Exhibit 1

 

 

 

Pillar 3 report Table of contents

 

Structure of Pillar 3 report

 

Executive summary	3
Introduction	6
Risk appetite and risk types	7
Controlling and managing risk	8
Group structure	14
Capital overview	16
Leverage ratio	20
Credit risk management	22
Credit risk exposures	31
Credit risk mitigation	55
Counterparty credit risk	58
Securitisation	61
Market risk	71
Liquidity risk management	75
Liquidity coverage ratio	76
Net stable funding ratio	77
Operational risk	79
Equity risk	81
Interest Rate Risk in the Banking Book	83
Appendices
Appendix I – Regulatory capital reconciliation	85
Appendix II – Entities included in regulatory consolidation	91
Appendix III – Level 3 entities’ asset and liabilities	94
Appendix IV – Regulatory expected loss	95
Appendix V – APS330 quantitative requirements	96
Glossary	99
Disclosure regarding forward-looking statements	104

 

 

 

 

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 March 2019 Pillar 3 report

 

 

Pillar 3 report Executive summary

 

	31 March 2019	30 September 2018	31 March 2018
The Westpac Group at Level 2
Common equity Tier 1 (CET1) capital after deductions $m	44,680	45,239	43,639
Risk weighted assets (RWA) $m	419,819	425,384	415,744
Common equity Tier 1  capital ratio %	10.64	10.63	10.50
Additional Tier 1 capital %	2.20	2.15	2.31
Tier 1 capital ratio %	12.84	12.78	12.81
Tier 2 capital %	1.78	1.96	2.02
Total regulatory capital ratio %	14.62	14.74	14.83
APRA leverage ratio %	5.72	5.84	5.75
Level 1 common equity Tier 1 capital ratio (CET1) %	10.72	10.50	10.40

 

 

Westpac’s common equity Tier 1 (CET1) capital ratio was 10.64% at 31 March 2019, up 1 basis point from 30 September 2018. This included First Half 2019 cash earnings of $3,296 million (79 basis points). Cash earnings for First Half 2019 were impacted by additional provisions for estimated customer refunds and payments (and associated costs) ($896 million before tax), and provisions for costs associated with the reset of the Wealth business ($190 million before tax). These provisions for customer remediation and wealth reset costs are referred to as ‘notable items’. Excluding these notable items, which reduced the CET1 ratio by 25 basis points 1 , organic capital growth was 27 basis points.

 

 

 

 

The 27 basis point organic capital growth included:

 

l        First Half 2019 cash earnings, excluding notable items (96 basis point increase);

 

l        The 2018 final dividend payment, net of Dividend Reinvestment Plan (DRP) share issuance (69 basis point decrease);

 

l        Ordinary RWA (before FX movements and regulatory measurement changes) fell slightly (7 basis point increase), mainly driven by reductions in non-credit RWA, with credit RWA slightly higher over the half; and,

 

l        A 7 basis point reduction from other movements, primarily driven by movements in fair value on economic hedges (3 basis point decrease) and regulatory expected loss in excess of eligible provisions (2 basis point decrease).

 

Other items reduced the CET1 capital ratio by 26 basis points. This was primarily driven by the impact of notable items (25 basis point decrease).

 

 

 

 

 

 

 

 

 

1   The impact of notable items on the CET1 ratio includes the capital deduction for the associated deferred tax assets.

 

Westpac Group March 2019 Pillar 3 report | 3

 

 

Pillar 3 report Executive summary

 

$m	31 March 2019	30 September 2018	31 March 2018
Risk weighted assets at Level 2
Credit risk	362,762	362,749	361,391
Market risk	8,338	6,723	7,406
Operational risk	38,641	39,113	30,866
Interest rate risk in the banking book	7,076	12,989	12,875
Other	3,002	3,810	3,206
Total RWA	419,819	425,384	415,744
Total Exposure at Default	1,029,817	1,021,926	1,013,355

 

 

Risk Weighted Assets

 

Total RWA decreased $5.6 billion or 1.3% this half:

 

l       Credit Risk RWA was little changed, with key movements including:

 

o      Adoption of AASB 9 reduced RWA $3.9 billion. Under the changes, certain defaulted loans (mostly mortgages) now carry higher accounting impairment provisions and therefore RWA is reduced.

