Australian Securities Exchange.

3   Deferred STVR is awarded in unhurdled share rights to employees outside Australia.

 

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Pillar 3 report

Remuneration

 

 

 

Eligible employees may receive an annual award of Westpac ordinary shares up to the value of $1,000 under the Employee Share Plan. The Chief Executive Officer (CEO), senior managers and any other employees who received an equity award during the year, for example, as deferred STVR or LTVR, are not eligible to receive an Employee Share Plan award for that year.

 

The mix of fixed and variable reward varies across employees and groups of employees. Factors that can influence the mix include the role type, level of the employee, market benchmarks and performance.

 

Fixed remuneration

 

Fixed remuneration is aligned to the market and reviewed annually. It takes into account the size, responsibilities and complexity of the role, as well as the skills and experience of the employee.

 

Fixed remuneration comprises:

 

l         cash salary;

 

l         salary sacrificed items; and

 

l         superannuation or superannuation equivalent contributions for employees in Australia, New Zealand and some other countries in which we operate.

 

Variable reward

 

Variable reward is designed to:

 

l         encourage employee conduct aligned to customer interests;

 

l         support Westpac’s long term financial soundness and risk management framework;

 

l         align remuneration with prudent risk-taking and allow for adjustments to reflect the outcomes of business activities, the risks related to business activities (taking account of the cost of the associated capital, where relevant) and the time necessary for outcomes to be reliably measured;

 

l         allow for an adjustment by an amount that is proportionate to the failure of an Accountable Person 1  to comply with their accountability obligations under the Banking Executive Accountability Regime; and

 

l         reflect Australian and international regulatory requirements.

 

There are two forms of variable reward:

 

Short Term Variable Reward

 

l         Employees must satisfy expected minimum requirements to be considered for STVR, including behaviour requirements in line with Westpac’s values and the Code of Conduct and risk and compliance requirements for the employee’s role and business unit. Additional requirements may apply based on the role and business unit.

 

l         Performance is measured against risk-adjusted financial and non-financial measures that support the Group’s strategy to determine the size of the award.

 

l         STVR is awarded in cash and, if allocations are above deferral thresholds, restricted shares or unhurdled share rights. Information on the deferral framework is set out in the table below.

 

Long Term Variable Reward

 

l         The CEO and Group Executives receive annual LTVR awards in the form of performance share rights which vest after four years subject to the achievement of performance hurdles, continued service and malus.

 

l         The CEO and Group Executives only receive value from their LTVR awards where vesting occurs. The two performance hurdles for the grants of performance share rights allocated in December 2017 are relative TSR and ROE.

 

l         A performance share right is not a Westpac share and does not attract the payment of dividends.

 

l         Senior managers and material risk takers at the General Manager level receive annual LTVR awards in the form of restricted shares under the Restricted Share Plan or unhurdled share rights under the Westpac Performance Plan.

 

The size of the award is set with reference to market benchmarks, individual performance over time, succession potential and key skills.

 

Deferral

 

All employees who receive an STVR award above a certain threshold have a portion of the award deferred. Deferral arrangements depend on the value of the award and the level and type of role. The table below sets out the variable reward deferral arrangements for senior managers and material risk takers.

 

 

 

 

 

 

 

 

 

 

 

 

1    As defined in the Banking Act 1959 excluding Non-executive Directors.

 

Westpac Group September 2018 Pillar 3 report | 85

 


 

Pillar 3 report

Remuneration

 

 

 

Role Type

Deferral Arrangement 1

CEO and Group Executives

l       50% of any STVR is deferred equally over two years

General Managers

l       40% of any STVR is deferred equally over two years

General Managers in Westpac Institutional Bank and Treasury

 

l       40% of any STVR is deferred equally over two years

 

l       50% deferral for portion of allocation above $500,000, vesting equally over two years

Westpac Institutional Bank and Treasury employees

l       25% deferral where STVR allocation is $150,000 or greater, vesting equally over three years

 

l       50% deferral for portion of allocation above $500,000, vesting equally over three years

 

l       70% deferral for portion of allocation above $2,000,000, vesting equally over three years

Other employees

l       25% deferral where STVR allocation is $150,000 or greater, vesting equally over two years

 

l       50% deferral for portion of allocation above $500,000, vesting equally over two years

 

l       70% deferral for portion of allocation above $2,000,000, vesting equally over two years

 

 

STVR deferral periods are set within the context of the market and the overall Group risk profile. The STVR deferral period for employees in Westpac Institutional Bank and Treasury is longer than the rest of the Group.

 

STVR is deferred into equity in the form of restricted Westpac ordinary shares (for Australian based employees) or Westpac share rights (for employees outside Australia).

 

By deferring a portion of the STVR as restricted equity, STVR awards are better aligned with the interests of shareholders as the ultimate value of the deferred portion is tied to the share price at the end of the restriction period.

 

The deferral framework provides the ability to reduce unvested STVR, including to zero, if having regard to circumstances or information which has come to light after the grant of the award, all or part of the initial award was not justified.

 

Remuneration governance

 

The Policy sets out the mandatory requirements reflected in the design and management of remuneration arrangements across Westpac.

 

The Policy supports Westpac’s vision by requiring the design and management of remuneration to align with stakeholder interests, support financial soundness and encourage prudent risk management.

 

The Policy is supported by an established governance structure, plans and frameworks that are designed to support remuneration decision making across the Group.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1    Thresholds shown in dollars apply to Australia and New Zealand.

 

86 | Westpac Group September 2018 Pillar 3 report

 

 


 

 

Pillar 3 report

Remuneration

 

 

 

 

Board

 

 

The role of the Board is to provide strategic guidance for the Group and have effective oversight of management. As part of this role, the Board has overall accountability for remuneration.

 

Without limiting its role, the Board approves (following recommendations from the BRC) performance outcomes and remuneration for the CEO, Group Executives and other persons whose activities in the Board’s opinion affect the financial soundness of the Group and any other person specified by the Australian Prudential Regulation Authority.

 

The Board has the discretion to withdraw, defer or adjust aggregate and individual variable reward.

 

The remuneration related responsibilities of the Board are set out in the Board Charter.

 

Board Remuneration Committee

 

 

The BRC assists the Board to fulfil its remuneration responsibilities to shareholders by monitoring the remuneration policies and practices of the Group, external remuneration practices, market expectations and regulatory requirements in Australia and globally.

 

The BRC’s purpose, responsibilities and duties are outlined in its Charter which is available on Westpac’s website. The Charter was last reviewed and amended in August 2018.

 

In carrying out its duties, the BRC accesses risk and financial control personnel and engages external advisors who are independent of management. The Chairman of the Risk & Compliance Committee is also a member of the BRC, and members of the BRC are all members of the Risk & Compliance Committee.

 

Members of the BRC are independent Non-executive Directors.

 

There were five BRC meetings during the financial year ended 30 September 2018 (FY18).

 

Committee fees for the BRC Chairman for FY18 were $63,800 per annum and for BRC members were $29,000 per annum.

 

 

Remuneration oversight committees

 

 

Independent remuneration consultants

 

The Board and the BRC receive support from internal groups and committees including the Group Remuneration Oversight Committee and business-specific remuneration oversight committees.

 

The governance structure below the BRC focuses on the appropriateness and consistency of remuneration arrangements within functions and divisions and across the Group.

 

 

In FY18, the Board retained Guerdon Associates as its independent consultant to provide specialist information on executive remuneration and other remuneration matters. The services were provided directly to the BRC independent of management. The Chairman of the BRC oversees the engagement and associated costs.

 

Work undertaken by Guerdon Associates during FY18 included the provision of information relating to the benchmarking of Non-executive Director, CEO and Group Executive remuneration. In FY18, no remuneration recommendations were made by Guerdon Associates, as prescribed under the Corporations Act.

 

 

 

Independence of risk and financial control employees

 

The Group follows a process of ‘two-up’ approval for all remuneration decisions. This means that remuneration is approved by the next most senior person above the employee’s manager.

 

This concept is also reflected in our requirement for the Board, based on recommendations from the BRC, to approve performance outcomes and remuneration for specified groups including the CEO and Group Executives and other persons whose activities in the Board’s opinion may affect the financial soundness of the Group and any other person specified by APRA.

 

To supplement the ‘two-up’ approval requirement, variable reward and scorecards for risk and financial control employees at the General Manager level must be reviewed for consistency and approved by the Chief Risk Officer, the Group Executive, Compliance, Legal & Secretariat 1  or the Chief Financial Officer (as appropriate) to ensure independence is not compromised.

 

Variable reward and the structure of scorecards for risk and financial control employees below General Manager level must also be approved by the Risk/Compliance/Finance function General Managers (as appropriate). All remuneration outcomes of risk and financial control employees are subject to review and approval to ensure they are rewarded independently of the businesses they oversee.

