Australia and New Zealand Banking Group Ltd. — Annual Report 2016

Nov 23, 2016

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - ANZ NEW ZEALAND REGISTERED BANK DISCLOSURE STATEMENT

FOR THE YEAR ENDED 30 SEPTEMBER 2016 NUMBER 32 | ISSUED NOVEMBER 2016

Australia and New Zealand Banking Group Limited - ANZ New Zealand

REGISTERED BANK DISCLOSURE STATEMENT

FOR THE YEAR ENDED 30 SEPTEMBER 2016

CONTENTS

CONTENTS
Glossary of Terms	2	Non-Financial Assets
		24. Other Assets	47
Consolidated Financial Statements		25. Goodwill and Other Intangible Assets	47
Income Statement	3
Statement of Comprehensive Income	3	Non-Financial Liabilities
Balance Sheet	4	26. Payables and Other Liabilities	47
Cash Flow Statement	5	27. Provisions	47
Statement of Changes in Equity	6
		Equity
Notes to the Financial Statements		28. Share Capital and Initial Head Office Account	48
Basis of Preparation		29. Capital Adequacy	49
1. Significant Accounting Policies	7
2. Critical Estimates and Judgements Used in	12	Consolidation and Presentation
Applying Accounting Policies		30. Subsidiaries	51
		31. Structured Entities, Transferred Financial Assets,	52
Financial Performance		Fiduciary Activities and Insurance
3. Net Interest Income	14
4. Non Interest Income	14	Other Disclosures
5. Operating Expenses	15	32. Related Party Disclosures	54
6. Income Tax	16	33. Capital Expenditure and Operating Lease	56
7. Segment Analysis	17	Commitments
8. Notes to the Cash Flow Statements	19	34. Compensation of Auditors	56
		35. Concentrations of Credit Risk to Individual	56
Financial Assets		Counterparties
9. Cash	20	36. Risk Management Framework	57
10. Trading Securities	20	37. NZ Branch and Overseas Banking Group	58
11. Derivative Financial Instruments	20	Information
12. Available-for-sale Assets	22
13. Net Loans and Advances	22	Other Registered Bank Disclosures
14. Provision for Credit Impairment	23	Historical Summary of Financial Statements	59
		General Disclosures	60
Financial Liabilities		Conditions of Registration	62
15. Deposits and Other Borrowings	24	Directorate and Auditor	63
16. Debt Issuances	24
17. Subordinated Debt	25	Directors’ and New Zealand Chief Executive Officer’s	65
		S Statement
Financial Instrument Disclosures		Independent Auditor’s Report	66

Notes to the Financial Statements
Basis of Preparation
1. Significant Accounting Policies	7
2. Critical Estimates and Judgements Used in	12
Applying Accounting Policies
Financial Performance
3. Net Interest Income	14
4. Non Interest Income	14
5. Operating Expenses	15
6. Income Tax	16
7. Segment Analysis	17
8. Notes to the Cash Flow Statements	19
Financial Assets
9. Cash	20
10. Trading Securities	20
11. Derivative Financial Instruments	20
12. Available-for-sale Assets	22
13. Net Loans and Advances	22
14. Provision for Credit Impairment	23
Financial Liabilities
15. Deposits and Other Borrowings	24
16. Debt Issuances	24
17. Subordinated Debt	25
Financial Instrument Disclosures
18. Financial Risk Management	27
19. Classification of Financial Instruments and Fair Value	41
Measurements
20. Maturity Analysis of Assets and Liabilities	43
21. Assets Charged as Security for Liabilities and Collateral	44
Accepted as Security for Assets
22. Offsetting	45
23. Credit Related Commitments, Guarantees and	46
Contingent Liabilities

Australia and New Zealand Banking Group Limited - ANZ New Zealand

2

GLOSSARY OF TERMS

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

Bank means ANZ Bank New Zealand Limited.

Banking Group means the Bank and all its controlled entities.

Immediate Parent Company means ANZ Funds Pty Limited, which is the immediate parent company of ANZ Holdings (New Zealand) Limited.

Ultimate Parent Bank means Australia and New Zealand Banking Group Limited.

Overseas Banking Group means the worldwide operations of Australia and New Zealand Banking Group Limited including its controlled entities.

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.

NZ Branch means the New Zealand business of the Ultimate Parent Bank.

ANZ New Zealand means the New Zealand business of the Overseas Banking Group.

Registered Office is Level 10, 171 Featherston Street, Wellington, New Zealand, which is also ANZ New Zealand’s address for service.

RBNZ means the Reserve Bank of New Zealand.

APRA means the Australian Prudential Regulation Authority.

the Order means the Registered Bank Disclosure Statements (Overseas Incorporated Registered Banks) Order 2014.

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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

INCOME STATEMENT

INCOME STATEMENT
		Year to	Year to
		30/09/2016	30/09/2015
	Note	NZ$m	NZ$m
Interest income	3	6,770	7,417
Interest expense	3	3,741	4,537
Net interest income		3,029	2,880
Net trading gains	4	12	262
Net funds management and insurance income	4	414	385
Other operating income	4	401	505
Share of associates' profit		5	5
Operating income		3,861	4,037
Operating expenses	5	1,600	1,513
Profit before credit impairment and income tax		2,261	2,524
Credit impairment charge	14	147	76
Profit before income tax		2,114	2,448
Income tax expense	6	572	677
Profit after income tax		1,542	1,771

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF COMPREHENSIVE INCOME
	Year to	Year to
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Profit after income tax	1,542	1,771
Items that will not be reclassified to profit or loss
Actuarial gain / (loss) on defined benefit schemes	18	(33)
Income tax credit / (expense) relating to items not reclassified	(5)	9
Total items that will not be reclassified to profit or loss	13	(24)
Items that may be reclassified subsequently to profit or loss
Unrealised gains recognised directly in equity	91	12
Realised losses / (gains) transferred to the income statement	9	(16)
Income tax credit / (expense) relating to items that may be reclassified	(28)	1
Total items that maybe reclassified subsequentlyto profit or loss	72	(3)
Total comprehensive income for the year	1,627	1,744

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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

4

BALANCE SHEET

BALANCE SHEET
		30/09/2016 30/09/2015
	Not	e NZ$m NZ$m
Assets
Cash	9 2,274 2,435
Settlement balances receivable	396 309
Collateral paid	2,310 1,929
Trading securities	10 11,979 12,139
Investments backing insurance contract liabilities	119 151
Derivative financial instruments	11 20,969 17,587
Available-for-sale assets	12 2,859 1,428
Net loans and advances	13 120,651 114,376
Other assets	24 701 740
Life insurance contract assets	630 552
Investments in associates	7 4
Premises and equipment	387 388
Goodwill and other intangible assets	25 3,424 3,492
Total assets	166,706 155,530
Interest earning and discount bearing assets	140,524 132,869
Liabilities
Settlement balances payable	1,554 1,469
Collateral received	529 1,687
Deposits and other borrowings	15 106,908 99,736
Derivative financial instruments	11 22,398 17,769
Current tax liabilities	22 81
Deferred tax liabilities	6 147 124
Payables and other liabilities	26 1,137 1,527
Provisions	27 206 191
Debt issuances	16 20,014 19,403
Subordinated debt	17 2,624 2,683
Total liabilities (excluding head office account)	155,539 144,670
Net assets (excluding head office account)	11,167 10,860
Equity
Share capital and initial head office account	28 8,055 8,058
Reserves	62 (10)
Retained earnings	3,050 2,812
Total equity & head office account	11,167 10,860
Interest and discount bearing liabilities	123,145 118,026

For and on behalf of the Board of Directors:

==> picture [168 x 34] intentionally omitted <==

David Gonski, AC Chairman Australia and New Zealand Banking Group Limited 23 November 2016

==> picture [87 x 48] intentionally omitted <==

Shayne Elliott Executive Director Australia and New Zealand Banking Group Limited 23 November 2016

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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

5

CASH FLOW STATEMENT

CASH FLOW STATEMENT
		Year to	Year to
		30/09/2016	30/09/2015
	Note	NZ$m	NZ$m
Cash flows from operating activities
Interest received		6,794	7,357
Dividends received		2	89
Net funds management and insurance income		332	303
Fees and other income received		624	627
Interest paid		(3,753)	(4,482)
Operating expenses paid		(1,499)	(1,390)
Income taxes paid		(641)	(589)
Cash flows from operating profits before changes in operating assets and liabilities		1,859	1,915
Net changes in operating assets and liabilities:
Change in settlements receivable		(19)	4
Change in collateral paid		(381)	(1,146)
Change in trading securities		164	(208)
Change in derivative financial instruments		(2,320)	2,498
Change in available-for-sale assets		(1,381)	(634)
Change in insurance investment assets		32	39
Change in loans and advances		(6,643)	(8,875)
Change in settlements payable		(67)	293
Change in collateral received		(1,158)	887
Change in deposits and other borrowings		8,180	5,205
Net changes in operating assets and liabilities		(3,593)	(1,937)
Net cash flows used in operating activities	8	(1,734)	(22)
Cash flows from investing activities
Proceeds from sale of premises and equipment		17	-
Proceeds from sale of insurance policies		23	-
Purchase of intangible assets		(29)	(73)
Purchase of premises and equipment		(71)	(59)
Net cash flows used in investing activities		(60)	(132)
Cash flows from financing activities
Proceeds from issue of debt issuances		7,380	4,212
Proceeds from issue of subordinated debt		-	1,482
Proceeds from issue of preference shares		-	675
Redemptions of debt issuances		(4,477)	(4,008)
Redemptions of subordinated debt		-	(297)
Redemptions of preference shares		-	(10)
Dividends paid		(1,320)	(1,630)
Net cash flows provided by financing activities		1,583	424
Net increase / (decrease) in cash and cash equivalents		(211)	270
Cash and cash equivalents at beginning of the year		2,526	2,256
Cash and cash equivalents at end of the year	8	2,315	2,526