 

o      Regulatory modelling updates for corporate and bank exposures reduced RWA by $1.0 billion.

 

These were offset by:

 

o      Portfolio growth, which increased RWA by $0.9 billion.

 

o      Changes to the credit quality of the portfolio, which increased RWA by $1.4 billion.

 

o      Foreign currency translation impacts which increased RWA by $2.1 billion from the appreciation of the NZ$.

 

o      An increase in mark-to-market related credit risk RWA of $0.5 billion.

 

l       Non-credit RWA decreased $5.6 billion or 8.9%. The main driver was a $5.9 billion reduction in interest rate risk in the banking book driven by lower interest rate risk exposure and an increase in the embedded gain.

 

 

Additional Tier 1 and Tier 2 capital movement for First Half 2019

 

During the half, Westpac:

 

l       Issued $1.42 billion of Additional Tier 1 capital (Westpac Capital Notes 6), of which approximately $0.72 billion comprised reinvestment by the holders of Westpac Capital Notes (net 17 basis points increase).

 

l       Redeemed $0.66 billion of Additional Tier 1 capital (residual Westpac Capital Notes) (16 basis points decrease).

 

l       Redeemed $1.0 billion of Tier 2 capital instruments (24 basis points decrease).

 

 

Exposure at Default

 

Over the half, exposure at default (EAD) increased $7.9 billion (up 0.8%), primarily due to growth in corporate exposures of $6.6 billion.

 

 

Leverage Ratio

 

The leverage ratio represents the amount of Tier 1 capital relative to exposure 1 . At 31 March 2019, Westpac’s leverage ratio was 5.72%, down 12 basis points since 30 September 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 31 March 2019 was 138% (30 September 2018: 133%) and the average LCR for the quarter ending 31 March 2019 was 134% 2 .

 

 

 

 

 

 

 

 

 

 

 

1   As defined under Attachment D of APS110: Capital Adequacy

2   Calculated as a simple average of the daily observations over the 31 March 2019 quarter.

 

4 | Westpac Group March 2019 Pillar 3 report

 

 

Pillar 3 report Executive summary

 

 

Net Stable Funding Ratio (NSFR)

 

The Group is required to maintain a NSFR, designed to encourage longer-term funding resilience, of at least 100%. Westpac had a NSFR of 113% at 31 March 2019 (30 September 2018: 114%). The ratio has remained relatively stable since 30 September 2018 as an increase in loans was funded by an increase in wholesale funding.

 

 

AASB 9 Financial Instruments 1

 

Westpac adopted AASB 9 on 1 October 2018. While the adoption of AASB 9 had an immaterial impact on Westpac’s capital ratios (2 basis point increase) it had an impact on the components of the capital ratios with CET1 capital down $0.3 billion, and RWA down $3.9 billion.

 

 

Change in loan impairment provisions

 

The following table summarises the AASB 9 transition impact on loan impairment provisions:

 

1 October 2018	AAS Provisions			GRCL	Total Regulatory
$m	IAPs	CAPs	Total	Adjustment	Provisions
Specific Provisions
for impaired loans	422	328	750	NA	750
for defaulted but not impaired loans	NA	522	522	NA	522
for Stage 2	NA	1,392	1,392	NA	1,392
Total Specific Provisions 2	422	2,242	2,664	NA	2,664
General Reserve for Credit Loss 2	NA	1,380	1,380	NA	1,380
Total provisions for impairment charges	422	3,622	4,044	NA	4,044
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
Total Specific Provisions	422	436	858	NA	858
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

