Australia and New Zealand Banking Group Ltd. — Annual Report 2014

Nov 18, 2014

ANZ Bank New Zealand Limited Annual Report and Registered Bank Disclosure Statement FOR THE YEAR ENDED 30 SEPTEMBER 2014 | NUMBER 75 ISSUED NOVEMBER 2014

ANZ Bank New Zealand Limited

Annual Report and Registered Bank Disclosure Statement For the year ended 30 September 2014

Contents

Contents
General Disclosures	1
Summary of Financial Statements	3
Income Statement	4
Statement of Comprehensive Income	4
Statement of Changes in Equity	5
Balance Sheet	6
Cash Flow Statement	7
Notes to the Financial Statements	8
Directorate and Auditors	77
Conditions of Registration	79
Directors’ Statement	84
Independent Auditor’s Report	85
Index	87

Annual Report

Pursuant to section 211(3) of the Companies Act 1993, the shareholder of the Bank has agreed that the Annual Report of the Bank and the Banking Group need not comply with any of the paragraphs (a), and (e) to (j) of subsection (1) and subsection (2) of section 211.

Accordingly, there is no information to be provided in this Annual Report other than the financial statements for the year ended 30 September 2014 and the audit report on those financial statements.

For and on behalf of the Board of Directors:

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John Judge David Hisco Chairman Executive Director 18 November 2014 18 November 2014

General Disclosures

General Matters

Glossary of Terms

In this Registered Bank Disclosure Statement (Disclosure Statement) unless the context otherwise requires:

• (a) Bank means ANZ Bank New Zealand Limited;

• (b) Banking Group means the Bank and all its controlled entities;

• (c) Immediate Parent Company means ANZ Holdings (New Zealand) Limited;

• (d) Ultimate Parent Bank means Australia and New Zealand Banking Group Limited;

• (e) Overseas Banking Group means the worldwide operations of Australia and New Zealand Banking Group Limited including its controlled entities;

• (f) New Zealand business means all business, operations, or undertakings conducted in or from New Zealand identified and treated as if it were conducted by a company formed and registered in New Zealand;

• (g) NZ Branch means the New Zealand business of the Ultimate Parent Bank;

• (h) ANZ New Zealand means the New Zealand business of the Overseas Banking Group;

• (i) Registered Office is Ground Floor, ANZ Centre, 23-29 Albert Street, Auckland, New Zealand, which is also the Banking Group’s address for service;

• (j) RBNZ means the Reserve Bank of New Zealand;

• (k) APRA means the Australian Prudential Regulation Authority;

• (l) the Order means the Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014; and

• (m) Any term or expression which is defined in, or in the manner prescribed by, the Order shall have the meaning given in or prescribed by the Order.

The Disclosure Statement has been issued in accordance with the Order.

The Bank is incorporated under the Companies Act 1993. The Bank is wholly owned by its Immediate Parent Company and ultimately by the Ultimate Parent Bank. The Immediate Parent Company of the Bank is incorporated in New Zealand and owned by ANZ Funds Pty Limited and the Ultimate Parent Bank (both incorporated in Australia). The address for service for the Ultimate Parent Bank is ANZ Centre Melbourne, Level 9, 833 Collins Street, Docklands, Victoria 3008, Australia.

The Immediate Parent Company has the power under the Bank’s Constitution to appoint any person as a Director of the Bank either to fill a casual vacancy or as an additional Director or to remove any person from the office of Director, from time to time by giving written notice to the Bank. No appointment of a new Director may occur unless the RBNZ confirms that it does not object to the appointment.

Credit Rating Information

As at 18 November 2014 the Bank has three credit ratings, which are applicable to its long-term senior unsecured obligations which are payable in New Zealand in New Zealand dollars.

The Bank’s Credit Ratings, which have not changed in the last two years, are:

two years, are:
	Current Credit
Rating Agency	Rating	Qualification
Standard & Poor’s	AA-	Outlook Stable
Moody’s Investors Service	Aa3	Outlook Stable
Fitch Ratings	AA-	Outlook Stable

ANZ Bank New Zealand Limited

2

General Disclosures

The following table describes the credit rating grades available:

The following table describes the credit available:	The following table describes the credit available:	rating grades
Standard &		Moody's Fitch Ratings
Poor's		Investors Service
The following grades display investment grade characteristics:
Ability to repay principal and AAA Aaa AAA
interest is extremely strong. This is the highest investment category.
Very strong ability to repay AA Aa AA
principal and interest.
Strong ability to repay principal A A A
and interest although somewhat susceptible to adverse changes in economic, business or financial conditions.
Adequate ability to repay BBB Baa BBB
principal and interest. More vulnerable to adverse changes.
The following grades have predominantly speculative
characteristics:
Significant uncertainties exist	BB Ba BB
which could affect the payment
of principal and interest on a
timelybasis.
Greater vulnerability and	B B B
therefore greater likelihood of
default.
Likelihood of default now	CCC Caa CCC
considered high. Timely
repayment of principal and
interest is dependent on
favourable financial conditions.
Highest risk of default.	CC to C Ca to C CC to C
Obligations currentlyin default.	D - RD & D

Credit ratings from Standard & Poor's and Fitch Ratings may be modified by the addition of "+" or "-" to show the relative standing within the “AA” to “B” categories. Moody's Investors Service applies numerical modifiers 1, 2, and 3 to each of the “Aa” to “Caa” classifications, with 1 indicating the higher end and 3 the lower end of the rating category.

Material Financial Support

In accordance with requirements issued by APRA pursuant to its Prudential Standards, the Ultimate Parent Bank may not provide material financial support to the Bank contrary to the following:

• the Ultimate Parent Bank should not undertake any third party dealings with the prime purpose of supporting the business of the Bank;

  • approval) is required before entering exceptionally large exposures;

• the impact on the Ultimate Parent Bank’s capital and liquidity position and its ability to continue operating in the event of a failure by the Bank; and

• the level of exposure to the Bank not exceeding:

• 50% on an individual exposure basis; and

• 150% in aggregate (being exposures to all similar regulated entities related to the Ultimate Parent Bank)

of the Ultimate Parent Bank’s capital base.

Additionally, the Ultimate Parent Bank may not provide material financial support in breach of the Australian Banking Act (1959). This requires APRA to exercise its powers and functions for the protection of a bank’s depositors and in the event of a bank becoming unable to meet its obligations or suspending payment, the assets of the bank in Australia shall be available to meet that bank’s deposit liabilities in Australia in priority to all other liabilities of the bank.

The Ultimate Parent Bank has not provided material financial support to the Bank contrary to any of the above requirements.

Guarantors

No material obligations of the Bank are guaranteed as at 18 November 2014.

ANZNZ Covered Bond Trust

Certain debt securities (Covered Bonds) issued by the Bank’s wholly owned subsidiary, ANZ New Zealand (Int’l) Limited, are guaranteed by ANZNZ Covered Bond Trust Limited (the Covered Bond Guarantor), solely in its capacity as trustee of ANZNZ Covered Bond Trust. The Covered Bond Guarantor has guaranteed the payment of interest and principal of Covered Bonds with a carrying value as at 30 September 2014 of $3,928 million, pursuant to a guarantee which is secured over a pool of assets. The Covered Bond Guarantor’s address for service is Level 35, Vero Centre, 48 Shortland Street, Auckland, New Zealand. The Covered Bond Guarantor is not a member of the Banking Group and has no credit ratings applicable to its long term senior unsecured obligations payable in New Zealand dollars. The Covered Bonds have been assigned a long term rating of Aaa and AAA by Moody’s Investors Service and Fitch Ratings respectively. Details of the pool of assets that secure this guarantee are provided in Note 34.

• the Ultimate Parent Bank should not hold unlimited exposures (should be limited as to specified time and amount) in the Bank (e.g. not provide a general guarantee covering any of the Bank’s obligations);

• the Ultimate Parent Bank should not enter into cross default clauses whereby a default by the Bank on an obligation (whether financial or otherwise) is deemed to trigger a default of the Ultimate Parent Bank in its obligations;

• the Board of the Ultimate Parent Bank in determining limits on acceptable levels of exposure to the Bank should have regard to:

• the level of exposure that would be approved to third parties of broadly equivalent credit status. In this regard, prior consultation (and in some cases

ANZ Bank New Zealand Limited

3

Summary of Financial Statements

		Banking Group
	Year t	o Year to Year to Year to Year to
$ millions	30/09/2014 30/09/20131 30/09/2012 30/09/2011 30/09/2010
Interest income	6,272 5,957 6,017 6,179 5,876
Interest expense	3,529 3,344 3,335 3,620 3,457
Net interest income	2,743 2,613 2,682 2,559 2,419
Non-interest income	1,085 823 1,006 856 744
Operating income	3,828 3,436 3,688 3,415 3,163
Operating expenses	1,489 1,512 1,742 1,686 1,565
Credit impairment charge / (release)	(16) 63 193 178 436
Profit before income tax	2,355 1,861 1,753 1,551 1,162
Income tax expense	639 490 428 452 335
Profit after income tax	1,716 1,371 1,325 1,099 827
Dividends paid	(2,353) (1,065) (1,150) (700) (600)
Share capital issued	970 300 - - -
	As at As at As at As at As at
$ millions	30/09/2014 30/09/20131 30/09/2012 30/09/2011 30/09/2010
Total impaired assets	634 901 1,366 1,726 2,004
Total assets	128,915 120,444 121,564 121,440 116,458
Total liabilities	117,134 108,990 110,653 110,615 106,012
Non-controlling interests	- - - - 1
Equity	11,781 11,454 10,911 10,825 10,446

The amounts included in this summary have been taken from the audited financial statements of the Banking Group.

1 Comparative amounts have changed. Refer to notes 1 and 35 for details.

ANZ Bank New Zealand Limited

4

Income Statement

Income Statement	Income Statement
Banking Group		Bank
Year to Year to		Year to Year to
$ millions Note 30/09/2014 30/09/20131		30/09/2014 30/09/20131
Interest income 4 6,272 5,957		6,723 6,272
Interest expense 5 3,529 3,344		4,359 4,021
Net interest income 2,743 2,613		2,364 2,251
Net trading gains 4 210 163		210 162
Net funds management and insurance income 4 325 234		74 73
Other operating income 4 547 419		865 778
Share of associates' profit 3 7		- -
Operating income 3,828 3,436		3,513 3,264
Operating expenses 5 1,489 1,512		1,443 1,216
Profit before credit impairment and income tax 2,339 1,924		2,070 2,048
Credit impairment charge / (release) 13 (16) 63		(28) 56
Profit before income tax 2,355 1,861		2,098 1,992
Income tax expense 6 639 490		539 416
Profit after income tax	1,716 1,371	1,559 1,576

Statement of Comprehensive Income

Statement of Comprehensive Income	Statement of Comprehensive Income
	**Banking Group **	Bank
	Year to Year to	Year to Year to
$ millions	30/09/2014 30/09/20131	30/09/2014 30/09/20131
Profit after income tax	1,716 1,371	1,559 1,576
Items that will not be reclassified to profit or loss
Actuarial gain on defined benefit schemes	35 71	35 71
Income tax expense relating to items not reclassified	(10) (20)	(10) (20)
Total items that will not be reclassified to profit or loss	25 51	25 51
Items that may be reclassified subsequently to profit or loss
Unrealised losses recognised directly in equity	(2) (138)	(2) (138)
Realised gains transferred to the income statement	(41) (21)	(41) (21)
Income tax credit relating to items that may be reclassified	12 45	12 45
Total items that may be reclassified subsequently to profit or loss	(31) (114)	(31) (114)
Total comprehensive income for the year	1,710 1,308	1,553 1,513

1 Comparative amounts have changed. Refer to notes 1 and 35 for details.

The notes to the financial statements form part of and should be read in conjunction with these financial statements.

ANZ Bank New Zealand Limited

5

Statement of Changes in Equity

Statement of Changes in Equity	Statement of Changes in Equity
Banking Group
Available- for-sale revaluation Cash flow hedging Retained
$ millions Note Share capital reserve reserve earnings Total equity
As at 1 October 20121 6,943 (3) 141 3,830 10,911
Profit after income tax - - - 1,371 1,371
Unrealised gains / (losses) recognised directly in equity - 1 (139) - (138)
Realised gains transferred to the income statement - - (21) - (21)
Actuarial gain on defined benefit schemes1 - - - 71 71
Income tax credit / (expense) on items recognised directly in equity1 - - 45 (20) 25
Total comprehensive income for the year - 1 (115) 1,422 1,308
Preference shares issued 25 300 - - - 300
Ordinary dividend paid 25 - - - (1,065) (1,065)
As at 30 September 2013 1 7,243 (2) 26 4,187 11,454
Profit after income tax - - - 1,716 1,716
Unrealised gains / (losses) recognised directly in equity - 3 (5) - (2)
Realised gains transferred to the income statement - - (41) - (41)
Actuarial gain on defined benefit schemes - - - 35 35
Income tax credit / (expense) on items recognised directly in equity - (1) 13 (10) 2
Total comprehensive income for the year - 2 (33) 1,741 1,710
Ordinary shares issued 25 970 - - - 970
Ordinary dividend paid 25 - - - (2,340) (2,340)
Preference dividend paid 25 - - - (13) (13)
As at 30 September 2014 8,213 - (7) 3,575 11,781
Bank
Available- for-sale revaluation Cash flow hedging Retained
$ millions Share capital reserve reserve earnings Total equity
As at 1 October 20121 6,943 (3) 141 3,103 10,184
Profit after income tax1 - - - 1,576 1,576
Unrealised gains / (losses) recognised directly in equity - 1 (139) - (138)
Realised gains transferred to the income statement - - (21) - (21)
Actuarial gain on defined benefit schemes1 - - - 71 71
Income tax credit / (expense) on items recognised directly in equity1 - - 45 (20) 25
Total comprehensive income for the year - 1 (115) 1,627 1,513
Preference shares issued 25 300 - - - 300
Ordinary dividend paid 25 - - - (1,065) (1,065)
As at 30 September 20131 7,243 (2) 26 3,665 10,932
Profit after income tax - - - 1,559 1,559
Unrealised gains / (losses) recognised directly in equity - 3 (5) - (2)
Realised gains transferred to the income statement - - (41) - (41)
Actuarial gain on defined benefit schemes - - - 35 35
Income tax credit / (expense) on items recognised directly in equity - (1) 13 (10) 2
Total comprehensive income for the year - 2 (33) 1,584 1,553
Ordinary shares issued 25 970 - - - 970
Ordinary dividend paid 25 - - - (2,340) (2,340)
Preference dividend paid 25 - - - (13) (13)
**As at 30 September 2014 **	8,213 - (7) 2,896 11,102

1 Comparative amounts have changed. Refer to notes 1 and 35 for details.

The notes to the financial statements form part of and should be read in conjunction with these financial statements.

ANZ Bank New Zealand Limited

6

Balance Sheet

Balance Sheet
Banking Group	Bank
$ millions Note 30/09/2014 30/09/20131 1/10/20121 30/09/2014 30/09/20131 1/10/20121
Assets
Cash 8 1,822 2,206 2,780	1,822 2,206 2,780
Settlement balances receivable 855 514 227	858 514 227
Collateral paid 783 1,002 1,256	783 1,002 1,256
Trading securities 9 11,750 10,320 12,338	11,750 10,319 12,338
Investments backing insurance contract liabilities 190 172 142	- - -
Derivative financial instruments 10 11,404 9,518 12,753	11,408 9,522 12,788
Current tax assets - - 15	7 62 79
Available-for-sale assets 11 772 942 157	770 940 154
Net loans and advances 12 96,299 90,837 86,915	109,668 100,769 96,175
Other assets 16 648 567 545	701 609 548
Insurance contract assets 470 399 408	- - -
Investments in subsidiaries and associates 15 88 98 99	4,749 4,864 6,609
Deferred tax assets 6 - 45 101	63 134 193
Premises and equipment 380 376 323	54 61 74
Goodwill and other intangible assets 17 3,454 3,448 3,505	3,312 3,299 3,317
Total assets 128,915 120,444 121,564	145,945 134,301 136,538
Interest earning and discount bearing assets 111,914 105,866 104,095	125,071 115,614 113,177
Liabilities
Settlement balances payable 2,296 1,428 1,525	2,771 1,767 1,865
Collateral received 800 438 257	800 438 257
Deposits and other borrowings 18 84,019 78,816 74,841	115,223 105,805 105,317
Derivative financial instruments 10 10,205 10,243 13,930	10,237 10,252 13,930
Current tax liabilities 67 3 -	- - -
Deferred tax liabilities 6 60 - -	- - -
Payables and other liabilities 19 1,297 1,195 1,349	1,209 1,089 1,025
Provisions 20 204 229 339	182 187 292
Bonds and notes 21 17,042 15,494 17,244	3,277 2,687 2,500
Subordinated debt 22 1,144 1,144 1,168	1,144 1,144 1,168
Total liabilities 117,134 108,990 110,653	134,843 123,369 126,354
Net assets 11,781 11,454 10,911	11,102 10,932 10,184
Equity
Share capital 25 8,213 7,243 6,943	8,213 7,243 6,943
Reserves (7) 24 138	(7) 24 138
Retained earnings 3,575 4,187 3,830	2,896 3,665 3,103
Total equity 11,781 11,454 10,911	11,102 10,932 10,184
Interest and discount bearing liabilities 97,809 91,061 89,299	115,248 105,764 105,017

For and on behalf of the Board of Directors:

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John Judge Chairman 18 November 2014

David Hisco Executive Director 18 November 2014

1 Comparative amounts have changed. Refer to notes 1 and 35 for details.

The notes to the financial statements form part of and should be read in conjunction with these financial statements.

ANZ Bank New Zealand Limited

7

Cash Flow Statement

Cash Flow Statement
Banking Group	Bank
Year to Year to	Year to Year to
$ millions Note 30/09/2014 30/09/20131	30/09/2014 30/09/20131
Cash flows from operating activities
Interest received 6,189 5,916	6,609 6,226
Dividends received 4 4	140 254
Net funds management & insurance income 261 236	74 73
Fees and other income received 686 637	867 710
Interest paid (3,429) (3,368)	(4,233) (4,020)
Operating expenses paid (1,430) (1,550)	(1,400) (1,493)
Income taxes paid (468) (390)	(411) (314)
Cash flows from operating profits before changes in operating assets and liabilities 1,813 1,485	1,646 1,436
Net changes in operating assets and liabilities:
Change in settlements receivable 167 (134)	164 (135)
Change in collateral paid 219 254	219 254
Change in trading securities (1,025) 1,558	(1,026) 1,559
Change in derivative financial instruments (480) 555	(976) 608
Change in available-for-sale assets 188 (766)	188 (767)
Change in insurance investment assets (18) (30)	- -
Change in loans and advances (8,873) (7,182)	(12,163) (7,859)
Proceeds from sale of loans and advances to NZ Branch 3,393 3,144	3,393 3,144
Change in settlements payable 33 (31)	37 (31)
Change in collateral received 362 181	362 181
Change in deposits and other borrowings 5,498 3,512	9,460 (399)
Net changes in operating assets and liabilities (536) 1,061	(342) (3,445)
Net cash flows provided by / (used in) operating activities 31 1,277 2,546	1,304 (2,009)
Cash flows from investing activities
Proceeds from sale of shares in associates 9 1	- -
Proceeds from sale of premises and equipment 9 -	- -
Proceeds from sale of subsidiaries - 68	- 70
Purchase of intangible assets (43) (27)	(43) (27)
Purchase of premises and equipment (77) (115)	(18) (12)
Net cash flows provided by / (used in) investing activities (102) (73)	(61) 31
Cash flows from financing activities
Proceeds from issue of bonds and notes 4,431 2,167	1,025 200
Proceeds from issue of subordinated debt - 12	- 12
Proceeds from issue of ordinary shares 970 -	970 -
Proceeds from issue of preference shares - 300	- 300
Proceeds from redemption of shares in subsidiaries - -	115 1,907
Redemptions of bonds and notes (3,684) (4,611)	(461) (100)
Change in funding from Immediate Parent Company (913) 199	(913) 199
Dividends paid (2,353) (1,065)	(2,353) (1,065)
Net cash flows provided by / (used in) financing activities (1,549) (2,998)	(1,617) 1,453
Net decrease in cash and cash equivalents (374) (525)	(374) (525)
Cash and cash equivalents at beginning of the year 2,204 2,729	2,204 2,729
Cash and cash equivalents at end of the year 31 1,830 2,204	1,830 2,204

1 Comparative amounts have changed. Refer to notes 1 and 35 for details.

The notes to the financial statements form part of and should be read in conjunction with these financial statements.

ANZ Bank New Zealand Limited

8

Notes to the Financial Statements

1. Significant Accounting Policies

(a) Basis of preparation

(i) Statement of compliance

These financial statements have been prepared in accordance with the requirements of the Companies Act 1993, the Financial Reporting Act 1993 and the Order. The Bank’s financial statements are for ANZ Bank New Zealand Limited as a separate entity and the Banking Group’s financial statements are for the Bank’s consolidated group, which includes subsidiaries and associates.

These financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice. They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards, as appropriate for profit-oriented entities. The financial statements comply with International Financial Reporting Standards (IFRS).

The principal accounting policies adopted in the preparation of these financial statements are set out below.

(ii) Use of estimates and assumptions

Preparation of the financial statements requires the use of management judgement, estimates and assumptions that affect reported amounts and the application of policies. Actual results may differ from these estimates.

Discussion of the critical accounting estimates, which include complex or subjective decisions or assessments, are covered in note 2. Such estimates will require review in future periods.

(iii) Basis of measurement

The financial statements have been prepared in accordance with the historical cost basis except that the following assets and liabilities are stated at their fair value:

• derivative financial instruments, including in the case of fair value hedging, the fair value adjustment on the underlying hedged exposure;

• available-for sale financial assets;

• financial instruments held for trading;

• financial instruments designated at fair value through profit and loss.

(iv) Changes in accounting policies and application of new accounting standards

All new and amending NZ IFRSs applicable for the first time to the Banking Group in the year ended 30 September 2014 have been applied to these financial statements effective from their required date of application. The initial application of these standards and interpretations have not resulted in any material change to the Banking Group’s reported result or financial position, and have largely resulted in changes to disclosures.

provisions, with the net impact of initial application recognised in retained earnings as at 1 October 2012. The balances of payables and other liabilities and the associated deferred tax asset have been restated for subsequent periods.

• Cash and cash equivalents: Loans and advances with financial institution counterparties with original maturities of less than 90 days and remittances in transit have been removed from the definition of cash equivalents. These balances are now included in net loans and advances and settlement balances receivable respectively. The associated cash inflows/outflows form part of cash flows from operating activities. The Banking Group considers that this change better reflects the characteristics of those financial instruments.

(v) Rounding

The amounts in the financial statements have been rounded to the nearest million dollars, except where otherwise stated.

(vi) Comparatives

In addition to restatements resulting from the initial application of the amendment to NZ IAS 19, certain amounts in the comparative information have been reclassified to ensure consistency with the current year’s presentation. Further information on material changes to comparative information is included in note 35.

(vii) Principles of consolidation

Subsidiaries

The consolidated financial statements of the Banking Group comprise the financial statements of the Bank and all its subsidiaries.

An entity, including a structured entity, is considered a subsidiary of the Banking Group when it is determined that control over the entity exists. Control is deemed to exist when the Banking Group is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Power is assessed by examining existing rights that give the Banking Group the current ability to direct the relevant activities of the entity. At times, the determination of control can be judgemental. Further detail on the judgement involved in assessing control has been provided in note 2.

The effect of all transactions between entities in the Banking Group is eliminated. Where subsidiaries have been sold during the year, their operating results have been included to the date of disposal. When control ceases, the assets and liabilities of the subsidiary and other components of equity are derecognised. Any resulting gain or loss is recognised in profit or loss.

In the Bank’s financial statements, investments in subsidiaries are carried at cost less accumulated impairment losses.

The accounting policies are consistent with those of the previous financial year except as noted below.

• Defined benefit liabilities: The amendments to NZ IAS 19 Employee Benefits have been applied

retrospectively, in accordance with transitional

ANZ Bank New Zealand Limited

9

Notes to the Financial Statements

Associates

The Banking Group applies the equity method of accounting for associates.

The Banking Group’s share of results of associates is included in the consolidated income statement. Shares in associates are carried in the consolidated balance sheet at cost plus the Banking Group’s share of post acquisition net assets less accumulated impairment. Interests in associates are reviewed for any indication of impairment at least at each reporting date. Where an indication of the impairment exists, the recoverable amount of the associate is determined as the higher of the associate’s fair value less costs to sell and its value in use. A discounted cash flow methodology and other methodologies, such as the capitalisation of earnings method, are used to determine the reasonableness of the valuation.

In the Bank’s financial statements investments in subsidiaries and associates are carried at cost less accumulated impairment losses.

(viii) Foreign currency translation

Functional and presentation currency

Items included in the financial statements of each of the Banking Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The Banking Group’s financial statements are presented in New Zealand dollars, which is the Banking Group’s functional and presentation currency.

Foreign currency transactions

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities resulting from foreign currency transactions are subsequently translated at the spot rate at reporting date.

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different to those at which they were initially recognised or included in a previous financial report, are recognised in the income statement in the period in which they arise.

Translation differences on non-monetary items measured at fair value through profit or loss are reported as part of the fair value gain or loss on these items.

Translation differences on non-monetary items measured at fair value through equity, such as equities classified as available-for-sale financial assets, are included in the available-for-sale revaluation reserve in equity.

(b) Income recognition

Income is recognised to the extent that it is probable that economic benefits will flow to the Banking Group and that revenue can be reliably measured.

(i) Interest income

Interest income is recognised as it accrues, using the effective interest method.

The effective interest method calculates the amortised cost of a financial asset or financial liability and allocates the interest income or interest expense, including any fees

(c)

and directly related transaction costs that are an integral part of the effective interest rate, over the expected life of the financial asset or liability so as to achieve a constant yield on the financial asset or liability.

For assets subject to prepayment, expected life is determined on the basis of the historical behaviour of the particular asset portfolio, taking into account contractual obligations and prepayment experience assessed on a regular basis.

(ii) Fee and commission income

Fees and commissions received that are integral to the effective interest rate of a financial asset are recognised using the effective interest method. For example, loan commitment fees, together with related direct costs, are deferred and recognised as an adjustment to the effective interest rate on a loan once drawn. Commitment fees to originate a loan which is unlikely to be drawn down are recognised as fee income as the service is provided.

Fees and commissions that relate to the execution of a significant act (for example, advisory or arrangement services, placement fees and underwriting fees) are recognised when the significant act has been completed.

Fees charged for providing ongoing services (for example, maintaining and administering existing facilities) are recognised as income over the period the service is provided.

(iii) Dividend income

Dividends are recognised as revenue when the right to receive payment is established.

(iv) Gain or loss on sale of assets

The gain or loss on the disposal of assets is determined as the difference between the carrying amount of the assets at the time of disposal and the proceeds of disposal net of incremental disposal costs. This is recognised as an item of other income in the period in which the significant risks and rewards of ownership are transferred to the buyer.

Expense recognition

Expenses are recognised in the income statement on an accruals basis.

(i) Interest expense

Interest expense on financial liabilities measured at amortised cost is recognised in the income statement as it accrues using the effective interest method.

(ii) Loan origination expenses

Certain loan origination expenses are an integral part of the effective interest rate of a financial asset measured at amortised cost. These loan origination expenses include:

• fees and commissions payable to brokers and certain customer incentive payments in respect of originating lending business; and

• other expenses of originating lending business, such as external legal costs and valuation fees, provided these are direct and incremental costs related to the issue of a financial asset.

Such loan origination expenses are initially recognised as part of the cost of acquiring the financial asset and amortised as part of the effective yield of the financial

ANZ Bank New Zealand Limited

10

Notes to the Financial Statements

asset over its expected life using the effective interest method.

(iii) Lease payments

Leases entered into by the Banking Group as lessee are predominantly operating leases, and the operating lease payments are recognised as an expense on a straight-line basis over the lease term.

(d) Income tax

(i) Income tax expense

Income tax on earnings for the year comprises current and deferred tax and is based on the applicable tax law. It is recognised in the income statement as tax expense, except when it relates to items credited directly to equity, in which case it is recorded in equity, or where it arises from the initial accounting for a business combination, in which case it is included in the determination of goodwill.

(ii) Current tax

Current tax is the expected tax payable on taxable income for the year, based on tax rates (and tax laws) which are enacted or substantively enacted by the reporting date and including any adjustment for tax payable in previous periods. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

(iii) Deferred tax

Deferred tax is accounted for using the comprehensive tax balance sheet method. It is generated by temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base.

Deferred tax assets, including those related to the tax effects of income tax losses and credits available to be carried forward, are recognised only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences or unused tax losses and credit can be utilised.

Deferred tax liabilities are recognised for all taxable temporary differences, other than those relating to taxable temporary differences arising from goodwill. They are also recognised for taxable temporary differences arising on investments in subsidiaries, branches, associates and joint ventures, except where the Banking Group is able to control the reversal of the temporary differences and it is probable that temporary differences will not reverse in the foreseeable future. Deferred tax assets associated with these interests are recognised only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and there will be sufficient taxable profits against which to utilise the benefits of the temporary difference.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates and tax laws that have been enacted or substantively enacted by the reporting date. The measurement reflects the tax consequences that would follow from the manner in which the Banking

Group, at the reporting date, recovers or settles the carrying amount of its assets and liabilities.

(iv) Offsetting

Current and deferred tax assets and liabilities are offset only to the extent that they relate to income taxes imposed by the same taxation authority, there is a legal right and intention to settle on a net basis and it is allowed under the tax law of the relevant jurisdiction.

(e) Assets

Financial assets

(i) Financial assets and liabilities at fair value through profit or loss

Trading securities are financial instruments acquired principally for the purpose of selling in the short-term or which are a part of a portfolio which is managed for shortterm profit-taking. Trading securities are initially recognised and subsequently measured in the balance sheet at their fair value.