 

Remuneration and risk

 

Westpac’s remuneration strategy, total reward framework, policies and practices reflect the sound risk management that is fundamental to the way the Group operates. Westpac integrates risk management into remuneration by designing and managing arrangements in a manner that encourages behaviour that supports our

 

 

1       On 1 October 2018, the Compliance team moved into the Risk function and the Chief Risk Officer became responsible for the review and approval of Compliance variable reward and scorecards.

 

Westpac Group September 2018 Pillar 3 report | 87

 

 


 

Pillar 3 report

Remuneration

 

 

 

long term financial soundness and risk management framework.

 

The performance of the Group and each division is reviewed and measured with reference to how risk is managed and the results influence remuneration outcomes. The key risks that are taken into account when implementing remuneration measures include capital requirements, credit, market, equity and structured credit, liquidity, insurance, risk culture, reputation and sustainability, conduct, operational and compliance risk and financial crime.

 

The deferral framework provides consistency across the Group and enhances our remuneration framework from a risk management perspective. The deferral framework provides the Board with the ability to adjust all forms of unvested deferred variable reward downwards, including to zero, if having regard to circumstances or information which has come to light after the grant of the deferred equity or cash, all or part of the initial award was not justified.

 

Variable reward pool

 

Each year, the Board determines the size of the variable reward pool which funds variable reward outcomes across the Group. This is based on the Group’s performance for the year and an assessment of how profit should be shared among shareholders and employees while retaining sufficient capital for growth.

 

To determine the variable reward pool a range of financial and risk measures are used. The primary financial indicator used is economic profit, which measures cash earnings adjusted for a capital charge. A range of other metrics are also considered including cash earnings, return on equity, cash EPS and dividends. A broad range of risk measures (both financial and non-financial) are assessed and considered when determining the variable reward pool.

 

Scorecards

 

STVR awards are determined with reference to an assessment of performance against a balanced scorecard.

 

The Board and the BRC recognise that the scorecard approach may not always appropriately reflect overall performance of the Group.

 

For FY18, the balanced scorecard of the CEO, Group Executives and General Managers was split into two sections to support decision making and enhance disclosure in relation to the Board’s application of discretion when determining STVR outcomes.

 

l        Focus areas: This includes consideration of financial and non-financial measures aligned to Westpac’s key strategic priorities to support an initial scorecard result. In assessing outcomes for each focus area, a number of factors are taken into account. For example:

 

o        matters not known or not relevant at the beginning of the performance period which are relevant to the under or over performance of the employee over the performance period;

 

o        the degree of difficulty associated with achieving the targets that had been set in the scorecard (and the context of those targets);

 

o        whether the budgetary assumptions that were present when performance targets were set remain correct (and whether the financial environment is better or worse compared with those assumptions); and

 

o        comparisons with the performance of Westpac’s main competitors having regard to major shareholder and customer benchmarks as well as the composition and/or consistency of financial result performance.

 

l        Modifier: This includes consideration of significant matters not covered in the focus areas, including behaviour, risk and reputation measures, and people management matters, and any other matters determined by the Board, as a tool to support the adjustment of the overall scorecard result, upwards or downwards (including to nil).

 

 

 

 

 

 

 

 

 

88 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Remuneration

 

 

 

The table below sets out the focus areas of the Group balanced scorecard for FY18 which forms the CEO scorecard.

 

Category

 

 

Weighting

 

 

Examples of measures 1

 

 

Economic performance

 

Delivering long term returns for our shareholders through high quality and consistent financial results

 

 

40%

 

 

l                   Economic profit

 

l                   Core earnings growth

 

Risk management

 

Ensuring we are and remain strong

 

 

10%

 

 

l                   Performance relative to Group Risk Appetite Statement

 

Balance sheet management

 

Holding sufficient capital to remain strong, meet regulatory requirements and support growth

 

 

10%

 

 

l                   Capital management

 

Customer outcomes

 

Helping our customers, communities and people to prosper and grow by delivering great customer outcomes, and by securing the Group’s future

 

 

15%

 

 

l                   Customer satisfaction

 

l                   Digitisation

 

Customer service transformation

 

Creating superior customer experiences for each customer, every time

 

 

15%

 

 

l                   Service Revolution deliverables

 

People and culture

 

Delivery of key people initiatives that drive further the Group’s change agenda

 

 

10%

 

 

l                   Workforce Revolution programme delivery

 

 

Westpac’s strategic priorities are cascaded from the CEO’s scorecard to the scorecards of senior managers and material risk takers in combination with other divisional or functional measures which support the Group’s strategic short and long term goals. Weightings and measures reflect individual roles.

 

Scorecard focus areas for senior managers and material risk takers are consistent with that of the CEOs:

 

l        Performance measures such as Group economic profit, divisional economic profit, divisional core earnings growth and divisional expense management accounted for 20% to 50% of senior managers’ scorecards.

 

l        Performance measures relating to the Group’s Risk Appetite Statement accounted for 10% to 20% of senior managers’ scorecards. The Risk Appetite Statement includes capital requirements, reputation, sustainability, conduct, credit, market, liquidity, operational and compliance risk. In addition, the CEO and each senior manager are assessed on specific risk measures that may influence any discretionary adjustment to the scorecard.

 

l        Scorecards for material risk takers at the General Manager level also include risk measures related to the Group’s Risk Appetite Statement, economic profit and compliance with weightings ranging from 30% to 55%.

 

l        Material risk takers below General Manager level have similar measures however there are no standardised percentage weightings for specific goals.

 

 

 

 

 

 

 

 

 

 

 

 

 

1   Individual measures will differ for each senior manager.

 

Westpac Group September 2018 Pillar 3 report | 89

 

 


 

Pillar 3 report

Remuneration

 

 

 

Quantitative Disclosures

 

For FY18, two senior managers received payments totalling $151,707 and $310,000 respectively reflecting annual incentives foregone from their previous employers on appointment to Westpac. Two other senior managers received termination payments of $1,471 and $43,527 respectively on their termination from Westpac. No senior manager or material risk taker received a guaranteed bonus in FY18.

 

Deferred remuneration

 

 

 

30 September 2018

 

 

30 September 2017

 

$000

 

Total amount oustanding 1

 

Paid out in financial year

 

Explicit reductions 2

 

Implicit reductions 3

 

 

Total amount oustanding 1

 

Paid out in financial year

 

Explicit reductions 2

 

Implicit reductions 3

 

Senior managers

 

121,928

 

10,376

 

(14,061)

 

(18,530)

 

 

133,044

 

9,574

 

(10,620)

 

-

 

Material risk takers

 

14,943

 

5,920

 

(623)

 

(2,271)

 

 

18,298

 

5,427

 

(756)

 

-

 

 

 

`Total value of remuneration awards for the current financial year for senior managers and material risk takers 4

 

 

 

30 September 2018

 

30 September 2017

 

 

 

Senior managers

 

Material risk takers

 

Senior managers

 

Material risk takers

 

$000

 

Unrestricted

 

Deferred

 

Unrestricted

 

Deferred

 

Unrestricted

 

 

Deferred

 

Unrestricted

 

Deferred

 

Fixed remuneration

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- Cash based 5

 

19,158

 

-

 

4,519

 

-

 

18,978

 

 

-

 

2,772

 

-

 

- Shares and share-linked instruments

 

-

 

-

 

-

 

-

 

-

 

 

-

 

-

 

-

 

- Other 6

 

930

 

-

 

385

 

-

 

953

 

 

-

 

247

 

-

 

Variable remuneration 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- Cash based 8

 

9,517

 

-

 

9,418

 

-

 

12,175

 

 

-

 

6,040

 

-

 

- Shares and share-linked instruments 9

 

-

 

19,705

 

-

 

7,746

 

-

 

 

19,713

 

-

 

6,705

 

- Other

 

-

 

-

 

-

 

-

 

-

 

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1      Value of unvested holdings at 30 September. All outstanding deferred remuneration is subject to either explicit or implicit adjustments.

2      The FY18 explicit adjustment reflects testing of the EPS and TSR hurdles on 1 October 2017. Explicit adjustments may also include malus, clawback or similar reversals or downward revaluations of awards.

3      Implicit adjustments include fluctuations in the value of shares or performance units during the year.

4      Prepared in accordance with APS330 Table 22A and accounting standard AASB 2, consistent with the process for the 2018 and 2017 Annual Report.

5      Cash based fixed remuneration is the total cost of salary, salary sacrificed benefits (including motor vehicles, parking, etc. and any associated fringe benefits tax) and an accrual for annual leave entitlements.

6      Other fixed remuneration relates to post-employment benefits. Senior managers and material risk takers are provided with insurance cover under the Westpac Group Plan at no cost. Superannuation benefits have been calculated consistent with AASB 119.

7      26 of 29 senior managers and all 10 material risk takers received variable reward in respect of FY18. 24 of 25 senior managers and all 7 material risk takers received variable reward in respect of FY17.

8      Cash based variable reward reflects annual cash performance awards accrued but not yet paid in respect of the year ended 30 September.

9       Shares and share-linked instruments are amortised over the vesting period and the amount shown is the amortisation relating to the reporting year, consistent with the relevant Annual Report.