 

 

Summary of changes in other Pillar 3 disclosures

 

The following table summarises the AASB 9 transition impact on key Pillar 3 metrics:

 

	Credit Risk Weighted		Regulatory Expected		Expected Loss for		Specific Provisions
	Assets		Loss		non-defaulted assets		for Impaired Loans
$m	30-Sep-18	1-Oct-18	30-Sep-18	1-Oct-18	30-Sep-18	1-Oct-18	30-Sep-18	1-Oct-18
Corporate	69,584	69,464	552	562	471	471	54	56
Business lending	35,417	35,187	657	676	442	442	173	177
Sovereign	1,644	1,644	2	2	2	2	-	-
Bank	6,606	6,606	8	8	8	8	-	-
Residential mortgages	132,734	129,633	1,272	1,540	1,048	1,048	103	118
Australian credit cards	6,313	6,296	358	359	304	304	50	51
Other retail	13,777	13,628	604	623	465	465	137	157
Small business	16,329	16,015	453	483	339	339	77	127
Specialised Lending	57,043	57,043	836	836	588	588	47	52
Securitisation	5,918	5,918	-	-	-	-	-	-
Standardised	17,384	17,384	-	-	-	-	12	12
Total	362,749	358,818	4,742	5,089	3,667	3,667	653	750

 

 

 

 

---

1   Refer to the Westpac 2019 Interim Results for further details on AASB 9.

2   Provisions classified according to APRA’s letter dated 4 July 2017 “Provisions for regulatory purposes and AASB 9 financial instruments”.

 

Westpac Group March 2019 Pillar 3 report | 5

 

 

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 31 March 2019.

 

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).

 

Capital instruments disclosures are updated when:

 

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

 

l         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/

 

6 | Westpac Group March 2019 Pillar 3 report

 

 

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 strategic objectives and business plans, 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 including the potential for capital and liquidity ratios to fall below target levels in stressed scenarios.

 

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, Westpac Group Risk Appetite Statement and the establishment of additional controls through supporting frameworks and policies.

 

Overview of key risk types

 

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

 

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

 

l          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;

 

l          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;

 

l          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;

 

l          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;

 

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

 

l          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;

 

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

 

l          insurance risk - the risk in our licensed regulated 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;

 

l          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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group March 2019 Pillar 3 report | 7

 

 

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, assessing 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;

 

 

 

8 | Westpac Group March 2019 Pillar 3 report

 

 

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 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 relevant 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.

 

 

1    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.

 

Westpac Group March 2019 Pillar 3 report | 9

 

 

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 risk, equity risk 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.

 

 

 

 

 

10 | Westpac Group March 2019 Pillar 3 report

 

 

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 policies in support of the Compliance Management Framework;

 

 

 

 

 

 

Westpac Group March 2019 Pillar 3 report | 11

 

 

Pillar 3 report Controlling and managing risk

 

Risk management governance structure (continued)

 

	l        provides independent advice on compliance matters; l        develop and deliver compliance training to relevant employees as required; l        reports on the performance of the Compliance Management Framework; and l        maintains resources with the skills and tools required to fulfil 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 | Westpac Group March 2019 Pillar 3 report

 

 

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 which 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 2nd Line can also approve certain risks outside the authorities granted to the 1st 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group March 2019 Pillar 3 report | 13

 

 

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.

 

14 | Westpac Group March 2019 Pillar 3 report

 

 

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.