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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

6

STATEMENT OF CHANGES IN EQUITY

		Share capital	Available-
		and initial	for-sale	Cash flow
		head	revaluation	hedging	Retained
		office account	reserve	reserve	earnings	Total equity
	Note	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
As at 1 October 2014		7,393	-	(7)	2,695	10,081
Profit after income tax		-	-	-	1,771	1,771
Unrealised gains recognised directly in equity		-	-	12	-	12
Realised gains transferred to the income statement		-	-	(16)	-	(16)
Actuarial loss on defined benefit schemes		-	-	-	(33)	(33)
Income tax credit on items recognised directly in equity		-	-	1	9	10
Total comprehensive income for the year		-	-	(3)	1,747	1,744
Preference shares issued	28	675	-	-	-	675
Preference shares redeemed	28	(10)	-	-	-	(10)
Ordinary dividend paid	28	-	-	-	(1,630)	(1,630)
As at 30 September 2015		8,058	-	(10)	2,812	10,860
Profit after income tax		-	-	-	1,542	1,542
Unrealised gains / (losses) recognised directly in equity		-	(2)	93	-	91
Realised losses transferred to the income statement		-	2	7	-	9
Actuarial gain on defined benefit schemes		-	-	-	18	18
Income tax expense on items recognised directly in equity		-	-	(28)	(5)	(33)
Total comprehensive income for the year		-	-	72	1,555	1,627
Shares cancelled on amalgamation	28	(3)	-	-	3	-
Ordinary dividend paid	28	-	-	-	(1,320)	(1,320)
As at 30 September 2016		8,055	-	62	3,050	11,167

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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

7

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 Financial Markets Conduct Act 2013 and the Order. ANZ New Zealand’s financial statements are for the Overseas Banking Group’s consolidated New Zealand business, which includes its subsidiaries and associates.

These financial statements comply with:

• New Zealand Generally Accepted Accounting Practice, as defined in the Financial Reporting Act 2013

• New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards, as appropriate for publicly accountable profit-oriented entities

• 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

The preparation of these financial statements requires the use of management judgements, estimates and assumptions that affect reported amounts and the application of policies.

Discussion of the critical accounting estimates, which include complex or subjective decisions or assessments, are covered in note 2. Such estimates are reviewed on an ongoing basis.

The effect of all transactions between entities in ANZ New Zealand is eliminated.

Associates

ANZ New Zealand applies the equity method of accounting for associates.

(vi) Foreign currency translation

Functional and presentation currency

Items included in the financial statements of each of ANZ New Zealand’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency).

ANZ New Zealand’s financial statements are presented in New Zealand dollars, which is ANZ New Zealand’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.

(b) Income recognition

(iii) Basis of measurement

The financial information has 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

• available-for sale financial assets

• financial instruments held for trading

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

(iv) Rounding

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

(v) Principles of consolidation

Subsidiaries

The consolidated financial statements of ANZ New Zealand comprise the financial statements of the NZ Branch and all the New Zealand businesses of all the subsidiaries of the Ultimate Parent Bank. An entity, including a structured entity, is considered a subsidiary of ANZ New Zealand when it is determined that control over the entity exists. Control is deemed to exist when ANZ New Zealand 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 ANZ New Zealand the current ability to direct the relevant activities of the entity.

At times, the determination of control can be judgemental. Further detail on the judgements involved in assessing control has been provided in note 2.

(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 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. This is 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.

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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

8

NOTES TO THE FINANCIAL STATEMENTS

recognised as income over the period the service is provided.

(c) Expense recognition

(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

• 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 asset over its expected life using the effective interest method.

(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.

(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.

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

(e)

follow from the manner in which ANZ New Zealand, 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.

Assets

Financial assets

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

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

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 any of 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

• 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.

(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 ANZ New Zealand’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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

9

NOTES TO THE FINANCIAL STATEMENTS

fair value being recognised in the income 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 effective as a hedging instrument and designated as such, 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 ANZ New Zealand 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

ANZ New Zealand 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. For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedges is recognised initially in other comprehensive income and then recycled to the income statement in the periods when the hedged item will affect profit or loss. Any ineffective portion is recognised immediately in the income statement. When the hedging instrument 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 ANZ New Zealand 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

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

Available-for-sale assets comprise non-derivative financial assets which ANZ New Zealand designates as available-forsale but which are not deemed to be held principally for trading purposes, and include equity investments and 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.

(iv) Net loans and advances

Net loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when ANZ New Zealand 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 and finance lease receivables.

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.

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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

10

NOTES TO THE FINANCIAL STATEMENTS

value. As this discount unwinds during the period between recognition of impairment and recovery of the cash flow, it is recognised in interest income.

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 to be onerous.

(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 ANZ New Zealand, 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 ANZ New Zealand does not acquire the risks and rewards of ownership, are recorded as cash or net loans and advances if original maturity is greater than 90 days. 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

ANZ New Zealand enters into transactions where it transfers financial assets recognised on its balance sheet yet retains either all or a portion of the risks and rewards of the transferred assets. 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, ANZ New Zealand derecognises the asset if control over the asset is lost. In transfers where control over the asset is retained, ANZ New Zealand 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. This involves using the discounted cash flows methodology to determine the expected future benefits of the cashgenerating units to which the goodwill relates. 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 noninterest 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 profit or loss, with fair value movements recorded directly in the income statement, which reflects the basis on which it is managed.

(ii) Debt issuances and subordinated debt

Debt issuances and subordinated debt are accounted for in the same way as deposits and other borrowings.

(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, ANZ New Zealand'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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

11

NOTES TO THE FINANCIAL STATEMENTS

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 other operating income) when the asset is derecognised or impaired.

Cash flow hedging reserve

This reserve includes the fair value gains and losses associated with the effective portion of designated cash flow hedging instruments. The cumulative deferred gain or loss on the hedge is recognised in the income statement when the hedged transaction impacts the income statement.

(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 either of 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 offset against the interest income generated by the financial instrument

• 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

ANZ New Zealand will be liable to settle the possible obligation.

(ii) Accounting Standards not early adopted

The following standards were available for early adoption but have not been applied in these financial statements.

Standards and amendments effective for periods commencing after 1 January 2018

NZ IFRS 9 Financial Instruments

The External Reporting Board (XRB) issued the final version of NZ IFRS 9 Financial Instruments in September 2014. When operative, this standard will replace NZ IAS 39 Financial Instruments: Recognition and Measurement . NZ IFRS 9 addresses recognition and measurement requirements for financial assets and financial liabilities, impairment requirements that introduce an expected credit loss impairment model and general hedge accounting requirements which more closely align with risk management activities undertaken when hedging financial and non-financial risks. NZ IFRS 9 is not mandatorily effective for ANZ New Zealand until 1 October 2018. ANZ New Zealand is in the process of assessing the impact of application of NZ IFRS 9 and is not yet able to reasonably estimate the impact on its financial statements.

Standards and amendments effective for periods commencing after 1 January 2019

NZ IFRS 16 Leases

The XRB issued the final version of NZ IFRS 16 Leases in February 2016. NZ IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. NZ IFRS 16 substantially carries forward the lessor accounting requirements in NZ IAS 17 Leases . Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. NZ IFRS 16 is not mandatorily effective for ANZ New Zealand until 1 October 2019. ANZ New Zealand is in the process of assessing the impact of application of NZ IFRS 16 and is not yet able to reasonably estimate the impact on its financial statements.

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

(iii) Segment reporting

Operating segments are distinguishable components of ANZ New Zealand that provide products or services that are subject to risks and rewards that are different to those of other operating segments. ANZ New Zealand operates predominately in the banking industry within New Zealand. ANZ New Zealand 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.

(i) Other

(i) Contingent liabilities

Contingent liabilities are not recognised in the balance sheet but disclosed in note 23 unless it is considered remote that

Australia and New Zealand Banking Group Limited - ANZ New Zealand

12

NOTES TO THE FINANCIAL STATEMENTS

2. CRITICAL ESTIMATES AND JUDGEMENTS 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 ANZ New Zealand, in the process of applying its accounting policies, that have the most significant effect on the amounts recognised in the financial statements is set out below.

Critical accounting estimates and assumptions

Credit provisioning

The accounting policy relating to measuring the impairment of loans and advances requires ANZ New Zealand 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 14 for details of credit impairment provisions.

Critical judgements in applying ANZ New Zealand’s accounting policies

Financial instruments at fair value

ANZ New Zealand’s financial instruments measured at fair value are stated in note 1(a)(iii). In estimating fair value ANZ New Zealand 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

ANZ New Zealand 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 nontrading 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 ANZ New Zealand 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. ANZ New Zealand 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.

ANZ New Zealand 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 ANZ New Zealand controls (and therefore consolidates) a structured entity, judgement is required about whether ANZ New Zealand 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.

ANZ New Zealand is deemed to have power over a managed fund when it performs the function of Manager of that managed fund. Whether ANZ New Zealand controls the managed fund depends on whether it holds that power as

Australia and New Zealand Banking Group Limited - ANZ New Zealand

13

NOTES TO THE FINANCIAL STATEMENTS

principal, or as an agent for other investors. ANZ New Zealand is considered the principal, and thus controls the 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 ANZ New Zealand is considered to be acting in an agency capacity and does not control the managed fund.

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

ANZ New Zealand 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 any of the following apply:

• where ANZ New Zealand is the major user of that structured entity

• ANZ New Zealand’s name appears in the name of that structured entity or on its products

• ANZ New Zealand provides implicit or explicit guarantees of that entity’s performance.