 

90 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Appendix I | Regulatory capital reconciliation

 

 

 

Balance Sheet Reconciliation

 

30 September 2018
$m

Group Balance
Sheet

Adjustment

Level 2
Regulatory
Balance Sheet

Reconciliation Table
Capital Disclosure
Template

 

 

 

 

 

Assets

 

 

 

 

Cash and balances with central banks

26,431

(142)

26,289

 

Receivables due from other financial institutions

5,790

-

5,790

 

Due from subsidiaries

-

211

211

 

Derivative financial instruments

24,101

-

24,101

 

Trading securities

19,158

-

19,158

 

Investments in associates

115

-

115

 

Other financial assets designated at fair value

2,976

(263)

2,713

 

Available-for-sale-securities

61,119

(66)

61,053

 

Loans

709,690

-

709,690

 

Life insurance assets

9,450

(9,450)

-

 

Regulatory deposits with central banks overseas

1,355

-

1,355

 

Deferred tax assets

1,180

(11)

1,169

Table a

Goodwill and other intangible assets

11,763

(385)

11,378

Table b

Property, plant and equipment

1,329

-

1,329

 

Investments in life & general insurance, funds management & securitisation entities

-

1,567

1,567

Table c

Other assets

5,135

(407)

4,728

 

Total assets

879,592

(8,946)

870,646

 

 

 

 

 

 

Liabilities

 

 

 

 

Payables due to other financial institutions

18,137

-

18,137

 

Due to subsidiaries

-

1,030

1,030

 

Deposits and other borrowings

559,285

-

559,285

 

Other Financial Liabilities at fair value through income statement

4,297

-

4,297

 

Derivative financial instruments

24,407

-

24,407

 

Debt issues and acceptances

172,596

-

172,596

 

Current tax liabilities

296

(11)

285

 

Deferred tax liabilities

18

(18)

-

Table a

Life insurance liabilities

7,597

(7,597)

-

 

Provisions

1,928

(82)

1,846

 

Loan Capital

17,265

-

17,265

Table d and e

Other liabilities

9,193

(971)

8,222

 

Total liabilities

815,019

(7,649)

807,370

 

 

 

 

 

 

Equity

 

 

 

 

Ordinary share capital

36,054

-

36,054

Row 1

Treasury shares and RSP treasury shares

(493)

(14)

(507)

Table f

Reserves

1,077

(68)

1,009

Table g

Retained Profit

27,883

(1,218)

26,665

Row 2

Non-controlling interest

52

3

55

 

Total equity

64,573

(1,297)

63,276

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 91

 


 

Pillar 3 report

Appendix I | Regulatory capital reconciliation

 

 

 

$m

30 September
2018

Capital
Disclosure
Template
Reference

Table a

 

 

Deferred Tax Assets

 

 

Total Deferred Tax Assets per level 2 Regulatory Balance Sheet

1,169

 

Deferred tax asset adjustment before applying prescribed thresholds

1,169

Row 26e

Less: Amounts below prescribed threshold - risk weighted

(1,169)

Row 75

Total per Capital Disclosure Template - Deferred Tax Asset

-

Row 21 / 25

 

 

 

$m

30 September
2018

Capital
Disclosure
Template
Reference

Table b

 

 

Goodwill and other intangible assets

 

 

Total Goodwill and Intangibles Assets per level 2 Regulatory Balance Sheet

11,378

 

Less: Capitalised Software Disclosed Under Intangibles

(1,792)

Row 9

Total per Capital Disclosure Template - Goodwill

9,586

Row 8

 

 

 

$m

30 September
2018

Capital
Disclosure
Template
Reference

Table c

 

 

Equity Investments

 

 

Significant Investment in financial entities

329

 

Equity Investments in non-consolidated subsidiaries

1,567

 

Total Significant Investment in financial entities

1,896

Row 73

Non-significant Investment in financial entities

180

Row 72

Total Investments in financial institutions

2,076

Row 26d

Investment in commercial entities

61

Row 26g

Total Equity Investments before applying prescribed threshold

2,137

 

Less: Amounts below prescribed threshold

(2,137)

 

Total per Capital Disclosure Template - Equity Investments

-

Row 18/ 19/ 23

 

 

 

$m

30 September
2018

Capital
Disclosure
Template
Reference

Table d

 

 

Additional Tier 1 Capital

 

 

Total Loan Capital per Level 2 Regulatory Balance Sheet

17,265

 

Less: Tier 2 Capital Instruments Reported Below

(8,310)

 

Add: Capitalised Issue Costs for Additional Tier 1 Capital Instruments 1

56

 

Less: Fair Value Adjustment 2

133

 

Total per Capital Disclosure Template - Tier 1 Capital

9,144

Row 36

 

 

 

Additional Tier 1 Capital included in Regulatory Capital

 

 

Westpac Capital Notes

1,384

 

Westpac Capital Notes 2

1,311

 

Westpac Capital Notes 3

1,324

 

Westpac Capital Notes 4

1,702

 

Westpac Capital Notes 5

1,690

 

SEC Registered Capital Securities

1,733

 

Total Basel III complying instruments

9,144

Row 30

Total Basel III non complying instruments

-

Row 33

Total per Capital Disclosure Template - Additional Tier 1 Capital Instruments

9,144

Row 36

 

 

 

 

1    Unamortised issue costs relating to capital instruments are netted off against each instrument in the Balance Sheet. For regulatory capital purposes, these capital instruments are shown gross of unamortised issue costs. The unamortised issue costs are deducted from CET1 as part of capitalised expenses in Row 26f in the capital disclosure template.

2   For regulatory capital purposes, APRA requires these instruments to be included as if they were unhedged.

 

92 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Appendix I | Regulatory capital reconciliation

 

 

 

$m

30 September
2018

Capital
Disclosure
Template
Reference

Table e

 

 

Tier 2 Capital

 

 

Total Tier 2 Capital per Level 2 Regulatory Balance Sheet

8,310

 

Add: Capitalised Issue Costs for Tier 2 Capital Instruments 1

3

 

Less: Fair Value Adjustment 2

198

 

Less: Cumulative amortisation of Tier 2 Capital Instruments

-

 

Less: Basel III transitional adjustment

-

Row 56c

Provisions

54

Row 50 / 76

Total per Capital Disclosure Template - Tier 2

8,565

Row 51

 

 

 

Tier 2 Capital included in Regulatory Capital

 

 

AUD1,000 million Westpac Subordinated Notes

1,000

 

CNY1,250 million Westpac Subordinated Notes

252

 

AUD350 million Westpac Subordinated Notes

349

 

SGD325 million Westpac Subordinated Notes

329

 

USD100 million Westpac Subordinated Notes

139

 

AUD700 million Westpac Subordinated Notes

700

 

JPY20,000 million Westpac Subordinated Notes

244

 

JPY10,200 million Westpac Subordinated Notes

124

 

JPY10,000 million Westpac Subordinated Notes

122

 

AUD175 million Westpac Subordinated Notes

175

 

NZD400 million Westpac Subordinated Notes

366

 

USD1,500 million Westpac Subordinated Notes

2,070

 

JPY8,000 million Westpac Subordinated Notes

98

 

JPY13,500 million Westpac Subordinated Notes

165

 

JPY12,000 million Westpac Subordinated Notes

146

 

HKD 600 million Westpac Subordinated Notes

106

 

AUD350 million Westpac Subordinated Notes

350

 

AUD185 million Westpac Subordinated Notes

185

 

AUD250 million Westpac Subordinated Notes

250

 

AUD130 million Westpac Subordinated Notes

130

 

AUD725 million Westpac Subordinated Notes II

725

 

Total Basel III complying instruments

8,025

Row 46

 

 

 

USD352 million Perpetual Floating Rate Notes

486

 

Total Basel III non complying instruments

486

 

Less: Basel III transitional adjustment

-

Row 85

Total Basel III non complying instruments after transitional adjustment

486

Row 47

Provisions

54

Row 50 / 76

Total per Capital Disclosure Template - Tier 2 Capital Instruments

8,565

Row 51

 

 

 

$m

30 September
2018

Capital
Disclosure
Template
Reference

Table f

 

 

Treasury Shares and RSP Teasury Shares

 

 

Total treasury shares per Level 2 Regulatory Balance Sheet

(507)

 

Less: Treasury Shares not included for Level 2 Regulatory Capital

-

 

Total per Capital Disclosure Template - Treasury Shares

(507)

Row 26a

 

 

 

$m

30 September
2018

Capital
Disclosure
Template
Reference

Table g

 

 

Accumulated Other Comprehensive Income

 

 

Total reserves per Level 2 Regulatory Balance Sheet

1,009

 

Less: Share Based Payment Reserve not included within capital

(82)

 

Total per Capital Disclosure Template - Accumulated Other Comprehensive Income

927

Row 3

 

 

 

1   Unamortised issue costs relating to capital instruments are netted off against each instrument in the Balance Sheet. For regulatory capital purposes, these capital instruments are shown gross of unamortised issue costs. The unamortised issue costs are deducted from CET1 as part of capitalised expenses in Row 26f in the capital disclosure template.

