UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
|
|
|
|
|
☐ |
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
||
|
Or |
||
|
|
||
|
☒ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
||
|
For the fiscal year ended September 30, 2021 |
||
|
|
||
|
Or |
||
|
|
||
|
☐ |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
||
|
Or |
||
|
|
||
|
☐ |
|
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 1-10167
WESTPAC BANKING CORPORATION
Australian Business Number 33 007 457 141
(Exact name of Registrant as specified in its charter)
New South Wales, Australia
(Jurisdiction of incorporation or organization)
275 Kent Street, Sydney, NSW 2000, Australia
(Address of principal executive offices)
Westpac Banking Corporation, New York branch,
575 Fifth Avenue, 39th Floor, New York, New York 10017-2422,
Attention: Branch Manager, telephone number: (212) 551-1800
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: 2.800% Notes due January 11, 2022, Floating Rate Notes due January 11, 2022, 2.500% Notes due June 28, 2022, Floating Rate Notes due June 28, 2022, 2.750% Notes due January 11, 2023, Floating Rate Notes due January 11, 2023, 2.000% Notes due January 13, 2023, Floating Rate Notes due January 13, 2023, 3.650% Notes due May 15, 2023, Floating Rate Notes due May 15, 2023, 3.300% Notes due February 26, 2024, Floating Rate Notes due February 26, 2024, 2.350% Notes due February 19, 2025, 2.850% Notes due May 13, 2026, 1.150% Notes due June 3, 2026, Floating Rate Notes due June 3, 2026, 2.700% Notes due August 19, 2026, 3.350% Notes due March 8, 2027, 3.400% Notes due January 25, 2028, 2.650% Notes due January 16, 2030, 2.894% Subordinated Notes due February 4, 2030, 2.150% Notes due June 3, 2031, 4.322% Subordinated Notes due November 23, 2031, 4.110% Subordinated Notes due July 24, 2034, 2.668% Subordinated Notes due November 15, 2035, 4.421% Subordinated Notes due July 24, 2039, 2.963% Subordinated Notes due November 16, 2040 and 5.000% Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
|
|
|
|
|
Ordinary shares |
|
3,668,591,808 fully paid |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒No ☐ (not currently applicable to registrant)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
Large accelerated filer ☒ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Emerging growth company ☐ |
|
|
|
|
|
147 |
WESTPAC GROUP 2021 ANNUAL REPORT |
|
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbannes-Oxley Act (15 U.S.C. 7262(b)) by the registered public account firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board ☒
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
“Item 17” ☐“Item 18” ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company.
Yes ☐No ☒
Table of contents
|
|
|
|
|
|
|
Form 20-F cross-reference index |
ii |
|
Section 4 |
313 |
|
Financial statements |
1 |
|
Shareholding information |
314 |
|
Income statements |
2 |
|
Additional information |
330 |
|
Statements of comprehensive income |
3 |
|
Glossary of abbreviations and defined terms |
335 |
|
Balance sheets |
4 |
|
|
|
|
Statements in changes in equity |
5 |
|
|
|
|
Cash flow statements |
7 |
|
|
|
|
Notes to the financial statements |
8 |
|
|
|
|
Statutory statements |
129 |
|
|
|
|
Exhibits index |
136 |
|
|
|
|
Section 1 |
148 |
|
|
|
|
Strategic Review |
148 |
|
|
|
|
Corporate governance |
175 |
|
|
|
|
Directors’ report |
198 |
|
|
|
|
Remuneration report |
212 |
|
|
|
|
Information on Westpac |
235 |
|
|
|
|
Section 2 |
243 |
|
|
|
|
Reding this report |
244 |
|
|
|
|
Review of Group’s operations |
246 |
|
|
|
|
Income statement review |
247 |
|
|
|
|
Balance sheet review |
256 |
|
|
|
|
Capital resources |
258 |
|
|
|
|
Divisional performance |
261 |
|
|
|
|
Consume |
268 |
|
|
|
|
Business |
269 |
|
|
|
|
Westpac Institutional Bank |
270 |
|
|
|
|
Westpac New Zealand |
272 |
|
|
|
|
Specialist Businesses |
274 |
|
|
|
|
Group Businesses |
276 |
|
|
|
|
Risk and risk management |
282 |
|
|
|
|
Risk management |
282 |
|
|
|
|
Risk factors |
290 |
|
|
|
|
Other Westpac business information |
304 |
|
|
|
|
Section 3 Financial statements |
311 |
|
|
|
In this Annual Report a reference to ‘Westpac’, ‘Group’, ‘Westpac Group’, ‘we’, ‘us’ and ‘our’ is to Westpac Banking Corporation ABN 33 007 457 141 and its subsidiaries unless it clearly means just Westpac Banking Corporation.
For certain information about the basis of preparing the financial information in this Annual Report see ‘Reading this report’ in Section 2. In addition, this Annual Report contains statements that constitute ‘forward-looking statements’ within the meaning of Section 21E of the US Securities Exchange Act of 1934. For an explanation of forward-looking statements and the risks, uncertainties and assumptions to which they are subject, see ‘Reading this report’ in Section 2.
Information contained in or accessible through the websites mentioned in this Annual 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.
Form 20-F cross-reference index
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT III |
|
Form 20-F cross-reference index
|
|
|
|
|
IV WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Form 20-F cross-reference index
|
|
|
|
|
|
|
Page |
|
|
|
|
|
Item 1402: Distribution of assets, liabilities and stockholders’ equity; interest rates and interest differential |
||
|
|
|
|
|
Average balance sheets |
26-28, 256 |
|
|
|
|
|
|
Analysis of net interest earnings |
23-24, 249-50 |
|
|
|
|
|
|
Interest rate and interest differential analysis |
23-24, 249-50 |
|
|
|
|
|
|
Item 1403: Investments in debt securities t II Investment portfolio |
|
|
|
|
|
|
|
Weighted average yield of debt securities |
33 |
|
|
|
|
|
|
Calculation of weighted average yield; tax-exempt obligations |
33 |
|
|
|
|
|
|
Item 1404: Loan Portfolio |
|
|
|
|
|
|
|
Maturity and interest rate profile of loan portfolio |
33-34 |
|
|
|
|
|
|
Item 1405: Allowances for Credit Losses |
|
|
|
|
|
|
|
Credit ratios and material changes |
35-43 |
|
|
|
|
|
|
Allocation of the allowance for credit losses |
35-43 |
|
|
|
|
|
|
Item 1406: Deposits |
||
|
|
|
|
|
Deposits by category |
46-47 |
|
|
|
|
|
|
Uninsured deposits |
47 |
|
|
|
|
|
|
Time deposits |
47 |
|
Financial
statements
Income statements
for the years ended 30 September
Westpac Banking Corporation
The above income statements should be read in conjunction with the accompanying notes.
Statements of comprehensive income
for the years ended 30 September
Westpac Banking Corporation
The above statements of comprehensive income should be read in conjunction with the accompanying notes.
|
|
|
|
|
4 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Balance sheets
as at 30 September
Westpac Banking Corporation
The above balance sheets should be read in conjunction with the accompanying notes.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 5 |
|
Statements of changes in equity
for the years ended 30 September
Westpac Banking Corporation
The above statements of changes in equity should be read in conjunction with the accompanying notes.
|
1. |
2021 consisted of 2021 interim dividend of 58 cents per share ($2,127 million) and 2020 final dividend of 31 cents per share ($1,120 million) (2020: 2019 final dividend of 80 cents per share ($2,791 million), 2019: 2019 interim dividend of 94 cents per share ($3,239 million) and 2018 final dividend of 94 cents per share ($3,227 million)), all fully franked at 30%. |
2.Refer to Note 1 for further details.
|
|
|
|
|
6 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Statements of changes in equity
for the years ended 30 September
Westpac Banking Corporation
The above statements of changes in equity should be read in conjunction with the accompanying notes.
|
1. |
2021 consisted of 2021 interim dividend of 58 cents per share ($2,127 million) and 2020 final dividend of 31 cents per share ($1,120 million) (2020: 2019 final dividend of 80 cents per share ($2,791 million)), all fully franked at 30%. |
|
2. |
Refer to Note 1 for further details. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 7 |
|
Cash flow statements
for the years ended 30 September
Westpac Banking Corporation
The above cash flow statements should be read in conjunction with the accompanying notes.
Note 1. Financial statements preparation
This financial report of Westpac Banking Corporation (the Parent Entity), together with its controlled entities (the Group or Westpac), for the year ended 30 September 2021, was authorised for issue by the Board of Directors on 31 October 2021. The Directors have the power to amend and reissue the financial report.
The principal accounting policies are set out below and in the relevant notes to the financial statements. The accounting policy for the recognition and derecognition of financial assets and financial liabilities precedes Note 10. These accounting policies provide details of the accounting treatments adopted for complex balances and where accounting standards provide policy choices. These policies have been consistently applied to all the years presented, unless otherwise stated.
a. Basis of preparation
(i) Basis of accounting
This financial report is a general purpose financial report prepared in accordance with:
| ● | the requirements for an Authorised Deposit-taking Institution (ADI) under the Banking Act 1959 (as amended); |
| ● | Australian Accounting Standards (AAS) and Interpretations as issued by the Australian Accounting Standards Board (AASB); and |
| ● | the Corporations Act 2001. |
Westpac Banking Corporation is a for-profit entity for the purposes of preparing this financial report.
The financial report also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and Interpretations as issued by the IFRS Interpretations Committee (IFRIC). It also includes additional disclosures required for foreign registrants by the United States Securities and Exchange Commission (US SEC).
In September 2020, the SEC amended these disclosure requirements which are effective for the Group’s 30 September 2022 year end unless early adopted. The Group has early adopted these requirements for the 30 September 2021 year end. The key changes are the removal of some disclosures considered to be superseded or duplicated by other SEC reporting requirements or relevant accounting standards as well as introducing some additional disclosure requirements. The key additional disclosure requirements for the Group are more granular maturity (refer to Note 12) and write-off disclosures for loans (refer to Note 13) and disclosure of uninsured deposits, i.e. those deposits which either do not have a form of government based deposit insurance scheme or are in excess of the insurance scheme limit (refer to Note 16).
All amounts have been rounded in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, to the nearest million dollars, unless otherwise stated.
(ii) Historical cost convention
The financial report has been prepared under the historical cost convention, as modified by applying fair value accounting to financial assets and financial liabilities (including derivative instruments) measured at fair value through income statement (FVIS) or in other comprehensive income (OCI).
(iii) Changes in accounting policy
Software-as-a-Service (SaaS) arrangements
The Group previously capitalised costs incurred in configuring or customising Software-as-a-Service (SaaS) arrangements as intangible assets as the Group considered that it would benefit from these implementation costs over the contract term of the SaaS arrangements. Following the IFRS Interpretations Committee (IFRIC) agenda decision on Configuration or Customisation Costs in a Cloud Computing Arrangement which was published in April 2021, the Group has reconsidered its accounting treatment and adopted the treatment set out in this IFRIC agenda decision. The revised accounting policy capitalises these costs as intangible assets only if the implementation activities create an intangible asset that the entity controls and the intangible asset meets the recognition criteria. Costs that do not meet these criteria are expensed as incurred, unless they are paid to the suppliers of the SaaS arrangement to significantly customise the cloud-based software for the Group, in which case they are recognised as a prepayment for services and amortised over the expected period of use of the SaaS arrangement.
Note 1. Financial statements preparation (continued)
The change in policy has been applied retrospectively, however as the impact on prior years was not material the amount relating to prior years has been adjusted through opening retained earnings and comparatives have not been restated. The impact on the Group’s financial statements to reflect the write-off of previously capitalised costs is shown in the table below. A positive number indicates an increase in the relevant balance, while a negative number indicates a reduction in the relevant balance:
In addition, the Group reclassified $32 million from intangible assets – computer software to other assets – prepayments (Parent Entity $29 million).
(iv) Standards adopted during the year ended 30 September 2021
A revised Conceptual Framework (Framework) was adopted by the Group on 1 October 2020. The Framework includes new definitions and recognition criteria for assets, liabilities, income and expenses and other relevant financial reporting concepts. These changes did not have a material impact on the Group.
AASB 2020-8 was early adopted, as permitted by the standard, by the Group for the financial year ended 30 September 2021. AASB 2020-8 makes amendments to AASB 9 Financial Instruments (December 2014) (AASB 9), AASB 139 Financial Instruments: Recognition and Measurement (AASB 139), and AASB 7 Financial Instruments: Disclosures (AASB 7) resulting from Interest Rate Benchmark Reform (IBOR reform). Amendments are also made to AASB 4 Insurance contracts and AASB 16 Leases. The amendments:
| ● | allow the Group to account for a change in contractual cash flows of a financial instrument or lease liability that are a direct result of the IBOR reform to be accounted for prospectively by updating the effective interest rate rather than recognising a modification gain or loss provided that the change is made on an economically equivalent basis; |
| ● | allow the Group to continue hedge accounting and not trigger a de-designation when the following occurs specific to IBOR reform: |
|
– |
changes to hedge documentation to update the hedged risk, item and instrument; |
|
– |
changes to the method of assessing hedge ineffectiveness; |
|
– |
once the hedge relationship has been converted from LIBOR to alternative reference rates (ARR) the cumulative change in fair value for ineffectiveness testing could be reset to zero if this would improve the retrospective effectiveness test; |
|
– |
this amendment can apply to macro cash flow and fair value hedges where subgroups can be formed within the portfolio of hedges where some are under the existing LIBOR rate and others have already changed to the ARR; |
| ● | require additional disclosures including: |
|
– |
quantitative information regarding all financial instruments linked to IBOR which have not been yet converted to ARR; |
|
– |
changes to the entity’s risk management strategy arising from IBOR reform; and |
|
– |
the management of the Group’s transition to ARR. |
There was no impact on opening retained earnings due to the adoption of the standard. Comparative information is not required to be restated. Note 21 provides further information regarding the Group’s exposure to the IBOR reform.
|
|
|
|
|
10 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 1. Financial statements preparation (continued)
(v) Business combinations
Business combinations are accounted for using the acquisition method of accounting. Acquisition cost is measured as the aggregate of the fair value at the date of acquisition of the assets given, equity instruments issued or liabilities incurred or assumed. Acquisition-related costs are expensed as incurred (except for those costs arising on the issue of equity instruments which are recognised directly in equity).
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at fair value on the acquisition date. Goodwill is measured as the excess of the acquisition cost, the amount of any non-controlling interest and the fair value of any previous Westpac equity interest in the acquiree, over the fair value of the identifiable net assets acquired.
(vi) Foreign currency translation
Functional and presentational currency
The consolidated financial statements are presented in Australian dollars which is the Parent Entity’s functional and presentation currency. The functional currency of offshore entities is usually the main currency of the economy it operates in.
Transactions and balances
Foreign currency transactions are translated into the functional currency of the relevant branch or subsidiary using the exchange rates prevailing at the dates of the transactions. Foreign exchange (FX) gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in OCI for qualifying cash flow hedges and qualifying net investment hedges.
Foreign operations
Assets and liabilities of foreign branches and subsidiaries that have a functional currency other than the Australian dollar are translated at exchange rates prevailing on the balance date. Income and expenses are translated at average exchange rates prevailing during the year. Equity balances are translated at historical exchange rates.
The resulting exchange differences are recognised in the foreign currency translation reserve and in OCI.
Where the group hedges the currency translation risk arising from net investments in foreign operations, the gains or losses on the hedging instruments are also reflected in OCI to the extent the hedge is effective. When all or part of a foreign operation is disposed or borrowings that are part of the net investments are repaid, a proportionate share of such exchange differences is recognised in the income statement as part of the gain or loss on disposal or repayment of borrowing.
(vii) Comparative revisions
Comparative information has been revised where appropriate to conform to changes in presentation in the current year and to enhance comparability.
b. Critical accounting assumptions and estimates
Applying the Group’s accounting policies requires the use of judgement, assumptions and estimates which impact the financial information. The significant assumptions and estimates used are discussed in the relevant notes below:
| ● | Note 7 Income tax |
| ● | Note 13 Provisions for expected credit losses |
| ● | Note 15 Life insurance assets and life insurance liabilities |
| ● | Note 22 Fair values of financial assets and financial liabilities |
| ● | Note 25 Intangible assets |
| ● | Note 26 Provisions, contingent liabilities, contingent assets and credit commitments |
| ● | Note 33 Superannuation commitments |
Intangible assets – computer software
Effective from 1 October 2020, the Group made a prospective change to computer software capitalisation by increasing the threshold for capitalisation for software development costs from a total project spend of $1 million to a total project spend of $20 million. This does not have a material effect on the Group’s financial statements. The change increased operating expenses and reduced profit before income tax in the year by $191 million.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 11 |
|
Notes to the financial statements
Note 1. Financial statements preparation (continued)
Impact of COVID-19
The COVID-19 pandemic and the measures put in place domestically and globally to control the spread of the virus continue to impact global economies and financial markets. As a result, this remains a source of uncertainty and judgement is required in relation to our critical accounting assumptions and estimates, primarily relating to:
| ● | expected credit losses (ECL); and |
| ● | recoverable amount assessments of intangible assets. |
As there is a higher than usual degree of uncertainty associated with these assumptions and estimates, the actual outcomes may differ significantly which may impact accounting estimates included in these financial statements. The impact of COVID-19 is discussed further in each of the related notes.
c. Future developments in accounting standards
AASB 17 Insurance Contracts (AASB 17) was issued on 19 July 2017 and will be effective for the 30 September 2024 year end unless early adopted. This will replace AASB 4 Insurance Contracts (AASB 4), AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. However, the Group’s remaining insurance businesses are classified as held for sale with the sale transactions expected to complete prior to AASB 17 taking effect. As a result, we do not anticipate the standard having any impact on the Group.
Other amendments to existing standards that are not yet effective are not expected to have a material impact to the Group.
|
|
|
|
|
12 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
FINANCIAL PERFORMANCE
Note 2. Segment reporting
Accounting policy
|
Operating segments are presented on a basis consistent with information provided internally to Westpac’s key decision makers and reflect the management of the business, rather than the legal structure of the Group. Internally, Westpac uses ‘cash earnings’ in assessing the financial performance of its divisions. Management believes this allows the Group to:
●
more effectively assess current year performance against prior years;
●
compare performance across business divisions; and
●
compare performance across peer companies.
Cash earnings is viewed as a measure of the level of profit that is generated by ongoing operations and is therefore typically considered in assessing distributions, including dividends. Cash earnings is neither a measure of cash flow nor net profit determined on a cash accounting basis, as it includes both cash and non-cash adjustments to statutory net profit. To determine cash earnings, three categories of adjustments are made to statutory results:
●
material items that key decision makers at the Westpac Group believe do not reflect ongoing operations;
●
items that are not typically considered when dividends are recommended, mainly economic hedging impacts; and
●
accounting reclassifications between individual line items that do not impact statutory results.
Internal charges and transfer pricing adjustments have been reflected in the performance of each operating segment. Inter-segment pricing is determined on an arm’s length basis. |
Reportable operating segments
We are one of Australia and New Zealand’s leading providers of financial services, operating under multiple brands, with a small presence in Europe, North America and Asia. We operate through an extensive branch and ATM network, significant online capability, and call centres supported by specialist relationship and product managers. Our operations comprise the following key divisions:
| ● | Consumer provides banking products, including mortgages, credit cards, personal loans, and savings and deposit products; |
| ● | Business serves the banking needs of SME and Commercial customers (including Agribusiness) and provides banking and advisory services to high net worth individuals through Private Wealth; |
| ● | Westpac Institutional Bank (WIB) provides a broad range of financial products and services to corporate, institutional and government customers; |
| ● | Westpac New Zealand provides banking, wealth and insurance products and services for consumer, business and institutional customers in New Zealand; |
| ● | Specialist Businesses comprises the operations that Westpac ultimately plans to exit with agreements in place for the sale of Westpac Life Insurance and motor vehicle dealer finance and novated leasing businesses. These sales are expected to finalise in 2022, subject to regulatory approvals. Other operations include investment products and services (including margin lending and equities broking), superannuation and retirement products as well as wealth administration platforms. It also manages Westpac Pacific which provides a full range of banking services in Fiji and Papua New Guinea; and |
| ● | Group Businesses includes the results of unallocated support functions such as Treasury, Chief Operating Office and Core Support. It also includes Group-wide elimination entries arising on consolidation, centrally raised provisions and other unallocated revenue and expenses. |
On 17 March 2021, Westpac announced that it was bringing together the leadership of its Consumer and Business divisions into a new Consumer and Business Banking division. No change has been made to segment reporting for 30 September 2021 as these changes are not yet reflected in internal reporting to Westpac’s key decision makers.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 13 |
|
Notes to the financial statements
Note 2. Segment reporting (continued)
The following tables present the segment results on a cash earnings basis for the Group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Westpac |
|
Westpac |
|
|
|
|
|
|
|
Net cash |
|
|
|
|
|
|
|
|
|
Institutional |
|
New |
|
Specialist |
|
Group |
|
|
|
earnings |
|
Income |
|
$m |
|
Consumer |
|
Business |
|
Bank |
|
Zealand |
|
Businesses |
|
Businesses |
|
Total |
|
adjustments |
|
statement |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
8,405 |
|
4,065 |
|
919 |
|
1,987 |
|
503 |
|
835 |
|
16,714 |
|
144 |
|
16,858 |
|
Net fee income |
|
393 |
|
452 |
|
555 |
|
140 |
|
69 |
|
(127) |
|
1,482 |
|
- |
|
1,482 |
|
Net wealth management and insurance income |
|
- |
|
21 |
|
- |
|
113 |
|
1,176 |
|
(104) |
|
1,206 |
|
5 |
|
1,211 |
|
Trading income |
|
78 |
|
72 |
|
455 |
|
58 |
|
33 |
|
19 |
|
715 |
|
4 |
|
719 |
|
Other income |
|
17 |
|
4 |
|
92 |
|
12 |
|
212 |
|
584 |
|
921 |
|
31 |
|
952 |
|
Net operating income before operating expenses and impairment (charges)/benefits |
|
8,893 |
|
4,614 |
|
2,021 |
|
2,310 |
|
1,993 |
|
1,207 |
|
21,038 |
|
184 |
|
21,222 |
|
Operating expenses1 |
|
(4,622) |
|
(2,530) |
|
(2,574) |
|
(1,062) |
|
(1,477) |
|
(1,018) |
|
(13,283) |
|
(28) |
|
(13,311) |
|
Impairment (charges)/benefits |
|
125 |
|
484 |
|
(162) |
|
79 |
|
66 |
|
(2) |
|
590 |
|
- |
|
590 |
|
Profit before income tax (expense)/benefit |
|
4,396 |
|
2,568 |
|
(715) |
|
1,327 |
|
582 |
|
187 |
|
8,345 |
|
156 |
|
8,501 |
|
Income tax (expense)/benefit |
|
(1,315) |
|
(779) |
|
45 |
|
(377) |
|
(387) |
|
(175) |
|
(2,988) |
|
(50) |
|
(3,038) |
|
Net profit attributable to NCI |
|
- |
|
- |
|
- |
|
- |
|
(2) |
|
(3) |
|
(5) |
|
- |
|
(5) |
|
Cash earnings |
|
3,081 |
|
1,789 |
|
(670) |
|
950 |
|
193 |
|
9 |
|
5,352 |
|
106 |
|
5,458 |
|
Net cash earnings adjustments |
|
- |
|
- |
|
- |
|
(2) |
|
- |
|
108 |
|
106 |
|
|
|
|
|
Net profit attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
owners of WBC |
|
3,081 |
|
1,789 |
|
(670) |
|
948 |
|
193 |
|
117 |
|
5,458 |
|
|
|
|
|
Balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans2 |
|
407,786 |
|
134,015 |
|
67,033 |
|
88,409 |
|
12,550 |
|
(9) |
|
709,784 |
|
|
|
|
|
Deposits and other borrowings2 |
|
235,569 |
|
158,741 |
|
97,770 |
|
75,756 |
|
11,008 |
|
48,111 |
|
626,955 |
|
|
|
|
|
1. |
Included in the Westpac Institutional Bank division in operating expenses is $1,192 million relating to impairment of assets (including goodwill and other intangible assets) for 2021 (2020: $Nil). For Specialist Businesses division, impairment of assets (including goodwill and other intangible assets) is $141 million for 2021 (2020: $571 million). For other divisions, there is no impairment of goodwill and impairment of other intangibles assets is not material. |
|
2. |
Specialist Businesses excludes balances presented as held for sale (refer to Note 37 for further details). |
|
|
|
|
|
14 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 2. Segment reporting (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Westpac |
|
Westpac |
|
|
|
|
|
|
|
Net cash |
|
|
|
|
|
|
|
|
|
Institutional |
|
New |
|
Specialist |
|
Group |
|
|
|
earnings |
|
Income |
|
$m |
|
Consumer |
|
Business |
|
Bank |
|
Zealand |
|
Businesses |
|
Businesses |
|
Total |
|
adjustments |
|
statement |
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
8,130 |
|
4,456 |
|
1,337 |
|
1,860 |
|
555 |
|
615 |
|
16,953 |
|
(46) |
|
16,907 |
|
Net fee income |
|
594 |
|
463 |
|
570 |
|
163 |
|
44 |
|
(179) |
|
1,655 |
|
- |
|
1,655 |
|
Net wealth management and insurance income |
|
- |
|
16 |
|
- |
|
177 |
|
1,319 |
|
(489) |
|
1,023 |
|
6 |
|
1,029 |
|
Trading income |
|
94 |
|
109 |
|
636 |
|
37 |
|
54 |
|
(23) |
|
907 |
|
22 |
|
929 |
|
Other income |
|
7 |
|
6 |
|
(11) |
|
46 |
|
(5) |
|
74 |
|
117 |
|
12 |
|
129 |
|
Net operating income before operating expenses and impairment (charges)/benefits |
|
8,825 |
|
5,050 |
|
2,532 |
|
2,283 |
|
1,967 |
|
(2) |
|
20,655 |
|
(6) |
|
20,649 |
|
Operating expenses |
|
(3,794) |
|
(2,094) |
|
(1,220) |
|
(939) |
|
(847) |
|
(1,137) |
|
(10,031) |
|
(75) |
|
(10,106) |
|
Impairment (charges)/ benefits |
|
(582) |
|
(172) |
|
(31) |
|
10 |
|
(111) |
|
92 |
|
(794) |
|
- |
|
(794) |
|
Profit before income tax (expense)/benefit |
|
4,449 |
|
2,784 |
|
1,281 |
|
1,354 |
|
1,009 |
|
(1,047) |
|
9,830 |
|
(81) |
|
9,749 |
|
Income tax (expense)/benefit |
|
(1,333) |
|
(838) |
|
(356) |
|
(369) |
|
(292) |
|
213 |
|
(2,975) |
|
16 |
|
(2,959) |
|
Net profit attributable to NCI |
|
- |
|
- |
|
- |
|
- |
|
(5) |
|
(1) |
|
(6) |
|
- |
|
(6) |
|
Cash earnings |
|
3,116 |
|
1,946 |
|
925 |
|
985 |
|
712 |
|
(835) |
|
6,849 |
|
(65) |
|
6,784 |
|
Net cash earnings adjustments |
|
- |
|
- |
|
- |
|
(1) |
|
(45) |
|
(19) |
|
(65) |
|
|
|
|
|
Net profit attributable to owners of WBC |
|
3,116 |
|
1,946 |
|
925 |
|
984 |
|
667 |
|
(854) |
|
6,784 |
|
|
|
|
|
Balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
399,279 |
|
146,867 |
|
73,572 |
|
78,005 |
|
17,216 |
|
(169) |
|
714,770 |
|
|
|
|
|
Deposits and other borrowings |
|
207,578 |
|
142,558 |
|
99,005 |
|
60,801 |
|
9,277 |
|
44,028 |
|
563,247 |
|
|
|
|
Reconciliation of cash earnings to net profit attributable to owners of WBC
Revenue from products and services
Details of revenue from external customers by product or service are disclosed in Notes 3 and 4. No single customer amounted to greater than 10% of the Group’s revenue.
Geographic segments
Geographic segments are based on the location of the office where the following items were recognised.
|
1. |
Other overseas included Pacific Islands, Asia, the Americas and Europe. |
|
2. |
Non-current assets represent property and equipment and intangible assets. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 15 |
|
Notes to the financial statements
Note 3. Net interest income
Accounting policy
|
Interest income and interest expense for all interest earning financial assets and interest bearing financial liabilities at amortised cost or FVOCI, detailed within the table below, are recognised using the effective interest rate method. Net income from treasury’s interest rate and liquidity management activities and the cost of the Bank levy are included in net interest income. The effective interest rate method calculates the amortised cost of a financial instrument by discounting the financial instrument’s estimated future cash receipts or payments to their present value and allocates the interest income or interest expense, including any fees, costs, premiums or discounts integral to the instrument, over its expected life. Interest income is calculated based on the gross carrying amount of financial assets in stages 1 and 2 of the Group’s ECL model and on the carrying amount net of the provision for ECL for financial assets in stage 3. |
|
1. |
Interest income included items relating to compliance, regulation and remediation costs recognised as an addition in interest income of $106 million (2020: $170 million reduction, 2019: $372 million reduction) for the Group, and an addition of $149 million (2020: $164 million reduction) for the Parent Entity. Refer to Note 26 for further details. |
|
2. |
Includes net impact of Treasury balance sheet management activities. |
|
|
|
|
|
16 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 4. Non-interest income
Accounting policy
|
Non-interest income includes net fee income, net wealth management and insurance income, trading income and other income. Net fee income When another party is involved in providing goods or services to a Group customer, the Group assesses whether the nature of the arrangement with its customer is as a principal provider or an agent of another party. Where the Group is acting as an agent for another party, the income earned by the Group is the net consideration received (i.e. the gross amount received from the customer less amounts paid to a third party provider). As an agent, the net consideration represents fee income for facilitating the transaction between the customer and the third party provider with primary responsibility for fulfilling the contract. Fee income Fee income is recognised when the performance obligation is satisfied by transferring the promised good or service to the customer. Fee income includes facility fees, transaction fees and other non-risk fee income. Facility fees include certain line fees, annual credit card fees and fees for providing customer bank accounts. They are recognised over the term of the facility/period of service on a straight-line basis. Transaction fees are earned for facilitating banking transactions such as FX fees, telegraphic transfers and issuing bank cheques. Fees for these one-off transactions are recognised once the transaction has been completed. Transaction fees are also recognised for credit card transactions including interchange fees net of scheme charges. These are recognised once the transaction has been completed, however, a component of interchange fees received is deferred as unearned income as the Group has a future service obligation to customers under the Group’s credit card reward programs. Other non-risk fee income includes advisory and underwriting fees which are recognised when the related service is completed. Income which forms an integral part of the effective interest rate of a financial instrument is recognised using the effective interest method and recorded in interest income (for example, loan origination fees). Fee expenses Fee expenses include incremental external costs that vary directly with the provision of goods or services to customers. An incremental cost is one that would not have been incurred if a specific good or service had not been provided to a specific customer. Fee expenses which form an integral part of the effective interest rate of a financial instrument are recognised using the effective interest method and recorded in net interest income. Fee expenses include the costs associated with credit card loyalty programs which are recognised as an expense when the services are provided on the redemption of points as well as merchant transaction costs. Net wealth management and insurance income Net wealth management income Wealth management fees earned for the ongoing management of customer funds and investments are recognised when the performance obligation is satisfied which is over the period of management. Insurance premium income Insurance premium income includes premiums earned for life insurance, life investment, loan mortgage insurance and general insurance products:
●
life insurance premiums with a regular due date are recognised as revenue on an accrual basis;
●
life investment premiums include a management fee component which is recognised as income over the period the service is provided. The deposit components of life insurance and investment contracts are not revenue and are treated as movements in life insurance liabilities;
●
general insurance premium comprises amounts charged to policyholders, excluding taxes, and is recognised based on the likely pattern in which the insured risk is likely to emerge. The portion not yet earned based on the pattern assessment is recognised as unearned premium liability.
|
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 17 |
|
Notes to the financial statements
Note 4. Non-interest income (continued)
Accounting policy (continued)
|
Insurance claims expense
●
life and general insurance contract claims are recognised as an expense when the liability is established;
●
claims incurred in respect of life investment contracts represent withdrawals and are recognised as a reduction in life insurance liabilities.
Changes in life insurance liabilities Changes in life insurance liabilities includes the change in the value of life insurance contract liabilities calculated using the margin on services methodology (MoS), specified in the Prudential Standard LPS 340 Valuation of Policy Liabilities (for discussion on MoS and critical accounting assumptions and estimates, refer to Note 15). Regulation, competition, interest rates, taxes, securities market conditions and general economic conditions also affect the estimation of life insurance liabilities. Trading income
●
realised and unrealised gains or losses from changes in the fair value of trading assets, liabilities and derivatives are recognised in the period in which they arise (except day one profits or losses which are deferred, refer to Note 22);
●
net income related to Treasury’s interest rate and liquidity management activities is included in net interest income.
Other income - dividend income
●
dividends on quoted shares are recognised on the ex-dividend date;
●
dividends on unquoted shares are recognised when the Company’s right to receive payment is established.
|
|
|
|
|
|
18 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 4. Non-interest income1 (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||||
|
$m |
|
2021 |
|
2020 |
|
2019 |
|
2021 |
|
2020 |
|
Net fee income |
|
|
|
|
|
|
|
|
|
|
|
Facility fees |
|
717 |
|
731 |
|
730 |
|
671 |
|
672 |
|
Transaction fees |
|
993 |
|
1,021 |
|
1,225 |
|
851 |
|
891 |
|
Other non-risk fee income |
|
- |
|
48 |
|
(76) |
|
(123) |
|
(52) |
|
Fee income |
|
1,710 |
|
1,800 |
|
1,879 |
|
1,399 |
|
1,511 |
|
Credit card loyalty programs |
|
(101) |
|
(102) |
|
(121) |
|
(71) |
|
(71) |
|
Transaction fee related expenses |
|
(127) |
|
(106) |
|
(103) |
|
(104) |
|
(81) |
|
Fee expenses |
|
(228) |
|
(208) |
|
(224) |
|
(175) |
|
(152) |
|
Net fee income |
|
1,482 |
|
1,592 |
|
1,655 |
|
1,224 |
|
1,359 |
|
Net wealth management and insurance income |
|
|
|
|
|
|
|
|
|
|
|
Net wealth management income |
|
657 |
|
631 |
|
276 |
|
- |
|
- |
|
Life insurance premium income |
|
1,077 |
|
1,297 |
|
1,443 |
|
- |
|
- |
|
General insurance and lenders mortgage insurance (LMI) net premium earned |
|
387 |
|
499 |
|
482 |
|
- |
|
- |
|
Life insurance investment and other income2 |
|
59 |
|
64 |
|
409 |
|
- |
|
- |
|
General insurance and LMI investment and other income |
|
76 |
|
42 |
|
52 |
|
- |
|
- |
|
Total insurance premium, investment and other income |
|
1,599 |
|
1,902 |
|
2,386 |
|
- |
|
- |
|
Life insurance claims and changes in life insurance liabilities3 |
|
(767) |
|
(1,284) |
|
(1,266) |
|
- |
|
- |
|
General insurance and LMI claims and other expenses |
|
(278) |
|
(498) |
|
(367) |
|
- |
|
- |
|
Total insurance claims, changes in life insurance liabilities and other expenses |
|
(1,045) |
|
(1,782) |
|
(1,633) |
|
- |
|
- |
|
Net wealth management and insurance income |
|
1,211 |
|
751 |
|
1,029 |
|
- |
|
- |
|
Trading income |
|
719 |
|
895 |
|
929 |
|
661 |
|
876 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
Dividends received from subsidiaries |
|
- |
|
- |
|
- |
|
1,184 |
|
762 |
|
Transactions with subsidiaries |
|
- |
|
- |
|
- |
|
973 |
|
579 |
|
Dividends received from other entities |
|
4 |
|
1 |
|
6 |
|
2 |
|
1 |
|
Net gain/(loss) on sale/derecognition of associates |
|
43 |
|
316 |
|
38 |
|
(11) |
|
305 |
|
Net gain/(loss) on disposal of assets |
|
7 |
|
11 |
|
61 |
|
- |
|
9 |
|
Net gain/(loss) on hedging of overseas operations |
|
(8) |
|
- |
|
- |
|
(150) |
|
(8) |
|
Net gain/(loss) on derivatives held for risk management purposes4 |
|
4 |
|
4 |
|
(11) |
|
4 |
|
4 |
|
Net gain/(loss) on financial assets measured at fair value |
|
655 |
|
(78) |
|
(39) |
|
118 |
|
(35) |
|
Net gain/(loss) on disposal of controlled entities and other businesses |
|
188 |
|
- |
|
3 |
|
- |
|
- |
|
Rental income on operating leases |
|
41 |
|
54 |
|
72 |
|
21 |
|
33 |
|
Share of associates’ net profit/(loss) |
|
(6) |
|
(23) |
|
(23) |
|
(2) |
|
- |
|
Other |
|
24 |
|
(36) |
|
22 |
|
169 |
|
(53) |
|
Total other income |
|
952 |
|
249 |
|
129 |
|
2,308 |
|
1,597 |
|
Total non-interest income |
|
4,364 |
|
3,487 |
|
3,742 |
|
4,193 |
|
3,832 |
Deferred income in relation to the credit card loyalty programs for the Group was $362 million as at 30 September 2021 (2020: $361 million, 2019: $322 million) and $35 million for the Parent Entity (2020: $30 million). This will be recognised as fee income as the credit card reward points are redeemed.
There were no other material contract assets or contract liabilities for the Group or the Parent Entity.
|
1. |
Non-interest income included items relating to compliance, regulation and remediation costs recognised as a reduction in non-risk fee income, net wealth management income and other income of $320 million (2020: $225 million, 2019: $860 million) for the Group, and $278 million (2020: $190 million) for the Parent Entity. Refer to Note 26 for further details. |
|
2. |
Includes policyholder tax recoveries. |
|
3. |
Life insurance claims and changes in life insurance liabilities are nil for the Group (2020: $260 million; 2019: nil) recognised as a result of the liability adequacy test on life insurance contracts (refer to Note 15). 2020 balance also includes a $97 million write-off of deferred acquisition costs for the Group (2019: nil) as a result of Westpac Life Insurance Limited (WLIS) ceasing to provide group life insurance products to BT Super. |
|
4. |
Income from derivatives held for risk management purposes reflects the impact of economic hedges of earnings. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 19 |
|
Notes to the financial statements
Note 5. Operating expenses1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||||
|
$m |
|
2021 |
|
2020 |
|
2019 |
|
2021 |
|
2020 |
|
Staff expenses |
|
|
|
|
|
|
|
|
|
|
|
Employee remuneration, entitlements and on-costs |
|
5,369 |
|
4,428 |
|
4,320 |
|
4,666 |
|
3,744 |
|
Superannuation expense2 |
|
475 |
|
413 |
|
378 |
|
409 |
|
351 |
|
Share-based payments |
|
97 |
|
80 |
|
108 |
|
94 |
|
76 |
|
Restructuring costs |
|
93 |
|
94 |
|
232 |
|
92 |
|
76 |
|
Total staff expenses |
|
6,034 |
|
5,015 |
|
5,038 |
|
5,261 |
|
4,247 |
|
Occupancy expenses |
|
|
|
|
|
|
|
|
|
|
|
Lease expense |
|
164 |
|
148 |
|
658 |
|
138 |
|
123 |
|
Depreciation and impairment of property and equipment3 |
|
955 |
|
708 |
|
222 |
|
845 |
|
614 |
|
Other |
|
107 |
|
160 |
|
143 |
|
95 |
|
145 |
|
Total occupancy expenses |
|
1,226 |
|
1,016 |
|
1,023 |
|
1,078 |
|
882 |
|
Technology expenses |
|
|
|
|
|
|
|
|
|
|
|
Amortisation and impairment of software assets3 |
|
1,240 |
|
970 |
|
719 |
|
1,171 |
|
896 |
|
Depreciation and impairment of IT equipment3 |
|
260 |
|
272 |
|
129 |
|
228 |
|
244 |
|
Technology services |
|
820 |
|
698 |
|
810 |
|
764 |
|
569 |
|
Software maintenance and licences |
|
531 |
|
398 |
|
371 |
|
463 |
|
343 |
|
Telecommunications |
|
181 |
|
216 |
|
207 |
|
157 |
|
190 |
|
Data processing |
|
96 |
|
89 |
|
83 |
|
96 |
|
88 |
|
Total technology expenses |
|
3,128 |
|
2,643 |
|
2,319 |
|
2,879 |
|
2,330 |
|
Other expenses |
|
|
|
|
|
|
|
|
|
|
|
Professional and processing services |
|
1,410 |
|
1,374 |
|
1,060 |
|
1,236 |
|
1,184 |
|
Amortisation and impairment of intangible assets and deferred expenditure3 |
|
599 |
|
523 |
|
9 |
|
512 |
|
116 |
|
Postage and stationery |
|
156 |
|
164 |
|
179 |
|
130 |
|
130 |
|
Advertising |
|
220 |
|
217 |
|
245 |
|
172 |
|
172 |
|
Non-lending losses |
|
234 |
|
1,443 |
|
58 |
|
174 |
|
1,428 |
|
Impairment of investments in subsidiaries |
|
- |
|
- |
|
- |
|
19 |
|
272 |
|
Other |
|
304 |
|
344 |
|
175 |
|
454 |
|
11 |
|
Total other expenses |
|
2,923 |
|
4,065 |
|
1,726 |
|
2,697 |
|
3,313 |
|
Total operating expenses |
|
13,311 |
|
12,739 |
|
10,106 |
|
11,915 |
|
10,772 |
|
1. |
Operating expenses included estimated costs associated with AUSTRAC proceedings of nil (2020: $1,478 million, 2019: nil) which included a provision for penalty of nil (2020: $1,300 million, 2019: nil) for the Group and the Parent Entity. They also included compliance, regulation and remediation costs of $359 million (2020: $317 million, 2019: $196 million) for the Group and $306 million (2020: $310 million) for the Parent Entity. Refer to Note 26 for further details. |
|
2. |
Superannuation expense includes both defined contribution and defined benefit expense. Further details of the Group’s defined benefit plans are in Note 33. |
|
3. |
Impairment expenses included: |
| ● | $275 million (2020: $5 million, 2019: nil) for property and equipment for the Group, and $248 million (2020: $4 million) for the Parent Entity; |
| ● | $485 million (2020: $171 million, 2019: $25 million) for computer software for the Group, and $475 million (2020: $165 million) for the Parent Entity; |
| ● | $45 million (2020: $23 million, 2019: nil) for IT equipment for the Group, and $41 million (2020: $23 million) for the Parent Entity. |
| ● | $571 million (2020: $518 million, 2019: nil) for goodwill and other intangible assets for the Group, and $487 million (2020: $116 million) for the Parent Entity. |
|
|
|
|
|
20 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 6. Impairment charges
Accounting policy
|
Impairment charges are based on an expected loss model which measures the difference between the current carrying amount and the present value of expected future cash flows taking into account past experience, current conditions and multiple probability-weighted macroeconomic scenarios for reasonably supportable future economic conditions. Further details of the calculation of ECL and the critical accounting assumptions and estimates relating to impairment charges are included in Note 13. Impairment charges are recognised in the income statement, with a corresponding amount recognised as follows: ● Loans, debt securities at amortised cost and due from subsidiaries balances: as a reduction of the carrying value of the financial asset through an offsetting provision account (refer to Note 13); ● Debt securities at FVOCI: in reserves in OCI with no reduction of the carrying value of the debt security (refer to Note 27); and ● Credit commitments: as a provision (refer to Note 26). Uncollectable loans A loan may become uncollectable in full or part if, after following the Group’s loan recovery procedures, the Group remains unable to collect that loan’s contractual repayments. Uncollectable amounts are written off against their related provision for ECL, after all possible repayments have been received. Where loans are secured, amounts are generally written off after receiving the proceeds from the security, or in certain circumstances, where the net realisable value of the security has been determined and this indicates that there is no reasonable expectation of full recovery, write-off may be earlier. Unsecured consumer loans are generally written off after 180 days past due. The Group may subsequently be able to recover cash flows from loans written off. In the period which these recoveries are made, they are recognised in the income statement. |
The following table details impairment charges.