Goodwill

Refer to note 25 for details of goodwill held by ANZ New Zealand.

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.

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 2% growth rate.

These cash flow projections are discounted using a capital asset pricing model. As at 30 June 2016 when the last valuation was prepared, a discount rate of 10.9% 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.

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

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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

14

NOTES TO THE FINANCIAL STATEMENTS

3. NET INTEREST INCOME

3. NET INTEREST INCOME
		Year to	Year to
		30/09/2016 30/09/2015
		NZ$m NZ$m
Interest income
Financial assets at fair value through profit or loss
Trading securities		453 488
Financial assets not at fair value through profit or loss
Cash		64 102
Available-for-sale assets		64 37
Net loans and advances		6,160 6,760
Other		29 30
		6,317 6,929
Total interest income		6,770 7,417
Interest expense
Financial liabilities at fair value through profit or loss
Commercial paper		226 280
Financial liabilities not at fair value through profit or loss
Deposits and other borrowings		2,646 3,248
Debt issuances		681 855
Subordinated debt		154 122
Other		34 32
		3,515 4,257
Total interest expense		3,741 4,537
Net Interest Income		3,029 2,880

4. NON INTEREST INCOME

4. NON INTEREST INCOME
	Year to	Year to
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Net trading gains
Net gain on foreign exchange trading	203	201
Net gain on trading securities	115	384
Net loss on trading derivatives	(306)	(323)
Net trading gains	12	262
Net funds management and insurance income
Net funds management income	187	165
Net insurance income	227	220
Total funds management and insurance income	414	385
Other operating income
Lending and credit facility fee income	55	54
Other fee income	656	591
Total fee income	711	645
Direct fee expense	(308)	(264)
Net fee income	403	381
Net loss on financial liabilities designated at fair value	(5)	(1)
Net ineffectiveness on qualifying fair value hedges	2	7
Net gain / (loss) on derivatives not qualifying for hedge accounting	(31)	48
Net cash flow hedge gain / (loss) transferred to income statement	(7)	16
Net loss on available for sale securities transferred to income statement	(2)	-
Other income	41	54
Total other operating income	401	505

Australia and New Zealand Banking Group Limited - ANZ New Zealand

15

NOTES TO THE FINANCIAL STATEMENTS

5. OPERATING EXPENSES

5. OPERATING EXPENSES
	Year to	Year to
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Personnel
Salaries and related costs	811	803
Superannuation costs	30	31
Share-based payments expense	21	22
Other	32	20
Total personnel expenses	894	876
Premises
Depreciation of premises and equipment	32	31
Leasing and rental costs	79	80
Other	41	42
Total premises expenses	152	153
Technology
Depreciation and amortisation	111	49
Licenses and outsourced services	116	99
Other	58	51
Total technology expenses	285	199
Other
Advertising and public relations	42	61
Amortisation of other intangible assets	5	5
Freight, stationery, postage and telephone	48	51
Professional Fees	45	37
Travel and entertainment expenses	28	38
Charges from Ultimate Parent Bank	64	64
Other	37	29
Total other expenses	269	285
Total operating expenses	1,600	1,513

Software capitalisation changes

During the year ended 30 September 2016, ANZ New Zealand changed the application of its accounting policy for the capitalisation of expenditure on internally generated software assets effective from 1 October 2015. The change aligns the accounting policy for software assets with the rapidly changing technology landscape and ANZ New Zealand’s evolving digital strategy by increasing the threshold for capitalisation of software development costs and directly expensing more project related costs. The change does not affect ANZ New Zealand’s total investment in technology but does affect the timing of recognition of costs in the income statement. The impact of the change on the results for the year ended 30 September 2016 was:

• Higher amortisation of NZ$54 million relating to the accelerated amortisation of software assets where the original cost was below the revised threshold at 1 October 2015. This brings forward amortisation which otherwise would have been recognised in future periods.

• Higher operating expenses of NZ$56 million relating to software development costs which otherwise would have been capitalised and amortised in future periods.

The change in capitalised software treatment has no impact on regulatory capital ratios.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

16

NOTES TO THE FINANCIAL STATEMENTS

6. INCOME TAX

6. INCOME TAX
	Year to	Year to
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Reconciliation of the prima facie income tax payable on profit
Profit before income tax	2,114	2,448
Prima facie income tax at 28%	591	685
Imputed and non-assessable dividends	(1)	(3)
Change in tax provisions	(5)	-
Non assessable income and non deductible expenditure	(11)	(5)
Income tax over provided in prior years	(2)	-
Total income tax expense	572	677
Effective tax rate (%)	27.1%	27.7%
Amounts recognised in the income statement
Current tax	582	602
Deferred tax	(10)	75
Total income tax expense recognised in the income statement	572	677
Imputation credits available	3,566	2,989

A number of companies within ANZ New Zealand are members of the New Zealand Resident imputation group. The imputation credit balance for ANZ New Zealand includes the imputation credit balance in relation to both the New Zealand Resident imputation group and other companies within ANZ New Zealand that are not in the New Zealand Resident 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.

	30/09/2016	30/09/2015
	NZ$m	NZ$m
Deferred tax assets / (liabilities) comprise the following temporary differences:
Provision for credit impairment	177	176
Premises and equipment, software and intangibles	22	(8)
Provisions and accruals	75	60
Insurance policy assets	(159)	(146)
Financial instruments	(24)	4
Lease finance	(216)	(203)
Other deferred tax assets and liabilities (including tax provisions)	(22)	(7)
Net deferred tax liabilities1	(147)	(124)

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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

17

NOTES TO THE FINANCIAL STATEMENTS

7. SEGMENT ANALYSIS

ANZ New Zealand is organised into three major business segments for segment reporting purposes - Retail, Commercial 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.

During the year ended 30 September 2016, Wealth was integrated with Retail, having been disclosed separately previously. Segment reporting has been updated to reflect this change and other minor changes to ANZ New Zealand’s structure. Comparative data has been adjusted to be consistent with the current year’s segment definitions.

Retail

Retail provides products and services to Retail, Private Banking, and Business Banking customers via the branch network, mortgage specialists, relationship managers, the contact centre and a variety of self service channels (internet banking, phone banking, ATMs, website and mobile phone banking). Retail and Private Banking customers have personal banking requirements and Business Banking customers consist primarily of small enterprises with annual revenues of less than NZ$5 million. Core products and services include current and savings accounts, unsecured lending (credit cards, personal loans and overdrafts), home loans secured by mortgages over property, investment products, superannuation and insurance services.

Commercial

Commercial provides services to Commercial & Agri (CommAgri) and UDC customers. CommAgri customers consist of primarily privately owned medium to large enterprises. Commercial’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.

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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

18

NOTES TO THE FINANCIAL STATEMENTS

Business segment analysis1
	Retail	Commercial	Institutional	Other	Total
30/09/2016	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
External interest income	3,836	2,202	718	14	6,770
External interest expense	(1,598)	(333)	(407)	(1,403)	(3,741)
Net intersegment interest	(509)	(981)	60	1,430	-
Net interest income	1,729	888	371	41	3,029
Other external operating income	657	16	113	41	827
Share of associates' profit	5	-	-	-	5
Operating income	2,391	904	484	82	3,861
Operating expenses	1,045	258	181	116	1,600
Profit before credit impairment and income tax	1,346	646	303	(34)	2,261
Credit impairment charge	55	72	20	-	147
Profit before income tax	1,291	574	283	(34)	2,114
Income tax expense	350	161	80	(19)	572
Profit after income tax	941	413	203	(15)	1,542
Other information
Depreciation and amortisation	12	1	-	135	148
Goodwill	1,109	1,052	1,072	-	3,233
Other intangible assets	118	3	-	70	191
Investment in associates	7	-	-	-	7
Total external assets	75,244	41,639	47,812	2,011	166,706
Total external liabilities	63,605	13,362	40,751	37,821	155,539
30/09/2015
External interest income	3,968	2,441	989	19	7,417
External interest expense	(1,905)	(388)	(498)	(1,746)	(4,537)
Net intersegment interest	(419)	(1,149)	(184)	1,752	-
Net interest income	1,644	904	307	25	2,880
Other external operating income	634	17	360	141	1,152
Share of associates' profit	3	-	-	2	5
Operating income	2,281	921	667	168	4,037
Operating expenses	1,023	257	189	44	1,513
Profit before credit impairment and income tax	1,258	664	478	124	2,524
Credit impairment charge	58	-	18	-	76
Profit before income tax	1,200	664	460	124	2,448
Income tax expense	328	186	127	36	677
Profit after income tax	872	478	333	88	1,771
Other information
Depreciation and amortisation	20	-	-	65	85
Goodwill	1,109	1,052	1,072	-	3,233
Other intangible assets	138	-	-	121	259
Investment in associates	4	-	-	-	4
Total external assets	69,683	40,561	43,767	1,519	155,530
Total external liabilities	59,935	12,390	38,850	33,495	144,670

1 Intersegment transfers are accounted for and determined on an arm's length or cost recovery basis.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

19

NOTES TO THE FINANCIAL STATEMENTS

8. NOTES TO THE CASH FLOW STATEMENT

	Year to	Year to
	30/09/2016 30/09/2015
	NZ$m NZ$m
Reconciliation of profit after income tax to net cash flows used in operating activities
Profit after income tax	1,542 1,771
Non-cash items:
Depreciation and amortisation	148 85
Provision for credit impairment	147 76
Deferred fee revenue and expenses	(7) (3)
Amortisation of capitalised brokerage / mortgage origination fees	160 131
Amortisation of premiums and discounts	70 60
Fair value gains and losses	31 (323)
Loss on disposal and impairment of premises and equipment and intangibles	4 1
Deferrals or accruals of past or future operating cash receipts or payments:
Change in net operating assets less liabilities	(3,593) (1,876)
Change in interest receivable	29 2
Change in interest payable	(63) (20)
Change in accrued expenses	(73) 14
Change in provisions	15 (13)
Change in life insurance policy assets	(57) (79)
Change in other receivables and payables	8 (20)
Change in net income tax assets / liabilities	(69) 88
Dividends from associates in excess of share of profits	(3) 84
Items classified as investing activities:
Proceeds from sale of insurance policies	(23) -
Net cash flows used in operating activities	(1,734) (22)