2   For regulatory capital purposes, APRA requires these instruments to be included as if they were unhedged.

 

Westpac Group September 2018 Pillar 3 report | 93

 


 

Pillar 3 report

Appendix I | Regulatory capital reconciliation

 

 

 

The capital disclosure template below represents the post 1 January 2018 Basel III requirements. The Group is applying the Basel III regulatory adjustments in full as implemented by APRA.

 

$m

 

30 September
2018

Table
Reference

 

Common Equity Tier 1 capital: instruments and reserves

 

 

1

Directly issued qualifying ordinary shares (and equivalent for mutually-owned entities) capital

36,054

 

2

Retained earnings

26,665

 

3

Accumulated other comprehensive income (and other reserves)

927

Table g

4

Directly issued capital subject to phase out from CET1 (only applicable to mutually-owned companies)

-

 

5

Ordinary share capital issued by subsidiaries and held by third parties (amount allowed in group CET1)

55

 

6

Common Equity Tier 1 capital before regulatory adjustments

63,701

 

 

Common Equity Tier 1 capital : regulatory adjustments

 

 

7

Prudential valuation adjustments

-

 

8

Goodwill (net of related tax liability)

(9,586)

Table b

9

Other intangibles other than mortgage servicing rights (net of related tax liability)

(1,792)

Table b

10

Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)

-

 

11

Cash-flow hedge reserve

125

 

12

Shortfall of provisions to expected losses

(1,312)

 

13

Securitisation gain on sale (as set out in paragraph 562 of Basel II framework)

-

 

14

Gains and losses due to changes in own credit risk on fair valued liabilities

(68)

 

15

Defined benefit superannuation fund net assets

(78)

 

16

Investments in own shares (if not already netted off paid-in capital on reported balance sheet)

-

 

17

Reciprocal cross-holdings in common equity

-

 

18

Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10% of the issued share capital (amount above 10% threshold)

-

Table c

19

Significant investments in the ordinary shares of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold)

-

Table c

20

Mortgage service rights (amount above 10% threshold)

-

 

21

Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability)

-

Table a

22

Amount exceeding the 15% threshold

-

 

23

of which: significant investments in the ordinary shares of financial entities

-

Table c

24

of which: mortgage servicing rights

-

 

25

of which: deferred tax assets arising from temporary differences

-

Table a

26

National specific regulatory adjustments (sum of rows 26a, 26b, 26c, 26d, 26e, 26f, 26g, 26h, 26i and 26j)

(5,752)

 

26a

of which: treasury shares

(507)

Table f

26b

of which: offset to dividends declared under a dividend reinvestment plan (DRP), to the extent that the dividends are used to purchase new ordinary shares issued by the ADI

-

 

26c

of which: deferred fee income

258

 

26d

of which: equity investments in financial institutions not reported in rows 18, 19 and 23

(2,076)

Table c

26e

of which: deferred tax assets not reported in rows 10, 21 and 25

(1,169)

Table a

26f

of which: capitalised expenses

(1,838)

 

26g

of which: investments in commercial (non-financial) entities that are deducted under APRA prudential requirements

(61)

Table c

26h

of which: covered bonds in excess of asset cover in pools

-

 

26i

of which: undercapitalisation of a non-consolidated subsidiary

-

 

26j

of which: other national specific regulatory adjustments not reported in rows 26a to 26i

(359)

 

27

Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions

-

 

28

Total regulatory adjustments to Common Equity Tier 1

(18,462)

 

29

Common Equity Tier 1 Capital (CET1)

45,239

 

 

 

 

 

 

 

 

94 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Appendix I | Regulatory capital reconciliation

 

 

 

$m

 

30 September
2018

Table
Reference

 

Additional Tier 1 Capital: instruments

 

 

30

Directly issued qualifying Additional Tier 1 instruments

9,144

Table d

31

of which: classified as equity under applicable accounting standards

-

 

32

of which: classified as liabilities under applicable accounting standards

9,144

Table d

33

Directly issued capital instruments subject to phase out from Additional Tier 1

-

Table d

34

Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1)

-

 

35

of which: instruments issued by subsidiaries subject to phase out

-

 

36

Additional Tier 1 Capital before regulatory adjustments

9,144

Table d

 

Additional Tier 1 Capital: regulatory adjustments

 

 

37

Investments in own Additional Tier 1 instruments

-

 

38

Reciprocal cross-holdings in Additional Tier 1 instruments

-

 

39

Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10% of the issued share capital (amount above 10% threshold)

-

 

40

Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions)

-

 

41

National specific regulatory adjustments (sum of rows 41a, 41b and 41c)

-

 

41a

of which: holdings of capital instruments in group members by other group members on behalf of third parties

-

 

41b

of which: investments in the capital of financial institutions that are outside the scope of regulatory consolidations not reported in rows 39 and 40

-

 

41c

of which: other national specific regulatory adjustments not reported in rows 41a and 41b

-

 

42

Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions

-

 

43

Total regulatory adjustments to Additional Tier 1 capital

-

 

44

Additional Tier 1 capital (AT1)

9,144

Table d

45

Tier 1 Capital (T1=CET1+AT1)

54,383

 

 

Tier 2 Capital: instruments and provisions

 

 

46

Directly issued qualifying Tier 2 instruments

8,025

Table e

47

Directly issued capital instruments subject to phase out from Tier 2

486

Table e

48

Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group T2)

-

 

49

of which: instruments issued by subsidiaries subject to phase out

-

 

50

Provisions

54

Table e

51

Tier 2 Capital before regulatory adjustments

8,565

Table e

 

Tier 2 Capital: regulatory adjustments

 

 

52

Investments in own Tier 2 instruments

(50)

 

53

Reciprocal cross-holdings in Tier 2 instruments

-

 

54

Investments in the Tier 2 capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10% of the issued share capital (amount above 10% threshold)

-

 

55

Significant investments in the Tier 2 capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions

(140)

 

56

National specific regulatory adjustments
(sum of rows 56a, 56b and 56c)

(43)

 

56a

of which: holdings of capital instruments in group members by other group members on behalf of third parties

-

 

56b

of which: investments in the capital of financial institutions that are outside the scope of regulatory consolidation not reported in rows 54 and 55

(43)

 

56c

of which: other national specific regulatory adjustments not reported in rows 56a and 56b

-

 

57

Total regulatory adjustments to Tier 2 capital

(233)

 

58

Tier 2 capital (T2)

8,332

 

59

Total capital (TC=T1+T2)

62,715

 

60

Total risk-weighted assets based on APRA standards

425,384

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 95

 


 

Pillar 3 report

Appendix I | Regulatory capital reconciliation

 

 

 

$m

 

30 September
2018

Table
Reference

 

Capital ratios and buffers

 

 

61

Common Equity Tier 1 (as a percentage of risk-weighted assets)

10.6%

 

62

Tier 1 (as a percentage of risk-weighted assets)

12.8%

 

63

Total capital (as a percentage of risk-weighted assets)

14.7%

 

64

Buffer requirement (minimum CET1 requirement of 4.5% plus capital conservation buffer of 2.5% plus any countercyclical buffer requirements expressed as a percentage of risk-weighted assets) 1

8.0%

 

65

of which: capital conservation buffer requirement 1

3.5%

 

66

of which: ADI-specific countercyclical buffer requirements

0.0%

 

67

of which: G-SIB buffer requirement (not applicable)

NA

 

68

Common Equity Tier 1 available to meet buffers (as a percentage of risk-weighted assets)

10.6%

 

 

National minima (if different from Basel III)

 

 

69

National Common Equity Tier 1 minimum ratio (if different from Basel III minimum)

4.5%

 

70

National Tier 1 minimum ratio (if different from Basel III minimum)

6.0%

 

71

National total capital minimum ratio (if different from Basel III minimum)

8.0%

 

 

Amount below thresholds for deductions (not risk-weighted)

 

 

72

Non-significant investments in the capital of other financial entities

180

Table c

73

Significant investments in the ordinary shares of financial entities

1,896

Table c

74

Mortgage servicing rights (net of related tax liability)

-

 

75

Deferred tax assets arising from temporary differences (net of related tax liability)

1,169

Table a

 

Applicable caps on the inclusion of provisions in Tier 2

 

 

76

Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap)

54

Table e

77

Cap on inclusion of provisions in Tier 2 under standardised approach

217

 

78

Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap)

-

 

79

Cap for inclusion of provisions in Tier 2 under internal ratings-based approach

2,037

 

 

Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2018 and 1 Jan 2022)

 

 

80

Current cap on CET1 instruments subject to phase out arrangements

NA

 

81

Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities

NA

 

82

Current cap on AT1 instruments subject to phase out arrangements

2,229

 

83

Amount excluded from AT1 instruments due to cap (excess over cap after redemptions and maturities)

-

 

84

Current cap on T2 instruments subject to phase out arrangements

2,274

 

85

Amount excluded from T2 due to cap (excess over cap after redemptions and maturities)

-

Table e

 

Countercyclical buffer

 

The table below details Westpac’s countercyclical buffer requirement.