Further details are discussed in Note 13.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 21 |
|
Notes to the financial statements
Note 7. Income tax
Accounting policy
|
The tax expense for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in OCI, in which case it is recognised in the statement of comprehensive income. Current tax is the tax payable for the year using enacted or substantively enacted tax rates and laws for each jurisdiction. Current tax also includes adjustments to tax payable for previous years. Deferred tax accounts for temporary differences between the carrying amounts of assets and liabilities in the financial statements and their values for taxation purposes. Deferred tax is determined using the enacted or substantively enacted tax rates and laws for each jurisdiction which are expected to apply when the assets will be realised or the liabilities settled. Deferred tax assets and liabilities have been offset where they relate to the same taxation authority, the same taxable entity or group, and where there is a legal right and intention to settle on a net basis. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available to utilise the assets. Deferred tax is not recognised for the following temporary differences:
●
the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither the accounting nor taxable profit or loss;
●
the initial recognition of goodwill in a business combination; and
●
retained earnings in subsidiaries which the Parent Entity does not intend to distribute for the foreseeable future.
The Parent Entity is the head entity of a tax consolidated group with its wholly owned Australian subsidiaries. All entities in the tax consolidated group have entered into a tax sharing agreement which, in the opinion of the Directors, limits the joint and several liabilities in the case of a default by the Parent Entity. Current and deferred tax are recognised using a ‘group allocation basis’. As head entity, the Parent Entity recognises all current tax balances and deferred tax assets arising from unused tax losses and relevant tax credits for the tax-consolidated group. The Parent Entity fully compensates/is compensated by the other members for these balances. Critical accounting assumptions and estimates The Group operates in multiple tax jurisdictions and significant judgement is required in determining the worldwide current tax liability. There are many transactions with uncertain tax outcomes and provisions are determined based on the expected outcomes. |
|
|
|
|
|
22 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 7. Income tax (continued)
Income tax expense
The following table reconciles income tax expense to the profit before income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||||
|
$m |
|
2021 |
|
2020 |
|
2019 |
|
2021 |
|
2020 |
|
Profit before income tax expense |
|
8,501 |
|
4,266 |
|
9,749 |
|
6,761 |
|
4,453 |
|
Tax at the Australian company tax rate of 30% |
|
2,550 |
|
1,280 |
|
2,925 |
|
2,028 |
|
1,336 |
|
The effect of amounts which are not deductible/(assessable) in calculating taxable income |
|
|
|
|
|
|
|
|
|
|
|
Hybrid capital distributions |
|
59 |
|
56 |
|
72 |
|
59 |
|
56 |
|
Life insurance: |
|
|
|
|
|
|
|
|
|
|
|
Tax adjustment on policyholder earnings |
|
3 |
|
(17) |
|
8 |
|
- |
|
- |
|
Adjustment for life business tax rates |
|
- |
|
1 |
|
(1) |
|
- |
|
- |
|
Dividend adjustments |
|
- |
|
- |
|
(1) |
|
(355) |
|
(228) |
|
Other non-assessable items |
|
(6) |
|
(3) |
|
(14) |
|
(5) |
|
(3) |
|
Other non-deductible items |
|
252 |
|
585 |
|
12 |
|
204 |
|
468 |
|
Adjustment for overseas tax rates |
|
(16) |
|
16 |
|
(32) |
|
9 |
|
32 |
|
Income tax (over)/under provided in prior years |
|
3 |
|
1 |
|
(10) |
|
(2) |
|
1 |
|
Other items |
|
193 |
|
55 |
|
- |
|
210 |
|
133 |
|
Total income tax expense |
|
3,038 |
|
1,974 |
|
2,959 |
|
2,148 |
|
1,795 |
|
Income tax expense comprises: |
|
|
|
|
|
|
|
|
|
|
|
Current income tax |
|
2,741 |
|
2,954 |
|
3,370 |
|
2,017 |
|
2,417 |
|
Movement in deferred tax |
|
294 |
|
(981) |
|
(401) |
|
133 |
|
(623) |
|
Income tax (over)/under provision in prior years |
|
3 |
|
1 |
|
(10) |
|
(2) |
|
1 |
|
Total income tax expense |
|
3,038 |
|
1,974 |
|
2,959 |
|
2,148 |
|
1,795 |
|
Total Australia |
|
2,610 |
|
1,697 |
|
2,526 |
|
2,090 |
|
1,753 |
|
Total Overseas |
|
428 |
|
277 |
|
433 |
|
58 |
|
42 |
|
Total income tax expense1 |
|
3,038 |
|
1,974 |
|
2,959 |
|
2,148 |
|
1,795 |
The effective tax rate was 35.74% in 2021 (2020: 46.27%, 2019: 30.35%).
|
1. |
As the Bank levy is not a levy on income, it is not included in income tax. It is included in Note 3. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 23 |
|
Notes to the financial statements
Note 7. Income tax (continued)
Deferred tax assets
The balance comprises temporary differences attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||
|
$m |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Amounts recognised in the income statements and opening retained profits |
|
|
|
|
|
|
|
|
|
Provisions for ECL on loans and credit commitments |
|
1,481 |
|
1,788 |
|
1,269 |
|
1,507 |
|
Provision for long service leave, annual leave and other employee benefits |
|
386 |
|
335 |
|
365 |
|
308 |
|
Financial instruments |
|
- |
|
- |
|
- |
|
- |
|
Property and equipment |
|
347 |
|
223 |
|
316 |
|
198 |
|
Other provisions |
|
424 |
|
606 |
|
388 |
|
570 |
|
Lease liabilities1 |
|
743 |
|
899 |
|
665 |
|
825 |
|
All other liabilities1 |
|
331 |
|
419 |
|
300 |
|
304 |
|
Total amounts recognised in the income statements and opening retained profits |
|
3,712 |
|
4,270 |
|
3,303 |
|
3,712 |
|
Amounts recognised directly in OCI |
|
|
|
|
|
|
|
|
|
Investment securities |
|
- |
|
- |
|
- |
|
- |
|
Cash flow hedges |
|
- |
|
25 |
|
- |
|
- |
|
Defined benefit |
|
103 |
|
155 |
|
101 |
|
149 |
|
Total amounts recognised directly in OCI |
|
103 |
|
180 |
|
101 |
|
149 |
|
Gross deferred tax assets |
|
3,815 |
|
4,450 |
|
3,404 |
|
3,861 |
|
Set-off of deferred tax assets and deferred tax liabilities |
|
(1,378) |
|
(1,386) |
|
(1,311) |
|
(1,364) |
|
Net deferred tax assets |
|
2,437 |
|
3,064 |
|
2,093 |
|
2,497 |
|
Movements |
|
|
|
|
|
|
|
|
|
Balance as at beginning of year |
|
3,064 |
|
2,048 |
|
2,497 |
|
1,925 |
|
Impact on adoption of new accounting standards1 |
|
(17) |
|
948 |
|
(14) |
|
872 |
|
Restated opening balance |
|
3,047 |
|
2,996 |
|
2,483 |
|
2,797 |
|
Recognised in the income statements |
|
(529) |
|
758 |
|
(395) |
|
507 |
|
Recognised in OCI |
|
(77) |
|
13 |
|
(48) |
|
9 |
|
Balances reclassified to assets held for sale |
|
(8) |
|
- |
|
- |
|
- |
|
Balances disposed of on sale of businesses |
|
(4) |
|
- |
|
- |
|
- |
|
Set-off of deferred tax assets and deferred tax liabilities |
|
8 |
|
(703) |
|
53 |
|
(816) |
|
Balance as at end of year |
|
2,437 |
|
3,064 |
|
2,093 |
|
2,497 |
|
1. |
The adoption of AASB 16 on 1 October 2019 resulted in an increase in deferred tax assets of $948 million for the Group and $872 million for the Parent Entity. A corresponding increase was also recognised in deferred tax liabilities (refer to the following table), which resulted in a net nil impact on retained profits. |
|
|
|
|
|
24 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 7. Income tax (continued)
Deferred tax liabilities
The balance comprises temporary differences attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||
|
$m |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Amounts recognised in the income statements and opening retained profits |
|
|
|
|
|
|
|
|
|
Finance lease transactions |
|
296 |
|
253 |
|
290 |
|
232 |
|
Property and equipment1 |
|
610 |
|
933 |
|
541 |
|
864 |
|
Life insurance assets |
|
- |
|
43 |
|
- |
|
- |
|
All other assets |
|
267 |
|
223 |
|
211 |
|
208 |
|
Total amounts recognised in the income statements and opening retained profits |
|
1,173 |
|
1,452 |
|
1,042 |
|
1,304 |
|
Amounts recognised directly in OCI |
|
|
|
|
|
|
|
|
|
Investment securities |
|
214 |
|
51 |
|
211 |
|
51 |
|
Cash flow hedges |
|
81 |
|
9 |
|
58 |
|
9 |
|
Total amounts recognised directly in OCI |
|
295 |
|
60 |
|
269 |
|
60 |
|
Gross deferred tax liabilities |
|
1,468 |
|
1,512 |
|
1,311 |
|
1,364 |
|
Set-off of deferred tax assets and deferred tax liabilities |
|
(1,378) |
|
(1,386) |
|
(1,311) |
|
(1,364) |
|
Net deferred tax liabilities |
|
90 |
|
126 |
|
- |
|
- |
|
Movements |
|
|
|
|
|
|
|
|
|
Balance as at beginning of year |
|
126 |
|
44 |
|
- |
|
- |
|
Impact on adoption of new accounting standards1 |
|
- |
|
948 |
|
- |
|
872 |
|
Restated opening balance |
|
126 |
|
992 |
|
- |
|
872 |
|
Recognised in the income statements |
|
(235) |
|
(223) |
|
(262) |
|
(116) |
|
Recognised in OCI |
|
235 |
|
60 |
|
209 |
|
60 |
|
Balances reclassified to liabilities held for sale |
|
(44) |
|
- |
|
- |
|
- |
|
Balances disposed of on sale of businesses |
|
- |
|
- |
|
- |
|
- |
|
Set-off of deferred tax assets and deferred tax liabilities |
|
8 |
|
(703) |
|
53 |
|
(816) |
|
Balance as at end of year |
|
90 |
|
126 |
|
- |
|
- |
|
1. |
The adoption of AASB 16 on 1 October 2019 resulted in an increase in deferred tax liabilities of $948 million for the Group and $872 million for the Parent Entity, which was recognised as an opening adjustment in retained profits. A corresponding increase was also recognised in deferred tax assets (refer to the previous table), which resulted in a net nil impact on retained profits. |
Unrecognised deferred tax balances
The following potential deferred tax balances have not been recognised. The tax effect of the gross balances would be based on the corporate tax rates applicable in the relevant jurisdictions, which range between 16.5% and 30%.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 25 |
|
Notes to the financial statements
Note 8. Earnings per share
Accounting policy
|
Basic earnings per share (EPS) is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares on issue during the year, adjusted for treasury shares. Diluted EPS is calculated by adjusting the basic EPS by assuming all dilutive potential ordinary shares are converted. Refer to Notes 19 and 32 for further information on the potential dilutive instruments. |
|
1. |
RSP is explained in Note 32. Some shares under the RSP have not vested and are not outstanding ordinary shares but do receive dividends. These RSP dividends are deducted to show the profit attributable to ordinary shareholders. Shares under the RSP were dilutive in 2021 (2020: antidilutive, 2019: antidilutive). |
|
2. |
The Group has issued convertible loan capital which may convert into ordinary shares in the future (refer to Note 19 for further details). These convertible loan capital instruments are potentially dilutive instruments, and diluted EPS is therefore calculated as if the instruments had been converted at the beginning of the year or, if later, the instruments’ issue dates. In 2021, all convertible loan capital instruments were dilutive (2020: antidilutive, 2019: dilutive). |
|
|
|
|
|
26 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 9. Average balance sheet and interest rates
The daily average balances of the Group’s interest earning assets and interest bearing liabilities are shown below along with their interest income or expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
2019 |
||||||||||||
|
|
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
|
|
balance |
|
income |
|
rate |
|
balance |
|
income |
|
rate |
|
balance |
|
income |
|
rate |
|
Consolidated |
|
$m |
|
$m |
|
% |
|
$m |
|
$m |
|
% |
|
$m |
|
$m |
|
% |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
10,748 |
|
7 |
|
0.1 |
|
13,555 |
|
56 |
|
0.4 |
|
8,428 |
|
152 |
|
1.8 |
|
New Zealand |
|
372 |
|
- |
|
- |
|
373 |
|
3 |
|
0.8 |
|
364 |
|
7 |
|
1.9 |
|
Other overseas |
|
1,108 |
|
9 |
|
0.8 |
|
1,804 |
|
16 |
|
0.9 |
|
2,031 |
|
42 |
|
2.1 |
|
Trading securities and financial assets measured at FVIS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
16,659 |
|
116 |
|
0.7 |
|
20,300 |
|
217 |
|
1.1 |
|
20,691 |
|
468 |
|
2.3 |
|
New Zealand |
|
3,881 |
|
28 |
|
0.7 |
|
4,728 |
|
47 |
|
1.0 |
|
3,862 |
|
85 |
|
2.2 |
|
Other overseas |
|
3,251 |
|
48 |
|
1.5 |
|
4,601 |
|
95 |
|
2.1 |
|
4,521 |
|
109 |
|
2.4 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
81,665 |
|
1,104 |
|
1.4 |
|
71,402 |
|
1,347 |
|
1.9 |
|
56,875 |
|
1,691 |
|
3.0 |
|
New Zealand |
|
4,492 |
|
74 |
|
1.6 |
|
3,921 |
|
96 |
|
2.4 |
|
3,850 |
|
130 |
|
3.4 |
|
Other overseas |
|
1,552 |
|
22 |
|
1.4 |
|
2,858 |
|
78 |
|
2.7 |
|
3,062 |
|
98 |
|
3.2 |
|
Loans and other receivables1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
585,416 |
|
17,859 |
|
3.1 |
|
585,643 |
|
21,315 |
|
3.6 |
|
589,427 |
|
25,931 |
|
4.4 |
|
New Zealand |
|
91,732 |
|
2,747 |
|
3.0 |
|
85,184 |
|
3,237 |
|
3.8 |
|
79,255 |
|
3,650 |
|
4.6 |
|
Other overseas |
|
14,437 |
|
136 |
|
0.9 |
|
27,349 |
|
540 |
|
2.0 |
|
26,558 |
|
859 |
|
3.2 |
|
Assets held for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
1,583 |
|
28 |
|
1.8 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
New Zealand |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Other overseas |
|
2,560 |
|
100 |
|
3.9 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Total interest earning assets and interest income |
|
819,456 |
|
22,278 |
|
2.7 |
|
821,718 |
|
27,047 |
|
3.3 |
|
798,924 |
|
33,222 |
|
4.2 |
|
Non-interest earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments |
|
20,305 |
|
|
|
|
|
31,334 |
|
|
|
|
|
25,959 |
|
|
|
|
|
Life insurance assets |
|
226 |
|
|
|
|
|
4,614 |
|
|
|
|
|
9,610 |
|
|
|
|
|
Assets held for sale |
|
4,590 |
|
|
|
|
|
- |
|
|
|
|
|
- |
|
|
|
|
|
All other assets2 |
|
61,478 |
|
|
|
|
|
62,414 |
|
|
|
|
|
60,231 |
|
|
|
|
|
Total non-interest earning assets |
|
86,599 |
|
|
|
|
|
98,362 |
|
|
|
|
|
95,800 |
|
|
|
|
|
Total assets |
|
906,055 |
|
|
|
|
|
920,080 |
|
|
|
|
|
894,724 |
|
|
|
|
|
1. |
Loans and other receivables are net of Stage 3 provision for ECL, where interest income is determined based on their carrying value. Stages 1 and 2 provisions for ECL are not included in the average interest earning assets balance, as interest income is determined based on the gross value of loans and other receivables. |
|
2. |
Includes property and equipment, intangible assets, deferred tax assets, non-interest earning loans relating to mortgage offset accounts and all other non-interest earning assets. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 27 |
|
Notes to the financial statements
Note 9. Average balance sheet and interest rates (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
2019 |
|
||||||||||||
|
|
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
|
|
|
balance |
|
expense |
|
rate |
|
balance |
|
expense |
|
rate |
|
balance |
|
expense |
|
rate |
|
|
Consolidated |
|
$m |
|
$m |
|
% |
|
$m |
|
$m |
|
% |
|
$m |
|
$m |
|
% |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral received: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
1,914 |
|
2 |
|
0.1 |
|
2,586 |
|
11 |
|
0.4 |
|
2,039 |
|
41 |
|
2.0 |
|
|
New Zealand |
|
307 |
|
- |
|
- |
|
596 |
|
3 |
|
0.5 |
|
390 |
|
8 |
|
2.1 |
|
|
Other overseas |
|
3,965 |
|
2 |
|
0.1 |
|
4,399 |
|
12 |
|
0.3 |
|
1,188 |
|
8 |
|
0.7 |
|
|
Repurchase agreements1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
32,600 |
|
54 |
|
0.2 |
|
16,120 |
|
73 |
|
0.5 |
|
11,266 |
|
172 |
|
1.5 |
|
|
New Zealand |
|
986 |
|
2 |
|
0.2 |
|
380 |
|
1 |
|
0.3 |
|
268 |
|
5 |
|
1.9 |
|
|
Other overseas |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
20 |
|
1 |
|
5.0 |
|
|
Deposits and other borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
457,675 |
|
1,400 |
|
0.3 |
|
435,877 |
|
3,745 |
|
0.9 |
|
425,799 |
|
7,023 |
|
1.6 |
|
|
New Zealand |
|
60,066 |
|
418 |
|
0.7 |
|
57,096 |
|
882 |
|
1.5 |
|
54,720 |
|
1,235 |
|
2.3 |
|
|
Other overseas |
|
13,610 |
|
50 |
|
0.4 |
|
25,660 |
|
427 |
|
1.7 |
|
26,270 |
|
687 |
|
2.6 |
|
|
Loan capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
24,573 |
|
754 |
|
3.1 |
|
19,554 |
|
663 |
|
3.4 |
|
15,080 |
|
632 |
|
4.2 |
|
|
New Zealand |
|
1,653 |
|
85 |
|
5.1 |
|
1,833 |
|
94 |
|
5.1 |
|
1,777 |
|
91 |
|
5.1 |
|
|
Other overseas |
|
368 |
|
10 |
|
2.7 |
|
1,324 |
|
43 |
|
3.2 |
|
1,324 |
|
53 |
|
4.0 |
|
|
Other interest bearing liabilities1,2: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
121,338 |
|
2,234 |
|
1.8 |
|
160,830 |
|
3,776 |
|
2.3 |
|
177,470 |
|
5,765 |
|
3.2 |
|
|
New Zealand |
|
15,836 |
|
368 |
|
2.3 |
|
18,130 |
|
557 |
|
3.1 |
|
15,397 |
|
570 |
|
3.7 |
|
|
Other overseas |
|
110 |
|
29 |
|
26.4 |
|
1,256 |
|
64 |
|
5.1 |
|
1,274 |
|
24 |
|
1.9 |
|
|
Liabilities held for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
|
New Zealand |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
|
Other overseas |
|
1,335 |
|
12 |
|
0.9 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
|
Total interest bearing liabilities and interest expense |
|
736,336 |
|
5,420 |
|
0.7 |
|
745,641 |
|
10,351 |
|
1.4 |
|
734,282 |
|
16,315 |
|
2.2 |
|
|
Non-interest bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and other borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia |
|
49,592 |
|
|
|
|
|
45,231 |
|
|
|
|
|
42,455 |
|
|
|
|
|
|
New Zealand |
|
12,426 |
|
|
|
|
|
8,760 |
|
|
|
|
|
5,996 |
|
|
|
|
|
|
Other overseas |
|
7 |
|
|
|
|
|
901 |
|
|
|
|
|
819 |
|
|
|
|
|
|
Derivative financial instruments |
|
20,612 |
|
|
|
|
|
33,249 |
|
|
|
|
|
26,568 |
|
|
|
|
|
|
Life insurance liabilities |
|
253 |
|
|
|
|
|
2,999 |
|
|
|
|
|
7,653 |
|
|
|
|
|
|
Liabilities held for sale |
|
2,728 |
|
|
|
|
|
- |
|
|
|
|
|
- |
|
|
|
|
|
|
All other liabilities3 |
|
13,202 |
|
|
|
|
|
15,233 |
|
|
|
|
|
13,187 |
|
|
|
|
|
|
Total non-interest bearing liabilities |
|
98,820 |
|
|
|
|
|
106,373 |
|
|
|
|
|
96,678 |
|
|
|
|
|
|
Total liabilities |
|
835,156 |
|
|
|
|
|
852,014 |
|
|
|
|
|
830,960 |
|
|
|
|
|
|
Shareholders’ equity |
|
70,849 |
|
|
|
|
|
68,014 |
|
|
|
|
|
63,714 |
|
|
|
|
|
|
NCI |
|
50 |
|
|
|
|
|
52 |
|
|
|
|
|
50 |
|
|
|
|
|
|
Total equity |
|
70,899 |
|
|
|
|
|
68,066 |
|
|
|
|
|
63,764 |
|
|
|
|
|
|
Total liabilities and equity |
|
906,055 |
|
|
|
|
|
920,080 |
|
|
|
|
|
894,724 |
|
|
|
|
|
Net interest income may vary from year to year due to changes in the volume of, and interest rates associated with, interest earning assets and interest bearing liabilities. The following table allocates the change in net interest income between changes in volume and interest rate for those assets and liabilities.
| 1. | Repurchase agreements, previously included in Other interest bearing liabilities, have been separately disclosed. Comparatives have been restated. |
| 2. | Includes net impact of Treasury balance sheet management activities and the Bank levy. |
| 3. | Includes other financial liabilities, provisions, current and deferred tax liabilities and all other non-interest bearing liabilities. |
|
|
|
|
|
28 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 9. Average balance sheet and interest rates (continued)
Calculation of variances
| ● | Volume changes are determined based on the movements in average asset and liability balances; and |
| ● | interest rate changes are determined based on the change in interest rate associated with those assets and liabilities. Variances that arise due to a combination of volume and interest rate changes are allocated to interest rate changes. |
|
1. |
Repurchase agreements, previously included in Other interest bearing liabilities, have been separately disclosed. Comparatives have been restated. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 29 |
|
Notes to the financial statements
FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Accounting policy
|
Recognition Purchases and sales by regular way of financial assets, except for loans and receivables, are recognised on trade-date, the date on which the Group commits to purchase or sell the asset. Loans and receivables are recognised on settlement date, when cash is advanced to the borrowers. Financial liabilities are recognised when an obligation arises. Derecognition Financial assets are derecognised when the rights to receive cash flows from the asset have expired, or when the Group has either transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full under a ‘pass through’ arrangement and transferred substantially all the risks and rewards of ownership. There may be situations where the Group has partially transferred the risks and rewards of ownership but has neither transferred nor retained substantially all the risks and rewards of ownership. In such situations, where the Group retains control of the transferred asset, it will continue to be recognised in the balance sheet to the extent of the Group’s continuing involvement in the asset. Financial liabilities are derecognised when the obligation is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, the exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, with the difference in the respective carrying amounts recognised in the income statement. The terms are deemed to be substantially different if the discounted present value of the cash flows under the new terms (discounted using the original effective interest rate) is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. Qualitative factors such as a change in the currency the instrument is denominated in, a change in the interest rate from fixed to floating and conversion features are also considered. Classification and measurement Financial assets are grouped into the following classes: cash and balances with central banks, collateral paid, trading securities and financial assets measured at FVIS, derivative financial instruments, investment securities, loans, other financial assets and life insurance assets. Financial assets Financial assets are classified based on a) the business model within which the assets are managed, and b) whether the contractual cash flows of the instrument represent solely payment of principal and interest (SPPI). The Group determines the business model at the level that reflects how groups of financial assets are managed. When assessing the business model the Group considers factors including how performance and risks are managed, evaluated and reported and the frequency and volume of, and reason for, sales in previous periods and expectations of sales in future periods. When assessing whether contractual cash flows are SPPI, interest is defined as consideration primarily for the time value of money and the credit risk of the principal outstanding. The time value of money is defined as the element of interest that provides consideration only for the passage of time and not consideration for other risks or costs associated with holding the financial asset. Terms that could change the contractual cash flows so that they may not meet the SPPI criteria include contingent and leverage features, non-recourse arrangements, and features that could modify the time value of money. Debt instruments If the debt instruments have contractual cash flows which represent SPPI on the principal balance outstanding they are classified at:
●
amortised cost if they are held within a business model whose objective is achieved through holding the financial asset to collect these cash flows; or
●
FVOCI if they are held within a business model whose objective is achieved both through collecting these cash flows or selling the financial asset; or
●
FVIS if they are held within a business model whose objective is achieved through selling the financial asset.
Debt instruments are measured at FVIS where the contractual cash flows do not represent SPPI on the principal balance outstanding or where it is designated at FVIS to eliminate or reduce an accounting mismatch. |
|
|
|
|
|
30 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
Accounting policy (continued)
|
Debt instruments at amortised cost are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method. They are presented net of provision for ECL determined using the ECL model. Refer to Notes 6 and 13 for further details. Debt instruments at FVOCI are measured at fair value with unrealised gains and losses recognised in OCI except for interest income, impairment charges and FX gains and losses, which are recognised in the income statement. Impairment on debt instruments at FVOCI is determined using the ECL model and is recognised in the income statement with a corresponding amount in OCI. There is no reduction of the carrying value of the debt security which remains at fair value. The cumulative gain or loss recognised in OCI is subsequently recognised in the income statement when the instrument is derecognised. Debt instruments at FVIS are measured at fair value with subsequent changes in fair value recognised in the income statement. Equity securities Equity securities are measured at FVOCI where they: ● are not held for trading; and ● an irrevocable election is made by the Group. Otherwise, they are measured at FVIS. Equity securities at FVOCI are measured at fair value with unrealised gains and losses recognised in OCI, except for dividend income which is recognised in the income statement. The cumulative gain or loss recognised in OCI is not subsequently recognised in the income statement when the instrument is disposed. Equity securities at FVIS are measured at fair value with subsequent changes in fair value recognised in the income statement. Financial liabilities Financial liabilities are grouped into the following classes: collateral received, deposits and other borrowings, other financial liabilities, derivative financial instruments, debt issues and loan capital. Financial liabilities are measured at amortised cost if they are not held for trading or designated at FVIS, otherwise they are measured at FVIS. Financial assets and financial liabilities measured at FVIS are recognised initially at fair value. All other financial assets and financial liabilities are recognised initially at fair value plus or minus directly attributable transaction costs, respectively. Further details of the accounting policy for each category of financial asset or financial liability mentioned above is set out in the note for the relevant item. The Group’s policies for determining the fair value of financial assets and financial liabilities are set out in Note 22. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 31 |
|
Notes to the financial statements
Note 10. Trading securities and financial assets measured at FVIS
Accounting policy
|
Trading securities Trading securities include actively traded debt (government and other) and equity instruments and those acquired for sale in the near term. As part of its trading activities, the Group also lends and borrows securities on a collateralised basis. Securities lent remain on the Group’s balance sheet and securities borrowed are not reflected on the Group’s balance sheet, as the risks and rewards of ownership remain with the initial holder. Where cash is provided as collateral, the amount advanced to or received from third parties is recognised as a receivable in collateral paid or as a borrowing in collateral received respectively. Reverse repurchase agreements Securities purchased under these agreements are not recognised in the balance sheet, as Westpac has not obtained the risks and rewards of ownership. The cash consideration paid is recognised as a reverse repurchase agreement, which forms part of a trading portfolio that is measured at fair value. Other financial assets measured at FVIS Other financial assets measured at FVIS include:
●
non-trading securities managed on a fair value basis;
●
non-trading debt securities that do not have contractual cash flows that represent SPPI on the principal balance outstanding; or
●
non-trading equity securities for which we have not made irrevocable designation to be measured at FVOCI.
Gains and losses on these financial assets are recognised in the income statement. Interest earned from debt securities is recognised in interest income (Note 3) while dividends on equity securities are recognised in non-interest income (Note 4). |
Trading securities include the following:
Other financial assets measured at FVIS include:
|
|
|
|
|
|
|
|
|
|
|
Other debt securities |
|
3,038 |
|
2,045 |
|
2,975 |
|
1,703 |
|
Equity securities |
|
107 |
|
445 |
|
23 |
|
407 |
|
Total other financial assets measured at FVIS |
|
3,145 |
|
2,490 |
|
2,998 |
|
2,110 |
|
|
|
|
|
32 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 11. Investment securities
Accounting policy
|
Investment securities include debt securities (government and other) and equity securities. It includes debt and equity securities that are measured at FVOCI and debt securities measured at amortised cost. These instruments are classified based on the criteria disclosed under the heading “Financial assets and financial liabilities” prior to Note 10. Debt securities measured at FVOCI Includes debt instruments that have contractual cash flows which represent SPPI on the principal balance outstanding and they are held within a business model whose objective is achieved both through collecting these cash flows or selling the financial asset. These securities are measured at fair value with gains and losses recognised in OCI except for interest income, impairment charges, FX gains and losses and fair value hedge adjustments which are recognised in the income statement. Impairment is measured using the same ECL model applied to financial assets measured at amortised cost. Impairment is recognised in the income statement with a corresponding amount in OCI with no reduction of the carrying value of the debt security which remains at fair value. Refer to Note 13 for further details. The cumulative gain or loss recognised in OCI is subsequently recognised in the income statement when the instrument is disposed. Debt securities measured at amortised cost Include debt instruments that have contractual cash flows which represent SPPI on the principal balance outstanding and are held within a business model whose objective is achieved through holding the financial asset to collect these cash flows. These securities are initially recognised at fair value plus directly attributable transaction costs. They are subsequently measured at amortised cost using the effective interest rate method and are presented net of any provision for ECL. Equity securities Equity securities are measured at FVOCI where they are not held for trading, the Group does not have control or significant influence over the investee and where an irrevocable election is made to measure them at FVOCI. These securities are measured at fair value with unrealised gains and losses recognised in OCI except for dividend income which is recognised in the income statement. The cumulative gain or loss recognised in OCI is not subsequently recognised in the income statement when the instrument is disposed. |
|
1. |
Impairment is recognised in the income statement with a corresponding amount in OCI (refer to Note 27). There is no reduction of the carrying value of the debt securities which remains at fair value. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 33 |
|
Notes to the financial statements
Note 11. Investment securities (continued)
The following table shows the maturities and the weighted average yield of the Group’s outstanding investment securities as at 30 September 2021. There are no tax-exempt securities.
The maturity profile is determined based upon contractual terms for investment securities.
Note 12. Loans
Accounting policy
|
Loans are financial assets initially recognised at fair value plus directly attributable transaction costs and fees. Loans are subsequently measured at amortised cost using the effective interest rate method where they have contractual cash flows which represent SPPI on the principal balance outstanding and they are held within a business model whose objective is achieved through holding the loans to collect these cash flows. They are presented net of any provision for ECL. Loans are subsequently measured at FVIS where they do not have cash flows which represent SPPI, are held within a business model whose objective is achieved by selling the financial asset, or are designated at FVIS to eliminate or reduce an accounting mismatch. Refer to Note 22 for balances which are measured at fair value and amortised cost. Loan products that have both mortgage and deposit facilities are presented gross in the balance sheet, segregating the asset and liability component, because they do not meet the criteria to be offset. Interest earned on these products is presented on a net basis in the income statement as this reflects how the customer is charged. |
The loan portfolio is disaggregated by location of booking office and product type, as follows.
|
1. |
Total net loans included securitised loans of $4,829 million (2020: $7,367 million) for the Group and $129,270 million (2020: $132,506 million) for the Parent Entity. The level of securitised loans excludes loans where Westpac is the holder of related debt securities. |
|
|
|
|
|
34 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 12. Loans (continued)
The following table shows the Group’s contractual maturity distribution of all loans as at 30 September 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 1 |
|
Over 5 |
|
|
|
|
|
Consolidated |
|
Up to |
|
year to |
|
years to |
|
Over |
|
|
|
$m |
|
1 year |
|
5 years |
|
15 years |
|
15 years |
|
Total |
|
Australia |
|
|
|
|
|
|
|
|
|
|
|
Housing |
|
7,314 |
|
2,083 |
|
18,238 |
|
427,969 |
|
455,604 |
|
Personal |
|
6,312 |
|
7,111 |
|
1,314 |
|
- |
|
14,737 |
|
Business |
|
49,367 |
|
87,774 |
|
6,867 |
|
4,445 |
|
148,453 |
|
Total Australia |
|
62,993 |
|
96,968 |
|
26,419 |
|
432,414 |
|
618,794 |
|
New Zealand |
|
|
|
|
|
|
|
|
|
|
|
Housing |
|
232 |
|
630 |
|
4,797 |
|
52,422 |
|
58,081 |
|
Personal |
|
935 |
|
228 |
|
12 |
|
- |
|
1,175 |
|
Business |
|
19,382 |
|
10,582 |
|
26 |
|
1 |
|
29,991 |
|
Total New Zealand |
|
20,549 |
|
11,440 |
|
4,835 |
|
52,423 |
|
89,247 |
|
Total other overseas |
|
2,215 |
|
3,715 |
|
402 |
|
- |
|
6,332 |
|
Total loans |
|
85,757 |
|
112,123 |
|
31,656 |
|
484,837 |
|
714,373 |
The following table shows the Group’s interest rate segmentation of loans maturing after one year as at 30 September 2021.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 35 |
|
Notes to the financial statements
Note 13. Provisions for expected credit losses
Accounting policy
|
Note 6 provides details of impairment charges. Impairment applies to all financial assets at amortised cost, lease receivables, debt securities measured at FVOCI, due from subsidiaries and credit commitments. The ECL is recognised as follows:
●
Loans (including lease receivables), debt securities at amortised cost and due from subsidiaries: as a reduction of the carrying value of the financial asset through an offsetting provision account (refer to Notes 11 and 12);
●
Debt securities at FVOCI: in reserves in OCI with no reduction of the carrying value of the debt security itself (refer to Notes 11 and 27); and
●
Credit commitments: as a provision (refer to Note 26).
|
|
|
Measurement The Group calculates the provision for ECL based on a three stage approach. The provision for ECL is a probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant time frame. They are determined by evaluating a range of possible outcomes and taking into account the time value of money, past events, current conditions and forecasts of future economic conditions. |
|
|
The models use three main components to determine the ECL (as well as the time value of money) including:
●
Probability of default (PD): the probability that a counter-party will default;
●
Loss given default (LGD): the loss that is expected to arise in the event of a default; and
●
Exposure at default (EAD): the estimated outstanding amount of credit exposure at the time of the default.
|
|
|
Model stages The three stages are as follows: Stage 1: 12 months ECL – performing For financial assets where there has been no significant increase in credit risk since origination, a provision for 12 months ECL is recognised. Stage 2: Lifetime ECL – performing For financial assets where there has been a significant increase in credit risk since origination but where the asset is still performing, a provision for lifetime ECL is recognised. The indicators of a significant increase in credit risk are described on the following page. Stage 3: Lifetime ECL – non-performing For financial assets that are non-performing, a provision for lifetime ECL is recognised. Indicators include a breach of contract with the Group such as a default on interest or principal payments, a borrower experiencing significant financial difficulties or observable economic conditions that correlate to defaults on an individual basis. Financial assets in Stage 3 are those that are in default. A default occurs when Westpac considers that the customer is unable to repay its credit obligations in full, irrespective of recourse by the Group to actions such as realising security, or the customer is more than 90 days past due on any material credit obligation. This definition is aligned to the Australian Prudential Regulation Authority (APRA) regulatory definition of default. Collective and individual assessment Financial assets that are in Stages 1 and 2 are assessed on a collective basis. This means that they are grouped in pools of similar assets with similar credit risk characteristics including the type of product and the customer risk grade. Financial assets in Stage 3 are assessed on an individual basis and calculated collectively for those below a specified threshold. Expected life In considering the lifetime time frame for ECL in Stages 2 and 3, the standard generally requires use of the remaining contractual life adjusted, where appropriate, for prepayments, extension and other options. For certain revolving credit facilities which include both a drawn and undrawn component (e.g. credit cards and revolving lines of credit), the Group’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the exposure to credit losses to the contractual notice period. For these facilities, lifetime is based on historical behaviour. |
|
|
|
|
|
|
36 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 13. Provisions for expected credit losses (continued)
Accounting policy (continued)
|
Movement between stages Financial assets may move in both directions through the stages of the impairment model. Financial assets previously in Stage 2 may move back to Stage 1 if it is no longer considered that there has been a significant increase in credit risk. Similarly, financial assets in Stage 3 may move back to Stage 1 or Stage 2 if they are no longer assessed to be non-performing. Critical accounting assumptions and estimates Key judgements include when a significant increase in credit risk has occurred, the estimation of forward- looking macroeconomic information and overlays. Other factors which can impact the provision include the borrower’s financial situation, the realisable value of collateral, the Group’s position relative to other claimants, the reliability of customer information and the likely cost and duration of recovering the loan. Significant increase in credit risk (SICR) Determining when a financial asset has experienced a SICR since origination is a critical accounting judgement. In the current period the Group has revised the methodology to determine a significant increase in risk from one which was primarily based on changes in internal customer risk grades since origination of the facility and based on a sliding scale to one which is directly driven by the change in the probability of default (PD) since origination. In determining whether a change in PD represents a significant increase in risk, relative changes in PD and absolute PD thresholds are both considered based on the portfolio of the exposure. This change did not have a material impact to the Group. The Group does not rebut the presumption that instruments that are 30 days past due have experienced a SICR but this is used as a backstop rather than the primary indicator. The deferral of payments by customers in hardship arrangements is generally treated as an indication of a SICR. In the prior year COVID-19 support packages for mortgages and business loans was not, in isolation, treated as an indication of SICR. The Group classified these deferral packages into different categories of risk which were assessed for an increased likelihood of a risk of default to determine whether a SICR has occurred. In the current year, deferral packages for mortgages and business loans are based on the specific circumstances of the customers and as such, the deferral packages could be an indication of SICR. Forward-looking macroeconomic information The measurement of ECL for each stage and the assessment of significant increase in credit risk consider information about past events and current conditions as well as reasonable and supportable projections of future events and economic conditions. The estimation of forward-looking information is a critical accounting judgement. The Group considers three future macroeconomic scenarios including a base case scenario along with upside and downside scenarios. The macroeconomic variables used in these scenarios, based on current economic forecasts, include (but are not limited to) employment to population rates, real gross domestic product growth rates and residential and commercial property price indices. |
|
● Base case scenario This scenario utilises the internal Westpac economics forecast used for strategic decision making and forecasting. ● Upside scenario This scenario represents a modest improvement on the base case scenario. ● Downside scenario The downside scenario is a more severe scenario with ECL higher than those under the current base case scenario. The more severe loss outcome for the downside is generated under a recession scenario in which the combination of negative GDP growth, declines in commercial and residential property prices and an increase in the unemployment rate simultaneously impact ECL across all portfolios from the reporting date. |
|
The macroeconomic scenarios are weighted based on the Group’s best estimate of the relative likelihood of each scenario. The weighting applied to each of the three macroeconomic scenarios takes into account historical frequency, current trends, and forward-looking conditions. The macroeconomic variables and probability weightings of the three macroeconomic scenarios are subject to the approval of the Group Chief Financial Officer and Group Chief Risk Officer with oversight from the Board of Directors (and its Committees). Overlays Where appropriate, adjustments will be made to modelled outcomes to reflect reasonable and supportable information not already incorporated in the models. Judgements can change with time as new information becomes available which could result in changes to the provision for ECL. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 37 |
|
Notes to the financial statements
Note 13. Provisions for expected credit losses (continued)
Loans and credit commitments
The reconciliation of the provision for ECL tables for loans and credit commitments has been determined by an aggregation of monthly movements over the year. The key line items in the reconciliation represent the following:
| ● | The “Transfers between stages” lines represent transfers between Stage 1, Stage 2 and Stage 3 prior to remeasurement of the provision for ECL. |
| ● | The “Business activity during the year” line represents new accounts originated during the year net of those that were de-recognised due to final repayments during the year. |
| ● | The “Net remeasurement of provision for ECL” line represents the impact on the provision for ECL due to changes in credit quality during the year (including transfers between stages), changes due to forward-looking economic scenarios, overlays and partial repayments and additional draw downs on existing facilities over the year. |
| ● | ”Write-offs” represent a reduction in the provision for ECL as a result of de-recognition of exposures where there is no reasonable expectation of full recovery. |
|
|
|
|
|
38 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 13. Provisions for expected credit losses (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
||||||||||||
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
Performing |
|
performing |
|
|
|
Performing |
|
performing |
|
|
||||
|
$m |
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
|
Parent Entity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for ECL on loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing |
|
114 |
|
669 |
|
552 |
|
1,335 |
|
145 |
|
630 |
|
904 |
|
1,679 |
|
Personal |
|
111 |
|
270 |
|
151 |
|
532 |
|
162 |
|
297 |
|
193 |
|
652 |
|
Business |
|
409 |
|
607 |
|
1,026 |
|
2,042 |
|
445 |
|
1,154 |
|
763 |
|
2,362 |
|
Total provision for ECL on loans |
|
634 |
|
1,546 |
|
1,729 |
|
3,909 |
|
752 |
|
2,081 |
|
1,860 |
|
4,693 |
|
Provision for ECL on credit commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing |
|
4 |
|
5 |
|
- |
|
9 |
|
4 |
|
5 |
|
- |
|
9 |
|
Personal |
|
23 |
|
34 |
|
- |
|
57 |
|
28 |
|
35 |
|
- |
|
63 |
|
Business |
|
119 |
|
150 |
|
19 |
|
288 |
|
129 |
|
269 |
|
9 |
|
407 |
|
Total provision for ECL on credit commitments |
|
146 |
|
189 |
|
19 |
|
354 |
|
161 |
|
309 |
|
9 |
|
479 |
|
Total provisions for ECL on loans and credit commitments |
|
780 |
|
1,735 |
|
1,748 |
|
4,263 |
|
913 |
|
2,390 |
|
1,869 |
|
5,172 |
|
Presented as provision for ECL on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (Note 12) |
|
627 |
|
1,546 |
|
1,729 |
|
3,902 |
|
752 |
|
2,081 |
|
1,860 |
|
4,693 |
|
Loans included in assets held for sale (Note 37) |
|
7 |
|
- |
|
- |
|
7 |
|
- |
|
- |
|
- |
|
- |
|
Credit commitments (Note 26) |
|
144 |
|
189 |
|
19 |
|
352 |
|
161 |
|
309 |
|
9 |
|
479 |
|
Credit commitments included in liabilities held for sale (Note 37) |
|
2 |
|
- |
|
- |
|
2 |
|
- |
|
- |
|
- |
|
- |
|
Total provisions for ECL on loans and credit commitments |
|
780 |
|
1,735 |
|
1,748 |
|
4,263 |
|
913 |
|
2,390 |
|
1,869 |
|
5,172 |
|
Of which: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually assessed provisions |
|
- |
|
- |
|
724 |
|
724 |
|
- |
|
- |
|
520 |
|
520 |
|
Collectively assessed provisions |
|
780 |
|
1,735 |
|
1,024 |
|
3,539 |
|
913 |
|
2,390 |
|
1,349 |
|
4,652 |
|
Total provisions for ECL on loans and credit commitments |
|
780 |
|
1,735 |
|
1,748 |
|
4,263 |
|
913 |
|
2,390 |
|
1,869 |
|
5,172 |
|
Gross loans and credit commitments |
|
720,659 |
|
68,179 |
|
8,980 |
|
797,818 |
|
712,381 |
|
61,822 |
|
10,293 |
|
784,496 |
|
Coverage ratio on loans (%) |
|
0.11 |
|
2.50 |
|
19.81 |
|
0.63 |
|
0.14 |
|
3.84 |
|
18.39 |
|
0.77 |
|
Coverage ratio on loans and credit commitments (%) |
|
0.11 |
|
2.54 |
|
19.47 |
|
0.53 |
|
0.13 |
|
3.87 |
|
18.16 |
|
0.66 |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 39 |
|
Notes to the financial statements
Note 13. Provisions for expected credit losses (continued)
The following tables reconcile the provisions for ECL on loans and credit commitments for the Group and Parent Entity.
