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	32
Credit risk mitigation	56
Counterparty credit risk	58
Securitisation	61
Market risk	71
Funding and 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
Remuneration	85
Appendices
Appendix I – Regulatory capital reconciliation	92
Appendix II – Entities included in regulatory consolidation	98
Appendix III – Level 3 entities’ assets and liabilities	101
Appendix IV – Regulatory expected loss	102
Appendix V – APS330 quantitative requirements	103
Glossary	106
Disclosure regarding forward-looking statements	111

 

 

 

 

 

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 2019 Pillar 3 report

 

 

Pillar 3 report Executive summary

 

	30 September 2019	31 March 2019	30 September 2018
Level 2 Regulatory capital structure
Common equity Tier 1 (CET1) capital after deductions $m	45,752	44,680	45,239
Risk weighted assets (RWA) $m	428,794	419,819	425,384
Common equity Tier 1 capital ratio %	10.67	10.64	10.63
Additional Tier 1 capital %	2.17	2.20	2.15
Tier 1 capital ratio %	12.84	12.84	12.78
Tier 2 capital %	2.79	1.78	1.96
Total regulatory capital ratio %	15.63	14.62	14.74
APRA leverage ratio %	5.68	5.72	5.84
Level 1 Regulatory capital structure
Common equity Tier 1 (CET1) capital after deductions $m	46,380	43,850	42,988
Risk weighted assets (RWA) $m	422,475	409,231	409,240
Level 1 Common equity Tier 1 capital ratio (CET1) %	10.98	10.72	10.50

 

Westpac’s common equity Tier 1 (CET1) capital ratio was 10.67% at 30 September 2019, up 3 basis points from 31 March 2019, as organic capital generation was largely offset by other items. This included Second Half 2019 cash earnings of $3,553 million (83 basis points). Cash earnings for Second Half 2019 were impacted by additional provisions for estimated customer refunds, payments, associated costs, and litigation ($488 million before tax), and provisions for costs associated with the restructuring of the Wealth business ($51 million before tax). These provisions for customer remediation and wealth restructuring costs are referred to as ‘notable items’1 (13 basis points). Excluding these notable items, organic capital growth was 51 basis points.

 

 

The 51 basis point organic capital growth included:

 

l         Second Half 2019 cash earnings, excluding notable items (92 basis point increase);

 

l         The 2019 interim dividend payment, net of dividend reinvestment plan (DRP) share issuance (48 basis point decrease);

 

l         Ordinary RWA (before regulatory measurement changes, and excluding IRRBB) grew slightly (4 basis point decrease), mainly driven by increases in credit RWA, and mark to market CVA;

 

l        Reduction in interest rate risk in the banking book (IRRBB) RWA (17 basis point increase), driven by an increase in the embedded gain from falling interest rates; and

 

l         A 6 basis point reduction from other capital movements, largely driven by movements in regulatory deductions.

 

Other items reduced the CET1 capital ratio by 48 basis points, principally:

 

l         Operational risk overlays comprising the Culture, Governance and Accountability (CGA) self-assessment overlay imposed by APRA (16 basis point reduction), and an increase in the overlay to better align Westpac to the standardised approach (5 basis point reduction);

 

l         Implementation of APRA’s new derivatives capital standard (14 basis point reduction)2; and

 

l         Notable items (13 basis point reduction).

 

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

2 APRA prudential standard APS180 Counterparty Credit Risk became effective on 1 July 2019 and implements the standardised approach to counterparty credit risk (SA-CCR)

 

Westpac Group September 2019 Pillar 3 report | 3

 

 

Pillar 3 report Executive summary

 

$m	30 September 2019	31 March 2019	30 September 2018
Risk weighted assets at Level 2
Credit risk	367,864	362,762	362,749
Market risk	9,350	8,338	6,723
Operational risk	47,680	38,641	39,113
Interest rate risk in the banking book	530	7,076	12,989
Other	3,370	3,002	3,810
Total RWA	428,794	419,819	425,384
Total Exposure at Default	1,054,178	1,029,817	1,021,926

 

Risk Weighted Assets

 

Total RWA increased $9.0 billion or 2.1% this half:

 

l        Credit risk RWA increased $5.1 billion over the half. This included a $5.3 billion increase from implementation of APRA’s new derivatives capital standard1. The remaining movements comprised:

 

o        An increase in mark-to-market related credit risk of $2.0 billion, mostly due to lower interest rates;

 

o        Changes to credit quality and portfolio mix, which reduced RWA by $2.3 billion;

 

o        Foreign currency translation impacts which reduced RWA by $0.7 billion; and

 

o        Business growth which increased RWA by $0.8 billion.