Derivatives that are not effective accounting hedging instruments are carried at fair value through profit or loss. In addition, certain financial assets and liabilities are designated and measured at fair value through profit or loss where the following applies:

• the asset represents investments backing insurance policy liabilities;

• doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets and liabilities, or recognising the gains or losses thereon, on different bases;

• a group of financial assets or financial liabilities or both is managed and its performance evaluated on a fair value basis; or

• the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Changes in the fair value (gains or losses) of these financial instruments are recognised in the income statement in the period in which they occur.

Purchases and sales of trading securities are recognised on trade date.

(ii) Derivative financial instruments

Derivative financial instruments are contracts whose value is derived from one or more underlying price index or other variables. They include swaps, forward rate agreements, futures, options and combinations of these instruments.

Derivative financial instruments are entered into for trading purposes (including customer-related reasons) or for hedging purposes (where the derivative instruments are used to hedge the Banking Group’s exposures to interest rate risk, currency risk, price risk, credit risk and other exposures relating to non-trading positions).

Derivative financial instruments are recognised initially at fair value with gains or losses from subsequent measurement at fair value being recognised in the income

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Notes to the Financial Statements

statement. Valuation adjustments are integral in determining the fair value of derivatives. This includes a credit valuation adjustment (CVA) to reflect the credit worthiness of the counterparty and funding valuation adjustment (FVA) to account for the funding cost inherent in the portfolio.

Where the derivative is designated and is effective as a hedging instrument, the timing of the recognition of any resultant gain or loss in the income statement is dependent on the hedging designation. These hedging designations and associated accounting are as follows:

Fair value hedge

Where the Banking Group hedges the fair value of a recognised asset or liability or firm commitment, changes in the fair value of the derivative designated as a fair value hedge are recognised in the income statement. Changes in the fair value of the hedged item attributable to the hedged risk are reflected in adjustments to the carrying value of the hedged item, which are also recognised in the income statement.

Hedge accounting is discontinued when the hedge instrument expires or is sold, terminated, exercised or no longer qualifies for hedge accounting. The resulting adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to the income statement over the period to maturity of the hedged item. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the income statement.

Cash flow hedge

The Banking Group designates derivatives as cash flow hedges where the instrument hedges the variability in cash flows of a recognised asset or liability, a foreign exchange component of a firm commitment, or a highly probable forecast transaction. The effective portion of changes in the fair value of derivatives qualifying and designated as cash flow hedges is deferred to the hedging reserve, which forms part of shareholders’ equity. Any ineffective portion is recognised immediately in the income statement. Amounts deferred in equity are recognised in the income statement in the period during which the hedged forecast transactions take place.

When the hedge expires, is sold, terminated, exercised, or no longer qualifies for hedge accounting, the cumulative amount deferred in equity remains in the hedging reserve, and is subsequently transferred to the income statement when the hedged item is recognised in the income statement.

When a forecast hedged transaction is no longer expected to occur, the amount deferred in equity is recognised immediately in the income statement.

Derivatives that do not qualify for hedge accounting

All gains and losses from changes in the fair value of derivatives that are not designated in a hedging relationship but are entered into to manage the interest rate and foreign exchange risk of the Banking Group are recognised in the income statement. Under certain circumstances, the component of the fair value change in the derivative which relates to current period realised and

accrued interest is included in net interest income. The remainder of the fair value movement is included in other income.

(iii) Available-for-sale assets

Available-for-sale assets comprise non-derivative financial assets which the Banking Group designates as availablefor-sale but which are not deemed to be held principally for trading purposes, and include equity investments and quoted debt securities.

They are initially recognised at fair value plus transaction costs. Subsequent gains or losses arising from changes in fair value are included as a separate component of equity in the available-for-sale revaluation reserve. When the asset is sold, the cumulative gain or loss relating to the asset is transferred to the income statement.

Where there is objective evidence of impairment on an available-for-sale asset, the cumulative loss related to that asset is removed from equity and recognised in the income statement, as an impairment expense for debt instruments or as non-interest income for equity instruments. If, in a subsequent period, the amount of an impairment loss relating to an available-for-sale debt instrument decreases and the decrease can be linked objectively to an event occurring after the impairment event, the loss is reversed through the income statement through the impairment expense line.

Purchases and sales of available-for-sale financial assets are recognised on trade date, being the date on which the Banking Group commits to purchase or sell the asset.

(iv) Net loans and advances

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Banking Group provides money to a debtor with no intention of trading the loans and advances. The loans and advances are initially recognised at fair value plus transaction costs that are directly attributable to the issue of the loan or advance. They are subsequently measured at amortised cost using the effective interest method, unless specifically designated on initial recognition at fair value through profit or loss.

All loans are graded according to the level of credit risk.

Net loans and advances include direct finance provided to customers such as bank overdrafts, credit cards, term loans, finance lease receivables and commercial bills.

Impairment of loans and advances

Loans and advances are reviewed at least at each reporting date for impairment. Credit impairment provisions are raised for exposures that are known to be impaired. Exposures are impaired and impairment losses are recorded if, and only if, there is objective evidence of impairment as a result of one or more loss events, that occurred after the initial recognition of the loan and prior to the reporting date, and that loss event, or events, has had an impact on the estimated future cash flows of the individual loan or the collective portfolio of loans that can be reliably estimated.

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Notes to the Financial Statements

Impairment is assessed for assets that are individually significant (or on a portfolio basis for small value loans) and then on a collective basis for those exposures not individually known to be impaired.

Exposures that are assessed collectively are placed in pools of similar assets with similar risk characteristics. The required provision is estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the collective pool. The historical loss experience is adjusted based on current observable data such as changed economic conditions. The provision also takes account of the impact of inherent risk of large concentrated losses within the portfolio and an assessment of the economic cycle.

The estimated impairment losses are measured as the difference between the asset’s carrying amount and the estimated future cash flows discounted to their present value. As this discount unwinds during the period between recognition of impairment and recovery of the cash flow, it is recognised in interest income. The process of estimating the amount and timing of cash flows involves considerable management judgement. These judgements are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Impairment of capitalised acquisition expenses is assessed through comparing the actual behaviour of the portfolio against initial expected life assumptions.

The provision for impairment loss (individual and collective) is deducted from loans and advances in the balance sheet and the movement for the reporting period is reflected in the income statement.

When a loan is uncollectible, either partially or in full, it is written off against the related provision for loan impairment. Unsecured facilities are normally written-off when they become 180 days past due or earlier in the event of the customer's bankruptcy or similar legal release from the obligation. However, a certain level of recoveries is expected after the write-off, which is reflected in the amount of the provision for credit losses. In the case of secured facilities, remaining balances are written-off after proceeds from the realisation of collateral have been received, if there is a shortfall.

Where impairment losses recognised in previous periods have subsequently decreased or no longer exist, such impairment losses are reversed in the income statement.

A provision is also raised for off-balance sheet items such as commitments that are considered likely to result in an expected loss.

(v) Lease receivables

Contracts to lease assets and hire purchase agreements are classified as finance leases if they transfer substantially all the risks and rewards of ownership of the asset to the customer or an unrelated third party. All other lease contracts are classified as operating leases.

(vi) Repurchase agreements

Securities sold under repurchase agreements are retained in the financial statements where substantially all the risks and rewards of ownership remain with the Banking Group,

and a counterparty liability is disclosed under deposits and other borrowings. The difference between the sale price and the repurchase price is accrued over the life of the repurchase agreement and charged to interest expense in the income statement.

Securities purchased under agreements to resell, where the Banking Group does not acquire the risks and rewards of ownership, are recorded as cash or net loans and advances depending on the term of the agreement. The security is not included in the balance sheet. Interest income is accrued on the underlying loan amount.

Securities borrowed are not recognised in the balance sheet, unless these are sold to third parties, at which point the obligation to repurchase is recorded as a financial liability at fair value with fair value movements included in the income statement.

(vii) Derecognition

The Banking Group enters into transactions where it transfers financial assets recognised on its balance sheet yet retains either all the risks and rewards of the transferred assets or a portion of them. If all, or substantially all, the risks and rewards are retained, the transferred assets are not derecognised from the balance sheet.

In transactions where substantially all the risks and rewards of ownership of a financial asset are neither retained nor transferred, the Banking Group derecognises the asset if control over the asset is lost. In transfers where control over the asset is retained, the Banking Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. The rights and obligations retained or created in the transfer are recognised separately as assets and liabilities as appropriate.

Non-financial assets

(viii) Goodwill

Goodwill represents the excess of the purchase consideration over the fair value of the identifiable net assets of a controlled entity at the date of gaining control. Goodwill is recognised as an asset and not amortised, but is assessed for impairment at least annually or more frequently if there is an indication that the goodwill may be impaired. Where the assessment results in the goodwill balance exceeding the value of expected future benefits, the difference is charged to the income statement. Any impairment of goodwill is not subsequently reversed.

(f) Liabilities

Financial liabilities

(i) Deposits and other borrowings

Deposits and other borrowings include certificates of deposit, interest bearing deposits, UDC secured investments, commercial paper and other related interest and non-interest bearing financial instruments. Deposits and other borrowings, excluding commercial paper, are initially recognised at fair value plus transaction costs and subsequently measured at amortised cost. The interest expense is recognised using the effective interest method. Commercial paper is designated at fair value through

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Notes to the Financial Statements

profit or loss, with fair value movements recorded directly in the income statement, which reflects the basis on which it is managed.

(ii) Bonds, notes and subordinated debt

Bonds, notes and subordinated debt are accounted for in the same way as deposits and other borrowings, except for those bonds and notes which are designated at fair value through profit or loss on initial recognition, with fair value movements recorded in the income statement.

(iii) Financial guarantee contracts

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due. Financial guarantees are issued in the ordinary course of business, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given; typically this is the premium received. Subsequent to initial recognition, the Banking Group's liabilities under such guarantees are measured at the higher of their amortised amount and the best estimate of the expenditure required to settle any financial obligation arising at the balance sheet date. These estimates are determined based on experience of similar transactions and history of past losses.

(iv) Derecognition

Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires.

(g) Equity

(i) Shares

Issued shares are recognised at the amount paid per share net of directly attributable issue costs.

(ii) Reserves

Available-for-sale revaluation reserve

This reserve includes changes in the fair value of availablefor-sale financial assets, net of tax. These changes are transferred to the income statement (in non-interest income) when the asset is derecognised. Where the asset is impaired, the changes are transferred to the impairment expense line in the income statement for debt instruments and in the case of equity instruments to noninterest income.

Cash flow hedging reserve

This reserve includes the fair value gains and losses associated with the effective portion of designated cash flow hedging instruments.

(h) Presentation

(i) Offsetting of income and expenses

Income and expenses are not offset unless required or permitted by an accounting standard. This generally arises in the following circumstances:

• where transaction costs form an integral part of the effective interest rate of a financial instrument which is measured at amortised cost, these are

(i)

offset against the interest income generated by the financial instrument;

• where gains and losses relating to fair value hedges are assessed as being effective; or

• where gains and losses arise from a group of similar transactions, such as foreign exchange gains and losses.

(ii) Offsetting of financial assets and liabilities

Assets and liabilities are offset and the net amount reported in the balance sheet only where there is:

• a current enforceable legal right to offset the asset and liability; and

• an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

(iii) Statement of cash flows

For cash flow statement presentation purposes, cash and cash equivalents includes cash and nostro balances included in settlement balances receivable and settlement balances payable.

Certain cash flows have been netted in order to provide more meaningful disclosure, as many of the cash flows are received and disbursed on behalf of customers and reflect the activities of the customers rather than those of the Banking Group. These include customer loans and advances, customer deposits, certificates of deposit, related party balances and trading securities.

(iv) Goods and services tax

Income, expenses and assets are recognised net of the amount of goods and services tax (GST) except where the amount of GST incurred is not recoverable from the Inland Revenue Department (IRD). In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the IRD is included as other assets or other liabilities in the balance sheet.

Cash flows are included in the cash flow statement on a net basis. The GST components of cash flows arising from investing and financing activities, which are recoverable from, or payable to, the IRD are classified as operating cash flows.

(v) Segment reporting

Operating segments are distinguishable components of the Banking Group that provide products or services that are subject to risks and rewards that are different to those of other operating segments. The Banking Group operates predominately in the banking industry within New Zealand. The Banking Group has very limited exposure to risk associated with operating in different economic environments or political conditions. On this basis no geographical segment information is provided.

Other

(i) Contingent liabilities

Contingent liabilities acquired in a business combination are individually measured at fair value at the acquisition date. At subsequent reporting dates the value of such

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Notes to the Financial Statements

contingent liabilities is reassessed based on the estimate of expenditure required to settle the contingent liability.

Other contingent liabilities are not recognised in the balance sheet but disclosed in Note 33 unless it is considered remote that the Banking Group will be liable to settle the possible obligation.

(ii) Accounting Standards not early adopted

The following standards and amendments were available for early adoption but have not been applied by the Banking Group in these financial statements. The Banking Group currently does not intend to apply any of these pronouncements until their effective date.

Standards and amendments effective for periods commencing after 1 January 2018

NZ IFRS 9 Financial Instruments

This standard is being released in phases and once finalised will replace NZ IAS 39 Financial Instruments: Recognition and Measurement in its entirety. The phases currently issued are:

• Phase 1: Specifies a simpler methodology for classifying and measuring financial assets, with two primary measurement categories: amortised cost and fair value.

• Phase 2: Simplifies hedge accounting requirements which more closely align with risk management activities undertaken when hedging financial and non-financial risks. Includes new impairment requirements that introduce an expected credit loss impairment model. Introduces a fair value through other comprehensive income classification for financial assets when the business model is to collect contractual cash flows and to sell financial assets.

The Banking Group is assessing the impact on the financial statements.

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Notes to the Financial Statements

2. Critical Estimates and Judgement Used in Applying Accounting Policies

There are a number of critical accounting treatments which include complex or subjective judgements and estimates that may affect the reported amounts of assets and liabilities in the financial statements. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

An explanation of the judgements and estimates made by the Banking Group, in the process of applying its accounting policies, that have the most significant effect on the amounts recognised in the financial statements are set out below.

Critical accounting estimates and assumptions

Credit provisioning

The accounting policy relating to measuring the impairment of loans and advances requires the Banking Group to assess impairment at least at each reporting date. The credit provisions raised (collective and individual) represent management's best estimate of the losses incurred in the loan portfolio at balance date based on their experienced judgement.

The collective provision is estimated on the basis of historical loss experience for assets with credit characteristics similar to those in the collective pool. The historical loss experience is adjusted based on current observable data and events and an assessment of the impact of model risk. The provision also takes into account the impact of large concentrated losses within the portfolio and the economic cycle.

The use of such judgements and reasonable estimates is considered by management to be an essential part of the process and does not impact on the reliability of the provision.

Individual and collective provisioning involves the use of assumptions for estimating the amounts and timing of expected future cash flows. The process of estimating the amount and timing of cash flows involves considerable management judgement. These judgements are revised regularly to reduce any differences between loss estimates and actual loss experience.

Refer to Note 13 for details of credit impairment provisions.

Critical judgements in applying the Banking Group’s accounting policies

Financial instruments at fair value

The Banking Group’s financial instruments measured at fair value are stated in note 1(a)(iii). In estimating fair value the Banking Group uses, wherever possible, quoted market prices in an active market for the financial instrument.

In the event that there is no active market for the instrument, fair value is based on present value estimates or other market accepted valuation techniques. The valuation models incorporate the impact of bid/ask spread, counterparty credit spreads and other factors that would influence the fair value determined by a market participant. The selection of appropriate valuation techniques, methodology and inputs

requires judgement. These are reviewed and updated as market practice evolves.

Derivatives and hedging

The Banking Group buys and sells derivatives as part of its trading operations and to hedge its interest rate risk, currency risk, price risk, credit risk and other exposures relating to non-trading positions.

A hedging instrument is a designated derivative whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item. A hedged item is an asset, liability, firm commitment or highly probable forecast transaction that: (a) exposes the Banking Group to the risk of changes in fair value or future cash flows; and (b) is designated as being hedged.

Judgement is required in selecting and designating hedging relationships and assessing hedge effectiveness. NZ IAS 39 Financial Instruments: Recognition and Measurement does not specify a single method for assessing hedge effectiveness prospectively or retrospectively. The Banking Group adopts the hypothetical derivative approach to determine hedge effectiveness in line with current risk management strategies. Hedge ineffectiveness can arise for a number of reasons and whilst a hedge may pass the effectiveness tests above it may not be perfectly effective, leaving some volatility in the income statement.

The majority of outstanding derivative positions are transacted over-the-counter and therefore need to be valued using valuation techniques. Included in the determination of the fair value of derivatives is a credit valuation adjustment (CVA) to reflect the creditworthiness of the counterparty. This is influenced by the mark-to-market of the derivative trades and by the movement in the market cost of credit. Further adjustments are made to account for the funding costs inherent in the derivative. Judgment is required to determine the appropriate cost of funding and the future expected cashflows used in this funding valuation adjustment (FVA).

Structured entities

A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. Structured entities are generally created to achieve a narrow and well defined objective with restrictions around their ongoing activities and are often thinly capitalised with a reliance on debt financing for support.

The Banking Group assesses, at inception and periodically, whether a structured entity should be consolidated based on the accounting policy outlined in note 1. Such assessments are predominantly securitisation activities and involvement with managed funds. When assessing whether the Banking Group controls (and therefore consolidates) a structured entity, judgement is required about whether the Banking Group has power over the relevant activities as well as exposure to variable returns of the structured entity. All involvement, rights and exposure to returns are considered when assessing if control exists.

The Banking Group is deemed to have power over a managed fund when it performs the function of Manager of

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Notes to the Financial Statements

that managed fund. Whether the Banking Group controls the managed fund depends on whether it holds that power as principal, or as an agent for other investors. The Banking Group is considered the principal, and thus controls an managed fund, when it cannot be easily removed from the position of Manager by other investors and has variable returns through significant aggregate economic interest in that managed fund. In all other cases the Banking Group is considered to be acting in an agency capacity and does not control the managed fund.

Management believes any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the Banking Group’s carrying amount to exceed its recoverable amount.

Structured entities are consolidated when control exists. In other cases the Banking Group may simply have an interest in or may sponsor a structured entity but not consolidate it.

The Banking Group considers itself the sponsor of an unconsolidated structured entity where it is the primary party involved in the design and establishment of that structured entity and:

• where the Banking Group is the major user of that structured entity; or

• the Banking Group’s name appears in the name of that structured entity or on its products; or

• the Banking Group provides implicit or explicit guarantees of that entity’s performance.

Goodwill

Refer to Note 17 for details of goodwill held by the Banking Group.

The carrying value of goodwill is subject to an impairment test to ensure that the current carrying value does not exceed its recoverable value at the balance sheet date. Any excess of carrying value over recoverable amount is taken to the income statement as an impairment write down.

Goodwill has been allocated for impairment purposes to the cash generating units at which the goodwill is monitored for internal reporting purposes. Impairment testing of purchased goodwill is performed by comparing the recoverable value of each cash generating unit with the current carrying amount of its net assets, including goodwill. Judgement is required in identifying the cash-generating units to which goodwill and other assets are allocated for the purpose of impairment testing.

The recoverable amount is based on value-in-use calculations. These calculations use cash flow projections based on a number of financial budgets within each segment approved by management covering a three year period. Cash flow projections are based on a range of readily available economic assumptions including GDP and CPI. Cash flows beyond the three year period are extrapolated using a 3% growth rate.

These cash flow projections are discounted using a capital asset pricing model. As at 28 February 2014 when the last valuation was prepared, a discount rate of 11.09% was applied to each cash generating unit. The main variables in the calculation of the discount rate used are the risk free rate, the beta rate and the market risk premium. The risk free rate is based on the 10 year Government Bond Rate. The beta rate and the market risk premium are consistent with observable and comparative market rates applied in the regional banking sector. Market observable information is not readily available at the segment level therefore management performed stress tests for key sensitivities in each segment.

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Notes to the Financial Statements

3. Risk Management Policies

The Banking Group recognises the importance of effective risk management to its business success. Management is committed to achieving strong control and a distinctive risk management capability that enables the Banking Group business units to meet their performance objectives.

The Banking Group approaches risk through managing the various elements of the system as a whole rather than viewing them as independent and unrelated parts. The risk management division (Risk Management) is independent of the business, with clear delegations from the Board, and operates within a comprehensive framework comprising:

• The Board providing leadership, setting risk appetite/strategy and monitoring progress;

• A strong framework for development and maintenance of Banking Group-wide risk management policies, procedures and systems, overseen by an independent team of risk professionals;

• The use of sophisticated risk tools, applications and processes to execute the global risk management strategy across the Banking Group;

• Business unit level accountability, as the “first line of defence”, for the management of risks in alignment with the Banking Group’s strategy; and

• Independent oversight to ensure business unit level compliance with policies, regulations and laws, and to provide regular risk evaluation and reporting.

The Banking Group manages risk through an approval, delegation and limits structure. Regular reviews of the policies, systems and risk reports, including the effectiveness of the risk management systems, discussions covering the Banking Group’s response to emerging risk issues and trends, and that the requisite culture and practices are in place across the Banking Group, are conducted within the Banking Group and also by the Ultimate Parent Bank. The Board has responsibility for reviewing all aspects of risk management.

The Board has ultimate responsibility for overseeing the effective deployment of risk management frameworks, policies and processes within New Zealand. The Bank’s Risk Committee assists the Board in this function. The role of the Risk Committee is to assist the Board in the effective discharge of its responsibilities for business, market, credit, operational, compliance, liquidity, product and reputational risk management, and to liaise and consult with the Ultimate Parent Bank Risk Committee as required. Risk Management, via the Chief Risk Officer, coordinates risk management activities directly between Business Unit risk functions and Ultimate Parent Bank Group Risk Management functions.

The risk management process is subject to oversight by the Risk Committee of the Ultimate Parent Bank Board. This includes the review of risk portfolios and the establishment of prudential policies and controls.

The Banking Group’s risk management policies are essentially the same as the Ultimate Parent Bank, but are tailored where required to suit the local New Zealand regulatory and business environment.

The Audit Committee, which is a sub-committee of the Board, has responsibility for ensuring the integrity of the Banking Group's financial controls, reporting systems and internal audit standards. It meets at least four times a year

and reports directly to the Board. All members of the Audit Committee are non-executive directors.

Financial risk management

Refer to Note 27 for detailed disclosures on the Banking Group's financial risk management policies.

Operational Risk

Operational risk is the risk arising from day to day operational activities which may result in direct or indirect loss. These losses may result from failure to comply with policies, procedures, laws and regulations, from fraud or forgery, from a breakdown in the availability or integrity of services, systems and information, or damage to the Banking Group’s reputation.

Examples include failure to comply with policy and legislation, human error, natural disasters, fraud and other malicious acts. Where appropriate, risks are mitigated by insurance.

Risk Management is responsible for establishing the Banking Group’s operational risk framework and associated Banking Group-wide policies. Business units are responsible for the identification, analysis, assessment and treatment of operational risks on a day-to-day basis.

Business units have primary responsibility for the identification and management of operational risk with executive oversight provided by the relevant Retail and Wholesale Risk Forums. The Bank’s Operational Risk Executive Committee (OREC) undertakes the governance function through the bi-monthly monitoring of operational risk performance across the Banking Group. The Board and Risk Management conduct effective oversight through the approval of operational risk policies and frameworks and monitoring key operational risk metrics.

Compliance

The Banking Group conducts its business in accordance with all relevant compliance requirements. In order to assist the Banking Group identify, manage, monitor and measure its compliance obligations, the Banking Group has a comprehensive regulatory compliance framework in place, which addresses both external (regulatory) and internal compliance.

Risk Management, in conjunction with business unit staff ensure the Banking Group operates within a compliance infrastructure and framework that incorporates new and changing business obligations and processes.

The compliance policies and their supporting framework seek to minimise material risks to the Banking Group’s reputation and value that could arise from non-compliance with laws, regulations, industry codes and internal standards and policies. Business units have primary responsibility for the identification and management of compliance. Risk Management provides policy and framework, measurement, monitoring and reporting, as well as leadership in areas such as anti-money laundering procedures and matters of prudential compliance. The Bank’s OREC, the Chief Risk Officer, the Board and the Risk Committee of the Ultimate Parent Bank Board conduct board and executive oversight.

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Notes to the Financial Statements

Global Internal Audit

Global Internal Audit is a function independent of management whose role is to provide the Board and management with an effective and independent appraisal of the internal controls established by management. Operating under a Board approved Charter, the reporting line for the outcomes of work conducted by Global Internal Audit is direct to the Chair of the Audit Committee, with a direct communication line to the Chief Executive Officer and the external auditor.

The Global Internal Audit Plan is developed utilising a risk based approach and is refreshed on a quarterly basis. The Audit Committee approves the plan, the associated budget and any changes.

All audit activities are conducted in accordance with local and international auditing standards, and the results of the activities are reported to the Audit Committee, Risk Committee and management. These results influence the performance assessment of business heads.

Furthermore, Global Internal Audit monitors the remediation of audit issues and highlights the current status of any outstanding audits.

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Notes to the Financial Statements

4. Income

4. Income	4. Income	4. Income
		Banking Group	Bank
		Year to Year to	Year to Year to
**$ millions **		30/09/2014 30/09/2013	30/09/2014 30/09/2013
**Interest income **
Financial assets at fair value through profit or loss
Trading securities		474 418	474 418
Financial assets not at fair value through profit or loss
Cash		72 72	72 72
Available-for-sale assets		33 16	33 16
Net loans and advances		5,677 5,426	6,135 5,749
Other		16 25	9 17
		5,798 5,539	6,249 5,854
Total interest income		6,272 5,957	6,723 6,272
**Net trading gains **
Net gain on foreign exchange trading		157 154	156 153
Net gain / (loss) on trading securities		57 (197)	57 (197)
Net gain / (loss) on trading derivatives		(4) 206	(3) 206
Net trading gains		210 163	210 162
**Net funds management and insurance income **
Net funds management income		139 124	40 34
Net insurance income		186 110	34 39
Total funds management and insurance income		325 234	74 73
**Other operating income **
Lending and credit facility fee income		55 57	55 57
Other fee income		569 566	690 635
Total fee income		624 623	745 692
Direct fee expense		(216) (200)	(216) (200)
Net fee income		408 423	529 492
Dividends received		- -	140 256
Net ineffectiveness on qualifying fair value hedges		1 -	1 -
Net loss on derivatives not qualifying for hedge accounting		(7) (56)	(7) (61)
Net cash flow hedge gain transferred to income statement		41 21	41 21
Insurance settlement proceeds		91 -	91 -
Gain on sale of subsidiary and associates		- 13	- 37
Loss on sale of mortgages to NZ Branch		(23) (14)	(23) (14)
Other income		36 32	93 47
Total other operating income		547 419	865 778

ANZ Bank New Zealand Limited

20

Notes to the Financial Statements

5. Expenses

5. Expenses	5. Expenses
	Banking Group	Bank
	Year to Year to	Year to Year to
**$ millions **	30/09/2014 30/09/2013	30/09/2014 30/09/2013
**Interest expense **
Financial liabilities at fair value through profit or loss
Commercial paper	229 170	- -
Financial liabilities not at fair value through profit or loss
Deposits and other borrowings	2,425 2,284	4,101 3,769
Bonds and notes	791 791	173 153
Subordinated debt	57 79	58 79
Other	27 20	27 20
	3,300 3,174	4,359 4,021
Total interest expense	3,529 3,344	4,359 4,021
**Operating expenses **
Personnel costs	716 702	689 646
Employee entitlements	69 71	67 66
Superannuation costs	38 43	38 42
Share-based payments expense	22 22	21 22
Building occupancy costs	41 41	4 (14)
Depreciation of premises and equipment	55 46	23 23
Leasing and rental costs	78 84	174 149
Technology expenses	137 114	122 97
Reversal of impairment of investment in subsidiary	- -	- (181)
Amortisation of software and other intangible assets	30 52	25 45
Administrative expenses	170 188	159 176
Charges from Ultimate Parent Bank	81 84	81 84
Other costs	52 65	40 61
Total operating expenses	1,489 1,512	1,443 1,216
**$ thousands **
**Fees paid to auditor (KPMG New Zealand)1 **
Audit or review of financial statements2	2,197 2,352	1,284 1,468
Other services:
Review of regulatory returns	96 186	- -
Prospectus assurance or review	249 120	- -
Other assurance services3	151 100	115 43
Total other services	496 406	115 43
Total fees paid to auditor relating to the Bank and the Banking Group	2,693 2,758	1,399 1,511
Fees paid on behalf of related entities and not recharged:
Subsidiaries and other members of ANZ New Zealand2,3	5 15	342 199
Other related entities4	147 181	63 94
Total fees paid to auditor	2,845 2,954	1,804 1,804

1 Comparative figures have been adjusted to include and show separately fees paid on behalf of other entities and which have not been recharged.

2 Includes fees for both the audit of the annual financial statements and reviews of interim financial statements.

3 Includes fees for controls reports, comfort letters and other agreed upon procedures engagements.

4 Amounts include fees for audits of annual financial statements and audits of summary financial statements for inclusion in prospectuses for ANZ PIE funds, and comfort letters and other agreed upon procedures engagements for The Bonus Bonds Trust and ANZ Staff Foundation.

It is the Banking Group’s policy that, subject to the approval of the Ultimate Parent Bank’s Audit Committee, KPMG can provide assurance and other audit-related services that, while outside the scope of the statutory audit, are consistent with the role of auditor. KPMG may not provide services that are perceived to be in conflict with the role of auditor. Services that are perceived to be in conflict with the role of auditor include consulting advice and subcontracting of operational activities normally undertaken by management, and engagements where the auditor may ultimately be required to express an opinion on its own work.