Movement in provision for ECL on loans and credit commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||||||||||
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
Performing |
|
performing |
|
|
|
Performing |
|
performing |
|
|
||||
|
$m |
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
|
Balance as at 30 September 2019 |
|
884 |
|
1,674 |
|
1,355 |
|
3,913 |
|
747 |
|
1,420 |
|
1,211 |
|
3,378 |
|
Transfers to Stage 1 |
|
1,578 |
|
(1,528) |
|
(50) |
|
- |
|
1,150 |
|
(1,125) |
|
(25) |
|
- |
|
Transfers to Stage 2 |
|
(345) |
|
1,161 |
|
(816) |
|
- |
|
(266) |
|
930 |
|
(664) |
|
- |
|
Transfers to Stage 3 |
|
(7) |
|
(955) |
|
962 |
|
- |
|
(6) |
|
(773) |
|
779 |
|
- |
|
Business activity during the year |
|
212 |
|
60 |
|
(77) |
|
195 |
|
188 |
|
64 |
|
(45) |
|
207 |
|
Net remeasurement of provision for ECL |
|
(1,233) |
|
2,474 |
|
1,915 |
|
3,156 |
|
(897) |
|
1,880 |
|
1,672 |
|
2,655 |
|
Write-offs |
|
- |
|
- |
|
(1,170) |
|
(1,170) |
|
- |
|
- |
|
(1,105) |
|
(1,105) |
|
Exchange rate and other adjustments |
|
(5) |
|
(11) |
|
54 |
|
38 |
|
(3) |
|
(6) |
|
46 |
|
37 |
|
Balance as at 30 September 2020 |
|
1,084 |
|
2,875 |
|
2,173 |
|
6,132 |
|
913 |
|
2,390 |
|
1,869 |
|
5,172 |
|
Transfers to Stage 1 |
|
1,246 |
|
(1,128) |
|
(118) |
|
- |
|
1,058 |
|
(960) |
|
(98) |
|
- |
|
Transfers to Stage 2 |
|
(200) |
|
1,290 |
|
(1,090) |
|
- |
|
(173) |
|
1,094 |
|
(921) |
|
- |
|
Transfers to Stage 3 |
|
(8) |
|
(507) |
|
515 |
|
- |
|
(7) |
|
(449) |
|
456 |
|
- |
|
Business activity during the year |
|
122 |
|
(223) |
|
(343) |
|
(444) |
|
110 |
|
(199) |
|
(298) |
|
(387) |
|
Net remeasurement of provision for ECL |
|
(1,284) |
|
(200) |
|
1,603 |
|
119 |
|
(1,121) |
|
(140) |
|
1,424 |
|
163 |
|
Write-offs |
|
- |
|
- |
|
(836) |
|
(836) |
|
- |
|
- |
|
(739) |
|
(739) |
|
Exchange rate and other adjustments |
|
(24) |
|
(16) |
|
68 |
|
28 |
|
- |
|
(1) |
|
55 |
|
54 |
|
Balance as at 30 September 2021 |
|
936 |
|
2,091 |
|
1,972 |
|
4,999 |
|
780 |
|
1,735 |
|
1,748 |
|
4,263 |
The provisions for ECL on loans and credit commitments can be further disaggregated into the following classes:
|
|
|
|
|
40 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 13. Provisions for expected credit losses (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||||||||||
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
Performing |
|
performing |
|
|
|
Performing |
|
performing |
|
|
||||
|
$m |
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
|
Personal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at 30 September 2019 |
|
268 |
|
459 |
|
248 |
|
975 |
|
229 |
|
401 |
|
213 |
|
843 |
|
Transfers to Stage 1 |
|
744 |
|
(732) |
|
(12) |
|
- |
|
549 |
|
(547) |
|
(2) |
|
- |
|
Transfers to Stage 2 |
|
(154) |
|
368 |
|
(214) |
|
- |
|
(131) |
|
313 |
|
(182) |
|
- |
|
Transfers to Stage 3 |
|
(1) |
|
(342) |
|
343 |
|
- |
|
(1) |
|
(307) |
|
308 |
|
- |
|
Business activity during the year |
|
35 |
|
(37) |
|
(50) |
|
(52) |
|
36 |
|
(31) |
|
(43) |
|
(38) |
|
Net remeasurement of provision for ECL |
|
(676) |
|
694 |
|
617 |
|
635 |
|
(492) |
|
503 |
|
573 |
|
584 |
|
Write-offs |
|
- |
|
- |
|
(728) |
|
(728) |
|
- |
|
- |
|
(699) |
|
(699) |
|
Exchange rate and other adjustments |
|
- |
|
(2) |
|
28 |
|
26 |
|
- |
|
- |
|
25 |
|
25 |
|
Balance as at 30 September 2020 |
|
216 |
|
408 |
|
232 |
|
856 |
|
190 |
|
332 |
|
193 |
|
715 |
|
Transfers to Stage 1 |
|
476 |
|
(469) |
|
(7) |
|
- |
|
403 |
|
(401) |
|
(2) |
|
- |
|
Transfers to Stage 2 |
|
(98) |
|
281 |
|
(183) |
|
- |
|
(92) |
|
251 |
|
(159) |
|
- |
|
Transfers to Stage 3 |
|
(1) |
|
(202) |
|
203 |
|
- |
|
(1) |
|
(182) |
|
183 |
|
- |
|
Business activity during the year |
|
27 |
|
(25) |
|
(35) |
|
(33) |
|
28 |
|
(20) |
|
(30) |
|
(22) |
|
Net remeasurement of provision for ECL |
|
(468) |
|
360 |
|
402 |
|
294 |
|
(394) |
|
324 |
|
386 |
|
316 |
|
Write-offs |
|
- |
|
- |
|
(461) |
|
(461) |
|
- |
|
- |
|
(438) |
|
(438) |
|
Exchange rate and other adjustments |
|
1 |
|
2 |
|
23 |
|
26 |
|
- |
|
- |
|
18 |
|
18 |
|
Balance as at 30 September 2021 |
|
153 |
|
355 |
|
174 |
|
682 |
|
134 |
|
304 |
|
151 |
|
589 |
Reconciliation of impairment charges
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 41 |
|
Notes to the financial statements
Note 13. Provisions for expected credit losses (continued)
Total write-offs net of recoveries to average loans
|
|
|
|
|
|
|
|
|
Consolidated |
||
|
% |
|
2021 |
|
2020 |
|
Write-offs net of recoveries to average loans |
|
|
|
|
|
Housing |
|
0.01 |
|
0.02 |
|
Personal |
|
1.46 |
|
2.75 |
|
Business |
|
0.15 |
|
0.15 |
|
Total write-offs net of recoveries to average loans |
|
0.08 |
|
0.14 |
Impact of Portfolio Overlays on the provision for ECL
The following table attributes the breakup between modelled ECL and other portfolio overlays.
Where there is increased uncertainty regarding the required forward-looking economic conditions, or areas of potential risk, including significant uncertainty, not captured in the underlying modelled ECL, overlays are used to capture that risk.
Details of these changes related to forward-looking economic inputs and portfolio overlays, which are based on reasonable and supportable information up to the date of this report are provided below.
Modelled provision for ECL
The modelled provision for ECL is a probability weighted estimate based on three scenarios which together are representative of the Group’s view of the forward-looking distribution of potential loss outcomes. The change in provisions as a result of changes in modelled ECL or overlays are reflected through the “Net remeasurement of provision for ECL” line.
The base case scenario uses current Westpac Economics forecasts and reflects the latest available forward- looking economic inputs which shows a deterioration in the short term due to the impact of recent lock downs, with a subsequent recovery. The latest view considers both the economic and societal impacts of COVID-19, the Australian Government stimulus measures implemented to cushion the impacts, and the New Zealand Government stimulus package. The Westpac Australian economics forecast assumes the following:
|
|
|
|
|
42 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 13. Provisions for expected credit losses (continued)
The downside scenario is a more severe scenario with ECL higher than the base case scenario. The more severe loss outcome for the downside is generated under a recession scenario in which the combination of negative GDP growth, declines in commercial and residential property prices and an increase in the unemployment rate simultaneously impact ECL across all portfolios from the reporting date. The assumptions in this scenario and relativities to the base case scenario will be monitored having regard to the emerging economic conditions and updated where necessary. The upside scenario represents a modest improvement to the base case.
The decline in provisions for loans and commitments over the financial year ended 30 September 2021 was due to more positive forward- looking economic inputs, improved portfolio performance and a decline in some higher risk exposures. These declines were partly offset by higher IAPs which were driven by one matter.
The following sensitivity table shows the reported provision for ECL based on the probability weighted scenarios and what the provision for ECL would be assuming a 100% weighting is applied to the base case scenario and to the downside scenario (with all other assumptions, including customer risk grades, held constant).
If 1% of the Stage 1 gross exposure from loans and credit commitments (calculated on a 12 month ECL) was reflected in Stage 2 (calculated on a lifetime ECL) the provision for ECL would increase by $252 million (2020: $296 million) for the Group and $200 million (2020: $266 million) for the Parent Entity based on applying the average provision coverage ratios by stage to the movement in the gross exposure by stage.
The following table indicates the weightings applied by the Group and Parent Entity:
|
|
|
|
|
|
|
Macroeconomic scenario weightings (%) |
|
2021 |
|
2020 |
|
Upside |
|
5.0 |
|
5.0 |
|
Base |
|
55.0 |
|
55.0 |
|
Downside |
|
40.0 |
|
40.0 |
Scenario weights have remained unchanged since 30 September 2020 mainly to reflect the high degree of risk around severe loss outcomes. Extraordinary policy measures have eased financial conditions and supported the economy, helping to contain financial stability risks. As the COVID-19 pandemic and associated impacts extend, this could lead to higher credit losses than those modelled under the base case. In particular, the current base case economic forecast indicates a relatively short and sharp economic impact from recent lock downs followed by a subsequent recovery.
The COVID-19 pandemic is leading to material structural shifts in the behaviour of the economy and customers, and unprecedented actions by banks, governments, and regulators in response. ECL models are expected to be subject to a higher than usual level of uncertainty during this period. In this environment there is a heightened need for the application of judgement to reflect these evolving relationships and risks.
This judgement has been applied in the consideration of scenario weights and COVID-19 overlays.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 43 |
|
Notes to the financial statements
Note 13. Provisions for expected credit losses (continued)
Portfolio Overlays
Portfolio overlays are used to address areas of potential risk, including significant uncertainty, not captured in the underlying modelled ECL. Determination of portfolio overlays requires expert judgement and is thoroughly documented and subject to comprehensive internal governance and oversight. If the risk of delayed losses is judged to have dissipated or actual stress emerges, the overlay will be removed or reduced.
The total portfolio overlays as at 30 September 2021 were $647 million (2020: $652 million) for the Group and $551 million (2020: $513 million) for the Parent Entity. Included in the total overlays were:
| ● | $557 million (2020: $577 million) for the Group and $461 million (2020: $438 million) for the Parent Entity related to COVID-19 overlay; and |
| ● | $90 million (2020: $75 million) for the Group and $90 million (2020: $75 million) for the Parent Entity reflecting other risks. No material overlays were held for extreme weather events. |
Overlays associated with COVID-19 decreased in 2021 as deferral packages which expired 31 March 2021 have had six months of performance post exit and the risk is now reflected in underlying ECL. This decrease was partially offset by new overlay for the deferral packages provided from July 2021 to cater for the recent lock downs in New South Wales and Victoria.
An overlay was introduced in 2021 to reflect the risk that some businesses may have been protected from default or stress because of COVID-19 related support packages and government stimulus and may become stressed once when these measures are removed. The overlay was retained at 30 September 2021 due to the uncertainty around the impact of recent lock downs in New South Wales and Victoria, and associated support measures, increasing the likelihood of temporarily suppressing losses. As at 30 September 2021 this overlay is $347 million for the Group and $298 million for the Parent.
Impact of changes in credit exposures on the provision for ECL
| ● | Stage 1 exposures had a net increase of $16.3 billion (2020: net decrease of $52.9 billion) for the Group and $8.3 billion (2020: net decrease of $51.9 billion) for the Parent Entity primarily driven by increases in housing segment due to new lending and in business segment due to transfer back of exposures from Stage 2. The increase from portfolio growth is offset by an additional $11.2 billion transferred to Stage 2 to account for staging methodology changes and overlays. Stage 1 ECL has decreased mainly from impacts from revised macro-economic forecasts. |
| ● | Stage 2 credit exposures increased by $5.1 billion (2020: increased by $34.3 billion) for the Group and $6.4 billion (2020: increased by $34.3 billion) for the Parent Entity mainly driven by increases from the housing segment due to the additional $11.2 billion transferred to Stage 2 to account for staging methodology changes and overlays. Stage 2 ECL has decreased driven by the reductions in overlay and impacts from revised macro-economic forecasts. |
| ● | Stage 3 credit exposures had a net decrease of $1.5 billion (2020: increased by $4.5 billion) for the Group and $1.3 billion (2020: increased by $4.5 billion) for the Parent Entity driven by reductions in 90 days past due exposures in the housing portfolio. Stage 3 ECL has decreased in line with the decrease in Stage 3 exposures. |
Note 14. Other financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||
|
$m |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Accrued interest receivable |
|
720 |
|
905 |
|
624 |
|
797 |
|
Securities sold not delivered |
|
3,542 |
|
2,358 |
|
3,542 |
|
2,352 |
|
Trade debtors |
|
574 |
|
992 |
|
397 |
|
502 |
|
Interbank lending |
|
592 |
|
299 |
|
73 |
|
295 |
|
Clearing and settlement balances |
|
564 |
|
630 |
|
524 |
|
558 |
|
Accrued fees and commissions |
|
264 |
|
170 |
|
187 |
|
117 |
|
Other |
|
138 |
|
120 |
|
139 |
|
124 |
|
Total other financial assets |
|
6,394 |
|
5,474 |
|
5,486 |
|
4,745 |
|
|
|
|
|
44 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 15. Life insurance assets and life insurance liabilities
Accounting policy
|
The Group conducts its life insurance business in Australia primarily through Westpac Life Insurance Services Limited and separate statutory funds registered under the Life Insurance Act 1995 (Life Act) and in New Zealand through Westpac Life-NZ-Limited which are separate statutory funds licensed under the Insurance (Prudential Supervision) Act 2010. |
|
Life insurance assets |
|
Life insurance assets, including investments in funds managed by the Group, are designated at FVIS. Changes in fair value are recognised in non-interest income. The determination of fair value of life insurance assets involves the same judgements as other financial assets, which are described in the critical accounting assumptions and estimates in Note 22. |
|
The Life Act places restrictions on life insurance assets, including that they can only be used: |
|
● to meet the liabilities and expenses of that statutory fund; |
|
● to acquire investments to further the business of the statutory fund; or |
|
● as a distribution, when the statutory fund has met its solvency and capital adequacy requirements. |
|
Life insurance liabilities |
|
Life insurance liabilities primarily consist of life investment contract liabilities and life insurance contract liabilities. Claims incurred in respect of life investment contracts are withdrawals of customer deposits, and are recognised as a reduction in life insurance liabilities. |
|
Life investment contract liabilities |
|
Life investment contract liabilities are designated at FVIS. Fair value is the higher of the valuation of life insurance assets linked to the life investment contract, or the minimum current surrender value (the minimum amount the Group would pay to a policyholder if their policy is voluntarily terminated before it matures or the insured event occurs). Changes in fair value are recognised in non-interest income. |
|
Life insurance contract liabilities |
|
The value of life insurance contract liabilities is calculated using the margin on services methodology (MoS), specified in the Prudential Standard LPS 340 Valuation of Policy Liabilities. |
|
MoS accounts for the associated risks and uncertainties of each type of life insurance contract written. At each reporting date, planned profit margins and an estimate of future liabilities are calculated. Profit margins are released to non-interest income over the period that life insurance is provided to policyholders (Note 4). The cost incurred of acquiring specific insurance contracts is deferred provided that these amounts are recoverable out of planned profit margins. The deferred amounts are recognised as a reduction in life insurance policy liabilities and are amortised to non-interest income over the same period as the planned profit margins. Life insurance contract liability adequacy test Life insurance contract policy liabilities are tested for liability adequacy by comparing them to the best estimate of future cash flows. Liabilities are grouped into related product groups and each group is tested against the best estimate of future cash flows. If the liability of a related product group is less than best estimate the liability is increased with the expense being recognised in non-interest income. |
|
External unit holder liabilities of managed investment schemes |
|
The life insurance statutory funds include controlling interests in managed investment schemes which are consolidated. When the managed investment scheme is consolidated, the external unit holder liabilities are recognised as a liability and included in life insurance liabilities. They are designated at FVIS. |
|
Critical accounting assumptions and estimates |
|
The key factors that affect the estimation of life insurance liabilities and related assets are: |
|
● the cost of providing benefits and administering contracts; |
|
● mortality and morbidity experience, which includes policyholder benefits enhancements; |
|
● discontinuance rates, which affects the Group’s ability to recover the cost of acquiring new business over the life of the contracts; and |
|
● the discount rate of projected future cash flows. |
|
Regulation, competition, interest rates, taxes, securities market conditions and general economic conditions also affect the estimation of life insurance liabilities. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 45 |
|
Notes to the financial statements
Note 15. Life insurance assets and life insurance liabilities (continued)
Life insurance assets
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
$m |
|
2021 |
|
2020 |
|
Investments held directly and in unit trusts |
|
|
|
|
|
Unit trusts |
|
- |
|
333 |
|
Debt securities |
|
- |
|
2,818 |
|
Loans and other assets |
|
- |
|
442 |
|
Total life Insurance assets |
|
- |
|
3,593 |
In 2021, the entire life insurance assets for the Group were reclassified as assets held for sale (refer to Note 37). There were no life insurance assets in the Parent Entity as at 30 September 2021 (2020: nil).
Life insurance liabilities
There were no life insurance liabilities in the Parent Entity as at 30 September 2021 (2020: nil).
|
|
|
|
|
46 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 16. Deposits and other borrowings1
Accounting policy
|
Deposits and other borrowings are initially recognised at fair value and subsequently either measured at amortised cost using the effective interest rate method or at fair value. |
|
Deposits and other borrowings are designated at fair value if they are managed on a fair value basis, reduce or eliminate an accounting mismatch or contain an embedded derivative. |
|
Where they are measured at fair value, any changes in fair value (except those due to changes in credit risk) are recognised as non-interest income. The change in the fair value that is due to changes in credit risk is recognised in OCI except where it would create an accounting mismatch, in which case it is also recognised in the income statement. |
|
Refer to Note 22 for balances measured at fair value and amortised cost. |
|
Interest expense incurred is recognised in net interest income using the effective interest rate method. |
The following table shows average balances and average rates in each of the past two years for major categories of deposits.
1. Non-interest bearing relates to instruments which do not carry a rate of interest.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 47 |
|
Notes to the financial statements
Note 16. Deposits and other borrowings (continued)
Certificates of deposit and term deposits
Uninsured deposits refer to deposits that are in excess of, or ineligible for, a government based deposit insurance scheme in their relevant country of domicile. For the Group, this primarily relates to deposit in excess of, or ineligible for, the Australian Government’s Financial Claims Scheme (FCS) limit. The table below shows the balances of uninsured certificates of deposits and term deposits by remaining maturity:
1. Interbank term deposits are included in Note 17.
Note 17. Other financial liabilities
Accounting policy
|
Other financial liabilities include liabilities measured at amortised cost as well as liabilities which are measured at FVIS. Financial liabilities measured at FVIS include: |
|
● trading liabilities (i.e. securities sold short); and |
|
● liabilities designated at FVIS (i.e. certain repurchase agreements). Refer to Note 22 for balances measured at fair value and amortised cost. Repurchase agreements |
|
Where securities are sold subject to an agreement to repurchase at a predetermined price, they remain recognised in the balance sheet in their original category (i.e. ‘Trading securities’ or ‘Investment securities’). |
|
The cash consideration received is recognised as a liability (‘Repurchase agreements’). Repurchase agreements are designated at fair value where they are managed as part of a trading portfolio, otherwise they are measured on an amortised cost basis. |
|
Where a repurchase agreement is designated at fair value, subsequent to initial recognition, these liabilities are measured at fair value with changes in fair value (except credit risk) recognised through the income statement as they arise. The change in fair value that is attributable to credit risk is recognised in OCI except where it would create an accounting mismatch, in which case it is also recognised through the income statement. |
|
|
|
|
|
48 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 18. Debt issues
Accounting policy
|
Debt issues are bonds, notes, commercial paper and debentures that have been issued by entities in the Group. |
|
Debt issues are initially measured at fair value and subsequently either measured at amortised cost using the effective interest rate method or at fair value. |
|
Debt issues are designated at fair value if they reduce or eliminate an accounting mismatch or contain an embedded derivative. |
|
The change in the fair value that is due to credit risk is recognised in OCI except where it would create an accounting mismatch, in which case it is also recognised in non-interest income. Refer to Note 22 for balances measured at fair value and amortised cost. |
|
Interest expense incurred is recognised within net interest income using the effective interest rate method. |
In the following table, the distinction between short-term (12 months or less) and long-term (greater than 12 months) debt is based on the original maturity of the underlying security.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 49 |
|
Notes to the financial statements
Note 18. Debt issues (continued)
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
$m |
|
2021 |
|
2020 |
|
Short-term debt |
|
|
|
|
|
Own issuances: |
|
|
|
|
|
US commercial paper |
|
19,595 |
|
13,864 |
|
Senior debt: |
|
|
|
|
|
GBP |
|
- |
|
2,437 |
|
Other |
|
- |
|
176 |
|
Total own issuances |
|
19,595 |
|
16,477 |
|
Total short-term debt |
|
19,595 |
|
16,477 |
|
Long-term debt (by currency): |
|
|
|
|
|
AUD |
|
27,634 |
|
36,062 |
|
CHF |
|
3,052 |
|
3,177 |
|
EUR |
|
31,380 |
|
34,498 |
|
GBP |
|
3,049 |
|
3,440 |
|
JPY |
|
1,141 |
|
2,439 |
|
NZD |
|
3,522 |
|
3,519 |
|
USD |
|
36,031 |
|
45,917 |
|
Other |
|
3,375 |
|
4,796 |
|
Total long-term debt |
|
109,184 |
|
133,848 |
The Group manages FX exposure from debt issuances as part of its hedging activities. Further details of the Group’s hedge accounting are in Note 20.
Note 19. Loan capital
Accounting policy
|
|
|
Loan capital are instruments issued by the Group which qualify for inclusion as regulatory capital under APRA Prudential Standards. Loan capital is initially measured at fair value and subsequently measured at amortised cost using the effective interest rate method. Interest expense incurred is recognised in net interest income. |
|
|
|
|
|
50 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 19. Loan capital (continued)
Additional Tier 1 loan capital
A summary of the key terms and common features of AT1 instruments are provided below1.
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated and |
|
|
|
|
|
|
|
|
|
|
|
Parent Entity |
|
|
|
Potential scheduled |
|
Optional |
|
|
|
|
|
$m |
|
Distribution/Interest rate |
|
conversion date2 |
|
redemption date3 |
|
2021 |
|
2020 |
|
Westpac capital notes (WCN) |
|
|
|
|
|
|
|
|
|
|
|
AUD 1,311 million WCN2 |
|
(90 day bank bill rate + 3.05% p.a.) |
|
23 September 2024 |
|
23 September 2022 |
|
1,309 |
|
1,307 |
|
|
|
x (1 - Australian corporate tax rate) |
|
|
|
|
|
|
|
|
|
AUD 1,324 million WCN3 |
|
(90 day bank bill rate + 4.00% p.a.) |
|
22 March 2023 |
|
22 March 20214 |
|
- |
|
1,323 |
|
|
|
x (1 - Australian corporate tax rate) |
|
|
|
|
|
|
|
|
|
AUD 1,702 million WCN4 |
|
(90 day bank bill rate + 4.90% p.a.) |
|
20 December 2023 |
|
20 December 20215 |
|
549 |
|
1,698 |
|
|
|
x (1 - Australian corporate tax rate) |
|
|
|
|
|
|
|
|
|
AUD 1,690 million WCN5 |
|
(90 day bank bill rate + 3.20% p.a.) |
|
22 September 2027 |
|
22 September 2025 |
|
1,682 |
|
1,680 |
|
|
|
x (1 - Australian corporate tax rate) |
|
|
|
|
|
|
|
|
|
AUD 1,423 million WCN6 |
|
(90 day bank bill rate + 3.70% p.a.) |
|
31 July 2026 |
|
31 July 2024 |
|
1,417 |
|
1,415 |
|
|
|
x (1 - Australian corporate tax rate) |
|
|
|
|
|
|
|
|
|
AUD 1,723 million WCN7 |
|
(90 day bank bill rate + 3.40% p.a.) |
|
22 March 2029 |
|
22 March 2027 |
|
1,709 |
|
- |
|
|
|
x (1 - Australian corporate tax rate) |
|
|
|
|
|
|
|
|
|
AUD 1,750 million WCN8 |
|
(90 day bank bill rate + 2.90% p.a.) |
|
21 June 2032 |
|
21 September 20296 |
|
1,737 |
|
- |
|
|
|
x (1 - Australian corporate tax rate) |
|
|
|
|
|
|
|
|
|
Total Westpac capital notes |
|
|
|
|
|
|
|
8,403 |
|
7,423 |
|
USD AT1 securities |
|
|
|
|
|
|
|
|
|
|
|
USD 1,250 million securities |
|
5.00% p.a. until but excluding 21 |
|
n/a |
|
21 September 20278 |
|
1,813 |
|
1,941 |
|
|
|
September 2027 (first reset date). If |
|
|
|
|
|
|
|
|
|
|
|
not redeemed, converted or written- |
|
|
|
|
|
|
|
|
|
|
|
off earlier, from, and including, each |
|
|
|
|
|
|
|
|
|
|
|
reset date7 to, but excluding, the |
|
|
|
|
|
|
|
|
|
|
|
next succeeding reset date, at a |
|
|
|
|
|
|
|
|
|
|
|
fixed rate p.a. equal to the prevailing |
|
|
|
|
|
|
|
|
|
|
|
5-year USD midmarket swap rate |
|
|
|
|
|
|
|
|
|
|
|
plus 2.89% p.a. |
|
|
|
|
|
|
|
|
|
Total USD AT1 securities |
|
|
|
|
|
|
|
1,813 |
|
1,941 |
|
1. |
AUD unless otherwise noted. |
|
2. |
Conversion is subject to the satisfaction of the scheduled conversion conditions. If the conversion conditions are not satisfied on the relevant scheduled conversion date, conversion will not occur until the next distribution payment date on which the scheduled conversion conditions are satisfied. |
|
3. |
Westpac may elect to redeem the relevant AT1 instrument, subject to APRA’s prior written approval. |
|
4. |
On 4 December 2020, AUD 866 million of WCN3 were transferred to the WCN3 nominated party for AUD 100 each pursuant to the WCN7 reinvestment offer. Those WCN3 were subsequently redeemed and cancelled by Westpac. On 22 March 2021, the remaining AUD 458 million of WCN3 were redeemed and cancelled by Westpac for AUD 100 each. |
|
5. |
On 15 September 2021, AUD 1,152 million of WCN4 were transferred to the WCN4 nominated party for AUD 100 each pursuant to the WCN8 reinvestment offer. Those WCN4 were subsequently redeemed and cancelled by Westpac. On 15 October 2021, Westpac issued a redemption notice notifying WCN4 holders that all outstanding WCN4 will be redeemed on the optional redemption date, being 20 December 2021. |
|
6. |
Westpac may also elect to redeem on 21 December 2029, 21 March 2030 and 21 June 2030, each an optional redemption date. |
|
7. |
Every fifth anniversary after the first reset date is a reset date. |
|
8. |
Westpac may elect to redeem on 21 September 2027 and every fifth anniversary after the first reset date. |
Common features of AT1 instruments
Payment conditions
Quarterly distributions on the Westpac capital notes and semi-annual interest payments on the USD AT1 securities are discretionary and will only be paid if the payment conditions are satisfied, including that the payment will not result in a breach of Westpac’s capital requirements under APRA’s prudential standards; not result in Westpac becoming, or being likely to become, insolvent; and if APRA does not object to the payment.
Broadly, if for any reason a distribution or interest payment has not been paid in full on the relevant payment date, Westpac must not determine or pay any dividends on Westpac ordinary shares or undertake a discretionary buy-back or capital reduction of Westpac ordinary shares, unless the unpaid amount is paid in full within 20 business days of the relevant payment date or in certain other circumstances.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 51 |
|
Notes to the financial statements
Note 19. Loan capital (continued)
The AT1 instruments convert into Westpac ordinary shares in the following circumstances:
| ● | Scheduled Conversion |
On the scheduled conversion date, provided certain conversion conditions are satisfied, it is expected that the relevant AT1 instrument1 will be converted and holders will receive a variable number of Westpac ordinary shares calculated using the formula described in the terms of the relevant AT1 instrument, subject to a maximum conversion number. The conversion number of Westpac ordinary shares will be calculated using the face value of the relevant AT1 instrument and the Westpac ordinary share price determined over the 20 business day period prior to the scheduled conversion date, including a 1% discount.
| ● | Capital Trigger Event or Non-Viability Trigger Event |
Westpac will be required to convert some or all AT1 instruments into a variable number of Westpac ordinary shares upon the occurrence of a capital trigger event or non-viability trigger event. No conversion conditions apply in these circumstances.
A capital trigger event occurs when Westpac determines, or APRA notifies Westpac in writing that it believes, Westpac’s Common Equity Tier 1 Capital ratio is equal to or less than 5.125% (on a level 1 or level 2 basis2).
A non-viability trigger event will occur when APRA notifies Westpac in writing that it believes conversion of all or some AT1 instruments (or conversion, write-off or write-down of relevant capital instruments of the Westpac Group), or public sector injection of capital (or equivalent support), in each case is necessary because without it, Westpac would become non-viable.
For each AT1 instrument converted, holders will receive a variable number of Westpac ordinary shares calculated using the formula described in the terms of the relevant AT1 instrument, subject to a maximum conversion number. The conversion number of Westpac ordinary shares is calculated using the face value or outstanding principal amount of the relevant AT1 instrument and the Westpac ordinary share price determined over the five business day period prior to the capital trigger event date or non-viability trigger event date and includes a 1% discount. For each AT1 instrument, the maximum conversion number is set using a Westpac ordinary share price which is broadly equivalent to 20% of the Westpac ordinary share price at the time of issue.
Following the occurrence of a capital trigger event or non-viability trigger event, if conversion of an AT1 instrument does not occur within five business days, holders’ rights in relation to the relevant AT1 instrument will be immediately and irrevocably terminated.
| ● | Conversion in other circumstances |
Westpac is able to elect to convert3, or may be required to convert3, AT1 instruments early in certain circumstances. The terms of conversion and the conversion conditions are broadly similar to scheduled conversion, however the share price floor in the maximum conversion number will depend on the conversion event.
| ● | Early Redemption |
Westpac is able to elect to redeem the relevant AT1 instrument on the optional redemption dates or for certain taxation or regulatory reasons, subject to APRA’s prior written approval.
| 1. | Scheduled conversion does not apply to USD AT1 securities. |
| 2. | Level 1 comprises Westpac Banking Corporation and its subsidiary entities that have been approved by APRA as being part of a single 'Extended Licensed Entity' for the purpose of measuring capital adequacy. Level 2 is 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. |
| 3. | Excludes USD AT1 securities. |
|
|
|
|
|
52 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 19. Loan capital (continued)
Tier 2 loan capital
A summary of the key terms and common features of Westpac’s Tier 2 instruments is provided below1:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated and |
|
|
|
|
|
|
|
|
|
|
|
Parent Entity |
|
|
|
|
|
Optional |
|
|
|
|
|
$m |
|
Interest rate2 |
|
Maturity date |
|
redemption date3 |
|
2021 |
|
2020 |
|
Subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
AUD 350 million |
|
4.50% p.a. until but excluding 11 March 2022. |
|
11 March 2027 |
|
11 March 2022 |
|
351 |
|
361 |
|
subordinated notes |
|
Thereafter, if not redeemed, a fixed rate per annum |
|
|
|
|
|
|
|
|
|
|
|
equal to the five-year AUD semi-quarterly mid-swap |
|
|
|
|
|
|
|
|
|
|
|
reference rate plus 1.95% p.a., the sum of which will |
|
|
|
|
|
|
|
|
|
|
|
be annualised. |
|
|
|
|
|
|
|
|
|
SGD 325 million |
|
4.00% p.a. until but excluding 12 August 2022. |
|
12 August 2027 |
|
12 August 2022 |
|
337 |
|
347 |
|
subordinated notes |
|
Thereafter, if not redeemed, a fixed rate per annum equal |
|
|
|
|
|
|
|
|
|
|
|
to the five-year SGD swap offer rate plus 1.54% p.a. |
|
|
|
|
|
|
|
|
|
AUD 175 million |
|
4.80% p.a. until but excluding 14 June 2023. |
|
14 June 2028 |
|
14 June 2023 |
|
181 |
|
185 |
|
subordinated notes |
|
Thereafter, if not redeemed, a fixed rate per annum |
|
|
|
|
|
|
|
|
|
|
|
equal to the five-year AUD semi-quarterly mid-swap |
|
|
|
|
|
|
|
|
|
|
|
reference rate plus 2.65% p.a., each of which will be |
|
|
|
|
|
|
|
|
|
|
|
annualised. |
|
|
|
|
|
|
|
|
|
USD 100 million |
|
Fixed 5.00% p.a. |
|
23 February 2046 |
|
n/a |
|
148 |
|
175 |
|
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
AUD 700 million |
|
90 day bank bill rate + 3.10% p.a. |
|
10 March 2026 |
|
10 March 20214 |
|
- |
|
700 |
|
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
JPY 20,000 million |
|
Fixed 1.16% p.a. |
|
19 May 2026 |
|
n/a |
|
249 |
|
270 |
|
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
JPY 10,200 million |
|
Fixed 1.16% p.a. |
|
2 June 2026 |
|
n/a |
|
127 |
|
137 |
|
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
JPY 10,000 million |
|
Fixed 0.76% p.a. |
|
9 June 2026 |
|
n/a |
|
124 |
|
134 |
|
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
NZD 400 million |
|
4.6950% p.a. until but excluding 1 September 2021. |
|
1 September 2026 |
|
1 September 20214 |
|
- |
|
376 |
|
subordinated notes |
|
Thereafter, if not redeemed, a fixed rate per annum |
|
|
|
|
|
|
|
|
|
|
|
equal to the New Zealand 5-year swap rate on 1 |
|
|
|
|
|
|
|
|
|
|
|
September 2021 plus 2.60% p.a. |
|
|
|
|
|
|
|
|
|
JPY 8,000 million |
|
0.9225% p.a. until but excluding 7 October 2021. |
|
7 October 2026 |
|
7 October 2021 |
|
99 |
|
107 |
|
subordinated notes |
|
Thereafter, if not redeemed, a fixed rate per annum |
|
|
|
|
|
|
|
|
|
|
|
equal to the five-year JPY mid-swap rate plus |
|
|
|
|
|
|
|
|
|
|
|
1.0005% p.a. |
|
|
|
|
|
|
|
|
|
USD 1,500 million |
|
4.322% p.a. until but excluding 23 November 2026. |
|
23 November 2031 |
|
23 November 2026 |
|
2,181 |
|
2,320 |
|
subordinated notes |
|
Thereafter, if not redeemed, a fixed rate per annum |
|
|
|
|
|
|
|
|
|
|
|
equal to the five-year USD mid-swap rate plus 2.236% p.a. |
|
|
|
|
|
|
|
|
|
JPY 12,000 million |
|
0.87% p.a. until but excluding 6 July 2022. Thereafter, |
|
6 July 2027 |
|
6 July 2022 |
|
149 |
|
161 |
|
subordinated notes |
|
if not redeemed, a fixed rate per annum equal to the |
|
|
|
|
|
|
|
|
|
|
|
five-year JPY mid-swap rate plus 0.78% p.a. |
|
|
|
|
|
|
|
|
|
JPY 13,500 million |
|
0.868% p.a. until but excluding 6 July 2022. |
|
6 July 2027 |
|
6 July 2022 |
|
168 |
|
181 |
|
subordinated notes |
|
Thereafter, if not redeemed, a fixed rate per annum |
|
|
|
|
|
|
|
|
|
|
|
equal to the five-year JPY mid-swap rate plus 0.778% p.a. |
|
|
|
|
|
|
|
|
|
HKD 600 million |
|
3.15% p.a. until but excluding 14 July 2022. Thereafter, |
|
14 July 2027 |
|
14 July 2022 |
|
108 |
|
111 |
|
subordinated notes |
|
if not redeemed, a fixed rate per annum equal to the |
|
|
|
|
|
|
|
|
|
|
|
five-year HKD mid-swap rate plus 1.34% p.a. |
|
|
|
|
|
|
|
|
|
AUD 350 million |
|
4.334% p.a. until but excluding 16 August 2024. |
|
16 August 2029 |
|
16 August 2024 |
|
350 |
|
349 |
|
subordinated notes |
|
Thereafter, if not redeemed, a fixed rate per annum |
|
|
|
|
|
|
|
|
|
|
|
equal to the five-year AUD semi-quarterly mid-swap |
|
|
|
|
|
|
|
|
|
|
|
reference rate plus 1.83% p.a., each of which will be |
|
|
|
|
|
|
|
|
|
|
|
annualised. |
|
|
|
|
|
|
|
|
|
AUD 185 million |
|
Fixed 5.00% p.a. |
|
24 January 2048 |
|
n/a |
|
185 |
|
185 |
|
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
AUD 250 million |
|
90 day bank bill rate + 1.40% p.a. |
|
16 February 2028 |
|
16 February 2023 |
|
250 |
|
250 |
|
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
AUD 130 million |
|
Fixed 5.00% p.a. |
|
2 March 2048 |
|
n/a |
|
130 |
|
130 |
|
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
AUD 725 million |
|
90 day bank bill rate + 1.80% p.a. |
|
22 June 2028 |
|
22 June 2023 |
|
724 |
|
714 |
|
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
USD 1,000 million |
|
Fixed 4.421% p.a. |
|
24 July 2039 |
|
n/a |
|
1,481 |
|
1,707 |
|
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
1. |
Excludes subordinated perpetual notes. |
|
2. |
Interest payments are made periodically as set out in the terms of the subordinated notes. |
|
3. |
Westpac may elect to redeem the relevant Tier 2 instrument on the optional redemption date or dates, subject to APRA’s prior written approval. If not redeemed on the first optional redemption date, Westpac may elect to redeem the relevant Tier 2 instrument on any interest payment date after the first optional redemption date (except for USD 1,500 million subordinated notes with an optional redemption date in November 2026, USD 1,250 million subordinated notes with an optional redemption date in July 2029, USD 1,500 million subordinated notes with an optional redemption date in February 2025, USD 1,500 million subordinated notes with an optional redemption date in November 2030, and EUR 1,000 million subordinated notes with an optional redemption date in May 2026), subject to APRA’s prior written approval. |
|
4. |
The subordinated notes were redeemed in full on the optional redemption date. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 53 |
|
Notes to the financial statements
Note 19. Loan capital (continued)
Tier 2 loan capital (continued)
A summary of the key terms and common features of Westpac’s Tier 2 instruments is continued below1:
|
1. |
Excludes subordinated perpetual notes. |
|
2. |
Interest payments are made periodically as set out in the terms of the subordinated notes. |
|
3. |
Westpac may elect to redeem the relevant Tier 2 instrument on the optional redemption date or dates, subject to APRA’s prior written approval. If not redeemed on the first optional redemption date, Westpac may elect to redeem the relevant Tier 2 instrument on any interest payment date after the first optional redemption date (except for USD 1,500 million subordinated notes with an optional redemption date in November 2026, USD 1,250 million subordinated notes with an optional redemption date in July 2029, USD 1,500 million subordinated notes with an optional redemption date in February 2025, USD 1,500 million subordinated notes with an optional redemption date in November 2030, and EUR 1,000 million subordinated notes with an optional redemption date in May 2026), subject to APRA’s prior written approval. |
Common features of subordinated notes
Interest payments are subject to Westpac being solvent at the time of, and immediately following, the interest payment. These subordinated notes contain non-viability loss absorption requirements.