	30/09/2016	30/09/2016	30/09/2015
	NZ$m		NZ$m
Reconciliation of cash and cash equivalents to the balance sheet
Cash	2,274		2,435
Amounts included in settlement balances receivable / (payable):
Nostro accounts	45		108
Overdrawn nostro accounts	(4)		(17)
Total cash and cash equivalents	2,315		2,526

Australia and New Zealand Banking Group Limited - ANZ New Zealand

20

NOTES TO THE FINANCIAL STATEMENTS

9. CASH

9. CASH
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Coins, notes and cash at bank	193	250
Securities purchased under agreements to resell	229	338
Balances with central banks	1,852	1,847
Total cash	2,274	2,435

10. TRADING SECURITIES

10. TRADING SECURITIES
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Government securities	5,953	6,555
Corporate and financial institution securities	6,026	5,584
Total trading securities	11,979	12,139

11. DERIVATIVE FINANCIAL INSTRUMENTS

The use of derivatives and their sale to customers as risk management products is an integral part of ANZ New Zealand’s trading activities. Derivatives are also used to manage ANZ New Zealand’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 ANZ New Zealand 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.

Derivatives held for trading

The held for trading classification includes two categories of derivative instruments: those held as trading positions and those used for ANZ New Zealand’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

ANZ New Zealand 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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

21

NOTES TO THE FINANCIAL STATEMENTS

		30/09/2016			30/09/2015
	Notional			Notional
	principal	Fair values		principal	Fair values
	amount	Assets	Liabilities	amount	Assets	Liabilities
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Derivatives held for trading
Foreign exchange derivatives
Spot and forward contracts	63,473	635	783	75,930	1,625	1,333
Swap agreements	144,501	1,616	3,639	130,093	2,898	4,118
Options purchased	2,379	50	2	1,870	79	3
Options sold	2,248	7	77	1,820	2	46
	212,601	2,308	4,501	209,713	4,604	5,500
Interest rate derivatives
Forward rate agreements	41,507	1	5	24,633	2	12
Swap agreements	1,170,478	17,853	16,992	1,130,414	12,338	11,395
Futures contracts	78,988	3	46	45,407	12	18
Options purchased	2,366	6	-	1,218	5	-
Options sold	1,603	1	2	827	1	2
	1,294,942	17,864	17,045	1,202,499	12,358	11,427
Commodity derivatives	460	33	32	235	29	29
Total derivatives held for trading	1,508,003	20,205	21,578	1,412,447	16,991	16,956
Derivatives in hedging relationships
Fair value hedges
Interest rate swap agreements	37,012	271	440	33,136	230	446
	37,012	271	440	33,136	230	446
Cash flow hedges
Interest rate swap agreements	18,985	493	380	21,715	366	367
Total derivatives in hedgingrelationships	55,997	764	820	54,851	596	813
Total derivative financial instruments	1,564,000	20,969	22,398	1,467,298	17,587	17,769

Derivatives in hedging relationships

Fair value hedges

ANZ New Zealand’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.

fixed-rate long-term financial instruments due to movements in market interest rates.
Gain / (loss) on fair value hedges attributable to the hedged risk	30/09/2016	30/09/2015
	NZ$m	NZ$m
Gain / (loss) arising from fair value hedges:
- hedged item	(84)	189
- hedging instrument	86	(182)
Net ineffectiveness on qualifying fair value hedges	2	7

Cash flow hedges

ANZ New Zealand’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	30/09/2016	30/09/2015
	NZ$m	NZ$m
Deferred gain / (loss) attributable to hedges of:
Variable rate loan assets	296	187
Short term re-issuances of fixed rate customer and wholesale deposit liabilities	(234)	(197)
Total cash flow hedging reserve	62	(10)

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 (2015: ten years).

Australia and New Zealand Banking Group Limited - ANZ New Zealand

22

NOTES TO THE FINANCIAL STATEMENTS

12. AVAILABLE-FOR-SALE ASSETS

		30/09/2016 30/09/2015
		NZ$m NZ$m
Government securities		1,195 869
Corporate and financial institution securities		1,663 557
Equity and other securities		1 2
Total available-for-sale assets		2,859 1,428

13. NET LOANS AND ADVANCES

13. NET LOANS AND ADVANCES
		30/09/2016 30/09/2015
	Not	e NZ$m NZ$m
Overdrafts1		1,133 1,162
Credit card outstandings		1,663 1,688
Term loans - housing1		73,330 67,932
Term loans - non-housing		43,651 42,880
Lease receivables		226 236
Hire purchase		1,098 946
Total gross loans and advances		121,101 114,844
Less: Provision for credit impairment	14 (632) (629)
Less: Unearned income	(211) (214)
Add: Capitalised brokerage/mortgage origination fees	366 323
Add: Customer liability for acceptances	27 52
Total net loans and advances	120,651 114,376

1 Comparative amounts have been changed to reclassify revolving credit facilities secured by residential property provided to corporate customers from Overdrafts to Term loans – housing (2015: NZ$476 million).

Australia and New Zealand Banking Group Limited - ANZ New Zealand

23

NOTES TO THE FINANCIAL STATEMENTS

14. PROVISION FOR CREDIT IMPAIRMENT

Credit impairment charge / (release)

Credit impairment charge / (release)
	30/09/2016			30/09/2015
Retail Other retail Non-retail
mortgages exposures exposures Total mortgages exposures exposures Total
NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m
New and increased provisions 23 110 111 244 45 107 76 228 Write-backs (35) (18) (30) (83) (48) (19) (59) (126) Recoveries of amounts written off previously - (22) (3) (25) (1) (20) (8) (29)
Individual credit impairment charge / (release) (12) 70 78 136 (4) 68 9 73 Collective credit impairment charge / (release) (2) 3 10 11 (4) 9 (2) 3
Credit impairment charge / (release) (14) 73 88 147 (8) 77 7 76

Movement in provision for credit impairment

Movement in provision for credit impairment
30/09/2016			30/09/2015
Retail Other retail Non-retail		Retail Other retail Non-retail
mortgages exposures exposures Total mortgages exposures exposures Total
NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m
Collective provision
Balance at beginning of the year 87 127 253 467 91 118 255 464
Charge / (release) to income statement (2) 3 10 11 (4) 9 (2) 3
Balance at end of the year 85 130 263 478 87 127 253 467
Individual provision
Balance at beginning of the year 62 9 91 162 81 15 128 224
New and increased provisions net of write-backs (12) 92 81 161 (3) 88 17 102
Bad debts written off (6) (95) (55) (156) (10) (94) (54) (158)
Discount unwind reversal / (discount unwind)1 (4) - (9) (13) (6) - - (6)
Balance at end of theyear 40 6 108 154 62 9 91 162
Total provision for credit impairment 125 136 371 632 149 136 344 629

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.

Impaired assets

Impaired assets
30/09/2016	30/09/2015
Retail Other retail Non-retail	Retail Other retail Non-retail
mortgages exposures exposures Total mortgages exposures exposures Total
NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m NZ$m
Balance at beginning of the year 119 32 253 404 223 35 410 668 Transfers from productive 76 129 395 600 121 126 155 402 Transfers to productive (40) (8) (7) (55) (80) (7) (46) (133) Assets realised or loans repaid (85) (31) (244) (360) (135) (28) (212) (375) Write offs (6) (95) (55) (156) (10) (94) (54) (158)
Total impaired assets 64 27 342 433 119 32 253 404
Other assets under administration 11 2 - 13 7 1 - 8 Undrawn facilities with impaired customers - 1 57 58 1 - 14 15

Australia and New Zealand Banking Group Limited - ANZ New Zealand

24

NOTES TO THE FINANCIAL STATEMENTS

15. DEPOSITS AND OTHER BORROWINGS

15. DEPOSITS AND OTHER BORROWINGS
		30/09/2016 30/09/2015
	Not	e NZ$m NZ$m
Term deposits		39,665 34,982
On demand and short term deposits		42,323 41,436
Deposits not bearing interest		7,780 6,716
UDC secured investments	21 1,592 1,736
Total customer deposits	91,360 84,870
Certificates of deposit	2,237 745
Commercial paper	5,364 4,964
Securities sold under repurchase agreements	76 47
Borrowings from Ultimate Parent Bank and Immediate Parent Company	32 7,871 9,110
Total deposits and other borrowings	106,908 99,736

Deposits from customers, except UDC secured investments, are unsecured and rank equally with other unsecured liabilities of ANZ New Zealand. In the unlikely event that the Bank was put into liquidation or ceased to trade, secured creditors and those creditors set out in Schedule 7 of the Companies Act 1993 would rank ahead of the claims of unsecured creditors.

16. DEBT ISSUANCES

16. DEBT ISSUANCES
		30/09/2016 30/09/2015
	Not	e NZ$m NZ$m
Domestic bonds U.S. medium term notes1 Euro medium term notes1 Covered bonds1 Index linked notes
Total debt issuances Fair value hedge adjustment Less debt issuances held by the Bank	19,868 19,324 192 175 (46) (96)
Total debt issuances	20,014 19,403

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

Debt issuances, other than covered bonds, are unsecured and rank equally with other unsecured liabilities of ANZ New Zealand.