ANZ Bank New Zealand Limited

21

Notes to the Financial Statements

6. Income Tax

	Banking Group	Bank
	Year to Year to	Year to Year to
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Reconciliation of the prima facie income tax payable on profit
Profit before income tax	2,355 1,861	2,098 1,992
Prima facie income tax at 28%	659 521	587 558
Imputed and non-assessable dividends	(3) (5)	(39) (72)
Change in tax provisions	(10) (10)	(10) (10)
Non assessable income and non deductible expenditure	(8) (17)	1 (60)
Income tax under provided in prior years	1 1	- -
Total income tax expense	639 490	539 416
Effective tax rate (%)	27.1% 26.3%	25.7% 20.9%
Amounts recognised in the income statement
Current tax	531 409	465 331
Deferred tax	108 81	74 85
Total income tax expense recognised in the income statement	639 490	539 416
Imputation credits available	2,341 1,852	2,224 1,725

The Bank is a member of an imputation group and can access imputation credits of the imputation group. The imputation credit balance for the Bank is the imputation credit balance of this imputation group. The imputation credit balance for the Banking Group includes the imputation credit balance in relation to both the imputation group and other companies in the the Banking Group that are not in the imputation group. The imputation credit balance available includes imputation credits that will arise from the payment of the amount of provision for income tax as at the reporting date.

	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Deferred tax assets / (liabilities) comprise the following temporary differences:
Provision for credit impairment	186 231	178 221
Premises and equipment, software and intangibles	2 8	9 13
Provisions and accruals	61 77	53 62
Insurance policy assets	(127) (108)	- -
Financial instruments	3 (10)	3 (10)
Carried forward losses	9 15	- -
Lease finance	(191) (179)	(188) (174)
Other deferred tax assets and liabilities (including tax provisions)	(3) 11	8 22
Net deferred tax assets / (liabilities)1	(60) 45	63 134

1 Deferred tax assets and liabilities are set-off where they relate to income tax levied by the same income tax authority on either the same taxable entity or different taxable entities within the same taxable group.

ANZ Bank New Zealand Limited

22

Notes to the Financial Statements

7. Segment Analysis

The Banking Group is organised into four major business segments for segment reporting purposes - Retail, Commercial, Wealth and Institutional. Centralised back office and corporate functions support these segments. These segments are consistent with internal reporting provided to the chief operating decision maker, being the Bank’s Chief Executive Officer.

Segmental reporting has been updated to reflect minor changes to the Banking Group’s structure. Comparative data has been adjusted to be consistent with the current year’s segment definitions.

Retail

Retail provides products and services to personal customers via the branch network, mortgage specialists, the contact centre and a variety of self service channels (internet banking, phone banking, ATMs, website and mobile phone banking). Core products include current and savings accounts, unsecured lending (credit cards, personal loans and overdrafts) and home loans secured by mortgages over property. Retail distributes insurance and investment products on behalf of the Wealth segment.

Commercial

Commercial provides services to Business Banking, Commercial & Agri, and UDC customers. Business Banking services are offered to small enterprises (typically with annual revenues of less than $5 million). Commercial & Agri customers consist of primarily privately owned medium to large enterprises. The Banking Group's relationship with these businesses ranges from simple banking requirements with revenue from deposit and transactional facilities, and cash flow lending, to more complex funding arrangements with revenue sourced from a wider range of products. UDC is principally involved in the financing and leasing of plant, vehicles and equipment, mainly for small and medium sized businesses, as well as investment products.

Wealth

Wealth comprises the Private Wealth, Funds Management and Insurance businesses, which provide private banking, investment, superannuation and insurance products and services.

Institutional

Institutional provides financial services through a number of specialised units to large multi-banked corporations, often global, which require sophisticated product and risk management solutions. Those financial services include loan structuring, foreign exchange, wholesale money market services and transaction banking.

Other

Other includes treasury and back office support functions, none of which constitutes a separately reportable segment.

ANZ Bank New Zealand Limited

23

Notes to the Financial Statements

Business segment analysis[1 ]

			Banking Group
**$ millions **	Retail Commercial Wealth2 Institutional Other Total
30/09/2014
External interest income	1,769 3,416 92 978 17 6,272
External interest expense	(1,096) (661) (199) (475) (1,098) (3,529)
Net intersegment interest	222 (1,400) 166 (178) 1,190 -
Net interest income	895 1,355 59 325 109 2,743
Other external operating income	317 94 318 298 55 1,082
Share of associates' profit	- 1 - - 2 3
Operating income	1,212 1,450 377 623 166 3,828
Operating expenses	632 488 137 182 50 1,489
Profit before credit impairment and income tax	580 962 240 441 116 2,339
Credit impairment charge / (release)	25 (41) (1) 1 - (16)
Profit before income tax	555 1,003 241 440 116 2,355
Income tax expense	156 280 59 122 22 639
Profit after income tax	399 723 182 318 94 1,716
**Other information **
Depreciation and amortisation	17 2 5 - 61 85
Goodwill	547 1,434 180 1,072 - 3,233
Other intangible assets	30 2 126 - 63 221
Investment in associates	- 3 - - 85 88
Total external assets	28,995 61,182 2,526 34,728 1,484 128,915
Total external liabilities	34,943 23,089 5,316 28,863 24,923 117,134
30/09/2013
External interest income	1,722 3,155 88 985 7 5,957
External interest expense	(1,056) (607) (200) (420) (1,061) (3,344)
Net intersegment interest	173 (1,248) 149 (208) 1,134 -
Net interest income	839 1,300 37 357 80 2,613
Other external operating income	319 125 195 251 (74) 816
Share of associates' profit	- 2 - - 5 7
Operating income	1,158 1,427 232 608 11 3,436
Operating expenses	639 489 139 196 49 1,512
Profit before credit impairment and income tax	519 938 93 412 (38) 1,924
Credit impairment charge / (release)	55 (11) (1) 20 - 63
Profit before income tax	464 949 94 392 (38) 1,861
Income tax expense	131 262 14 106 (23) 490
Profit after income tax	333 687 80 286 (15) 1,371
**Other information **
Depreciation and amortisation	24 5 5 - 64 98
Goodwill	547 1,434 180 1,072 - 3,233
Other intangible assets	27 2 130 - 56 215
Investment in associates	- 3 - - 95 98
Total external assets	28,203 56,935 2,261 31,555 1,490 120,444
Total external liabilities	32,383 20,399 4,848 26,835 24,525 108,990

1 Intersegment transfers are accounted for and determined on an arm's length or cost recovery basis. 2 Wealth other external operating income for the year ended 30 September 2014 includes the $91 million insurance settlement relating to the Bank’s former involvement in the ING Diversified Yield Fund and the ING Regular Income Fund.

ANZ Bank New Zealand Limited

24

Notes to the Financial Statements

8. Cash

	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Coins, notes and cash at bankers	204 187	204 187
Balances with central banks	1,309 1,709	1,309 1,709
Securities purchased under agreements to resell	309 310	309 310
Total cash	1,822 2,206	1,822 2,206

9. Trading Securities

	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Government, local body stock and bonds	6,607 5,404	6,607 5,403
Certificates of deposit	378 551	378 551
Promissory notes	91 36	91 36
Other bank bonds	4,630 4,300	4,630 4,300
Other	44 29	44 29
Total trading securities	11,750 10,320	11,750 10,319

ANZ Bank New Zealand Limited

25

Notes to the Financial Statements

10. Derivative Financial Instruments

The use of derivatives and their sale to customers as risk management products is an integral part of the Banking Group’s trading activities. Derivatives are also used to manage the Banking Group’s own exposure to fluctuations in exchange and interest rates as part of its own asset and liability management activities.

Derivatives are subject to the same types of credit and market risk as other financial instruments and the Banking Group manages these risks in a consistent manner.

Derivatives, except for those that are specifically designated as effective hedging instruments, are classified as held for trading.

	Banking Group	Banking Group	Bank	Bank
	Notional		Notional
	principa	Fair values l	principa	Fair values l
$ millions	amoun	t Assets Liabilities	amoun	t Assets Liabilities
30/09/2014
Derivatives held for trading
Foreign exchange derivatives
Spot and forward contracts	64,229 1,464 1,234		64,229 1,464 1,234
Swap agreements	146,852 5,368 4,950		146,852 5,368 4,950
Options purchased	2,528 47 1		2,528 47 1
Options sold	2,381 1 36		2,381 1 36
	215,990 6,880 6,221		215,990 6,880 6,221
Interest rate derivatives
Forward rate agreements	9,514 2 1		9,514 2 1
Swap agreements	694,051 4,180 3,782		702,020 4,184 3,814
Futures contracts	17,930 2 5		17,930 2 5
Options purchased	1,607 2 -		1,607 2 -
Options sold	840 1 3		840 1 3
	723,942 4,187 3,791		731,911 4,191 3,823
Commodity derivatives	346 22 21		346 22 21
Total derivatives held for trading	940,278 11,089 10,033		948,247 11,093 10,065
Derivatives in hedging relationships
Fair value hedges
Foreign exchange swap agreements	17 - -		17 - -
Interest rate swap agreements	20,044 219 64		20,044 219 64
	20,061 219 64		20,061 219 64
Cash flow hedges
Interest rate swap agreements	18,866 96 108		18,866 96 108
Total derivatives in hedging relationships	38,927 315 172		38,927 315 172
Total derivative financial instruments	979,205 11,404 10,205		987,174 11,408 10,237

ANZ Bank New Zealand Limited

26

Notes to the Financial Statements

	Banking Group	Bank
	Notional	Notional
30/09/2013	Fair values principal	Fair values principal
$ millions	amount Assets Liabilities	amount Assets Liabilities
Derivatives held for trading
Foreign exchange derivatives
Spot and forward contracts	54,152 568 987	54,152 568 987
Swap agreements	132,066 3,189 4,113	132,066 3,189 4,113
Options purchased	2,982 52 -	2,982 52 -
Options sold	2,973 1 70	2,973 1 70
	192,173 3,810 5,170	192,173 3,810 5,170
Interest rate derivatives
Forward rate agreements	15,877 - 2	15,877 - 2
Swap agreements	530,909 5,441 4,888	535,791 5,445 4,897
Futures contracts	24,857 2 6	24,857 2 6
Options purchased	1,098 4 -	1,098 4 -
Options sold	1,010 - 5	1,010 - 5
	573,751 5,447 4,901	578,633 5,451 4,910
Commodity derivatives	366 32 32	366 32 32
Total derivatives held for trading	766,290 9,289 10,103	771,172 9,293 10,112
Derivatives in hedging relationships
Fair value hedges
Foreign exchange swap agreements	55 2 -	55 2 -
Interest rate swap agreements	17,056 137 41	17,056 137 41
	17,111 139 41	17,111 139 41
Cash flow hedges
Interest rate swap agreements	15,240 90 99	15,240 90 99
Total derivatives in hedging relationships	32,351 229 140	32,351 229 140
Total derivative financial instruments	798,641 9,518 10,243	803,523 9,522 10,252

Derivatives held for trading

The held for trading classification includes two categories of derivative instruments: those held as trading positions and those used for the Banking Group’s balance sheet risk management.

Trading positions

Trading positions consist of both sales to customers and market making activities. Sales to customers include the structuring and marketing of derivative products to customers which enable them to take or mitigate risks. Market making activities consist of derivatives entered into principally for the purpose of generating profits from short-term fluctuations in price or margins. Positions may be traded actively or held over a period of time to benefit from expected changes in market rates.

Balance sheet risk management

The Banking Group designates certain balance sheet risk management derivatives into hedging relationships in order to minimise income statement volatility. This volatility is created by differences in the timing of recognition of gains and losses between the derivative and the hedged item. Hedge accounting is not applied to all balance sheet risk management positions as some balance sheet risk management derivatives are classified as held for trading.

Derivatives in hedging relationships

Fair value hedges

The Banking Group’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates.

Gain / (loss) on fair value hedges attributable to the hedged risk

	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Gain / (loss) arising from fair value hedges:
- hedged item	(41) 72	(41) 72
- hedging instrument	42 (72)	42 (72)
Net ineffectiveness on qualifying fair value hedges	1 -	1 -

ANZ Bank New Zealand Limited

27

Notes to the Financial Statements

Cash flow hedges

The Banking Group’s cash flow hedges comprise interest rate swaps that are used to protect against exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be refunded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their forecast repricing profile. This forms the basis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges.

Analysis of the cash flow hedging reserve
	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Deferred gain / (loss) attributable to hedges of:
Variable rate loan assets	(29) (18)	(29) (18)
Variable rate liabilities	- 15	- 15
Short term re-issuances of fixed rate customer and wholesale deposit liabilities	22 29	22 29
Total cash flow hedging reserve	(7) 26	(7) 26

All underlying hedged cash flows are expected to be recognised in the income statement in the period in which they occur, which is anticipated to take place over the next ten years (30/09/2013 ten years).

11. Available-for-sale Assets

		Banking Group	Bank
$ millions		30/09/2014 30/09/2013	30/09/2014 30/09/2013
Government, local body stock and bonds		522 742	522 742
Other debt securities		248 198	248 198
Equity securities		2 2	- -
Total available-for-sale assets		772 942	770 940

12. Net Loans and Advances

	Banking Group		Bank
$ millions	Note 30/09/2014 30/09/2013		30/09/2014 30/09/2013
Overdrafts	1,744 1,841		1,744 1,841
Credit card outstandings	1,580 1,458		1,580 1,458
Term loans - housing	52,717 49,521		52,717 49,521
Term loans - non-housing	39,622 37,673		38,127 36,307
Loans to subsidiaries	- -		15,834 12,193
Lease receivables	277 351		81 119
Hire purchase	837 721		- -
Other	125 125		- -
Total gross loans and advances	96,902 91,690		110,083 101,439
Less: Provision for credit impairment	13 (666) (826)		(634) (789)
Less: Unearned income		(212) (214)	(56) (68)
Add: Capitalised brokerage/mortgage origination fees		208 156	208 156
Add: Customer liability for acceptances		67 31	67 31
Total net loans and advances		96,299 90,837	109,668 100,769

The Bank has sold residential mortgages to the NZ Branch with a net carrying value of $9,176 million as at 30 September 2014 (30/09/2013 $9,256 million). These assets qualify for derecognition as the Bank does not retain a continuing involvement in the transferred assets.

ANZ Bank New Zealand Limited

28

Notes to the Financial Statements

13. Provision for Credit Impairment

Credit impairment charge / (release)

13. Provision for Credit Impairment	13. Provision for Credit Impairment
Credit impairment charge / (release)
	Banking Group	Bank
	Retail Other retail Non-retail Retail Other retail Non-retail
$ millions	mortgages exposures exposures Total mortgages exposures exposures Total
30/09/2014
New and increased provisions	50 120 111 281	50 114 94 258
Write-backs	(44) (21) (112) (177)	(44) (20) (107) (171)
Recoveries of amounts written off previously	(2) (20) (7) (29)	(2) (20) (5) (27)
Individual credit impairment charge / (release)	4 79 (8) 75	4 74 (18) 60
Collective credit impairment charge / (release)	(23) 1 (69) (91)	(23) 3 (68) (88)
Credit impairment charge / (release)	(19) 80 (77) (16)	(19) 77 (86) (28)
30/09/2013
New and increased provisions	87 113 157 357	87 113 149 349
Write-backs	(75) (30) (104) (209)	(75) (30) (101) (206)
Recoveries of amounts written off previously	(2) (16) (5) (23)	(2) (16) (3) (21)
Individual credit impairment charge	10 67 48 125	10 67 45 122
Collective credit impairment release	(3) (8) (51) (62)	(3) (12) (51) (66)
Credit impairment charge / (release)	7 59 (3) 63	7 55 (6) 56

Movement in provision for credit impairment

Movement inprovision for credit impairment	Movement inprovision for credit impairment
	Banking Group	Bank
	Retail Other retail Non-retail Retail Other retail Non-retail
**$ millions **	mortgages exposures exposures Total mortgages exposures exposures Total
**30/09/2014 **
**Collective provision **
Balance at beginning of the year	101 117 324 542	101 101 316 518
Charge / (release) to income statement	(23) 1 (69) (91)	(23) 3 (68) (88)
Balance at end of the year	78 118 255 451	78 104 248 430
Individual provision
Balance at beginning of the year	74 22 188 284	74 22 175 271
New and increased provisions net of write-
	6 99 (1) 104	6 94 (13) 87
backs
Bad debts written off	(3) (106) (67) (176)	(3) (102) (53) (158)
Discount unwind reversal / (discount unwind)1	(5) - 8 3	(5) - 9 4
Balance at end of the year	72 15 128 215	72 14 118 204
Total provision for credit impairment	150 133 383 666	150 118 366 634
**30/09/2013 **
**Collective provision **
Balance at beginning of the year	104 125 375 604	104 113 367 584
Release to income statement	(3) (8) (51) (62)	(3) (12) (51) (66)
Balance at end of the year	101 117 324 542	101 101 316 518
Individual provision
Balance at beginning of the year	119 26 305 450	119 26 287 432
New and increased provisions net of write-
	12 83 53 148	12 83 48 143
backs
Bad debts written off	(49) (87) (150) (286)	(49) (87) (138) (274)
Discount unwind1	(8) - (20) (28)	(8) - (22) (30)
Balance at end of the year	74 22 188 284	74 22 175 271
Total provision for credit impairment	175 139 512 826	175 123 491 789

1 The impairment loss on an impaired asset is calculated as the difference between the asset’s carrying amount and the estimated future cash flows discounted to its present value using the original effective interest rate for the asset. This discount unwinds as interest income over the period the asset is held.

ANZ Bank New Zealand Limited

29

Notes to the Financial Statements

14. Impaired Assets

Banking Group	Bank
Retail Other retail Non-retail Retail Other retail Non-retail
$ millions mortgages exposures exposures Total mortgages exposures exposures Total
30/09/2014
Balance at beginning of the year 179 49 673 901	179 49 649 877
Transfers from productive 178 138 299 615	178 128 271 577
Transfers to productive (41) (4) (153) (198)	(41) (3) (152) (196)
Assets realised or loans repaid (124) (42) (342) (508)	(124) (37) (324) (485)
Write offs (3) (106) (67) (176)	(3) (102) (53) (158)
Total impaired assets 189 35 410 634	189 35 391 615
Undrawn facilities with impaired customers 1 - 38 39
	1 - 38 39
30/09/2013
Balance at beginning of the year 313 44 1,009 1,366	313 44 955 1,312
Transfers from productive 268 134 408 810	268 134 385 787
Transfers to productive (91) (5) (194) (290)	(91) (5) (189) (285)
Assets realised or loans repaid (262) (37) (400) (699)	(262) (37) (364) (663)
Write offs (49) (87) (150) (286)	(49) (87) (138) (274)
Total impaired assets 179 49 673 901	179 49 649 877
Undrawn facilities with impaired customers - 1 24 25
	- 1 24 25

15. Investments in Subsidiaries and Associates

15. Investments in Subsidiaries and Associates	15. Investments in Subsidiaries and Associates
	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Investments in subsidiaries	- -	4,664 4,779
Investments in associates	88 98	85 85
Total investments in subsidiaries and associates	88 98	4,749 4,864

The following table lists the principal subsidiaries of the Bank. Principal subsidiaries are those that have transactions or balances with parties outside the Banking Group. All subsidiaries are 100% owned and incorporated in New Zealand unless stated otherwise.

**Principal subsidiaries **	Nature of business
ANZ Capital NZ Limited	Investment
ANZ Investment Services (New Zealand) Limited	Funds management
ANZ New Zealand (Int'l) Limited	Finance
ANZ New Zealand Investments Limited	Funds management
ANZ New Zealand Securities Limited	On-line share broker
ANZNZ Covered Bond Trust1	Securitisation entity
Arawata Assets Limited	Property
Arawata Finance Limited	Investment
AUT Investments Limited	Investment
Karapiro Investments Limited	Investment
Kingfisher NZ Trust 2008-11	Securitisation entity
OnePath Insurance Services (NZ) Limited	Insurance
OnePath Life (NZ) Limited	Insurance
UDC Finance Limited	Asset finance

1 The Banking Group does not own ANZNZ Covered Bond Trust and Kingfisher NZ Trust 2008-1. Control exists as the Banking Group retains substantially all the risks and rewards of the operations. Details of the Banking Group’s interest in consolidated structured entities is included in note 34.

ANZ Bank New Zealand Limited

30

Notes to the Financial Statements

16. Other Assets

16. Other Assets	16. Other Assets	16. Other Assets
		Banking Group	Bank
$ millions		30/09/2014 30/09/2013	30/09/2014 30/09/2013
Accrued interest and prepaid discounts		426 374	551 462
Accrued commission		19 18	7 7
Share-based payments asset		60 62	60 62
Prepaid expenses		15 15	15 14
Other assets		128 98	68 64
Total other assets		648 567	701 609

17. Goodwill and Other Intangible Assets

17. Goodwill and Other Intangible Assets	17. Goodwill and Other Intangible Assets	17. Goodwill and Other Intangible Assets
		Banking Group	Bank
$ millions		30/09/2014 30/09/2013	30/09/2014 30/09/2013
Goodwill		3,233 3,233	3,217 3,217
Software		96 84	95 82
Other intangibles		125 131	- -
Total goodwill and other intangible assets		3,454 3,448	3,312 3,299

18. Deposits and Other Borrowings

18. Deposits and Other Borrowings	18. Deposits and Other Borrowings	18. Deposits and Other Borrowings
	Banking Group		Bank
$ millions	Note 30/09/2014 30/09/2013		30/09/2014 30/09/2013
Certificates of deposit	1,376 2,364		1,376 2,364
Term deposits	34,758 33,862		34,758 33,862
Other deposits bearing interest and other borrowings	34,027 29,687		34,027 29,687
Deposits not bearing interest	6,001 5,526		6,001 5,526
Deposits from banks	226 180		47 180
Commercial paper	6,057 4,765		- -
UDC secured investments	28 1,569 1,492		- -
Deposits from other members of ANZ New Zealand	23 5 940		5 940
Deposits and other borrowings from subsidiaries	23 - -		39,009 33,246
Total deposits and other borrowings		84,019 78,816	115,223 105,805

Deposits from customers are unsecured and rank equally with other unsecured liabilities of the Banking Group. In the unlikely event that the Bank was put into liquidation or ceased to trade, secured creditors and those creditors set out in the Seventh Schedule of the Companies Act 1993 would rank ahead of the claims of unsecured creditors.

ANZ Bank New Zealand Limited

31

Notes to the Financial Statements

19. Payables and Other Liabilities

19. Payables and Other Liabilities	19. Payables and Other Liabilities
	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Creditors	58 61	42 29
Accrued interest and unearned discounts	488 456	597 538
Defined benefit schemes deficit	20 60	20 60
Share-based payments liability	39 39	39 39
Accrued charges	227 252	182 205
Security settlements and short sales	226 143	226 143
Life insurance contract liabilities - reinsurance	104 100	- -
Liability for acceptances	67 31	67 31
Other liabilities	68 53	36 44
Total payables and other liabilities	1,297 1,195	1,209 1,089

20. Provisions

20. Provisions	20. Provisions
	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Employee annual and long service leave	114 120	113 116
Other1	90 109	69 71
Total provisions	204 229	182 187

1 Includes provisions for surplus leased space, make-good of leased premises, seismic obligations, and restructuring costs.

21. Bonds and Notes

21. Bonds and Notes	21. Bonds and Notes	21. Bonds and Notes
	Banking Group		Bank
$ millions	Note 30/09/2014 30/09/2013		30/09/2014 30/09/2013
Domestic bonds	3,250 2,635		3,250 2,635
U.S. medium term notes1	4,934 4,464		- -
Euro medium term notes1	4,774 4,349		- -
Covered bonds1	28, 34 3,928 3,925		- -
Index linked notes		35 84	35 84
Total bonds and notes issued		16,921 15,457	3,285 2,719
Fair value hedge adjustment		129 69	- -
Less bonds and notes held by the Bank		(8) (32)	(8) (32)
Total bonds and notes		17,042 15,494	3,277 2,687

Bonds and notes, other than covered bonds, are unsecured and rank equally with other unsecured liabilities of the Banking Group.

1 These bonds and notes are issued by ANZ New Zealand (Int’l) Limited and are guaranteed by the Bank.

ANZ Bank New Zealand Limited

32

Notes to the Financial Statements

22. Subordinated Debt

22. Subordinated Debt	22. Subordinated Debt
	Banking Group	Bank
**$ millions **	30/09/2014 30/09/2013	30/09/2014 30/09/2013
NZD 835,000,000 perpetual subordinated bond1	835 835	835 835
AUD 265,740,000 perpetual subordinated floating rate loan1	298 299	298 299
AUD 10,000,000 perpetual subordinated floating rate loan	11 11	11 11
Total subordinated debt issued	1,144 1,145	1,144 1,145
Less subordinated debt instruments held by the Bank	- (1)	- (1)
Total subordinated debt	1,144 1,144	1,144 1,144

1 These instruments qualify as tier 2 capital under RBNZ’s transitional rules. Refer to Note 26 for further details.

Subordinated debt is subordinated in right of payment in the event of liquidation or wind up to the claims of depositors and all creditors of the Bank.

Subordinated debt instruments are classified as debt reflecting an assessment of the key terms and conditions of the instruments, and an assessment of the ability, and likelihood of interest payments being deferred. Certain of these instruments have interrelationships that have been considered in this assessment.

NZD 835,000,000 bond

This bond was issued by the Bank on 18 April 2008. The Bank did not elect to redeem the bond on 18 April 2013 (the First Call Date). The Bank may elect to redeem the bond on 18 April 2018 (the Second Call Date) or any interest payment date subsequent to 18 April 2018. Interest is payable half yearly in arrears on 18 April and 18 October each year, up to and including the Second Call Date and then quarterly thereafter. Should the bond not be called at the Second Call Date, the Coupon Rate from the Second Call Date onwards will be set on a quarterly basis to the three month FRA rate plus 3.00%.

As at 30 September 2014, this bond carried a BBB+ rating by Standard and Poor's and an A3 rating by Moody’s.

The coupon interest on the bond was 9.66% until 18 April 2013 when it reset to 5.28% for the five year period to 18 April 2018.

This bond is listed on the New Zealand Exchange (NZX). The Market Surveillance Panel of the NZX granted the Bank a waiver from the requirements of Listing Rules 10.4 (relating to the provision of preliminary announcements of half yearly and annual results to the NZX) and 10.5 (relating to preparing and providing a copy of half yearly and annual reports to the NZX).

AUD 265,740,000 loan

This loan was drawn down by the Bank on 27 September 1996 and has no fixed maturity. Interest is payable half yearly in arrears at BBSW + 0.95% p.a., with interest payments due on 15 March and 15 September each year.

AUD 10,000,000 loan

This loan was drawn down by the Bank on 27 March 2013 and has no fixed maturity. Interest is payable half yearly in arrears on 15 March and 15 September each year. The bank may repay the loan on any interest payment date after both the NZD 835,000,000 bond and AUD 265,740,000 loan have been repaid in full.

Coupon interest is BBSW + 2.4% p.a., increasing to BBSW + 4.4% p.a. from 15 September 2018.

23. Related Party Transactions

Key management personnel

Key management personnel are defined as the Directors and senior management of the Banking Group - those persons having the authority and responsibility for planning, directing and controlling the activities of the entity. The information below includes transactions with those individuals, their close family members and their subsidiaries.

Loans made to and deposits held by key management personnel are made in the course of ordinary business on normal commercial terms and conditions no more favourable than those given to other employees or customers. Loans are on terms of repayment that range between fixed, variable and interest only, all of which have been made in accordance with the Bank's lending policies.

All transactions with key management personnel (including personally related parties) are conducted on an arm's length basis in the ordinary course of business and on commercial terms and conditions. These transactions principally consist of the provision of financial and investment services.

ANZ Bank New Zealand Limited

33

Notes to the Financial Statements

Notes to the Financial Statements
Banking Group	Bank
Year to Year to	Year to Year to
$ thousands 30/09/2014 30/09/2013	30/09/2014 30/09/2013
Key management personnel compensation
Salaries and short-term employee benefits 12,402 13,210	12,402 13,210
Post-employment benefits 387 258	387 258
Other long-term benefits 130 76	130 76
Termination benefits - 123	- 123
Share-based payments expense 5,400 5,693	5,400 5,693
Total compensation of key management personnel 18,319 19,360	18,319 19,360
Loans to and deposits held by key management personnel
Loans to key management personnel 7,661 5,741	7,661 5,741
Deposits from key management personnel 5,035 8,001	5,035 8,001

Transactions with other related parties

The Bank and Banking Group undertake transactions with the Immediate Parent Company, the Ultimate Parent Bank, other members of the Overseas Banking Group and associates.

These transactions principally consist of funding and hedging transactions, the provision of other financial and investment services, technology and process support, and compensation for share based payments made to Banking Group employees. Transactions with related parties outside of the Banking Group are conducted on an arm’s length basis and on normal commercial terms.

In addition the Bank undertakes similar transactions with subsidiaries, which are eliminated in the consolidated Banking Group financial statements. Included within the Bank’s transactions with subsidiaries is the provision of administrative functions to some subsidiaries for which no payments have been made.