 

Westpac Group March 2019 Pillar 3 report | 15

 

 

Pillar 3 report Capital overview

 

Capital Structure

 

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

 

	31 March	30 September	31 March
$m	2019	2018	2018
Common equity Tier 1 capital
Paid up ordinary capital	36,351	36,054	35,168
Treasury shares	(571)	(507)	(506)
Equity based remuneration	1,527	1,441	1,414
Foreign currency translation reserve	(331)	(379)	(522)
Accumulated other comprehensive income	15	(11)	(14)
Non-controlling interests - other	54	55	50
Retained earnings	26,949	27,883	27,122
Less retained earnings in life and general insurance, funds management and securitisation entities	(1,289)	(1,218)	(1,238)
Deferred fees	234	258	254
Total common equity Tier 1 capital	62,939	63,576	61,728
Deductions from common equity Tier 1 capital
Goodwill (excluding funds management entities)	(8,665)	(8,644)	(8,656)
Deferred tax assets	(1,710)	(1,169)	(1,116)
Goodwill in life and general insurance, funds management and securitisation entities	(941)	(942)	(1,032)
Capitalised expenditure	(1,778)	(1,838)	(1,867)
Capitalised software	(1,881)	(1,792)	(1,628)
Investments in subsidiaries not consolidated for regulatory purposes	(1,522)	(1,567)	(1,532)
Regulatory expected loss in excess of eligible provisions 1	(1,148)	(1,312)	(1,192)
General reserve for credit losses adjustment	-	(356)	(339)
Defined benefit superannuation fund surplus	(66)	(78)	-
Equity investments	(482)	(570)	(680)
Regulatory adjustments to fair value positions	(65)	(68)	(46)
Other Tier 1 deductions	(1)	(1)	(1)
Total deductions from common equity Tier 1 capital	(18,259)	(18,337)	(18,089)
Total common equity Tier 1 capital after deductions	44,680	45,239	43,639
Additional Tier 1 capital
Basel III complying instruments	9,216	9,144	9,041
Basel III transitional instruments	-	-	566
Total Additional Tier 1 capital	9,216	9,144	9,607
Net Tier 1 regulatory capital	53,896	54,383	53,246
Tier 2 capital
Basel III complying instruments	7,143	8,025	8,102
Basel III transitional instruments	495	486	473
Eligible general reserve for credit loss	66	54	55
Basel III transitional adjustment	-	-	-
Total Tier 2 capital	7,704	8,565	8,630
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	(103)	(93)	(83)
Total deductions from Tier 2 capital	(243)	(233)	(223)
Net Tier 2 regulatory capital	7,461	8,332	8,407
Total regulatory capital	61,357	62,715	61,653

 

 

 

 

 

 

 

 

 

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

 

16 | Westpac Group March 2019 Pillar 3 report

 

 

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

 

%	31 March 2019	30 September 2018	31 March 2018
The Westpac Group at Level 2
Common equity Tier 1 capital ratio	10.6	10.6	10.5
Additional Tier 1 capital	2.2	2.2	2.3
Tier 1 capital ratio	12.8	12.8	12.8
Tier 2 capital	1.8	1.9	2.0
Total regulatory capital ratio	14.6	14.7	14.8
The Westpac Group at Level 1
Common equity Tier 1 capital ratio	10.7	10.5	10.4
Additional Tier 1 capital	2.3	2.3	2.4
Tier 1 capital ratio	13.0	12.8	12.8
Tier 2 capital	1.8	2.0	2.1
Total regulatory capital ratio	14.8	14.8	14.9

 

Westpac New Zealand Limited’s capital adequacy ratios

 

%	31 March 2019	30 September 2018	31 March 2018
Westpac New Zealand Limited
Common equity Tier 1 capital ratio	11.7	11.7	11.8
Additional Tier 1  capital	2.8	2.8	2.8
Tier 1 capital ratio	14.5	14.5	14.6
Tier 2 capital	2.0	2.1	2.0
Total regulatory capital ratio	16.5	16.6	16.6

 

 

 

 

1    Noting that APRA may apply higher CET1 requirements for an individual ADI.
	Westpac Group March 2019 Pillar 3 report | 17

 

 

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 .