 

30 September 2018
$m

Exposure at
default

Risk Weighted
Assets
2

Jurisdictional
buffer

ADI-specific
buffer

Hong Kong

4,216

1,686

1.875%

0.00868%

Norway

7

14

2.000%

0.00008%

Sweden

5

8

2.000%

0.00005%

United Kingdom

7,754

2,407

0.500%

0.00331%

Other

1,009,945

359,898

0.000%

0.00000%

Total

1,021,926

364,013

 

0.01211%

 

 

 

 

 

Total Risk Weighted Asset

 

 

 

425,384

Countercyclical capital buffer

 

 

 

52

 

 

 

 

 

 

 

1  Includes 1% Domestic Systemically Important Bank (D-SIB) requirement.

2  Represents total private sector (excludes Banks and Sovereigns) credit and specific market risk weighted assets.

 

96 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Appendix II | Entities included in regulatory consolidation

 

 

 

This appendix lists all subsidiaries controlled by Westpac according to their level of regulatory consolidation.

 

Level 1 Entities

 

The following controlled entities have been approved by APRA for inclusion in the Westpac ADI’s ‘Extended Licensed Entity’ (ELE) for the purposes of measuring capital adequacy at Level 1:

 

Westpac Banking Corporation

 

Westpac Americas Inc.

1925 (Commercial) Pty Limited

 

Westpac Capital-NZ-Limited

1925 (Industrial) Pty Limited

 

Westpac Debt Securities Pty Limited

Belliston Pty Limited

 

Westpac Direct Equity Investments Pty Limited

Bill Acceptance Corporation Pty Limited

 

Westpac Equity Investments NZ Limited

Capital Finance Australia Limited

 

Westpac Finance (HK) Limited

CBA Limited

 

Westpac Financial Holdings Pty Limited

Challenge Limited

 

Westpac Group Investment-NZ-Limited

Mortgage Management Pty Limited

 

Westpac Holdings-NZ-Limited

Partnership Pacific Pty Limited

 

Westpac Investment Capital Corporation

Partnership Pacific Securities Pty Limited

 

Westpac Investment Vehicle No.2 Pty Limited

Pashley Investments Pty Limited

 

Westpac Investment Vehicle Pty Limited

Sallmoor Pty Limited

 

Westpac Leasing Nominees-Vic.-Pty Limited

Sixty Martin Place (Holdings) Pty Limited

 

Westpac New Zealand Group Limited

St.George Business Finance Pty Limited

 

Westpac Overseas Holdings No. 2 Pty Limited

St.George Custodial Pty Limited

 

Westpac Overseas Holdings Pty Limited

St.George Equity Finance Limited

 

Westpac Properties Limited

St.George Finance Holdings Limited

 

Westpac Securitisation Holdings Pty Limited

St.George Security Holdings Pty Limited

 

Westpac Structured Products Limited

Value Nominees Pty Limited

 

Westpac TPS Trust

Westpac Administration 2 Pty Limited

 

Westpac Unit Trust

Westpac Administration Pty Limited

 

Westpac USA Inc.

 

 

Level 2 Entities

 

The following controlled entities are included in the Level 2 consolidation (along with the ELE entities) for the purposes of measuring capital adequacy:

 

1925 Advances Pty Limited

 

Capital Finance (NZ) Limited

Altitude Administration Pty Limited

 

Capital Finance New Zealand Limited

Altitude Rewards Pty Limited

 

Capital Fleetlease Limited

Aotearoa Financial Services Limited

 

Capital Motor Finance Limited

Ascalon Funds Seed Pool Trust

 

Capital Rent Group Limited

BT (Queensland) Pty Limited

 

Crusade ABS Series 2015-1 Trust

BT Australia Pty Limited

 

Crusade ABS Series 2016-1 Trust

BT Financial Group (NZ) Limited

 

Crusade ABS Series 2017-1 Trust

BT Financial Group Pty Limited

 

Crusade ABS Series 2017-1P Trust

BT Securities Limited

 

Crusade ABS Series 2018-1P Trust

Capital Corporate Finance Limited

 

Crusade Management Limited

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 97

 


 

Pillar 3 report

Appendix II | Entities included in regulatory consolidation

 

 

 

Level 2 Entities (Continued)

 

Crusade Trust No.2P of 2008

 

Westpac Administration 3 Pty Limited

Danaby Pty Limited

 

Westpac Administration 4 Pty Limited

General Credits Pty Limited

 

Westpac Altitude Rewards Trust

Hastings Management Pty Limited

 

Westpac Asian Lending Pty Limited

Net Nominees Limited

 

Westpac Bank-PNG-Limited

Number 120 Limited

 

Westpac Capital Markets Holding Corp.

Oniston Pty Limited

 

Westpac Capital Markets LLC

Pendal Short Term Income Fund

 

Westpac Cash PIE Fund

Qvalent Pty Limited

 

Westpac Covered Bond Trust

RAMS Financial Group Pty Limited

 

Westpac Equity Holdings Pty Limited

RMS Warehouse Trust 2007-1

 

Westpac Europe Limited

Seed Pool Trust No. 2

 

Westpac Financial Consultants Limited

Series 2008-1M WST Trust

 

Westpac Financial Services Group Limited

Series 2009-1 WST Trust

 

Westpac Financial Services Group-NZ-Limited

Series 2011-1 WST Trust

 

Westpac Global Capital Markets Pty Limited

Series 2011-2 WST Trust

 

Westpac Investment Vehicle No.3 Pty Limited

Series 2011-3 WST Trust

 

Westpac New Zealand Limited

Series 2012-1 WST Trust

 

Westpac Notice Saver PIE Fund

Series 2013-1 WST Trust

 

Westpac NZ Covered Bond Holdings Limited

Series 2013-2 WST Trust

 

Westpac NZ Covered Bond Limited

Series 2014-1 WST Trust

 

Westpac NZ Operations Limited

Series 2014-2 WST Trust

 

Westpac NZ Securitisation Holdings Limited

Series 2015-1 WST Trust

 

Westpac NZ Securitisation Limited

SIE-LEASE (Australia) Limited

 

Westpac NZ Securitisation No.2 Limited

SIE-LEASE (New Zealand) Pty Limited

 

Westpac Securities Limited

St.George Commercial Credit Corporation Limited

 

Westpac Securities NZ Limited

St.George Finance Limited

 

Westpac Securitisation Management Pty Limited

St.George Motor Finance Limited

 

Westpac Singapore Limited

The Home Mortgage Company Limited

 

Westpac Syndications Management Pty Limited

W2 Investments Pty Limited

 

Westpac Term PIE Fund

Westpac (NZ) Investments Limited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

98 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Appendix II | Entities included in regulatory consolidation

 

 

 

Level 3 Entities

 

The following controlled entities are excluded from the Level 2 consolidation but form part of the conglomerate group at Level 3:

 

Advance Asset Management Limited

 

Reinventure Special Purpose Investment Unit Trust

Ascalon Capital Managers (Asia) Limited

 

Securitor Financial Group Limited

Ascalon Capital Managers Limited

 

St.George Life Limited

Asgard Capital Management Limited

 

Sydney Capital Corporation Inc.

Asgard Wealth Solutions Limited

 

Waratah Receivables Corporation Pty Limited

BT Funds Management (NZ) Limited

 

Waratah Securities Australia Limited

BT Funds Management Limited

 

Westpac Custodian Nominees Pty Limited

BT Funds Management No.2 Limited

 

Westpac Databank Pty Limited

BT Portfolio Services Limited

 

Westpac Financial Services Limited

BT Private Nominees Pty Limited

 

Westpac General Insurance Limited

eQR Securities Pty Limited

 

Westpac General Insurance Services Limited

Hastings Funds Management Limited

 

Westpac Lenders Mortgage Insurance Limited

Hastings Investment Management Pty Ltd

 

Westpac Life Insurance Services Limited

Infrastructure Research and Advisory Services Private Limited

 

Westpac Life-NZ-Limited

Magnitude Group Pty Limited

 

Westpac New Zealand Staff Superannuation Scheme Trustee Limited

Pendal Long Term Income Fund

 

Westpac Nominees-NZ-Limited

Planwise AU Pty Ltd

 

Westpac RE Limited

Reinventure Fund I.L.P.

 

Westpac Securities Administration Limited

Reinventure Fund II I.L.P

 

Westpac Superannuation Nominees-NZ-Limited

Reinventure Fund III I.L.P

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2018 Pillar 3 report | 99

 

 


 

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Appendix III | Level 3 entities’ assets and liabilities

 

 

 

The following legal entities are excluded from the regulatory scope of consolidation.

 

The total assets and liabilities should not be aggregated because some of the entities are holding companies for other entities in the table shown below.