Transactions with related parties	Banking Group Bank
	Year to Year to Year to Year to
$ millions	30/09/2014 30/09/2013 30/09/2014 30/09/2013
Ultimate Parent Bank and subsidiaries not part of the Banking Group
Interest income	3 2 3 2
Interest expense	28 97 19 77
Fee income	26 25 26 25
Loss on sale of mortgages to the NZ Branch	(23) (14) (23) (14)
Other operating income	116 16 116 16
Operating expenses	81 84 81 83
Mortgages sold to the NZ Branch	3,393 3,144 3,393 3,144
Immediate Parent Company
Interest expense	8 19 8 19
Ordinary shares issued	970 - 970 -
Preference shares issued	- 300 - 300
Subsidiaries
Interest income	- - 630 506
Interest expense	- - 1,343 1,619
Net funds management and insurance income	- - 64 28
Dividends received	- - 137 252
Operating expenses	- - 161 139
Repayments of share capital received	- - 115 1,907
Associates
Interest expense	3 2 3 2
Dividends received	- - 4 4
Share of associates' profit	3 7 - -

ANZ Bank New Zealand Limited

34

Notes to the Financial Statements

Notes to the Financial Statements
Balances with related parties
	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Ultimate Parent Bank and subsidiaries not part of the Banking Group
Cash	61 95	61 95
Settlement balances receivable	12 22	12 22
Collateral paid	125 -	125 -
Derivative financial instruments	3,747 1,911	3,747 1,911
Other assets	83 65	83 65
Immediate Parent Company
Derivative financial instruments	- 2	- 2
Subsidiaries
Derivative financial instruments	- -	4 4
Net loans and advances	- -	15,834 12,193
Other assets	- -	129 90
Investments in subsidiaries	- -	4,664 4,779
Associates
Investments in associates	88 98	85 85
Total due from related parties	4,116 2,193	24,744 19,246
Ultimate Parent Bank and subsidiaries not part of the Banking Group
Settlement balances payable	424 351	424 351
Deposits and other borrowings	182 1	3 1
Derivative financial instruments	3,819 2,154	3,819 2,154
Payables and other liabilities	9 10	9 9
Bonds and notes	- 1,267	- -
Subordinated debt	309 310	309 310
Immediate Parent Company
Deposits and other borrowings	4 939	4 939
Derivative financial instruments	1 14	1 14
Payables and other liabilities	1 1	1 1
Subsidiaries
Settlement balances payable	- -	472 339
Deposits and other borrowings	- -	39,009 33,246
Derivative financial instruments	- -	34 9
Payables and other liabilities	- -	240 183
Associates
Deposits and other borrowings	85 85	85 85
Total due to related parties	4,834 5,132	44,410 37,641

Balances due from / to related parties are unsecured other than that the Banking Group and the Bank have provided guarantees and commitments to related parties as follows:

	Banking	Group	Bank
$ millions	30/09/2014	30/09/2013	30/09/2014	30/09/2013
Bonds and notes issued by ANZ New Zealand (Int'l) Limited to subsidiaries of the Ultimate Parent Bank not part of ANZ New Zealand and guaranteed by the Bank	-	-	-	1,267
Financial guarantees provided to the Ultimate Parent Bank	180	181	180	181
Undrawn credit commitments provided to the Immediate Parent Company	250	250	250	250
Undrawn credit commitments provided to subsidiaries	-	-	1,225	2,566

ANZ Bank New Zealand Limited

35

Notes to the Financial Statements

24. Current and Non-current Assets and Liabilities

Assets and liabilities are classified as current if:

• it is expected they will be realised, consumed or settled in the normal operating cycle or within twelve months after the end of the reporting date; or

• they are held primarily for trading; or

• they are assets that are cash or a cash equivalent; or

• they are liabilities where there is no unconditional right to defer settlement for at least twelve months.

Non-current assets include premises and equipment and intangible assets as well as financial assets of a long-term nature. Noncurrent liabilities include financial and non-financial liabilities which are expected to be settled after twelve months from balance date.

For the purposes of this disclosure, the fair value of both trading and hedging derivatives has been classified as current. For more information on the contractual timing of expected outflows and inflows in relation to hedging derivatives refer to Note 27.

	Banking Group	Bank
	30/09/2014 30/09/2013	30/09/2014 30/09/2013
$ millions	Current Non-current Current Non-current	Current Non-current Current Non-current
Assets
Cash	1,822 - 2,206 -	1,822 - 2,206 -
Settlement balances receivable	855 - 514 -	858 - 514 -
Collateral paid	783 - 1,002 -	783 - 1,002 -
Trading securities	11,750 - 10,320 -	11,750 - 10,319 -
Investment backing insurance contract
	190 - 169 3	- - - -
liabilities
Derivative financial instruments	11,404 - 9,518 -	11,408 - 9,522 -
Current tax assets	- - - -	7 - 62 -
Available-for-sale assets	437 335 567 375	435 335 565 375
Net loans and advances	26,451 69,848 29,226 61,611	29,201 80,467 30,841 69,928
Other assets	588 60 505 62	641 60 547 62
Insurance contract assets	- 470 - 399	- - - -
Investments in subsidiaries and
	- 88 - 98	- 4,749 - 4,864
associates
Deferred tax assets	- - - 45	- 63 - 134
Premises and equipment	- 380 - 376	- 54 - 61
Goodwill and other Intangible assets	- 3,454 - 3,448	- 3,312 - 3,299
Total assets	54,280 74,635 54,027 66,417	56,905 89,040 55,578 78,723
Liabilities
Settlement balances payable	2,296 - 1,428 -	2,771 - 1,767 -
Collateral Received	800 - 438 -	800 - 438 -
Deposits and other borrowings	80,201 3,818 76,262 2,554	87,219 28,004 79,035 26,770
Derivative financial instruments	10,205 - 10,243 -	10,237 - 10,252 -
Current tax liabilities	67 - 3 -	- - - -
Deferred tax liabilities	- 60 - -	- - - -
Payables and other liabilities	1,238 59 1,096 99	1,150 59 990 99
Provisions	117 87 137 92	97 85 99 88
Bond and Notes	3,944 13,098 3,338 12,156	599 2,678 402 2,285
Subordinated debt	- 1,144 - 1,144	- 1,144 - 1,144
Total liabilities	98,868 18,266 92,945 16,045	102,873 31,970 92,983 30,386

ANZ Bank New Zealand Limited

36

Notes to the Financial Statements

25. Share Capital

25. Share Capital	25. Share Capital	25. Share Capital
Bank and Banking Group	Number of issued shares		$ millions
	30/09/2014 30/09/2013		30/09/2014 30/09/2013
Ordinary shares
At beginning of the year	1,700,755,498 1,700,755,498		6,943 6,943
Issued during the year	970,000,000 -		970 -
Ordinary shares at end of the year	2,670,755,498 1,700,755,498		7,913 6,943
Preference shares
At beginning of the year	300,000,000 -		300 -
Issued during the year	- 300,000,000		- 300
Preference shares at end of the year	300,000,000 300,000,000		300 300
Total share capital	2,970,755,498 2,000,755,498		8,213 7,243

Ordinary shares

650,712 of the ordinary shares are uncalled (30/09/2013 650,712 shares uncalled).

During the year ended 30 September 2014 the Bank paid ordinary dividends of $2,340 million (30/09/2013 $1,065 million) to the Immediate Parent Company (equivalent to $1.20 per share) (30/09/2013 equivalent to $0.63 per share).

All ordinary shares share equally in dividends and any proceeds available to ordinary shareholders on winding up of the Bank. On a show of hands every member who is present at a meeting in person or by proxy or by representative is entitled to one vote, and upon a poll every member shall have one vote for each share held.

Preference shares

All preference shares were issued by the Bank to the Immediate Parent and do not carry any voting rights. The preference shares are wholly classified as equity instruments as there is no contractual obligation for the Bank to either deliver cash or another financial instrument or to exchange financial instruments on a potentially unfavourable basis. The key terms of the preference shares are as follows:

Dividends

Dividends are payable at the discretion of the directors of the Bank and are non-cumulative. The Bank must not resolve to pay any dividend or make any other distribution on its ordinary shares until the next preference dividend payment date if the Directors elect to not pay a dividend on the preference shares.

Should the Bank elect to pay a dividend, the dividend is payable at 72% of BKBM + 3.25% p.a., with dividend payments due on 1 March and 1 September each year, beginning on 1 March 2014.

Redemption features

The preference shares are redeemable, subject to prior written approval of the RBNZ, by the Bank providing notice in writing to holders of the preference shares:

• on any date on or after a change to laws or regulations that adversely affects the regulatory capital or tax treatment of the preference shares; or

• on any dividend payment date on or after 1 March 2019; or

• on any date after 1 March 2019 if the Bank has ceased to be a wholly owned subsidiary of the Ultimate Parent Bank.

The preference shares may be redeemed for nil consideration should a non-viability trigger event occur.

Rights of holders in event of liquidation

In the event of liquidation, holders of preference shares are entitled to available subscribed capital per share, pari passu with all holders of existing preference shares but in priority to all holders of ordinary shares. They have no entitlement to participate in further distribution of profits or assets.

The preference shares qualify as “additional tier 1 capital” for capital adequacy purposes.

ANZ Bank New Zealand Limited

37

Notes to the Financial Statements

26. Capital Adequacy

Capital management policies

The Banking Group’s core capital objectives are to:

• Protect the interests of depositors, creditors and shareholders;

• Ensure the safety and soundness of the Banking Group’s capital position; and

• Ensure that the capital base supports the Banking Group’s risk appetite, and strategic business objectives, in an efficient and effective manner.

The Board holds ultimate responsibility for ensuring that capital adequacy is maintained. This includes: setting, monitoring and obtaining assurance for the Banking Group’s Internal Capital Adequacy Assessment Process (“ICAAP”) policy and framework; standardised risk definitions for all material risks; materiality thresholds; capital adequacy targets; internal economic risk capital principles; and risk appetite.

The Banking Group has minimum and trigger levels for common equity tier 1, tier 1 and total capital that ensure sufficient capital is maintained to:

• Meet minimum prudential requirements imposed by regulators;

• Ensure consistency with the Banking Group’s overall risk profile and financial positions, taking into account its strategic focus and business plan; and

• Support the economic risk capital requirements of the business.

The Banking Group’s Asset & Liability Committee and its related Capital Management Forum are responsible for developing, implementing and maintaining the Banking Group's ICAAP framework, including ongoing monitoring, reporting and compliance. The Banking Group’s ICAAP is subject to independent and periodic review conducted by Internal Audit.

The Banking Group has complied with all externally imposed capital requirements to which it is subject during the current and comparative periods.

Basel III capital ratios	Banking	Group	Bank
	30/09/2014	30/09/2013	30/09/2014	30/09/2013
Unaudited
Common equity tier 1 capital	10.7%	10.4%	9.4%	9.2%
Tier 1 capital	11.1%	10.8%	9.8%	9.7%
Total capital	12.3%	12.4%	11.1%	11.3%
Buffer ratio	4.3%	4.4%
RBNZ minimum ratios:
Common equity tier 1 capital	4.5%	4.5%
Tier 1 capital	6.0%	6.0%
Total capital	8.0%	8.0%
Buffer requirement	2.5%	n/a

ANZ Bank New Zealand Limited

38

Notes to the Financial Statements

Capital of the Banking Group

**Capital of the Banking Group **
	Unaudited
**$ millions **	30/09/2014
**Tier 1 capital **
Common equity tier 1 capital
Paid up ordinary shares issued by the Bank	7,913
Retained earnings (net of appropriations)	3,575
Accumulated other comprehensive income and other disclosed reserves	(7)
Less deductions from common equity tier 1 capital
Goodwill and intangible assets, net of associated deferred tax liabilities	(3,441)
Cash flow hedge reserve	7
Expected losses to the extent greater than total eligible allowances for impairment	(221)
Common equity tier 1 capital	7,826
Additional tier 1 capital - preference shares	300
Total tier 1 capital	8,126
Tier 2 capital
NZD 835,000,000 perpetual subordinated bond	835
AUD 265,740,000 perpetual subordinated loan	298
Less deductions from tier 2 capital
Basel III transition adjustment1	(197)
Total tier 2 capital	936
Total capital	9,062

Capital requirements of the Banking Group

Capital requirements of the Banking Group
	Risk weighted exposure or implied risk
	Exposure at weighted Total capital
**$ millions **	default exposure2 requirement
Unaudited 30/09/2014
Exposures subject to internal ratings based approach	132,421 52,144 4,172
Specialised lending exposures subject to slotting approach	8,736 8,234 659
Exposures subject to standardised approach	2,323 336 26
Equity exposures	90 381 31
Other exposures	2,729 1,289 103
Total credit risk	146,299 62,384 4,991
Operational risk	n/a 5,336 427
Market risk	n/a 5,707 456
Total	146,299 73,427 5,874

1 These instruments qualify as tier 2 capital under the RBNZ’s transitional rules. Fixing the base at the nominal amount of such instruments outstanding at 31 December 2012, their recognition is capped at 80% of that base from 1 January 2014; 60% from 1 January 2015; 40% from 1 January 2016; 20% from 1 January 2017; and from 1 January 2018 onwards these instruments will not be included in regulatory capital.

2 Total credit risk weighted exposures include a scalar of 1.06 in accordance with the Bank's Conditions of Registration.

ANZ Bank New Zealand Limited

39

Notes to the Financial Statements

Implementation of the advanced internal ratings based approach to credit risk measurement

The Banking Group adheres to the standards of risk grading and risk quantification as set out for Internal Ratings Based (IRB) banks in the RBNZ document Capital Adequacy Framework (Internal Models Based Approach) (BS2B).

Under this IRB Framework banks use their own measures for calculating the level of credit risk associated with customers and exposures, by way of the primary components of:

Probability of Default (PD): An estimate of the level of risk of borrower default graded by way of rating models used both at loan origination and for ongoing monitoring;

Exposure at Default (EAD): The expected facility exposure at default. Total credit risk-weighted exposures include a scalar of 1.06 in accordance with the Bank’s Conditions of Registration; and

Loss Given Default (LGD): An estimate of the potential economic loss on a credit exposure, incurred as a consequence of obligor default and expressed as a percentage of the facility’s EAD. For Retail Mortgage exposures the Bank is required to apply the downturn LGDs according to loan to value (LVR) bands as set out in BS2B. For farm lending exposures the Banking Group is required to adopt RBNZ prescribed downturn LVR based LGDs, along with a minimum maturity of 2.5 years and the removal of the firm-size adjustment.

For exposures classified under Specialised Lending, the Banking Group uses slotting tables supplied by the RBNZ rather than internal estimates.

The exceptions to IRB treatment are three minor portfolios where, due to systems constraints, determining these IRB risk estimates is not currently feasible or appropriate. Risk weights for these exposures are calculated under a separate treatment as set out in the RBNZ document Capital Adequacy Framework (Standardised Approach) (BS2A).

Classification of Banking Group exposures according to rating approach

Internal ratings based approach	Internal ratings based approach
IRB Asset Class	Borrower Type Rating Approach
Sovereign	Crown IRB - Advanced
	RBNZ IRB - Advanced
	Any other sovereign and its central bank IRB - Advanced
Bank	Registered banks IRB - Advanced
Corporate	Corporation, partnerships or proprietorships that do not fit any other asset classification IRB - Advanced
	Corporate Small to Medium Enterprises ("SME") with turnover of less than $50 million IRB - Advanced
Retail Mortgages	Individuals' borrowings against residential property IRB - Advanced
Other Retail	Other lending to individuals (including credit cards) IRB - Advanced
	SME business borrowers IRB - Advanced
Corporate sub-class	Project finance IRB - Slotting
- Specialised lending	Income producing real estate IRB - Slotting
Equity	IRB
Other assets	All other assets not falling within any of the above classes IRB
Standardised approach

ANZ Bank New Zealand Limited

40

Notes to the Financial Statements

Controls surrounding credit risk rating systems

The term “Rating Systems” covers all of the methods, processes, controls, data collection and technology that support the assessment of credit risk, the assignment of internal credit risk ratings and the quantification of associated default and loss estimates.

All material aspects of the Rating Systems and risk estimate processes are governed by the Banking Group’s Risk Committee. Risk grades are an integral part of reporting to senior management and executives. Management and staff of credit risk functions, in conjunction with the relevant Retail and Wholesale Risk Committees, regularly assess the performance of the rating systems, identify any areas for improvement and monitor progress on previously identified development work needed.

The Banking Group's Rating Systems are governed by a comprehensive framework of controls that operate at the business unit and support centres, and through central audit and validation processes. All policies, model designs, model reviews, methodologies, validations, responsibilities, systems and processes supporting the ratings systems are fully documented.

The Banking Group's Retail and Wholesale ratings functions work closely with the Ultimate Parent Bank's risk ratings functions, are independent of operational lending activities and are responsible for the ratings strategies and ongoing management of credit risk models within New Zealand. The annual review of models used across the Banking Group is a function undertaken by the ANZ Decision Model Validation Unit, which is also independent of credit risk operational functions and is responsible for overseeing the design, implementation and performance of all rating models in the Banking Group.

The target approach to modelling for the Banking Group is to deploy the model most suitable for the environment. At present this involves an approach to modelling that combines models developed in New Zealand and models developed by the Ultimate Parent Bank, tested and validated for use in New Zealand, as appropriate.

Capital requirements by asset class under the IRB approach

	Totalexposure Exposure- weighted LGD used for the Exposure-
	or principal Exposure at capital weighted risk Risk weighted Total capital
	amount default calculation weight exposure requirement
Unaudited 30/09/2014	$m $m % % $m $m
On-balance sheet exposures
Corporate	33,731 33,854 35 54 19,491 1,559
Sovereign	9,864 9,686 5 1 117 9
Bank	3,971 3,456 59 26 946 76
Retail mortgages	50,712 50,944 21 25 13,697 1,097
Other retail	4,753 4,855 76 96 4,939 395
Total on-balance sheet exposures	103,031 102,795 28 36 39,190 3,136
Off-balance sheet exposures
Corporate	12,150 10,132 51 47 5,048 404
Sovereign	186 106 5 1 1 -
Bank	1,491 1,145 52 18 215 17
Retail mortgages	6,386 6,712 17 16 1,124 90
Other retail	5,462 5,143 79 56 3,051 244
Total off-balance sheet exposures	25,675 23,238 47 38 9,439 755
Market related contracts
Corporate	86,019 2,310 63 73 1,779 142
Sovereign	10,942 408 5 28 122 10
Bank	656,396 3,670 64 41 1,614 129
Total market related contracts	753,357 6,388 60 52 3,515 281
Total credit risk exposures subject to the IRB approach	882,063 132,421 33 37 52,144 4,172

ANZ Bank New Zealand Limited

41

Notes to the Financial Statements

IRB exposures by customer credit rating

IRB exposures by customer credit rating
			Exposure-
			weighted LGD
			used for the	Exposure-
	Probability of	Exposure at	capital	weighted risk	Risk weighted	Total capital
	default	default	calculation	weight	exposure	requirement
Unaudited 30/09/2014	%	$m	%	%	$m	$m
Corporate
0 - 2	0.05	5,348	65	34	1,930	154
3 - 4	0.31	24,952	37	40	10,578	846
5	1.00	9,910	36	64	6,686	535
6	2.23	4,350	39	86	3,945	316
7 - 8	7.41	1,175	40	134	1,674	134
Default	100.00	561	47	253	1,505	120
Total corporate exposures	2.00	46,296	40	54	26,318	2,105
Sovereign
0	0.01	9,320	5	2	223	18
1 - 8	0.02	880	5	2	17	1
Total sovereign exposures	0.01	10,200	5	2	240	19
Bank
0	0.03	23	65	11	3	-
1	0.03	6,407	60	29	1,979	158
2 - 4	0.09	1,810	62	40	758	61
5 - 8	1.21	31	63	107	35	3
Total bank exposures	0.05	8,271	60	32	2,775	222
Retail mortgages
0 - 3	0.20	13,014	12	5	662	53
4	0.46	19,939	19	15	3,089	247
5	0.93	18,864	25	34	6,764	541
6	2.04	4,868	29	67	3,450	276
7 - 8	5.24	521	29	111	616	49
Default	100.00	450	26	50	240	21
Total retail mortgages exposures	1.51	57,656	20	24	14,821	1,187
Other retail
0 - 2	0.10	670	78	48	344	28
3 - 4	0.30	4,759	78	55	2,797	224
5	1.13	1,597	71	75	1,278	102
6	2.60	1,580	76	96	1,609	129
7 - 8	9.56	1,306	88	135	1,875	150
Default	100.00	86	79	94	87	6
Total other retail exposures	2.85	9,998	78	75	7,990	639
Total credit risk exposures subject to the IRB approach	1.57	132,421	33	37	52,144	4,172

Credit risk exposures subject to the IRB approach have been derived in accordance with BS2B and other relevant correspondence with RBNZ setting out prescribed credit risk estimates.

ANZ Bank New Zealand Limited

42

Notes to the Financial Statements

Specialised lending subject to the slotting approach

	Exposure at		Risk weighted	Total capital
	default	Risk weight	exposure	requirement
Unaudited 30/09/2014	$m	%	$m	$m
On-balance sheet exposures
Strong	2,150	70	1,596	128
Good	4,278	90	4,081	326
Satisfactory	862	115	1,051	84
Weak	132	250	345	28
Default	135	-	-	-
Total on-balance sheet exposures	7,557	88	7,073	566

	Exposure Exposure at Average risk Risk weighted Total capital
	amount default weight exposure requirement
	$m $m % $m $m
Off-balance sheet exposures
Undrawn commitments and other off balance sheet exposures	1,455 1,117 91 1,079 86
Market related contracts	2,073 62 124 82 7
Total off-balance sheet exposures	3,528 1,179 93 1,161 93

Specialised lending exposures subject to the slotting approach have been calculated in accordance with BS2B.

The supervisory categories of specialised lending above are associated with specific risk-weights. These categories broadly correspond to the following external credit assessments using Standard & Poor's rating scale, Strong: BBB- or better, Good: BB+ or BB, Satisfactory: BB- or B+ and Weak: B to C-.

Credit risk exposures subject to the standardised approach

	Exposure at Risk weighted Total capital
	default Risk weight exposure requirement
Unaudited 30/09/2014	$m % $m $m
On-balance sheet exposures
Corporates	59 100 62 5
Default	1 150 1 -
Total on-balance sheet exposures	60 101 63 5

	Average credit
	Exposure conversion Exposure at Average risk Risk weighted Total capital
	amount factor default weight exposure requirement
	$m % $m % $m $m
Off-balance sheet exposures
Undrawn commitments and other off balance sheet exposures	526 47 246 88 230 18
Market related contracts	231,640 1 2,017 2 43 3
Total off balance sheet	232,166 n/a 2,263 11 273 21

Credit exposures subject to the Standardised Approach have been calculated in accordance with BS2A.

Equity exposures
	Exposure a	t Risk weighted Total capital
	default Risk weight exposure requirement
Unaudited 30/09/2014	$m % $m $m
All equity holdings not deducted from capital	90 400 381 31

Equity exposures have been calculated in accordance with BS2B.

ANZ Bank New Zealand Limited

43

Notes to the Financial Statements

Other exposures
			Risk weighted Total capital
		Exposure at default Risk weight exposure requirement
Unaudited 30/09/2014		$m % $m $m
Cash		204 - - -
New Zealand dollar denominated claims on the Crown and the RBNZ		1,309 - - -
Other assets		1,216 100 1,289 103
Total other IRB credit risk exposures		2,729 45 1,289 103

Other exposures have been calculated in accordance with BS2B.

Credit risk mitigation

The Banking Group assesses the integrity and ability of counterparties to meet their contractual financial obligations for repayment. The Banking Group generally takes collateral security in the form of real property or a security interest in personal property, except for major government, bank and corporate counterparties of strong financial standing. Longer term consumer finance, in the form of housing loans, is generally secured against real estate while short term revolving consumer credit is generally unsecured.

As at 30 September 2014, under the IRB approach, the Banking Group had $1,121 million of Corporate exposures covered by guarantees where the presence of the guarantees was judged to reduce the underlying credit risk of the exposures. Information on the total value of exposures covered by financial guarantees and eligible financial collateral is not disclosed, as the effect of these guarantees and collateral on the underlying credit risk exposures is not considered to be material.

Operational risk

The Banking Group uses the Advanced Measurement Approach for determining its regulatory capital requirement for operational risk calculated in accordance with BS2B. As at 30 September 2014 the Banking Group had an implied risk weighted exposure of $5,336 million for operational risk and an operational risk capital requirement of $427 million.

Operational risk capital is modelled at a New Zealand geographic level and then distributed and adjusted for the business environment and internal controls down to the business units using the Risk Scenario Methodology. This methodology ensures that there is sufficient operational risk capital held as a buffer for rare and severe unexpected operational loss events that may impact the New Zealand business. The Methodology applies a combination of expert judgement, business unit risk profiles, audit findings, and internal and external loss events to derive a series of business specific Risk Scenarios that are applied to the capital model. The Risk Scenario approach

• assesses the level of the Bank's exposure to specified risk scenarios;

• assesses the scope and quality of the Bank's internal control environment, key operational processes and risk mitigants; and

• • directly links the risk scenarios to operational risk capital.

The Banking Group's operating risk capital is calculated using the Ultimate Parent Bank’s methodology, but with standalone New Zealand inputs to ensure there are no diversification benefits.

The Banking Group does not incorporate any insurance mitigation impact into its capital number. Accordingly, there are no insurance related questions contained within the Risk Scenario Methodology.

Market risk

The aggregate market risk exposures below have been calculated in accordance with BS2B. The peak end-of-day market risk exposures are for the half-year ended 30 September 2014.

exposures are for the half-year ended 30 September 2014.
	Implied risk weighted exposure Aggregate capital charge Peak
$ millions	Period end Peak Period end Peak occurred on
Unaudited 30/09/2014
Interest rate risk	5,653 5,829 452 466 26/09/2014
Foreign currency risk	52 162 4 13 16/07/2014
Equity risk	2 2 - - 1/07/2014
	5,707	456

ANZ Bank New Zealand Limited

44

Notes to the Financial Statements

Pillar II capital for other material risks

The Banking Group has an Internal Capital Adequacy Assessment Process (ICAAP) which complies with the requirements of the Bank's Conditions of Registration.

Under the Banking Group's ICAAP it identifies and measures all "other material risks", which are those material risks that are not explicitly captured in the calculation of the Banking Group's tier 1 and total capital ratios. The other material risks identified by the Banking Group include business risk, pension risk, insurance risk, funds management risk, lapse risk, premises and equipment risk and capitalised origination fees risk.

The Banking Group's internal capital allocation for these other material risks is $369 million (30/09/2013 $343 million).

The Banking Group regularly reviews the methodologies used to calculate the economic capital allocated to other material risks. Updated capital methodologies (particularly relating pension risk and business retention risk) were applied in November 2013 and prior periods restated accordingly.

Capital adequacy of the Ultimate Parent Bank

Basel III capital ratios			Ultimate Parent Bank	Ultimate Parent Bank
	Overseas Banking	Group	(Extended Licensed Entity)
	30/09/2014	30/09/2013	30/09/2014	30/09/2013
Unaudited
Common equity tier 1 capital	8.8%	8.5%	9.1%	8.5%
Tier 1 capital	10.7%	10.4%	11.3%	10.6%
Total capital	12.7%	12.2%	13.4%	12.5%

For calculation of minimum capital requirements under Pillar 1 (Capital Requirements) of the Basel Accord, APRA has accredited the Overseas Banking Group to use the Advanced Internal Ratings Based (AIRB) methodology for calculation of credit risk weighted assets and the Advanced Measurement Approach (AMA) for the operational risk weighted asset equivalent.

Under prudential regulations, the Overseas Banking Group is required to maintain a Prudential Capital Ratio (PCR) as determined by APRA. The Overseas Banking Group exceeded the PCR set by APRA as at 30 September 2014 and for the comparative prior periods.

The Overseas Banking Group is required to publicly disclose Pillar 3 financial information as at 30 September 2014. The Overseas Banking Group’s Pillar 3 disclosure document for the quarter ended 30 September 2014, in accordance with APS 330: Public Disclosure of Prudential Information, discloses capital adequacy ratios and other prudential information. This document can be accessed at the website anz.com.

ANZ Bank New Zealand Limited

45

Notes to the Financial Statements

Residential mortgages by loan-to-valuation ratio

As required by the RBNZ, LVRs are calculated as the current exposure secured by a residential mortgage divided by the Banking Group's valuation of the security property at origination of the exposure. Off balance sheet exposures include undrawn and partially drawn residential mortgage loans as well as commitments to lend. Commitments to lend are formal offers for housing lending which have been accepted by the customer.

		30/09/2014	30/09/2014
Unaudited		On-balance Off-balance
$ millions		sheet sheet Total
LVR range
Does not exceed 60%		19,161 3,531 22,692
Exceeds 60% and not 70%		9,445 982 10,427
Exceeds 70% and not 80%		15,151 1,440 16,591
Does not exceed 80%		43,757 5,953 49,710
Exceeds 80% and not 90%		4,489 211 4,700
Exceeds 90%		2,466 222 2,688
Total		50,712 6,386 57,098
Reconciliation of mortgage related amounts
Unaudited
$ millions		Note 30/09/2014
Term loans - housing		12 52,717
Add: fair value hedging adjustment		23
Add: short-term housing loans classified as overdrafts		490
Less: housing loans made to corporate customers		(2,592)
Gross retail mortgage loans		27 50,638
Add: Unsettled re-purchases of mortgages from the NZ Branch			74
On-balance sheet retail mortgage exposures subject to the IRB approach			50,712
Add: off-balance sheet retail mortgage exposures subject to the IRB approach			6,386
Total retail mortgage exposures subject to the IRB approach (as per LVR analysis)			57,098

ANZ Bank New Zealand Limited

46

Notes to the Financial Statements

27. Financial Risk Management

Strategy in using financial instruments

Financial instruments are fundamental to the Banking Group’s business, constituting the core element of its operations. Accordingly, the risks associated with financial instruments are a significant component of the risks faced by the Banking Group. Financial instruments create, modify or reduce the credit, market and liquidity risks of the Banking Group’s balance sheet. The Banking Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Banking Group.

The risk management and policy control framework applicable to the entities comprising the Banking Group has been set by the Board and Risk Committee of the Bank or the Ultimate Parent Bank, as appropriate. Likewise oversight and monitoring of material risk exposures of the Banking Group is undertaken by the Risk Management functions of the Bank and also the Ultimate Parent Bank. Throughout this document, references to the Risk Management of the operations within the entities comprising the Banking Group, implicitly involves oversight by both related entities.

Credit risk

Credit risk is the risk of financial loss from counterparties being unable to fulfil their contractual obligations. The Banking Group assumes credit risk in a wide range of lending and other activities in diverse markets and many jurisdictions. Credit risks arise not only from traditional lending to customers, but also from inter-bank, treasury, international trade and capital market activities around the world.

The Banking Group has an overall lending objective of sound growth for appropriate returns. The credit risk objectives of the Banking Group are set by the Board and are implemented and monitored within a tiered structure of delegated authority, designed to oversee multiple facets of credit risk, including business writing strategies, credit policies/controls, single exposures, portfolio monitoring and risk concentrations.

Credit risk management

A credit risk management framework is in place across the Banking Group with the aim of ensuring a structured and disciplined approach is maintained in achieving the objectives set by the Board. The framework focuses on policies, people, skills, controls, risk concentrations and portfolio balance. It is supported by portfolio analysis and business-writing strategies, which guide lending decisions and identify segments of the portfolio requiring attention. The effectiveness of the framework is monitored through a series of compliance and reporting processes.