Non-viability trigger event
Westpac will be required to convert some or all subordinated notes into a variable number of Westpac ordinary shares upon the occurrence of a non-viability trigger event. A non-viability trigger event will occur on similar terms as described under AT1 loan capital.
For each subordinated note converted, holders will receive a variable number of Westpac ordinary shares calculated using the formula described in the terms of the relevant Tier 2 instrument, subject to a maximum conversion number. The conversion number of Westpac ordinary shares will be calculated in a manner similar to that described under AT1 loan capital for a non-viability trigger event. For each Tier 2 instrument, the maximum conversion number is set using a Westpac ordinary share price which is broadly equivalent to 20% of the Westpac ordinary share price at the time of issue.
Following the occurrence of a non-viability trigger event, if conversion of a Tier 2 instrument does not occur within five business days, holders’ rights in relation to the relevant Tier 2 instrument will be immediately and irrevocably terminated.
Subordinated perpetual notes
These notes have no final maturity but Westpac can choose to redeem them at par on any interest payment date falling on or after September 1991, subject to APRA approval and certain other conditions. Interest is cumulative and payable on the notes semi-annually at a rate of 6 month US$ LIBOR plus 0.15% p.a., subject to Westpac being solvent immediately after making the payment and having paid any dividend on any class of share capital of Westpac within the prior 12-month period.
These notes qualify for transitional treatment as Tier 2 capital of Westpac under APRA’s Basel III capital adequacy framework.
The rights of the noteholders and coupon holders are subordinated to the claims of all creditors (including depositors) of Westpac other than creditors whose claims against Westpac rank equally with, or junior to, these notes.
|
|
|
|
|
54 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 20. Derivative financial instruments
Accounting policy
|
Derivative financial instruments are instruments whose values are derived from the value of an underlying asset, reference rate or index and include forwards, futures, swaps and options. The Group uses derivative financial instruments for meeting customers’ needs, our asset and liability risk management (ALM) activities, and undertaking market making and positioning activities. Trading derivatives Derivatives which are used in our ALM activities but are not designated into a hedge accounting relationship are considered economic hedges, and are adjusted for cash earnings purposes due to the accounting mismatch between the fair value of the derivatives and the accounting treatment of the underlying exposure (refer to Note 2 for further details). These derivatives, along with derivatives used for meeting customers’ needs and undertaking market making and positioning activities, are measured at FVIS and are disclosed as trading derivatives. Hedging derivatives Hedging derivatives are those which are used in our ALM activities and have also been designated into one of three hedge accounting relationships: fair value hedge; cash flow hedge; or hedge of a net investment in a foreign operation. These derivatives are measured at fair value. These hedge designations and the associated accounting treatment are detailed below. For more details regarding the Group’s ALM activities, refer to Note 21. Fair value hedges Fair value hedges are used to hedge the exposure to changes in the fair value of an asset or liability. Changes in the fair value of derivatives and the hedged asset or liability in fair value hedges are recognised in interest income. The carrying value of the hedged asset or liability is adjusted for the changes in fair value related to the hedged risk. If a hedge is discontinued, any fair value adjustments to the carrying value of the asset or liability are amortised to net interest income over the period to maturity. If the asset or liability is sold, any unamortised adjustment is immediately recognised in net interest income. Cash flow hedges Cash flow hedges are used to hedge the exposure to variability of cash flows attributable to an asset, liability or future forecast transaction. For effective hedges, changes in the fair value of derivatives are recognised in the cash flow hedge reserve through OCI and subsequently recognised in interest income when the cash flows attributable to the asset or liability that was hedged impact the income statement. For hedges with some ineffectiveness, the changes in the fair value of the derivatives relating to the ineffective portion are immediately recognised in interest income. If a hedge is discontinued, any cumulative gain or loss remains in OCI. It is amortised to net interest income over the period in which the asset or liability that was hedged also impacts the income statement. If a hedge of a forecast transaction is no longer expected to occur, any cumulative gain or loss in OCI is immediately recognised in net interest income. Net investment hedges Net investment hedges are used to hedge FX risks arising from a net investment of a foreign operation. For effective hedges, changes in the fair value of derivatives are recognised in the foreign currency translation reserve through OCI. For hedges with some ineffectiveness, the changes in the fair value of the derivatives relating to the ineffective portion are immediately recognised in non-interest income. If a foreign operation is disposed of, any cumulative gain or loss in OCI is immediately recognised in non-interest income. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 55 |
|
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
Total derivatives
The carrying values of derivative instruments are set out in the tables below.
|
1. |
The fair value of futures contracts is settled daily with the exchange, and therefore have been excluded from this table. |
|
|
|
|
|
56 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
||
|
Parent Entity |
|
Trading |
|
Hedging |
|
carrying value |
||||||
|
$m |
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward rate agreements |
|
1 |
|
(1) |
|
- |
|
- |
|
1 |
|
(1) |
|
Swap agreements |
|
30,779 |
|
(29,764) |
|
3,228 |
|
(5,261) |
|
34,007 |
|
(35,025) |
|
Options |
|
115 |
|
(121) |
|
- |
|
- |
|
115 |
|
(121) |
|
Total interest rate contracts |
|
30,895 |
|
(29,886) |
|
3,228 |
|
(5,261) |
|
34,123 |
|
(35,147) |
|
FX contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
Spot and forward contracts |
|
5,929 |
|
(5,603) |
|
5 |
|
(2) |
|
5,934 |
|
(5,605) |
|
Cross currency swap agreements |
|
6,452 |
|
(6,925) |
|
519 |
|
(34) |
|
6,971 |
|
(6,959) |
|
Options |
|
198 |
|
(173) |
|
- |
|
- |
|
198 |
|
(173) |
|
Total FX contracts |
|
12,579 |
|
(12,701) |
|
524 |
|
(36) |
|
13,103 |
|
(12,737) |
|
Credit default swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection bought |
|
- |
|
(15) |
|
- |
|
- |
|
- |
|
(15) |
|
Credit protection sold |
|
13 |
|
- |
|
- |
|
- |
|
13 |
|
- |
|
Total credit default swaps |
|
13 |
|
(15) |
|
- |
|
- |
|
13 |
|
(15) |
|
Commodity contracts |
|
227 |
|
(360) |
|
- |
|
- |
|
227 |
|
(360) |
|
Equities |
|
1 |
|
- |
|
- |
|
- |
|
1 |
|
- |
|
Total of gross derivatives |
|
43,715 |
|
(42,962) |
|
3,752 |
|
(5,297) |
|
47,467 |
|
(48,259) |
|
Impact of netting arrangements |
|
(25,299) |
|
25,365 |
|
(3,041) |
|
5,005 |
|
(28,340) |
|
30,370 |
|
Total of net derivatives |
|
18,416 |
|
(17,597) |
|
711 |
|
(292) |
|
19,127 |
|
(17,889) |
1.The fair value of futures contracts is settled daily with the exchange, and therefore have been excluded from this table.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 57 |
|
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
Hedge accounting
The Group designates derivatives into hedge accounting relationships in order to manage the volatility in earnings and capital that would otherwise arise from interest rate and FX risks that may result from differences in the accounting treatment of derivatives and underlying exposures. These hedge accounting relationships and the risks they are used to hedge are described below.
The Group enters into one-to-one hedge relationships to manage specific exposures where the terms of the hedged item significantly match the terms of the hedging instrument. The Group also uses dynamic hedge accounting where the hedged items are part of a portfolio of assets and/or liabilities that frequently change. In this hedging strategy, the exposure being hedged and the hedging instruments may change frequently rather than there being a one-to-one hedge accounting relationship for a specific exposure.
Fair value hedges
Interest rate risk
The Group hedges its interest rate risk to reduce exposure to changes in fair value due to interest rate fluctuations over the hedging period. Interest rate risk arising from fixed rate debt issuances and fixed rate bonds classified as investment securities at FVOCI is hedged with single currency fixed to floating interest rate derivatives. The Group also hedges its benchmark interest rate risk from fixed rate foreign currency denominated debt issuances using cross currency swaps. In applying fair value hedge accounting, the Group primarily uses one-to-one hedge accounting to manage specific exposures.
The Group also uses a dynamic hedge accounting strategy for fair value portfolio hedge accounting of some fixed rate mortgages to reduce exposure to changes in fair value due to interest rate fluctuations over the hedging period. These fixed rate mortgages are allocated to time buckets based on their expected repricing dates and the fixed-to-floating interest rate derivatives are designated accordingly to the capacity in the relevant time buckets.
The Group hedges the benchmark interest rate which generally represents the most significant component of the changes in fair value. The benchmark interest rate is a component of interest rate risk that is observable in the relevant financial markets, for example, BBSW for AUD interest rates, LIBOR for USD interest rates and BKBM for NZD interest rates. Ineffectiveness may arise from timing or discounting differences on repricing between the hedged item and the derivative. For the portfolio hedge accounting ineffectiveness also arises from prepayment risk (i.e. the difference between actual and expected prepayment of loans). In order to manage the ineffectiveness from early repayments and accommodate new originations the portfolio hedges are de-designated and redesignated periodically.
Cash flow hedges
Interest rate risk
The Group’s exposure to the volatility of interest cash flows from customer deposits and loans is hedged with interest rate derivatives using a dynamic hedge accounting strategy called macro cash flow hedges. Customer deposits and loans are allocated to time buckets based on their expected repricing dates. The interest rate derivatives are designated accordingly to the gross asset or gross liability positions for the relevant time buckets. The Group hedges the benchmark interest rate which generally represents the most significant component of the changes in fair value. The benchmark interest rate is a component of interest rate risk that is observable in the relevant financial markets, for example, BBSW for AUD interest rates, LIBOR for USD interest rates and BKBM for NZD interest rates. Ineffectiveness may arise from timing or discounting differences on repricing between the hedged item and the interest rate derivative. Ineffectiveness also arises if the notional values of the interest rate derivatives exceed the capacity for the relevant time buckets. The hedge accounting relationship is reviewed on a monthly basis and the hedging relationships are de-designated and redesignated if necessary.
FX risk
The Group’s exposure to foreign currency principal and credit margin cash flows from fixed rate foreign currency debt issuances is hedged through the use of cross currency derivatives in a one-to-one hedging relationship to manage the changes between the foreign currency and AUD. In addition, for floating rate foreign currency debt issuances, the Group hedges from foreign floating to primarily AUD or NZD floating interest rates. These exposures represent the most significant components of fair value. Ineffectiveness may arise from timing or discounting differences on repricing between the hedged item and the cross currency derivative.
|
|
|
|
|
58 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
Net investment hedges
FX risk
Structural FX risk results from Westpac’s capital deployed in offshore branches and subsidiaries, where it is denominated in currencies other than Australian dollars. As exchange rates move, the Australian dollar equivalent of offshore capital is subject to change that could introduce significant variability to the Group’s reported financial results and capital ratios.
The Group uses FX forward contracts when hedging the currency translation risk arising from net investments in foreign operations. The Group currently applies hedge accounting to its net investment in New Zealand operations which is the most material offshore operation and therefore the hedged risk is the movement of the NZD against the AUD. Ineffectiveness only arises if the notional values of the FX forward contracts exceed the net investment in New Zealand operations.
Economic hedges
As part of the Group’s ALM activities, economic hedges may be entered into to hedge New Zealand future earnings and long-term funding transactions. These hedges do not qualify for hedge accounting and the impact on the income statement of these hedges is treated as a cash earnings adjustment. This is due to the accounting mismatch between the fair value accounting of the derivatives used in the economic hedges when compared to the recognition of the New Zealand future earnings as they are earned and the amortised cost accounting of the borrowing respectively. Refer to Note 2 for further details.
Interest Rate Benchmark Reform
The Group's hedging relationships include hedged items and hedging instruments that are impacted by IBOR reform. Refer to Note 21.5 for further details of the Group’s exposure to IBOR reform.
Hedging instruments
The following tables show the carrying value of hedging instruments and a maturity analysis of the notional amounts of the hedging instruments in one-to-one hedge relationships categorised by the types of hedge relationships and the hedged risk.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 59 |
|
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts |
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
Over |
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
Within |
|
1 year to |
|
Over |
|
|
|
Carrying value |
||
|
$m |
|
Hedging instrument |
|
Hedged risk |
|
1 year |
|
5 years |
|
5 years |
|
Total |
|
Assets |
|
Liabilities |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-one hedge relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges |
|
Interest rate swap |
|
Interest rate risk |
|
16,748 |
|
60,258 |
|
56,979 |
|
133,985 |
|
4,395 |
|
(8,810) |
|
|
|
Cross currency swap |
|
Interest rate risk |
|
4,668 |
|
8,381 |
|
1,615 |
|
14,664 |
|
355 |
|
- |
|
Cash flow hedges |
|
Cross currency swap |
|
FX risk |
|
5,877 |
|
9,590 |
|
1,615 |
|
17,082 |
|
1,095 |
|
(141) |
|
Net investment hedges |
|
Forward contracts |
|
FX risk |
|
6,320 |
|
- |
|
- |
|
6,320 |
|
61 |
|
(46) |
|
Total one-to-one hedge relationships |
|
|
|
|
|
33,613 |
|
78,229 |
|
60,209 |
|
172,051 |
|
5,906 |
|
(8,997) |
|
Macro hedge relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio fair value hedges |
|
Interest rate swap |
|
Interest rate risk |
|
n/a |
|
n/a |
|
n/a |
|
19,907 |
|
- |
|
(187) |
|
Macro cash flow hedges |
|
Interest rate swap |
|
Interest rate risk |
|
n/a |
|
n/a |
|
n/a |
|
174,611 |
|
1,521 |
|
(1,334) |
|
Total macro hedge relationships |
|
|
|
|
|
n/a |
|
n/a |
|
n/a |
|
194,518 |
|
1,521 |
|
(1,521) |
|
Total of gross hedging derivatives |
|
|
|
|
|
n/a |
|
n/a |
|
n/a |
|
366,569 |
|
7,427 |
|
(10,518) |
|
Impact of netting arrangements |
|
|
|
|
|
n/a |
|
n/a |
|
n/a |
|
n/a |
|
(5,566) |
|
9,680 |
|
Total of net hedging derivatives |
|
|
|
|
|
n/a |
|
n/a |
|
n/a |
|
n/a |
|
1,861 |
|
(838) |
|
|
|
|
|
60 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
The following tables show the weighted average FX rate related to significant hedging instruments in one-to-one hedge relationships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average rate |
||
|
|
|
Hedging instrument |
|
Hedged risk |
|
Currency pair |
|
2021 |
|
2020 |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
|
Cross currency swap |
|
FX risk |
|
EUR:AUD |
|
0.6823 |
|
0.6687 |
|
|
|
|
|
|
|
JPY:AUD |
|
not material |
|
81.4507 |
|
|
|
|
|
|
|
EUR:NZD |
|
0.6086 |
|
0.6160 |
|
|
|
|
|
|
|
HKD:NZD |
|
not material |
|
4.9670 |
|
Net investment hedges |
|
Forward contracts |
|
FX risk |
|
NZD:AUD |
|
1.0505 |
|
1.0838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent Entity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
|
Cross currency swap |
|
FX risk |
|
EUR:AUD |
|
0.6823 |
|
0.6687 |
|
|
|
|
|
|
|
JPY:AUD |
|
79.6302 |
|
81.4507 |
|
|
|
|
|
|
|
CHF:AUD |
|
0.7679 |
|
not material |
|
|
|
|
|
|
|
CNH:AUD |
|
4.9359 |
|
4.9492 |
|
Net investment hedges |
|
Forward contracts |
|
FX risk |
|
NZD:AUD |
|
1.0460 |
|
1.0904 |
Impact of hedge accounting in the balance sheets and reserves
The following tables show the carrying amount of hedged items in a fair value hedge relationship and the component of the carrying amount related to accumulated fair value hedge accounting adjustments (FVHA).
There were no (2020: nil) FVHA included in the above carrying amounts relating to hedged items that have ceased to be adjusted for hedging gains and losses.
The pre-tax impact of cash flow and net investment hedges on reserves is detailed below:
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 61 |
|
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
There were losses of $176 million (2020: $43 million) remaining in the cash flow hedge reserve relating to hedge relationships for which hedge accounting is no longer applied for the Group and Parent Entity.
As disclosed in Note 27, the net losses from changes in the fair value of net investment hedges were $198 million (2020: net gains $9 million) for the Group and $41 million (2020: net gains $17 million) for the Parent Entity. Included in the foreign currency translation reserve is a loss of $210 million (2020: $210 million) for the Group and $214 million (2020: $214 million) for the Parent Entity relating to discontinued hedges of our net investment in USD operations. This would only be transferred to the income statement on disposal of the related USD operations.
Hedge effectiveness
Hedge effectiveness is tested prospectively at inception and during the lifetime of hedge relationships. For one-to-one hedge relationships this testing uses a qualitative assessment of matched terms where the critical terms of the derivatives used as the hedging instrument match the terms of the hedged item. In addition, a quantitative effectiveness test is performed for all hedges which could include regression analysis, dollar offset and/or sensitivity analysis.
Retrospective testing is also performed to determine whether the hedge relationship remains highly effective so that hedge accounting can continue to be applied and also to determine any ineffectiveness. These tests are performed using regression analysis and the dollar offset method.
The following tables provide information regarding the determination of hedge effectiveness:
|
|
|
|
|
62 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 21. Financial risk
Financial instruments are fundamental to the Group’s business of providing banking and financial services. The associated financial risks (including credit risk, funding and liquidity risk and market risk) are a significant proportion of the total risks faced by the Group.
This note details the financial risk management policies, practices and quantitative information of the Group’s principal financial risk exposures.
|
|
|
|
|
Note |
|
Index |
|
Note name |
|
number |
|
Overview |
|
Risk management frameworks |
|
21.1 |
|
Credit risk |
|
Credit risk ratings system |
|
21.2.1 |
|
The risk of financial loss where a customer or counterparty fails to meet their financial obligations. |
|
Credit risk mitigation, collateral and other credit enhancements |
|
21.2.2 |
|
|
|
Credit risk concentrations |
|
21.2.3 |
|
|
|
Credit quality of financial assets |
|
21.2.4 |
|
|
|
Non-performing loans and credit commitments |
|
21.2.5 |
|
|
|
Collateral held |
|
21.2.6 |
|
Funding and liquidity risk |
|
Liquidity modelling |
|
21.3.1 |
|
|
|
|
|
|
|
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. |
|
Sources of funding |
|
21.3.2 |
|
|
|
Assets pledged as collateral |
|
21.3.3 |
|
|
|
Contractual maturity of financial liabilities |
|
21.3.4 |
|
|
|
Expected maturity |
|
21.3.5 |
|
Market risk |
|
Value-at-Risk (VaR) |
|
21.4.1 |
|
The risk of an adverse impact on earnings resulting from changes in market factors, such as foreign exchange rates, interest rates, commodity prices or equity price. |
|
Traded market risk |
|
21.4.2 |
|
|
|
Non-traded market risk |
|
21.4.3 |
|
IBOR reform |
|
Benchmark interest rate exposure |
|
21.5 |
21.1 Risk management frameworks
The Board is responsible for approving the Westpac Group Risk Management Framework, 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 Committee (BRiskC) responsibility to:
| ● | review and recommend the Westpac Group Risk Management Framework, Westpac Group Risk Management Strategy and Westpac Group Risk Appetite Statement to the Board for approval; |
| ● | review and monitor the risk profile and controls of the Group consistent with Westpac Group’s 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. |
The Board Legal, Regulatory & Compliance Committee (BLRCC) is a sub-committee of the BRiskC. The BLRCC oversees material legal and regulatory change relevant to the Westpac Group. In addition it oversees management of material litigation and regulatory investigations, compliance, conduct risk, financial crime risk and customer remediation activities and customer complaints. The BLRCC also reviews and approves the Compliance and Conduct Risk Management Framework and the Financial Crime Risk Management Framework.
For each of its primary financial risks, the Group maintains risk management frameworks and a number of supporting policies that define roles and responsibilities, acceptable practices, limits and key controls:
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 63 |
|
Notes to the financial statements
Notes 21. Financial risk (continued)
|
Risk |
Risk management framework and controls |
|---|---|
|
Credit risk |
● The Credit Risk Management Framework describes the principles, methodologies, systems, roles and responsibilities, reports and key controls for managing credit risk. ● The BRiskC, Westpac Group Executive Risk Committee (RISKCO) and Westpac Group Credit Risk Committee (CREDCO) monitor the risk profile, performance and management of the Group’s credit portfolio and the development and review of key credit risk policies. ● The Credit Risk Rating System Policy describes the credit risk rating system philosophy, design, key features and uses of rating outcomes. ● All models materially impacting the risk rating process are periodically reviewed in accordance with Westpac’s model risk policies. ● An annual review is performed of the Credit Risk Rating System by the BRiskC and CREDCO. ● Specific credit risk estimates (including PD, LGD and EAD levels) are overseen, reviewed annually and supported by the Credit Risk Estimates Committee (a subcommittee of CREDCO) prior to approval under delegated authority from the Chief Risk Officer. ● In determining the provision for ECL, the forward-looking economic inputs and the probability weightings of the forward-looking scenarios as well as any adjustments made to the modelled outcomes are subject to the approval of the Group Chief Financial Officer and the Chief Risk Officer with oversight from the Board of Directors (and its Committees). ● Policies for the delegation of credit approval authorities and formal limits for the extension of credit are established throughout the Group. ● Credit manuals are established throughout the Group including policies governing the origination, evaluation, approval, documentation, settlement and ongoing management of credit risks. ● Climate change related credit risks are considered in line with our Climate Change Position Statement (CCPS). Climate change risks are managed in accordance with the Group's risk framework which is supported by the Sustainability Risk Management Framework (SRMF), Group Environmental, Social and Governance (ESG) Credit Risk Policy and Board Risk Appetite Statements (RAS). Where appropriate, these are applied at the portfolio, customer and transaction level. ● The Climate Change Financial Risk Committee oversees work to identify and manage the potential impact on credit exposures from climate change-related transition and physical risks across the Group and reports to CREDCO. ● The Group's ESG Credit Risk Policy details the Group's overall approach to managing ESG risks in the credit risk process for applicable transactions. ● Sector policies guide credit extension where industry-specific guidelines are considered necessary (e.g. acceptable financial ratios or permitted collateral). ● The Related Entity Risk Management Framework and supporting policies govern credit exposures to related entities, to minimise the spread of credit risk between Group entities and to comply with prudential requirements prescribed by APRA. |
|
|
|
|
|
64 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Notes 21. Financial risk (continued)
|
Risk |
Risk management framework and controls |
|---|---|
|
Funding and
|
● Funding and liquidity risk is measured and managed in accordance with the policies and processes defined in the Board-approved Liquidity Risk Management Framework which is part of the Westpac Board-approved Risk Management Strategy. ● Responsibility for managing Westpac's liquidity and funding positions in accordance with the Liquidity Risk Management Framework is delegated to Treasury, under the oversight of Group ALCO and Treasury Risk. ● Westpac's Liquidity Risk Management Framework sets out Westpac's funding and liquidity risk appetite, roles and responsibilities of key people managing funding and liquidity risk within Westpac, risk reporting and control processes and limits and targets used to manage Westpac's balance sheet. ● Treasury undertakes an annual funding review that outlines Westpac's balance sheet funding strategy over a three year period. This review encompasses trends in global markets, peer analysis, wholesale funding capacity, expected funding requirements and a funding risk analysis. This strategy is continuously reviewed to take account of changing market conditions, investor sentiment and estimations of asset and liability growth rates. ● Westpac monitors the composition and stability of its funding so that it remains within Westpac's funding risk appetite. This includes compliance with both the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). ● Westpac holds a portfolio of liquid assets for several purposes, including as a buffer against unforeseen funding requirements. The level of liquid assets held takes into account the liquidity requirements of Westpac's balance sheet under normal and stress conditions. ● Treasury maintains a contingent funding plan that outlines the steps that should be taken by Westpac in the event of an emerging 'funding crisis'. The plan is aligned with Westpac's broader Liquidity Crisis Management Policy which is approved annually by the Board. ● Daily liquidity risk reports are reviewed by the Group's Treasury and Treasury Risk teams. Liquidity reports are presented to Group ALCO monthly and to the Board quarterly. |
|
Market risk |
● The Market Risk Framework describes the Group's approach to managing traded and non- traded market risk. ● Traded market risk includes interest rate, FX, commodity, equity price, credit spread and volatility risks. Non-traded market risk includes interest rate and credit spread risks. ● Market risk is managed using VaR limits, Net interest income at risk (NaR) and structural risk limits (including credit spread and interest rate basis point value limits) as well as scenario analysis and stress testing. ● The BRiskC approves the risk appetite for traded and non-traded risks through the use of VaR, NaR and specific structural risk limits. This includes separate VaR sub-limits for the trading activities of Financial Markets and Treasury and for non-traded ALM activities. ● Market risk limits are assigned to business management based upon the Bank's risk appetite and business strategies in addition to the consideration of market liquidity and concentration. ● Market risk positions are managed by the trading desks and ALM unit consistent with their delegated authorities and the nature and scale of the market risks involved. ● Daily monitoring of current exposure and limit utilisation is conducted independently by the Market Risk and Treasury Risk units, which monitor market risk exposures against VaR and structural risk limits. Daily VaR position reports are produced by risk type, by product lines and by geographic region. Quarterly reports are produced for the Westpac Group Market Risk Committee (MARCO), RISKCO and the BRiskC. ● Daily stress testing and backtesting of VaR results are performed to support model integrity and to analyse extreme or unexpected movements. A review of the potential profit and loss outcomes is also undertaken to monitor any skew created by the historical data. MARCO has ratified an approved escalation framework. ● The BRiskC has approved a framework for profit or loss escalation which considers both single day and 20 day cumulative results. ● Treasury's ALM unit is responsible for managing the non-traded interest rate risk including risk mitigation through hedging using derivatives. This is overseen by the Treasury Risk unit and reviewed by Banking Book Risk Committee (BBRC), MARCO, RISKCO and BRiskC. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 65 |
|
Notes to the financial statements
Notes 21. Financial risk (continued)
21.2 Credit Risk
21.2.1 Credit risk ratings system
The principal objective of the credit risk rating system is to assess the credit risk to which the Group is exposed. The Group has two main approaches to this assessment.
Transaction-managed customers
Transaction managed customers are generally customers with business lending exposures. They are individually assigned a Customer Risk Grade (CRG), corresponding to their expected PD. Each facility is assigned an LGD. The Group’s risk rating system has a tiered scale of risk grades for both non-defaulted customers and defaulted customers. Non-defaulted CRGs are mapped to Moody’s and S&P Global Ratings (S&P) external senior unsecured ratings.
The table below shows Westpac’s high level CRGs for transaction-managed portfolios mapped to the Group’s credit quality disclosure categories and to their corresponding external rating.
Program-managed portfolio
The program-managed portfolio generally includes retail products including mortgages, personal lending (including credit cards) as well as certain SME lending. These customers are grouped into pools of similar risk. Pools are created by analysing similar risk characteristics that have historically predicted that an account is likely to go into default. Customers grouped according to these predictive characteristics are assigned a PD and LGD relative to their pool. The credit quality of these pools is based on a combination of behavioural factors, delinquency trends, PD estimates and loan to valuation ratio (housing loans only).
|
|
|
|
|
66 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 21. Financial risk (continued)
21.2.2 Credit risk mitigation, collateral and other credit enhancements
Westpac uses a variety of techniques to reduce the credit risk arising from its lending activities. This includes the Group establishing that it has direct, irrevocable and unconditional recourse to collateral and other credit enhancements through obtaining legally enforceable documentation.
Collateral
The table below describes the nature of collateral or security held for each relevant class of financial asset.
|
Loans – housing and personal1 |
Housing loans are secured by a mortgage over property and additional security may take the form of guarantees and deposits. Personal lending (including credit cards and overdrafts) is predominantly unsecured. Where security is taken, it is restricted to eligible motor vehicles, caravans, campers, motor homes and boats. Personal lending also includes margin lending which is secured primarily by shares or managed funds. |
|
Loans – business1 |
Business loans may be secured, partially secured or unsecured. Security is typically taken by way of a mortgage over property and/or a general security agreement over business assets or other assets. Other security such as guarantees, standby letters of credit or derivative protection may also be taken as collateral, if appropriate. |
|
Trading securities, financial assets measured at FVIS and derivatives |
These exposures are carried at fair value which reflects the credit risk. For trading securities, no collateral is sought directly from the issuer or counterparty; however this may be implicit in the terms of the instrument (such as an asset-backed security). The terms of debt securities may include collateralisation. For derivatives, master netting agreements are typically used to enable the effects of derivative assets and liabilities with the same counterparty to be offset when measuring these exposures. Additionally, collateralisation agreements are also typically entered into with major institutional counterparties to avoid the potential build-up of excessive mark-to-market positions. Derivative transactions are increasingly being cleared through central clearers. |
Management of risk mitigation
The Group mitigates credit risk through controls covering:
|
Collateral and valuation management |
The estimated realisable value of collateral held in support of loans is based on a combination of:
●
formal valuations currently held for such collateral; and
●
management’s assessment of the estimated realisable value of all collateral held.
This analysis also takes into consideration any other relevant knowledge available to management at the time. Updated valuations are obtained when appropriate. The Group revalues collateral related to financial markets positions on a daily basis and has formal processes in place to promptly call for collateral top-ups, if required. These processes include margining for non-centrally cleared customer derivatives as regulated by Australian Prudential Standard CPS226. The collateralisation arrangements are documented via the Credit Support Annex of the ISDA dealing agreements and Global Master Repurchase Agreements (GMRA) for repurchase transactions. In relation to financial markets positions, Westpac only recognises collateral which is:
●
cash, primarily in Australian dollars (AUD), New Zealand dollars (NZD), US dollars (USD), Canadian dollars (CAD), British pounds (GBP) or European Union euro (EUR);
●
bonds issued by Australian Commonwealth, State and Territory governments or their Public Sector Enterprises, provided these attract a zero risk-weighting under Australian Prudential Standard (APS) 112;
●
securities issued by other sovereign governments and supranationals as approved by an authorised credit officer; or
●
protection bought via credit-linked notes (provided the proceeds are invested in cash or other eligible collateral).
|
|
|
|
|
1. |
This includes collateral held in relation to associated credit commitments. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 67 |
|
Notes to the financial statements
Note 21. Financial risk (continued)
|
Other credit enhancements |
The Group only recognises guarantees, standby letters of credit, or credit derivative protection from the following entities (provided they are not related to the entity with which Westpac has a credit exposure):
●
Sovereign;
●
Australia and New Zealand public sector;
●
ADIs and overseas banks with a minimum risk grade equivalent of A3 / A–; and
●
Others with a minimum risk grade equivalent of A3 / A–.
Credit Portfolio Management (CPM) manages the Group’s corporate, sovereign and bank credit portfolios through monitoring the exposure and any offsetting hedge positions. CPM purchases credit protection from entities meeting the criteria above and sells credit protection to diversify the Group’s credit risk. |
|
Offsetting |
Creditworthy customers domiciled in Australia and New Zealand may enter into formal agreements with the Group, permitting the Group to set-off gross credit and debit balances in their nominated accounts. Cross-border set-offs are not permitted. Close-out netting is undertaken with counterparties with whom the Group has entered into a legally enforceable master netting agreement for their off-balance sheet financial market transactions in the event of default. Further details of offsetting are provided in Note 23. |
|
Central clearing |
The Group executes derivative transactions through central clearing counterparties. Central clearing counterparties mitigate risk through stringent membership requirements, the collection of margin against all trades placed, the default fund, and an explicitly defined order of priority of payments in the event of default. |
21.2.3 Credit risk concentrations
Credit risk is concentrated when a number of counterparties are engaged in similar activities, have similar economic characteristics and thus may be similarly affected by changes in economic or other conditions.
The Group monitors its credit portfolio to manage risk concentrations and rebalance the portfolio.
Individual customers or groups of related customers
The Group has large exposure limits governing the aggregate size of credit exposure normally acceptable to individual customers and groups of related customers. These limits are tiered by customer risk grade.
Specific industries
Exposures to businesses, governments and other financial institutions are classified into a number of industry clusters based on related Australian and New Zealand Standard Industrial Classification (ANZSIC) codes and are monitored against the Group’s industry risk appetite limits.
Individual countries
The Group has limits governing risks related to individual countries, such as political situations, government policies and economic conditions that may adversely affect either a customer’s ability to meet its obligations to the Group, or the Group’s ability to realise its assets in a particular country.
Maximum exposure to credit risk
The maximum exposure to credit risk (excluding collateral received) is represented by the carrying amount of on-balance sheet financial assets (which comprise cash and balances with central banks, collateral paid, trading securities and financial assets measured at FVIS, derivative financial instruments, investment securities, loans, other financial assets and certain balances included in assets held for sale) and undrawn credit commitments.
The following tables set out the credit risk concentrations to which the Group and the Parent Entity are exposed for on-balance sheet financial assets and for undrawn credit commitments.
Life insurance assets are excluded as primarily the credit risk is passed on to the policyholder and backed by the policyholder liabilities.
The balances for trading securities and financial assets measured at FVIS and investment securities exclude equity securities as the primary financial risk is not credit risk.
|
|
|
|
|
68 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 21. Financial risk (continued)
The credit concentrations for each significant class of financial asset are:
|
Trading securities and financial assets measured at FVIS (Note 10) |
●
42% (2020: 64%) were issued by financial institutions for the Group; 44% (2020: 67%) for the Parent Entity.
●
53% (2020: 33%) were issued by government or semi-government authorities for the Group; 52% (2020: 31%) for the Parent Entity.
●
67% (2020: 79%) were held in Australia by the Group; 74% (2020: 84%) by the Parent Entity.
|
|
|
|
|
Investment securities (Note 11) |
●
18% (2020: 18%) were issued by financial institutions for the Group; 19% (2020: 18%) for the Parent Entity.
●
81% (2020: 82%) were issued by government or semi-government authorities for the Group; 81% (2020: 82%) for the Parent Entity.
●
92% (2020: 92%) were held in Australia by the Group; 99% (2020: 98%) by the Parent Entity.
|
|
|
|
|
Loans (Note 12) |
●
The table below provides a detailed breakdown of loans by industry and geographic classification.
|
|
|
|
|
Derivative financial instruments (Note 20) |
●
78% (2020: 68%) were issued by financial institutions for both the Group and Parent Entity.
●
80% (2020: 76%) were held in Australia by the Group; 81% (2020: 78%) by the Parent Entity.