 

l        Non-credit RWA increased $3.9 billion over the half, driven by:

 

o        An increase of $9.0 billion in operational risk RWA, mainly from operational risk overlays2;

 

o        A decrease of $6.5 billion in interest rate risk in the banking book RWA, driven by an increase in the embedded gain from falling interest rates; and

 

o        An increase of $1.0 billion in market risk RWA and an increase of $0.4 billion in other assets RWA.

 

Supplementary capital movement for Second Half 2019

 

During the half, Westpac issued $4.2 billion of Tier 2 capital instruments, increasing the total regulatory capital ratio by 99 basis points. The higher new issuance was in response to APRA’s increased total capital requirements to be met by 1 January 2024.

 

Exposure at Default

 

Exposure at default (EAD) increased $24 billion (or 2%), primarily due to implementation of the standardised approach to counterparty credit risk which increased EAD by $16 billion.

 

Leverage Ratio

 

The leverage ratio represents the amount of Tier 1 capital relative to exposure3.  At 30 September 2019, Westpac’s leverage ratio was 5.68%, down 4 basis points since 31 March 2019.

 

Liquidity Coverage Ratio (LCR)

 

Westpac’s average LCR for the quarter ending 30 September 2019 was 132%4 (31 March 2019: 134%).

 

Net Stable Funding Ratio (NSFR)

 

Westpac’s NSFR at 30 September 2019 was 112% (31 March 2019: 113%). The reduction in the Group’s NSFR over the half mainly reflects changes in the treatment of certain loans which increased the Group’s required stable funding.

 

 

 

 

 

 

1  APRA prudential standard APS180 Counterparty Credit Risk became effective on 1 July 2019 and implements the revised standardised approach to counterparty credit risk (SA-CCR)

2  This includes the $500 million capital overlay applied by APRA in response to Westpac’s Culture, Governance and Accountability (CGA) self-assessment, which translates to a $6.25 billion increase in RWA. This also includes a $165 million increase in the operational risk capital overlay to align Westpac’s operational risk capital with the standardised approach, which translates to a $2.1 billion increase in RWA.

3  As defined under Attachment D of APS110: Capital Adequacy

4  Calculated as a simple average of the daily observations over the 30 September 2019 quarter.

 

4 | Westpac Group September 2019 Pillar 3 report

 

 

Pillar 3 report Executive summary

 

Implementation of APRA’s new derivative capital standard

 

APRA prudential standard APS180 Counterparty Credit Risk became effective on 1 July 2019 and implements the Standardised Approach to Counterparty Credit Risk (SA-CCR). The following tables detail the transition impacts of this change on key Pillar 3 metrics.

 

 

	Risk Weighted Assets
	Off-balance sheet, Market Related
$m	30 June 2019	1 July 2019	Movement
Corporate	5,125	6,420	1,295
Business lending	-	-	-
Sovereign	171	259	88
Bank	2,090	3,130	1,040
Residential mortgages	-	-	-
Australian credit cards	-	-	-
Other retail	-	-	-
Small business	-	-	-
Specialised lending	964	1,488	524
Securitisation	69	42	27
Standardised	53	145	92
Mark-to-market related credit risk1	8,203	10,441	2,238
Total	16,675	21,925	5,250
	Exposure at default
	Off-balance sheet, Market Related
$m	30 June 2019	1 July 2019	Movement
Corporate	11,522	16,882	5,360
Business lending	-	-	-
Sovereign	2,544	4,913	2,369
Bank	7,379	10,056	2,677
Residential mortgages	-	-	-
Australian credit cards	-	-	-
Other retail	-	-	-
Small business	-	-	-
Specialised lending	1,318	2,042	724
Securitisation	196	124	72
Standardised	2,655	7,886	5,231
Total	25,614	41,903	16,289

 

 

 

 

 

 

 

 

 

 

 

 

 

---

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

 

Westpac Group September 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 30 September 2019.