 

30 September 2018

 

Liabilities

$m

Total Assets

(excluding equity)

a) Securitisation

 

 

Sydney Capital Corporation Inc.

-

-

Waratah Receivables Corporation Pty Limited

-

(1)

Waratah Securities Australia Limited

-

-

 

 

 

b) Insurance, funds management and other

 

 

Advance Asset Management Limited

66

35

Ascalon Capital Managers (Asia) Limited

27

-

Ascalon Capital Managers Limited

44

2

Asgard Capital Management Limited

43

9

Asgard Wealth Solutions Limited

27

7

BT Funds Management (NZ) Limited

77

19

BT Funds Management Limited

320

262

BT Funds Management No.2 Limited

12

2

BT Portfolio Services Limited

77

18

BT Private Nominees Pty Limited

4

1

eQR Securities Pty. Limited

-

-

Hastings Funds Management Limited

15

-

Hastings Investment Management Pty Ltd

-

-

Infrastructure Research and Advisory Services Private Limited

-

-

Magnitude Group Pty Limited

15

11

Pendal Long Term Income Fund

457

457

Planwise AU Pty Ltd

15

1

Reinventure Fund II I.L.P

24

-

Reinventure Fund III I.L.P

3

-

Reinventure Fund, I.L.P.

60

-

Reinventure Special Purpose Investment Unit Trust

3

-

Securitor Financial Group Limited

14

10

St.George Life Limited

16

-

Westpac Custodian Nominees Pty Limited

-

-

Westpac Databank Pty Limited

-

-

Westpac Financial Services Limited

9

2

Westpac General Insurance Limited

727

572

Westpac General Insurance Services Limited

62

6

Westpac Lenders Mortgage Insurance Limited

1,047

743

Westpac Life Insurance Services Limited

9,555

8,057

Westpac Life-NZ-Limited

201

(17)

Westpac New Zealand Staff Superannuation Scheme Trustee Limited

-

-

Westpac Nominees-NZ-Limited

4

-

Westpac RE Limited

9

2

Westpac Securities Administration Limited

13

6

Westpac Superannuation Nominees-NZ-Limited

-

-

 

 

 

 

 

 

 

 

 

 

 

 

100 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Appendix IV | Regulatory expected loss

 

 

 

Capital deduction for regulatory expected loss

 

For capital adequacy purposes APRA requires the amount of regulatory expected credit losses in excess of eligible provisions to be deducted from capital. The following table shows how the deduction is calculated.

 

 

30 September

31 March

30 September

$m

2018

2018

2017

Provisions associated with eligible portfolios

 

 

 

Total provisions for impairment charges

3,053

3,165

3,119

plus general reserve for credit losses adjustment

356

339

332

plus provisions associated with partial write-offs

101

82

148

less ineligible provisions 1

(80)

(79)

(74)

Total eligible provisions

3,430

3,507

3,525

Regulatory expected downturn loss

4,742

4,699

4,386

Shortfall in eligible provisions compared to regulatory expected downturn loss

(1,312)

1,192

861

Common equity Tier 1 capital deduction for regulatory expected downturn loss in excess of eligible provisions 2

(1,312)

(1,192)

(861)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1   Provisions associated with portfolios subject to the Basel standardised approach to credit risk are not eligible.

2   Regulatory expected loss is calculated for portfolios subject to the Basel advanced IRB approach to credit risk. The comparison between regulatory expected loss and eligible provisions is performed separately for defaulted and non-defaulted exposures. As at 30 September 2018, there was no excess of eligible provisions compared to regulatory expected loss for defaulted exposures (31 March 2018: nil).

 

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Appendix V | APS330 quantitative requirements

 

 

 

The following table cross-references the quantitative disclosure requirements given by Attachments A, C, D and E of APS330 to the quantitative disclosures made in this report. The continuous reporting requirements for capital instruments under Attachment B are satisfied separately and can be found on the regulatory disclosures section on the Westpac website

 

In addition to this report, the regulatory disclosures section of the Westpac website 1  contains the reporting requirements for:

 

l      Capital instruments under Attachment B of APS330; and

 

l      The identification of potential Global-Systemically Important Banks (G-SIB) under Attachment H of APS330 (disclosed annually).

 

APS330 reference

 

Westpac disclosure

Page

General Requirements

 

 

 

Paragraph 12

(a) (c) to (d)

Balance Sheet Reconciliation

88

Paragraph 13

 

Level 3 entities’ assets and liabilities

97

Paragraph 49

 

Summary leverage ratio

19

 

 

 

 

Attachment A:

 

 

 

Table 1: Capital disclosure template

 

Capital disclosure template

91

 

 

 

 

Attachment C:

 

 

 

Table 3: Capital adequacy

(a) to (e)

Capital requirements

17

 

(f)

Westpac’s capital adequacy ratios

16

 

 

Capital adequacy ratios of major subsidiary banks

16

 

 

 

 

Table 4: Credit risk

(a)

Exposure at Default by major type

29

 

(b)

Impaired and past due loans by portfolio

36

 

(c)

General reserve for credit losses

28

 

 

 

 

Table 5: Securitisation exposures

(a)

Banking book summary of securitisation activity by asset type

64

 

(b)

Banking book summary of on and off-balance sheet securitisation by exposure type

65

 

 

Trading book summary of on and off-balance sheet securitisation by exposure type

68

 

 

 

 

Attachment D:

 

 

 

Table 6: Capital adequacy

(b) to (f)

Capital requirements

17

 

(g)

Westpac’s capital adequacy ratios

16

 

 

Capital adequacy ratios of major subsidiary banks

16

Table 7: Credit risk - general disclosures

(b)

Exposure at Default by major type

29

(c)

Exposure at Default by geography

34

 

(d)

Exposure at Default by industry classification

31

 

(e)

Exposure at Default by residual contractual maturity

35

 

(f)

Impaired and past due loans by industry classification

37

 

(g)

Impaired and past due loans by geography

38

 

(h)

Movement in provisions for impairment charges

39

 

(h)

Loan impairment provisions

28

 

(i)

Exposure at Default by measurement method

30

 

(j)

General reserve for credit losses

28

Table 8: Credit risk - disclosures for portfolios subject to the standardised approach and supervisory risk-weights in the IRB approaches (formerly Table 5)

(b)

Portfolios subject to the standardised approach

40

 

Property finance

41

 

Project finance

42

 

 

 

1   http://www.westpac.com.au/about-westpac/investor-centre/financial-information/regulatory-disclosures/

 

102 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Appendix V | APS330 quantitative requirements

 

 

 

APS330 reference

 

Westpac disclosure

Page

Table 9: Credit risk - disclosures for portfolios subject to IRB approaches

(d)

Corporate portfolio by external credit rating

43

 

Business lending portfolio by external credit rating

44

 

 

Sovereign portfolio by external credit rating

45

 

 

Bank portfolio by external credit rating

46

 

 

Residential mortgages portfolio by PD band

47

 

 

Australian credit cards portfolio by PD band

48

 

 

Other retail portfolio by PD band

49

 

 

Small business portfolio by PD band

50

 

(e)

Actual losses

51

 

(f)

Comparison of regulatory expected and actual loss rates

52

Table 10: Credit risk mitigation disclosures

(b) to (c)

Total exposure covered by collateral, credit derivatives and guarantees

56

Table 11: General disclosure for exposures related to counterparty credit risk

(b)

Counterparty credit risk summary

58

(c)

Credit derivative transactions that create exposures to counterparty credit risk

58

Table 12: Securitisation exposures

 

Banking Book

 

 

(g) part i and (h) to (i)

Summary of assets securitised by Westpac

63

 

(g) part ii

Summary of total Westpac sponsored third party assets securitised

63

 

(j)

Summary of securitisation activity by asset type

64

 

(k)

Summary of on and off-balance sheet securitisation by exposure type

65

 

(l) part i

Securitisation exposure by risk weight band

66

 

(l) part ii

Securitisation exposures deducted from capital

66

 

(m)

Securitisation subject to early amortisation treatment

66

 

(n) part i

Resecuritisation exposure subject to credit risk mitigation

66

 

(n) part ii

Resecuritisation exposure to guarantors

67

 

 

Trading Book

 

 

(o) part i and (p)

Summary of assets securitised by Westpac

67

 

(o) part ii

Summary of total Westpac sponsored third party assets securitised

67

 

(q)

Summary of securitisation activity by asset type

67

 

(r)

Aggregate amount of exposures securitised by Westpac and subject to APS116 Capital Adequacy: Market Risk

67

 

(s)

Summary of on and off-balance sheet securitisation by exposure type

68

 

(t) part i

Securitisation exposure retained or purchase subject to specific risk

68

 

(t) part ii

Securitisation exposure subject to APS120 for Specific risk by risk weight band

68

 

(u) part i

Capital requirements for securitisation exposure subject to internal models approach (IMA) by risk classification

68

 

(u) part ii

Capital requirements for securitisation regulatory capital approaches by risk weight band

68

 