An independent Risk Management function is staffed by risk specialists. In regard to credit risk management, the objective is for Risk Management to provide robust credit policies, to make independent credit decisions, and to provide strong support to front line staff in the application of sound credit practices. In addition to providing independent credit assessment on lending decisions, Risk Management also performs key roles in portfolio management by development and validation of credit risk measurement systems, loan asset

quality reporting, and development of credit standards and policies.

The credit risk management framework is top down. The framework is defined by the Banking Group's credit principles and policies. The effectiveness of the credit risk management framework is validated through the compliance and monitoring processes.

Risk Management's responsibilities for credit risk policy and management are executed through dedicated departments, which support the business units. All major business unit credit decisions require approval from both business writers and independent risk personnel.

Credit risk is controlled through a combination of approvals, limits, reviews and monitoring procedures that are carried out on a regular basis, the frequency of which is dependent upon the level of risk. Credit risk policy and management is executed through the Chief Risk Officer, who is responsible for various dedicated areas within the Risk Management division. Wholesale Risk services the Banking Group's commercial, investment banking and rural lending activities through dedicated teams. Retail Risk services the Banking Group's small business and consumer customers. The Credit Reporting team within Risk Management provides an independent overview of credit risk across the Bank at a portfolio level. The Banking Group allows sole discretion for transaction approvals at the business unit level in both the retail and wholesale lending sectors, with larger transactions approved by Retail Risk and Wholesale Risk.

The credit risk review function within Global Internal Audit also provides a further independent check mechanism to ensure the quality of credit decisions. This includes providing independent periodic checks on asset quality and compliance with the agreed standards and policies across the Banking Group.

Country risk management

Some customer credit risks involve country risk, whereby actions or events at a national or international level could disrupt servicing of commitments. Country risk arises when payment or discharge of an obligation will, or could, involve the flow of funds from one country to another or involve transactions in a currency other than the domestic currency of the relevant country.

Country ratings are assigned to each country where the Banking Group incurs country risk and have a direct bearing on the Banking Group's risk appetite for each country. The country rating is determined through a defined methodology based around external ratings agencies’ ratings and internal specialist opinion. It is also a key risk consideration in the Banking Group's capital pricing model for cross border flows.

The recording of country limits provides the Banking Group with a means to identify and control country risk. Country limits ensure that there is a country-by-country ceiling on exposures that involve country risk. They are recorded by time to maturity and purpose of exposure, e.g., trade, markets and project finance. Country limits are managed centrally by the Ultimate Parent Bank, through a global country risk exposure management system managed by a specialist unit within Institutional Risk.

ANZ Bank New Zealand Limited

47

Notes to the Financial Statements

Portfolio stress testing

Stress testing is integral to strengthening the predictive approach to Risk Management and is a key component to managing risk appetite and business writing strategies. It creates greater understanding of impacts on financial performance through modelling relationships and sensitivities between geographic, industry and business unit exposures under a range of macro economic scenarios.

The Ultimate Parent Bank has a dedicated stress testing team that assists business and risk executives in the Banking Group to model and report periodically to management and the Board Risk Committee on a range of scenarios and stress tests.

Portfolio analysis and reporting

Credit portfolios are actively monitored at each layer of the risk structure to ensure credit deterioration is quickly detected and mitigated through the implementation of remediation strategies.

Businesses incurring credit risk undertake regular and comprehensive analysis of their credit portfolios. Issue identification and adherence to performance benchmarks are reported to Risk Management and business executives through a series of reports including monthly ‘asset quality’ reporting. This process is undertaken by or overseen by Risk Management ensuring an efficient and independent conduit exists to identify and communicate emerging credit issues to Banking Group executives and the Board.

Collateral management

Banking Group credit principles specify lending only what the counterparty has the capacity and ability to repay and the Banking Group sets limits on the acceptable level of credit risk. Acceptance of credit risk is firstly based on the counterparty’s assessed capacity to meet contractual obligations (i.e., interest and capital repayments). Obtaining collateral is only used to mitigate credit risk. Procedures are designed to ensure collateral is managed, legally enforceable, conservatively valued and adequately insured where appropriate. Banking Group policy sets out the types of acceptable collateral, including:

• Cash;

• Mortgages over property;

• Charges over business assets, e.g., premises, stock and debtors;

• Charges over financial instruments, e.g., debt securities and equities in support of trading facilities; and

• Financial guarantees.

realise it. Therefore the Banking Group does not usually hold any real estate or other assets acquired through the enforcement of security.

The Banking Group uses ISDA Master Agreements to document derivatives' activities to limit exposure to credit losses. The credit risk is reduced by a master agreement to the extent that, if an event of default occurs, all contracts with the counterparty are terminated and settled on a net basis. Further, it is the Banking Group's preferred practice to include all products covered by the ISDA in the Credit Support Annex (CSA) in order to achieve further credit exposure reduction. Under a CSA, collateral is passed between the parties, depending on the aggregate mark-tomarket (positive or negative) of derivative trades between the two entities, to mitigate the market contingent counterparty risk inherent in the outstanding positions.

Concentrations of credit risk

Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities within the same geographic region, or when they have similar risk characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.

The Banking Group monitors its portfolios to identify and assess risk concentrations. Concentration limits are used to guard against large single customer or correlated credit risks. Risk Management, Business Unit executives and senior management monitor large exposure concentrations through a monthly list of the Banking Group's top corporate exposures. The ANZ Credit and Market Risk Committee and Board Risk Committee regularly review a comprehensive list of single customer concentration limits and customers’ adherence to these limits.

Analyses of financial assets by industry sector are based on Australian and New Zealand Standard Industrial Classification (ANZSIC) codes. Notes on the following tables:

• 1 Government and local authority includes exposures to government administration and defence, education and health and community services.

• 2 Other includes exposures to electricity, gas and water, communications and personal services.

• 3 Net loans and advances exclude individual and collective provisions for credit impairment held in respect of credit related commitments.

• 4 Credit related commitments comprise undrawn facilities, customer contingent liabilities and letters of offer.

In the event of customer default, any loan security is usually held as mortgagee in possession while action is taken to

ANZ Bank New Zealand Limited

48

Notes to the Financial Statements

	Banking Group
	Cash, settlements receivable and Trading securities and available-for- Derivative financial Net loans and Other financial Credit related
**30/09/2014 **
**$ millions **	collateral paid sale assets instruments advances 3 assets commitments 4 Total
Industry
Agriculture	- - 9 17,362 76 1,364 18,811
Forestry, fishing and mining	- - 8 1,122 5 914 2,049
Business and property services	- - 16 9,504 42 2,499 12,061
Construction	- - - 1,214 5 935 2,154
Entertainment, leisure and tourism	- - 25 1,026 5 238 1,294
Finance and insurance	1,947 5,526 10,061 972 322 1,426 20,254
Government and local authority1	1,309 6,857 630 1,256 6 1,305 11,363
Manufacturing	- 25 177 3,030 13 2,067 5,312
Personal lending	- - - 54,751 241 15,106 70,098
Retail trade	- - 20 2,029 9 968 3,026
Transport and storage	- 12 31 1,484 7 730 2,264
Wholesale trade	- - 15 1,384 6 1,290 2,695
Other2	- 102 412 1,835 8 1,736 4,093
	3,256 12,522 11,404 96,969 745 30,578 155,474
Less: Provision for credit impairment	- - - (561) - (105) (666)
Less: Unearned income	- - - (212) - - (212)
Add: Capitalised brokerage/mortgage
	- - - 208 - - 208
origination fees
Total financial assets	3,256 12,522 11,404 96,404 745 30,473 154,804
Geography
New Zealand	2,566 8,339 2,664 94,236 735 30,293 138,833
Overseas	690 4,183 8,740 2,168 10 180 15,971
Total financial assets	3,256 12,522 11,404 96,404 745 30,473 154,804
**30/09/2013 **
Industry
Agriculture	- 29 22 17,469 70 1,229 18,819
Forestry, fishing and mining	- - 11 940 4 894 1,849
Business and property services	- 1 24 8,899 36 2,363 11,323
Construction	- - - 1,033 4 709 1,746
Entertainment, leisure and tourism	- - 27 1,031 4 326 1,388
Finance and insurance	1,760 5,284 8,586 670 291 1,517 18,108
Government and local authority1	1,764 5,872 248 1,250 5 1,022 10,161
Manufacturing	- - 69 2,970 12 1,996 5,047
Personal lending	- - - 51,407 206 11,811 63,424
Retail trade	- - 40 1,820 7 991 2,858
Transport and storage	- 3 54 1,472 6 610 2,145
Wholesale trade	- - 13 1,315 5 1,369 2,702
Other2	- 73 424 1,445 6 2,627 4,575
	3,524 11,262 9,518 91,721 656 27,464 144,145
Less: Provision for credit impairment	- - - (689) - (137) (826)
Less: Unearned income	- - - (214) - - (214)
Add: Capitalised brokerage / mortgage
	- - - 156 - - 156
origination fees
Total financial assets	3,524 11,262 9,518 90,974 656 27,327 143,261
Geography
New Zealand	3,037 7,843 2,523 88,989 648 27,146 130,186
Overseas	487 3,419 6,995 1,985 8 181 13,075
Total financial assets	3,524 11,262 9,518 90,974 656 27,327 143,261

ANZ Bank New Zealand Limited

49

Notes to the Financial Statements

Notes to the Financial	Statements
	Bank
	Cash, settlements receivable and Trading securities and available-for- Derivative financial Net loans and Other financial Credit related
**30/09/2014 **
**$ millions **	collateral paid sale assets instruments advances 3 assets commitments 4 Total
Industry
Agriculture	- - 9 17,001 85 1,364 18,459
Forestry, fishing and mining	- - 8 924 5 914 1,851
Business and property services	- - 16 9,383 47 2,499 11,945
Construction	- - - 873 4 935 1,812
Entertainment, leisure and tourism	- - 25 1,008 5 238 1,276
Finance and insurance	1,950 5,524 10,065 16,800 155 2,368 36,862
Government and local authority1	1,309 6,857 630 1,110 6 1,305 11,217
Manufacturing	- 25 177 2,935 15 2,067 5,219
Personal lending	- - - 54,175 271 15,106 69,552
Retail trade	- - 20 1,828 9 968 2,825
Transport and storage	- 12 31 1,046 5 730 1,824
Wholesale trade	- - 15 1,310 7 1,290 2,622
Other2	- 102 412 1,757 9 1,736 4,016
	3,259 12,520 11,408 110,150 623 31,520 169,480
Less: Provision for credit impairment	- - - (530) - (104) (634)
Less: Unearned income	- - - (56) - - (56)
Add: Capitalised brokerage / mortgage
	- - - 208 - - 208
origination fees
Total financial assets	3,259 12,520 11,408 109,772 623 31,416 168,998
Geography
New Zealand	2,569 8,337 2,668 107,604 612 31,236 153,026
Overseas	690 4,183 8,740 2,168 11 180 15,972
Total financial assets	3,259 12,520 11,408 109,772 623 31,416 168,998
**30/09/2013 **
Industry
Agriculture	- 29 22 17,162 78 1,204 18,495
Forestry, fishing and mining	- - 11 793 4 871 1,679
Business and property services	- 1 24 8,778 40 2,340 11,183
Construction	- - - 738 3 658 1,399
Entertainment, leisure and tourism	- - 27 1,005 5 324 1,361
Finance and insurance	1,760 5,281 8,590 13,003 126 4,242 33,002
Government and local authority1	1,764 5,872 248 1,075 5 1,022 9,986
Manufacturing	- - 69 2,856 13 1,987 4,925
Personal lending	- - - 50,733 231 11,801 62,765
Retail trade	- - 40 1,631 7 934 2,612
Transport and storage	- 3 54 1,081 5 546 1,689
Wholesale trade	- - 13 1,253 6 1,351 2,623
Other2	- 73 424 1,362 6 2,623 4,488
	3,524 11,259 9,522 101,470 529 29,903 156,207
Less: Provision for credit impairment	- - - (655) - (134) (789)
Less: Unearned income	- - - (68) - - (68)
Add: Capitalised brokerage / mortgage
	- - - 156 - - 156
origination fees
Total financial assets	3,524 11,259 9,522 100,903 529 29,769 155,506
Geography
New Zealand	3,037 7,840 2,527 98,918 520 29,588 142,430
Overseas	487 3,419 6,995 1,985 9 181 13,076
Total financial assets	3,524 11,259 9,522 100,903 529 29,769 155,506

ANZ Bank New Zealand Limited

50

Notes to the Financial Statements

Maximum exposure to credit risk

The following table presents the maximum exposure to credit risk for on and off balance sheet financial instruments before taking account of the financial effect of any collateral held or other credit enhancements, unless such collateral meets the offsetting criteria in NZ IAS 32 Financial Instruments: Presentation.

The table also provides a quantification of the value of the financial charges the Banking Group holds over a borrower’s specific asset (or assets) where the Banking Group is able to enforce the collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations. For the purposes of this disclosure, where the collateral held is valued at more than the corresponding credit exposure, the financial effect is capped at the value of the credit exposure. In respect of derivative financial instruments, the assessed collateral is the amount of cash collateral received and does not include the effect of any netting arrangements under ISDAs.

The most common types of collateral include:

• Security over real estate including residential, commercial, industrial and rural property;

• Cash deposits; and

• Other security over business assets including specific plant and equipment, inventory and accounts receivables.

The Banking Group also manages its credit risk by accepting other types of collateral such as guarantees and security interests over the assets of a customer’s business. The assignable value of such credit mitigants is less certain and their financial effect has not been quantified for disclosure purposes. Credit exposures shown as not fully secured may benefit from such credit mitigants.

	Banking Group		Bank
	Maximum	Unsecured	Maximum	Unsecured
	exposure to Financial effect portion of credit		exposure to Financial effect portion of credit
$ millions	credit risk of collateral exposure		credit risk of collateral exposure
30/09/2014
On and off-balance sheet positions
Cash	1,618 309 1,309		1,618 309 1,309
Settlement balances receivable	855 746 109		858 746 112
Collateral paid	783 - 783		783 - 783
Trading securities	11,750 - 11,750		11,750 - 11,750
Derivative financial instruments	11,404 800 10,604		11,408 800 10,608
Available-for-sale assets	772 - 772		770 - 770
Net loans and advances	96,404 85,947 10,457		109,772 83,513 26,259
Other financial assets	745 380 365		623 380 243
Credit related commitments	30,473 15,340 15,133		31,416 15,876 15,540
Total exposure to credit risk	154,804 103,522 51,282		168,998 101,624 67,374
30/09/2013
On and off-balance sheet positions
Cash	2,008 310 1,698		2,008 310 1,698
Settlement balances receivable	514 254 260		514 254 260
Collateral paid	1,002 - 1,002		1,002 - 1,002
Trading securities	10,320 - 10,320		10,319 - 10,319
Derivative financial instruments	9,518 438 9,080		9,522 438 9,084
Available-for-sale assets	942 - 942		940 - 940
Net loans and advances	90,974 81,385 9,589		100,903 79,317 21,586
Other financial assets	656 329 327		529 329 200
Credit related commitments	27,327 12,769 14,558		29,769 14,719 15,050
Total exposure to credit risk	143,261 95,485 47,776		155,506 95,367 60,139

Credit quality

A core component of the Banking Group’s credit risk management capability is the risk grading framework used across all major business units. A set of risk grading principles and policies is supported by a complementary risk grading methodology. Pronouncements by the International Basel Committee on Banking Supervision have been encapsulated in these principles and policies, including governance, validation and modelling requirements.

The Banking Group’s risk grade profile changes dynamically through new counterparty lending and existing counterparty movements in either risk or volume. All counterparty risk grades are subject to frequent review, including statistical and behavioural reviews in consumer and small business segments, and individual counterparty reviews in segments with larger single name borrowers.

ANZ Bank New Zealand Limited

51

Notes to the Financial Statements

Impairment and provisioning of financial assets

The Banking Group's policy relating to the recognition and measurement of impaired assets conforms to the RBNZ's guidelines.

Loans are classified as either performing or impaired. Impaired assets are credit exposures where: there is doubt as to whether the full contractual amount (including interest) will be received; a material credit obligation is 90 days past due but not well secured; they are portfolio managed and can be held for up to 180 days past due; or concessional terms have been provided due to the financial difficulties of the customer.

An exposure is classified as past due but not impaired (less than 90 days) where the value of collateral is sufficient to repay both the principal debt and all other potential interest or there is no concern as to the creditworthiness of the counterparty in question.

The past due but not impaired (over 90 days) classification applies where contractual payments are past due by 90 days or more, or where the facility remains outside of contractual arrangements for 90 or more consecutive days, but the Banking Group believes that impairment is not appropriate on the basis of the level of security/collateral available, or the facility is portfolio managed.

The provision for credit impairment represents management’s best estimate of the losses incurred in the loan portfolio at balance date based on its experienced judgement.

Distribution of gross loans and advances assets by credit quality

The credit quality of the portfolio of loans and advances is assessed by reference to the Banking Group’s risk grading principles and policies supported by a complementary risk grading methodology.

Distribution by asset class of gross loans and advances by credit quality

	Banking Group	Bank
	Retail Other retail Non-retail Retail Other retail Non-retail
$ millions	mortgages exposures exposures Total mortgages exposures exposures Total
30/09/2014
Strong risk rating	41,515 1,428 21,804 64,747	41,515 1,427 37,027 79,969
Satisfactory risk rating	7,530 2,721 17,040 27,291	7,530 1,705 16,168 25,403
Substandard but not past due or
	580 313 1,254 2,147	580 291 1,199 2,070
impaired
Total neither past due nor impaired	49,625 4,462 40,098 94,185	49,625 3,423 54,394 107,442
Past due but not impaired:
1 to 5 days	342 121 580 1,043	342 113 574 1,029
6 to 29 days	198 91 190 479	198 69 188 455
1 to 29 days	540 212 770 1,522	540 182 762 1,484
30 to 59 days	133 31 116 280	133 25 111 269
60 to 89 days	63 16 52 131	63 13 51 127
90 days and over	88 30 32 150	88 25 33 146
Total past due but not impaired	824 289 970 2,083	824 245 957 2,026
Total impaired assets	189 35 410 634	189 35 391 615
Gross loans and advances	50,638 4,786 41,478 96,902	50,638 3,703 55,742 110,083
30/09/2013
Strong risk rating	38,140 1,342 20,952 60,434	38,140 1,342 32,510 71,992
Satisfactory risk rating	7,550 2,519 15,591 25,660	7,550 1,562 14,898 24,010
Substandard but not past due or
	721 326 1,792 2,839	721 307 1,724 2,752
impaired
Total neither past due nor impaired	46,411 4,187 38,335 88,933	46,411 3,211 49,132 98,754
Past due but not impaired:
1 to 5 days	327 138 477 942	327 131 472 930
6 to 29 days	177 94 148 419	177 78 145 400
1 to 29 days	504 232 625 1,361	504 209 617 1,330
30 to 59 days	111 38 57 206	111 32 56 199
60 to 89 days	49 19 13 81	49 17 12 78
90 days and over	92 40 76 208	92 35 74 201
Total past due but not impaired	756 329 771 1,856	756 293 759 1,808
Total impaired assets	179 49 673 901	179 49 649 877
Gross loans and advances	47,346 4,565 39,779 91,690	47,346 3,553 50,540 101,439

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52

Notes to the Financial Statements

Credit quality of gross loans and advances neither past due nor impaired

The credit quality of financial assets is assessed by the Banking Group using internal ratings which aim to reflect the relative ability of counterparties to fulfil, on time, their creditrelated obligations, and is based on their current probability of default.

Internal ratings

Strong risk rating - Corporate customers demonstrating superior stability in their operating and financial performance over the long-term, and whose debt servicing capacity is not significantly vulnerable to foreseeable events. Retail customers with low expected loss. This rating band broadly corresponds to ratings “Aaa” to “Ba1” and “AAA” to “BB+” of Moody's Investors Service and Standard & Poor's respectively.

Satisfactory risk rating - Corporate customers consistently demonstrating sound operational and financial stability over the medium to long term, even though some may be susceptible to cyclical trends or variability in earnings. Retail customers with moderate expected loss. This rating band broadly corresponds to ratings “Ba2” to “B1” and “BB” to “B+” of Moody's Investors Service and Standard & Poor's respectively.

Substandard but not past due or impaired - Corporate customers demonstrating some operational and financial instability, with variability and uncertainty in profitability and liquidity projected to continue over the short and possibly medium term. Retail customers with higher expected loss. This rating band broadly corresponds to ratings “B2” to “Caa” and “B” to “CCC” of Moody's Investors Service and Standard & Poor's respectively.

Movements in the rating categories between balance dates are due to both changes in the underlying internal ratings applied to customers and to new loans written or loans rolling off.

Credit quality of financial assets that are past due but not impaired

Ageing analysis of past due loans is used by the Banking Group to measure and manage credit quality. Financial assets that are past due but not impaired include those:

• Assessed, approved and managed on a portfolio basis within a centralised environment (for example, credit cards and personal loans);

• Held on a productive basis until they are 180 days past due; and

• Managed on an individual basis.

A large portion of retail credit exposures, such as residential mortgages, are generally well secured. That is, the fair value of associated security is sufficient to ensure that the Banking Group will recover the entire amount owing over the life of the facility and there is reasonable assurance that collection efforts will result in payment of the amounts due in a timely manner.

Market risk

Market risk is the risk to the Banking Group’s earnings arising from changes in interest rates, currency exchange rates, credit spreads, or from fluctuations in bond, commodity or equity prices. Market risk is generated through both trading activities and the interest rate risk inherent in the banking book.

The Banking Group conducts trading operations in interest rates, foreign exchange, commodities and debt securities.

The Banking Group has a detailed risk management and control framework to support its trading and balance sheet management activities. The framework incorporates a risk measurement approach to quantify the magnitude of market risk within trading and balance sheet portfolios. This approach, and related analysis, identifies the range of possible outcomes that can be expected over a given period of time, establishes the relative likelihood of those outcomes and allocates an appropriate amount of capital to support these activities.

Market risk management and control responsibilities

The Board Risk Committee has delegated responsibility for the oversight of market risk to the Asset & Liability Committee (ALCO), chaired by the Chief Financial Officer of the Bank. ALCO are required to ensure that market risk exposure across Traded and Non-Traded portfolios remains within the risk appetite specified by the Board Risk Committee. ALCO receive regular reporting on a range of trading and balance sheet market risk exposures.

The Risk Management division of the Banking Group, through the Chief Risk Officer, is responsible for the day-today oversight of market risk. This includes the implementation of a comprehensive limit and policy framework to control the amount of risk that the Banking Group will accept. Market risk limits are allocated at various levels and are reported and monitored on a daily basis. The detailed limit framework allocates individual limits to manage and control asset classes (e.g., interest rates, foreign exchange), risk factors (e.g., interest rates, volatilities) and profit and loss limits (to monitor and manage the performance of the trading portfolios).

Additional oversight and monitoring of material risk exposures of the Banking Group is undertaken by the Risk Management functions of the Ultimate Parent Bank.

Within overall strategies and policies, the control of market risk is the joint responsibility of business units and Risk Management, with the delegation of market risk limits from the Board Risk Committee to both Risk Management and the business units.

These risks are monitored daily against a comprehensive limit framework that includes Value at Risk, aggregate market position and sensitivity, product and geographic thresholds. To facilitate the management, control, measurements and reporting of market risk, the Banking Group has grouped market risk into two broad categories:

ANZ Bank New Zealand Limited

53

Notes to the Financial Statements

a. Traded market risk

This is the risk of loss from changes in the value of financial instruments due to movements in price factors for both physical and derivative trading positions. They arise in trading transactions where the Banking Group acts as principal with clients or with the market. The principal risk categories monitored are:

• Currency risk is the potential loss arising from the decline in the value of a financial instrument due to changes in foreign exchange rates or their implied volatilities.

• Interest rate risk is the potential loss arising from the change in the value of a financial instrument due to changes in market interest rates or their implied volatilities.

• Credit spread risk is the potential loss arising from a change in value of an instrument due to a movement of its margin or spread relative to a bench mark.

b. Non-traded market risk (or balance sheet risk)

This comprises the management of non-traded interest rate risk, liquidity, and the risk to capital and earnings as a result of movements in market rates.

Some instruments do not fall into either category but also expose the Banking Group to market risk. These include equity securities classified as available-for-sale. Regular reviews are performed to substantiate the valuation of these types of instruments.

In all trading areas the Banking Group has implemented models that calculate Value at Risk (“VaR”) exposures, monitor risk exposures against defined limits on a daily basis, and “stress test” trading portfolios.

VaR measure

A key measure of market risk is VaR. VaR is a statistical estimate of the likely daily loss and is based on historical market movements.

The confidence level is such that there is a 99% probability that the loss will not exceed the VaR estimate on any given day. Conversely there is 1% probability of the decrease in market value exceeding the VaR estimate on any given day.

The Banking Group’s standard VaR approach for both traded and non-traded risk is historical simulation. The Banking Group calculates VaR using historical changes in market rates and prices over the previous 500 business days. Traded and Non-Traded VaR is calculated using a one-day holding period.

It should be noted that because VaR is driven by actual historical observations, it is not an estimate of the maximum loss that the Banking Group could experience from an extreme market event. As a result of this limitation, the Banking Group utilises a number of other risk measures (e.g. stress testing) and associated detailed control limits to measure and manage market risk.

Traded market risks

Traded market risks
		Banking Group
		Value at risk at 99% confidence
		High for Low for Average for
$ millions	Period end year year year
30/09/2014
Foreign exchange risk	0.3 1.1 - 0.4
Interest rate risk	1.5 3.1 0.9 1.8
Credit spread risk	0.3 0.6 0.1 0.3
Diversification benefit	(0.6) n/a n/a (0.7)
Total VaR	1.5 3.3 0.9 1.8
30/09/2013
Foreign exchange risk	0.3 1.4 - 0.3
Interest rate risk	2.1 3.7 1.1 2.3
Credit spread risk	0.4 1.0 0.2 0.4
Diversification benefit	(0.8) n/a n/a (0.7)
Total VaR	2.0 4.1 1.2 2.3

Traded market risk VaR is calculated separately for foreign exchange and for interest rate/debt markets businesses as well as for the Banking Group. The diversification benefit reflects the historical correlation between foreign exchange, interest rate and debt markets.

To supplement the VaR methodology, the Banking Group applies a wide range of stress tests, both on individual portfolios and at the Banking Group level. The Banking Group's stress-testing regime provides senior management with an assessment of the financial impact of identified extreme events on market risk exposures of the Banking Group.

Non-traded market risk (or balance sheet risk)

The principal objectives of balance sheet management are to manage net interest income sensitivity while maintaining acceptable levels of interest rate and liquidity risk and to manage the market value of the Banking Group’s capital. Liquidity risk is dealt with in the next section.

ANZ Bank New Zealand Limited

54

Notes to the Financial Statements

Interest rate risk

The objective of balance sheet interest rate risk management is to mitigate the negative impact of movements in wholesale interest rates on the earnings of the Banking Group's banking book. Non-traded interest rate risk relates to the potential adverse impact to earnings from changes in market interest rates. This risk arises from two principal sources: mismatches between the repricing dates of interest bearing assets and liabilities; and the investment of capital and other non-interest bearing liabilities in interest bearing assets.

As part of normal business activity the Banking Group has additional risks from fixed rate mortgage prepayments and basis risk:

• Prepayment risk is the potential risk to earnings or market value from when a customer prepays all or part of a fixed rate mortgage and where any customer fee charged is not sufficient to offset the loss in value to the Banking Group of this financial asset due to movements in interest rates and other pricing factors. As far as possible the true economic cost is passed through to customers in line with their terms and conditions and relevant legislation.

• Basis risk is the potential risk to earnings or market value from differences between customer pricing and wholesale market pricing. This is managed through active review of product margins.

Non-traded interest rate risk is managed to both value and earnings at risk limits. Interest rate risk is reported using three measures: VaR; scenario analysis (to a 1% shock); and interest rate sensitivity gap. This treatment excludes the effect of prepayment and basis risk.

a. Non-traded interest rate risk VaR

		Banking Group
		High for	Low for	Average for
$ millions	Period end	year	year	year
30/09/2014
Value at risk at 99% confidence	10.7	10.7	8.0	8.9
30/09/2013
Value at risk at 99% confidence	9.2	14.3	7.7	11.1

b. Scenario analysis – a 1% shock on the next 12 months’ net interest income

A 1% overnight parallel positive shift in the yield curve is modelled to determine the potential impact on net interest income over the succeeding 12 months. This is a standard risk quantification tool.

The figures in the table below indicate the outcome of this risk measure for the current and comparative periods – expressed as a percentage of reported net interest income. The sign indicates the nature of the rate sensitivity with a positive number signifying that a rate increase is positive for net interest income over the next 12 months. Conversely, a negative number signifies that a rate increase is negative for the next 12 months’ net interest income.

	Banking	Group
	30/09/2014	30/09/2013
Impact of 1% rate shock
Period end	1.1%	1.1%
Maximum exposure	1.9%	2.0%
Minimum exposure	0.8%	0.6%
Average exposure (in absolute terms)	1.3%	1.3%

The extent of mismatching between the repricing characteristics and timing of interest bearing assets and liabilities at any point has implications for future net interest income.

Interest rate sensitivity gap

The interest rate sensitivity gap analysis provides information about the Banking Group's exposure to interest rate risk.

Sensitivity to interest rates arises from mismatches in the period to repricing of assets and that of the corresponding liability funding. These mismatches are managed within policy guidelines for mismatch positions.

The following tables represent the interest rate sensitivity of the Banking Group's assets, liabilities and off balance sheet instruments by showing the periods in which these instruments may reprice (that is, when interest rates applicable to each asset or liability can be changed).

The repricing gaps are based upon contractual repricing.