|
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 69 |
|
Notes to the financial statements
Note 21. Financial risk (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
2020 |
||||||||
|
|
|
|
|
Total all |
|
Undrawn |
|
|
|
|
|
Total all |
|
Undrawn |
|
|
|
|
|
|
|
other on |
|
credit |
|
|
|
|
|
other on |
|
credit |
|
|
|
Consolidated |
|
|
|
balance |
|
commit- |
|
|
|
|
|
balance |
|
commit- |
|
|
|
$m |
|
Loans |
|
sheet |
|
ments |
|
Total |
|
Loans |
|
sheet |
|
ments |
|
Total |
|
Australia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodation, cafes and restaurants |
|
7,658 |
|
13 |
|
1,294 |
|
8,965 |
|
7,933 |
|
23 |
|
1,225 |
|
9,181 |
|
Agriculture, forestry and fishing |
|
10,501 |
|
32 |
|
2,367 |
|
12,900 |
|
10,116 |
|
43 |
|
2,219 |
|
12,378 |
|
Construction |
|
6,214 |
|
16 |
|
3,718 |
|
9,948 |
|
6,711 |
|
15 |
|
3,643 |
|
10,369 |
|
Finance and insurance |
|
16,026 |
|
86,412 |
|
9,664 |
|
112,102 |
|
13,348 |
|
68,154 |
|
8,954 |
|
90,456 |
|
Government, administration and defence |
|
957 |
|
72,343 |
|
1,327 |
|
74,627 |
|
730 |
|
79,452 |
|
1,588 |
|
81,770 |
|
Manufacturing |
|
8,067 |
|
570 |
|
6,351 |
|
14,988 |
|
8,493 |
|
755 |
|
6,477 |
|
15,725 |
|
Mining |
|
3,003 |
|
158 |
|
3,527 |
|
6,688 |
|
2,975 |
|
427 |
|
3,735 |
|
7,137 |
|
Property |
|
45,645 |
|
435 |
|
12,792 |
|
58,872 |
|
44,468 |
|
671 |
|
10,869 |
|
56,008 |
|
Property services and business services |
|
11,248 |
|
100 |
|
6,544 |
|
17,892 |
|
12,562 |
|
150 |
|
7,019 |
|
19,731 |
|
Services |
|
9,918 |
|
437 |
|
8,058 |
|
18,413 |
|
11,675 |
|
247 |
|
7,595 |
|
19,517 |
|
Trade |
|
13,165 |
|
1,171 |
|
9,535 |
|
23,871 |
|
13,268 |
|
365 |
|
10,171 |
|
23,804 |
|
Transport and storage |
|
7,681 |
|
777 |
|
5,734 |
|
14,192 |
|
8,218 |
|
1,174 |
|
5,136 |
|
14,528 |
|
Utilities |
|
5,445 |
|
937 |
|
5,206 |
|
11,588 |
|
4,962 |
|
1,406 |
|
4,918 |
|
11,286 |
|
Retail lending |
|
467,218 |
|
481 |
|
86,570 |
|
554,269 |
|
454,433 |
|
553 |
|
84,454 |
|
539,440 |
|
Other |
|
6,048 |
|
821 |
|
2,160 |
|
9,029 |
|
5,706 |
|
1,161 |
|
2,491 |
|
9,358 |
|
Total Australia |
|
618,794 |
|
164,703 |
|
164,847 |
|
948,344 |
|
605,598 |
|
154,596 |
|
160,494 |
|
920,688 |
|
New Zealand |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodation, cafes and restaurants |
|
389 |
|
1 |
|
49 |
|
439 |
|
388 |
|
1 |
|
51 |
|
440 |
|
Agriculture, forestry and fishing |
|
9,371 |
|
29 |
|
724 |
|
10,124 |
|
9,101 |
|
57 |
|
632 |
|
9,790 |
|
Construction |
|
438 |
|
2 |
|
481 |
|
921 |
|
509 |
|
8 |
|
429 |
|
946 |
|
Finance and insurance |
|
3,344 |
|
13,787 |
|
1,984 |
|
19,115 |
|
3,427 |
|
9,274 |
|
1,782 |
|
14,483 |
|
Government, administration and defence |
|
145 |
|
6,919 |
|
767 |
|
7,831 |
|
94 |
|
7,739 |
|
865 |
|
8,698 |
|
Manufacturing |
|
1,608 |
|
80 |
|
1,525 |
|
3,213 |
|
1,689 |
|
115 |
|
1,782 |
|
3,586 |
|
Mining |
|
202 |
|
3 |
|
53 |
|
258 |
|
203 |
|
5 |
|
97 |
|
305 |
|
Property |
|
6,840 |
|
625 |
|
1,239 |
|
8,704 |
|
6,667 |
|
766 |
|
977 |
|
8,410 |
|
Property services and business services |
|
1,052 |
|
40 |
|
578 |
|
1,670 |
|
951 |
|
82 |
|
712 |
|
1,745 |
|
Services |
|
1,683 |
|
24 |
|
1,105 |
|
2,812 |
|
2,119 |
|
49 |
|
853 |
|
3,021 |
|
Trade |
|
2,172 |
|
32 |
|
1,368 |
|
3,572 |
|
1,949 |
|
76 |
|
1,510 |
|
3,535 |
|
Transport and storage |
|
1,129 |
|
129 |
|
919 |
|
2,177 |
|
1,176 |
|
73 |
|
871 |
|
2,120 |
|
Utilities |
|
1,341 |
|
435 |
|
1,599 |
|
3,375 |
|
1,303 |
|
506 |
|
1,681 |
|
3,490 |
|
Retail lending |
|
59,341 |
|
53 |
|
13,249 |
|
72,643 |
|
52,584 |
|
61 |
|
12,596 |
|
65,241 |
|
Other |
|
192 |
|
45 |
|
179 |
|
416 |
|
190 |
|
14 |
|
182 |
|
386 |
|
Total New Zealand |
|
89,247 |
|
22,204 |
|
25,819 |
|
137,270 |
|
82,350 |
|
18,826 |
|
25,020 |
|
126,196 |
|
Other overseas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodation, cafes and restaurants |
|
116 |
|
- |
|
9 |
|
125 |
|
118 |
|
- |
|
10 |
|
128 |
|
Agriculture, forestry and fishing |
|
10 |
|
- |
|
2 |
|
12 |
|
124 |
|
- |
|
5 |
|
129 |
|
Construction |
|
51 |
|
- |
|
111 |
|
162 |
|
51 |
|
- |
|
118 |
|
169 |
|
Finance and insurance |
|
1,402 |
|
16,106 |
|
2,192 |
|
19,700 |
|
2,298 |
|
16,896 |
|
2,243 |
|
21,437 |
|
Government, administration and defence |
|
1 |
|
3,316 |
|
- |
|
3,317 |
|
20 |
|
4,767 |
|
18 |
|
4,805 |
|
Manufacturing |
|
580 |
|
- |
|
2,745 |
|
3,325 |
|
1,877 |
|
31 |
|
3,443 |
|
5,351 |
|
Mining |
|
339 |
|
- |
|
805 |
|
1,144 |
|
336 |
|
16 |
|
1,194 |
|
1,546 |
|
Property |
|
363 |
|
- |
|
29 |
|
392 |
|
416 |
|
- |
|
27 |
|
443 |
|
Property services and business services |
|
946 |
|
41 |
|
497 |
|
1,484 |
|
1,545 |
|
107 |
|
790 |
|
2,442 |
|
Services |
|
40 |
|
1 |
|
756 |
|
797 |
|
218 |
|
- |
|
698 |
|
916 |
|
Trade |
|
1,130 |
|
1 |
|
1,911 |
|
3,042 |
|
1,553 |
|
2 |
|
1,931 |
|
3,486 |
|
Transport and storage |
|
504 |
|
11 |
|
237 |
|
752 |
|
732 |
|
23 |
|
276 |
|
1,031 |
|
Utilities |
|
413 |
|
- |
|
74 |
|
487 |
|
950 |
|
2 |
|
615 |
|
1,567 |
|
Retail lending |
|
407 |
|
2 |
|
29 |
|
438 |
|
457 |
|
2 |
|
32 |
|
491 |
|
Other |
|
30 |
|
129 |
|
28 |
|
187 |
|
18 |
|
111 |
|
27 |
|
156 |
|
Total other overseas |
|
6,332 |
|
19,607 |
|
9,425 |
|
35,364 |
|
10,713 |
|
21,957 |
|
11,427 |
|
44,097 |
|
Total gross credit risk |
|
714,373 |
|
206,514 |
|
200,091 |
|
1,120,978 |
|
698,661 |
|
195,379 |
|
196,941 |
|
1,090,981 |
|
|
|
|
|
70 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 21. Financial risk (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
2020 |
||||||||
|
|
|
|
|
Total all |
|
Undrawn |
|
|
|
|
|
Total all |
|
Undrawn |
|
|
|
|
|
|
|
other on |
|
credit |
|
|
|
|
|
other on |
|
credit |
|
|
|
Parent Entity |
|
|
|
balance |
|
commit- |
|
|
|
|
|
balance |
|
commit- |
|
|
|
$m |
|
Loans |
|
sheet |
|
ments |
|
Total |
|
Loans |
|
sheet |
|
ments |
|
Total |
|
Australia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodation, cafes and restaurants |
|
7,613 |
|
13 |
|
1,294 |
|
8,920 |
|
7,857 |
|
23 |
|
1,225 |
|
9,105 |
|
Agriculture, forestry and fishing |
|
10,446 |
|
32 |
|
2,367 |
|
12,845 |
|
10,058 |
|
43 |
|
2,219 |
|
12,320 |
|
Construction |
|
5,757 |
|
16 |
|
3,718 |
|
9,491 |
|
6,199 |
|
14 |
|
3,643 |
|
9,856 |
|
Finance and insurance |
|
15,969 |
|
244,440 |
|
9,664 |
|
270,073 |
|
13,290 |
|
231,468 |
|
8,954 |
|
253,712 |
|
Government, administration and defence |
|
954 |
|
72,343 |
|
1,327 |
|
74,624 |
|
709 |
|
79,457 |
|
1,588 |
|
81,754 |
|
Manufacturing |
|
7,913 |
|
570 |
|
6,351 |
|
14,834 |
|
8,282 |
|
755 |
|
6,477 |
|
15,514 |
|
Mining |
|
2,979 |
|
157 |
|
3,527 |
|
6,663 |
|
2,955 |
|
426 |
|
3,735 |
|
7,116 |
|
Property |
|
45,598 |
|
435 |
|
12,792 |
|
58,825 |
|
44,468 |
|
671 |
|
10,868 |
|
56,007 |
|
Property services and business services |
|
10,815 |
|
100 |
|
6,544 |
|
17,459 |
|
11,843 |
|
149 |
|
7,019 |
|
19,011 |
|
Services |
|
9,677 |
|
437 |
|
8,058 |
|
18,172 |
|
11,334 |
|
247 |
|
7,595 |
|
19,176 |
|
Trade |
|
12,997 |
|
1,171 |
|
9,535 |
|
23,703 |
|
13,058 |
|
367 |
|
10,171 |
|
23,596 |
|
Transport and storage |
|
7,394 |
|
775 |
|
5,734 |
|
13,903 |
|
7,870 |
|
1,174 |
|
5,136 |
|
14,180 |
|
Utilities |
|
5,422 |
|
937 |
|
5,206 |
|
11,565 |
|
4,938 |
|
1,404 |
|
4,918 |
|
11,260 |
|
Retail lending |
|
467,153 |
|
478 |
|
86,558 |
|
554,189 |
|
454,259 |
|
549 |
|
84,437 |
|
539,245 |
|
Other |
|
5,556 |
|
595 |
|
2,157 |
|
8,308 |
|
5,098 |
|
633 |
|
2,489 |
|
8,220 |
|
Total Australia |
|
616,243 |
|
322,499 |
|
164,832 |
|
1,103,574 |
|
602,218 |
|
317,380 |
|
160,474 |
|
1,080,072 |
|
New Zealand |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodation, cafes and restaurants |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
1 |
|
1 |
|
Agriculture, forestry and fishing |
|
6 |
|
16 |
|
4 |
|
26 |
|
4 |
|
44 |
|
4 |
|
52 |
|
Construction |
|
2 |
|
1 |
|
34 |
|
37 |
|
4 |
|
7 |
|
35 |
|
46 |
|
Finance and insurance |
|
- |
|
8,413 |
|
105 |
|
8,518 |
|
- |
|
8,173 |
|
135 |
|
8,308 |
|
Government, administration and defence |
|
- |
|
1,605 |
|
7 |
|
1,612 |
|
- |
|
1,743 |
|
8 |
|
1,751 |
|
Manufacturing |
|
67 |
|
80 |
|
64 |
|
211 |
|
70 |
|
114 |
|
51 |
|
235 |
|
Mining |
|
- |
|
3 |
|
- |
|
3 |
|
- |
|
5 |
|
- |
|
5 |
|
Property |
|
- |
|
112 |
|
- |
|
112 |
|
1 |
|
101 |
|
- |
|
102 |
|
Property services and business services |
|
10 |
|
39 |
|
16 |
|
65 |
|
7 |
|
81 |
|
16 |
|
104 |
|
Services |
|
- |
|
22 |
|
1 |
|
23 |
|
- |
|
46 |
|
- |
|
46 |
|
Trade |
|
298 |
|
30 |
|
159 |
|
487 |
|
263 |
|
74 |
|
157 |
|
494 |
|
Transport and storage |
|
1 |
|
26 |
|
53 |
|
80 |
|
5 |
|
71 |
|
67 |
|
143 |
|
Utilities |
|
- |
|
305 |
|
80 |
|
385 |
|
- |
|
492 |
|
83 |
|
575 |
|
Retail lending |
|
- |
|
1 |
|
- |
|
1 |
|
- |
|
- |
|
1 |
|
1 |
|
Other |
|
- |
|
1 |
|
1 |
|
2 |
|
- |
|
2 |
|
- |
|
2 |
|
Total New Zealand |
|
384 |
|
10,654 |
|
524 |
|
11,562 |
|
354 |
|
10,953 |
|
558 |
|
11,865 |
|
Other overseas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodation, cafes and restaurants |
|
74 |
|
- |
|
9 |
|
83 |
|
81 |
|
- |
|
10 |
|
91 |
|
Agriculture, forestry and fishing |
|
2 |
|
- |
|
1 |
|
3 |
|
114 |
|
- |
|
1 |
|
115 |
|
Construction |
|
45 |
|
- |
|
110 |
|
155 |
|
46 |
|
- |
|
114 |
|
160 |
|
Finance and insurance |
|
1,399 |
|
17,145 |
|
2,171 |
|
20,715 |
|
2,295 |
|
18,290 |
|
2,217 |
|
22,802 |
|
Government, administration and defence |
|
1 |
|
2,464 |
|
- |
|
2,465 |
|
20 |
|
3,882 |
|
18 |
|
3,920 |
|
Manufacturing |
|
576 |
|
- |
|
2,687 |
|
3,263 |
|
1,875 |
|
30 |
|
3,384 |
|
5,289 |
|
Mining |
|
319 |
|
- |
|
802 |
|
1,121 |
|
314 |
|
16 |
|
1,134 |
|
1,464 |
|
Property |
|
180 |
|
- |
|
11 |
|
191 |
|
209 |
|
- |
|
10 |
|
219 |
|
Property services and business services |
|
886 |
|
41 |
|
495 |
|
1,422 |
|
1,478 |
|
107 |
|
786 |
|
2,371 |
|
Services |
|
19 |
|
- |
|
754 |
|
773 |
|
196 |
|
- |
|
695 |
|
891 |
|
Trade |
|
1,016 |
|
1 |
|
1,761 |
|
2,778 |
|
1,415 |
|
2 |
|
1,754 |
|
3,171 |
|
Transport and storage |
|
436 |
|
11 |
|
230 |
|
677 |
|
642 |
|
23 |
|
268 |
|
933 |
|
Utilities |
|
390 |
|
- |
|
53 |
|
443 |
|
894 |
|
2 |
|
511 |
|
1,407 |
|
Retail lending |
|
324 |
|
- |
|
28 |
|
352 |
|
359 |
|
- |
|
31 |
|
390 |
|
Other |
|
21 |
|
128 |
|
13 |
|
162 |
|
7 |
|
111 |
|
14 |
|
132 |
|
Total other overseas |
|
5,688 |
|
19,790 |
|
9,125 |
|
34,603 |
|
9,945 |
|
22,463 |
|
10,947 |
|
43,355 |
|
Total gross credit risk |
|
622,315 |
|
352,943 |
|
174,481 |
|
1,149,739 |
|
612,517 |
|
350,796 |
|
171,979 |
|
1,135,292 |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 71 |
|
Notes to the financial statements
Note 21. Financial risk (continued)
21.2.4 Credit quality of financial assets
Credit quality disclosures1
The following tables show the credit quality of gross credit risk exposures measured at amortised cost or at FVOCI to which the impairment requirements apply. The credit quality is determined by reference to the credit risk ratings system (refer to Note 21.2.1) and expectations of future economic conditions under multiple scenarios.
|
1. |
This credit quality disclosure differs to that of credit risk concentration as it relates only to financial assets measured at amortised cost or at FVOCI and therefore excludes trading securities and financial assets measured at FVIS, and derivative financial instruments. |
|
2. |
Debt securities included $938 million (2020: $1,011 million) at amortised cost. $331 million (2020: $424 million) of these are classified as strong, $48 million (2020: nil) were classified as good/satisfactory and $559 million (2020: $587 million) are classified as weak. |
|
3. |
Includes credit commitments on held for sale assets of $828 million (2020: nil). |
|
|
|
|
|
72 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 21. Financial risk (continued)
Details of collateral held in support of these balances are provided in Note 21.2.6.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent Entity |
|
2021 |
|
2020 |
||||||||||||
|
$m |
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total1 |
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total1 |
|
Loans - housing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong |
|
352,163 |
|
19,540 |
|
- |
|
371,703 |
|
345,662 |
|
5,805 |
|
- |
|
351,467 |
|
Good/satisfactory |
|
47,301 |
|
16,725 |
|
- |
|
64,026 |
|
54,065 |
|
19,001 |
|
- |
|
73,066 |
|
Weak |
|
2,925 |
|
12,186 |
|
5,064 |
|
20,175 |
|
3,066 |
|
6,467 |
|
7,195 |
|
16,728 |
|
Total loans - housing |
|
402,389 |
|
48,451 |
|
5,064 |
|
455,904 |
|
402,793 |
|
31,273 |
|
7,195 |
|
441,261 |
|
Loans - personal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong |
|
4,204 |
|
42 |
|
- |
|
4,246 |
|
4,292 |
|
135 |
|
- |
|
4,427 |
|
Good/satisfactory |
|
8,386 |
|
1,178 |
|
- |
|
9,564 |
|
10,071 |
|
1,376 |
|
- |
|
11,447 |
|
Weak |
|
231 |
|
400 |
|
258 |
|
889 |
|
294 |
|
449 |
|
329 |
|
1,072 |
|
Total loans - personal |
|
12,821 |
|
1,620 |
|
258 |
|
14,699 |
|
14,657 |
|
1,960 |
|
329 |
|
16,946 |
|
Loans - business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong |
|
59,224 |
|
393 |
|
- |
|
59,617 |
|
53,321 |
|
1,761 |
|
- |
|
55,082 |
|
Good/satisfactory |
|
77,251 |
|
7,798 |
|
- |
|
85,049 |
|
77,330 |
|
13,275 |
|
- |
|
90,605 |
|
Weak |
|
142 |
|
3,496 |
|
3,408 |
|
7,046 |
|
135 |
|
5,899 |
|
2,589 |
|
8,623 |
|
Total loans - business |
|
136,617 |
|
11,687 |
|
3,408 |
|
151,712 |
|
130,786 |
|
20,935 |
|
2,589 |
|
154,310 |
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong |
|
77,741 |
|
- |
|
- |
|
77,741 |
|
85,434 |
|
324 |
|
- |
|
85,758 |
|
Good/satisfactory |
|
- |
|
48 |
|
- |
|
48 |
|
- |
|
- |
|
- |
|
- |
|
Weak |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Total debt securities2 |
|
77,741 |
|
48 |
|
- |
|
77,789 |
|
85,434 |
|
324 |
|
- |
|
85,758 |
|
Assets held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong |
|
180 |
|
- |
|
- |
|
180 |
|
- |
|
- |
|
- |
|
- |
|
Good/satisfactory |
|
786 |
|
56 |
|
- |
|
842 |
|
- |
|
- |
|
- |
|
- |
|
Weak |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Total assets held for sale |
|
966 |
|
56 |
|
- |
|
1,022 |
|
- |
|
- |
|
- |
|
- |
|
All other financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong |
|
235,953 |
|
- |
|
- |
|
235,953 |
|
204,239 |
|
- |
|
- |
|
204,239 |
|
Good/satisfactory |
|
273 |
|
- |
|
- |
|
273 |
|
354 |
|
- |
|
- |
|
354 |
|
Weak |
|
26 |
|
- |
|
- |
|
26 |
|
31 |
|
- |
|
- |
|
31 |
|
Total all other financial assets |
|
236,252 |
|
- |
|
- |
|
236,252 |
|
204,624 |
|
- |
|
- |
|
204,624 |
|
Undrawn credit commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strong |
|
133,404 |
|
1,327 |
|
- |
|
134,731 |
|
130,494 |
|
2,111 |
|
- |
|
132,605 |
|
Good/satisfactory |
|
34,365 |
|
4,242 |
|
- |
|
38,607 |
|
33,552 |
|
4,117 |
|
- |
|
37,669 |
|
Weak |
|
97 |
|
796 |
|
250 |
|
1,143 |
|
99 |
|
1,426 |
|
180 |
|
1,705 |
|
Total undrawn credit commitments3 |
|
167,866 |
|
6,365 |
|
250 |
|
174,481 |
|
164,145 |
|
7,654 |
|
180 |
|
171,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total strong |
|
862,869 |
|
21,302 |
|
- |
|
884,171 |
|
823,442 |
|
10,136 |
|
- |
|
833,578 |
|
Total good/satisfactory |
|
168,362 |
|
30,047 |
|
- |
|
198,409 |
|
175,372 |
|
37,769 |
|
- |
|
213,141 |
|
Total weak |
|
3,421 |
|
16,878 |
|
8,980 |
|
29,279 |
|
3,625 |
|
14,241 |
|
10,293 |
|
28,159 |
|
Total on and off-balance sheet |
|
1,034,652 |
|
68,227 |
|
8,980 |
|
1,111,859 |
|
1,002,439 |
|
62,146 |
|
10,293 |
|
1,074,878 |
|
1. |
This credit quality disclosure differs to that of credit risk concentration as it relates only to financial assets measured at amortised cost or at FVOCI and therefore excludes trading securities and financial assets measured at FVIS, and derivative financial instruments. |
|
2. |
Debt securities included $50 million (2020: $3 million) at amortised cost. $2 million (2020: $3 million) of these are classified as strong, $48 million (2020: nil) were classified as good/satisfactory. |
|
3. |
Includes $0.8 billion (2020: nil) of undrawn credit commitments related to facilities classified as held for sale. |
Details of collateral held in support of these balances are provided in Note 21.2.6.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 73 |
|
Notes to the financial statements
Note 21. Financial risk (continued)
21.2.5 Non-performing loans and credit commitments
The loans and credit commitments balance in Stage 3 (non-performing) is represented by those loans and credit commitments which are in default. A default occurs when Westpac considered that the customer is unlikely to repay its credit obligations in full, irrespective of recourse by the Group to actions such as realising security, or the customer is more than 90 days past due on any material credit obligation. This definition of default is aligned to the APRA regulatory definition of default. These can be disaggregated into impaired loans and credit commitments (which is where the customer is unlikely to pay its credit obligations in full including restructured loans) and items 90 days past due, or otherwise in default but not impaired.
Impaired loans and credit commitments include:
| ● | housing and business loans with insufficient security to cover the principal and interest payments owing (aligned to an impaired internal credit risk grade); |
| ● | personal loans which are greater than 90 days past due; and |
| ● | restructured loans (the original contractual terms have been modified to provide for concessions for a customer facing financial difficulties). |
Items 90 days past due, or otherwise in default but not impaired include:
| ● | currently 90 days or more past due but well secured1; |
| ● | assets that were, but are no longer 90 days past due but are yet to satisfactorily demonstrate sustained improvement to allow reclassification; and |
| ● | other assets in default and not impaired, including those where an order for bankruptcy or similar legal action has been taken (e.g. appointment of an Administrator or Receiver). |
The determination of the provisions for ECL is one of the Group’s critical accounting assumptions and estimates. Details of this and the Group’s accounting policy for the provision for ECL are discussed in Notes 6 and 13, along with the total provisions for ECL on loans and credit commitments and the total for those loans that are considered non-performing (i.e. Stage 3).
The gross amount of impaired exposures, along with the provisions for ECL is summarised in the following table:
|
1. |
The estimated net realisable value of security to which the Group has recourse is sufficient to cover all principal and interest. |
|
2. |
Included restructured loans and credit commitments amounting to $18 million (2020: $16 million), with a related provision of $1 million (2020: $4 million). |
|
3. |
Gross amount included $nil million of loans in assets held for sale (2020: nil), with undrawn credit commitments of $nil million (2020:nil). Provision includes $nil million in assets held for sale (2020: nil) and nil in liabilities held for sale (2020: nil). |
21.2.6 Collateral held
Loans
The Group analyses the coverage of the loan portfolio which is secured by the collateral that it holds. Coverage is measured as follows:
|
Coverage |
|
Secured loan to collateral value ratio |
|
Fully secured |
|
Less than or equal to 100% |
|
Partially secured |
|
Greater than 100% but not more than 150% |
|
Unsecured |
|
Greater than 150%, or no security held (e.g. can include credit cards, personal loans, and exposure to highly rated corporate entities) |
|
|
|
|
|
74 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 21. Financial risk (continued)
The Group and the Parent Entity’s loan portfolio have the following coverage from collateral held:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
||||||||||||||
|
|
Housing |
|
Personal |
|
Business |
|
Assets held |
|
|
|
Housing |
|
Personal |
|
Business |
|
|
|
% |
loans1 |
|
loans |
|
loans |
|
for sale |
|
Total |
|
loans1 |
|
loans |
|
loans |
|
Total |
|
Performing loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully secured |
100.0 |
|
9.9 |
|
66.2 |
|
5.9 |
|
89.2 |
|
100.0 |
|
8.0 |
|
62.8 |
|
87.6 |
|
Partially secured |
- |
|
31.2 |
|
15.6 |
|
92.5 |
|
4.8 |
|
- |
|
32.5 |
|
18.9 |
|
5.9 |
|
Unsecured |
- |
|
58.9 |
|
18.2 |
|
1.6 |
|
6.0 |
|
- |
|
59.5 |
|
18.3 |
|
6.5 |
|
Total |
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
Parent Entity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully secured |
100.0 |
|
10.6 |
|
66.6 |
|
5.9 |
|
89.7 |
|
100.0 |
|
8.7 |
|
63.7 |
|
88.3 |
|
Partially secured |
- |
|
33.5 |
|
14.8 |
|
92.5 |
|
4.5 |
|
- |
|
34.6 |
|
17.7 |
|
5.4 |
|
Unsecured |
- |
|
55.9 |
|
18.6 |
|
1.6 |
|
5.8 |
|
- |
|
56.7 |
|
18.6 |
|
6.3 |
|
Total |
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully secured |
94.6 |
|
- |
|
44.9 |
|
- |
|
72.2 |
|
95.2 |
|
- |
|
39.2 |
|
76.4 |
|
Partially secured |
5.4 |
|
45.7 |
|
21.9 |
|
- |
|
13.1 |
|
4.8 |
|
49.4 |
|
30.7 |
|
13.5 |
|
Unsecured |
- |
|
54.3 |
|
33.2 |
|
- |
|
14.7 |
|
- |
|
50.6 |
|
30.1 |
|
10.1 |
|
Total |
100.0 |
|
100.0 |
|
100.0 |
|
- |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
Parent Entity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully secured |
94.7 |
|
- |
|
47.1 |
|
- |
|
73.3 |
|
95.2 |
|
- |
|
44.1 |
|
79.0 |
|
Partially secured |
5.3 |
|
47.8 |
|
21.2 |
|
- |
|
12.8 |
|
4.8 |
|
50.7 |
|
26.4 |
|
11.8 |
|
Unsecured |
- |
|
52.2 |
|
31.7 |
|
- |
|
13.9 |
|
- |
|
49.3 |
|
29.5 |
|
9.2 |
|
Total |
100.0 |
|
100.0 |
|
100.0 |
|
- |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
1. |
For the purpose of collateral classification, housing loans are classified as fully secured, unless they are non-performing in which case they may be classified as partially secured. |
Details of the carrying value and associated provision for ECL are disclosed in Notes 12 and 13 respectively. The credit quality of loans is disclosed in Note 21.2.4.
Collateral held against financial assets other than loans
|
2. |
Securities received as collateral are not recognised in the Group and Parent Entity’s balance sheet. |
21.3 Funding and liquidity risk
21.3.1 Liquidity modelling
In managing liquidity for Westpac, Treasury utilises balance sheet forecasts and the maturity profile of Westpac’s wholesale funding portfolio to project liquidity outcomes. Local liquidity limits are also used by Westpac in applicable jurisdictions to ensure liquidity is managed efficiently and prudently.
In addition, Westpac conducts regular stress testing to assess its ability to meet cash flow obligations under a range of market conditions and scenarios. These scenarios inform liquidity limits and strategic planning.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 75 |
|
Notes to the financial statements
Note 21. Financial risk (continued)
21.3.2 Sources of funding
Sources of funding are regularly reviewed to maintain a wide diversification by currency, geography, product and term. Sources include, but are not limited to:
| ● | deposits; |
| ● | debt issues; |
| ● | proceeds from sale of marketable securities; |
| ● | repurchase agreements with central banks; |
| ● | principal repayments on loans; |
| ● | interest income; and |
| ● | fee income. |
Liquid assets
Treasury holds a portfolio of high-quality liquid assets as a buffer against unforeseen funding requirements. These assets are held in cash, or are otherwise eligible for repurchase agreements with the Reserve Bank of Australia or another central bank and include Government, State Government and highly rated investment grade securities. The level of liquid asset holdings is reviewed frequently and is consistent with both the requirements of the balance sheet and market conditions.
A summary of the Group’s liquid asset holdings is as follows:
|
1. |
Loans are self-originated AAA rated mortgage backed securities which are eligible for repurchase with the RBA and Reserve Bank of New Zealand. |
Group’s funding composition
The Group monitors the composition and stability of its funding so that it remains within the Group's funding risk appetite. This includes compliance with both the LCR and NSFR.
Movements in the Group’s funding composition in 2021 included:
| ● | Customer deposits accounted for 65.0% of the Group’s total funding (including equity) at 30 September 2021. Over the year, customer deposits increased by $25 billion and fully funded the bank’s new lending growth. This saw an increase in the Group's customer deposit to loan ratio to 82% from 80% at 30 September 2020; |
| ● | Long-term funding with a residual maturity greater than 12 months accounted for 15.6% of the Group’s total funding at 30 September 2021.The Group raised $34.6 billion of long term wholesale funding over the year, including $12 billion drawn down from the TFF prior to the end of the facility on 30 June 2021. In line with the closure of the TFF, the Group also began returning to its more usual funding activities, accessing senior unsecured and covered bond markets in the second half of the year. New long term funding during the year also included $3.5 billion in Additional Tier 1 and $6.2 billion in Tier 2 capital securities, the latter contributing to the Group’s Total Loss Absorbing Capital (TLAC) requirements that become effective on 1 January 2024; |
| ● | As 30 September 2021, funding from securitisation accounted for 0.6% of total funding; |
| ● | Wholesale funding with a residual maturity less than 12 months accounted for 10.8% of the Group’s total funding at 30 September 2021. This portfolio, including long term to short term scroll, had a weighted average maturity of 138 days. |
| ● | Funding from equity increased by $3.4 billion and accounted for 8.0% of total funding. |
|
|
|
|
|
76 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 21. Financial risk (continued)
Borrowings and outstanding issuances from existing debt programs at 30 September 2021 can be found in Notes 16 to 19.
Term Funding Facility (TFF)
The TFF was introduced by the Reserve Bank of Australia in March 2020 to reinforce the benefits to the economy of a lower cash rate. The TFF provided low-cost fixed rate funding to eligible Authorised Deposit-taking Institutions (ADIs) for a maximum of three years.
The TFF closed to new drawdowns on 30 June 2021, by which time Westpac had fully drawn its total available TFF allowance of $30 billion.
Term Lending Facility (TLF) and Funding for Lending Programme (FLP)
The Reserve Bank of New Zealand (RBNZ) has provided funding facilities as follows:
| ● | In December 2020, the RBNZ announced an extension of its TLF to 28 July 2021. The TLF offers loans to New Zealand Bank for a fixed term of five years at the rate of the Official Cash Rate (OCR) with access to the funds linked to banks’ lending under the Scheme. As at 30 September 2021, the Group had drawn down $0.1 billion1. |
| ● | On 11 November 2020, the RBNZ announced a stimulus through FLP commencing in December 2020. The FLP provides funding to New Zealand banks at the prevailing OCR for a term of three years which must be secured by high quality collateral. The size of the funding available under the FLP includes an initial allocation of 4% of each bank’s eligible loans. A conditional additional allocation of up to 2% of eligible loans is also available, subject to growth in eligible loans, for a total size of up to 6% of eligible loans, which equates to $4.8 billion1 for Westpac New Zealand Limited. As at 30 September 2021, the Group had drawn down $1.9 billion1. |
Credit ratings
As at 30 September 2021 the Parent Entity’s credit ratings were:
|
|
|
|
|
|
|
|
|
2021 |
|
Short-term |
|
Long-term |
|
Outlook |
|
Fitch Ratings |
|
F1 |
|
A+ |
|
Stable |
|
Moody’s Investors Service |
|
P-1 |
|
Aa3 |
|
Stable |
|
S&P Global Ratings |
|
A-1+ |
|
AA- |
|
Stable |
21.3.3 Assets pledged as collateral
The Group and Parent Entity are required to provide collateral (predominantly to other financial institutions), as part of standard terms, to secure liabilities. In addition to assets supporting securitisation and covered bond programs disclosed in Note 24, the carrying value of these financial assets pledged as collateral is:
21.3.4 Contractual maturity of financial liabilities
The following tables present cash flows associated with financial liabilities, payable at the balance sheet date, by remaining contractual maturity. The amounts disclosed in the table are the future contractual undiscounted cash flows, whereas the Group manages inherent liquidity risk based on expected cash flows.
Cash flows associated with financial liabilities include both principal payments as well as fixed or variable interest payments incorporated into the relevant coupon period. Principal payments reflect the earliest contractual maturity date. Derivative liabilities designated for hedging purposes are expected to be held for their remaining contractual lives, and reflect gross cash flows over the remaining contractual term.
Derivatives held for trading and certain liabilities classified in “Other financial liabilities” which are measured at FVIS are not managed for liquidity purposes on the basis of their contractual maturity, and accordingly these liabilities are presented in the up to 1 month column. Only the liabilities that the Group manages based on their contractual maturity are presented on a contractual undiscounted basis in the following tables.
|
1. |
Translated using spot NZD/AUD exchange rate as at 30 September 2021. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 77 |
|
Notes to the financial statements
Note 21. Financial risk (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Up to |
|
Over 1 month |
|
Over 3 months |
|
Over 1 year |
|
Over |
|
|
|
$m |
|
1 month |
|
to 3 months |
|
to 1 year |
|
to 5 years |
|
5 years |
|
Total |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral received |
|
2,368 |
|
- |
|
- |
|
- |
|
- |
|
2,368 |
|
Deposits and other borrowings |
|
482,084 |
|
58,731 |
|
80,350 |
|
6,369 |
|
67 |
|
627,601 |
|
Other financial liabilities |
|
14,621 |
|
1,243 |
|
1,803 |
|
31,870 |
|
- |
|
49,537 |
|
Derivative financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Held for trading |
|
17,526 |
|
- |
|
- |
|
- |
|
- |
|
17,526 |
|
Held for hedging purposes (net settled) |
|
24 |
|
23 |
|
119 |
|
128 |
|
14 |
|
308 |
|
Held for hedging purposes (gross settled): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash outflow |
|
2,933 |
|
88 |
|
1,361 |
|
2,572 |
|
2,669 |
|
9,623 |
|
Cash inflow |
|
(2,874) |
|
(76) |
|
(1,201) |
|
(2,148) |
|
(2,577) |
|
(8,876) |
|
Debt issues |
|
2,370 |
|
3,661 |
|
38,821 |
|
65,465 |
|
25,828 |
|
136,145 |
|
Liabilities held for sale |
|
28 |
|
- |
|
- |
|
- |
|
- |
|
28 |
|
Total financial liabilities excluding loan capital |
|
519,080 |
|
63,670 |
|
121,253 |
|
104,256 |
|
26,001 |
|
834,260 |
|
Loan capital |
|
6 |
|
105 |
|
1,034 |
|
6,517 |
|
30,623 |
|
38,285 |
|
Total undiscounted financial liabilities |
|
519,086 |
|
63,775 |
|
122,287 |
|
110,773 |
|
56,624 |
|
872,545 |
|
Total contingent liabilities and commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit and guarantees |
|
11,323 |
|
- |
|
- |
|
- |
|
- |
|
11,323 |
|
Commitments to extend credit |
|
188,768 |
|
- |
|
- |
|
- |
|
- |
|
188,768 |
|
Total undiscounted contingent liabilities and commitments |
|
200,091 |
|
- |
|
- |
|
- |
|
- |
|
200,091 |
|
|
|
|
|
78 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 21. Financial risk (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent Entity |
|
Up to |
|
Over 1 month |
|
Over 3 months |
|
Over 1 year |
|
Over |
|
|
|
$m |
|
1 month |
|
to 3 months |
|
to 1 year |
|
to 5 years |
|
5 years |
|
Total |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral received |
|
2,189 |
|
- |
|
- |
|
- |
|
- |
|
2,189 |
|
Deposits and other borrowings |
|
430,949 |
|
48,187 |
|
66,438 |
|
4,966 |
|
67 |
|
550,607 |
|
Other financial liabilities |
|
13,689 |
|
1,243 |
|
1,712 |
|
29,961 |
|
- |
|
46,605 |
|
Derivative financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Held for trading |
|
17,597 |
|
- |
|
- |
|
- |
|
- |
|
17,597 |
|
Held for hedging purposes (net settled) |
|
17 |
|
17 |
|
106 |
|
104 |
|
14 |
|
258 |
|
Held for hedging purposes (gross settled): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash outflow |
|
105 |
|
67 |
|
11 |
|
577 |
|
- |
|
760 |
|
Cash inflow |
|
(103) |
|
(65) |
|
(3) |
|
(520) |
|
- |
|
(691) |
|
Debt issues |
|
1,543 |
|
2,593 |
|
32,270 |
|
55,824 |
|
22,900 |
|
115,130 |
|
Due to subsidiaries |
|
23,412 |
|
964 |
|
3,702 |
|
15,347 |
|
157,506 |
|
200,931 |
|
Liabilities held for sale |
|
3 |
|
- |
|
- |
|
- |
|
- |
|
3 |
|
Total financial liabilities excluding loan capital |
|
489,401 |
|
53,006 |
|
104,236 |
|
106,259 |
|
180,487 |
|
933,389 |
|
Loan capital |
|
6 |
|
105 |
|
1,034 |
|
6,517 |
|
30,623 |
|
38,285 |
|
Total undiscounted financial liabilities |
|
489,407 |
|
53,111 |
|
105,270 |
|
112,776 |
|
211,110 |
|
971,674 |
|
Total contingent liabilities and commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit and guarantees |
|
10,796 |
|
- |
|
- |
|
- |
|
- |
|
10,796 |
|
Commitments to extend credit |
|
163,685 |
|
- |
|
- |
|
- |
|
- |
|
163,685 |
|
Total undiscounted contingent liabilities and commitments |
|
174,481 |
|
- |
|
- |
|
- |
|
- |
|
174,481 |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 79 |
|
Notes to the financial statements
Note 21. Financial risk (continued)
21.3.5 Expected maturity
The following tables present the balance sheet based on expected maturity dates. The liability balances in the following tables will not agree to the contractual maturity tables (Note 21.3.4) due to the analysis below being based on expected rather than contractual maturities, the impact of discounting and the exclusion of interest accruals beyond the reporting period. Included in the following tables are equity securities classified as trading securities, investment securities and life insurance assets that have no specific maturity. These assets have been classified based on the expected period of disposal. Deposits are presented in the following table on a contractual basis, however as part of our normal banking operations, the Group would expect a large proportion of these balances to be retained.
|
|
|
|
|
80 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 21. Financial risk (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
||||||||
|
Parent Entity |
|
Due within |
|
Greater than |
|
|
|
Due within |
|
Greater than |
|
|
|
$m |
|
12 months |
|
12 months |
|
Total |
|
12 months |
|
12 months |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and balances with central banks |
|
62,754 |
|
- |
|
62,754 |
|
25,436 |
|
- |
|
25,436 |
|
Collateral paid |
|
4,055 |
|
- |
|
4,055 |
|
4,641 |
|
- |
|
4,641 |
|
Trading securities and financial assets measured at FVIS |
|
11,853 |
|
6,926 |
|
18,779 |
|
30,550 |
|
7,480 |
|
38,030 |
|
Derivative financial instruments |
|
9,545 |
|
9,582 |
|
19,127 |
|
13,349 |
|
9,445 |
|
22,794 |
|
Investment securities |
|
6,677 |
|
71,186 |
|
77,863 |
|
5,120 |
|
80,706 |
|
85,826 |
|
Loans (net of provisions) |
|
63,725 |
|
554,688 |
|
618,413 |
|
70,453 |
|
537,371 |
|
607,824 |
|
Other financial assets |
|
5,486 |
|
- |
|
5,486 |
|
4,745 |
|
- |
|
4,745 |
|
Due from subsidiaries |
|
10,628 |
|
164,718 |
|
175,346 |
|
10,420 |
|
170,559 |
|
180,979 |
|
Investment in subsidiaries |
|
- |
|
6,287 |
|
6,287 |
|
- |
|
6,475 |
|
6,475 |
|
Investment in associates |
|
- |
|
34 |
|
34 |
|
- |
|
57 |
|
57 |
|
Assets held for sale |
|
1,015 |
|
- |
|
1,015 |
|
- |
|
- |
|
- |
|
All other assets |
|
596 |
|
12,934 |
|
13,530 |
|
796 |
|
15,199 |
|
15,995 |
|
Total assets |
|
176,334 |
|
826,355 |
|
1,002,689 |
|
165,510 |
|
827,292 |
|
992,802 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral received |
|
2,189 |
|
- |
|
2,189 |
|
1,862 |
|
- |
|
1,862 |
|
Deposits and other borrowings |
|
547,101 |
|
3,086 |
|
550,187 |
|
516,391 |
|
5,222 |
|
521,613 |
|
Other financial liabilities |
|
17,473 |
|
29,790 |
|
47,263 |
|
22,092 |
|
18,064 |
|
40,156 |
|
Derivative financial instruments |
|
9,804 |
|
8,085 |
|
17,889 |
|
12,805 |
|
9,974 |
|
22,779 |
|
Debt issues |
|
35,084 |
|
73,126 |
|
108,210 |
|
40,886 |
|
86,780 |
|
127,666 |
|
Due to subsidiaries |
|
25,053 |
|
153,763 |
|
178,816 |
|
20,551 |
|
165,712 |
|
186,263 |
|
Liabilities held for sale |
|
10 |
|
- |
|
10 |
|
- |
|
- |
|
- |
|
All other liabilities |
|
2,897 |
|
3,362 |
|
6,259 |
|
3,770 |
|
4,996 |
|
8,766 |
|
Total liabilities excluding loan capital |
|
639,611 |
|
271,212 |
|
910,823 |
|
618,357 |
|
290,748 |
|
909,105 |
|
Loan capital |
|
3,070 |
|
25,997 |
|
29,067 |
|
1,323 |
|
22,626 |
|
23,949 |
|
Total liabilities |
|
642,681 |
|
297,209 |
|
939,890 |
|
619,680 |
|
313,374 |
|
933,054 |
|
Net assets/(liabilities) |
|
(466,347) |
|
529,146 |
|
62,799 |
|
(454,170) |
|
513,918 |
|
59,748 |
21.4 Market risk
21.4.1 Value-at-Risk
The Group uses VaR as one of the mechanisms for controlling both traded and non-traded market risk.
VaR is a statistical estimate of the potential loss in earnings over a specified period of time and to a given level of confidence based on historical market movements. The confidence level indicates the probability that the loss will not exceed the VaR estimate on any given day.
VaR seeks to take account of all material market variables that may cause a change in the value of the portfolio, including interest rates, FX rates, price changes, volatility and the correlations between these variables. Daily monitoring of current exposure and limit utilisation is conducted independently by the Market Risk and Treasury Risk units which monitor market risk exposures against VaR and structural concentration limits. These are supplemented by escalation triggers for material profits or losses and stress testing of risks beyond the 99% confidence interval.
The key parameters of VaR are:
|
|
|
|
|
Holding period |
|
1 day |
|
Confidence level |
|
99% |
|
Period of historical data used |
|
1 year |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 81 |
|
Notes to the financial statements
Note 21. Financial risk (continued)
21.4.2 Traded market risk
The following table depicts the aggregate VaR, by risk type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated and Parent Entity |
|
2021 |
|
2020 |
|
2019 |
||||||||||||
|
$m |
|
High |
|
Low |
|
Average |
|
High |
|
Low |
|
Average |
|
High |
|
Low |
|
Average |
|
Interest rate risk |
|
28.7 |
|
5.1 |
|
12.9 |
|
25.5 |
|
7.0 |
|
14.6 |
|
14.9 |
|
6.6 |
|
10.9 |
|
FX risk |
|
8.7 |
|
0.6 |
|
2.0 |
|
11.7 |
|
0.5 |
|
4.0 |
|
8.6 |
|
0.8 |
|
4.1 |
|
Equity risk |
|
3.2 |
|
0.0 |
|
0.2 |
|
0.7 |
|
0.0 |
|
0.2 |
|
0.2 |
|
0.0 |
|
0.0 |
|
Commodity risk1 |
|
7.9 |
|
0.4 |
|
1.2 |
|
3.4 |
|
0.6 |
|
1.9 |
|
42.0 |
|
1.7 |
|
8.2 |
|
Other market risks2 |
|
23.8 |
|
1.6 |
|
10.3 |
|
32.9 |
|
2.4 |
|
14.6 |
|
5.5 |
|
2.0 |
|
3.5 |
|
Diversification effect |
|
n/a |
|
n/a |
|
(8.7) |
|
n/a |
|
n/a |
|
(14.9) |
|
n/a |
|
n/a |
|
(12.3) |
|
Net market risk |
|
41.5 |
|
5.9 |
|
17.9 |
|
42.0 |
|
7.1 |
|
20.4 |
|
45.3 |
|
7.9 |
|
14.4 |
|
1. |
Includes electricity risk. Closure of the electricity business was completed in FY20. |
|
2. |
Includes prepayment risk and credit spread risk (exposure to movements in generic credit rating bands). |
21.4.3 Non-traded market risk
Non-traded market risk includes Interest Rate Risk in the Banking Book (IRRBB) – the risk to net interest income or the economic value on banking book items as interest rates change.
Net interest income (NII) sensitivity is managed in terms of the NaR. A simulation model is used to calculate Westpac’s potential NaR. This combines the underlying balance sheet data with assumptions about run-off and new business, expected repricing behaviour and changes in wholesale market interest rates. To provide a series of potential future NII outcomes, simulations use a range of interest rate scenarios over one to three year time horizons. This includes 100 and 200 basis point shifts up and down from the current market yield curves in Australia and New Zealand. Additional stressed interest rate scenarios are also considered and modelled.
A comparison between the NII outcomes from these modelled scenarios indicates the sensitivity to interest rate changes.
Net interest income-at-Risk (NaR)
The following table depicts potential NII outcomes assuming a worst case 100 basis point rate shock (up and down) with a 12 month time horizon (expressed as a percentage of reported NII):
Value at Risk - IRRBB
The table below depicts VaR for IRRBB:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
||||||||||||
|
$m |
|
As at |
|
High |
|
Low |
|
Average |
|
As at |
|
High |
|
Low |
|
Average |
|
Consolidated |
|
63.7 |
|
224.3 |
|
59.7 |
|
127.8 |
|
202.4 |
|
219.7 |
|
31.0 |
|
126.7 |
As at 30 September 2021 the Value at Risk – IRRBB for the Parent Entity was $60 million (2020: $208 million).
Risk mitigation
IRRBB stems from the ordinary course of banking activities, including structural interest rate risk (the mismatch between the duration of assets and liabilities) and capital management.
The Group hedges its exposure to such interest rate risk using derivatives. Further details on the Group’s hedge accounting are discussed in Note 20.
The same controls used to monitor traded market risk allow management to continuously monitor and manage IRRBB.
Structural FX risk
Structural FX risk results from the generation of foreign currency denominated earnings and from Westpac’s capital deployed in offshore branches and subsidiaries, where it is denominated in currencies other than Australian dollars. As exchange rates move, the Australian dollar equivalent of offshore earnings and capital is subject to change that could introduce significant variability to the Bank’s reported financial results and capital ratios. Note 20 includes details of the Group’s ALM activities including details of the hedge accounting and economic hedges used to manage this risk.
|
|
|
|
|
82 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 21. Financial risk (continued)
21.5Interest rate benchmark reform
Overview
Interbank Offered Rates (IBORs) are interest rate benchmarks which are referenced in many financial instruments across various currencies and tenors. In recent years, financial regulators have reviewed the use of IBORs and recommended either a reform of the benchmark rate to reference market observable transactions (e.g. EURIBOR) or a transition of certain IBORs to more observable, risk-free alternative reference rates (ARR).
On 5 March 2021, the UK regulator, the Financial Conduct Authority (FCA), confirmed the transition dates for LIBORs to ARR.
The transition dates can be summarised as follows:
|
● |
a cessation date of 31 December 2021 for most LIBORs; |
|
● |
a cessation date of 30 June 2023 for certain settings of USD LIBOR (i.e. overnight and 12-months) and for synthetic benchmarks which use USD LIBOR in their calculation process including SGD SOR; |
|
● |
a non-representative date of 31 December 2021 for both GBP LIBOR and JPY LIBOR for the 1-month, 3-month and 6-month settings; and |
|
● |
a non-representative date of 30 June 2023 for USD LIBOR 1-month, 3-month and 6-month settings. |
Risks
These IBOR reforms result in various risks to the Group including:
|
● |
Operational risk: relating to any adverse impacts from the implementation of the IBOR reform on the business, compliance, customers or and technology; |
|
● |
Market risk: including adverse impacts to the Group and its customers if the markets are disrupted by the IBOR reform; and |
|
● |
Accounting risk: A key assumption made when performing hedge accounting at the reporting date is that both the hedged item and instrument will be amended from existing LIBOR linked floating rates to new ARRs on the same date. Where actual differences between those dates arise, hedge ineffectiveness will be recorded in the income statement. Also, as current IBOR becomes less observable due to transition to ARR consideration will need to be given to the appropriate fair valuation hierarchy level used to classify impacted financial instruments. |
The Group does not expect material changes to its business-as-usual risk management frameworks and controls due to IBOR. The Group has a working group in place to manage any transition related risks resulting from IBOR to ARR which is discussed further below.