 

In addition to this report, the regulatory disclosures section of the Westpac website1 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 September 2019 Pillar 3 report

 

 

Pillar 3 report Risk appetite and risk types

 

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 that result in material impacts on our customers, our staff, our reputation, our regulatory relationships and/or 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 risks. The annual review of the Westpac Group Risk Management Framework, Westpac’s annual Group Risk Management Strategy, Westpac Group Risk Appetite Statement and the establishment of additional controls through supporting frameworks and policies all play vital roles

 

Overview of key risk types

 

l        governance risk – the risk that the right information does not get to the right people or governance fora in the right format and timeframe to empower decision making. It is driven by organisational structures and relationships including between the Board, management, its shareholders and other stakeholders, which leads to deficient decision making, poor accountability and ineffective structures and processes;

 

l        risk culture – the risk that our culture does not promote and reinforce behavioural expectations or structures to identify, understand, discuss and act on risks. This leads to ineffective risk management, poor risk awareness, risk-taking outside of risk appetite that is tolerated and a culture where key learnings are not integrated into Group-wide and customer outcomes, impeding continuous improvement;

 

l        strategic risk – the risks arising from key elements of the strategic objectives and business plans;

 

l        capital adequacy risk- the risk that the firm has an insufficient level or composition of capital to support its normal business activities and to meet its regulatory capital requirements under normal operating environments or stressed conditions (both actual and as defined for internal planning or regulatory testing purposes). This includes the risk from Westpac’s pension plans;

 

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

 

l        funding and liquidity risk - the risk that Westpac cannot meet its payment obligations or that it does not have the appropriate amount, tenor and composition of funding and liquidity to support its assets;

 

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 includes legal and regulatory risk but excludes strategic risk;

 

l        conduct and compliance risk - the risk of failing to abide by compliance obligations required of us or otherwise failing to have behaviours and practices that deliver suitable, fair and clear outcomes for our customers and that support market integrity;

 

l        cyber risk – the potential for loss or harm to the business and stakeholders related to the use of technology;

 

l        reputational risk - the risk that an action, inaction, transaction, investment or event will reduce trust in Westpac’s integrity and competence by clients, counterparties, investors regulators, employees or the public; and

 

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. This includes climate change related risks.

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2019 Pillar 3 report | 7

 

 

Pillar 3 report Controlling and managing risk

 

We have adopted the Three Lines of Defence model to aid in holistic end-to-end management of risk, within which all employees play an active role. This necessitates co-operation between businesses and functions, such that there are no gaps in risk coverage. Effective risk management enables:

 

l     accurate measurement of our risk profile and to balance risk and reward within our risk appetite, optimising financial growth opportunities and mitigating potential loss or damage;

 

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

 

l     deliver suitable, fair, clear and transparent 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 Group’s overall risk management framework, the Westpac Group Risk Management Framework, Westpac’s annual Group 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 establish a view of the Group’s current and future risk position relative to its risk appetite and capital strength; review and approve frameworks, policies and processes for managing risk; and review and, where appropriate, approve risks beyond the approval discretion provided to management.

 

Risk management governance structure as at 30 September 2019

 

Board

l     approves Westpac’s Risk Management Framework, Westpac’s annual Risk Management Strategy and Westpac’s Group Risk Appetite Statement; and   l     makes annual declaration to APRA on risk management.