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55

Notes to the Financial Statements

Notes to the Financial	Statements
	Banking Group
	Up to Over 3 to Over 6 to Over 1 to Over Not bearing
$ millions	Total 3 months 6 months 12 months 2 years 2 years interest
30/09/2014
Assets
Cash	1,822 1,618 - - - - 204
Settlement balances receivable	855 53 - - - - 802
Collateral paid	783 783 - - - - -
Trading securities	11,750 1,388 304 1,631 418 8,009 -
Derivative financial instruments	11,404 - - - - - 11,404
Available-for-sale assets	772 262 10 250 - 248 2
Net loans and advances	96,299 54,390 6,201 10,603 16,408 9,148 (451)
Other financial assets	745 137 35 18 - - 555
Total financial assets	124,430 58,631 6,550 12,502 16,826 17,405 12,516
Liabilities
Settlement balances payable	2,296 512 - - - - 1,784
Collateral received	800 800 - - - - -
Deposits and other borrowings	84,019 55,782 10,852 7,566 2,371 1,447 6,001
Derivative financial instruments	10,205 - - - - - 10,205
Bonds and notes	17,042 5,149 267 1,971 2,811 6,844 -
Subordinated debt	1,144 - 309 - - 835 -
Other financial liabilities	833 131 - 10 6 146 540
Total financial liabilities	116,339 62,374 11,428 9,547 5,188 9,272 18,530
Hedging instruments	- 7,532 2,598 3,867 (11,308) (2,689) -
Interest sensitivity gap	8,091 3,789 (2,280) 6,822 330 5,444 (6,014)
30/09/2013
Assets
Cash	2,206 2,018 - - - - 188
Settlement balances receivable	514 34 - - - - 480
Collateral paid	1,002 1,002 - - - - -
Trading securities	10,320 1,235 455 606 3,105 4,919 -
Derivative financial instruments	9,518 - - - - - 9,518
Available-for-sale assets	942 337 234 23 250 96 2
Net loans and advances	90,837 58,760 5,116 10,828 10,917 5,759 (543)
Other financial assets	656 103 30 36 3 - 484
Total financial assets	115,995 63,489 5,835 11,493 14,275 10,774 10,129
Liabilities
Settlement balances payable	1,428 547 - - - - 881
Collateral received	438 438 - - - - -
Deposits and other borrowings	78,816 53,086 9,419 8,231 1,437 1,117 5,526
Derivative financial instruments	10,243 - - - - - 10,243
Bonds and notes	15,494 4,867 47 266 2,933 7,381 -
Subordinated debt	1,144 - 309 - - 835 -
Payables and other liabilities	703 22 - - - 126 555
Total financial liabilities	108,266 58,960 9,775 8,497 4,370 9,459 17,205
Hedging instruments	- (5,695) 14,905 (3,058) (9,566) 3,414 -
Interest sensitivity gap	7,729 (1,166) 10,965 (62) 339 4,729 (7,076)

ANZ Bank New Zealand Limited

56

Notes to the Financial Statements

Notes to the Financial	Statements
	Bank
	Up to Over 3 to Over 6 to Over 1 to Over Not bearing
$ millions	Total 3 months 6 months 12 months 2 years 2 years interest
30/09/2014
Assets
Cash	1,822 1,618 - - - - 204
Settlement balances receivable	858 52 - - - - 806
Collateral paid	783 783 - - - - -
Trading securities	11,750 1,388 304 1,631 418 8,009 -
Derivative financial instruments	11,408 - - - - - 11,408
Available-for-sale assets	770 262 10 250 - 248 -
Net loans and advances	109,668 68,677 6,086 10,400 16,076 8,859 (430)
Other financial assets	623 - - - - - 623
Total financial assets	137,682 72,780 6,400 12,281 16,494 17,116 12,611
Liabilities
Settlement balances payable	2,771 512 - - - - 2,259
Collateral received	800 800 - - - - -
Deposits and other borrowings	115,223 68,297 12,343 11,571 8,665 8,346 6,001
Derivative financial instruments	10,237 - - - - - 10,237
Bonds and notes	3,277 1,255 250 349 150 1,273 -
Subordinated debt	1,144 - 309 - - 835 -
Payables and other liabilities	913 131 - 10 6 146 620
Total financial liabilities	134,365 70,995 12,902 11,930 8,821 10,600 19,117
Hedging instruments	- (2,276) 4,360 6,608 (7,448) (1,244) -
Interest sensitivity gap	3,317 (491) (2,142) 6,959 225 5,272 (6,506)
30/09/2013
Assets
Cash	2,206 2,018 - - - - 188
Settlement balances receivable	514 34 - - - - 480
Collateral paid	1,002 1,002 - - - - -
Trading securities	10,319 1,234 455 606 3,105 4,919 -
Derivative financial instruments	9,522 - - - - - 9,522
Available-for-sale assets	940 337 234 23 250 96 -
Net loans and advances	100,769 69,647 5,007 10,630 10,496 5,507 (518)
Other financial assets	529 14 - - - - 515
Total financial assets	125,801 74,286 5,696 11,259 13,851 10,522 10,187
Liabilities
Settlement balances payable	1,767 1,077 - - - - 690
Collateral received	438 438 - - - - -
Deposits and other borrowings	105,805 65,840 10,513 10,086 5,861 7,949 5,556
Derivative financial instruments	10,252 - - - - - 10,252
Bonds and notes	2,687 847 - 235 596 1,009 -
Subordinated debt	1,144 - 309 - - 835 -
Payables and other liabilities	745 43 - - - 126 576
Total financial liabilities	122,838 68,245 10,822 10,321 6,457 9,919 17,074
Hedging instruments	- (12,096) 16,193 (816) (7,258) 3,977 -
Interest sensitivity gap	2,963 (6,055) 11,067 122 136 4,580 (6,887)

Equity price risk

The portfolio of financial assets classified as available-for-sale contains equity investment holdings held for longer term strategic intentions. These equity investments are also subject to market risk which is not captured by the VaR measures for traded and nontraded market risks. The fair value of these securities as at 30 September 2014 was $2 million (30/09/2013 $2 million). A 10 per cent reduction in the value of the available-for-sale equity securities would not be material.

ANZ Bank New Zealand Limited

57

Notes to the Financial Statements

Foreign currency related risks

This risk relates to the potential loss arising from the decline in the value of foreign currency positions due to changes in foreign exchange rates.

For non-traded instruments in foreign currencies, the risk is monitored and is hedged in accordance with policy. Risk arising from individual funding and other transactions is actively managed. The total amounts of unmatched foreign currency assets and liabilities, and consequent foreign currency exposures arising from each class of financial asset and liability, whether recognised or unrecognised, within each currency are not material.

The net open position in each foreign currency represents the net on-balance sheet assets and liabilities in that foreign currency aggregated with the net expected future cash flows from off-balance sheet purchases and sales from foreign exchange transactions in that foreign currency. The amounts are stated in New Zealand dollar equivalents translated using the spot exchange rates as at balance sheet date.

	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Net open position
Australian dollar	4 32	4 32
Euro	37 1	37 1
Japanese yen	9 (1)	9 (1)
US dollar	(14) (1)	(14) (1)
Swiss franc	(37) -	(37) -
Other	1 1	1 1
Total net open position	- 32	- 32

ANZ Bank New Zealand Limited

58

Notes to the Financial Statements

Liquidity risk

Liquidity risk is the risk that the Banking Group is unable to meet its payment obligations as they fall due. The timing mismatch of cash flows and the related liquidity risk is inherent in all banking operations and is closely monitored by the Banking Group.

The Banking Group’s liquidity and funding risks are governed by a detailed policy framework which is approved by the Risk Committees of the Bank’s and Ultimate Parent Bank’s Boards. The core objective of the Banking Group’s framework is to manage liquidity to meet obligations as they fall due, without incurring unacceptable losses.

Central to the Banking Group’s liquidity risk management approach is the establishment of a liquidity risk appetite framework to which the Banking Group must conform at all times. The risk appetite for liquidity has been set as low, and this objective is achieved by the Banking Group managing liquidity risks within the boundaries of the following requirements and principles:

• Maintaining the ability to meet all payment obligations in the immediate term.

• Ensuring the ability to meet “survival horizons” under a range of the Banking Group specific and general market liquidity stress scenarios.

• Maintaining strength in the Banking Group’s balance sheet structure to ensure long term resilience in the Banking Group’s liquidity and funding risk profile.

• Limiting the potential earnings at risk associated with unexpected increases in funding costs or the liquidation of assets under stress.

• Ensuring the liquidity management framework is compatible with regulatory requirements.

• Daily liquidity reporting and scenario analysis, quantifying the Banking Group’s positions.

• Targeting a diversified funding base, avoiding undue concentrations by investor type, maturity, market source and currency.

• Holding a portfolio of high quality liquid assets to protect against adverse funding conditions and to support day-to-day operations.

• Establishing detailed contingency plans to cover different liquidity crisis events.

Management of liquidity and funding risks are overseen by ALCO.

Supervision and Regulation

The RBNZ requires the Bank to have a comprehensive Board approved liquidity strategy defining: policy, systems and procedures for measuring, assessing, reporting and managing domestic and foreign currency liquidity. This also includes a formal contingency plan for dealing with a liquidity crisis. The Banking Group is required to meet one week and one month liquidity mismatch ratios and a one year core funding ratio each day.

Scenario Modelling

able to meet all commitments and obligations under a going concern scenario, within the Banking Group’s normal funding capacity (‘available to fund’ limit), over at least the following 30 calendar days. In estimating the funding requirement, the Banking Group models expected cash flows by reference to historical behaviour and contractual maturity data.

Name-crisis: refers to a potential name-specific liquidity crisis scenario which models the behaviour of cash flows where there is a problem (real or perceived) which may include, but is not limited to, operational issues, doubts about the solvency of the Banking Group, or adverse rating changes. Under this scenario the Banking Group may have significant difficulty rolling over or replacing funding. Under the liquidity policy the Banking Group must be cash flow positive over an eight calendar day period.

Survival horizons: The global financial crisis has highlighted the importance of differentiating between stressed and normal market conditions in a name-specific crisis and the different behaviour that offshore and domestic wholesale funding markets can exhibit during market stress events. The Banking Group has linked its liquidity risk appetite to defined liquidity “survival horizons” (i.e. the time period under which the Banking Group must maintain a positive cash flow position). The following stressed scenarios are modelled:

• Extreme Short Term Crisis Scenario: A name-specific stress during a period of market stress.

• Short Term Crisis Scenario: A name-specific stress during a period of normal markets conditions.

• Global Funding Market Disruption: Stressed global wholesale funding markets leading to a closure of domestic and offshore markets.

• Offshore Funding Market Disruption: Stressed global wholesale funding markets leading to a closure of offshore markets only.

As of 30 September 2014 the Banking Group was in compliance with all of the above scenarios.

Wholesale funding

The Banking Group’s wholesale funding strategy is designed to deliver a sustainable portfolio of wholesale funds that balances cost efficiency while targeting diversification by markets, investors, currencies, maturities and funding structures. Short-term wholesale funding requirements, with a contractual maturity of less than one year, are managed through the Treasury and Markets operations. Long-term wholesale funding is managed and executed through Treasury operations.

The Banking Group also uses maturity concentration limits under the wholesale funding and liquidity management framework. Maturity concentration limits ensure that the Banking Group does not become reliant on issuing large volumes of new wholesale funding within a short time period. Funding instruments used to meet the wholesale borrowing requirement must be on a pre-established list of approved products.

A key component of the Banking Group’s liquidity management framework is scenario modelling. Liquidity is assessed under different scenarios, including going-concern, name-crisis and various survival horizons.

Going-concern: reflects the normal behaviour of cash flows in the ordinary course of business. The Banking Group must be

ANZ Bank New Zealand Limited

59

Notes to the Financial Statements

Funding capacity and debt issuance planning

The Banking Group adopts a conservative approach to determine its funding capacity. Funding capacity limits are determined at the Ultimate Parent Bank level and allocated to individual sites based on their requirements. Annually, a funding plan is approved by the Bank’s Board. The plan is supplemented by monthly updates and is linked to the Banking Group’s three year strategic planning cycle.

Funding Composition

The Banking Group actively uses balance sheet disciplines to prudently manage the funding mix. The Banking Group employs funding metrics to ensure that an appropriate proportion of its assets are funded from stable sources, including customer liabilities, longer-dated wholesale debt (with remaining term exceeding one year) and equity. This approach recognises that long-term wholesale debt and other sticky liabilities have favourable liquidity characteristics.

Analysis of funding liabilities by industry sector is based on Australian and New Zealand Standard Industrial Classification (ANZSIC) codes.

Funding composition	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
**Customer deposits1 **
New Zealand	67,759 62,309	66,303 60,926
Overseas	8,596 8,258	8,483 8,149
Total customer deposits	76,355 70,567	74,786 69,075
Wholesale funding
Bonds and notes	17,042 15,494	3,277 2,687
Subordinated debt	1,144 1,144	1,144 1,144
Certificates of deposit	1,376 2,364	1,376 2,364
Commercial paper	6,057 4,765	- -
Other borrowings	231 1,120	39,061 34,366
Total wholesale funding	25,850 24,887	44,858 40,561
Total funding	102,205 95,454	119,644 109,636
Concentrations of funding by industry
Agriculture	2,996 2,312	2,996 2,312
Forestry, fishing and mining	544 613	544 613
Business and property services	5,576 5,148	5,576 5,148
Construction	1,044 882	1,044 882
Entertainment, leisure and tourism	922 737	922 737
Finance and insurance	35,327 34,803	54,335 50,477
Government and local authority	2,434 2,166	2,434 2,166
Manufacturing	1,458 1,416	1,458 1,416
Households	47,600 43,286	46,031 41,794
Retail trade	994 954	994 954
Transport and storage	772 636	772 636
Wholesale trade	1,029 1,086	1,029 1,086
Other2	1,509 1,415	1,509 1,415
Total funding	102,205 95,454	119,644 109,636
**Concentrations of funding by geography3 **
New Zealand	72,969 69,188	110,522 101,051
Australia	1,321 1,215	1,305 1,199
United States	11,518 9,822	941 555
Europe	10,464 9,508	998 1,166
Other countries	5,933 5,721	5,878 5,665
Total funding	102,205 95,454	119,644 109,636

1 Represents term deposits, other deposits bearing interest, deposits not bearing interest and UDC secured investments. 2 Other includes exposures to electricity, gas and water, communications and personal services.

3

The Banking Group classifies funding via ANZ New Zealand (Int’l) as either from the United States or Europe based on the respective programmes.

ANZ Bank New Zealand Limited

60

Notes to the Financial Statements

Liquidity portfolio management

The Banking Group holds a diversified portfolio of cash and high-quality highly-liquid securities to support liquidity risk management. The size of the Banking Group’s liquidity portfolio is based on the amount required to meet its internal and regulatory liquidity scenario metrics.

Total liquidity portfolio	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Balances with central banks	1,309 1,709	1,309 1,709
Securities purchased under agreement to resell	- 41	- 41
Certificates of deposit	159 159	159 159
Government, local body stock and bonds	6,318 5,522	6,318 5,522
Government treasury bills	380 387	380 387
Other bonds	5,135 5,069	5,135 5,069
Total liquidity portfolio	13,301 12,887	13,301 12,887

Assets held for managing liquidity risk include short term cash held with the RBNZ, New Zealand Government securities, securities issued by supranational agencies, securities issued by highly rated banks and securities issued by State Owned Enterprises, Local Authorities and highly rated NZ domestic corporates. These assets would be accepted as collateral by the RBNZ in repurchase transactions. At 30 September 2014 the Banking Group would be eligible to enter into repurchase transactions with a value of $11,536 million. The Banking Group also held unencumbered internal residential mortgage backed securities (“RMBS”) which would entitle the Banking Group to enter into repurchase transactions with a value of $5,709 million at 30 September 2014 (the RBNZ has imposed a cap limiting the amount of RMBS deemed as eligible in the liquidity portfolio to 4% of total assets).

Liquidity crisis contingency planning

The Banking Group maintains liquidity crisis contingency plans defining an approach for analysing and responding to a liquiditythreatening event on a group wide basis. The framework includes:

• the establishment of crisis severity/stress levels;

• clearly assigned crisis roles and responsibilities;

• early warning signals indicative of an approaching crisis, and mechanisms to monitor and report these signals;

• outlined action plans, and courses of action for altering asset and liability behaviour;

• procedures for crisis management reporting, and covering cash-flow shortfalls;

• guidelines determining the priority of customer relationships in the event of liquidity problems; and

• assigned responsibilities for internal and external communications.

ANZ Bank New Zealand Limited

61

Notes to the Financial Statements

Contractual maturity analysis of financial assets and liabilities

The following tables present the Banking Group's financial assets and liabilities within relevant contractual maturity groupings, based on the earliest date on which the Bank or the Banking Group may be required to realise an asset or settle a liability. The amounts disclosed in the tables represent undiscounted future principal and interest cash flows, except for derivatives held for trading where the full mark-to-market amount has been included in the less than three months category. As a result, the amounts in the tables below may differ to the amounts reported on the balance sheet.

The contractual maturity analysis for off-balance sheet commitments and contingent liabilities has been prepared using the earliest date at which the Banking Group or the Bank can be called upon to pay. The liquidity risk of credit related commitments and contingent liabilities may be less than the contract amount, and does not necessarily represent future cash requirements as many of these facilities are expected to be only partially used or to expire unused.

The Banking Group does not manage its liquidity risk on this basis.

				Banking Group
30/09/2014			Up to	Over 3 to	Over 1 to	Over	No maturity
$ millions	Total	At call	3 months	12 months	5 years	5 years	specified
Financial assets
Cash	1,822	1,513	309	-	-	-	-
Settlement balances receivable	855	514	341	-	-	-	-
Collateral paid	783	-	783	-	-	-	-
Trading securities	13,325	-	818	2,491	8,172	1,844	-
Derivative financial assets (trading)	10,736	-	10,736	-	-	-	-
Available-for-sale assets	826	-	163	279	382	-	2
Net loans and advances	135,691	350	15,607	15,900	45,713	58,121	-
Other financial assets	319	-	266	53	-	-	-
Total financial assets	164,357	2,377	29,023	18,723	54,267	59,965	2
Financial liabilities
Settlement balances payable	2,296	999	1,297	-	-	-	-
Collateral received	800	-	800	-	-	-	-
Deposits and other borrowings	85,550	40,270	20,109	20,913	4,258	-	-
Derivative financial liabilities (trading)	9,353	-	9,353	-	-	-	-
Bonds and notes	17,935	-	1,014	3,184	13,116	621	-
Subordinated debt	1,754	-	14	42	241	313	1,144
Other financial liabilities	405	-	172	17	61	155	-
Total financial liabilities	118,093	41,269	32,759	24,156	17,676	1,089	1,144
Derivative financial instruments used for balance sheet management
- gross inflows	15,953	-	2,700	2,884	9,485	884	-
- gross outflows	(15,957)	-	(2,617)	(2,840)	(9,600)	(900)	-
Net financial assets / (liabilities) after balance sheet management	46,260	(38,892)	(3,653)	(5,389)	36,476	58,860	(1,142)

Contractual maturity of off-balance sheet commitments and contingent liabilities

		Less than Beyond
	Total 1 year 1 year
Non-credit related commitments	483 102 381
Credit related commitments	28,142 28,142 -
Contingent liabilities	2,436 2,436 -
Total	31,061 30,680 381

ANZ Bank New Zealand Limited

62

Notes to the Financial Statements

Notes to the Financial Statements	Notes to the Financial Statements	Notes to the Financial Statements
Banking Group
30/09/2013 Up to Over 3 to Over 1 to Over No maturity
$ millions Total At call 3 months 12 months 5 years 5 years specified
Financial assets
Cash 2,206 1,896 310 - - - -
Settlement balances receivable 518 351 167 - - - -
Collateral paid 1,002 - 1,002 - - - -
Trading securities 11,528 - 412 1,617 8,429 1,070 -
Derivative financial assets (trading) 8,536 - 8,536 - - - -
Available-for-sale assets 983 - 296 271 324 90 2
Net loans and advances 123,499 350 15,534 17,685 38,271 51,659 -
Other financial assets 287 - 218 66 3 - -
Total financial assets 148,559 2,597 26,475 19,639 47,027 52,819 2
Financial liabilities
Settlement balances payable 1,430 879 551 - - - -
Collateral received 438 - 438 - - - -
Deposits and other borrowings 80,146 34,793 22,676 19,825 2,846 6 -
Derivative financial liabilities (trading) 9,526 - 9,526 - - - -
Bonds and notes 16,442 - 1,614 1,979 11,359 1,490 -
Subordinated debt 1,529 - 14 41 275 55 1,144
Other financial liabilities 287 - 107 4 31 145 -
Total financial liabilities 109,798 35,672 34,926 21,849 14,511 1,696 1,144
Derivative financial instruments used for balance sheet management
- gross inflows 16,196 - 2,704 3,539 8,689 1,264 -
- gross outflows (15,370) - (2,647) (3,186) (8,288) (1,249) -
Net financial assets / (liabilities) after balance sheet management 39,587 (33,075) (8,394) (1,857) 32,917 51,138 (1,142)
Contractual maturity of off-balance sheet commitments and contingent liabilities
		Less than Beyond
	Total 1 year 1 year
Non-credit related commitments	429 97 332
Credit related commitments	25,263 25,263 -
Contingent liabilities	2,201 2,201 -
Total	27,893 27,561 332

ANZ Bank New Zealand Limited

63

Notes to the Financial Statements

Notes to the Financial Statements	Notes to the Financial Statements	Notes to the Financial Statements
Bank
30/09/2014 Up to Over 3 to Over 1 to Over No maturity
$ millions Total At call 3 months 12 months 5 years 5 years specified
Financial assets
Cash 1,822 1,513 309 - - - -
Settlement balances receivable 858 514 344 - - - -
Collateral paid 783 - 783 - - - -
Trading securities 13,324 - 817 2,491 8,172 1,844 -
Derivative financial assets (trading) 10,740 - 10,740 - - - -
Available-for-sale assets 824 - 163 279 382 - -
Net loans and advances 162,614 349 18,631 15,932 50,464 77,238 -
Other financial assets 92 - 92 - - - -
Total financial assets 191,057 2,376 31,879 18,702 59,018 79,082 -
Financial liabilities
Settlement balances payable 2,771 999 1,772 - - - -
Collateral received 800 - 800 - - - -
Deposits and other borrowings 127,981 40,081 25,396 23,835 20,232 18,437 -
Derivative financial liabilities (trading) 9,353 - 9,353 - - - -
Bonds and notes 3,734 - 15 746 2,761 212 -
Subordinated debt 1,754 - 14 42 241 313 1,144
Other financial liabilities 603 - 370 17 61 155 -
Total financial liabilities 146,996 41,080 37,720 24,640 23,295 19,117 1,144
Derivative financial instruments used for balance sheet management
- gross inflows 21,186 - 2,813 3,223 11,120 4,030 -
- gross outflows (29,526) - (2,729) (3,173) (11,377) (12,247) -
Net financial assets / (liabilities) after balance sheet management 35,721 (38,704) (5,757) (5,888) 35,466 51,748 (1,144)
Contractual maturity of off-balance sheet commitments and contingent liabilities
		Less than Beyond
	Total 1 year 1 year
Non-credit related commitments	482 102 380
Credit related commitments	29,085 29,085 -
Contingent liabilities	2,435 2,435 -
Total	32,002 31,622 380

Contractual maturity of off-balance sheet commitments and contingent liabilities	Contractual maturity of off-balance sheet commitments and contingent liabilities	Contractual maturity of off-balance sheet commitments and contingent liabilities	Contractual maturity of off-balance sheet commitments and contingent liabilities
		Less than	Beyond
	Total	1 year	1 year
Non-credit related commitments	482	102	380
Credit related commitments	29,085	29,085	-
Contingent liabilities	2,435	2,435	-
Total	32,002	31,622	380

ANZ Bank New Zealand Limited

64

Notes to the Financial Statements

Notes to the Financial Statements	Notes to the Financial Statements	Notes to the Financial Statements	Notes to the Financial Statements
Bank
30/09/2013 Up to Over 3 to Over 1 to Over No maturity
$ millions Total At call 3 months 12 months 5 years 5 years specified
Financial assets
Cash 2,206 1,896 310 - - - -
Settlement balances receivable 515 354 161 - - - -
Collateral paid 1,002 - 1,002 - - - -
Trading securities 11,528 - 412 1,617 8,429 1,070 -
Derivative financial assets (trading) 8,536 - 8,536 - - - -
Available-for-sale assets 981 - 296 271 324 90 -
Net loans and advances 141,689 346 17,598 17,218 41,491 65,036 -
Other financial assets 64 - 64 - - - -
Total financial assets 166,521 2,596 28,379 19,106 50,244 66,196 -
Financial liabilities
Settlement balances payable 1,769 879 890 - - - -
Collateral received 438 - 438 - - - -
Deposits and other borrowings 115,179 34,794 24,360 21,767 19,914 14,344 -
Derivative financial liabilities (trading) 9,526 - 9,526 - - - -
Bonds and notes 3,046 - 117 356 2,111 462 -
Subordinated debt 1,528 - 13 41 275 55 1,144
Other financial liabilities 463 - 283 4 31 145 -
Total financial liabilities 131,949 35,673 35,627 22,168 22,331 15,006 1,144
Derivative financial instruments used for balance sheet management
- gross inflows 19,352 - 2,782 3,766 9,761 3,043 -
- gross outflows (23,600) - (2,713) (3,383) (9,337) (8,167) -
Net financial assets / (liabilities) after balance sheet management 30,324 (33,077) (7,179) (2,679) 28,337 46,066 (1,144)
Contractual maturity of off-balance sheet commitments and contingent liabilities
		Less than Beyond
	Total 1year 1year
Non-credit related commitments	427 96 331
Credit related commitments	27,703 27,703 -
Contingent liabilities	2,200 2,200 -
Total	30,330 29,999 331

		Less than	Beyond
	Total	1year	1year
Non-credit related commitments	427	96	331
Credit related commitments	27,703	27,703	-
Contingent liabilities	2,200	2,200	-
Total	30,330	29,999	331

28. Financial Assets Pledged as Collateral and Offsetting Financial Instruments

	Banking Group Bank
$ millions Note	30/09/2014 30/09/2013 30/09/2014 30/09/2013
Cash collateral given on derivative financial instruments	783 1,002 783 1,002
Trading securities encumbered through repurchase agreements	47 108 47 108
Residential mortgages pledged as security for covered bonds 21, 34	7,283 5,857 7,283 5,857
Assets pledged as collateral for UDC secured investments 18	2,354 2,162 - -
Total financial assets pledged as collateral	10,467 9,129 8,113 6,967

UDC secured investments are constituted and secured by a trust deed between UDC Finance Limited and its independent trustee, Trustees Executors Limited. UDC Finance Limited has granted a charge over all its assets and undertaking, primarily net loans and advances, in favour of the Trustee.

Offsetting financial assets and financial liabilities

The following information relates to financial assets and liabilities which have been set off in the balance sheet and those which have not been set off but for which the Banking Group has enforceable master netting agreements in place with counterparties.

ANZ Bank New Zealand Limited

65

Notes to the Financial Statements

			Banking	Group
		Amounts set off	Net amounts	Related amounts	not offset 1
		in the balance	presented in the	Financial
**$ millions **	Gross amounts	sheet	balance sheet	instruments	Cash collateral	Net amounts
**30/09/2014 **
**Financial assets **
Collateral paid	284	-	284	-	(182)	102
Trading securities2	47	-	47	(47)	-	-
Derivative financial instruments	8,482	-	8,482	(7,606)	(716)	160
**Financial liabilities **
Collateral received	753	-	753	-	(716)	37
Securities sold under agreements to repurchase3	47	-	47	(47)	-	-
Derivative financial instruments	7,858	-	7,858	(7,606)	(182)	70
**30/09/2013 **
**Financial assets **
Collateral paid	145	-	145	-	(94)	51
Trading securities2	108	-	108	(107)	-	1
Derivative financial instruments	6,085	-	6,085	(5,920)	(123)	42
**Financial liabilities **
Collateral received	136	-	136	-	(123)	13
Securities sold under agreements to repurchase3	107	-	107	(107)	-	-
Derivative financial instruments	6,155	-	6,155	(5,920)	(94)	141

Bank

		Amounts set off	Net amounts	Related amounts	not offset 1
		in the balance	presented in the	Financial
**$ millions **	Gross amounts	sheet	balance sheet	instruments	Cash collateral	Net amounts
**30/09/2014 **
**Financial assets **
Collateral paid	284	-	284	-	(182)	102
Trading securities2	47	-	47	(47)	-	-
Loans to subsidiaries	905	(905)	-	-	-	-
Derivative financial instruments	8,482	-	8,482	(7,606)	(716)	160
**Financial liabilities **
Collateral received	753	-	753	-	(716)	37
Securities sold under agreements to repurchase3	47	-	47	(47)	-	-
Deposits and other borrowings from subsidiaries	905	(905)	-	-	-	-
Derivative financial instruments	7,858	-	7,858	(7,606)	(182)	70
**30/09/2013 **
**Financial assets **
Collateral paid	145	-	145	-	(94)	51
Trading securities2	108	-	108	(107)	-	1
Loans to subsidiaries	902	(902)	-	-	-	-
Derivative financial instruments	6,085	-	6,085	(5,920)	(123)	42
**Financial liabilities **
Collateral received	136	-	136	-	(123)	13
Securities sold under agreements to repurchase3	107	-	107	(107)	-	-
Deposits and other borrowings from subsidiaries	902	(902)	-	-	-	-
Derivative financial instruments	6,155	-	6,155	(5,920)	(94)	141

1 The Banking Group enters into derivatives and repurchase and reverse repurchase agreements with various counterparties which are governed by industry standard master netting agreements. The Banking Group holds and provides cash and securities collateral in respective of derivative transactions covered by these agreements. The right to set off balances under these master netting agreements or to set off cash and securities collateral only arises in the event of non payment or default and, as a result, these arrangements do not qualify for offsetting under NZ IAS 32 Financial Instruments: Presentation.

2 This is the amount of trading securities encumbered through repurchase agreements, see financial assets pledged as collateral table in this note.

3 Included in deposits from banks, see note 18.

ANZ Bank New Zealand Limited

66

Notes to the Financial Statements

29. Concentrations of Credit Risk to Individual Counterparties

The Banking Group measures its concentration of credit risk in respect to bank counterparties on the basis of approved exposures and in respect to non bank counterparties on the basis of limits. No account is taken of collateral, security and/or netting agreements which the Banking Group may hold in respect of the various counterparty exposures.