(u) part iii

Securitisation exposures deducted from capital

69

 

(v)

Securitisation subject to early amortisation treatment

69

 

(w) part i

Aggregate resecuritisation exposures retain or purchased subject to credit risk mitigation

69

 

(w) part ii

Resecuritisation exposure to guarantors credit worthiness

69

 

 

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Pillar 3 report

Appendix V | APS330 quantitative requirements

 

 

 

APS330 reference

 

Westpac disclosure

Page

Table 13: Market risk - disclosures for ADIs using the standard method

(b)

Market Risk regulatory capital and risk weighted assets

71

Table 14: Market risk - disclosures for ADIs using the IMA for trading portfolios

(d)

VaR and Stressed VaR by risk type

72

Table 16: Equities - disclosures for banking book positions

(b) to (c)

Book value of listed equity exposures by industry classification / Book value of unlisted equity exposures by industry classification

81

(d) to (e)

Gains/losses

81

(f)

Capital requirement 1

NA

Table 17: Interest rate risk in the banking book

(b)

Change in economic value of sudden upward and downward movement in interest rates

83

 

(b)

Capital requirement

83

 

 

 

 

Attachment E

 

 

 

Table 18: Leverage ratio disclosure template

 

Leverage ratio disclosure

19

Table 19: Summary comparison of accounting assets vs leverage ratio exposure measure

 

Summary comparison of accounting assets vs leverage ratio exposure measure

20

 

 

 

 

Attachment F

 

 

 

Table 20: Liquidity Coverage Ratio disclosure template

 

Liquidity Coverage Ratio disclosure

75

Table 21: Net Stable Funding Ratio template

 

Net Stable Funding Ratio disclosure

76

 

 

 

 

Attachment G 2

 

 

 

Table 21: Remuneration disclosure requirements

(g)

Governance structure

87

(h)

Quantitative Disclosures

89

 

(i)

Deferred remuneration

89

 

(j) to (k)

Total value of remuneration awards for the current financial year for senior managers and material risk takers

86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1   Equity exposures are not risk weighted at Level 2.

2   Remuneration disclosure is an annual reporting requirement under APS330.

 

104 | Westpac Group September 2018 Pillar 3 report

 


 

Pillar 3 report

Glossary

 

 

 

Term

Description

Actual losses

Represent direct write-offs and write-offs from provisions after adjusting for recoveries.

Additional Tier 1 capital

Comprises high quality components of capital that provide a permanent and unrestricted commitment of funds that are freely available to absorb losses but rank behind claims of depositors and other more senior creditors. They also provide for fully discretionary capital distributions.

Alternate Liquid Assets (ALA)

Assets that qualify for inclusion in the numerator of the LCR in jurisdictions where there is insufficient supply of HQLA.

Advanced measurement approach (AMA)

The capital requirement using the AMA is based on a bank’s internal operational risk systems, which must both measure and manage operational risk.

Assets intended to be securitised

Represents securitisation activity from the end of the reporting period to the disclosure date of this report.

Australian accounting standards (AAS)

A set of Australian reporting standards and interpretations issued by the Australian Accounting Standards Board.

Australian and New Zealand standard industrial classification (ANZSIC)

A code used by the Australian Bureau of Statistics and Statistics New Zealand for classifying businesses.

Authorised deposit-taking institution (ADI)

ADIs are corporations that are authorised under the Banking Act 1959 to carry on banking business in Australia.

Banking book

The banking book includes all securities that are not actively traded by Westpac.

Cash EPS compound annual growth rate (CAGR)

An internal measure used to assess performance by measuring growth in cash earnings per share over a three year performance period.

Committed Liquidity Facility (CLF)

Facility established with the RBA to cover the shortfall in Australian dollars between the ADI’s holding of HQLA and net cash outflows. The CLF is an ALA for the Group’s LCR calculation.

Common equity Tier 1 (CET1) capital

The highest form of capital. The key components of common equity are shares, retained earnings and undistributed current year earnings.

Credit valuation adjustment (CVA) risk

Refer to mark-to-market related credit risk.

Default

A customer default is deemed to have occurred when Westpac considers that either or both of the following events have taken place:

 

l      the customer is unlikely to pay its credit obligations to its financiers in full, without recourse by any of them to actions such as realising security (where held); and

 

l      the customer is past due 90 or more calendar days on any material credit obligation to its financiers. Overdrafts will be considered past due once the customer has breached an advised limit, or been advised of a limit smaller than the current outstandings.

Double default rules

Double default applies to exposures where a particular obligor’s exposure has been hedged by the purchase of credit protection from a counterparty and loss will only occur if both obligor and counterparty default. In this instance, capital can be reduced.

Exposure at default (EAD)

EAD represents an estimate of the amount of committed exposure expected to be drawn by the customer at the time of default.

Extended licensed entity (ELE)

An Extended Licensed Entity (ELE) comprises an ADI and any subsidiaries of the ADI that have been approved by APRA as being part of a single ‘stand-alone’ entity.

External credit assessment institution
(ECAI)

ECAI is an external institution recognised by APRA (directly or indirectly) to provide credit assessment in determining the risk-weights on financial institutions’ rated credit exposures (including securitisation exposures).

 

 

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Pillar 3 report

Glossary

 

 

 

 

External Rating Based Approach (ERBA)

Under the ERBA, APRA provides risk-weights that are matched to external credit ratings and takes into account tranche maturity and tranche thickness.

Facilities 90 days or more past due date not impaired

Includes facilities where:

 

l      contractual payments of interest and/or principal are 90 or more calendar days overdue, including overdrafts or other revolving facilities that remain continuously outside approved limits by material amounts for 90 or more calendar days (including accounts for customers who have been granted hardship assistance); or

 

l      an order has been sought for the customer’s bankruptcy or similar legal action has been instituted, which may avoid or delay repayment of its credit obligations; and

 

l      the estimated net realisable value of assets/security to which Westpac has recourse is sufficient to cover repayment of all principal and interest, or where there are otherwise reasonable grounds to expect payment in full and interest is being taken to profit on an accrual basis.

 

These facilities, while in default, are not treated as impaired for accounting purposes.

Geography

Geographic segmentation of exposures is based on the location of the office in which these items were booked.

High-quality liquid assets (HQLA)

Assets which meet APRA’s criteria for inclusion as HQLA in the numerator of the LCR.

Impaired assets

Includes exposures that have deteriorated to the point where full collection of interest and principal is in doubt, based on an assessment of the customer’s outlook, cashflow, and the net realisation of value of assets to which recourse is held:

 

l      facilities 90 days or more past due, and full recovery is in doubt: exposures where contractual payments are 90 or more days in arrears and the net realisable value of assets to which recourse is held may not be sufficient to allow full collection of interest and principal, including overdrafts or other revolving facilities that remain continuously outside approved limits by material amounts for 90 or more calendar days;

 

l      non-accrual assets: exposures with individually assessed impairment provisions held against them, excluding restructured loans;

 

l      restructured assets: exposures where the original contractual terms have been formally modified to provide for concessions of interest or principal for reasons related to the financial difficulties of the customer;

 

l      other assets acquired through security enforcement (includes other real estate owned): includes the value of any other assets acquired as full or partial settlement of outstanding obligations through the enforcement of security arrangements; and

 

l      any other assets where the full collection of interest and principal is in doubt.

Industry

Exposures to businesses, government and other financial institutions are classified into industry clusters based upon groups of related ANZSIC codes. Companies that operate in multiple industries are classified according to their primary industry. Consumer customers as classified as “retail” and not further broken down.

Interest rate risk in the banking book (IRRBB)

The risk to current and future year interest income arising from a mismatch between the duration of assets and liabilities that arises in the normal course of banking activities.

 

 

 

 

 

 

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Glossary

 

 

 

 

Internal ratings-based approach (IRB & Advanced IRB)

These approaches allow banks to use internal estimates of the risks of their loans as inputs into the determination of the amount of credit risk capital needed to support the organisation. In the Advanced IRB approach, banks must supply their own estimates for all three credit parameters – Probability of Default, Loss Given Default and Exposure at Default.

Leverage ratio

The leverage ratio is defined by APRA as Tier 1 capital divided by the “Exposure measure” and is expressed as a percentage. “Exposure measure” includes on-balance sheet exposures, derivatives exposures, securities financing transaction (SFT) exposures, and other off-balance sheet exposures.

Liquidity coverage ratio (LCR)

An APRA requirement to maintain an adequate level of unencumbered high quality liquid assets, to meet liquidity needs for a 30 calendar day period under an APRA-defined severe stress scenario. Absent a situation of financial stress, the value of the LCR must not be less than 100%. LCR is calculated as the percentage ratio of stock of HQLA, CLF and qualifying Reserve Bank of New Zealand securities over the total net cash out flows in a modelled 30 day defined stressed scenario.