Governance
The Group established an enterprise-wide IBORs Transition Program to manage the impacts of IBOR reform. The scope of the program is to address the impact of transition from IBORs to ARRs including business, compliance, customer and technology impacts. The Governance structure of the program is well established to include a Steering Committee that includes senior executives from Finance, Legal, Technology, Compliance, Risk and all impacted business units.
Significant activities underway include development of ARR product variations, changes required for implementing the International Swaps and Derivatives Association (ISDA) Protocol, Customer Outreach including management of conduct risk in customer transition and technology changes required to ensure the Group’s systems can transact, value and perform the necessary accounting (including hedging) requirements once contracts transition from LIBOR to ARR. These activities focus on two broad areas including:
|
● |
developing new alternative risk-free rate products; and |
|
● |
amending existing LIBOR products to reference alternative risk-free rates. |
The Group is actively engaging with customers and counterparties to transition or include appropriate fallback provisions. Fallback provisions refer to contractual provisions that lay out the process through which a replacement rate can be identified if a benchmark rate is not available.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 83 |
|
Notes to the financial statements
Note 21. Financial risk (continued)
Financial instruments impacted by IBOR reform post transition date
Derivatives
The following table summarises the Group’s derivative financial instrument exposures currently maturing after the relevant IBOR transition dates noted above that are yet to transition to ARR. While these exposures reference benchmark rates impacted by the IBOR reform as at 30 September 2021, almost all have bilateral adherence from our counterparties to the fallback clauses issued by the International Swaps and Derivatives Association (ISDA) in the ISDA 2020 IBOR Fallbacks Protocol which provides a standardised process to identify the appropriate ARR at the relevant benchmark transition date.
For hedging derivatives, the extent of the risk exposure also reflects the notional amounts of related hedging instruments.
Non-derivatives
The following tables summarise the Group's non-derivative financial instrument exposures currently maturing after the relevant IBOR transition dates noted above that are yet to transition to ARR. The Group is engaging with its customers and counterparties to transition or include appropriate fallback provisions. Due to the nature of these contracts, these fallback provisions will be determined bilaterally with the customer or counterparty rather than the standardised basis provided by the ISDA protocols applicable to our derivative contracts.
|
1. |
The Group’s primary exposure to USD LIBOR is to settings with a transition date of 30 June 2023. The Group has no material exposures to USD LIBOR that have a 31 December 2021 transition date (i.e. 1-week and 2-month settings). |
|
2. |
Included in the table above are cross currency swaps with a total carrying amount of $321 million derivative assets and $325 million derivative liabilities for Consolidated and Parent Entity that have exposure to IBOR reform on both the currencies referenced in the swap arrangement. The carrying amount has been included in the table based on the currency of the receive leg of the swap and is primarily comprised of USD/GBP LIBOR swaps with a carrying amount of $240 million derivative assets and $282 million derivative liabilities for Consolidated and Parent Entity. Other currency pairs have a carrying value of $81 million derivative assets and $43 million derivative liabilities for Consolidated and Parent Entity. |
|
3. |
The notional balances for 30 September 2020 have been restated to reflect the change in cessation date of certain USD LIBOR settings from 31 December 2021 to 30 June 2023. |
|
4. |
Where a multi-currency facility has been partially drawn down and references a benchmark rate impacted by the IBOR reform, the undrawn balance has been included in the table above for undrawn credit commitments impacted by IBOR reform based on the currency of the drawn portion. These balances do not include balances for multi-currency facilities which are yet to be drawn down and where it is not known whether a customer will choose to drawn down funds linked to an IBOR benchmark. |
|
|
|
|
|
84 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities
Accounting policy
|
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. |
|
On initial recognition, the transaction price generally represents the fair value of the financial instrument unless there is observable information from an active market to the contrary. Where unobservable information is used, the difference between the transaction price and the fair value (day one profit or loss) is recognised in the income statement over the life of the instrument when the inputs become observable. |
|
Critical accounting assumptions and estimates |
|
The majority of valuation models used by the Group employ only observable market data as inputs. However, for certain financial instruments data may be employed which is not readily observable in current markets. |
|
The availability of observable inputs is influenced by factors such as: |
|
● product type; |
|
● depth of market activity; |
|
● maturity of market models; and |
|
● complexity of the transaction. |
|
Where unobservable market data is used, more judgement is required to determine fair value. The significance of these judgements depends on the significance of the unobservable input to the overall valuation. Unobservable inputs are generally derived from other relevant market data and adjusted against: |
|
● standard industry practice; |
|
● economic models; and |
|
● observed transaction prices. |
|
In order to determine a reliable fair value for a financial instrument, management may apply adjustments to the techniques previously described. These adjustments reflect the Group’s assessment of factors that market participants would consider in setting the fair value. |
|
These adjustments incorporate bid/offer spreads, credit valuation adjustments (CVA) and funding valuation adjustments (FVA). |
Fair Valuation Control Framework
The Group uses a Fair Valuation Control Framework where the fair value is either determined or validated by a function independent of the transaction. This framework formalises the policies and procedures used to achieve compliance with relevant accounting, industry and regulatory standards. The framework includes specific controls relating to:
| ● | the revaluation of financial instruments; |
| ● | independent price verification; |
| ● | fair value adjustments; and |
| ● | financial reporting. |
A key element of the framework is the Revaluation Committee, comprising senior valuation specialists from within the Group. The Revaluation Committee reviews the application of the agreed policies and procedures to assess that a fair value measurement basis has been applied.
The method of determining fair value differs depending on the information available.
Fair value hierarchy
A financial instrument’s categorisation within the valuation hierarchy is based on the lowest level input that is significant to the fair value measurement.
The Group categorises all fair value instruments according to the hierarchy described below.
Valuation techniques
The Group applies market accepted valuation techniques in determining the fair valuation of over the counter (OTC) derivatives. This includes CVA and FVA, which incorporate credit risk and funding costs and benefits that arise in relation to uncollateralised derivative positions, respectively.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 85 |
|
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
The specific valuation techniques, the observability of the inputs used in valuation models and the subsequent classification for each significant product category are outlined as follows:
Level 1 instruments (Level 1)
The fair value of financial instruments traded in active markets is based on recent unadjusted quoted prices. These prices are based on actual arm’s length basis transactions.
The valuations of Level 1 instruments require little or no management judgement.
|
Instrument |
|
Balance sheet category |
|
Includes |
|
|
Valuation |
|---|---|---|---|---|---|---|---|
|
|
|
|
|
|
|
|
|
|
Exchange traded products |
|
Derivatives |
|
Exchange traded interest rate futures and options and commodity and carbon futures |
|
|
|
|
FX products |
|
Derivatives |
|
FX spot and futures contracts |
|
|
|
|
Equity products |
|
Derivatives Trading securities and financial assets measured at FVIS Other financial liabilities |
|
Listed equities and equity indices |
|
|
All these instruments are traded in liquid, active markets where prices are readily observable. No modelling or assumptions are used in the valuation. |
|
Non-asset backed debt instruments |
|
Trading securities and financial assets measured at FVIS Investment securities Other financial liabilities |
|
Australian Commonwealth and New Zealand government bonds |
|
|
|
|
Life insurance assets and liabilities |
|
Life insurance assets Life insurance liabilities |
|
Listed equities, exchange traded derivatives and short sale of listed equities within controlled managed investment schemes |
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 instruments (Level 2)
The fair value for financial instruments that are not actively traded is determined using valuation techniques which maximise the use of observable market prices. Valuation techniques include:
| ● | the use of market standard discounting methodologies; |
| ● | option pricing models; and |
| ● | other valuation techniques widely used and accepted by market participants. |
|
Instrument |
|
Balance sheet category |
|
Includes |
|
Valuation |
|---|---|---|---|---|---|---|
|
Interest rate products |
|
Derivatives |
|
Interest rate and inflation swaps, swaptions, caps, floors, collars and other non-vanilla interest rate derivatives |
|
Industry standard valuation models are used to calculate the expected future value of payments by product, which is discounted back to a present value. The model’s interest rate inputs are benchmark and active quoted interest rates in the swap, bond and futures markets. Interest rate volatilities are sourced from brokers and consensus data providers. If consensus prices are not available, these are classified as Level 3 instruments. |
|
FX products |
|
Derivatives |
|
FX swap, FX forward contracts, FX options and other non-vanilla FX derivatives |
|
Derived from market observable inputs or consensus pricing providers using industry standard models. |
|
Other credit products |
|
Derivatives |
|
Single name and index credit default swaps (CDS) |
|
Valued using an industry standard model that incorporates the credit spread as its principal input. Credit spreads are obtained from consensus data providers. If consensus prices are not available, these are classified as Level 3 instruments. |
|
|
|
|
|
86 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
Level 2 instruments (Level 2) (continued)
|
Instrument |
|
Balance sheet category |
|
Includes |
|
Valuation |
|
Commodity products |
|
Derivatives |
|
Commodity and carbon derivatives |
|
Valued using industry standard models. The models calculate the expected future value of deliveries and payments and discount them back to a present value. The model inputs include forward curves, volatilities implied from market observable inputs, discount curves and underlying spot and futures prices. The significant inputs are market observable or available through a consensus data service. If consensus prices are not available, these are classified as Level 3 instruments. |
|
Equity products |
|
Derivatives |
|
Exchange traded equity options, OTC equity options and equity warrants |
|
Due to low liquidity, exchange traded options are Level 2. Valued using industry standard models based on observable parameters such as stock prices, dividends, volatilities and interest rates. |
|
Asset backed debt instruments |
|
Trading securities and financial assets measured at FVIS Investment securities |
|
Australian residential mortgage backed securities (RMBS) and other asset backed securities (ABS) |
|
Valued using an industry approach to value floating rate debt with prepayment features. Australian RMBS are valued using prices sourced from a consensus data provider. If consensus prices are not available these are classified as Level 3 instruments. |
|
Non-asset backed debt instruments |
|
Trading securities and financial assets measured at FVIS Investment securities Other financial liabilities |
|
State and other government bonds, corporate bonds and commercial paper Repurchase agreements and reverse repurchase agreements over non-asset backed debt securities |
|
Valued using observable market prices, which are sourced from independent pricing services, broker quotes or inter-dealer prices. |
|
Loans at fair value |
|
Loans |
|
Fixed rate bills and syndicated loans |
|
Discounted cash flow approach, using a discount rate which reflects the terms of the instrument and the timing of cash flows, adjusted for creditworthiness, or expected sale amount. |
|
Certificates of deposit |
|
Deposits and other borrowings |
|
Certificates of deposit |
|
Discounted cash flow using market rates offered for deposits of similar remaining maturities. |
|
Debt issues at fair value |
|
Debt issues |
|
Debt issues |
|
Discounted cash flows, using a discount rate which reflects the terms of the instrument and the timing of cash flows adjusted for market observable changes in Westpac’s implied credit worthiness. |
|
Life insurance assets and liabilities |
|
Life insurance assets included in assets held for sale Life insurance liabilities included in liabilities held for sale |
|
Corporate bonds, OTC derivatives, units in unlisted unit trusts, life insurance contract liabilities, life investment contract liabilities and external liabilities of managed investment schemes controlled by statutory life funds |
|
Valued using observable market prices or other widely used and accepted valuation techniques utilising observable market input. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 87 |
|
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
Level 3 instruments (Level 3)
Financial instruments valued where at least one input that could have a significant effect on the instrument’s valuation is not based on observable market data due to illiquidity or complexity of the product. These inputs are generally derived and extrapolated from other relevant market data and calibrated against current market trends and historical transactions.
These valuations are calculated using a high degree of management judgement.
|
Instrument |
|
Balance sheet
|
|
Includes |
|
Valuation |
|---|---|---|---|---|---|---|
|
Debt instruments |
|
Trading securities and financial assets measured at FVIS Investment securities |
|
Certain ABS, offshore non-ABS and debt securities issued via private placement |
|
These securities are evaluated by an independent pricing service or based on third party revaluations. Due to their illiquidity and/or complexity these are classified as Level 3 assets. |
|
Equity instruments |
|
Trading securities and financial assets measured at FVIS Investment securities |
|
Strategic equity investments |
|
Valued using valuation techniques appropriate to the instrument, including the use of recent arm’s length transactions where available, discounted cash flow approach or reference to the net assets of the entity. Due to their illiquidity, complexity and/or use of unobservable inputs into valuation models, they are classified as Level 3 assets. |
|
Finance leases |
|
Assets held for sale |
|
Finance leases |
|
Valuation reflects the expected sales price before transaction costs based on the terms of sales contract. As the expected sales price includes judgements regarding the estimation of variable consideration, they are classified as Level 3 assets. |
|
|
|
|
|
88 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
The following tables summarise the attribution of financial instruments measured at fair value to the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
||||||||||||
|
$m |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets measured at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities and financial assets measured at FVIS |
|
6,221 |
|
14,875 |
|
5 |
|
21,101 |
|
8,059 |
|
32,387 |
|
221 |
|
40,667 |
|
Derivative financial instruments |
|
22 |
|
19,305 |
|
26 |
|
19,353 |
|
10 |
|
23,353 |
|
4 |
|
23,367 |
|
Investment securities |
|
19,282 |
|
62,923 |
|
277 |
|
82,482 |
|
18,032 |
|
72,370 |
|
153 |
|
90,555 |
|
Loans |
|
- |
|
74 |
|
36 |
|
110 |
|
- |
|
540 |
|
21 |
|
561 |
|
Life insurance assets |
|
- |
|
- |
|
- |
|
- |
|
617 |
|
2,976 |
|
- |
|
3,593 |
|
Assets held for sale |
|
1,309 |
|
1,663 |
|
- |
|
2,972 |
|
- |
|
- |
|
- |
|
- |
|
Total financial assets measured at fair value on a recurring basis |
|
26,834 |
|
98,840 |
|
344 |
|
126,018 |
|
26,718 |
|
131,626 |
|
399 |
|
158,743 |
|
Financial liabilities measured at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and other borrowings1 |
|
- |
|
46,665 |
|
- |
|
46,665 |
|
- |
|
35,764 |
|
- |
|
35,764 |
|
Other financial liabilities2 |
|
1,478 |
|
4,968 |
|
- |
|
6,446 |
|
420 |
|
4,229 |
|
- |
|
4,649 |
|
Derivative financial instruments |
|
35 |
|
17,992 |
|
32 |
|
18,059 |
|
10 |
|
23,031 |
|
13 |
|
23,054 |
|
Debt issues3 |
|
- |
|
5,514 |
|
- |
|
5,514 |
|
- |
|
5,333 |
|
- |
|
5,333 |
|
Life insurance liabilities |
|
- |
|
- |
|
- |
|
- |
|
- |
|
1,396 |
|
- |
|
1,396 |
|
Liabilities held for sale |
|
- |
|
447 |
|
- |
|
447 |
|
- |
|
- |
|
- |
|
- |
|
Total financial liabilities measured at fair value on a recurring basis |
|
1,513 |
|
75,586 |
|
32 |
|
77,131 |
|
430 |
|
69,753 |
|
13 |
|
70,196 |
|
1. |
The contractual outstanding amount payable at maturity was $46,661 million (2020: $35,764 million) for the Group and $43,367 million (2020: $32,990 million) for the Parent Entity. |
|
2. |
The contractual outstanding amount payable at maturity for the Group is $6,446 million (2020: $4,649 million) and $5,893 million for the Parent Entity (2020: $4,649 million). |
|
3. |
The contractual outstanding amount payable at maturity was $5,357 million (2020: $5,062 million) for the Group and $2,507 million (2020: $2,714 million) for the Parent Entity. The cumulative change in the fair value of debt issues attributable to changes in Westpac’s own credit risk was $14 million increase (2020: $5 million increase) for the Group and Parent Entity. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 89 |
|
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
Reconciliation of non-market observables
The following tables summarise the changes in financial instruments measured at fair value derived from non-market observable valuation techniques (Level 3).
|
1. |
Other is comprised of derivative financial assets and certain loans. |
|
|
|
|
|
90 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
Transfers into and out of Level 3 have occurred due to changes in observability in the significant inputs into the valuation models used to determine the fair value of the related financial instruments. Transfers in and transfers out are reported using the end of year fair values.
Significant unobservable inputs
Sensitivities to reasonably possible changes in non-market observable valuation assumptions would not have a material impact on the Group’s reported results.
Day one profit or loss
The closing balance of unrecognised day one profit for both the Group and the Parent Entity for the year was $1 million (2020: $4 million).
Financial instruments not measured at fair value
For financial instruments not measured at fair value on a recurring basis, fair value has been derived as follows:
|
Instrument |
|
Valuation |
|
Loans |
|
Where available, the fair value of loans is based on observable market transactions, otherwise fair value is estimated using discounted cash flow models. For variable rate loans, the discount rate used is the current effective interest rate. The discount rate applied for fixed rate loans reflects the market rate for the maturity of the loan and the credit worthiness of the borrower. |
|
Investment securities |
|
The carrying value approximates the fair value. The balance principally relates to government securities from illiquid markets. Fair value is monitored by reference to recent issuances. |
|
Deposits and other borrowings |
|
Fair values of deposit liabilities payable on demand (non-interest bearing, interest bearing and savings deposits) approximate their carrying value. Fair values for term deposits are estimated using discounted cash flows, applying market rates offered for deposits of similar remaining maturities. |
|
Debt issues and loan capital |
|
Fair values are calculated using a discounted cash flow model. The discount rates applied reflect the terms of the instruments, the timing of the estimated cash flows and are adjusted for any changes in Westpac’s credit spreads. |
|
Assets and liabilities held for sale |
|
Valuation reflects the expected sales price before transaction costs based on the terms of the sales contract. |
|
All other financial assets and liabilities |
|
For all other financial assets and liabilities, the carrying value approximates the fair value. These items are either short-term in nature, re-price frequently or are of a high credit rating. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 91 |
|
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
The following tables summarise the estimated fair value and fair value hierarchy of financial instruments not measured at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value |
|
|
||||
|
Consolidated |
|
Carrying |
|
|
|
|
|
|
|
|
|
$m |
|
amount |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
Financial assets not measured at fair value |
|
|
|
|
|
|
|
|
|
|
|
Cash and balances with central banks |
|
71,353 |
|
71,353 |
|
- |
|
- |
|
71,353 |
|
Collateral paid |
|
4,232 |
|
4,232 |
|
- |
|
- |
|
4,232 |
|
Investment securities |
|
935 |
|
- |
|
331 |
|
604 |
|
935 |
|
Loans |
|
709,674 |
|
- |
|
- |
|
710,284 |
|
710,284 |
|
Other financial assets |
|
6,394 |
|
- |
|
6,394 |
|
- |
|
6,394 |
|
Assets held for sale |
|
1,041 |
|
7 |
|
19 |
|
1,015 |
|
1,041 |
|
Total financial assets not measured at fair value |
|
793,629 |
|
75,592 |
|
6,744 |
|
711,903 |
|
794,239 |
|
Financial liabilities not measured at fair value |
|
|
|
|
|
|
|
|
|
|
|
Collateral received |
|
2,368 |
|
2,368 |
|
- |
|
- |
|
2,368 |
|
Deposits and other borrowings |
|
580,290 |
|
- |
|
576,293 |
|
3,819 |
|
580,112 |
|
Other financial liabilities |
|
43,863 |
|
- |
|
43,863 |
|
- |
|
43,863 |
|
Debt issues1 |
|
123,265 |
|
- |
|
123,826 |
|
743 |
|
124,569 |
|
Loan capital1 |
|
29,067 |
|
- |
|
30,147 |
|
- |
|
30,147 |
|
Liabilities held for sale |
|
28 |
|
- |
|
28 |
|
- |
|
28 |
|
Total financial liabilities not measured at fair value |
|
778,881 |
|
2,368 |
|
774,157 |
|
4,562 |
|
781,087 |
1.The estimated fair values of debt issues and loan capital include the impact of changes in Westpac's credit spreads since origination.
|
|
|
|
|
92 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value |
|
|
||||
|
Parent Entity |
|
Carrying |
|
|
|
|
|
|
|
|
|
$m |
|
amount |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
Financial assets not measured at fair value |
|
|
|
|
|
|
|
|
|
|
|
Cash and balances with central banks |
|
62,754 |
|
62,754 |
|
- |
|
- |
|
62,754 |
|
Collateral paid |
|
4,055 |
|
4,055 |
|
- |
|
- |
|
4,055 |
|
Investment securities |
|
49 |
|
- |
|
2 |
|
47 |
|
49 |
|
Loans |
|
618,322 |
|
- |
|
- |
|
619,061 |
|
619,061 |
|
Due from subsidiaries1 |
|
162,794 |
|
- |
|
123,164 |
|
34,525 |
|
157,689 |
|
Other financial assets |
|
5,486 |
|
- |
|
5,486 |
|
- |
|
5,486 |
|
Assets held for sale |
|
1,015 |
|
- |
|
- |
|
1,015 |
|
1,015 |
|
Total financial assets not measured at fair value |
|
854,475 |
|
66,809 |
|
128,652 |
|
654,648 |
|
850,109 |
|
Financial liabilities not measured at fair value |
|
|
|
|
|
|
|
|
|
|
|
Collateral received |
|
2,189 |
|
2,189 |
|
- |
|
- |
|
2,189 |
|
Deposits and other borrowings |
|
506,815 |
|
- |
|
505,367 |
|
1,241 |
|
506,608 |
|
Other financial liabilities |
|
41,370 |
|
- |
|
41,370 |
|
- |
|
41,370 |
|
Debt issues2 |
|
105,546 |
|
- |
|
106,713 |
|
- |
|
106,713 |
|
Due to subsidiaries |
|
177,949 |
|
- |
|
7,569 |
|
170,380 |
|
177,949 |
|
Loan capital2 |
|
29,067 |
|
- |
|
30,147 |
|
- |
|
30,147 |
|
Liabilities held for sale |
|
3 |
|
- |
|
3 |
|
- |
|
3 |
|
Total financial liabilities not measured at fair value |
|
862,939 |
|
2,189 |
|
691,169 |
|
171,621 |
|
864,979 |
|
1. |
Due from subsidiaries excluded $11,389 million (2020: $11,177 million) of long-term debt instruments with equity-like characteristics which are part of the total investment in subsidiaries. |
|
2. |
The estimated fair values of debt issues and loan capital include the impact of changes in Westpac's credit spreads since origination. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 93 |
|
Notes to the financial statements
Note 23. Offsetting financial assets and financial liabilities
Accounting policy
|
Financial assets and liabilities are presented net in the balance sheet when the Group has a legally enforceable right to offset them in all circumstances and there is an intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously. The gross assets and liabilities behind the net amounts reported in the balance sheet are disclosed in the following tables. |
Some of the Group’s offsetting arrangements are not enforceable in all circumstances. The amounts in the tables below may not tie back to the balance sheet if there are balances which are not subject to offsetting or enforceable netting arrangements. The amounts presented in this note do not represent the credit risk exposure of the Group or Parent Entity. Refer to Note 21.2 for information on credit risk management. The offsetting and collateral arrangements and other credit risk mitigation strategies used by the Group are further explained in the ‘Management of risk mitigation’ section of Note 21.2.2.
|
1. |
$2,368 million (2020: $2,250 million) of cash collateral on derivative financial assets and reverse repurchase agreements, is disclosed as collateral received in the balance sheet. The remainder is included in term deposits recognised in deposits and other borrowings within Note 16. |
|
2. |
$3,910 million (2020: $4,524 million) of cash collateral, subject to enforceable netting arrangements with derivative financial liabilities and repurchase agreements, forms part of collateral paid as disclosed in the balance sheet. The remainder of collateral paid, as disclosed in the balance sheet, consists of $3 million (2020: $16 million) in stock borrowing arrangements and $319 million (2020: $238 million) in futures margin that does not form part of this column. |
|
3. |
Gross amounts consist of variation margin held directly with central clearing counterparties and stock borrowing arrangements. Where variation margin is receivable it is reported as part of collateral paid. Where variation margin is payable it is reported as part of collateral received. Amounts offset relate to variation margin. |
|
4. |
$2,284 million (2020: $2,164 million) of derivative financial assets and $1,687 million (2020: $1,409 million) of derivative financial liabilities are not subject to enforceable netting arrangements. |
|
5. |
Reverse repurchase agreements form part of trading securities and financial assets measured at FVIS in Note 10. |
|
6. |
Gross amounts consist of debt and interest set-off accounts which meet the requirements for offsetting as described above. These accounts form part of business loans in Note 12 and part of deposits and other borrowings at amortised cost in Note 16. |
|
7. |
Repurchase agreements form part of other financial liabilities in Note 17. |
|
|
|
|
|
94 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 23. Offsetting financial assets and financial liabilities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts subject to enforceable netting arrangements |
||||||||||||
|
|
|
Effects of offsetting |
|
Amounts subject to enforceable |
|
|
||||||||
|
|
|
in the balance sheet |
|
netting arrangements but not offset |
|
|
||||||||
|
|
|
|
|
|
|
Net amounts |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
reported in |
|
recognised |
|
|
|
Financial |
|
|
|
Parent Entity |
|
Gross |
|
Amounts |
|
the balance |
|
financial |
|
Cash |
|
instrument |
|
Net |
|
$m |
|
amounts |
|
offset |
|
sheet |
|
instruments |
|
collateral1,2 |
|
collateral |
|
amount |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral paid3 |
|
4,806 |
|
(4,787) |
|
19 |
|
- |
|
- |
|
(3) |
|
16 |
|
Derivative financial instruments4 |
|
45,198 |
|
(28,340) |
|
16,858 |
|
(11,294) |
|
(2,178) |
|
(6) |
|
3,380 |
|
Reverse repurchase agreements5 |
|
2,763 |
|
- |
|
2,763 |
|
- |
|
(13) |
|
(2,744) |
|
6 |
|
Loans6 |
|
29,827 |
|
(29,772) |
|
55 |
|
- |
|
- |
|
- |
|
55 |
|
Total assets |
|
82,594 |
|
(62,899) |
|
19,695 |
|
(11,294) |
|
(2,191) |
|
(2,753) |
|
3,457 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral received |
|
2,763 |
|
(2,757) |
|
6 |
|
- |
|
- |
|
- |
|
6 |
|
Derivative financial instruments4 |
|
46,572 |
|
(30,370) |
|
16,202 |
|
(11,294) |
|
(3,718) |
|
(1,190) |
|
- |
|
Repurchase agreements7 |
|
33,346 |
|
- |
|
33,346 |
|
- |
|
(15) |
|
(33,331) |
|
- |
|
Deposits and other borrowings6 |
|
51,236 |
|
(29,772) |
|
21,464 |
|
- |
|
- |
|
- |
|
21,464 |
|
Total liabilities |
|
133,917 |
|
(62,899) |
|
71,018 |
|
(11,294) |
|
(3,733) |
|
(34,521) |
|
21,470 |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral paid3 |
|
10,068 |
|
(10,032) |
|
36 |
|
- |
|
- |
|
(16) |
|
20 |
|
Derivative financial instruments4 |
|
60,616 |
|
(39,968) |
|
20,648 |
|
(14,586) |
|
(1,859) |
|
(16) |
|
4,187 |
|
Reverse repurchase agreements5 |
|
20,401 |
|
- |
|
20,401 |
|
- |
|
(5) |
|
(20,396) |
|
- |
|
Loans6 |
|
23,301 |
|
(23,266) |
|
35 |
|
- |
|
- |
|
- |
|
35 |
|
Total assets |
|
114,386 |
|
(73,266) |
|
41,120 |
|
(14,586) |
|
(1,864) |
|
(20,428) |
|
4,242 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral received |
|
5,516 |
|
(5,501) |
|
15 |
|
- |
|
- |
|
- |
|
15 |
|
Derivative financial instruments4 |
|
65,874 |
|
(44,499) |
|
21,375 |
|
(14,586) |
|
(4,289) |
|
(1,693) |
|
807 |
|
Repurchase agreements7 |
|
27,763 |
|
- |
|
27,763 |
|
- |
|
(98) |
|
(27,665) |
|
- |
|
Deposits and other borrowings6 |
|
43,999 |
|
(23,266) |
|
20,733 |
|
- |
|
- |
|
- |
|
20,733 |
|
Total liabilities |
|
143,152 |
|
(73,266) |
|
69,886 |
|
(14,586) |
|
(4,387) |
|
(29,358) |
|
21,555 |
|
1. |
$2,189 million (2020: $1,862 million) of cash collateral on derivative financial assets and reverse repurchase agreements, is disclosed as collateral received in the balance sheet. The remainder is included in term deposits recognised in deposits and other borrowings within Note 16. |
|
2. |
$3,733 million (2020: $4,387 million) of cash collateral, subject to enforceable netting arrangements with derivative financial liabilities and repurchase agreements, forms part of collateral paid as disclosed in the balance sheet. The remainder of collateral paid, as disclosed in the balance sheet, consists of $3 million (2020: $16 million) in stock borrowing arrangements and $319 million (2020: $238 million) on futures margin that does not form part of this column. |
|
3. |
Gross amounts consist of variation margin held directly with central clearing counterparties and stock borrowing arrangements. Where variation margin is receivable it is reported as part of collateral paid. Where variation margin is payable it is reported as part of collateral received. Amounts offset relate to variation margin. |
|
4. |
$2,269 million (2020: $2,146 million) of derivative financial assets and $1,687 million (2020: $1,404 million) of derivative financial liabilities are not subject to enforceable netting arrangements. |
|
5. |
Reverse repurchase agreements form part of trading securities and financial assets measured at FVIS in Note 10. |
|
6. |
Gross amounts consist of debt and interest set-off accounts which meet the requirements for offsetting as described above. These accounts form part of business loans in Note 12 and part of deposits and other borrowings at amortised cost in Note 16. |
|
7. |
Repurchase agreements form part of other financial liabilities in Note 17. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 95 |
|
Notes to the financial statements
Note 23. Offsetting financial assets and financial liabilities (continued)
Other recognised financial instruments
These financial assets and liabilities are subject to master netting agreements which are not enforceable in all circumstances, so they are recognised gross in the balance sheet. The offsetting rights of the master netting arrangements can only be enforced if a predetermined event occurs in the future, such as a counterparty defaulting.
Cash collateral and financial instrument collateral
These amounts are received or pledged under master netting arrangements against the gross amounts of assets and liabilities. Financial instrument collateral typically comprises securities which can be readily liquidated in the event of counterparty default. The offsetting rights of the master netting arrangement can only be enforced if a predetermined event occurs in the future, such as a counterparty defaulting.
Note 24. Securitisation, covered bonds and other transferred assets
The Group enters into transactions in the normal course of business by which financial assets are transferred to counterparties or structured entities. Depending on the circumstances, these transfers may result in derecognition of the assets in their entirety, partial derecognition or no derecognition of the assets subject to the transfer. For the Group’s accounting policy on derecognition of financial assets refer to the notes to the financial statements section before Note 10 titled ‘Financial assets and financial liabilities’.
Securitisation
Securitisation is the transferring of assets (or an interest in either the assets or the cash flows arising from the assets) to a structured entity which then issues the majority of interest bearing debt securities to third party investors for funding deals and to Westpac for liquidity deals.
Securitisation of its own assets is used by Westpac as a funding and liquidity tool.
For securitisation structured entities which Westpac controls, as defined in Note 31, the structured entities are classified as subsidiaries and consolidated. When assessing whether Westpac controls a structured entity, it considers its exposure to and ability to affect variable returns. Westpac may have variable returns from a structured entity through ongoing exposures to the risks and rewards associated with the assets, the provision of derivatives, liquidity facilities, trust management and operational services.
Undrawn funding and liquidity facilities of $435 million (2020: $492 million) were provided by Westpac for the securitisation of its own assets.
Covered bonds
The Group has two covered bond programs relating to Australian residential mortgages (Australian Program) and New Zealand residential mortgages (New Zealand Program). Under these programs, selected pools of residential mortgages are assigned to bankruptcy remote structured entities which provide guarantees on the payments to bondholders. Through the guarantees and derivatives with the structured entities, Westpac has variable returns from these structured entities and consolidates them.
Repurchase agreements
Where securities are sold subject to an agreement to repurchase at a predetermined price, they remain recognised in the balance sheet in their original category (i.e. Trading securities or Investment securities).
The cash consideration received is recognised as a liability (Repurchase agreements). Refer to Note 17 for further details.
|
|
|
|
|
96 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 24. Securitisation, covered bonds and other transferred assets (continued)
The following tables present Westpac's assets transferred and their associated liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For those liabilities that only have |
||||
|
|
|
|
|
|
|
recourse to the transferred assets: |
||||
|
|
|
Carrying |
|
Carrying |
|
Fair |
|
Fair |
|
|
|
|
|
amount of |
|
amount of |
|
value of |
|
value of |
|
Net fair |
|
|
|
transferred |
|
associated |
|
transferred |
|
associated |
|
value |
|
$m |
|
assets |
|
liabilities |
|
assets |
|
liabilities |
|
position |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
Securitisation1 |
|
5,016 |
|
5,000 |
|
5,035 |
|
5,044 |
|
(9) |
|
Covered bonds2 |
|
35,287 |
|
31,374 |
|
n/a |
|
n/a |
|
n/a |
|
Repurchase agreements |
|
52,213 |
|
35,899 |
|
n/a |
|
n/a |
|
n/a |
|
Total |
|
92,516 |
|
72,273 |
|
5,035 |
|
5,044 |
|
(9) |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
Securitisation1 |
|
8,029 |
|
8,000 |
|
8,072 |
|
7,994 |
|
78 |
|
Covered bonds2 |
|
43,654 |
|
36,051 |
|
n/a |
|
n/a |
|
n/a |
|
Repurchase agreements |
|
36,727 |
|
27,763 |
|
n/a |
|
n/a |
|
n/a |
|
Total |
|
88,410 |
|
71,814 |
|
8,072 |
|
7,994 |
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent Entity |
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
Securitisation1 |
|
142,724 |
|
142,172 |
|
142,891 |
|
148,574 |
|
(5,683) |
|
Covered bonds2 |
|
28,109 |
|
27,234 |
|
n/a |
|
n/a |
|
n/a |
|
Repurchase agreements |
|
49,262 |
|
33,346 |
|
n/a |
|
n/a |
|
n/a |
|
Total |
|
220,095 |
|
202,752 |
|
142,891 |
|
148,574 |
|
(5,683) |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
Securitisation1 |
|
141,660 |
|
141,000 |
|
141,991 |
|
138,870 |
|
3,121 |
|
Covered bonds2 |
|
36,689 |
|
31,926 |
|
n/a |
|
n/a |
|
n/a |
|
Repurchase agreements |
|
36,727 |
|
27,763 |
|
n/a |
|
n/a |
|
n/a |
|
Total |
|
215,076 |
|
200,689 |
|
141,991 |
|
138,870 |
|
3,121 |
|
1. |
The carrying amount of assets securitised exceeds the amount of notes issued primarily because the carrying amount includes both principal and income received from the transferred assets. |
|
2. |
The difference between the carrying values of covered bonds and the assets pledged reflects the over-collateralisation required to maintain the ratings of the covered bonds and also additional assets to allow immediate issuance of additional covered bonds if required. These additional assets can be repurchased by Westpac at its discretion, subject to the conditions set out in the transaction documents. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 97 |
|
Notes to the financial statements
INTANGIBLE ASSETS, PROVISIONS, COMMITMENTS AND CONTINGENCIES
Note 25. Intangible assets
Accounting policy
|
|
|
|
|
98 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 25. Intangible assets (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||
|
$m |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
Balance as at beginning of year |
|
8,397 |
|
8,895 |
|
6,728 |
|
6,844 |
|
Disposals (refer to Note 36) |
|
(243) |
|
- |
|
- |
|
- |
|
Impairment |
|
(571) |
|
(498) |
|
(487) |
|
(116) |
|
Other adjustments |
|
16 |
|
- |
|
- |
|
- |
|
Balance as at end of year |
|
7,599 |
|
8,397 |
|
6,241 |
|
6,728 |
|
Computer software |
|
|
|
|
|
|
|
|
|
Balance as at beginning of year |
|
2,430 |
|
2,365 |
|
2,266 |
|
2,207 |
|
Additions |
|
740 |
|
1,035 |
|
638 |
|
955 |
|
Impairment1 |
|
(485) |
|
(171) |
|
(475) |
|
(165) |
|
Amortisation |
|
(755) |
|
(799) |
|
(696) |
|
(731) |
|
Other adjustments2 |
|
(90) |
|
- |
|
(80) |
|
- |
|
Balance as at end of year |
|
1,840 |
|
2,430 |
|
1,653 |
|
2,266 |
|
Cost |
|
7,770 |
|
7,370 |
|
6,681 |
|
6,372 |
|
Accumulated amortisation and impairment |
|
(5,930) |
|
(4,940) |
|
(5,028) |
|
(4,106) |
|
Carrying amount |
|
1,840 |
|
2,430 |
|
1,653 |
|
2,266 |
|
Brand names |
|
670 |
|
670 |
|
636 |
|
636 |
|
Total intangible assets |
|
10,109 |
|
11,497 |
|
8,530 |
|
9,630 |
In addition, brand names of $670 million for the Group have been allocated as $382 million to Consumer, $286 million to Business and $2 million to Specialist Businesses as at 30 September 2021 and 30 September 2020. Brand names of $636 million for the Parent Entity have been allocated as $350 million to Consumer and $286 million to Business as at 30 September 2021 and 30 September 2020.
|
1. |
Includes impairment of $380 million for the Group and Parent Entity from the WIB CGU ($344 million as a result of the annual impairment test). |
|
2. |
Includes the impact of a change in accounting policy in 2021 with respect to the treatment of configuring or customising SaaS arrangements amounting to $94 million for the Group and $80 million for the Parent Entity (refer to Note 1). |
|
3. |
The Specialist Businesses segment comprises individual CGUs (Superannuation, Platforms, Investments) to which goodwill has been allocated. The carrying amount of goodwill allocated to these individual CGUs is not significant compared to total Group goodwill. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 99 |
|
Notes to the financial statements
Note 25. Intangible assets (continued)
Impairment testing and results
Impairment testing is performed at least once a year, or whenever there is an indication of impairment, by comparing the recoverable amount of each CGU with the carrying amount. The primary test for the recoverable amount is determined based on value-in-use which refers to the present value of expected cash flows under its current use. Fair value less costs to sell was also considered for those CGUs where value-in-use was lower than carrying value. In these cases, there was no change to the result of the impairment test.
In the current year, as a result of the annual impairment test, the Group recognised impairment of intangible assets of $831 million for the Group and the Parent Entity from the Westpac Institutional Bank (WIB) CGU ($487 million of goodwill and $344 million of computer software)1. In addition, goodwill of $84 million ($nil for Parent Entity) allocated to the Lenders Mortgage Insurance CGU was written down as impaired on reclassification of the business to held for sale (refer to Note 37). No goodwill remains for these CGUs.
The impairment of the WIB CGU resulted from a combination of factors which have impacted earnings, including reducing risk in the division through the exit of the energy trading business, consolidating Asian operations and reducing correspondent banking relationships. At the same time, medium term expectations of a prolonged low interest rate environment, subdued financial markets income and elevated compliance expenses have impacted WIB's earnings outlook. WIB's forecasts are also highly responsive to changes in assumptions particularly with respect to credit losses, capital retention requirements and interest rates. To address the uncertainty resulting from these assumptions, a range of probability weighted scenarios were used to calculate the recoverable amount.
Significant assumptions used in recoverable amount calculations
The assumptions made for goodwill impairment testing for each relevant significant CGU are provided in the following table and are based on past experience and management’s expectations for the future. In the current year and given the present economic environment, the Group has reassessed these assumptions and revised them where necessary in order to provide a reasonable estimate of the value-in-use of the CGUs and Group.
For CGUs other than WIB, the Group discounts the projected cash flows by its adjusted pre-tax equity rate. For WIB, a probability weighted discount rate was used (based on the Group's pre-tax equity rate and using a range of reasonable additional risk premiums to reflect the inherent risk of the underlying cash flows).
The cash flows used are based on management approved forecasts. These forecasts utilise information about current and future economic conditions, observable historical information and management expectations of future business performance. The terminal value growth rate represents the growth rate applied to extrapolate cash flows beyond the forecast period and reflects the lower end of the RBA’s target long-term inflation rate band.