 

31 March 2019	IRB	Standardised	Total Risk	Total Capital
$m	Approach	Approach 2	Weighted Assets	Required 1
Credit risk
Corporate	73,551	1,737	75,288	6,023
Business lending	35,294	982	36,276	2,902
Sovereign	1,653	1,042	2,695	216
Bank	7,066	31	7,097	568
Residential mortgages	132,133	5,273	137,406	10,992
Australian credit cards	5,910	-	5,910	473
Other retail	13,082	944	14,026	1,122
Small business	16,092	-	16,092	1,287
Specialised lending	54,833	446	55,279	4,422
Securitisation	5,583	-	5,583	447
Mark-to-market related credit risk 3	-	7,110	7,110	569
Total	345,197	17,565	362,762	29,021
Market risk			8,338	667
Operational risk			38,641	3,091
Interest rate risk in the banking book			7,076	566
Other assets 4			3,002	240
Total			419,819	33,585
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

 

 

 

 

 

 

 

 

 

 

 

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 March 2019 Pillar 3 report

 

 

Pillar 3 report Capital overview

 

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 March 2019 Pillar 3 report | 19

 

 

Pillar 3 report Leverage ratio

 

Leverage ratio

 

The following table summarises Westpac’s leverage ratio at 31 March 2019. This has been determined using APRA’s definition of the leverage ratio as specified in APS110 Capital Adequacy.

 

$ billion	31 March 2019	31-December 2018	30 September 2018	30 June 2018
Tier 1 Capital	53.9	53.6	54.4	52.6
Total Exposures	942.4	936.0	931.1	935.1
Leverage ratio	5.7%	5.7%	5.8%	5.6%

 

Leverage ratio disclosure

 

 

$m		31 March 2019
On-balance sheet exposures
1	On-balance sheet items (excluding derivatives and securities financing transactions (SFTs), but including collateral)	855,300
2	(Asset amounts deducted in determining Tier 1 capital)	(18,258)
3	Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of rows 1 and 2)	837,042
Derivative exposures
4	Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)	9,325
5	Add-on amounts for potential future credit exposure (PFCE) associated with all derivatives transactions	16,758
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)	(862)
8	(Exempted central counterparty (CCP) leg of client-cleared trade exposures)	-
9	Adjusted effective notional amount of written credit derivatives	4,577
10	(Adjusted effective notional offsets and add-on deductions for written credit derivatives)	(4,488)
11	Total derivative exposures (sum of rows 4 to 10)	25,310
SFT exposures
12	Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions	5,106
13	(Netted amounts of cash payables and cash receivables of gross SFT assets)	-
14	Counterparty credit risk exposure for SFT assets	32
15	Agent transaction exposures	-
16	Total SFT exposures (sum of rows 12 to 15)	5,138
Other off-balance sheet exposures
17	Off-balance sheet exposure at gross notional amount	200,884
18	(Adjustments for conversion to credit equivalent amounts)	(126,012)
19	Other off-balance sheet exposures (sum of rows 17 and 18)	74,872
Capital and total exposures
20	Tier 1 Capital	53,896
21	Total exposures (sum of rows 3, 11, 16 and 19)	942,362
Leverage ratio %
22	Leverage ratio	5.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20 | Westpac Group March 2019 Pillar 3 report

 

 

Pillar 3 report Leverage ratio

 

Summary comparison of accounting assets versus leverage ratio exposure measure

 

 

$m		31 March 2019
1	Total consolidated assets as per published financial statements	891,062
2	Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation	(8,891)
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	3,545
5	Adjustment for SFTs (i.e. repos and similar secured lending)	32
6	Adjustment for off-balance sheet exposures (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)	74,872
7	Other adjustments	(18,258)
8	Leverage ratio exposure	942,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group March 2019 Pillar 3 report | 21

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22 | Westpac Group March 2019 Pillar 3 report

 

 

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 internal 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.

 

 

 

Westpac Group March 2019 Pillar 3 report | 23

 

 

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.

 

24 | Westpac Group March 2019 Pillar 3 report