Board Risk & Compliance Committee (BRCC)

l     assists the Board to consider and approve the Group’s overall risk framework for managing risk; l     reviews and recommends the Risk Management Framework and annual Risk Management Strategy and Group Risk Appetite Statement to the Board for approval; l     reviews and monitors the risk profile and controls of the Group consistent with Westpac’s Group Risk Appetite Statement; l     reviews and approves material frameworks, policies and processes for managing risk; 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 and performance; l     oversight of our credit portfolio; 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     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 September 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 and monitoring the market risk profile; l     operational risk – approving key policies supporting the Operational Risk Management Framework, and monitoring the performance of operational 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     sustainability risk – reviewing and approving the Sustainability Risk Management Framework; and l     compliance risk – reviewing and approving the Westpac Group Compliance Management Framework and Financial Crime Risk Management Framework and supporting policies and standards and monitoring the performance of compliance and financial crime risk management and controls. 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’s stress testing, sets the target capital ranges for regulatory capital and reviews and monitors capital levels for consistency with Westpac’s risk appetite; l     provides relevant periodic assurances and reports (as appropriate) to the Board Audit Committee; l     reviews and approves other risk management frameworks1 and the monitoring of performance under those frameworks (as appropriate); l     forms a view on Westpac’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 relevant matters that come to the attention of the Board Risk & Compliance; and l     in its capacity as the Westpac Group’s US Risk Committee, oversees the key risks, risk management framework and policies of Westpac’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 Westpac, in the context that these policies and practices reflect Westpac’s risk management framework, including making recommendations to the Board for the adjustment of variable components of remuneration for relevant employees including as a result of risk or compliance failures. Board Technology Committee (BTC) l     oversees the implementation of the Westpac’s technology strategy, including risks associated with major technology programs.

 

 

 

1  Additional frameworks include the Equity Risk Management Framework, Related Entity Risk Management Framework, and Insurance Risk Management Framework.

 

Westpac Group September 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 Westpac’s various strategic and performance goals within the approved risk appetite; and l     approves position statements that guide Westpac’s response to sustainability issues; and l     monitors key risks within each business unit, capital adequacy and Westpac’s reputation.
Executive risk committees	Westpac Group Executive Risk Committee (RISKCO) l     leads the management and oversight of material risks across Westpac within the context of the risk appetite approved by the Board; l     oversees the effectiveness of the Risk Management Framework and the execution of the Risk Management Strategy; l     monitors and reviews Westpac’s risk profile for all identified material risks; l     shapes and promotes a strong risk culture; and l     oversees emerging 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 Westpac; l     reviews the level and quality of capital to ensure that it is commensurate with Westpac’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     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     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 Operational Risk Committee (OPCO) l     reviews and oversees the Operational Risk Management Framework and key supporting policies; l     oversees Westpac’s operational risk profile; and l     identifies emerging operational risks, and appropriate actions to address these.

 

 

 

10 | Westpac Group September 2019 Pillar 3 report

 

 

Pillar 3 report Controlling and managing risk

 

Risk management governance structure (continued)

 

	Westpac Group Remuneration Oversight Committee (ROC) l     supporting the CEO, BRC and the Board by reviewing and approving remuneration frameworks, guidelines and short term variable reward plans underpinning the Board-approved Westpac Group Remuneration Policy from a Human Resources, Risk (including Compliance), Finance and Legal perspective and in line with external requirements; l     assisting the BRC and the Board in fulfilling its responsibility to oversee remuneration policies and practices of Westpac in the context that these policies and practices fairly and responsibly reward individuals having regard to customer and shareholder interests, long term financial soundness and prudential risk management; l     recommending to the CEO for recommendation to the BRC remuneration arrangements for Responsible Persons, risk and financial control employees, Material Risk Takers and other individuals whose activities may impact the financial soundness of Westpac below the Group Executive level; and l     recommending to the CEO for recommendation to the BRC the criteria and rationale for determining the total quantum of Westpac’s variable reward pool.
	Prudential Reporting and Compliance Committee l     oversees from a Group-wide perspective, Westpac’s compliance with prudential requirements and regulatory reporting; l     oversees the effective management of prudential compliance breaches, incidents or issues including remediation actions; and l     monitors and reviews ongoing prudential governance activities, including changes to prudential standards.
	Reputation Risk Committee l     reviews issues with material reputation risk that arise in the operations of Westpac’s business to mitigate reputation risk and detrimental customer impacts.
	Westpac Group Financial Crime Risk Committee l     oversees Anti-Money Laundering and Counter-Terrorism Financing, Anti-Bribery and Corruption, Sanctions and Tax Transparency within the context of the risk appetite approved by the Board; l     reviews and oversees the Financial Crime Risk Management Framework, key supporting policies, programs and standards; l     monitors and oversees Westpac’s financial crime risk profile; and l     identifies emerging financial crime risks, and appropriate actions to address these.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2019 Pillar 3 report | 11