For the three month period ended 30 September 2014 there were no individual counterparties (excluding connected parties, governments and banks with long term credit ratings of A- or above) where the Banking Group’s period end or peak end-of-day credit exposure equalled or exceeded 10% of equity (as at the end of the period).

Concentrations of credit risk to connected persons

Credit exposures to connected persons reported in the table below have been calculated partially on a bilateral net basis and partially on a gross basis. Netting has occurred (up to a limit of 125% of the Banking Group’s tier 1 capital) in respect of certain transactions which are the subject of a bilateral netting agreement.

This information has been derived in accordance with the Bank’s conditions of registration, the RBNZ document Connected Exposures Policy (BS8). The exposures are net of individual credit impairment allowances and exclude advances to connected persons of a capital nature.

Banking Group 30/09/2014	30/09/2013
Amount % of Tier 1	Amount % of Tier 1
$m Capital	$m Capital
**Aggregate at end of year1 **
Bank connected persons (on gross basis, before netting) 7,318 90.0%	4,065 52.0%
Less: amount netted off 5,747 70.7%	3,073 39.3%
Bank connected persons (on partial bilateral net basis) 1,571 19.3%	992 12.7%
**Peak end-of-day for the year2 **
Bank connected persons (on gross basis, before netting) 6,510 80.1%	5,696 72.8%
Less: amount netted off 4,254 52.4%	3,334 42.6%
Bank connected persons (on partial bilateral net basis) 2,256 27.7%	2,362 30.2%
**Rating-contingent limit3 **
Bank connected persons (on a gross basis, before netting) n/a 125.0%	n/a 125.0%
Bank connected persons (on partial bilateral net basis) n/a 70.0%	n/a 70.0%
Non-bank connected persons n/a 15.0%	n/a 15.0%

1 The Banking Group has amounts due from the Immediate Parent Company and the Ultimate Parent Bank and other entities within the Overseas Banking Group arising in the ordinary course of business. These balances arise primarily from unrealised gains on trading and hedging derivative financial instruments with the Ultimate Parent Bank. As at 30 September 2014, the gross exposures to the Immediate Parent Company were $6 million (30/09/2013 $14 million). As at 30 September 2014, the gross exposures to the Ultimate Parent Bank were $7,312 million (30/09/2013 $4,051 million).

2 The Banking Group has complied with the limits on aggregate credit exposure (of a non-capital nature and net of individual provisions) to connected persons and non-bank connected persons, as set out in the Conditions of Registration, at all times during the year. The peak end-of-day credit exposures for the year to connected persons are measured over Tier 1 Capital as at the end of the year.

3 Represents the maximum peak end-of-day aggregate credit exposures limit (of a non-capital nature and net of individual provisions) to all connected persons. This limit is based on the ratings applicable to the Bank’s long term senior unsecured obligations payable in New Zealand in New Zealand dollars. Within the overall limit a sub-limit of 15% of Tier 1 Capital applies to aggregate credit exposures (exclusive of exposures of a capital nature and net of individual provisions) to non-bank connected persons. There have been no changes to these limits for the year ended 30 September 2014.

ANZ Bank New Zealand Limited

67

Notes to the Financial Statements

30. Classification of Financial Instruments and Fair Value Measurements

	Banking Group
	At amortised Available-for- Total carrying
	cost At fair value through profit or loss Hedging sale assets amount Fair value
	Designated on initial
**$ millions **	recognition Held for trading
30/09/2014
Cash	1,822 - - - - 1,822 1,822
Settlement balances receivable	855 - - - - 855 855
Collateral paid	783 - - - - 783 783
Trading securities	- - 11,750 - - 11,750 11,750
Derivative financial instruments1	- - 11,089 315 - 11,404 11,404
Available-for-sale assets	- - - - 772 772 772
Net loans and advances2	96,299 - - - - 96,299 96,397
Other financial assets	555 190 - - - 745 745
Total financial assets	100,314 190 22,839 315 772 124,430 124,528
Settlement balances payable	2,296 - - - - 2,296 2,296
Collateral received	800 - - - - 800 800
Deposits and other borrowings	77,962 6,057 - - - 84,019 84,042
Derivative financial instruments1	- - 10,033 172 - 10,205 10,205
Bonds and notes2	17,042 - - - - 17,042 17,225
Subordinated debt	1,144 - - - - 1,144 1,137
Other financial liabilities	607 - 226 - - 833 833
Total financial liabilities	99,851 6,057 10,259 172 - 116,339 116,538
30/09/2013
Cash	2,206 - - - - 2,206 2,206
Settlement balances receivable	514 - - - - 514 514
Collateral paid	1,002 - - - - 1,002 1,002
Trading securities	- - 10,320 - - 10,320 10,320
Derivative financial instruments1	- - 9,289 229 - 9,518 9,518
Available-for-sale assets	- - - - 942 942 942
Net loans and advances2	90,837 - - - - 90,837 90,919
Other financial assets	484 172 - - - 656 656
Total financial assets	95,043 172 19,609 229 942 115,995 116,077
Settlement balances payable	1,428 - - - - 1,428 1,428
Collateral received	438 - - - - 438 438
Deposits and other borrowings	74,051 4,765 - - - 78,816 78,873
Derivative financial instruments1	- - 10,103 140 - 10,243 10,243
Bonds and notes2	15,494 - - - - 15,494 15,721
Subordinated debt	1,144 - - - - 1,144 1,044
Other financial liabilities	561 - 142 - - 703 703
Total financial liabilities	93,116 4,765 10,245 140 - 108,266 108,450

ANZ Bank New Zealand Limited

68

Notes to the Financial Statements

	Bank
	At amortised Available-for- Total carrying
	cost At fair value through profit or loss Hedging sale assets value Fair Value
	Designated on initial
**$ millions **	recognition Held for trading
30/09/2014
Cash	1,822 - - - - 1,822 1,822
Settlement balances receivable	858 - - - - 858 858
Collateral paid	783 - - - - 783 783
Trading securities	- - 11,750 - - 11,750 11,750
Derivative financial instruments1	- - 11,093 315 - 11,408 11,408
Available-for-sale assets	- - - - 770 770 770
Net loans and advances2	109,668 - - - - 109,668 109,825
Other financial assets	623 - - - - 623 623
Total financial assets	113,754 - 22,843 315 770 137,682 137,839
Settlement balances payable	2,771 - - - - 2,771 2,771
Collateral received	800 - - - - 800 800
Deposits and other borrowings	115,223 - - - - 115,223 115,339
Derivative financial instruments1	- - 10,065 172 - 10,237 10,237
Bonds and notes	3,277 - - - - 3,277 3,339
Subordinated debt	1,144 - - - - 1,144 1,137
Other financial liabilities	687 - 226 - - 913 913
Total financial liabilities	123,902 - 10,291 172 - 134,365 134,536
30/09/2013
Cash	2,206 - - - - 2,206 2,206
Settlement balances receivable	514 - - - - 514 514
Collateral paid	1,002 - - - - 1,002 1,002
Trading securities	- - 10,319 - - 10,319 10,319
Derivative financial instruments1	- - 9,293 229 - 9,522 9,522
Available-for-sale assets	- - - - 940 940 940
Net loans and advances2	100,769 - - - - 100,769 100,854
Other financial assets	529 - - - - 529 529
Total financial assets	105,020 - 19,612 229 940 125,801 125,886
Settlement balances payable	1,767 - - - - 1,767 1,767
Collateral received	438 - - - - 438 438
Deposits and other borrowings	105,805 - - - - 105,805 106,027
Derivative financial instruments1	- - 10,112 140 - 10,252 10,252
Bonds and notes	2,687 - - - - 2,687 2,759
Subordinated debt	1,144 - - - - 1,144 1,044
Other financial liabilities	603 - 142 - - 745 745
Total financial liabilities	112,444 - 10,254 140 - 122,838 123,032

1 Derivative financial instruments classified as held for trading include derivatives entered into as economic hedges which are not designated as accounting hedges.

2 Fair value hedging is applied to certain financial assets within loans and advances and certain financial liabilities within bonds and notes. The resulting fair value adjustment means that the carrying value differs from the amortised cost.

ANZ Bank New Zealand Limited

69

Notes to the Financial Statements

Measurement of fair value

Valuation methodologies

The Banking Group has an established control framework that ensures fair value is either determined or validated by a function independent of the party that undertakes the transaction. The control framework ensures that all models are calibrated periodically to test that outputs reflect prices from observable current market transactions in the same instrument or other available observable market data.

Where quoted market prices are used, prices are independently verified from other sources. For fair values determined using a valuation model, the control framework may include, as applicable, independent development or validation of valuation models, any inputs to those models, any adjustments required outside of the valuation model and, where possible, independent validation of model outputs. In this way, continued appropriateness of the valuations is ensured.

In instances where the Banking Group holds offsetting risk positions, the Banking Group uses the portfolio exemption in NZ IFRS 13 Fair Value Measurement to measure the fair value of such groups of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (that is, an asset) for a particular risk exposure or to transfer a net short position (that is, a liability) for a particular risk exposure.

The Group categorises its fair value measurements on the basis of inputs used in measuring fair value using the fair value hierarchy below:

• Level 1 – Financial instruments that have been valued by reference to unadjusted quoted prices in active markets for identical financial instruments. This category includes financial instruments valued using quoted yields where available for specific debt securities.

• Level 2 – Financial instruments that have been valued through valuation techniques incorporating inputs other than quoted prices within Level 1 that are observable for a similar financial asset or liability, either directly or indirectly.

• Level 3 – Financial instruments that have been valued using valuation techniques which incorporate significant inputs that are not based on observable market data (unobservable inputs).

Valuation techniques and inputs used

In the event that there is no quoted market price for the instrument, fair value is based on valuation techniques. The valuation models incorporate the impact of bid/ask spreads, counterparty credit spreads, funding costs and other factors that would influence the fair value determined by market participants.

The majority of valuation techniques employ only observable market data. However, for certain financial instruments the valuation technique may employ some data (valuation inputs or components) which is not readily observable in the current market. In these cases valuation inputs (or components of the overall value) are derived and extrapolated from other relevant market data and tested against historic transactions and observed market trends. To the extent that valuation is based on models or inputs that are not observable in the market, the determination of fair value can be more subjective, dependent on the significance of the unobservable input to the overall valuation.

The following valuation techniques have been applied to determine the fair values of financial instruments where there is no quoted price (level1) for the instrument:

• For instruments classified as trading securities and securities short sold, derivative financial assets and liabilities, available-forsale assets, and investments backing insurance contract liabilities, fair value measurements are derived by using modelled valuations techniques (including discounted cash flow models) that incorporate market prices / yields for securities with similar credit risk, maturity and yield characteristics; and/or current market yields for similar instruments.

• For net loans and advances, deposits and other borrowings and debt issuances, discounted cash flow techniques are used where contractual future cash flows of the instrument are discounted using discount rates incorporating wholesale market rates or market borrowing rates of debt with similar maturities or a yield curve appropriate for the remaining term to maturity.

• The Banking Group holds units in an unlisted fund, included in available-for sale assets which does not trade in an active market. The fair value of these units is based on the estimated cashflows from the realisation of the underlying assets.

There have been no substantial changes in the valuation techniques applied to different classes of financial instruments during the year.

ANZ Bank New Zealand Limited

70

Notes to the Financial Statements

Notes to the Financial Statements	Notes to the Financial Statements
Valuation hierarchy for financial assets and financial liabilities measured at fair value
Banking Group		Bank
$ millions Level 1 Level 2 Level 3 Total		Level 1 Level 2 Level 3 Total
30/09/2014
Financial assets
Trading securities 11,659 91 - 11,750		11,659 91 - 11,750
Derivative financial instruments 2 11,402 - 11,404		2 11,406 - 11,408
Available-for-sale assets 712 58 2 772		712 58 - 770
Other financial assets 129 61 - 190		- - - -
Total 12,502 11,612 2 24,116		12,373 11,555 - 23,928
Financial liabilities
Deposits and other borrowings - 6,057 - 6,057		- - - -
Derivative financial instruments 5 10,200 - 10,205		5 10,232 - 10,237
Other financial liabilities 226 - - 226		226 - - 226
Total 231 16,257 - 16,488		231 10,232 - 10,463
30/09/2013
Financial assets
Trading securities 10,208 112 - 10,320		10,207 112 - 10,319
Derivative financial instruments 2 9,516 - 9,518		2 9,520 - 9,522
Available-for-sale assets 940 - 2 942		940 - - 940
Other financial assets 140 32 - 172		- - - -
Total 11,290 9,660 2 20,952		11,149 9,632 - 20,781
Financial liabilities
Deposits and other borrowings - 4,765 - 4,765		- - - -
Derivative financial instruments 6 10,237 - 10,243		6 10,246 - 10,252
Other financial liabilities 142 - - 142		142 - - 142
Total 148 15,002 - 15,150		148 10,246 - 10,394
**Valuation hierarchy for financial assets and financial liabilities not measured at fair value1 **
	Banking Group	Bank
**$ millions **	Level 1 Level 2 Level 3 Total	Level 1 Level 2 Level 3 Total
30/09/2014
Financial assets
Net loans and advances	- 92,493 3,904 96,397	- 105,921 3,904 109,825
Financial liabilities
Deposits and other borrowings	- 77,985 - 77,985	- 115,339 - 115,339
Bonds and notes	- 17,225 - 17,225	- 3,339 - 3,339
Subordinated debt	828 309 - 1,137	828 309 - 1,137
Total	828 95,519 - 96,347	828 118,987 - 119,815

Valuation hierarchy for financial assets and financial	Valuation hierarchy for financial assets and financial	**liabilities not measured at fair value1 **	**liabilities not measured at fair value1 **	**liabilities not measured at fair value1 **
		Banking Group				Bank
**$ millions **	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
30/09/2014
Financial assets
Net loans and advances	-	92,493	3,904	96,397	-	105,921	3,904	109,825
Financial liabilities
Deposits and other borrowings	-	77,985	-	77,985	-	115,339	-	115,339
Bonds and notes	-	17,225	-	17,225	-	3,339	-	3,339
Subordinated debt	828	309	-	1,137	828	309	-	1,137
Total	828	95,519	-	96,347	828	118,987	-	119,815

1 Fair values, where the carrying amount is not considered a close approximation of fair value.

ANZ Bank New Zealand Limited

71

Notes to the Financial Statements

31. Notes to the Cash Flow Statement

31. Notes to the Cash Flow Statement	31. Notes to the Cash Flow Statement
	Banking Group	Bank
	Year to Year to	Year to Year to
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Reconciliation of profit after income tax to net cash flows provided by / (used in)
operating activities
Profit after income tax	1,716 1,371	1,559 1,576
Non-cash items:
Depreciation and amortisation	85 98	48 68
Provision for credit impairment	(16) 63	(28) 56
Deferred fee revenue and expenses	(4) 4	(6) 2
Amortisation of capitalised brokerage / mortgage origination fees	66 43	66 43
Amortisation of premiums and discounts	152 181	152 181
Fair value gains and losses	(222) (114)	(222) (108)
Loss on disposal and impairment of premises and equipment and intangibles	16 6	7 2
Reversal of impairment of investment in subsidiary	- -	- (181)
Deferrals or accruals of past or future operating cash receipts or payments:
Change in net operating assets less liabilities	(536) 1,061	(342) (3,445)
Change in interest receivable	(52) (11)	(89) (21)
Change in interest payable	32 (86)	59 (62)
Change in accrued expenses	(25) (5)	(23) (23)
Change in provisions	(25) (110)	(5) (105)
Change in insurance policy assets	(67) 2	- -
Change in other receivables and payables	(15) (29)	- (42)
Change in net income tax assets / liabilities	171 99	128 101
Dividends from associates in excess of share of profits	1 -	- -
Items classified as investing / financing:
Gain on disposal of subsidiaries (excluding disposal costs)	- (28)	- (51)
Net cash flows provided by / (used in) operating activities	1,277 2,545	1,304 (2,009)
	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Reconciliation of cash and cash equivalents to the balance sheet
Cash	1,822 2,206	1,822 2,206
Amounts included in settlement balances receivable / (payable):
Nostro accounts	38 22	38 22
Overdrawn nostro accounts	(30) (24)	(30) (24)
Total cash and cash equivalents	1,830 2,204	1,830 2,204

32. Commitments

32. Commitments	32. Commitments
	Banking Group	Bank
$ millions	30/09/2014 30/09/2013	30/09/2014 30/09/2013
Contracts for outstanding capital expenditure
Not later than 1 year	15 24	15 24
Future minimum lease payments under non-cancellable operating leases
Not later than 1 year	87 73	87 72
Later than 1 year but not later than 5 years	203 167	202 166
Later than 5 years	178 165	178 165
Total operating lease commitments	468 405	467 403
Total commitments	483 429	482 427

ANZ Bank New Zealand Limited

72

Notes to the Financial Statements

33. Credit Related Commitments, Guarantees and Contingent Liabilities

		Banking Group	Bank
		Face or contract value	Face or contract value
$ millions		30/09/2014 30/09/2013	30/09/2014 30/09/2013
Credit related commitments
Commitments with certain drawdown due within one year		764 817	764 817
Commitments to provide financial services		27,378 24,446	28,321 26,886
Total credit related commitments		28,142 25,263	29,085 27,703
Guarantees and contingent liabilities
Financial guarantees		925 997	925 997
Standby letters of credit		79 32	79 32
Transaction related contingent items		1,321 1,059	1,321 1,059
Trade related contingent liabilities		111 113	110 112
Total guarantees and contingent liabilities		2,436 2,201	2,435 2,200

The Banking Group guarantees the performance of customers by issuing standby letters of credit and guarantees to third parties, including its Ultimate Parent Bank. The risk involved is essentially the same as the credit risk involved in extending loan facilities to customers, therefore these transactions are subjected to the same credit origination, portfolio management and collateral requirements for customers applying for loans. As the facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements.

Other contingent liabilities

In October 2012, the Commerce Commission commenced an investigation, under the Fair Trading Act 1986, into the promotion and sale of interest rate swaps by certain banks (including the Bank) to rural customers. The investigation is ongoing and the outcome is not certain.

On 11 March 2013, litigation funder Litigation Lending Services (NZ) Limited announced plans for a representative action against banks in New Zealand for certain fees charged to New Zealand customers over the past six years. Proceedings were filed against the Bank on 25 June 2013. The potential outcome of this litigation cannot be determined with any certainty at this stage.

The Banking Group has other contingent liabilities in respect of actual and possible claims and court proceedings.

An assessment of the Banking Group’s likely loss in respect of these matters has been made on a case-by-case basis and provision made where deemed necessary.

ANZ Bank New Zealand Limited

73

Notes to the Financial Statements

34. Structured Entities, Transferred Financial Assets, Fiduciary Activities and Insurance

Structured entities

The Banking Group’s involvement with structured entities is mainly through securitisations and its funds management activities, which are outlined further below. The Banking Group has involvement with structured entities that may be established either by the Banking Group or by a third party.

Consolidated structured entities

Kingfisher NZ Trust 2008-1 (the Kingfisher Trust)

The Banking Group has established the Kingfisher Trust as an in-house residential mortgage backed securities facility that can issue securities meeting the RBNZ criteria to use as collateral in repurchase transactions with the RBNZ.

These assets do not qualify for derecognition as the Bank retains substantially all of the risks and rewards of the transferred assets.

As at 30 September 2014 and 30 September 2013 the Banking Group had not entered into any repurchase agreements with the RBNZ for residential mortgage backed securities and therefore no collateral had been accepted by the RBNZ under this facility.

ANZNZ Covered Bond Trust (the Covered Bond Trust)

Substantially all of the assets of the Covered Bond Trust are made up of certain housing loans and related securities originated by the Bank which are security for the guarantee by ANZNZ Covered Bond Trust Limited as trustee of the Covered Bond Trust of issuances of covered bonds by the Bank, or its wholly owned subsidiary ANZ New Zealand (Int’l) Limited, from time to time. The assets of the Covered Bond Trust are not available to creditors of the Bank, although the Bank (or its liquidator or statutory manager) may have a claim against the residual assets of the Covered Bond Trust (if any) after all prior ranking creditors of the Covered Bond Trust have been satisfied.

The Banking Group continues to recognise the assets of the Covered Bond Trust on its balance sheet as, although they are pledged as security for covered bonds, the Bank retains substantially all the risks and rewards of ownership.

Unconsolidated securitisations

The Banking Group also has an interest in unconsolidated securitisation entities through the provision of funding facilities or holding bonds or notes issued by such entities. The Banking Group’s exposure to these entities is not material.

Transferred financial assets

Assets transferred to the Kingfisher Trust and the Covered Bond Trust

The Bank has purchased securities issued by both the Kingfisher Trust and the Covered Bond Trust in exchange for the transfer of the rights to the cash flows associated with the identified residential mortgages.

Repurchase transactions

Securities sold subject to repurchase agreements are not derecognised when substantially all the risks and rewards of ownership remain with the Bank.

The following table sets out the carrying values assets transferred by the Bank and the Banking Group to other entities and the associated liabilities to deliver the cashflows on those instruments.

associated liabilities to deliver the cashflows on those instruments.
		Banking	Group	Bank
$ millions	Note	30/09/2014	30/09/2013	30/09/2014		30/09/2013
Securitisations1,2
Carrying amount of assets transferred		-	-	7,963		5,823
Carrying amount of associated liabilities		-	-	7,963		5,823
**Covered Bonds1 **
Carrying amount of assets transferred		-	-	7,283		5,857
Carrying amount of associated liabilities		-	-	7,283		5,857
Repurchase agreements
Carrying amount of assets transferred	28	47	108	47		108
Carrying amount of associated liabilities	28	47	107	47		107

1 There are no balances for the Banking Group as the balances for the Bank relate to transfers to internal special purpose entities.

2 The securitisation liabilities have recourse only to the pool of residential mortgages which have been securitised. The fair value of securitised assets is $7,928 million (30/09/2013 $5,823 million). The fair value of the associated liabilities is $7,928 million (30/09/2013 $5,823 million). The net position is nil (30/09/2013 nil).

ANZ Bank New Zealand Limited

74

Notes to the Financial Statements

Funds management and other fiduciary activities

Funds management

Certain subsidiaries of the Bank act as trustee and/or manager for a number of unit trusts and investment and superannuation funds. The Banking Group provides private banking services to a number of clients, including investment advice and portfolio management. The Banking Group is not responsible for any decline in performance of the underlying assets of the investors due to market forces.

As funds under management are not controlled by the Banking Group, they are not included in these financial statements. The Banking Group derives fee and commission income from the sale and management of investment funds and superannuation schemes, unit trusts and the provision of private banking services to customers. The Banking Group derives commission income from the sale of third party funds management products.

Some funds under management are invested in products owned or securities issued by the Banking Group and are recorded as liabilities in the balance sheet. At 30 September 2014, $2,928 million of funds under management were invested in the Banking Group's own products or securities (30/09/2013 $3,054 million).

Custodial services

The Banking Group provides custodial services to customers in respect of assets that are beneficially owned by those customers.

**Funds managed and held in custody by the Banking Group **	Banking	Group
**$ millions **	30/09/2014	30/09/2013
Kiwisaver and other managed funds	7,205	5,506
The Bonus Bonds Trust	3,196	3,259
ANZ PIE Fund1	715	833
Other investment portfolios2	8,807	7,354
Total funds under management	19,923	16,952
Funds held in custody or as nominee on behalf of customers	7,427	6,365
Funds management fee income from structured entities	110	95

1 The Banking Group established, and is considered to be the sponsor of, the ANZ PIE Fund. The ANZ PIE Fund invests only in deposits with the Bank. The Banking Group does not receive a management fee from, and does not have an interest in, the ANZ PIE Fund.

2 These funds are not structured entities as they are investment portfolios managed on behalf of customers.

Provision of financial services

Financial services provided by the Banking Group to entities which are involved in trust, custodial, funds management and other fiduciary activities are provided on arm’s length terms and conditions and at fair value. Any assets purchased from such entities have been purchased on an arm’s length basis and at fair value. The Banking Group does not have any affiliated insurance entities or affiliated insurance groups that are not members of the Banking Group.

Except for standard lending facilities provided in the normal course of business on arm’s length terms, the Banking Group has not provided any funding to entities where trust, custodial, funds management or other fiduciary activities are established, marketed and/or sponsored by a member of the Banking Group (30/09/2013 $nil).

Insurance business

The Banking Group conducts insurance business through its subsidiaries OnePath Life (NZ) Limited and OnePath Insurance Services (NZ) Limited (together OnePath Insurance). OnePath Insurance provides a range of risk transfer insurance products, including life, lump sum trauma/disablement, income protection and medical cover. In addition, other entities within the Banking Group market and distribute a range of insurance products which are underwritten by OnePath Insurance, or by third party insurance companies.

The aggregate amount of insurance business in this group comprises assets totalling $850 million (30/09/2013 $779 million), which is 0.7% (30/09/2013 0.6%) of the total consolidated assets of the Banking Group.

OnePath Life (NZ) Limited and OnePath Insurance Services (NZ) Limited propose to amalgamate and continue as OnePath Life (NZ) Limited. The proposed amalgamation is subject to necessary consents and approvals, including from the RBNZ.

Risk management

The Bank and subsidiaries of the Bank participating in the activities identified above have in place policies and procedures to ensure that those activities are conducted in an appropriate manner. Should adverse conditions arise, it is considered that these policies and procedures will minimise the possibility that these conditions will adversely impact the Bank or the Banking Group. The policies and procedures include comprehensive and prominent disclosure of information regarding products, and formal and regular review of operations and policies by management.

ANZ Bank New Zealand Limited

75

Notes to the Financial Statements

35. Changes to Comparatives

Certain amounts in the comparative information have been reclassified to conform with current period financial statement presentations.

The classification of the balance sheet was changed during the period to more consistently reflect the nature of the financial assets and liabilities. Prior to this reclassification, the balance sheet was classified according to both nature and counterparty. The key changes include:

Assets

• Securities purchased under agreements to resell in less than three months previously reported in liquid assets and due from other financial institutions are now classified as cash.

• Money at call, bills receivable and remittances in transit previously reported in liquid assets are now classified as either cash, settlement balances receivable or net loans and advances depending on the nature of the asset.

• Loans to other banks previously reported in due from other financial institutions are now classified as net loans and advances.

• Collateral paid previously reported in due from other financial institutions is now classified separately.

• Issued security settlements previously reported in other assets are now classified as settlement balances receivable.

Liabilities

• Loans from other banks previously reported in due to other financial institutions are now classified as deposits and other borrowings.

• Collateral received previously reported in due to other financial institutions is now classified separately.

• Issued security settlements previously reported in other liabilities are now classified as settlement balances payable.

Minor changes in the overall total assets and total liabilities have also occurred due to an amendment to NZ IAS19 Employee Benefits.

The tables below show the impact of these changes on the balance sheet, together with the impact of the change in the definition of cash and cash equivalents explained in note 1. Associated amounts in the income statement, statement of comprehensive income and cash flow statement have been restated accordingly, and the impact of the changes to these statements is not material.

Banking Group	30/09/2013	1/10/2012
	Previously Currently	Previously	Currently
$ millions	reported Change reported	reported Change reported
Assets
Liquid assets	2,496 (2,496) -	2,831 (2,831) -
Due from other financial institutions	1,570 (1,570) -	1,722 (1,722) -
Cash	- 2,206 2,206	- 2,780 2,780
Settlement balances receivable	- 514 514	- 227 227
Collateral paid	- 1,002 1,002	- 1,256 1,256
Available-for-sale assets	782 160 942	57 100 157
Net loans and advances	90,489 348 90,837	86,678 237 86,915
Other assets	731 (164) 567	592 (47) 545
Deferred tax assets	39 6 45	93 8 101
All other assets	24,331 - 24,331	29,583 - 29,583
Total assets	120,438 6 120,444	121,556 8 121,564
Liabilities
Due to other financial institutions	1,517 (1,517) -	1,759 (1,759) -
Settlement balances payable	- 1,428 1,428	- 1,525 1,525
Collateral received	- 438 438	- 257 257
Deposits and other borrowings	77,697 1,119 78,816	73,652 1,189 74,841
Due to immediate parent company	939 (939) -	740 (740) -
Payables and other liabilities	1,705 (510) 1,195	1,792 (443) 1,349
All other liabilities	27,113 - 27,113	32,681 - 32,681
Total liabilities	108,971 19 108,990	110,624 29 110,653
Equity	11,467 (13) 11,454	10,932 (21) 10,911
Cash and cash equivalents in cash flow statement	2,861 (657) 2,204	3,255 (526) 2,729

ANZ Bank New Zealand Limited

76

Notes to the Financial Statements

Notes to the Financial Statements
Bank 30/09/2013	1/10/2012
Previously Currently	Previously Currently
$ millions reported Change reported	reported Change reported
Assets
Liquid assets 2,495 (2,495) -	2,815 (2,815) -
Due from other financial institutions 1,570 (1,570) -	1,722 (1,722) -
Cash - 2,206 2,206	- 2,780 2,780
Settlement balances receivable - 514 514	- 227 227
Collateral paid - 1,002 1,002	- 1,256 1,256
Available-for-sale assets 780 160 940	54 100 154
Net loans and advances 88,229 12,540 100,769	84,319 11,856 96,175
Due from subsidiaries 12,206 (12,206) -	11,619 (11,619) -
Other assets 760 (151) 609	611 (63) 548
Deferred tax assets 128 6 134	185 8 193
All other assets 28,127 - 28,127	35,205 - 35,205
Total assets 134,295 6 134,301	136,530 8 136,538
Liabilities
Due to other financial institutions 1,517 (1,517) -	1,555 (1,555) -
Settlement balances payable - 1,767 1,767	- 1,865 1,865
Collateral received - 438 438	- 257 257
Deposits and other borrowings 71,440 34,365 105,805	66,731 38,586 105,317
Due to subsidiaries 33,768 (33,768) -	37,940 (37,940) -
Due to immediate parent company 939 (939) -	740 (740) -
Payables and other liabilities 1,416 (327) 1,089	1,469 (444) 1,025
All other liabilities 14,270 - 14,270	17,890 - 17,890
Total liabilities 123,350 19 123,369	126,325 29 126,354
Equity 10,945 (13) 10,932	10,205 (21) 10,184
Cash and cash equivalents in cash flow statement 2,861 (657) 2,204	3,255 (526) 2,729

ANZ Bank New Zealand Limited

77

Directorate and Auditors

Any document or communication may be sent to any Director at the Registered Office. The document or communication should be marked for the attention of that Director.