Loss given default (LGD)

The LGD represents an estimate of the expected severity of a loss to Westpac should a customer default occur during a severe economic downturn. Westpac assigns LGD to each credit facility, assuming an event of default has occurred and taking into account a conservative estimate of the net realisable value of assets to which Westpac has recourse and over which it has security. LGDs also reflect the seniority of exposure in the customer’s capital and debt structure.

Maturity

The maturity date used is drawn from the contractual maturity date of the customer loans.

Mark-to-market related credit risk

The risk of mark-to-market losses related to deterioration in the credit quality of a derivative counterparty also referred to as credit valuation adjustment (CVA) risk.

Monte Carlo simulation

A method of random sampling to achieve numerical solutions to mathematical problems.

Net cash outflows

Total expected cash outflows minus total expected cash inflows in the specified LCR stress scenario calculated in accordance with APRA’s liquidity standard.

Net interest income at risk (NaR)

BRCC-approved limit expressed as a deviation from the benchmark hedge level over a 1-year time frame, at a 99% confidence level.

Net Stable Funding Ratio (NSFR)

The NSFR is defined as the ratio of the amount of available stable funding (ASF) to the amount of required stable funding (RSF) defined by APRA. The amount of ASF is the portion of an ADI’s capital and liabilities expected to be a reliable source of funds over a one year time horizon. The amount of RSF is a function of the liquidity characteristics and residual maturities of an ADI’s assets and off-balance sheet activities. ADI’s must maintain an NSFR of at least 100%.

Off-balance sheet exposure

Credit exposures arising from facilities that are not recorded on Westpac’s balance sheet (under accounting methodology). Undrawn commitments and the expected future exposure calculated for Westpac’s derivative products are included in off-balance sheet exposure.

On balance sheet exposure

Credit exposures arising from facilities that are recorded on Westpac’s balance sheet (under accounting methodology).

Potential future credit exposure (PFCE)

The PFCE for each transaction is calculated by multiplying the effective notional principal amount by a credit conversion factor specified in APS112.

Probability of default (PD)

Probability of default is a through-the-cycle assessment of the likelihood of a customer defaulting on its financial obligations within one year.

 

 

 

 

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Glossary

 

 

 

Resecuritisation

A resecuritisation exposure is a securitisation exposure in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is a securitisation exposure. In addition, an exposure to one or more resecuritisation exposures is a resecuritisation exposure;

Risk weighted assets (RWA)

Assets (both on and off-balance sheet) are risk weighted according to each asset’s inherent potential for default and what the likely losses would be in case of default.  In the case of non-asset backed risks (i.e. market and operational risk), RWA is determined by multiplying the capital requirements for those risks by 12.5.

Securitisation purchased

The purchase of third party securitisation exposure, for example residential mortgage backed securities.

Securitisation retained

Securitisation exposures arising through Westpac originated assets or generated by Westpac third party securitisation activity.

Securities financing transactions (SFT)

APRA defines SFTs as “transactions such as repurchase agreements, reverse repurchase agreements, and security lending and borrowing, and margin lending transactions, where the value of the transactions depends on the market valuation of securities and the transactions are typically subject to margin agreements.”

Sponsor

An ADI would generally be considered a sponsor if it, in fact or substance, manages or advises the securitisation program, places securities into the market, or provide liquidity and/or credit enhancements.

Standard model

The standard model for Market risk applies supervisory risk weights to trading positions.

Stressed VaR (SVaR)

Stressed VaR uses the approved VaR model but applies a period of significant market stress. Market risk capital is estimated by adding Stressed VaR to regular VaR.

Substitution approach

Substitutions refers to the rules governing the circumstances when capital can be reduced because an obligor’s exposure has been hedged by the purchase of credit protection from a counterparty and the counterparty’s PD is used in place of the obligors’ PD.

Supervisory Formula Approach (SFA)

The SFA applicable to unrated exposures dynamically looks at the type and performance of underlying asset pools funded by the securitisation exposure as well as the structural features of the transaction to determine capital requirements

Tier 2 capital

Includes other capital elements, which, to varying degrees, fall short of the quality of Tier 1 capital but still contribute to the overall strength of an entity as a gone concern capital.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Pillar 3 report

Glossary

 

 

 

 

Trading book

Trading book activity represents dealings that encompass book running and distribution activity. The types of market risk arising from trading activity include interest rate risk, foreign exchange risk, commodity risk, equity price risk, credit spread risk and volatility risk. Financial Markets and Treasury are responsible for managing market risk arising from Westpac’s trading activity.

Value at risk (VaR)

VaR is the potential loss in earnings from adverse market movements and is calculated over a one-day time horizon at a 99% confidence level using a minimum of one year of historical rate data. VaR takes account of all material market variables that may cause a change in the value of the trading portfolio and the banking book including interest rates, foreign exchange rates, price changes, volatility, and the correlation among these variables.

 

 

 

Exchange rates

 

The following exchange rates were used in the Westpac Pillar 3 report, and reflect spot rates for the period end.

 

 

$

30 September 2018

31 March 2018

30 September 2017

USD

0.7218

0.7670

0.7844

GBP

0.5520

0.5445

0.5846

NZD

1.0919

1.0650

1.0867

EUR

0.6206

0.6220

0.6656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Disclosure regarding forward-looking statements

 

 

 

This report contains statements that constitute ‘forward-looking statements’ within the meaning of Section 21E of the US Securities Exchange Act of 1934.

 

Forward-looking statements are statements about matters that are not historical facts. Forward-looking statements appear in a number of places in this report and include statements regarding Westpac’s intent, belief or current expectations with respect to its business and operations, market conditions, results of operations and financial condition, including, without limitation, future loan loss provisions and financial support to certain borrowers. Words such as ‘will’, ‘may’, ‘expect’, ‘intend’, ‘seek’, ‘would’, ‘should’, ‘could’, ‘continue’, ‘plan’, ‘estimate’, ‘anticipate’, ‘believe’, ‘probability’, ‘risk’, ‘aim’ or other similar words are used to identify forward-looking statements. These forward-looking statements reflect Westpac’s current views with respect to future events and are subject to change, certain risks, uncertainties and assumptions which are, in many instances, beyond Westpac’s control, and have been made based upon management’s expectations and beliefs concerning future developments and their potential effect upon Westpac. There can be no assurance that future developments will be in accordance with Westpac’s expectations or that the effect of future developments on Westpac will be those anticipated. Actual results could differ materially from those expected, depending on the outcome of various factors, including, but not limited to:

 

l      the effect of, and changes in, laws, regulations, taxation or accounting standards or practices and government policy, particularly changes to liquidity, leverage and capital requirements;

 

l      regulatory investigations, and other actions, inquiries, litigation, fines, penalties, restrictions or other regulator imposed conditions, including as a result of our actual or alleged failure to comply with laws (such as financial crime laws), regulations or regulatory policy;

 

l      internal and external events which may adversely impact Westpac’s reputation;

 

l      information security breaches, including cyberattacks;

 

l      reliability and security of Westpac’s technology and risks associated with changes to technology systems;

 

l      the stability of Australian and international financial systems and disruptions to financial markets and any losses or business impacts Westpac or its customers or counterparties may experience as a result;

 

l      market volatility, including uncertain conditions in funding, equity and asset markets;

 

l      adverse asset, credit or capital market conditions;

 

l      an increase in defaults in credit exposures because of a deterioration in economic conditions;

 

l      the conduct, behaviour or practices of Westpac or its staff;

 

l      changes to Westpac’s credit ratings or to the methodology used by credit rating agencies;

 

l      levels of inflation, interest rates, exchange rates and market and monetary fluctuations;

 

l      market liquidity and investor confidence;

 

l      changes in economic conditions, consumer spending, saving and borrowing habits in Australia, New Zealand and in other countries in which Westpac or its customers or counterparties conduct their operations and Westpac’s ability to maintain or to increase market share, margins and fees, and control expenses;

 

l      the effects of competition, including from established providers of financial services and from non-financial service entities in the geographic and business areas in which Westpac conducts its operations;

 

l      the timely development and acceptance of new products and services and the perceived overall value of these products and services by customers;

 

l      the effectiveness of Westpac’s risk management policies, including internal processes, systems and employees;

 

l      the incidence or severity of Westpac insured events;

 

l      the occurrence of environmental change (including as a result of climate change) or external events in countries in which Westpac or its customers or counterparties conduct their operations;

 

l      changes to the value of Westpac’s intangible assets;

 

l      changes in political, social or economic conditions in any of the major markets in which Westpac or its customers or counterparties operate;

 

l      the success of strategic decisions involving diversification or innovation, in addition to business expansion activity, business acquisitions and the integration of new businesses; and

 

l      various other factors beyond Westpac’s control.

 

The above list is not exhaustive. For certain other factors that may impact on forward-looking statements made by Westpac refer to ‘Risk factors’ in Westpac’s 2018 Annual Report. When relying on forward-looking statements to make decisions with respect to Westpac, investors and others should carefully consider the foregoing factors and other uncertainties and events.

 

Westpac is under no obligation to update any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise, after the date of this report.

 

110 | Westpac Group September 2018 Pillar 3 report