 

 

Pillar 3 report Controlling and managing risk

 

Risk management governance structure (continued)

 

Risk function	Risk Function l     promotes a strong risk culture; l     owns the design and content of the Risk Management Framework; l     defines the structure and  coverage of risk appetite; l     defines the annual risk strategy to execute the Risk Management Framework ensuring the management of risks in alignment with risk appetite and business strategy; l     establishes risk policies, procedures and limits; l     measures and reports on risk levels; and l     provides oversight of and direction on the management of risks.
Independent internal review	Group Audit l     reviews the adequacy and effectiveness of management controls over risk.
Divisional business units and Functions	Business Units and Functions 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 September 2019 Pillar 3 report

 

 

Pillar 3 report Controlling and managing risk

 

Roles and responsibilities

 

Our Three Lines of Defence approach is designed on a functional basis and covers all employees within Westpac.

 

The First Line of Defence – Business and support: manages the risks they originate

 

The First Line proactively identifies, evaluates, owns and manages the risks in their business/domain. It also ensures that business activities are within approved risk appetite and policies. The First Line of defence is accountable for ‘self-certification’. In managing its risk, the First Line is required to establish and maintain appropriate governance structures, controls, resources and self-assessment processes, including issue identification, recording and escalation procedures.

 

The Second Line of Defence – Risk: provides oversight, insight and control of First Line activities

 

The Second Line sets frameworks, policies, limits and standards for use across Westpac. The Second Line reviews and challenges First Line activities and decisions that may materially affect Westpac’s risk position, and independently evaluate the effectiveness of First Line’s controls, monitoring, compliance, and monitors progress towards mitigating risks. In addition, the Second Line provides insights to the First Line, assisting in developing, maintaining and enhancing the business’ approach to risk management. The Second Line analyses and reports on the aggregated risk profile of Westpac to ensure end-to-end oversight of risk and can accept risks outside of the business’ risk appetite.

 

The Third Line of Defence – Audit: provides independent audit

 

The Third Line is an independent assurance function that evaluates and opines on the adequacy and effectiveness of both First and Second Line risk management approaches and tracks remediation progress, with the aim of providing the Board, and senior executives, with comfort that Westpac’s governance, risk management and internal controls are operating effectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 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 adequacy1 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 basis2.

 

The Westpac Group

 

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

 

 

Accounting consolidation3

 

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 31 of Westpac’s 2019 Annual Report for further details.

 

14 | Westpac Group September 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 Entities1. 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 September 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.

 

	30 September	31 March	30 September
$m	2019	2019	2018
Common equity Tier 1 capital
Paid up ordinary capital	37,508	36,351	36,054
Treasury shares	(575)	(571)	(507)
Equity based remuneration	1,548	1,527	1,441
Foreign currency translation reserve	(199)	(331)	(379)
Accumulated other comprehensive income	(68)	15	(11)
Non-controlling interests - other	58	54	55
Retained earnings	27,188	26,949	27,883
Less retained earnings in life and general insurance, funds management and securitisation entities	(1,407)	(1,289)	(1,218)
Deferred fees	267	234	258
Total common equity Tier 1 capital	64,320	62,939	63,576
Deductions from common equity Tier 1 capital
Goodwill (excluding funds management entities)	(8,648)	(8,665)	(8,644)
Deferred tax assets	(2,034)	(1,710)	(1,169)
Goodwill in life and general insurance, funds management and securitisation entities	(940)	(941)	(942)
Capitalised expenditure	(1,719)	(1,778)	(1,838)
Capitalised software	(2,019)	(1,881)	(1,792)
Investments in subsidiaries not consolidated for regulatory purposes	(1,540)	(1,522)	(1,567)
Regulatory expected loss in excess of eligible provisions1	(1,106)	(1,148)	(1,312)
General reserve for credit losses adjustment	-	-	(356)
Defined benefit superannuation fund surplus	(73)	(66)	(78)
Equity investments	(425)	(482)	(570)
Regulatory adjustments to fair value positions	(63)	(65)	(68)
Other Tier 1 deductions	(1)	(1)	(1)
Total deductions from common equity Tier 1 capital	(18,568)	(18,259)	(18,337)
Total common equity Tier 1 capital after deductions	45,752	44,680	45,239
Additional Tier 1 capital
Basel III complying instruments	9,299	9,216	9,144
Basel III transitional instruments	-	-	-
Total Additional Tier 1 capital	9,299	9,216	9,144
Net Tier 1 regulatory capital	55,051	53,896	54,383
Tier 2 capital
Basel III complying instruments	11,645	7,143	8,025
Basel III transitional instruments	519	495	486
Eligible general reserve for credit loss	62	66	54
Basel III transitional adjustment	-	-	-
Total Tier 2 capital	12,226	7,704	8,565
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	(115)	(103)	(93)
Total deductions from Tier 2 capital	(255)	(243)	(233)
Net Tier 2 regulatory capital	11,971	7,461	8,332
Total regulatory capital	67,022	61,357	62,715