For all CGUs other than WIB, the recoverability of goodwill is not reliant on any one particular assumption. There are no reasonably possible changes in assumptions for any significant CGU that would result in an indication of impairment or have a material impact on the Group’s reported results.
|
1. |
$325 million of other assets in the WIB CGU (included in Property and equipment, and Other assets) were also written down as impaired as a result of the annual impairment test. |
|
|
|
|
|
100 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 26. Provisions, contingent liabilities, contingent assets and credit commitments
Accounting policy
|
Provisions Provisions are recognised for present obligations arising from past events where a payment (or other economic transfer) is likely to be necessary to settle the obligation and can be reliably estimated. Employee benefits – long service leave provision Long service leave is granted to certain employees in Australia and New Zealand. The provision is calculated based on the expected payments. When payments are expected to be more than one year in the future, the payments factor in expected employee service periods and average salary increases are then discounted. Employee benefits – annual leave and other employee benefits provision The provision for annual leave and other employee benefits (including wages and salaries, inclusive of non-monetary benefits, and any associated on-costs (e.g. payroll tax)) is calculated based on expected payments. Provision for ECL on credit commitments The Group is committed to provide facilities and guarantees as explained below. If it is probable that a facility will be drawn and the resulting asset will be less than the drawn amount then a provision for impairment is recognised. The provision for ECL is calculated using the methodology described in Note 13. Compliance, Regulation and Remediation provisions The compliance, regulation and remediation provisions relate to matters of potential misconduct in providing services to our customers identified both as a result of regulatory action and internal reviews. An assessment of the likely cost of these matters to the Group (including applicable customer refunds) is made on a case-by-case basis and specific provisions are made where appropriate. Contingent liabilities Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events, and present obligations where the transfer of economic resources is not probable or cannot be reliably measured. Contingent liabilities are not recognised in the balance sheet but are disclosed unless the outflow of economic resources is remote. Undrawn credit commitments The Group enters into various arrangements with customers which are only recognised in the balance sheet when called upon. These arrangements include commitments to extend credit, bill endorsements, financial guarantees, standby letters of credit and underwriting facilities. Contingent assets Contingent assets are possible assets whose existence will be confirmed only by uncertain future events. Contingent assets are not recognised in the balance sheet but are disclosed if an inflow of economic benefits is probable. Critical accounting assumptions and estimates The financial reporting of provisions for litigation and non-lending losses and for compliance, regulation and remediation matters involves a significant degree of judgement in relation to identifying whether a present obligation exists and also in estimating the probability, timing, nature and quantum of the outflows that may arise from past events. These judgements are made based on the specific facts and circumstances relating to individual events. Specific judgements in respect of material items are included in the discussion below. Provisions carried for long service leave are supported by an independent actuarial report. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 101 |
|
Notes to the financial statements
Note 26. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
Provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
leave |
|
Litigation |
|
Provision for |
|
|
|
|
|
Compliance, |
|
|
|
|
|
Long |
|
and other |
|
and non- |
|
ECL |
|
Lease |
|
Restructuring |
|
regulation and |
|
|
|
|
|
service |
|
employee |
|
lending |
|
on credit |
|
restoration |
|
and other |
|
remediation |
|
|
|
$m |
|
leave |
|
benefits |
|
losses |
|
commitments |
|
obligations |
|
provisions |
|
provisions |
|
Total |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at 30 September 2020 |
|
511 |
|
596 |
|
1,371 |
|
530 |
|
208 |
|
176 |
|
1,895 |
|
5,287 |
|
Additions |
|
92 |
|
986 |
|
155 |
|
- |
|
4 |
|
371 |
|
889 |
|
2,497 |
|
Utilisation |
|
(42) |
|
(743) |
|
(1,377) |
|
- |
|
(11) |
|
(121) |
|
(1,308) |
|
(3,602) |
|
Reversal of unutilised provisions |
|
(22) |
|
(25) |
|
(27) |
|
(127) |
|
- |
|
(50) |
|
(316) |
|
(567) |
|
Transferred to purchaser on settlement of assets and liabilities held for sale |
|
(1) |
|
- |
|
(4) |
|
- |
|
- |
|
- |
|
(4) |
|
(9) |
|
Balances reclassified to liabilities held for sale (Note 37) |
|
(7) |
|
(11) |
|
(1) |
|
(2) |
|
- |
|
- |
|
(14) |
|
(35) |
|
Balance as at 30 September 2021 |
|
531 |
|
803 |
|
117 |
|
401 |
|
201 |
|
376 |
|
1,142 |
|
3,571 |
|
Parent Entity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at 30 September 2020 |
|
482 |
|
540 |
|
1,343 |
|
479 |
|
179 |
|
142 |
|
1,818 |
|
4,983 |
|
Additions |
|
92 |
|
936 |
|
150 |
|
- |
|
2 |
|
363 |
|
716 |
|
2,259 |
|
Utilisation |
|
(40) |
|
(711) |
|
(1,364) |
|
- |
|
(9) |
|
(103) |
|
(1,257) |
|
(3,484) |
|
Reversal of unutilised provisions |
|
(22) |
|
(25) |
|
(15) |
|
(125) |
|
- |
|
(29) |
|
(281) |
|
(497) |
|
Balances reclassified to liabilities held for sale (Note 37) |
|
(4) |
|
(1) |
|
- |
|
(2) |
|
- |
|
- |
|
- |
|
(7) |
|
Balance as at 30 September 2021 |
|
508 |
|
739 |
|
114 |
|
352 |
|
172 |
|
373 |
|
996 |
|
3,254 |
Legislative liabilities
The Group had the following assessed liabilities as at 30 September 2021:
| ● | $22 million (2020: $22 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation Act 1987 and the Workplace Injury Management and Workers’ Compensation Act 1998 (New South Wales); |
| ● | $7 million (2020: $7 million) based on actuarial assessment as a self-insurer under the Accident Compensation Act 1985 (Victoria); |
| ● | $7 million (2020: $6 million) based on actuarial assessment as a self-insurer under the Workers’ Rehabilitation and Compensation Act 1986 (South Australia); |
| ● | $1 million (2020: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation and Rehabilitation Act 2003 (Queensland); |
| ● | $nil (2020: $nil) based on an actuarial assessment as a self-insurer under the Workers’ Compensation Act 1951 (Australian Capital Territory); |
| ● | $nil (2020: $nil) based on an actuarial assessment as a self-insurer under the Return to Work Act 1986 (Northern Territory); |
| ● | $1 million (2020: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation and Injury Management Act 1981 (Western Australia); and |
| ● | $1 million (2020: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Rehabilitation and Compensation Act 1988 (Tasmania). |
Adequate provision has been made for these liabilities in the provision for annual leave and other employee benefits above.
|
|
|
|
|
102 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 26. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
Provisions
Litigation and non-lending loss provisions
At 30 September 2020 the Group held a provision for penalties in relation to the AUSTRAC civil proceedings of $1,300 million. This penalty has subsequently been paid.
Compliance, regulation and remediation provisions
Provisions for 2021 in respect of compliance, regulation and remediation include estimates of:
| ● | customer refunds associated with matters of potential historical misconduct; |
| ● | costs of completing remediation programs; and |
| ● | potential non-lending losses and costs connected with certain litigation and regulatory investigations. |
The provisions held include estimated customer refunds and program costs associated with the following major customer remediation programs:
| ● | certain ongoing advice service fees charged by the Group’s salaried financial planners; and |
| ● | certain ongoing advice service fees charged by authorised representatives of the Group’s wholly owned subsidiaries Securitor Financial Group Limited and Magnitude Group Pty Ltd. |
During the year, significant progress has been made towards finalising a number of the Group’s major remediation programs, including those noted above relating to ongoing advice services. Given the progress made, the degree of estimation uncertainty inherent in these major remediation provisions has reduced significantly.
It is possible that the final outcome could be below or above the provision, if the actual outcome differs from the assumptions used in estimating the provision. Remediation processes may change over time as further facts emerge and such changes could result in a change to the final exposure.
Certain litigation and regulatory investigations
At 30 September 2021, the Group held provisions in respect of potential non-lending losses and costs connected with certain litigation and regulatory investigations including:
| ● | ASIC proceedings in the Federal Court of Australia against Westpac in relation to the sale of consumer credit insurance (CCI) products to customers; |
| ● | a class action against BTFM and WLIS in the Federal Court of Australia in relation to aspects of BTFM’s BT Super for Life former cash investment option; |
| ● | ASIC’s investigation into the continued charging of advice service fees to customer accounts following the death of the relevant account holder; |
| ● | ASIC’s investigation into the sale and assignment of credit card and flexi loan debts to third party debt purchasers; |
| ● | ASIC’s investigation into Westpac’s systems and processes in relation to accounts held by deregistered companies and Westpac’s approach to rectification and remediation of the relevant issues; |
| ● | ASIC’s investigation into the adequacy of disclosure of contributions fees charged for certain of our products and services; |
| ● | ASIC’s investigation into the provision of home and contents insurance, including where some customers received duplicate policies or were issued policies without their consent; and |
| ● | ASIC’s investigation into arrangements concerning the provision of insurance to some superannuation customers (including the charging of adviser insurance commissions in superannuation). |
Westpac is working with ASIC to accelerate the closure of the investigations described above, which is expected to involve Court proceedings.
Provisions for these matters have been recognised in circumstances where there remains considerable uncertainty as to the expenses that may be associated with each matter and, in particular, the approach a Court may take in assessing any appropriate penalties or damages. This includes where the parties may agree a proposed penalty or settlement amount and submit it to the Court on an agreed basis (which the Court would have regard to but not be obliged to accept). The actual aggregate expense to Westpac associated with either the agreed or court determined resolution of the matters may be materially higher or lower than the provision.
Restructuring provisions
The Group carries restructuring provisions in relation to changes in business restructures primarily for separation and redundancy costs. The primary increase in the current year relates to business sales entered into or completed during the year. Refer to Note 37 for further details.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 103 |
|
Notes to the financial statements
Note 26. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
Lease restoration obligations
The addition to the lease restoration provision reflects a reassessment of the cost of making good leasehold premises at the end of the Group’s property leases. The increase in the expected make-good cost has been treated as an addition to the right-of-use asset and is being depreciated over the remaining life of those assets.
Contingent liabilities
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events and present obligations where the transfer of economic resources is not probable or cannot be reliably measured. Contingent liabilities are not recognised on the balance sheet but are disclosed unless the outflow of economic resource is remote.
Regulatory investigations, reviews and inquiries
Regulators, statutory authorities and other bodies routinely conduct investigations, reviews and inquiries involving the financial services sector, both in Australia and overseas. These regulatory actions may consider a range of subject matters, and in Australia, a number of regulatory investigations and reviews are currently considering potential misconduct in relation to credit and financial services. Matters the subject of regulatory reviews are also assessed for their impact on customers, with customer remediation undertaken where appropriate in accordance with our Westpac Group Customer Remediation Policy.
Domestic regulators such as ASIC, APRA, ACCC, AUSTRAC, the OAIC, the ATO and the Fair Work Ombudsman, as well as certain international regulators such as the Reserve Bank of New Zealand, Financial Markets Authority and Commerce Commission in New Zealand and Hong Kong Monetary Authority are currently conducting investigations covering a range of matters involving the Group, that may include potential civil and criminal contraventions.
These include:
| ● | investigations by the OAIC in relation to certain practices and systems for compliance with the Privacy Act 1988 (Cth); |
| ● | the provision of superannuation (including the adequacy of arrangements for the provision of written reasons to complainants about the payment of death benefits, insurance in superannuation and compliance with the Superannuation Industry (Supervision) Act 1993 in connection with MySuper investment performance); and |
| ● | other areas such as: risk governance; RBNZ liquidity policy and associated risk culture; credit portfolio management; prudential standards compliance; and anti-money laundering and counter-terrorism financing processes and procedures. |
It is uncertain what (if any) actions will result following the conclusion of the investigations set out above. No provisions have yet been made in relation to any financial penalty that might arise in the event proceedings are pursued in relation to the matters outlined above, as any potential future liability of that kind cannot be reliably estimated at this time.
These investigations may result (or have resulted) in litigation (including class action proceedings and criminal proceedings), significant fines and penalties, infringement notices, enforceable undertakings, referral to the relevant Commonwealth or State Director of Public Prosecutions for consideration for criminal prosecution, imposition of capital or liquidity requirements, licence revocation or variation, or other action being taken by regulators or other parties. Given the size of Westpac, these investigations have in some instances resulted, and could in the future result, in findings of a significant number of breaches of obligations. This in turn could lead to significant financial and other penalties.
Litigation
There are ongoing Court proceedings, claims and possible claims for and against the Group. Contingent liabilities exist in respect of actual and potential claims and proceedings, including those listed below. An assessment of the Group’s likely loss has been made on a case-by-case basis for the purpose of the financial statements but cannot always be reliably estimated, including in relation to those listed below. No provision has been recognised for potential losses that may arise in relation to the matters below because liability is not certain and cannot be reliably estimated.
Regulatory litigation
| ● | On 5 May 2021, ASIC filed civil proceedings against Westpac alleging that it had engaged in insider trading and unconscionable conduct, and had failed to comply with its Australian Financial Services Licence obligations. The allegations relate to interest rate hedging activity during the course of Westpac’s involvement in the 2016 Ausgrid privatisation transaction. Westpac has filed its Response to ASIC’s Concise Statement. |
|
|
|
|
|
104 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 26. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
Class actions
| ● | Westpac is defending a class action proceeding which was commenced in December 2019 in the Federal Court of Australia on behalf of certain investors who acquired an interest in Westpac securities between 16 December 2013 and 19 November 2019. The proceeding involves allegations relating to market disclosure issues connected to Westpac’s monitoring of financial crime over the relevant period and matters which were the subject of the recent AUSTRAC proceedings. The damages sought are unspecified. However, given the time period in question and the nature of the claims, it is likely that any alleged damages will be significant. |
| ● | On 28 February 2020, a class action was commenced against Westpac, Westpac General Insurance Limited and WLIS in the Federal Court of Australia in relation to Westpac’s sale of CCI. The claim follows other industry class actions. It is alleged that the three entities failed to adhere to a number of obligations in selling CCI in conjunction with credit cards, personal loans and flexi loans. The damages sought are unspecified. The three entities are defending the proceedings. |
| ● | On 16 July 2020, a class action was commenced against Westpac and St.George Finance Limited (SGF) in the Supreme Court of Victoria in relation to flex commissions paid to auto dealers from 1 March 2013 to 31 October 2018. This proceeding is one of two class actions commenced against a number of lenders in the auto finance industry. It is alleged that Westpac and SGF are liable for the unfair conduct of dealers acting as credit representatives and engaged in misleading or deceptive conduct. The damages sought are unspecified. Westpac and SGF are defending the proceedings. Another law firm publicly announced in July 2020 that it is preparing to commence a class action against Westpac entities for similar conduct. Westpac has not been served with a claim from that law firm on flex commissions. Westpac has not paid flex commissions since 1 November 2018 following an industry-wide ban issued by ASIC. |
Westpac is aware from media reports and other publicly available material that other class actions against Westpac entities are being investigated. In July 2020, a law firm publicly stated that it intends to commence a class action against BTFM alleging that since 2014, BTFM did not act in the best interests of members of certain superannuation funds when obtaining group insurance policies. In August 2020, another law firm announced that it is investigating claims on behalf of persons who in the past six years acquired, renewed or continued to hold a financial product (including life insurance) on the advice or recommendation of a financial adviser from Magnitude Group, Securitor Financial Group or Westpac. Westpac has not been served with a claim in relation to either of these matters and has no further information about the proposed claims beyond the public statements issued by the law firms involved.
Exposures relating to divested businesses
The Group has potential exposures relating to warranties, indemnities and other commitments it has provided to other parties in connection with various divestments of businesses and assets and other transactions. The warranties, indemnities and other commitments cover a range of matters and risks, including certain compliance, regulatory investigations and litigation matters outlined in this Note 26.
Internal reviews and remediation
As in prior periods, Westpac is continuing to undertake a number of reviews to identify and resolve issues that have the potential to impact our customers, employees, other relevant stakeholders and reputation. These internal reviews continue to identify a number of issues in respect of which we are taking steps or will take steps to put things right so that our customers and employees (as applicable) are not disadvantaged from certain past practices, including making compensation/remediation payments and providing refunds where identified. These issues include, among other things, compliance with lending obligations (including responsible lending), payroll processes, regulatory reporting, compliance with client monies requirements and impacts from inadequate product governance including the way some product terms and conditions are operationalised.
The Group's APRA regulated insurer WLIS is reviewing premium increases on certain life insurance products following a number of customer complaints. This review relates to Product Disclosure Statements for life insurance products issued in the years 2010 to 2017. This is a complex review where the outcomes are currently uncertain. As such, there is a risk that customer remediation may be required in the future in relation to prior premium increases. The review will also consider the premium increases that can and should be made in the future, and there is a risk that the outcomes of the review could impact the financial and/or capital position of WLIS.
In addition, our New Zealand business is reviewing its processes for some products relating to the requirements of the New Zealand Credit Contracts and Consumer Finance Act 2003. The outcome of this complex review is uncertain and could result in customer remediation, regulatory action and litigation.
By undertaking these reviews, we can also improve our processes and controls. An assessment of the Group’s likely loss has been made on a case-by-case basis for the purpose of the financial statements but cannot always be reliably estimated. Contingent liabilities may exist in respect of actual or potential claims or proceedings (which could be brought by customers, regulators or criminal prosecutors), compensation/remediation payments and/or refunds identified as part of these reviews.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 105 |
|
Notes to the financial statements
Note 26. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
Australian Financial Complaints Authority
Contingent liabilities may also exist in relation to customer complaints brought before the Australian Financial Complaints Authority (AFCA). AFCA has the power to make determinations about complaints and can award compensation up to certain thresholds. AFCA has a broader jurisdiction than previous dispute resolution bodies which it has replaced.
Financial Claims Scheme
Under the Financial Claims Scheme (FCS), the Australian Government provides depositors a free guarantee of deposits in eligible ADIs up to and including $250,000. The FCS applies to an eligible ADI if APRA has applied for the winding up of the ADI and the responsible Australian Government minister has declared that the FCS applies to the ADI.
The Financial Claims Scheme (ADIs) Levy Act 2008 (Cth) provides for the imposition of a levy to fund the excess of certain APRA FCS costs connected to an ADI, including payments by APRA to deposit holders in a failed ADI. The levy would be imposed on liabilities of eligible ADIs to their depositors and cannot be more than 0.5% of the amount of those liabilities. A contingent liability may exist in respect of any levy imposed under the FCS.
Contingent tax risk
Tax and regulatory authorities in Australia and in other jurisdictions are reviewing the taxation treatment of certain transactions (both historical and present-day transactions) undertaken by the Group in the course of normal business activities and the claiming of tax incentives and indirect taxes such as GST. The Group also responds to various notices and requests for information it receives from tax and regulatory authorities.
These reviews, notices and requests may result in additional tax liabilities (including interest and penalties).
The Group has assessed these and other taxation claims arising in Australia and elsewhere, including seeking independent advice.
Settlement risk
The Group is subject to a credit risk exposure in the event that another counterparty fails to settle for its payments clearing activities (including foreign exchange). The Group seeks to minimise credit risk arising from settlement risk in the payments system by aligning our processing method with the legal certainty of settlement in the relevant clearing mechanism.
Parent Entity guarantees and undertakings
The Parent Entity makes the following guarantees and undertakings to subsidiaries:
| ● | letters of comfort for certain subsidiaries which recognise that Westpac has a responsibility that those subsidiaries continue to meet their obligations; and |
| ● | guarantees to certain wholly owned subsidiaries which are Australian financial services or credit licensees to comply with legislative requirements. All but two guarantees are capped at $20 million per year (with an automatic reinstatement for another $20 million) and two specific guarantees are capped at $2 million (with an automatic reinstatement for another $2 million). |
|
|
|
|
|
106 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 26. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
Undrawn credit commitments
The Group enters into various arrangements with customers which are only recognised in the balance sheet when called upon. These arrangements include commitments to extend credit, bill endorsements, financial guarantees, standby letters of credit and underwriting facilities.
They expose the Group to liquidity risk when called upon and also to credit risk if the customer fails to repay the amounts owed at the due date. The maximum exposure to credit loss is the contractual or notional amount of the instruments. Some of the arrangements can be cancelled by the Group at any time and a significant portion is expected to expire without being drawn. The actual liquidity and credit risk exposure varies in line with amounts drawn and may be less than the amounts disclosed.
The Group uses the same credit policies when entering into these arrangements as it does for on-balance sheet instruments. Refer to Note 21 for further details of liquidity risk and credit risk management.
Undrawn credit commitments excluding derivatives are as follows:
|
1. |
Standby letters of credit are undertakings to pay, against presentation documents, an obligation in the event of a default by a customer. Guarantees are unconditional undertakings given to support the obligations of a customer to third parties. The Group may hold cash as collateral for certain guarantees issued. |
|
2. |
Commitments to extend credit include all obligations on the part of the Group to provide credit facilities. As facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. In addition to the commitments disclosed above, at 30 September 2021 the Group had offered $9.7 billion (2020: $4.9 billion) of facilities to customers, which had not yet been accepted. |
|
3. |
Include $0.8 billion (2020: nil) of undrawn credit commitments related to facilities which are held for sale. |
Contingent assets
The credit commitments shown in the table above also constitute contingent assets. These commitments would be classified as loans in the balance sheet on the contingent event occurring.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 107 |
|
Notes to the financial statements
CAPITAL AND DIVIDENDS
Note 27. Shareholders’ equity
Accounting policy
|
Share capital Ordinary shares are recognised at the amount paid up per ordinary share, net of directly attributable issue costs. Treasury shares are shares in the Parent Entity, purchased by the Parent Entity or other entities within the Group. These shares are adjusted against share capital as the net of the consideration paid to purchase the shares and, where applicable, any consideration received from the subsequent sale or reissue of these shares. Non-controlling interests Non-controlling interests represent the share in the net assets of subsidiaries attributable to equity interests that are not owned directly or indirectly by the Parent Entity. Reserves Foreign currency translation reserve Exchange differences arising on translation of the Group’s foreign operations, and any offsetting gains or losses on hedging the net investment are reflected in the foreign currency translation reserve. A cumulative credit balance in this reserve would not normally be regarded as being available for payment of dividends until such gains are realised and recognised in the income statement on sale or disposal of the foreign operation. Debt securities at FVOCI reserve This reserve comprises the changes in fair value of debt securities measured at FVOCI (except for interest income, impairment charges and FX gains and losses which are recognised in the income statement), net of any related hedge accounting adjustments and tax. These changes are transferred to non-interest income in the income statement when the asset is disposed. Equity securities at FVOCI reserve This reserve comprises the changes in fair value of equity securities measured at FVOCI, net of tax. These changes are not transferred to the income statement when the asset is disposed. Cash flow hedge reserve This comprises the fair value gains and losses associated with the effective portion of designated cash flow hedging instruments, net of tax. Share-based payment reserve This comprises the fair value of equity-settled share-based payments recognised as an expense. Other reserves Other reserves for the Parent Entity relate to certain historic internal group restructurings performed at fair value. The reserve is eliminated on consolidation. Other reserves for the Group consist of transactions relating to changes in the Parent Entity’s ownership of a subsidiary that do not result in a loss of control. The amount recorded in other reserves reflects the difference between the amount by which NCI are adjusted and the fair value of any consideration paid or received. |
|
|
|
|
|
108 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 27. Shareholders’ equity (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||
|
$m |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Share capital |
|
|
|
|
|
|
|
|
|
Ordinary share capital, fully paid |
|
41,601 |
|
40,509 |
|
41,601 |
|
40,509 |
|
RSP treasury shares1 |
|
(661) |
|
(618) |
|
(661) |
|
(618) |
|
Other treasury shares2 |
|
55 |
|
55 |
|
(3) |
|
(3) |
|
Total treasury shares |
|
(606) |
|
(563) |
|
(664) |
|
(621) |
|
Total share capital |
|
40,995 |
|
39,946 |
|
40,937 |
|
39,888 |
|
NCI |
|
57 |
|
51 |
|
- |
|
- |
|
1. |
2021: 4,363,329 unvested shares held (2020: 4,588,277). |
|
2. |
2021: nil shares held (2020: nil). |
Ordinary shares
Westpac does not have authorised capital and the ordinary shares have no par value. Ordinary shares entitle the holder to participate in dividends and, in the event of Westpac winding up, to a share of the proceeds in proportion to the number of and amounts paid on the shares held.
Each ordinary share entitles the holder to one vote, either in person or by proxy, at a shareholder meeting.
Reconciliation of movement in number of ordinary shares
|
3. |
The average price per share for the share issuance in 2020 was $24.81. |
|
4. |
The DRP for the 2021 interim dividend had no impact on the number of ordinary shares on issue as Westpac arranged for the purchase of the necessary shares from the market and transfer to participants of 9,085,937 ordinary shares at an average price of $25.98. The price per share for the issuance of shares in relation to the dividend reinvestment plan for the 2020 final dividend was $19.83 (2020: 2019 final dividend was $25.17). |
|
5. |
The Group entered into an arrangement to fully underwrite the 2020 final dividend, referred to as a DRP underwrite. The arrangement ensured that the capital impact of the dividend was negated as new shares of equivalent value to the amount of dividend that was paid to shareholders in cash were purchased by the DRP underwriter. The price per share for the issuance of shares in relation to the 2020 DRP underwrite was $19.59. |
Ordinary shares purchased on-market
|
6. |
Ordinary shares allocated to employees under the RSP are classified as treasury shares until the shares vest. |
For details of the share-based payment arrangements refer to Note 32.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 109 |
|
Notes to the financial statements
Note 27. Shareholders’ equity (continued)
Reconciliation of movement in reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||
|
$m |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Debt securities at FVOCI reserve |
|
|
|
|
|
|
|
|
|
Balance as at beginning of year |
|
177 |
|
(22) |
|
125 |
|
(25) |
|
Net gains/(losses) from changes in fair value |
|
578 |
|
360 |
|
730 |
|
292 |
|
Income tax effect |
|
(177) |
|
(96) |
|
(220) |
|
(77) |
|
Transferred to income statements |
|
(195) |
|
(79) |
|
(195) |
|
(79) |
|
Income tax effect |
|
58 |
|
15 |
|
58 |
|
15 |
|
Loss allowance on debt securities measured at FVOCI |
|
2 |
|
2 |
|
2 |
|
2 |
|
Exchange differences |
|
- |
|
(3) |
|
(1) |
|
(3) |
|
Balance as at end of year |
|
443 |
|
177 |
|
499 |
|
125 |
|
Equity securities at FVOCI reserve |
|
|
|
|
|
|
|
|
|
Balance as at beginning of year |
|
(4) |
|
17 |
|
- |
|
(1) |
|
Net gains/(losses) from changes in fair value |
|
50 |
|
(21) |
|
(2) |
|
1 |
|
Income tax effect |
|
(2) |
|
- |
|
- |
|
- |
|
Balance as at end of year |
|
44 |
|
(4) |
|
(2) |
|
- |
|
Share-based payment reserve |
|
|
|
|
|
|
|
|
|
Balance as at beginning of year |
|
1,720 |
|
1,642 |
|
1,611 |
|
1,533 |
|
Share-based payment expense |
|
86 |
|
78 |
|
86 |
|
78 |
|
Balance as at end of year |
|
1,806 |
|
1,720 |
|
1,697 |
|
1,611 |
|
Cash flow hedge reserve |
|
|
|
|
|
|
|
|
|
Balance as at beginning of year |
|
(42) |
|
(129) |
|
20 |
|
(65) |
|
Net gains/(losses) from changes in fair value |
|
296 |
|
(95) |
|
177 |
|
(28) |
|
Income tax effect |
|
(86) |
|
28 |
|
(53) |
|
9 |
|
Transferred to income statements |
|
39 |
|
218 |
|
(13) |
|
150 |
|
Income tax effect |
|
(11) |
|
(64) |
|
4 |
|
(46) |
|
Balance as at end of year |
|
196 |
|
(42) |
|
135 |
|
20 |
|
Foreign currency translation reserve |
|
|
|
|
|
|
|
|
|
Balance as at beginning of year |
|
(292) |
|
(179) |
|
(221) |
|
(145) |
|
Exchange differences on translation of foreign operations |
|
249 |
|
(177) |
|
40 |
|
(148) |
|
Gains/(losses) on net investment hedges |
|
(198) |
|
9 |
|
(41) |
|
17 |
|
Transferred to income statements |
|
- |
|
55 |
|
- |
|
55 |
|
Balance as at end of year |
|
(241) |
|
(292) |
|
(222) |
|
(221) |
|
Other reserves |
|
|
|
|
|
|
|
|
|
Balance as at beginning of year |
|
(15) |
|
(18) |
|
41 |
|
41 |
|
Transactions with owners |
|
(6) |
|
3 |
|
- |
|
- |
|
Balance as at end of year |
|
(21) |
|
(15) |
|
41 |
|
41 |
|
Total reserves |
|
2,227 |
|
1,544 |
|
2,148 |
|
1,576 |
|
|
|
|
|
110 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 28. Capital adequacy
APRA measures an ADI’s regulatory capital using three measures:
|
Level of capital |
Definition |
|
Common Equity Tier 1 Capital (CET1) |
Comprises the highest quality components of capital that consists of paid-up share capital, retained profits and certain reserves, less certain intangible assets, capitalised expenses and software, and investments and retained profits in insurance and funds management subsidiaries that are not consolidated for capital adequacy purposes. |
|
Tier 1 Capital |
The sum of CET 1 and AT1 Capital. AT1 Capital comprises high quality components of capital that consist of certain securities not included in CET 1, but which include loss absorbing characteristics. |
|
Total Regulatory Capital |
The sum of Tier 1 Capital and Tier 2 Capital. Tier 2 Capital includes subordinated instruments and other components of capital that, to varying degrees, do not meet the criteria for Tier 1 Capital, but nonetheless contribute to the overall strength of an ADI and its capacity to absorb losses. |
Under APRA’s Prudential Standards, Australian ADIs, including Westpac, are required to maintain a minimum CET1 ratio of at least 4.5%, Tier 1 Capital ratio of at least 6.0% and Total Regulatory Capital ratios of at least 8.0%. APRA may also require ADIs, including Westpac, to meet Prudential Capital Requirements (PCRs) above the industry PCRs. APRA does not allow the PCRs for individual ADIs to be disclosed.
APRA also requires ADIs to hold additional CET1 buffers comprising of:
| ● | a capital conservation buffer (CCB) of 3.5% for ADIs designated by APRA as domestic systemically important banks (D-SIBs) unless otherwise determined by APRA, which includes a 1.0% surcharge for D-SIBs. APRA has determined that Westpac is a D-SIB; and |
| ● | a countercyclical capital buffer. The countercyclical buffer is set on a jurisdictional basis and APRA is responsible for setting the requirement in Australia. The countercyclical buffer requirement is currently set to zero for Australia and New Zealand. |
Collectively, the above buffers are referred to as the “Capital Buffer” (CB). Should the CET 1 capital ratio fall within the capital buffer range restrictions on the distributions of earnings will apply. This includes restrictions on the amount of earnings that can be distributed through dividends, AT1 Capital distributions and discretionary staff bonuses.
APRA announcements on capital
APRA made the following announcements relevant to its capital framework:
| ● | On 19 July 2021 APRA announced regulatory support for banks offering temporary financial assistance to borrowers impacted by COVID-191. APRA has outlined that for eligible borrowers, ADIs do not need to treat the period of deferral as a period of arrears or loan restructuring. This applied to loans granted a repayment deferral of up to three months before the end of September 20212. ADIs must continue to provision for these loans under accounting standards. |
| ● | APRA has released the final revised standard for APS 111 Capital Adequacy: Measurement of Capital, effective from 1 January 20223. The final standard includes changes to the parent ADI’s (Level 1) treatment of equity investments in banking and insurance subsidiaries including: |
|
– |
Equity investments in subsidiaries (including any Additional Tier 1 and Tier 2 capital investments in subsidiaries) will be risk weighted at 250%, up to a limit of 10% of Level 1 CET1 capital per investment; and |
|
– |
Any equity investments in excess of the 10% limit will be fully deducted from Level 1 CET1 capital in determining Level 1 capital ratios. |
| ● | APRA is proposing changes to embed the ‘unquestionably strong’ level of capital in the capital framework, including implementation of Basel III reforms. On 21 July 2021 APRA released further guidance on capital buffers and the calculation of RWA including for specific asset classes4. As part of the proposal, APRA intends to increase the capital conservation buffer from 2.5% to 4.0% and introduce a base level for the countercyclical capital buffer of 1.0%. As a result, the CET1 capital ratio requirement for D-SIBs is proposed to increase from 8% to 10.5% from 1 January 2023. We expect further clarity on the changes ahead of 1 January 2023. |
|
1. |
APRA announcement - “APRA announces further regulatory support for loans impacted by COVID-19” dated 19 July 2021. |
|
2. |
Letter to all authorised deposit taking institutions - “Regulatory support for loans impacted by COVID-19” dated 25 August 2021. |
|
3. |
Letter to all authorised deposit taking institutions - “Final revised Prudential Standard: APS 111 Capital Adequacy - Measurement of Capital” dated 5 August 2021. |
|
4. |
Letter to all authorised deposit taking institutions - “Bank Capital Reforms: Update” dated 21 July 2021. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 111 |
|
Notes to the financial statements
Note 28. Capital adequacy (continued)
| ● | On 10 September 2021, APRA announced it expects ADIs to reduce their Committed Liquidity Facility (CLF) usage to zero by 31 December 20221. Westpac’s current CLF allocation is $37 billion. Westpac expects to reduce its allocation in line with APRA’s announcement, and to meet its liquidity requirements by increasing its holdings of High Quality Liquid Assets. |
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:
| ● | the development of a capital management strategy, including consideration of regulatory minimums, capital buffers and contingency plans. The current regulatory capital minimums together with the capital conservation buffer (CCB) are the Total CET1 Requirement. The Total CET1 Requirement for Westpac is at least 8.0%, based on an industry minimum CET1 requirement of 4.5% plus a capital buffer of at least 3.5% applicable to D-SIBs2,3; |
| ● | consideration of both regulatory and economic capital requirements; |
| ● | a stress testing framework that challenges the capital measures, coverage and requirements including the impact of adverse economic scenarios; and |
| ● | consideration of the perspectives of external stakeholders including rating agencies as well as equity and debt investors. |
Given the above and in light of proposed changes to APRA's capital management framework under which the CET1 capital ratio requirement for D-SIBs is to increase from 8% to 10.5% (including the capital conservation buffer and the countercyclical capital buffer), Westpac will seek to operate with a CET1 capital ratio above 10.5% as measured under the existing capital framework4. Capital settings may be reviewed if more challenging or uncertain conditions emerge, or if APRA's proposals change significantly.
Note 29. Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||||
|
$m |
|
2021 |
|
2020 |
|
2019 |
|
2021 |
|
2020 |
|
Dividends not recognised at year end |
|
|
|
|
|
|
|
|
|
|
|
Since year end the Directors have proposed the following dividends: |
|
|
|
|
|
|
|
|
|
|
|
Final dividend 60 cents per share (2020: 31 cents, 2019: 80 cents) all fully franked at 30% |
|
2,201 |
|
1,120 |
|
2,791 |
|
2,201 |
|
1,120 |
|
Total dividends not recognised at year end |
|
2,201 |
|
1,120 |
|
2,791 |
|
2,201 |
|
1,120 |
The Board has determined a final fully franked dividend of 60 cents per share, to be paid on 21 December 2021 to shareholders on the register at the record date of 8 November 2021.
Shareholders can choose to receive their dividends as cash or reinvest for an equivalent number of shares under the Dividend Reinvestment Plan (DRP).
The Board has determined to satisfy the DRP for the 2021 final dividend by arranging for the purchase of shares in the market by a third party. The market price used to determine the number of shares allocated to DRP participants will be set over the 10 trading days commencing 11 November 2021 and will not include a discount.
Details of dividends recognised during the year are provided in the statement of changes in equity.
Westpac has announced an off-market buy-back of up to $3.5 billion worth of Westpac shares. Westpac's operating performance and progress on strategic priorities, including the completion of a number of divestments, have contributed to a strong capital position, allowing Westpac to return capital to shareholders.
Australian franking credits available to the Parent Entity for subsequent years are $3,857 million (2020: $3,448 million, 2019: $1,558 million). This is calculated as the year end franking credit balance, adjusted for the Australian current tax liability and the proposed 2021 final dividend.
New Zealand imputation credits
New Zealand imputation credits of NZ$ 0.07 (2020: NZ $0.07, 2019: NZ $0.07) per share will be attached to the proposed 2021 final dividend. New Zealand imputation credits available to the Parent Entity for subsequent years are NZ$820 million (2020: NZ $980 million, 2019: NZ $860 million). This is calculated on the same basis as the Australian franking credits but using the New Zealand current tax liability.
1.Letter to locally incorporated LCR authorised deposit taking institutions - "Committed Liquidity Facility update" dated 10 September 2021.
2.Noting that APRA may apply higher CET1 requirements for an individual ADI.
|
3. |
If an ADI's CET1 ratio falls below the Total CET1 Requirement (at least 8)%, they face restrictions on the distribution of earnings, such as dividends, distribution payments on AT1 capital instruments and discretionary staff bonuses. |
4.Allowing for quarterly volatility of capital ratios due to the half yearly cycle of ordinary dividend payments.
|
|
|
|
|
112 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
GROUP STRUCTURE
Note 30. Investments in subsidiaries and associates
Accounting policy
|
Subsidiaries |
|
Westpac’s subsidiaries are entities which it controls and consolidates as it is exposed to, or has rights to, variable returns from the entity, and can affect those returns through its power over the entity. |
|
When the Group ceases to control a subsidiary, any retained interest in the entity is remeasured to fair value, with any resulting gain or loss recognised in the income statement. |
|
Changes in the Group’s ownership interest in a subsidiary which do not result in a loss of control are accounted for as transactions with equity holders in their capacity as equity holders. |
|
In the Parent Entity’s financial statements, investments in subsidiaries are initially recorded at cost and are subsequently held at the lower of cost and recoverable amount. |
|
All transactions between Group entities are eliminated on consolidation. |
|
Associates |
|
Associates are entities in which the Group has significant influence, but not control, over the operating and financial policies. The Group accounts for associates using the equity method. The investments are initially recognised at cost (except where recognised at fair value due to a loss of control of a subsidiary), and increased (or decreased) each year by the Group’s share of the associate’s profit (or loss). Dividends received from the associate reduce the investment in associate. |
Overseas companies predominantly carry on business in the country of incorporation. For unincorporated entities, ‘Country of incorporation’ refers to the country where business is carried on. The financial years of all controlled entities are the same as that of Westpac unless otherwise stated. From time to time, the Group consolidates a number of unit trusts where the Group has variable returns from its involvement with the trusts, and has the ability to affect those returns through its power over the trusts. These unit trusts are excluded from the table.
The following table includes the principal controlled entities of the Group as at 30 September 2021.
|
1. |
Refer to Note 37 for details of assets and liabilities held for sale. |
|
2. |
The Group indirectly owns 19% of Westpac NZ Covered Bond Limited (WNZCBL) and Westpac NZ Securitisation Limited (WNZSL), however, due to contractual and structural arrangements both WNZCBL and WNZSL are considered to be controlled entities within the Group. |
The following controlled entities have been granted relief from compliance with the balance date synchronisation provisions in the Corporations Act 2001: Westpac Cash PIE Fund; Westpac Notice Saver PIE Fund; and Westpac Term PIE Fund.
The following material controlled entities are not wholly owned:
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 113 |
|
Notes to the financial statements
Note 30. Investments in subsidiaries and associates (continued)
Non-controlling interests
Details of the balance of NCIs are set out in Note 27. There are no NCIs that are material to the Group.
Significant restrictions
On 2 April 2020, a decision was made by the RBNZ to freeze distribution of dividends on ordinary shares by all banks in New Zealand during the period of uncertainty caused by COVID-19. With effect from 29 April 2021, these dividend restrictions were eased to allow New Zealand banks to pay up to a maximum of 50% of their earnings as dividend. This 50% dividend restriction will remain in place until 1 July 2022. As a result there is currently a restriction on the payment of dividends by WNZL, the Group's New Zealand subsidiary.
There were no other significant restrictions on the ability to transfer cash or other assets, pay dividends or other capital distributions, provide or repay loans and advances between the entities within the Group. There were also no significant restrictions on Westpac’s ability to access or use the assets and settle the liabilities of the Group resulting from protective rights of NCIs.
Associates
There are no associates that are material to the Group.
Changes in ownership of subsidiaries
Businesses disposed during the year ending 30 September 2021
Westpac sold its interest in the following business during the year:
| ● | Westpac General Insurance Limited (sold on 1 July 2021) |
| ● | Westpac General Insurance Services Limited (sold on 1 July 2021) |
| ● | Westpac Vendor Finance business (sold on 31 July 2021) |
| ● | Westpac Lenders Mortgage Insurance Limited (sold on 31 August 2021). |
Refer to Notes 36 and 37 for further details of businesses disposed in 2021.
Businesses disposed during the year ending 30 September 2020
No businesses were sold in 2020.
Businesses disposed during the year ending 30 September 2019
Westpac sold its interest in Ascalon Capital Managers (Asia) Limited and Ascalon Capital Managers Limited on 8 February 2019 for a combined profit of $3 million recognised in non-interest income (refer to Note 36).
Note 31. Structured entities
Accounting policy
|
Structured entities are generally created to achieve a specific, defined objective and their operations are restricted such as only purchasing specific assets. Structured entities are commonly financed by debt or equity securities that are collateralised by and/or indexed to their underlying assets. The debt and equity securities issued by structured entities may include tranches with varying levels of subordination. |
|
Structured entities are classified as subsidiaries and consolidated if they meet the definition in Note 30. If the Group does not control a structured entity then it will not be consolidated. |
The Group engages in various transactions with both consolidated and unconsolidated structured entities that are mainly involved in securitisations, asset backed and other financing structures and managed funds.
Consolidated structured entities
Securitisation and covered bonds
The Group uses structured entities to securitise its financial assets, including two covered bond programs, to assign pools of residential mortgages to bankruptcy remote structured entities.
Refer to Note 24 for further details.
|
|
|
|
|
114 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 31. Structured entities (continued)
Group managed funds
The Group acts as the responsible entity and/or fund manager for various investment management funds. As fund manager, if the Group is deemed to be acting as a principal rather than an agent then it consolidates the fund. The principal versus agent decision requires judgement of whether the Group has sufficient exposure to variable returns.
Non-contractual financial support
The Group does not provide non-contractual financial support to these consolidated structured entities.
Unconsolidated structured entities
The Group has interests in various unconsolidated structured entities including debt or equity instruments, guarantees, liquidity and other credit support arrangements, lending, loan commitments, certain derivatives and investment management agreements.
Interests exclude non-complex derivatives (e.g. interest rate or currency swaps), instruments that create, rather than absorb, variability in the entity (e.g. credit protection under a credit default swap), and lending to a structured entity with recourse to a wider operating entity, not just the structured entity.