Directors’ interests

In order to ensure that members of the Board are reminded of their disclosure obligations under the Companies Act 1993, the following procedures are adopted:

• a. At least once in each year, Directors are requested to complete, in terms of section 140(1) of the Companies Act 1993, a disclosure of any interests which they have with the Bank itself. Directors are reminded at this time of their obligation under the Companies Act 1993 to disclose promptly any transaction or proposed transaction with the Bank in which they have an interest.

• b. Directors are also requested to make a general disclosure of their interest in other entities in terms of section 140(2) of the Companies Act 1993. In addition, they are requested to initiate a review of that disclosure if there are any significant alterations which occur subsequently during the period.

In addition to the written disclosures referred to above, Directors disclose relevant interests which they have before discussion of particular business items.

The Companies Act 1993 allows a Director with an interest in a transaction to participate in discussions and to vote on all matters relating to that particular transaction. However, the Board has adopted a guideline whereby a Director with an interest in a transaction should not be present during any discussions, and should not vote, on any matter pertaining to that particular transaction.

Transactions with Directors

No Director has disclosed that he/she or any immediate relative or professional associate has any dealing with the Banking Group which has been either entered into on terms other than those which would in the ordinary course of business be given to any other person of like circumstances or means or which could otherwise be reasonably likely to influence materially the exercise of the Director’s duties as a Director of the Bank.

Board Members as at 18 November 2014

Independent Non-Executive Director and Chair

John Frederick Judge

B Com, FCA Company Director Auckland, New Zealand

Mr Judge is the Chair of the Remuneration Committee and a member of the Audit Committee and the Risk Committee.

Other directorships: Aquatx Holdings Limited, Biotelliga Limited, Biotelliga Holdings Limited, Biotelliga Nominees Limited, CIC28 Biotech Limited, Fletcher Building Limited, Fletcher Building Industries Limited, Janohn Limited, Sebca Limited, John Judge Limited, Cup Limited, Sails Friday Limited, The New Zealand Initiative Limited

Executive Director

David Duncan Hisco

B Bus, MBA Chief Executive, ANZ Bank New Zealand Limited Auckland, New Zealand

Other directorships: ANZ Holdings (New Zealand) Limited

Non-Executive Directors

Shayne Cary Elliott

B Com Chief Financial Officer, Australia and New Zealand Banking Group Limited Melbourne, Australia

Mr Elliott is a member of the Risk Committee and the Audit Committee.

Other directorships: ANZ Holdings (New Zealand) Limited, AMMB Holdings Berhad

Michael Roger Pearson Smith, OBE

BSc (Hons) (City Lond), Hon LLD (Monash) Chief Executive Officer, Australia and New Zealand Banking Group Limited Melbourne, Australia

Mr Smith is a member of the Remuneration Committee.

Other directorships: Australia and New Zealand Banking Group Limited, The Financial Markets Foundation for Children, The Institute of International Finance, The International Monetary Conference, Financial Literacy Australia Limited, Executive Chairman of Chongqinq Mayor’s International Economic Advisory Council

Nigel Henry Murray Williams

BCom Chief Risk Officer, Australia and New Zealand Banking Group Limited Melbourne, Australia

Mr Williams is an alternate director for Michael Smith.

Other directorships: Shanghai Rural Commercial Bank

ANZ Bank New Zealand Limited

78

Directorate and Auditors

Independent Non-Executive Directors

Antony John Carter

BE (Hons), ME, FNZIM Company Director Auckland, New Zealand

Mr Carter is the Chair of the Risk Committee and a member of the Audit Committee and the Remuneration Committee.

Other directorships: Air New Zealand Limited, Avonhead Mall Limited, Blues Management Limited, Fletcher Building Limited, Fisher & Paykel Healthcare Corporation Limited, Fisher & Paykel Healthcare Employee Share Purchase Trustee Limited, Fletcher Building Industries Limited, Loughborough Investments Limited, Modern Merchants Limited, Strategic Interchange Limited, Tetrad Corporation Limited

Mark John Verbiest

LLB, MInstD Company Director Wanaka, New Zealand

Mr Verbiest is the Chair of the Audit Committee and a member of the Remuneration Committee and the Risk Committee.

Other directorships: Bear Fund NZ Limited, Freightways Limited, Spark New Zealand Limited, Transpower New Zealand Limited, Willis Bond Capital Partners Limited, Willis Bond General Partner Limited

Joan Withers

MBA, AFInstD Company Director Auckland, New Zealand

Ms Withers is a member of the Remuneration Committee, the Risk Committee and the Audit Committee.

Other directorships: Mighty River Power Limited, Television New Zealand Limited

Auditors

KPMG

Chartered Accountants 10 Customhouse Quay P O Box 996 Wellington, New Zealand

ANZ Bank New Zealand Limited

79

Conditions of Registration

Conditions of Registration, applicable as at 30 September 2014. These Conditions of Registration have applied from 1 July 2014.

The registration of ANZ Bank New Zealand Limited (“the bank”) as a registered bank is subject to the following conditions:

1. That-

2. (a) the Total capital ratio of the banking group is not less than 8%;

3. (b) the Tier 1 capital ratio of the banking group is not less than 6%;

4. (c) the Common Equity Tier 1 capital ratio of the banking group is not less than 4.5%;

5. (d) the Total capital of the banking group is not less than $30 million; and

6. (e) the process in Subpart 2H of the Reserve Bank of New Zealand document: “Capital Adequacy Framework (Internal Models Based Approach)” (BS2B) dated July 2014 is followed for the recognition and repayment of capital.

For the purposes of this condition of registration,-

the scalar referred to in the Reserve Bank of New Zealand document “Capital adequacy framework (Internal Models Based Approach)” (BS2B) dated July 2014 is 1.06.

“Total capital ratio”, “Tier 1 capital ratio”, “Common Equity Tier 1 capital ratio”, and “Total capital” must be calculated in accordance with the Reserve Bank of New Zealand document “Capital adequacy framework (Internal Models Based Approach)” (BS2B) dated July 2014.

1A. That-

• (a) the bank has an internal capital adequacy assessment process (“ICAAP”) that accords with the requirements set out in the document “Guidelines on a bank’s internal capital adequacy assessment process (‘ICAAP’)” (BS12) dated December 2007;

• (b) under its ICAAP the bank identifies and measures its “other material risks” defined as all material risks of the banking group that are not explicitly captured in the calculation of the Common Equity Tier 1 capital ratio, the Tier 1 capital ratio and the Total capital ratio under the requirements set out in the document “Capital adequacy framework (Internal Models Based Approach)” (BS2B) dated July 2014; and

• (c) the bank determines an internal capital allocation for each identified and measured “other material risk”.

• 1B. That the banking group complies with all requirements set out in the Reserve Bank of New Zealand document “Capital adequacy framework (Internal Models Based Approach)” (BS2B) dated July 2014.

• 1C. That, if the buffer ratio of the banking group is 2.5% or less, the bank must:

• (a) according to the following table, limit the aggregate distributions of the bank’s earnings to the percentage limit to distributions that corresponds to the banking group’s buffer ratio:

Banking group's buffer ratio 0% - 0.625%	Percentage limit to
	distributions of the
	**bank's earnings **
	0%
>0.625 - 1.25%	20%
>1.25 - 1.875% >1.875% - 2.5%	40%
	60%

• (b) prepare a capital plan to restore the banking group’s buffer ratio to above 2.5% within any timeframe determined by the Reserve Bank for restoring the buffer ratio; and

• (c) have the capital plan approved by the Reserve Bank.

For the purposes of this condition of registration, —

“buffer ratio”, “distributions”, and “earnings” have the same meaning as in Part 3 of the Reserve Bank of New Zealand document: “Capital Adequacy Framework (Internal Models Based Approach)” (BS2B) dated July 2014.

the scalar referred to in the Reserve Bank of New Zealand document “Capital adequacy framework (Internal Models Based Approach)” (BS2B) dated July 2014 is 1.06.

1. That the banking group does not conduct any nonfinancial activities that in aggregate are material relative to its total activities.

2. In this condition of registration, the meaning of “material” is based on generally accepted accounting practice.

3. That the banking group’s insurance business is not greater than 1% of its total consolidated assets.

For the purposes of this condition of registration, the banking group’s insurance business is the sum of the following amounts for entities in the banking group:

• (a) if the business of an entity predominantly consists of insurance business and the entity is not a subsidiary of another entity in the banking group whose business predominantly consists of insurance business, the amount of the insurance business to sum is the total consolidated assets of the group headed by the entity; and

• (b) if the entity conducts insurance business and its business does not predominantly consist of insurance business and the entity is not a subsidiary of another entity in the banking group whose business predominantly consists of insurance business, the amount of the insurance business to sum is the total liabilities relating to the entity’s insurance business plus the equity retained by the entity to meet the solvency or financial soundness needs of its insurance business.

In determining the total amount of the banking group’s insurance business-

• (a) all amounts must relate to on balance sheet items only, and must comply with generally accepted accounting practice; and

• (b) if products or assets of which an insurance business is comprised also contain a non-insurance

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Conditions of Registration

component, the whole of such products or assets must be considered part of the insurance business.

For the purposes of this condition of registration,-

“insurance business” means the undertaking or assumption of liability as an insurer under a contract of insurance:

“insurer” and “contract of insurance” have the same meaning as provided in sections 6 and 7 of the Insurance (Prudential Supervision) Act 2010.

1. That the aggregate credit exposures (of a non-capital nature and net of any allowances for impairment) of the banking group to all connected persons do not exceed the rating-contingent limit outlined in the following matrix:

**Credit Rating of the bank1 **	Connected exposure limit
	(% of the banking group’s Tier 1
	capital)
AA/Aa2 and above	75
AA-/Aa3	70
A+/A1	60
A/A2	40
A-/A3	30
BBB+/Baa1 and below	15

• 1 This table uses the rating scales of Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. (Fitch Ratings’ scale is identical to Standard & Poor’s)

Within the rating-contingent limit, credit exposures (of a non-capital nature and net of any allowances for impairment) to non-bank connected persons shall not exceed 15 percent of the banking group’s Tier 1 capital.

For the purposes of this condition of registration, compliance with the rating-contingent connected exposure limit is determined in accordance with the Reserve Bank of New Zealand document entitled “Connected Exposures Policy” (BS8) dated July 2014.

1. That exposures to connected persons are not on more favourable terms (e.g. as relates to such matters as credit assessment, tenor, interest rates, amortisation schedules and requirement for collateral) than corresponding exposures to non-connected persons.

2. That the bank complies with the following corporate governance requirements:

3. (a) the board of the bank must have at least five directors;

4. (b) the majority of the board members must be nonexecutive directors;

5. (c) at least half of the board members must be independent directors;

6. (d) an alternate director,—

   • (i) for a non-executive director must be nonexecutive; and

   • (ii) for an independent director must be independent;

7. (e) at least half of the independent directors of the bank must be ordinarily resident in New Zealand;

8. (f) the chairperson of the board of the bank must be independent; and

9. (g) the bank’s constitution must not include any provision permitting a director, when exercising powers or performing duties as a director, to act other than in what he or she believes is the best interests of the company (i.e. the bank).

For the purposes of this condition of registration, “nonexecutive” and “independent” have the same meaning as in the Reserve Bank of New Zealand document entitled “Corporate Governance” (BS14) dated July 2014.

1. That no appointment of any director, chief executive officer, or executive who reports or is accountable directly to the chief executive officer, is made in respect of the bank unless:

2. (a) the Reserve Bank has been supplied with a copy of the curriculum vitae of the proposed appointee; and

3. (b) the Reserve Bank has advised that it has no objection to that appointment.

4. That a person must not be appointed as chairperson of the board of the bank unless:

5. (a) the Reserve Bank has been supplied with a copy of the curriculum vitae of the proposed appointee; and

6. (b) the Reserve Bank has advised that it has no objection to that appointment.

7. That the bank has a board audit committee, or other separate board committee covering audit matters, that meets the following requirements:

8. (a) the mandate of the committee must include: ensuring the integrity of the bank’s financial controls, reporting systems and internal audit standards;

9. (b) the committee must have at least three members;

10. (c) every member of the committee must be a nonexecutive director of the bank;

11. (d) the majority of the members of the committee must be independent; and

12. (e) the chairperson of the committee must be independent and must not be the chairperson of the bank.

For the purposes of this condition of registration, “nonexecutive” and “independent” have the same meaning as in the Reserve Bank of New Zealand document entitled “Corporate Governance” (BS14) dated July 2014.

1. That a substantial proportion of the bank’s business is conducted in and from New Zealand.

2. That the bank has legal and practical ability to control and execute any business, and any functions relating to any business, of the bank that are carried on by a person other than the bank, sufficient to achieve, under normal business conditions and in the event of stress or failure of the bank or of a service provider to the bank, the following outcomes:

3. (a) that the bank’s clearing and settlement obligations due on a day can be met on that day;

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Conditions of Registration

• (b) that the bank’s financial risk positions on a day can be identified on that day;

• (c) that the bank’s financial risk positions can be monitored and managed on the day following any failure and on subsequent days; and

• (d) that the bank’s existing customers can be given access to payments facilities on the day following any failure and on subsequent days.

For the purposes of this condition of registration, the term “legal and practical ability to control and execute” is explained in the Reserve Bank of New Zealand document entitled “Outsourcing Policy” (BS11) dated January 2006.

1. That:

2. (a) the business and affairs of the bank are managed by, or under the direction and supervision of, the board of the bank;

3. (b) the employment contract of the chief executive officer of the bank or person in an equivalent position (together “CEO”) is with the bank, and the terms and conditions of the CEO’s employment agreement are determined by, and any decision relating to the employment or termination of employment of the CEO are made by, the board of the bank; and

4. (c) all staff employed by the bank shall have their remuneration determined by (or under the delegated authority of) the board or the CEO of the bank and be accountable (directly or indirectly) to the CEO of the bank.

5. (c) identifies the principal methods that the bank will use for measuring, monitoring and controlling liquidity risk; and

6. (d) considers the material sources of stress that the bank might face, and prepares the bank to manage stress through a contingency funding plan.

7. That no more than 10% of total assets may be beneficially owned by a SPV.

For the purposes of this condition, —

“total assets” means all assets of the banking group plus any assets held by any SPV that are not included in the banking group’s assets:

• “SPV” means a person—

• (a) to whom any member of the banking group has sold, assigned, or otherwise transferred any asset;

• (b) who has granted, or may grant, a security interest in its assets for the benefit of any holder of any covered bond; and

• (c) who carries on no other business except for that necessary or incidental to guarantee the obligations of any member of the banking group under a covered bond:

“covered bond” means a debt security issued by any member of the banking group, for which repayment to holders is guaranteed by a SPV, and investors retain an unsecured claim on the issuer.

  16. That—

1. That the banking group complies with the following quantitative requirements for liquidity-risk management:

2. (a) the one-week mismatch ratio of the banking group is not less than zero per cent at the end of each business day;

3. (b) the one-month mismatch ratio of the banking group is not less than zero per cent at the end of each business day; and

4. (c) the one-year core funding ratio of the banking group is not less than 75 per cent at the end of each business day.

For the purposes of this condition of registration, the ratios identified must be calculated in accordance with the Reserve Bank of New Zealand documents entitled “Liquidity Policy” (BS13) dated July 2014 and “Liquidity Policy Annex: Liquid Assets” (BS13A) dated December 2011.

1. That the bank has an internal framework for liquidity risk management that is adequate in the bank’s view for managing the bank’s liquidity risk at a prudent level, and that, in particular:

2. (a) is clearly documented and communicated to all those in the organisation with responsibility for managing liquidity and liquidity risk;

3. (b) identifies responsibility for approval, oversight and implementation of the framework and policies for liquidity risk management;

4. (a) no member of the banking group may give effect to a qualifying acquisition or business combination that meets the notification threshold, and does not meet the non-objection threshold, unless:

5. (i) the bank has notified the Reserve Bank in writing of the intended acquisition or business combination and at least 10 working days have passed; and

6. (ii) at the time of notifying the Reserve Bank of the intended acquisition or business combination, the bank provided the Reserve Bank with the information required under the Reserve Bank of New Zealand Banking Supervision Handbook document “Significant Acquisitions Policy” (BS15) dated December 2011; and

7. (b) no member of the banking group may give effect to a qualifying acquisition or business combination that meets the non-objection threshold unless:

8. (i) the bank has notified the Reserve Bank in writing of the intended acquisition or business combination;

9. (ii) at the time of notifying the Reserve Bank of the intended acquisition or business combination, the bank provided the Reserve Bank with the information required under the Reserve Bank of New Zealand Banking Supervision Handbook document “Significant Acquisitions Policy” (BS15) dated December 2011; and

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Conditions of Registration

• (iii) the Reserve Bank has given the bank a notice of non-objection to the significant acquisition or business combination.

For the purposes of this condition of registration, “qualifying acquisition or business combination”, “notification threshold” and “non-objection threshold” have the same meaning as in the Reserve Bank of New Zealand Banking Supervision Handbook document “Significant Acquisitions Policy” (BS15) dated December 2011.

1. That the bank is pre-positioned for Open Bank Resolution and in accordance with a direction from the Reserve Bank, the registered bank can—

2. (a) close promptly at any time of the day and on any day of the week and that effective upon the appointment of the statutory manager—

   • (i) all liabilities are frozen in full; and

   • (ii) no further access by customers and counterparties to their accounts (deposits, liabilities or other obligations) is possible;

3. (b) apply a de minimis to relevant customer liability accounts;

4. (c) apply a partial freeze to the customer liability account balances;

5. (d) reopen by no later than 9am the next business day following the appointment of a statutory manager and provide customers access to their unfrozen funds;

6. (e) maintain a full freeze on liabilities not pre-positioned for open bank resolution; and

7. (f) reinstate customers’ access to some or all of their residual frozen funds.

For the purposes of this condition of registration, “de minimis”, “partial freeze”, “customer liability account”, and “frozen and unfrozen funds” have the same meaning as in the Reserve Bank of New Zealand document “Open Bank Resolution (OBR) Pre-positioning Requirements Policy” (BS17) dated September 2013.

1. That the registered bank has an Implementation Plan that—

2. (a) is up-to-date; and

3. (b) demonstrates that the bank’s prepositioning for Open Bank Resolution meets the requirements set out in the Reserve Bank document: “Open Bank Resolution Prepositioning Requirements Policy” (BS17).

For the purposes of this condition of registration, “Implementation Plan” has the same meaning as in the Reserve Bank of New Zealand document “Open Bank Resolution (OBR) Pre-positioning Requirements Policy” (BS17) dated September 2013.

1. That the bank has a compendium of liabilities that—

2. (a) at the product-class level lists all liabilities, indicating which are—

   • (i) pre-positioned for Open Bank Resolution; and

   • (ii) not pre-positioned for Open Bank Resolution;

3. (b) is agreed to by the Reserve Bank; and

4. (c) if the Reserve Bank’s agreement is conditional, meets the Reserve Bank’s conditions.

For the purposes of this condition of registration, “compendium of liabilities” and “pre-positioned and non pre-positioned liabilities” have the same meaning as in the Reserve Bank of New Zealand document “Open Bank Resolution (OBR) Pre-positioning Requirements Policy” (BS17) dated September 2013.

1. That on an annual basis the bank tests all the component parts of its Open Bank Resolution solution that demonstrates the bank’s prepositioning for Open Bank Resolution as specified in the bank’s Implementation Plan.

For the purposes of this condition of registration, “Implementation Plan” has the same meaning as in the Reserve Bank of New Zealand document “Open Bank Resolution (OBR) Pre-positioning Requirements Policy” (BS17) dated September 2013.

1. That, for a loan-to-valuation measurement period, the total of the bank’s qualifying new mortgage lending amounts must not for residential properties with a loan-to-valuation ratio of more than 80%, exceed 10% of the total of the qualifying new mortgage lending amounts arising in the loan-to-valuation measurement period.

2. That the bank must not make a residential mortgage loan unless the terms and conditions of the loan contract or the terms and conditions for an associated mortgage require that a borrower obtain the bank’s agreement before the borrower can grant to another person a charge over the residential property used as security for the loan.

3. That the bank must not permit a borrower to grant a charge in favour of another person over a residential property used as security for a residential mortgage loan unless the sum of the lending secured by the charge and the loan value for the residential mortgage loan would not exceed 80% of the property value of the residential property when the lending secured by the charge is drawn down.

4. That the bank must not provide a residential mortgage loan if the residential property to be mortgaged to the bank as security for the residential mortgage loan is subject to a charge in favour of another person unless the total amount of credit secured by the residential property would not exceed 80% of the property value when the residential mortgage loan is drawn down.

5. That the bank must not act as broker or arrange for a member of its banking group to provide a residential mortgage loan.

In these conditions of registration,—

“banking group”,—

• (a) means ANZ Bank New Zealand Limited (as reporting entity) and all other entities included in the group as defined in section 6(1) of the Financial Markets Conduct Act 2013 for the purposes of Part 7 of that Act (unless paragraph (b) applies); or

• (b) means ANZ Bank New Zealand Limited’s financial reporting group (as defined in section 2(1) of the

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Conditions of Registration

Financial Reporting Act 1993) if the Financial Reporting Act 1993 applies to the bank:

“generally accepted accounting practice” —

• (a) has the same meaning as in section 8 of the Financial Reporting Act 2013 (unless paragraph (b) applies); or

• (b) means generally accepted accounting practice within the meaning of section 3 of the Financial Reporting Act 1993 if the bank is required to prepare financial statements in accordance with that practice.

In conditions of registration 21 to 25, —

“loan-to-valuation ratio”, “loan value”, “property value”, “qualifying new mortgage lending amount” and “residential mortgage loan” have the same meaning as in the Reserve Bank of New Zealand document entitled “Framework for Restrictions on High-LVR Residential Mortgage Lending” (BS19) dated July 2014:

“loan-to-valuation measurement period” means—

• (a) the six calendar month period ending on the last day of March 2014; and

• (b) thereafter a period of three calendar months ending on the last day of the third calendar month, the first of which ends on the last day of April 2014.

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Directors’ Statement

As at the date on which this Disclosure Statement is signed, after due enquiry, each Director believes that:

• (i) The Disclosure Statement contains all the information that is required by the Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014; and

• (ii) The Disclosure Statement is not false or misleading.

Over the year ended 30 September 2014, after due enquiry, each Director believes that:

• (i) ANZ Bank New Zealand Limited has complied with all Conditions of Registration that applied during that period;

• (ii) Credit exposures to connected persons were not contrary to the interests of the Banking Group;

• (iii) ANZ Bank New Zealand Limited had systems in place to monitor and control adequately the Banking Group’s material risks, including credit risk, concentration of credit risk, interest rate risk, currency risk, equity risk, liquidity risk, operational risk and other business risks, and that those systems were being properly applied.

This Disclosure Statement is dated, and has been signed by all Directors of the Bank on, 18 November 2014.

Antony Carter

Shayne Elliott

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David Hisco

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John Judge

Michael Smith, OBE

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Mark Verbiest

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Joan Withers

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Independent Auditor’s Report

To the Shareholder of ANZ Bank New Zealand Limited

Report on the Bank and Banking Group Disclosure Statement

We have audited the accompanying financial statements and supplementary information of ANZ Bank New Zealand Limited (the Bank) and its subsidiaries (the Banking Group) on pages 4 to 76 of the Disclosure Statement. The financial statements comprise the balance sheets as at 30 September 2014, the statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information of the Bank and the Banking Group. The supplementary information comprises the information that is required to be disclosed under the Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014 (the Order).

Directors' Responsibility for the Disclosure Statement

The Directors are responsible for the preparation of the Bank and Banking Group Disclosure Statement, including financial statements prepared in accordance with Clause 24 of the Order, generally accepted accounting practice in New Zealand and International Financial Reporting Standards that give a true and fair view of the matters to which they relate. The Directors are also responsible for such internal controls as they determine are necessary to enable the preparation of the Bank and Banking Group financial statements that are free from material misstatement whether due to fraud or error.

The Directors are responsible for the preparation and fair presentation of supplementary information, in accordance with Schedules 2, 4, 7, 13, 14, 15 and 17 of the Order.

Auditor’s Responsibility

Our responsibility is to express an opinion on the Disclosure Statement, including the financial statements prepared in accordance with Clause 24 of the Order and the supplementary information disclosed in accordance with Schedules 4, 7, 13, 14, 15 and 17 of the Order. We conducted our audit in accordance with International Standards on Auditing (New Zealand). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Bank and Banking Group financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Bank and Banking Group financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the Bank and Banking Group’s preparation of the financial statements that gives a true and fair view of the matters to which they relate in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank and Banking Group’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

KPMG has also provided other audit related services to the Bank and Banking Group. In addition, certain partners and employees of our firm may also deal with the Bank and Banking Group on normal terms within the ordinary course of trading activities of the Bank and Banking Group. These matters have not impaired our independence as auditors of the Bank and Banking Group. We have no other relationship with, or interest in, the Bank and Banking Group.

Opinion on the Disclosure Statement

In our opinion the Disclosure Statement of the Bank and the Banking Group on pages 4 to 76 (excluding the supplemental information):

• a. complies with generally accepted accounting practice in New Zealand;

• b. complies with International Financial Reporting Standards; and

• c. gives a true and fair view of the financial position as at 30 September 2014 and of their financial performance and cash flows for the year ended on that date.

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Opinion on Supplementary Information

In our opinion, the supplementary information that is required to be disclosed in accordance with Schedules 4, 7, 13, 14, 15 and 17 of the Order, and is included within notes 13, 14, 26, 27, 29 and 34 of the Disclosure Statement:

• a. has been prepared, in all material respects, in accordance with the guidelines issued pursuant to section 78(3) of the Reserve Bank of New Zealand Act 1989 and any Conditions of Registration;

• b. is in accordance with the books and records of the Bank and Banking Group; and

• c. fairly states the matters to which it relates in accordance with those Schedules.

Report on Supplementary Information Relating to Capital Adequacy

We have reviewed the Supplementary Information relating to Capital Adequacy, as disclosed in note 26 of the Disclosure Statement for the year ended 30 September 2014.

Directors’ Responsibility for the Supplementary Information Relating to Capital Adequacy

The Directors are responsible for the preparation of Supplementary Information relating to Capital Adequacy that is required to be disclosed under Schedule 11 of the Order.

Auditor’s Responsibility

Our responsibility is to express an opinion on the supplementary information relating to Capital Adequacy based on our review. We conducted our review in accordance with the review engagement standard RS-1 Statement of Review Engagement Standards issued by the External Reporting Board. Those standards require that we comply with ethical requirements and plan and perform the review to obtain limited assurance about whether the supplementary information relating to Capital Adequacy is, in all material respects:

• a. prepared in accordance with the Bank’s Conditions of Registration;

• b. prepared in accordance with the Bank’s internal models for credit risk and operational risk as accredited by the Reserve Bank of New Zealand; and

• c. disclosed in accordance with Schedule 11 of the Order.

A review is limited primarily to enquiries of Bank and Banking Group personnel and analytical review procedures applied to the financial data, and thus provides less assurance than an audit. We have not performed an audit in respect of the Capital Adequacy disclosures, and accordingly, we do not express an audit opinion on these disclosures.

Opinion on the Supplementary Information Relating to Capital Adequacy

Based on our review, nothing has come to our attention that causes us to believe that the supplementary information relating to capital adequacy prescribed by Schedule 11 of the Order, and disclosed in note 26 of the Disclosure Statement, is not, in all material respects:

• a. prepared in accordance with the Bank’s Conditions of Registration;

• b. prepared in accordance with the Bank’s internal models for credit risk and operational risk as accredited by the Reserve Bank of New Zealand; and

• c. disclosed in accordance with Schedule 11 of the Order.

Report on Other Legal and Regulatory Requirements

In accordance with the requirements of sections 16(1)(d) and 16(1)(e) of the Financial Reporting Act 1993, and clauses 2(1)(d) and 2(1)(e) of Schedule 1 of the Order, we report that:

• a. we have obtained all the information and explanations we have required; and

• b. in our opinion, proper accounting records have been kept by the Bank and Banking Group, as far as appears from our examination of those records.

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Wellington 18 November 2014

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Index
Contents and Glossary of Terms	1
General Disclosures	1
Summary of Financial Statements	3
Income Statement	4
Statement of Comprehensive Income	4
Statement of Changes in Equity	5
Balance Sheet	6
Cash Flow Statement	7
1. Significant Accounting Policies	8
2. Critical Estimates and Judgement Used in Applying Accounting Policies	15
3. Risk Management Policies	17
4. Income	19
5. Expenses	20
6. Income Tax	21
7. Segmental Analysis	22
8. Cash	24
9. Trading Securities	24
10. Derivative Financial Instruments	25
11. Available-for-sale Assets	27
12. Net Loans and Advances	27
13. Provision for Credit Impairment	28
14. Impaired Assets	29
15. Subsidiaries and Associates	29
16. Other Assets	30
17. Goodwill and Other Intangible Assets	30
18. Deposits and Other Borrowings	30
19. Payables and Other Liabilities	31
20. Provisions	31
21. Bonds and Notes	31
22. Subordinated Debt	32
23. Related Party Transactions	32
24. Current and Non-current Assets and Liabilities	35
25. Share Capital	36
26. Capital Adequacy	37
27. Financial Risk Management	46
28. Financial Assets Pledged as Collateral and Offsetting Financial Instruments	64
29. Concentrations of Credit Risk to Individual Counterparties	66
30. Classification of Financial Instruments and Fair Value Measurements	67
31. Notes to the Cash Flow Statements	71
32. Commitments	71
33. Credit Related Commitments and Contingent Liabilities	72
34. Structured Entities, Transferred Financial Assets, Fiduciary Activities and Insurance	73
35. Changes to Comparatives	75
Directorate and Auditors	77
Conditions of Registration	79
Directors’ Statement	84
Independent Auditor’s Report	85
Index	87