Domestic bonds includes two series of bonds quoted on the NZX Debt Market which mature on 2 September 2021 and 1 September 2023 respectively (the Bonds). NZX Regulation has granted the Bank a waiver in respect of the Bonds from the requirement in Main Board/Debt Market Listing Rule 5.2.3 (as modified by NZX’s ruling on Rule 5.2.3 issued on 29 September 2015) to enable the Bank to apply for quotation of the Bonds on the NZX Debt Market even though the Bonds may not initially be held by at least 100 members of the public holding at least 25% of the Bonds issued. The waiver has been granted for a period of 6 months from the relevant dates of quotation of the Bonds on the NZX Debt Market. The effect of the waiver from NZX Listing Rule 5.2.3 is that initially the Bonds may not be widely held and there may be reduced liquidity in the Bonds. To the extent that there is a material reduction in the spread of the Bonds, the Bank will notify NZX accordingly.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

25

NOTES TO THE FINANCIAL STATEMENTS

17. SUBORDINATED DEBT

17. SUBORDINATED DEBT
	30/09/2016		30/09/2015
	NZ$m		NZ$m
ANZ Capital Notes1
AUD 970m ANZ Capital Notes 3 (ANZ CN3)2	1,005		1,052
NZD 500m ANZ New Zealand Capital Notes (ANZ NZ CN)3	496		494
Perpetual subordinated debt
NZD 835m perpetual subordinated bond3	835		835
AUD 10m perpetual subordinated floating rate loan	10		11
Dated subordinated debt
AUD 265m subordinated floating rate loan	278		291
Total subordinated debt	2,624		2,683

1 These instruments qualify as additional tier 1 capital of the Overseas Banking Group.

2 These instruments are quoted on the Australian Stock Exchange.

3 These instruments are quoted on the NZX Debt Market.

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 relevant issuer or drawer of the debt.

ANZ Capital Notes

• On 5 March 2015, the NZ Branch issued 9.7 million convertible notes (ANZ CN3) at A$100 each, raising A$970 million before issue costs.

• On 31 March 2015, the Bank issued 500 million convertible notes (ANZ NZ CN) at NZ$1 each, raising NZ$500 million before issue costs.

ANZ Capital Notes (the notes) are fully paid mandatorily convertible non-cumulative perpetual subordinated notes.

As at 30 September 2016 ANZ NZ CN carried a BBB- credit rating from Standard and Poor’s.

The notes are classified as debt given there are circumstances beyond ANZ New Zealand’s control where the principal is converted into a variable number of shares of the Ultimate Parent Bank.

Distributions and interest

Distributions on ANZ CN3 and interest on ANZ NZ CN are recorded as interest expense in the statement of comprehensive income. Distributions and interest on the notes are non-cumulative and payable as follows:

• ANZ CN3: payable semi-annually in arrears in March and September in each year and will be franked in line with the franking applied to ordinary shares of the Ultimate Parent Bank. The distributions are based on a floating rate equal to the aggregate of the Australian 6 month bank bill rate plus a 360 basis point margin, multiplied by one minus the Australian company tax rate. Should the distribution not be fully-franked, the terms of the notes provide for a cash gross-up for the amount of the franking benefit not provided.

• ANZ NZ CN: payable quarterly in arrears in February, May, August and November in each year. The interest rate is fixed at 7.2% per annum until 25 May 2020, and thereafter will be based on a floating rate equal to the aggregate of the New Zealand 3 month bank bill rate plus a 350 basis point margin.

Distributions and interest payments are subject to the Ultimate Parent Bank’s (ANZ CN3) and the Bank’s (ANZ NZ CN) absolute discretion and certain payment conditions being satisfied (including APRA and RBNZ (ANZ NZ CN only) requirements). If distributions or interest are not paid on the notes, the Ultimate Parent Bank (ANZ CN3) or the Bank (ANZ NZ CN) may not, except in limited circumstances, pay dividends or undertake a share buy-back or other capital reduction on its ordinary shares until the distributions or interest are next paid.

Conversion features

On 24 March 2025 (ANZ CN3) or 25 May 2022 (ANZ NZ CN) or an earlier date under certain circumstances, the relevant notes will mandatorily convert into a variable number of ordinary shares of the Ultimate Parent Bank based on the average market price of the Ultimate Parent Bank’s ordinary shares over a specified period prior to conversion less a 1% discount.

The mandatory conversion will be deferred for a specified period if the conversion tests are not met.

If a common equity capital trigger event, an APRA non-viability trigger event or an RBNZ non-viability trigger event (ANZ NZ CN only) occurs, some or all of the notes will be required to be immediately converted into ordinary shares of the Ultimate Parent Bank, subject to a maximum conversion number.

A common equity capital trigger event occurs if the:

• Overseas Banking Group’s Level 1 (ANZ CN3 only) or Level 2 common equity tier 1 capital ratio is equal to or less than 5.125% or

• Banking Group’s common equity tier 1 capital ratio is equal to or less than 5.125% (ANZ NZ CN only).

An APRA non-viability trigger event occurs if APRA notifies the Ultimate Parent Bank that, without the conversion or write-off of certain securities or a public sector injection of capital (or equivalent support), it considers that the Ultimate Parent Bank would become non-viable. An RBNZ non-viability trigger event occurs if the RBNZ directs the Bank to convert or write off the notes or a statutory manager is appointed to the Bank and decides the Bank must convert or write off the notes.

On 25 May 2020 the Bank has the right, subject to satisfying certain conditions, to redeem (subject to receiving RBNZ’s and APRA’s prior approval), or to convert into ordinary shares of the

Australia and New Zealand Banking Group Limited - ANZ New Zealand

26

NOTES TO THE FINANCIAL STATEMENTS

Ultimate Parent Bank, all or some of the ANZ NZ CN at its discretion on similar terms as mandatory conversion.

On 24 March 2023 the Ultimate Parent Bank has the right, subject to receiving APRA’s prior approval and satisfying certain conditions, to redeem, or to convert into ordinary shares of the Ultimate Parent Bank, all or some of the ANZ CN3 at its discretion on similar terms as mandatory conversion.

Rights of holders in event of liquidation

In a liquidation of the Ultimate Parent Bank, ANZ CN3 rank equally with other additional tier 1 capital instruments issued by the Ultimate Parent Bank. In a liquidation of the Bank, ANZ NZ CN rank equally with the Bank’s other additional tier 1 capital instruments, including preference shares, and lower than the Bank’s perpetual subordinated debt. Holders of the notes do not have any right to vote in general meetings of the Ultimate Parent Bank or the Bank.

Perpetual subordinated debt

Perpetual 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 may elect to redeem the bond on 18 April 2018 (the Call Date) or any interest payment date subsequent to 18 April 2018. Interest is payable semi-annually in arrears on 18 April and 18 October each year, up to and including the Call Date and then quarterly thereafter. Should the bond not be called at the Call Date, the Coupon Rate from the Call Date onwards will be based on a floating rate equal to the aggregate of the 3 month bank bill rate plus a 300 basis point margin.

As at 30 September 2016, this bond carried a BBB+ rating by Standard and Poor's and an A3 rating by Moody’s.

The coupon interest on the bond is 5.28% per annum until 18 April 2018.

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 semi-annually in arrears on 15 March and 15 September each year. The Bank may repay the loan on any interest payment date after the NZD 835,000,000 bond has been repaid in full.

Coupon interest is based on a floating rate equal to the aggregate of the Australian 6 month bank bill rate plus a 240 basis point margin, increasing to the Australian 6 month bank bill rate plus a 440 basis point margin from 15 September 2018.

Dated subordinated debt

AUD 265,017,668 loan

This loan was drawn down by ANZ Holdings (New Zealand) Limited on 25 September 2013. The loan matures on 1 September 2023, but ANZ Holdings (New Zealand) Limited may elect to repay the loan on any interest payment date from 1 September 2018. Interest is payable semi-annually in arrears on 1 March and 1 September in each year and is based on a floating rate equal to the aggregate of the Australian 6 month bank bill rate plus a 260 basis point margin.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

27

NOTES TO THE FINANCIAL STATEMENTS

18. FINANCIAL RISK MANAGEMENT

Strategy in using financial instruments

Financial instruments are fundamental to ANZ New Zealand’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 ANZ New Zealand. Financial instruments create, modify or reduce the credit, market and liquidity risks of ANZ New Zealand’s balance sheet. ANZ New Zealand’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of ANZ New Zealand.

The risk management and policy control framework applicable to the entities comprising ANZ New Zealand 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 ANZ New Zealand 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 ANZ New Zealand, 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. ANZ New Zealand 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.

ANZ New Zealand has an overall lending objective of sound growth for appropriate returns. The credit risk objectives of ANZ New Zealand are set by each 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 ANZ New Zealand with the aim of ensuring a structured and disciplined approach is maintained in achieving the objectives set by each 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 ANZ New Zealand'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. For the key operating entities within ANZ New Zealand, credit risk policy and management is executed through the Chief Risk Officer, who is responsible for various dedicated areas within the Risk Management division. A formal outsourcing agreement provides for credit risk functions to be provided to a number of ANZ New Zealand entities by staff of the Bank.

Credit risk review function Group Credit Assurance 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 ANZ New Zealand.

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 ANZ New Zealand incurs country risk and have a direct bearing on ANZ New Zealand'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 ANZ New Zealand's capital pricing model for cross border flows.

The recording of country limits provides ANZ New Zealand 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.

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 ANZ New Zealand to

Australia and New Zealand Banking Group Limited - ANZ New Zealand

28

NOTES TO THE FINANCIAL STATEMENTS

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 ANZ New Zealand executives and each Board.