 

 

 

 

 

 

 

 

 

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 September 2019 Pillar 3 report

 

 

Pillar 3 report Capital overview

 

Capital management strategy

 

Westpac’s approach to capital management seeks to ensure that it is adequately capitalised as an ADI. Westpac evaluates its approach to capital management 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 regulatory and economic 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 ‘unquestionably strong’ capital benchmarks, Westpac will seek to operate with a CET1 capital ratio above 10.5% in March and September as measured under the existing capital framework. Additional buffers may also be held to reflect challenging or uncertain environments. 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 levels once APRA finalises its review of the capital adequacy framework.

 

Total regulatory capital developments

 

On 9 July 2019 APRA announced that it will require the major banks (including Westpac) to lift Total Regulatory Capital by three percentage points of RWA by 1 January 2024 in order to boost loss absorbing capacity and support orderly resolution. APRA also confirmed that its overall long term target of an additional four to five percentage points of loss absorbing capacity remains unchanged, and that it will consider the most feasible alternative method of sourcing the remaining one to two percentage points, taking into account the particular characteristics of the Australian financial system.

 

Further details of APRA’s regulatory changes are set out in the Significant Developments section of Westpac’s 2019 Annual Report.

 

Westpac’s capital adequacy ratios

 

%	30 September 2019	31 March 2019	30 September 2018
The Westpac Group at Level 2
Common equity Tier 1 capital ratio	10.7	10.6	10.6
Additional Tier 1 capital	2.2	2.2	2.2
Tier 1 capital ratio	12.8	12.8	12.8
Tier 2 capital	2.8	1.8	1.9
Total regulatory capital ratio	15.6	14.6	14.7
The Westpac Group at Level 1
Common equity Tier 1 capital ratio	11.0	10.7	10.5
Additional Tier 1 capital	2.2	2.3	2.3
Tier 1 capital ratio	13.2	13.0	12.8
Tier 2 capital	2.9	1.8	2.0
Total regulatory capital ratio	16.1	14.8	14.8

 

Westpac New Zealand Limited’s capital adequacy ratios

 

%	30 September 2019	31 March 2019	30 September 2018
Westpac New Zealand Limited
Common equity Tier 1 capital ratio	11.3	11.7	11.7
Additional Tier 1  capital	2.6	2.8	2.8
Tier 1 capital ratio	13.9	14.5	14.5
Tier 2 capital	2.0	2.0	2.1
Total regulatory capital ratio	15.9	16.5	16.6

 

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

 

Westpac Group September 2019 Pillar 3 report | 17

 

 

Pillar 3 report Capital overview

 

Capital requirements

 