The Group’s main interests in unconsolidated structured entities, which arise in the normal course of business, are:
|
Trading securities |
The Group actively trades interests in structured entities and normally has no other involvement with the structured entity. The Group earns interest income on these securities and also recognises fair value changes through trading income in non-interest income. |
|
Investment securities |
The Group holds mortgage-backed securities for liquidity purposes and the Group normally has no other involvement with the structured entity. These assets are highly-rated, investment grade and eligible for repurchase agreements with the RBA or another central bank. The Group earns interest income and net gains or losses on selling these assets are recognised in the income statements. |
|
Loans and other credit commitments |
The Group lends to unconsolidated structured entities, subject to the Group’s collateral and credit approval processes, in order to earn interest and fee income. The structured entities are mainly property trusts, securitisation entities and those associated with project and property financing transactions. |
|
Investment management agreements |
The Group manages funds that provide customers with investment opportunities. The Group also manages superannuation funds for its employees. The Group earns management and performance fee income which is recognised in non-interest income. The Group may also retain units in these investment management funds, primarily through life insurance subsidiaries. The Group earns fund distribution income and recognises fair value movements through non-interest income. |
The following tables show the Group’s interests in unconsolidated structured entities and its maximum exposure to loss in relation to those interests. The maximum exposure does not take into account any collateral or hedges that will reduce the risk of loss.
| ● | For on-balance sheet instruments, including debt and equity instruments in and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying value. |
| ● | For off-balance sheet instruments, including liquidity facilities, loan and other credit commitments and guarantees, the maximum exposure to loss is the notional amounts. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 115 |
|
Notes to the financial statements
Note 31. Structured entities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in |
|
|
|
|
|
|
|
|
|
|
|
third party |
|
|
|
|
|
|
|
|
|
|
|
mortgage and |
|
|
|
|
|
Interest |
|
|
|
|
|
other |
|
Financing to |
|
Group |
|
in other |
|
|
|
Consolidated |
|
asset-backed |
|
securitisation |
|
managed |
|
structured |
|
|
|
$m |
|
securities1 |
|
vehicles |
|
funds |
|
entities |
|
Total |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
Trading securities and financial assets measured at FVIS |
|
2,694 |
|
- |
|
- |
|
40 |
|
2,734 |
|
Investment securities |
|
5,352 |
|
- |
|
- |
|
- |
|
5,352 |
|
Loans |
|
- |
|
23,028 |
|
- |
|
18,415 |
|
41,443 |
|
Life insurance assets2 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Other assets |
|
- |
|
- |
|
55 |
|
- |
|
55 |
|
Assets held for sale |
|
- |
|
- |
|
232 |
|
695 |
|
927 |
|
Total on-balance sheet exposures |
|
8,046 |
|
23,028 |
|
287 |
|
19,150 |
|
50,511 |
|
Total notional amounts of off-balance sheet exposures |
|
— |
|
6,609 |
|
15 |
|
8,553 |
|
15,177 |
|
Maximum exposure to loss |
|
8,046 |
|
29,637 |
|
302 |
|
27,703 |
|
65,688 |
|
Size of structured entities3 |
|
74,925 |
|
29,637 |
|
77,036 |
|
48,309 |
|
229,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
Trading securities and financial assets measured at FVIS |
|
1,526 |
|
- |
|
- |
|
34 |
|
1,560 |
|
Investment securities |
|
6,105 |
|
- |
|
- |
|
- |
|
6,105 |
|
Loans |
|
- |
|
20,094 |
|
- |
|
16,955 |
|
37,049 |
|
Life insurance assets |
|
- |
|
- |
|
204 |
|
129 |
|
333 |
|
Other assets |
|
- |
|
- |
|
52 |
|
- |
|
52 |
|
Total on-balance sheet exposures |
|
7,631 |
|
20,094 |
|
256 |
|
17,118 |
|
45,099 |
|
Total notional amounts of off-balance sheet exposures |
|
- |
|
6,122 |
|
44 |
|
7,768 |
|
13,934 |
|
Maximum exposure to loss |
|
7,631 |
|
26,216 |
|
300 |
|
24,886 |
|
59,033 |
|
Size of structured entities3 |
|
59,324 |
|
26,216 |
|
67,423 |
|
40,209 |
|
193,172 |
|
1. |
The Group’s interests in third-party mortgages and other asset-backed securities are senior tranches of notes and are investment grade rated. |
|
2. |
Balances reclassified to assets held for sale. |
|
3. |
Represents either the total assets or market capitalisation of the entity, or if not available, the Group’s total committed exposure (for lending arrangements and external debt and equity holdings), funds under management (for Group managed funds) or the total value of notes on issue (for investments in third-party asset-backed securities). |
Non-contractual financial support
The Group does not provide non-contractual financial support to these unconsolidated structured entities.
|
|
|
|
|
116 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
OTHER
Note 32. Share-based payments
Accounting policy
|
The Group enters into various share-based payment arrangements with its employees as a component of overall compensation for services provided. Share-based payment arrangements comprise rights to receive shares for free (share rights) and restricted shares (issued at no cost). Share-based payment arrangements typically require a specified period of continuing employment (the service period or vesting period) and may include performance targets (vesting conditions). Specific details of each arrangement are provided below. |
|
Share-based payments must be classified as either cash-settled or equity-settled arrangements. The Group’s significant arrangements are equity-settled, as the Group is not obliged to settle in cash. |
|
Share rights |
|
Share rights are equity-settled arrangements. The fair value is measured at grant date and is recognised as an expense over the service period, with a corresponding increase in the share-based payment reserve in equity. |
|
The fair values of share rights are estimated at grant date using a binomial/Monte Carlo simulation pricing model which incorporates the vesting and market-related performance targets of the grants. The fair value of share rights excludes non-market vesting conditions such as employees’ continuing employment by the Group. The non-market vesting conditions are instead incorporated in estimating the number of share rights that are expected to vest and are therefore recognised as an expense. At each reporting date the non-market vesting assumptions are revised and the expense recognised each year takes into account the most recent estimates. The market-related assumptions are not revised each year as the fair value is not re-estimated after the grant date. |
|
Restricted share plan (RSP) |
|
The RSP is accounted for as an equity-settled arrangement. The fair value of shares allocated to employees for nil consideration is recognised as an expense over the vesting period with a corresponding increase in the share-based payments reserve in equity. The fair value of ordinary shares issued to satisfy the obligation to employees is measured at grant date and is recognised as a separate component of equity. |
|
Employee share plan (ESP) |
|
The value of shares expected to be allocated to employees for nil consideration is recognised as an expense over the financial year and provided for as other employee benefits. The fair value of any ordinary shares issued to satisfy the obligation to employees is recognised in equity. Alternatively, shares may be purchased on-market to satisfy the obligation to employees. |
|
Scheme name |
Westpac Long Term Variable
|
Westpac Performance Plan (WPP) |
Restricted Share Plan
|
Employee Share Plan
|
|---|---|---|---|---|
|
Type of share-based payment |
Share rights (allocated at no cost). |
Share rights (allocated at no cost). |
Westpac ordinary shares (allocated at no cost). |
Westpac ordinary shares (allocated at no cost) of up to $1,000 per employee per year. |
|
How it is used |
Aligns executive remuneration and accountability with shareholder interests over the long term. |
Primarily used for mandatory deferral of a portion of short-term variable reward for New Zealand employees and key employees based outside Australia. |
Primarily used to reward key employees and for mandatory deferral of a portion of short-term variable reward for Australian employees and some other offshore jurisdictions. |
To reward eligible Australian employees (unless they have already been provided instruments under another scheme for the previous year). |
|
Exercise price |
Nil |
Nil |
n/a |
n/a |
|
Performance hurdles |
For the 2020 and 2021 awards: relative Total Shareholder return (TSR) over a four-year performance period. |
None |
None |
None |
|
|
For the 2017, 2018 and 2019 awards: TSR over a four-year performance period and average cash Return on Equity (cash ROE) over a three-year performance period plus one-year holding lock, each applying to half of the award. |
|
|
|
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 117 |
|
Notes to the financial statements
Note 32. Share-based payments (continued)
|
Scheme name |
Westpac Long Term Variable
|
Westpac Performance Plan (WPP) |
Restricted Share Plan
|
Employee Share Plan
|
|
Service conditions |
Continued employment throughout the vesting period or as determined by the Board. |
Continued employment throughout the vesting period or as determined by the Board. |
Continued employment throughout the restriction period or as determined by the Board. |
Shares must normally remain within the ESP for three years from granting unless the employee leaves Westpac. |
|
Vesting period (period over which expenses are recognised) |
4 years |
Defined period set out at time of grant. |
Defined period set out at time of grant. |
1 year |
|
Treatment at end of term |
Automatically exercised at the end of the term. |
Automatically exercised at the end of the term. |
Vested shares are released from the RSP at the end of the vesting period. |
Shares are released at the end of the restriction period or when the employee leaves Westpac. |
|
Does the employee receive dividends and voting rights during the vesting period? |
No |
No |
Yes |
Yes |
Each share-based payment scheme is quantified below.
(i) Westpac Long-Term Variable Reward Plan (LTVR)
The weighted average fair value at grant date of LTVR share rights issued during the year was $6.56 (2020: $28.44).
(ii) Westpac Performance Plan (WPP)
The weighted average fair value at grant date of WPP share rights issued during the year was $18.27 (2020: $24.68).
|
|
|
|
|
118 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 32. Share-based payments (continued)
(iii) Restricted Share Plan (RSP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
Outstanding |
|
|
|
as at beginning |
|
Granted during |
|
|
|
Forfeited |
|
as at end |
|
Allocation date |
|
of year |
|
the year |
|
Released |
|
during the year |
|
of year |
|
2021 |
|
4,389,161 |
|
2,165,046 |
|
2,012,519 |
|
226,613 |
|
4,315,075 |
|
2020 |
|
4,773,171 |
|
2,100,030 |
|
2,081,545 |
|
402,495 |
|
4,389,161 |
The weighted average fair value at grant date of RSP shares issued during the year was $20.63 (2020: $23.88).
(iv)Employee Share Plan (ESP)
|
1. |
The market price per share for the allocation is based on the five day volume-weighted average price up to the grant date. |
The 2020 ESP award was satisfied through the purchase of shares on-market.
The liability accrued for the ESP at 30 September 2021 is $28 million (2020: $28 million) and is provided for as other employee benefits.
(v) Other plans
Westpac also provides plans for small, specialised parts of the Group. The benefits under these plans are directly linked to growth and performance of the relevant part of the business. The plans, individually and in aggregate, are not material to the Group in terms of expenses and dilution of earnings.
The names of all persons who hold share options and/or rights currently on issue are entered in Westpac’s register of option holders which may be inspected at Link Market Services, Level 12, 680 George Street, Sydney, New South Wales.
(vi) Fair value assumptions
The fair values of share rights have been independently calculated at their respective grant dates.
The fair value of share rights with performance targets based on relative TSR takes into account the average TSR outcome determined using a Monte Carlo simulation pricing model.
The fair values of share rights without TSR based performance targets (i.e. share rights with cash EPS compound annual growth rate (CAGR), economic profit and cash ROE performance targets) have been determined with reference to the share price at grant date and a discount rate reflecting the expected dividend yield over their vesting periods.
Other significant assumptions include:
| ● | a risk free rate of return of 0.2%, applied to TSR-hurdled grants; |
| ● | a dividend yield on Westpac shares of 6.0%, applied to TSR and ROE-hurdled grants; |
| ● | volatility in Westpac’s TSR of 25%, applied to TSR-hurdled grants; and |
| ● | volatilities of, and correlation factors between, TSR of the comparator group and Westpac for TSR-hurdled grants. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 119 |
|
Notes to the financial statements
Note 33. Superannuation commitments
Accounting policy
|
The Group recognises an asset or a liability for its defined benefit schemes, being the net of the defined benefit obligations and the fair value of the schemes’ assets. The defined benefit obligation is calculated as the present value of the estimated future cash flows, discounted using high-quality long dated corporate bond rates. |
|
The superannuation expense is recognised in operating expenses and remeasurements are recognised through OCI. |
|
Critical accounting assumptions and estimates |
|
The actuarial valuation of plan obligations is dependent upon a series of assumptions, principally price inflation, salary growth, mortality, morbidity, discount rate and investment returns. Different assumptions could significantly alter the valuation of the plan assets and obligations and the resulting remeasurement recognised in OCI and the superannuation expense recognised in the income statement. |
Westpac had the following defined benefit plans at 30 September 2021:
1. The 2021 final actuarial assessment of the funding status for WGP and UKSS will be available in 2022.
The defined benefit sections of the schemes are closed to new members. The Group has no obligation beyond the annual contributions for the accumulation or defined contribution sections of the schemes.
The WGP is the Group’s principal defined benefit plan and is managed and administered in accordance with the terms of its trust deed and relevant legislation in Australia. Its defined benefit liabilities are based on salary and length of membership for active members and inflation in the case of pensioners.
The defined benefit schemes expose the Group to the following risks:
| ● | discount rate – reductions in the discount rate would increase the present value of the future payments; |
| ● | inflation rate – increases in the inflation rate would increase the payments to pensioners; |
| ● | investment risk – lower investment returns would increase the contributions needed to offset the shortfall; |
| ● | mortality risk – members may live longer than expected extending the cash flows payable by the Group; |
| ● | behavioural risk - higher proportion of members taking some of their benefits as a pension rather than a lump sum would increase the cash flows payable by the Group; and |
| ● | legislative risk – legislative changes could be made which increase the cost of providing defined benefits. |
Investment risk is managed by setting benchmarks for the allocation of plan assets between asset classes. The long-term investment strategy will often adopt relatively high levels of equity investment in order to:
| ● | secure attractive long-term investment returns; and |
| ● | provide an opportunity for capital appreciation and dividend growth, which gives some protection against inflation. |
Funding recommendations for the WGP, WNZS and the UKSS are made based on triennial actuarial valuations. The funding valuations of the defined benefit plans are based on different assumptions to the calculation of the defined benefit surplus/deficit for accounting purposes. Based on the most recent valuations, the defined benefit plan assets are adequate to cover the present value of the accrued benefits of all members with a combined surplus of $143 million (2020: $154 million). Current contribution rates are as follows:
| ● | WGP – contributions are made to the WGP at the rate of 15.4% of members’ salaries; |
| ● | WNZS – contributions are made to the WNZS at the rate of 17% of members’ salaries; and |
| ● | UKSS – not required to make contributions under the 2018 actuarial assessment. |
|
|
|
|
|
120 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 33. Superannuation commitments (continued)
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||
|
$m |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Employer contributions |
|
33 |
|
26 |
|
31 |
|
26 |
|
Member contributions |
|
10 |
|
10 |
|
10 |
|
10 |
Expected employer contributions for the year ended 30 September 2022 are $23 million.
Expense recognised
Defined benefit balances recognised
The average duration of the defined benefit obligation is 15 years (2020: 14 years).
Significant assumptions
Sensitivity to changes in significant assumptions
The following table shows the impact of changes in assumptions on the defined benefit obligation for the WGP. No reasonably possible changes in the assumptions of the Group’s other defined benefit plans would have a material impact on the defined benefit obligation.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 121 |
|
Notes to the financial statements
Note 33. Superannuation commitments (continued)
Asset allocation
The table below provides a breakdown of the schemes’ investments by asset class.
Equity and debt instruments are mainly quoted assets while property and other assets are mainly unquoted. Other assets include infrastructure funds and private equity funds.
Note 34. Auditor’s remuneration
The fees payable to the auditor, PricewaterhouseCoopers (PwC), and overseas firms belonging to the PwC network of firms were:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||
|
$'000 |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Audit and audit-related fees |
|
|
|
|
|
|
|
|
|
Audit fees |
|
|
|
|
|
|
|
|
|
PwC Australia |
|
29,306 |
|
27,667 |
|
29,148 |
|
27,667 |
|
Overseas PwC network firms |
|
4,310 |
|
5,295 |
|
536 |
|
705 |
|
Total audit fees |
|
33,616 |
|
32,962 |
|
29,684 |
|
28,372 |
|
Audit-related fees |
|
|
|
|
|
|
|
|
|
PwC Australia |
|
1,456 |
|
4,404 |
|
1,456 |
|
4,404 |
|
Overseas PwC network firms |
|
221 |
|
107 |
|
- |
|
- |
|
Total audit-related fees |
|
1,677 |
|
4,511 |
|
1,456 |
|
4,404 |
|
Total audit and audit-related fees |
|
35,293 |
|
37,473 |
|
31,140 |
|
32,776 |
|
Tax fees |
|
|
|
|
|
|
|
|
|
PwC Australia |
|
35 |
|
57 |
|
35 |
|
57 |
|
Total tax fees |
|
35 |
|
57 |
|
35 |
|
57 |
|
Total audit and non-audit fees |
|
35,328 |
|
37,530 |
|
31,175 |
|
32,833 |
Fees payable to the auditor have been categorised as follows:
|
Audit |
The year end audit, half-year review and comfort letters associated with debt issues and capital raisings. |
|
Audit-related |
Consultations regarding accounting standards and reporting requirements, regulatory compliance reviews and assurance related to debt and capital offerings. |
|
Tax |
Tax compliance and tax advisory services. |
It is Westpac’s policy to engage PwC on assignments additional to its statutory audit duties only if its independence is not impaired or seen to be impaired and where its expertise and experience with Westpac is important. All services were approved by the Board Audit Committee in accordance with Westpac’s Pre-Approval of Engagement of PricewaterhouseCoopers for Audit or Non-Audit Services Policy.
PwC also received fees of $9.6 million (2020: $6.1 million) for various entities which are related to Westpac but not consolidated. These non-consolidated entities include entities sponsored by the Group, trusts of which a Westpac Group entity is trustee, manager or responsible entity, superannuation funds and pension funds.
|
|
|
|
|
122 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 35. Related party disclosures
Related parties
Westpac’s related parties are those it controls or can exert significant influence over. Examples include subsidiaries, associates, joint ventures and superannuation plans as well as key management personnel and their related parties.
Key management personnel (KMP)
Key management personnel are those who, directly or indirectly, have authority and responsibility for planning, directing and controlling the activities of Westpac. This includes all Executives and Non-Executive Directors.
Parent Entity
Westpac Banking Corporation is the ultimate parent company of the Group.
Subsidiaries - Note 30
The Parent Entity has the following related party transactions and balances with subsidiaries:
The balances due to/from subsidiaries include a wide range of banking and other financial facilities.
The terms and conditions of related party transactions between the Parent Entity and subsidiaries are sometimes different to commercial terms and conditions. Related party transactions between the Parent Entity and subsidiaries eliminate on consolidation.
Associates - Note 30
The Group provides a wide range of banking and other financial facilities and funds management activities to its associates on commercial terms and conditions.
Superannuation plans
The Group contributed $418 million (2020: $361 million) to defined contribution plans and $33 million (2020: $26 million) to defined benefit plans. Refer to Note 33.
Remuneration of KMP
Total remuneration1 of the KMP was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post |
|
Other long- |
|
|
|
|
|
|
|
|
|
Short-term |
|
employment |
|
term |
|
Termination |
|
Share-based |
|
|
|
$ |
|
benefits |
|
benefits |
|
benefits |
|
benefits |
|
payments |
|
Total |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
28,469,165 |
|
730,700 |
|
(29,003) |
|
3,101,006 |
|
10,832,584 |
|
43,104,452 |
|
2020 |
|
22,506,249 |
|
967,898 |
|
657,375 |
|
1,176,487 |
|
2,654,510 |
|
27,962,519 |
|
Parent Entity |
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
27,108,174 |
|
607,503 |
|
(29,003) |
|
2,421,267 |
|
9,631,777 |
|
39,739,718 |
|
2020 |
|
21,513,543 |
|
873,350 |
|
657,375 |
|
1,176,487 |
|
2,147,884 |
|
26,368,639 |
| 1. | Comparative amounts have been revised to align to current year presentation. The revisions primarily relate to changes in interpretation as to the appropriate period over which to expense the fair value of certain grants and to the appropriate grant date on which to value grants where there is an opt-out period. |
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 123 |
|
Notes to the financial statements
Note 35. Related party disclosures (continued)
Other transactions with KMP
KMP receive personal banking and financial investment services from the Group in the ordinary course of business. The terms and conditions, for example interest rates and collateral, and the risks to Westpac are comparable to transactions with other employees and did not involve more than the normal risk of repayment or present other unfavourable features.
Details of loans provided and the related interest charged to KMP and their related parties are as follows:
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
Number of |
|
|
|
payable for |
|
Closing loan |
|
KMP with |
|
$ |
|
the year |
|
balance |
|
loans |
|
2021 |
|
403,893 |
|
28,924,924 |
|
12 |
|
2020 |
|
549,257 |
|
15,779,157 |
|
8 |
Share rights holdings
For compliance with SEC disclosure requirements, the following table sets out certain details of the performance share rights and unhurdled share rights held at 30 September 2021 by the CEO and other key management personnel (including their related parties):
The Group has not issued any options during the year and there are no outstanding options as at 30 September 2021.
|
|
|
|
|
124 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 36. Notes to the cash flow statements
Accounting policy
|
Cash and balances with central banks include cash held at branches and in ATMs, balances with overseas banks in their local currency and balances with central banks including accounts with the RBA and accounts with overseas central banks. |
Reconciliation of net cash provided by/(used in) operating activities to net profit for the year is set out below.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 125 |
|
Notes to the financial statements
Note 36. Notes to the cash flow statements (continued)
Details of the assets and liabilities over which control ceased
Details of the entities over which control ceased are provided in Note 37.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
Parent Entity |
||||||
|
$m |
|
2021 |
|
2020 |
|
2019 |
|
2021 |
|
2020 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Cash and balances with central banks |
|
50 |
|
- |
|
3 |
|
- |
|
- |
|
Trading securities and other financial assets measured at FVIS |
|
409 |
|
- |
|
3 |
|
- |
|
- |
|
Loans |
|
369 |
|
- |
|
- |
|
- |
|
- |
|
Other financial assets |
|
688 |
|
- |
|
3 |
|
- |
|
- |
|
Property and equipment |
|
29 |
|
- |
|
- |
|
- |
|
- |
|
Deferred tax assets |
|
4 |
|
- |
|
- |
|
- |
|
- |
|
Intangible assets |
|
243 |
|
- |
|
- |
|
- |
|
- |
|
Other assets |
|
226 |
|
- |
|
- |
|
- |
|
- |
|
Total assets |
|
2,018 |
|
- |
|
9 |
|
- |
|
- |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Other financial liabilities |
|
110 |
|
- |
|
- |
|
- |
|
- |
|
Provisions |
|
9 |
|
- |
|
- |
|
- |
|
- |
|
Other liabilities |
|
720 |
|
- |
|
- |
|
- |
|
- |
|
Total liabilities |
|
839 |
|
- |
|
- |
|
- |
|
- |
|
Total equity attributable to owners of WBC |
|
1,179 |
|
- |
|
9 |
|
- |
|
- |
|
Cash proceeds received (net of transaction costs) |
|
1,322 |
|
- |
|
2 |
|
- |
|
- |
|
Expected receivable (completion settlement) |
|
8 |
|
- |
|
- |
|
- |
|
- |
|
Deferred consideration |
|
37 |
|
- |
|
- |
|
- |
|
- |
|
Total consideration |
|
1,367 |
|
- |
|
2 |
|
- |
|
- |
|
Reserves reclassified to the income statement |
|
- |
|
- |
|
10 |
|
- |
|
- |
|
Gain/(loss) on disposal |
|
188 |
|
- |
|
3 |
|
- |
|
- |
|
Reconciliation of cash proceeds from disposal: |
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds received (net of transaction costs) |
|
1,322 |
|
- |
|
2 |
|
- |
|
- |
|
Less: Cash deconsolidated |
|
(50) |
|
- |
|
(3) |
|
- |
|
- |
|
Cash consideration (paid)/received (net of transaction costs and cash held) |
|
1,272 |
|
- |
|
(1) |
|
- |
|
- |
Non-cash financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under the dividend reinvestment plan |
|
401 |
|
273 |
|
1,489 |
|
401 |
|
273 |
|
Increase in lease liabilities |
|
199 |
|
177 |
|
- |
|
114 |
|
173 |
On 4 December 2020, $866 million of Westpac Capital Notes (WCN) 3 were transferred to the WCN 3 nominated party for $100 each pursuant to the WCN 7 reinvestment offer. Those WCN 3 were subsequently redeemed and cancelled by Westpac. On 22 March 2021, the remaining $458 million of WCN 3 were redeemed and cancelled by Westpac for $100 each.
On 15 September 2021, $1,152 million of WCN4 were transferred to the WCN4 nominated party for $100 each pursuant to the WCN8 reinvestment offer. Those WCN4 were subsequently redeemed and cancelled by Westpac. On 15 October 2021, Westpac issued a redemption notice notifying WCN4 holders that all outstanding WCN4 will be redeemed on the optional redemption date, being 20 December 2021.
Cash and balances with central banks
The following table provides the breakdown of cash and cash balances with central banks.
|
|
|
|
|
126 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 36. Notes to the cash flow statements (continued)
Restricted cash
Certain of our foreign operations are required to maintain reserves or minimum balances with central banks in their respective countries of operation, totalling $445 million (2020: $457 million) for the Group and $369 million (2020: $380 million) for the Parent Entity which are included in cash and balances with central banks.
Note 37. Assets and liabilities held for sale
Accounting policy
|
Assets and liabilities held for sale Non-current assets or disposal groups are classified as held for sale if they will be recovered primarily through sale rather than through continuing use and a sale is considered highly probable. Non-current assets or disposal groups held for sale are measured at the lower of their existing carrying amount and fair value less costs to sell, except for liabilities and certain assets such as deferred tax assets, financial assets and contractual rights under insurance contracts, which are specifically exempt from this requirement and continue to be recognised at their existing carrying value. An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition. Non-current assets are not depreciated or amortised while they are classified as held for sale. Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet. |
During the year ending 30 September 2021, the assets and liabilities of certain businesses were classified as held for sale. As these businesses do not constitute a major line of business for the Group, they have not been classified as discontinued operations.
Details of the businesses which were classified as held for sale during the financial year are as follows:
Businesses held for sale as at 30 September 2021
Westpac Motor Vehicle Dealer Finance and Novated Leasing business
On 28 June 2021, the Group announced that it expects to sell its motor vehicle dealer finance and novated leasing business to Angle Auto Finance Pty Ltd, a portfolio company of Cerberus Capital Management, L.P. As part of the sale, Westpac will transfer:
| ● | Auto dealer and introducer agreements together with wholesale dealer loans of approximately $1 billion; |
| ● | Strategic alliance agreements with vehicle manufacturers; and |
| ● | Novated lease origination capability and related agreements. |
Westpac will retain its existing retail auto loans of around $10 billion originated by the businesses being transferred. The loans will run down in the normal course of business over the life of those loans. Westpac will also progressively cease new retail auto loan originations from these three channels with customers still able to use the Group’s Consumer and Business lending products to help buy motor vehicles.
The sale agreement includes initial payment on completion based on the final value of the portfolio transferred and deferred consideration payable over the two-year period following completion. Completion of the transaction will occur over several stages to allow for a smooth transition. Final completion of the transaction is expected by no later than 31 March 2022, at which time a small gain on sale is expected to be recognised in non-interest income.
The business is currently included in the Group’s Specialist Businesses division.
Westpac New Zealand Life Insurance business
On 6 July 2021, the Group announced that it had entered into an agreement to sell Westpac Life-NZ-Limited to Fidelity Life Assurance Company Limited and enter into an exclusive 15-year agreement for the distribution of life insurance products to Westpac’s New Zealand customers. This entity is currently included in the Group’s Westpac New Zealand division.
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 127 |
|
Notes to the financial statements
Note 37. Assets and liabilities held for sale (continued)
The sale price of NZ$400 million (approximately A$375 million1) is expected to result in a small post-tax gain on sale. The transaction also includes ongoing payments to Westpac in accordance with the distribution agreement.
Completion of the transaction is subject to various regulatory approvals and is expected to occur by first half 2022, at which time the gain will be recognised in non-interest income.
Westpac Australian Life Insurance business
On 9 August 2021, the Group announced that it will sell Westpac Life Insurance Services Limited to TAL Dai-ichi Life Australia Pty Limited (TAL) and enter into an exclusive 20-year strategic alliance for the provision of life insurance products to Westpac’s Australian customers. This entity is currently included in the Group’s Specialist Businesses division.
The sale price is $900 million and is estimated to result in a pre-tax loss on sale of $1.3 billion. For the year ended 30 September 2021, a loss of $224 million has been recognised in operating expenses reflecting expected separation and transaction costs. The remaining loss will be recognised on completion of the sale. The transaction also includes ongoing payments to Westpac in accordance with the distribution agreement.
Westpac will retain responsibility for certain pre-completion matters and provide protection to TAL through a combination of provisions, warranties and indemnities.
Completion of the transaction is subject to various regulatory approvals and is expected to occur in the second half of the 2022 calendar year.
Businesses no longer held for sale as at 30 September 2021
Westpac General Insurance Limited and Westpac General Insurance Services Limited
On 2 December 2020, the Group announced it would sell Westpac General Insurance Limited and Westpac General Insurance Services Limited to Allianz and enter into an exclusive 20-year agreement for the distribution of general insurance products to Westpac’s customers. The sale was completed on 1 July 2021 for $725 million and resulted in a pre-tax gain on sale of $160 million (net of transaction and separation costs) recognised in non-interest income. A further payment of $25 million is expected to be received by Westpac by 31 December 2021 subject to an integration milestone, with contingent payments over the next five years in addition to ongoing payments under the distribution agreement.
Westpac will retain responsibility for certain pre-completion matters and provide protection to Allianz through a combination of customary warranties and indemnities.
These entities were included in the Group’s Specialist Businesses division.
Westpac Vendor Finance business
On 21 August 2020, the Group announced that it had entered into an agreement for the sale of its Vendor Finance business to Angle Auto Finance Pty Ltd, a portfolio company of Cerberus Management, L.P. The sale was completed on 31 July 2021 resulting in a pre-tax gain on sale of $29 million recognised at this date in non-interest income. A pre-tax loss of $81 million was previously recognised in operating expenses prior to completion date, reflecting a writedown of assets held for sale to their estimated fair value less costs to sell and recognition of related separation and transaction costs.
The business was included in the Group’s Specialist Businesses division.
Westpac Lenders Mortgage Insurance Limited
On 18 March 2021, the Group announced it would sell Westpac Lenders Mortgage Insurance Limited (WLMI) to Arch Capital Group (Arch) and enter into a 10-year exclusive supply agreement for Arch to provide Lenders Mortgage Insurance (LMI) to the Group. The sale was completed on 31 August 2021 with nil gain on sale recognised at this date as the sales price reflected the book value of the business transferred. A loss of $110 million was previously recognised in the first half of 2021 in operating expenses reflecting the write-down of goodwill and recognition of related transaction and separation costs. Ongoing fixed annual payments will be received under the distribution agreement.
Westpac will retain responsibility for certain legacy matters and provide protection to Arch through a combination of customary warranties and indemnities.
WLMI was included in the Group’s Specialist Businesses division.
1Translated using a year-to-date average NZD/AUD exchange rate.
|
|
|
|
|
128 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Notes to the financial statements
Note 37 Assets and liabilities held for sale (continued)
Westpac Pacific
On 7 December 2020, the Group announced the sale of its Pacific businesses (comprised of Fiji Branch of Westpac Banking Corporation and the Group’s 89.9% stake in Westpac Bank-PNG-Limited) to Kina Securities Limited (Kina). Completion of the sale was subject to various regulatory approvals.
On 22 September 2021, the Group announced it and Kina had agreed to terminate the agreements for the sale of these businesses.
In first half of 2021, a loss of $121 million was recognised in operating expenses, reflecting a writedown of assets held for sale to their estimated fair value less costs to sell and recognition of related separation and transaction costs. Following termination of the sale contracts, the businesses are no longer considered held for sale and a reassessment of the carrying value of the assets was undertaken. Consequently, a $60 million write-back of the previous loss was recognised at 30 September 2021 reflecting a partial reversal of the asset writedowns and reversal of the unutilised amount of estimated separation and transaction costs provisioned.
Westpac Pacific is included in the Group’s Specialist Businesses division.
Balance sheet presentation
Details of the assets and liabilities held for sale are as follows (no amounts were presented as held for sale in prior year):
Note 38. Subsequent events
Since 30 September 2021, the Board has determined to pay a fully franked final dividend of 60 cents per fully paid ordinary share. The dividend is expected to be $2,201 million. The dividend is not recognised as a liability at 30 September 2021. The proposed payment date of the dividend is 21 December 2021.
The Board has determined to satisfy the DRP for the 2021 final dividend by arranging for the purchase of shares in the market by a third party. The market price used to determine the number of shares allocated to DRP participants will be set over the 10 trading days commencing 11 November 2021 and will not include a discount.
Off-market buy-back
Westpac has announced an off-market buy-back of up to $3.5 billion worth of Westpac shares. Westpac’s operating performance and progress on strategic priorities, including the completion of a number of divestments, have contributed to a strong capital position, allowing Westpac to return capital to shareholders.
No other matters have arisen since the year ended 30 September 2021 which are not otherwise dealt with in this report, that have significantly affected or may significantly affect the operations of the Group, the results of its operations or the state of affairs of the Group in subsequent periods.
Directors' declaration
In the Directors' opinion:
(a) the financial statements and notes set out in 'Section 3 - Financial report for the year ended 30 September 2021 are in accordance with the Corporations Act 2001, including:
|
(i) |
complying with Australian Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and |
|
(ii) |
giving a true and fair view of Westpac Banking Corporation and the Group's financial position as at 30 September 2021 and of their performance for the financial year ended on that date; and |
(b) there are reasonable grounds to believe that Westpac will be able to pay its debts as and when they become due and payable.
Note 1 (a) includes a statement that the financial report also complies with International Financial Reporting Standards as issued by the International Accounting Standards Board.
The Directors have been given the declaration by the Chief Executive Officer and the Chief Financial Officer required by section 295A of the Corporations Act 2001.
This declaration is made in accordance with a resolution of the Directors.
For and on behalf of the Board.
|
|
|
|
|
|
|
John McFarlane
Sydney 31 October 2021 |
Peter King Managing Director and Chief Executive Officer |
Management's report on internal control over financial reporting
The following report is required by rules of the US Securities and Exchange Commission.
The management of Westpac is responsible for establishing and maintaining adequate internal control over financial reporting for Westpac as defined in Rule 13a - 15(f) under the Securities Exchange Act of 1934, as amended. Westpac's internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable accounting standards.
Westpac's internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately reflect the transactions and dispositions of the assets of Westpac and its consolidated entities; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable accounting standards, and that receipts and expenditures of Westpac are being made only in accordance with authorizations of management and directors of Westpac and its consolidated entities; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of Westpac and its consolidated entities that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Westpac management, with the participation of the CEO and CFO, assessed the effectiveness of Westpac's internal control over financial reporting as of 30 September 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control-Integrated Framework. Based on this assessment, management has concluded that Westpac's internal control over financial reporting as of 30 September 2021 was effective.
The effectiveness of Westpac's internal control over financial reporting as of 30 September 2021 has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, as stated in its report which is included herein.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Westpac Banking Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Westpac Banking Corporation and its subsidiaries (the “Company”) as of September 30, 2021 and 2020, and the related consolidated income statements, statements of comprehensive income, statements of changes in equity and cash flow statements for each of the three years in the period ended September 30, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021 in conformity with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing on page 130 of the 2021 Annual Report. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
PricewaterhouseCoopers, ABN 52 780 433 757
One International Towers Sydney, Watermans Quay, Barangaroo NSW 2000, GPO BOX 2650 Sydney NSW 2001
T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au
Supplemental Information
The parent entity only information on the face of the consolidated financial statements and other parent entity only disclosures in the notes to the financial statements have been subjected to audit procedures performed in conjunction with the audit of the Company’s consolidated financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the consolidated financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. The supplemental information, which is presented for purposes of additional analysis, is presented on a basis that differs from the consolidated financial statements and is not a required part of the consolidated financial statements presented in accordance with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards as issued by the International Accounting Standards Board. In our opinion, the parent entity only information on the face of the consolidated financial statements and other parent entity only disclosures in the notes to the financial statements are fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Board Audit Committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Provision for expected credit losses on loans and credit commitments
As described in Note 13 to the consolidated financial statements, the provision for expected credit losses on loans and credit commitments (ECL) was $4,999 million at September 30, 2021. ECL are a probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant timeframe determined by evaluating a range of possible outcomes and taking into account the time value of money, past events, current conditions and forecasts of future economic conditions. Management’s model to determine the ECL includes significant judgment in assumptions used to determine when a significant increase in credit risk (SICR) has occurred, estimating forward looking macroeconomic scenarios (MES), applying a probability weighting to
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 133 |
|
Statutory statements
different scenarios and identifying and calculating adjustments to model output (overlays). Economic uncertainty has increased the impact of certain judgements made by management, specifically relating to forward-looking assumptions applied to the probability of default of individual customers and the associated macroeconomic scenarios that are applied across the Company's portfolio. Where customers have received government support payments or granted payment deferrals, management have applied additional judgements outside of their credit models in order to estimate ECL.
The principal considerations for our determination that performing procedures relating to the provision for ECL is a critical audit matter were (i) there was significant judgment by management in determining the ECL, which in turn led to a high degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence related to the ECL model and assumptions, (ii) there was significant judgement and effort in evaluating audit evidence related to the identification and calculation of overlays to the ECL due to the impacts of current conditions and forecasts of future economic conditions; (iii) the nature and extent of audit testing related to critical data elements used in the model; (iv) the audit effort involved the use of professionals with specialized skill and knowledge; and (v) the nature and extent of audit testing related to user access for the relevant IT systems used in determining the provision for ECL.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company's ECL estimation process, which included controls over the data, model and assumptions used in determining the provision for ECL as well as IT general controls related to user access for the relevant IT systems. These procedures also included, among others, (i) the involvement of professionals with specialized skill and knowledge to assist in testing management’s process for determining the provision for ECL by evaluating the appropriateness of the models and the reasonableness of the assumptions; (ii) testing the accuracy and completeness of selected critical data elements that are inputs used in the ECL model: (iii) testing the reasonableness of overlays to the ECL; and (iv) testing the user access to relevant IT systems used in determining the provision for ECL.
Provisions and contingent liabilities
As described in Note 26 to the consolidated financial statements, the Company recorded compliance, regulation and remediation provisions of $1,142 million and litigation and non-lending loss provisions of $117 million at September 30, 2021 (collectively referred to as the “provisions”). The provisions relate to matters of potential misconduct in providing services to customers identified as a result of regulatory action and internal reviews. An assessment of the likely cost to the Company of these matters (including applicable customer refunds and regulatory penalties) is made on a case-by-case basis and specific provisions or disclosures are made where management considers appropriate. Disclosures are also made in Note 26 for contingent liabilities for possible obligations whose existence will be confirmed only by uncertain future events, and present obligations where the transfer of economic resources is not probable or cannot be reliably estimated.
The principal consideration for our determination that performing procedures relating to the provisions and contingent liabilities is a critical audit matter was that there was significant judgment by management to identify contingent liabilities and quantify the provisions, which included assumptions related to the probability of loss and the timing, nature and quantum of related cash outflows. This in turn led to a high degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence related to the provisions and key assumptions and in evaluating the appropriateness of the related disclosure.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management's evaluation of provisions to determine whether a present obligation with a probable cash outflow exists, and can be reliably estimated. For contingent liabilities, these procedures also included testing the effectiveness of controls relating to management's evaluation, including controls over determining whether or not it is possible that a loss has occurred or whether there is a probable outflow from a present obligation. These procedures also included, among others. (i) evaluating the evidence of management's quantification of provisions and the assumptions applied and (ii) assessing the appropriateness of disclosures.
|
|
|
|
|
134 WESTPAC GROUP 2021 ANNUAL REPORT |
|
|
Statutory statements
Impairment of goodwill and other non-financial assets
The Company has an intangible assets balance of $10,109 million (of which $7,599 million is goodwill) as described in Note 25 to the consolidated financial statements, and property and equipment assets of $2,853 million and other assets of $567 million (collectively called “other non-financial assets”) recognized on the consolidated balance sheet at September 30, 2021 which form part of the Company's Cash Generating Units ("CGU"). The annual goodwill impairment test described in Note 25 resulted in impairment charges of $1,156 million in the Westpac Institutional Bank CGU, consisting of $487 million goodwill and $669 million other non-financial assets as disclosed in Note 5. The Company conducts an impairment assessment of goodwill on an annual basis or more frequently if circumstances indicate that the carrying value of the Company's CGUs may be impaired. Potential impairment is identified by comparing the value-in-use of a CGU to its carrying value, including goodwill and non-financial assets. The value-in-use for each of the CGUs is estimated by the Company using a discounted cash flow model. The Company's value-in-use models for the CGUs include significant judgments and assumptions relating to cash flow projections, terminal growth rates, and the discount rate.
The principal considerations for our determination that performing procedures relating to the impairment of goodwill and other non-financial assets is a critical audit matter were (i) there was significant judgment by management when developing key assumptions used in the determination of the value-in-use, which in turn led to a high degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence related to management's cash flow projections, terminal growth rate and discount rate assumptions; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of the controls related to management's impairment assessments which includes testing over the reasonableness of management's key assumptions. These procedures also included, among others (i) testing management’s process for developing the value-in-use estimate of the CGUs including evaluating the appropriateness of the value-in-use methodology; (ii) evaluating the significant assumptions used by management related to management's cash flow projections, terminal growth rate, discount rate; and (iii) the involvement of professionals with specialized skill and knowledge to assist in testing the reasonableness of the discount rate and terminal growth rate assumptions. Evaluating management's assumptions related to the terminal growth rates of the CGUs involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the CGUs (ii) the consistency with external market and industry data and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
Assets and liabilities held for sale
As described in Note 37 to the consolidated financial statements, the balance of assets and liabilities held for sale was $4,188 million and $837 million, respectively, at September 30, 2021. During the year, the Company announced the sale of certain businesses within the Specialist Businesses Division and determined that these businesses met the classification criteria as held for sale and were therefore measured at the lower of carrying amount and fair value less cost to sell.
The principal considerations for our determination that performing procedures relating to the assets and liabilities held for sale is a critical audit matter were (i) there was complexity in evaluating the sales contracts against the classification criteria as held for sale, which in turn lead to a higher degree of auditor effort; (ii) there was significant judgement and effort in evaluating audit evidence related to management's determination of the measurement of individual assets within the disposal group; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management's evaluation and key judgements in determining the classification and measurement of the assets and liabilities held for sale. These procedures also included, among
|
|
|
|
|
|
WESTPAC GROUP 2021 ANNUAL REPORT 135 |
|
Statutory statements
others, (i) reading the relevant sale contracts to obtain an understanding of the terms and conditions and assessing the criteria for the businesses to be recognized and measured as held for sale; (ii) testing the Company's calculation of the gain or loss on sale of each business, including assessing the measurement of individual assets within the disposal group; and (iii) the involvement of professionals with specialized skill and knowledge to assist in assessing tax implications against the requirements of the tax legislation.
|
|
|
|
|
|
|
PricewaterhouseCoopers |
|
|
Sydney, Australia
|
|
|
|
|
|
We have served as the Company's auditor since 1968. |
|
Item 19. Exhibits Index
|
|
|
|
1. |
Constitution (as amended) incorporated by reference to our Form 6-K filed on 14 December 2012. |
|
|
|
|
2. |
|
|
|
|
|
4(c).2 |
|
|
|
|
|
4(c).3 |
|
|
|
|
|
8. |
List of controlled entities – refer to Note 30 to the financial statements in this Annual Report. |
|
|
|
|
12. |
Certifications pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
|
|
|
|
13. |
|
|
|
|
|
15.1 |
|
|
|
|
|
15.2 |
|
|
|
|
|
101.INS |
Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document |
|
|
|
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
104 |
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
Copies of any instrument relating to the long-term debt of Westpac Banking Corporation that is not being attached as an exhibit to this Annual Report on Form 20-F and which does not exceed 10% of the total consolidated assets of Westpac Banking Corporation will be furnished to the SEC upon request.
Signatures
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorised the undersigned to sign this Annual Report on its behalf.
|
|
|
|
WESTPAC BANKING CORPORATION |
|
|
|
|
|
By: /s/ Michael Clayton |
|
|
|
|
|
Michael Clayton |
|
|
|
|
|
General Counsel – Corporate, Treasury and Technology |
|
|
|
|
|
Dated November 3, 2021 |
|