Collateral management

ANZ New Zealand credit principles specify lending only what the counterparty has the capacity and ability to repay and ANZ New Zealand 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 (ie 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. ANZ New Zealand policy sets out the types of acceptable collateral, including:

• Cash

• Mortgages over property

• Charges over business assets, eg premises, stock and debtors

• Charges over financial instruments, eg debt securities and equities in support of trading facilities

• Financial guarantees.

In the event of customer default, any loan security is usually held as mortgagee in possession while action is taken to realise it. Therefore ANZ New Zealand does not usually hold any real estate or other assets acquired through the enforcement of security.

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 ANZ New Zealand'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 markto-market (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.

ANZ New Zealand 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 ANZ New Zealand'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.

ANZ New Zealand uses International Swaps and Derivatives Association Master Agreements (ISDA) to document derivatives'

Australia and New Zealand Banking Group Limited - ANZ New Zealand

29

NOTES TO THE FINANCIAL STATEMENTS

	Cash, settlements receivable and collateral paid	Trading securities and available-for- sale assets	Derivative financial instruments	Net loans and advances 3	Other financial assets	Credit related commitments 4	Total
30/09/2016	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Industry
Agriculture	-	-	24	18,510	64	1,189	19,787
Forestry, fishing and mining	-	-	45	776	3	809	1,633
Business and property services	-	-	79	11,293	39	2,865	14,276
Construction	-	-	17	1,492	5	853	2,367
Entertainment, leisure and tourism	-	-	31	1,349	5	361	1,746
Finance and insurance	2,935	7,728	18,551	949	282	1,128	31,573
Government and local authority1	1,852	7,030	1,075	1,246	4	1,167	12,374
Manufacturing	-	12	185	3,465	12	1,977	5,651
Personal lending	-	-	-	74,911	238	14,125	89,274
Retail trade	-	-	64	1,967	7	933	2,971
Transport and storage	-	5	91	1,611	6	871	2,584
Wholesale trade	-	-	23	1,617	6	1,561	3,207
Other2	-	63	784	1,942	7	1,668	4,464
	4,787	14,838	20,969	121,128	678	29,507	191,907
Less: Provision for credit impairment	-	-	-	(528)	-	(104)	(632)
Less: Unearned income	-	-	-	(211)	-	-	(211)
Add: Capitalised brokerage/mortgage origination fees	-	-	-	366	-	-	366
Total financial assets	4,787	14,838	20,969	120,755	678	29,403	191,430
Geography
New Zealand	2,931	9,681	3,453	118,011	669	29,220	163,965
Overseas	1,856	5,157	17,516	2,744	9	183	27,465
Total financial assets	4,787	14,838	20,969	120,755	678	29,403	191,430
30/09/2015
Industry
Agriculture	-	-	23	18,383	73	1,238	19,717
Forestry, fishing and mining	-	-	44	931	4	1,035	2,014
Business and property services	-	1	23	10,818	43	2,798	13,683
Construction	-	-	12	1,344	5	811	2,172
Entertainment, leisure and tourism	-	-	47	1,069	4	268	1,388
Finance and insurance	2,631	6,956	15,069	1,246	335	1,067	27,304
Government and local authority1	1,847	6,475	1,338	1,157	5	1,408	12,230
Manufacturing	-	31	417	3,471	14	1,993	5,926
Personal lending	-	-	-	69,390	245	13,820	83,455
Retail trade	-	-	18	2,010	8	1,012	3,048
Transport and storage	-	6	60	1,638	7	759	2,470
Wholesale trade	-	-	17	1,468	6	1,248	2,739
Other2	-	98	519	1,971	8	1,672	4,268
	4,478	13,567	17,587	114,896	757	29,129	180,414
Less: Provision for credit impairment	-	-	-	(531)	-	(98)	(629)
Less: Unearned income	-	-	-	(214)	-	-	(214)
Add: Capitalised brokerage / mortgage origination fees	-	-	-	323	-	-	323
Total financial assets	4,478	13,567	17,587	114,474	757	29,031	179,894
Geography
New Zealand	2,582	8,673	3,585	111,991	748	28,851	156,430
Overseas	1,896	4,894	14,002	2,483	9	180	23,464
Total financial assets	4,478	13,567	17,587	114,474	757	29,031	179,894

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 Excludes 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. The comparative amount for undrawn facilities has been reduced by $5,518 million following a review of the composition of commitments.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

30

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 ANZ New Zealand holds over a borrower’s specific asset (or assets) where ANZ New Zealand 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

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

ANZ New Zealand 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.

		30/09/2016			30/09/2015
	Maximum	Financial	Unsecured	Maximum	Financial	Unsecured
	exposure to	effect of	portion of credit	exposure to	effect of	portion of credit
	credit risk	collateral	exposure	credit risk	collateral	exposure
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
On and off-balance sheet positions
Cash	2,081	229	1,852	2,240	338	1,902
Settlement balances receivable	396	265	131	309	134	175
Collateral paid	2,310	-	2,310	1,929	-	1,929
Trading securities	11,979	-	11,979	12,139	-	12,139
Derivative financial instruments	20,969	529	20,440	17,587	1,687	15,900
Available-for-sale assets	2,859	-	2,859	1,428	-	1,428
Net loans and advances	120,755	110,370	10,385	114,474	103,482	10,992
Other financial assets	678	361	317	757	382	375
Credit related commitments	29,403	15,193	14,210	29,031	14,590	14,441
Total exposure to credit risk	191,430	126,947	64,483	179,894	120,613	59,281

Credit quality

A core component of ANZ New Zealand’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.

ANZ New Zealand’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.

Impairment and provisioning of financial assets

ANZ New Zealand'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 ANZ New Zealand 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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

31

NOTES TO THE FINANCIAL STATEMENTS

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 ANZ New Zealand’s risk grading principles and policies supported by a complementary risk grading methodology.

		30/09/2016	30/09/2016			30/09/2015	30/09/2015
	Retail	Other retail	Non-retail		Retail	Other retail	Non-retail
	mortgages	exposures	exposures	Total	mortgages	exposures	exposures	Total
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Strong risk rating	62,528	1,263	20,296	84,087	55,837	1,285	23,051	80,173
Satisfactory risk rating	6,842	2,997	22,309	32,148	7,661	3,021	19,192	29,874
Substandard but not past due or impaired	336	539	1,928	2,803	649	382	1,430	2,461
Total neither past due nor impaired	69,706	4,799	44,533	119,038	64,147	4,688	43,673	112,508
Past due but not impaired:
1 to 5 days	359	125	350	834	311	110	454	875
6 to 29 days	170	73	42	285	258	92	99	449
1 to 29 days	529	198	392	1,119	569	202	553	1,324
30 to 59 days	136	32	62	230	134	37	88	259
60 to 89 days	106	17	6	129	98	18	11	127
90 days and over	103	26	23	152	128	32	62	222
Total past due but not impaired	874	273	483	1,630	929	289	714	1,932
Total impaired assets	64	27	342	433	119	32	253	404
Gross loans and advances	70,644	5,099	45,358	121,101	65,195	5,009	44,640	114,844

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

The credit quality of financial assets is assessed by ANZ New Zealand using internal ratings which aim to reflect the relative ability of counterparties to fulfil, on time, their credit-related 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.

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 ANZ New Zealand 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

• 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 ANZ New Zealand 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.

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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

32

NOTES TO THE FINANCIAL STATEMENTS

Market risk

Market risk is the risk to ANZ New Zealand’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.

ANZ New Zealand conducts trading operations in interest rates, foreign exchange, commodities and debt securities.

ANZ New Zealand 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 is 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 receives regular reporting on a range of trading and balance sheet market risk exposures.

The Risk Management division of ANZ New Zealand, through the Chief Risk Officer, is responsible for the day-to-day 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 ANZ New Zealand 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, measurement and reporting of market risk, ANZ New Zealand has grouped market risk into two broad categories:

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 ANZ New Zealand acts as principal with clients or with the market. The primary 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 ANZ New Zealand 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 ANZ New Zealand 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.

ANZ New Zealand’s standard VaR approach for both traded and non-traded risk is historical simulation. ANZ New Zealand calculates VaR using historical changes in market rates and prices over the previous 500 business days. Traded and NonTraded 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 ANZ New Zealand could experience from an extreme market event. As a result of this limitation, ANZ New Zealand utilises a number of other risk measures (e.g. stress testing) and associated detailed control limits to measure and manage market risk.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

33

NOTES TO THE FINANCIAL STATEMENTS

Traded market risks

Traded market risks
		30/09/2016				30/09/2015
		Value at risk at 99% confidence				Value at risk at 99% confidence
		High for	Low for	Average for		High for	Low for	Average for
	Period end	year	year	year	Period end	year	year	year
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Foreign exchange risk	0.2	0.9	0.1	0.4	0.6	1.1	-	0.3
Interest rate risk	2.1	4.9	1.3	2.6	2.4	5.1	1.0	2.1
Credit spread risk	0.5	0.7	0.3	0.5	0.7	0.7	0.2	0.4
Diversification benefit	(0.7)	n/a	n/a	(1.0)	(2.0)	n/a	n/a	(0.7)
Total VaR	2.1	4.4	1.3	2.5	1.7	4.9	1.0	2.1

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

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

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 ANZ New Zealand’s capital. Liquidity risk is dealt with in the next section.

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 ANZ New Zealand'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 ANZ New Zealand 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 loan and where any customer fee charged is not sufficient to offset the loss in value to ANZ New Zealand 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

a. Non-traded interest rate risk VaR
		High for	Low for	Average for
	Period end	year	year	year
	NZ$m	NZ$m	NZ$m	NZ$m
30/09/2016
Value at risk at 99% confidence	9.7	10.3	7.7	8.9
30/09/2015
Value at risk at 99% confidence	7.4	12.4	7.3	10.1

Australia and New Zealand Banking Group Limited - ANZ New Zealand

34

NOTES TO THE FINANCIAL STATEMENTS

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.

negative for the next 12 months’ net interest income.
	30/09/2016	30/09/2015
Impact of 1% rate shock
Period end	0.3%	1.0%
Maximum exposure	1.6%	2.3%
Minimum exposure	-0.3%	-0.2%
Average exposure (in absolute terms)	0.7%	1.1%

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 ANZ New Zealand'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 ANZ New Zealand'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.