This table shows risk weighted assets and associated capital requirements1 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 2019	IRB	Standardised	Total Risk	Total Capital
$m	Approach	Approach2	Weighted Assets	Required1
Credit risk
Corporate	74,807	1,166	75,973	6,078
Business lending	35,470	950	36,420	2,914
Sovereign	2,068	1,069	3,137	251
Bank	8,339	46	8,385	671
Residential mortgages	131,629	5,010	136,639	10,931
Australian credit cards	5,089	-	5,089	407
Other retail	12,395	894	13,289	1,063
Small business	16,090	-	16,090	1,287
Specialised lending	55,262	518	55,780	4,462
Securitisation	5,749	-	5,749	460
Mark-to-market related credit risk3	-	11,313	11,313	905
Total	346,898	20,966	367,864	29,429
Market risk			9,350	748
Operational risk			47,680	3,814
Interest rate risk in the banking book			530	42
Other assets4			3,370	270
Total			428,794	34,303
31 March 2019	IRB	Standardised	Total Risk	Total Capital
$m	Approach	Approach2	Weighted Assets	Required1
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 risk3	-	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 assets4			3,002	240
Total			419,819	33,585

 

 

 

 

 

 

 

 

 

 

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 2019 Pillar 3 report

 

 

Pillar 3 report Capital overview

 

30 September 2018	IRB	Standardised	Total Risk	Total Capital
$m	Approach	Approach2	Weighted Assets	Required1
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 risk3	-	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 assets4			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.

 

Westpac Group September 2019 Pillar 3 report | 19

 

 

Pillar 3 report Leverage ratio

 

Leverage ratio

 

The following table summarises Westpac’s leverage ratio at 30 September 2019. This has been determined using APRA’s definition of the leverage ratio as specified in APS110 Capital Adequacy.

 

$ billion	30 September 2019	30 June 2019	31 March 2019	31 December 2018
Tier 1 Capital	55.1	53.7	53.9	53.6
Total Exposures	968.8	946.7	942.4	936.0
Leverage ratio	5.7%	5.7%	5.7%	5.7%

 

 

Leverage ratio disclosure

 

$m		30 September 2019
On-balance sheet exposures
1	On-balance sheet items (excluding derivatives and securities financing transactions (SFTs), but including collateral)	860,848
2	(Asset amounts deducted in determining Tier 1 capital)	(18,586)
3	Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of rows 1 and 2)	842,262
Derivative exposures
4	Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)	21,636
5	Add-on amounts for potential future credit exposure (PFCE) associated with all derivatives transactions	21,987
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)	(2,485)
8	(Exempted central counterparty (CCP) leg of client-cleared trade exposures)	-
9	Adjusted effective notional amount of written credit derivatives	4,942
10	(Adjusted effective notional offsets and add-on deductions for written credit derivatives)	(4,862)
11	Total derivative exposures (sum of rows 4 to 10)	41,218
SFT exposures
12	Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions	6,833
13	(Netted amounts of cash payables and cash receivables of gross SFT assets)	-
14	Counterparty credit risk exposure for SFT assets	4,777
15	Agent transaction exposures	-
16	Total SFT exposures (sum of rows 12 to 15)	11,610
Other off-balance sheet exposures
17	Off-balance sheet exposure at gross notional amount	197,957
18	(Adjustments for conversion to credit equivalent amounts)	(124,201)
19	Other off-balance sheet exposures (sum of rows 17 and 18)	73,756
Capital and total exposures
20	Tier 1 Capital	55,051
21	Total exposures (sum of rows 3, 11, 16 and 19)	968,846
Leverage ratio %
22	Leverage ratio	5.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20 | Westpac Group September 2019 Pillar 3 report

 

 

Pillar 3 report Leverage ratio

 

Summary comparison of accounting assets versus leverage ratio exposure measure

 

$m		30 September 2019
1	Total consolidated assets as per published financial statements	906,626
2	Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation	(9,086)
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	11,359
5	Adjustment for SFTs (i.e. repos and similar secured lending)	4,777
6	Adjustment for off-balance sheet exposures (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)	73,756
7	Other adjustments	(18,586)
8	Leverage ratio exposure	968,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 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. The Group Chief Credit Officer is responsible for the effectiveness of credit risk management, including credit approval decisioning beyond business authority level and appointing our most senior authorised credit officers. 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 originated 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 September 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 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 September 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 million1.
		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 properties2.
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 September 2019 Pillar 3 report

 

 

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 - Credit provisions are held by Westpac to cover expected credit losses 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.

 

Westpac Group September 2019 Pillar 3 report | 25