		Up to	Over 3 to	Over 6 to	Over 1 to	Over	Not bearing
	Total	3 months	6 months	12 months	2 years	2 years	interest
30/09/2016	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Assets
Cash	2,274	2,081	-	-	-	-	193
Settlement balances receivable	396	48	-	-	-	-	348
Collateral paid	2,310	2,310	-	-	-	-	-
Trading securities	11,979	1,092	243	308	2,090	8,246	-
Derivative financial instruments	20,969	-	-	-	-	-	20,969
Available-for-sale assets	2,859	1,956	149	50	160	543	1
Net loans and advances	120,651	63,666	9,000	19,839	19,898	8,726	(478)
Other financial assets	678	65	25	17	12	-	559
Total financial assets	162,116	71,218	9,417	20,214	22,160	17,515	21,592
Liabilities
Settlement balances payable	1,554	666	-	-	-	-	888
Collateral received	529	529	-	-	-	-	-
Deposits and other borrowings	106,908	73,261	11,986	10,120	2,460	1,302	7,779
Derivative financial instruments	22,398	-	-	-	-	-	22,398
Debt issuances	20,014	4,342	-	1,087	2,843	11,742	-
Subordinated debt	2,624	-	1,293	-	835	496	-
Other financial liabilities	654	51	-	-	9	124	470
Total financial liabilities	154,681	78,849	13,279	11,207	6,147	13,664	31,535
Hedging instruments	-	20,128	(14,284)	4,412	(13,121)	2,865	-
Interest sensitivity gap	7,435	12,497	(18,146)	13,419	2,892	6,716	(9,943)

Australia and New Zealand Banking Group Limited - ANZ New Zealand

35

NOTES TO THE FINANCIAL STATEMENTS

		Up to	Over 3 to	Over 6 to	Over 1 to	Over	Not bearing
	Total	3 months	6 months	12 months	2 years	2 years	interest
30/09/2015	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Assets
Cash	2,435	2,240	-	-	-	-	195
Settlement balances receivable	309	141	-	-	-	-	168
Collateral paid	1,929	1,929	-	-	-	-	-
Trading securities	12,139	1,280	731	789	863	8,476	-
Derivative financial instruments	17,587	-	-	-	-	-	17,587
Available-for-sale assets	1,428	1,178	-	-	-	248	2
Net loans and advances	114,376	60,366	7,117	17,035	21,984	8,341	(467)
Other financial assets	757	-	113	33	-	5	606
Total financial assets	150,960	67,134	7,961	17,857	22,847	17,070	18,091
Liabilities
Settlement balances payable	1,469	871	-	-	-	-	598
Collateral received	1,687	1,687	-	-	-	-	-
Deposits and other borrowings	99,736	70,249	9,586	9,507	2,103	1,575	6,716
Derivative financial instruments	17,769	-	-	-	-	-	17,769
Debt issuances	19,403	6,001	1,587	-	2,498	9,317	-
Subordinated debt	2,683	-	1,354	-	-	1,329	-
Payables and other liabilities	997	100	-	-	6	256	635
Total financial liabilities	143,744	78,908	12,527	9,507	4,607	12,477	25,718
Hedging instruments	-	39,841	(22,090)	(3,027)	(13,420)	(1,304)	-
Interest sensitivity gap	7,216	28,067	(26,656)	5,323	4,820	3,289	(7,627)

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.

sheet date.
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Net open position
Australian dollar	26	(1)
Euro	6	(13)
Japanese yen	(3)	(4)
US dollar	(5)	34
Other	1	6
Total net open position	25	22

Australia and New Zealand Banking Group Limited - ANZ New Zealand

36

NOTES TO THE FINANCIAL STATEMENTS

Liquidity risk

Liquidity risk is the risk that ANZ New Zealand 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 ANZ New Zealand.

ANZ New Zealand’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 ANZ New Zealand’s framework is to manage liquidity to meet obligations as they fall due, without incurring unacceptable losses.

Central to ANZ New Zealand’s liquidity risk management approach is the establishment of a liquidity risk appetite framework to which ANZ New Zealand must conform at all times. The risk appetite for liquidity has been set as low, and this objective is achieved by ANZ New Zealand 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 ANZ New Zealand specific and general market liquidity stress scenarios.

• Maintaining strength in ANZ New Zealand’s balance sheet structure to ensure long term resilience in ANZ New Zealand’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 ANZ New Zealand’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 dayto-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

A key component of ANZ New Zealand’s liquidity management framework is scenario modelling. Liquidity is assessed under different scenarios, including normal conditions, name crisis and funding market disruption.

Normal conditions : reflects the normal behaviour of cash flows in the ordinary course of business. ANZ New Zealand must manage its short and long term wholesale funding to ensure there are no undue maturity concentrations within the wholesale funding profile over the following three months. Limits are applied within the three month period based on a combination of ANZ New Zealand’s demonstrated and assumed wholesale funding capacity.

Name-crisis : refers to a potential severe 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 ANZ New Zealand, or adverse rating changes. Under this scenario ANZ New Zealand may have significant difficulty rolling over or replacing funding. Under the liquidity policy ANZ New Zealand must have sufficient high quality liquid assets to meet its liquidity needs for the following 30 calendar days under this scenario.

Funding market disruption: The global financial crisis highlighted the importance of differentiating between a name specific crisis and the different behaviour that domestic and offshore funding markets can exhibit during market disruption events. Under the liquidity policy, ANZ New Zealand must be able to meet its wholesale maturities under a scenario of protracted stress in domestic and offshore wholesale funding markets over a period of six months.

As of 30 September 2016 ANZ New Zealand was in compliance with the above scenarios.

Wholesale funding

ANZ New Zealand’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. Shortterm 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.

ANZ New Zealand also uses maturity concentration limits under the wholesale funding and liquidity management framework. Maturity concentration limits ensure that ANZ New Zealand 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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

37

NOTES TO THE FINANCIAL STATEMENTS

Funding capacity and debt issuance planning

ANZ New Zealand adopts a conservative approach to determine its funding capacity. Annually, a funding plan is approved by the Bank’s Board. The plan is supplemented by regular updates and is linked to ANZ New Zealand’s three year strategic planning cycle.

Funding Composition

ANZ New Zealand actively uses balance sheet disciplines to prudently manage the funding mix. ANZ New Zealand 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.

	30/09/2016	30/09/2015
	NZ$m	NZ$m
Customer deposits1
New Zealand	81,342	75,408
Overseas	10,018	9,462
Total customer deposits	91,360	84,870
Wholesale funding
Debt issuances	20,014	19,403
Subordinated debt	2,624	2,683
Certificates of deposit	2,237	745
Commercial paper	5,364	4,964
Other borrowings	7,947	9,157
Total wholesale funding	38,186	36,952
Total funding	129,546	121,822
Concentrations of funding by industry
Agriculture	2,989	2,871
Forestry, fishing and mining	618	656
Business and property services	6,751	6,304
Construction	1,588	1,283
Entertainment, leisure and tourism	1,010	1,021
Finance and insurance	47,567	44,728
Government and local authority	2,958	2,910
Manufacturing	2,004	1,913
Households	59,275	55,239
Retail trade	1,075	1,064
Transport and storage	653	745
Wholesale trade	1,274	1,312
Other2	1,784	1,776
Total funding	129,546	121,822
Concentrations of funding by geography
New Zealand	88,452	80,564
Australia	10,163	11,472
United States	12,215	12,332
Europe	11,448	10,388
Other countries	7,268	7,066
Total funding	129,546	121,822

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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

38

NOTES TO THE FINANCIAL STATEMENTS

Liquidity portfolio management

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

Total liquidity portfolio
	30/09/2016		30/09/2015
	NZ$m		NZ$m
Cash and balances with central banks	2,068		2,069
Certificates of deposit	1,124		468
Government, local body stock and bonds	6,117		5,063
Government treasury bills	811		1,155
Reserve Bank bills	100		799
Other bonds	6,483		5,930
Total liquidity portfolio	16,703		15,484

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 2016 ANZ New Zealand would be eligible to enter into repurchase transactions with a value of NZ$13,515 million. The Banking Group also held unencumbered internal residential mortgage backed securities (RMBS) which would entitle ANZ New Zealand to enter into repurchase transactions with a value of NZ$6,793 million at 30 September 2016.

Liquidity crisis contingency planning

ANZ New Zealand 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

• assigned responsibilities for internal and external communications.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

39

NOTES TO THE FINANCIAL STATEMENTS

Contractual maturity analysis of financial assets and liabilities

The following tables present ANZ New Zealand's financial assets and liabilities within relevant contractual maturity groupings, based on the earliest date on which the NZ Branch or ANZ New Zealand 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 ANZ New Zealand or the NZ Branch 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.

ANZ New Zealand does not manage its liquidity risk on this basis.

			Up to	Over 3 to	Over 1 to	Over	No maturity
30/09/2016	Total	At call	3 months	12 months	5 years	5 years	specified
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Financial assets
Cash	2,274	2,045	229	-	-	-	-
Settlement balances receivable	396	58	338	-	-	-	-
Collateral paid	2,310	-	2,310	-	-	-	-
Trading securities	12,804	-	171	1,136	10,859	638	-
Derivative financial assets (trading)	19,396	-	19,396	-	-	-	-
Available-for-sale assets	2,923	-	1,670	283	969	-	1
Net loans and advances	156,693	246	15,532	18,045	52,361	70,509	-
Other financial assets	281	-	228	41	12	-	-
Total financial assets	197,077	2,349	39,874	19,505	64,201	71,147	1
Financial liabilities
Settlement balances payable	1,523	1,111	412	-	-	-	-
Collateral received	529	-	529	-	-	-	-
Deposits and other borrowings	108,532	50,413	21,343	28,341	7,540	895	-
Derivative financial liabilities (trading)	19,328	-	19,328	-	-	-	-
Debt issuances¹	20,983	-	2,363	1,882	13,466	3,272	-
Subordinated debt¹	2,733	-	14	43	1,659	1,017	-
Other financial liabilities	303	-	72	7	93	131	-
Total financial liabilities	153,931	51,524	44,061	30,273	22,758	5,315	-
Derivative financial instruments used for balance sheet management
- gross inflows	21,743	-	3,461	3,203	11,207	3,872	-
- gross outflows	(22,590)	-	(4,042)	(3,398)	(11,460)	(3,690)	-
Net financial assets / (liabilities) after balance sheet management	42,299	(49,175)	(4,768)	(10,963)	41,190	66,014	1

Contractual maturity of off-balance sheet commitments and contingent liabilities

		Less than	Beyond
	Total	1 year	1 year
	NZ$m	NZ$m	NZ$m
Non-credit related commitments	460	92	368
Credit related commitments	27,046	27,046	-
Contingent liabilities	2,461	2,461	-
Total	29,967	29,599	368

1 Any callable wholesale debt instruments have been included at their next call date. Refer to note 17 for subordinated debt call dates.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

40

NOTES TO THE FINANCIAL STATEMENTS

			Up to	Over 3 to	Over 1 to	Over	No maturity
30/09/2015	Total	At call	3 months	12 months	5 years	5 years	specified
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Financial assets
Cash	2,435	2,041	394	-	-	-	-
Settlement balances receivable	309	140	169	-	-	-	-
Collateral paid	1,929	-	1,929	-	-	-	-
Trading securities	13,180	-	516	1,929	9,710	1,025	-
Derivative financial assets (trading)	16,430	-	16,430	-	-	-	-
Available-for-sale assets	1,454	-	1,078	11	363	-	2
Net loans and advances	153,787	252	15,716	16,989	52,704	68,126	-
Other financial assets	331	-	180	146	5	-	-
Total financial assets	189,855	2,433	36,412	19,075	62,782	69,151	2
Financial liabilities
Settlement balances payable	1,427	1,188	239	-	-	-	-
Collateral received	1,687	-	1,687	-	-	-	-
Deposits and other borrowings	101,835	48,429	19,410	24,470	9,526	-	-
Derivative financial liabilities (trading)	14,635	-	14,635	-	-	-	-
Debt issuances¹	20,315	-	2,217	3,207	13,498	1,393	-
Subordinated debt¹	2,858	-	15	44	1,734	1,065	-
Other financial liabilities	583	-	212	9	107	255	-
Total financial liabilities	143,340	49,617	38,415	27,730	24,865	2,713	-
Derivative financial instruments used for balance sheet management
- gross inflows	23,581	-	2,488	4,434	14,714	1,945	-
- gross outflows	(25,247)	-	(2,629)	(4,889)	(15,730)	(1,999)	-
Net financial assets / (liabilities) after balance sheet management	44,849	(47,184)	(2,144)	(9,110)	36,901	66,384	2

Contractual maturity of off-balance sheet commitments and contingent liabilities

		Less than	Beyond
	Total	1 year	1 year
	NZ$m	NZ$m	NZ$m
Non-credit related commitments	514	59	455
Credit related commitments	26,675	26,675	-
Contingent liabilities	2,454	2,454	-
Total	29,643	29,188	455

1 Any callable wholesale debt instruments have been included at their next call date. Prior period interest cash flows have been revised to improve comparability.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

41

NOTES TO THE FINANCIAL STATEMENTS

1. CLASSIFICATION OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

						Total
	At amortised	At fair value through			Available-for-	carrying
	cost	profit or loss		Hedging	sale assets	amount	Fair value
		Designated
		on initial	Held for
		recognition	trading
30/09/2016	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Cash	2,274	-	-	-	-	2,274	2,274
Settlement balances receivable	396	-	-	-	-	396	396
Collateral paid	2,310	-	-	-	-	2,310	2,310
Trading securities	-	-	11,979	-	-	11,979	11,979
Derivative financial instruments1	-	-	20,205	764	-	20,969	20,969
Available-for-sale assets	-	-	-	-	2,859	2,859	2,859
Net loans and advances2	120,651	-	-	-	-	120,651	120,931
Other financial assets	559	119	-	-	-	678	678
Total financial assets	126,190	119	32,184	764	2,859	162,116	162,396
Settlement balances payable	1,554	-	-	-	-	1,554	1,554
Collateral received	529	-	-	-	-	529	529
Deposits and other borrowings	101,544	5,364	-	-	-	106,908	107,106
Derivative financial instruments1	-	-	21,578	820	-	22,398	22,398
Debt issuances2	20,014	-	-	-	-	20,014	20,148
Subordinated debt	2,624	-	-	-	-	2,624	2,636
Other financial liabilities	497	-	157	-	-	654	654
Total financial liabilities	126,762	5,364	21,735	820	-	154,681	155,025
30/09/2015
Cash	2,435	-	-	-	-	2,435	2,435
Settlement balances receivable	309	-	-	-	-	309	309
Collateral paid	1,929	-	-	-	-	1,929	1,929
Trading securities	-	-	12,139	-	-	12,139	12,139
Derivative financial instruments1	-	-	16,991	596	-	17,587	17,587
Available-for-sale assets	-	-	-	-	1,428	1,428	1,428
Net loans and advances2	114,376	-	-	-	-	114,376	114,899
Other financial assets	606	151	-	-	-	757	757
Total financial assets	119,655	151	29,130	596	1,428	150,960	151,483
Settlement balances payable	1,469	-	-	-	-	1,469	1,469
Collateral received	1,687	-	-	-	-	1,687	1,687
Deposits and other borrowings	94,772	4,964	-	-	-	99,736	99,947
Derivative financial instruments1	-	-	16,956	813	-	17,769	17,769
Debt issuances2	19,403	-	-	-	-	19,403	19,516
Subordinated debt	2,683	-	-	-	-	2,683	2,640
Other financial liabilities	688	-	309	-	-	997	997
Total financial liabilities	120,702	4,964	17,265	813	-	143,744	144,025

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 debt issuances. The resulting fair value adjustment means that the carrying value differs from the amortised cost.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

42

NOTES TO THE FINANCIAL STATEMENTS

Measurement of fair value

Valuation methodologies

ANZ New Zealand 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 ANZ New Zealand holds offsetting risk positions, ANZ New Zealand 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.

ANZ New Zealand 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-for-sale 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.

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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

43

NOTES TO THE FINANCIAL STATEMENTS

Valuation hierarchy for financial assets and financial liabilities measured at fair value in the balance sheet

		30/09/2016				30/09/2015
	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Financial assets
Trading securities	11,967	12	-	11,979	11,880	259	-	12,139
Derivative financial instruments	3	20,959	7	20,969	12	17,569	6	17,587
Available-for-sale assets	1,671	1,187	1	2,859	900	526	2	1,428
Investments backing insurance contract liabilities	5	114	-	119	2	149	-	151
Total	13,646	22,272	8	35,926	12,794	18,503	8	31,305
Financial liabilities
Deposits and other borrowings	-	5,364	-	5,364	-	4,964	-	4,964
Derivative financial instruments	46	22,350	2	22,398	18	17,749	2	17,769
Other financial liabilities	157	-	-	157	309	-	-	309
Total	203	27,714	2	27,919	327	22,713	2	23,042

Valuation hierarchy for financial assets and financial liabilities not measured at fair value¹

		30/09/2016				30/09/2015
	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Financial assets
Net loans and advances	-	117,553	3,378	120,931	-	110,990	3,909	114,899
Financial liabilities
Deposits and other borrowings	-	101,742	-	101,742	-	94,983	-	94,983
Debt issuances	1,629	18,519	-	20,148	638	18,878	-	19,516
Subordinated debt	2,344	292	-	2,636	2,333	307	-	2,640
Total	3,973	120,553	-	124,526	2,971	114,168	-	117,139

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

20. MATURITY ANALYSIS OF ASSETS AND LIABILITIES

The following is an analysis of asset and liability line items in the balance sheet that combine amounts expected to be realised or due to be settled within one year and after more than one year.

	30/09/2016	30/09/2016		30/09/2015	30/09/2015
	within one year	after more than one year	Total	within one year	after more than one year	Total
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Assets
Investments backing insurance contract liabilities	107	12	119	146	5	151
Available-for-sale assets	1,915	944	2,859	1,071	357	1,428
Net loans and advances	25,112	95,539	120,651	27,442	86,934	114,376
Other assets	598	103	701	657	83	740
Liabilities
Deposits and other borrowings	99,850	7,058	106,908	90,915	8,821	99,736
Payables and other liabilities	895	242	1,137	1,312	215	1,527
Provisions	108	98	206	95	96	191
Debt issuances	4,009	16,005	20,014	5,237	14,166	19,403

Australia and New Zealand Banking Group Limited - ANZ New Zealand

44

NOTES TO THE FINANCIAL STATEMENTS

1. ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL ACCEPTED AS SECURITY FOR ASSETS

Assets charged as security for liabilities[1]

The carrying amounts of assets pledged as security are as follows:

The carrying amounts of assets pledged as security are as follows:
	Carrying	Amount	Related Liability
	30/09/2016	30/09/2015	30/09/2016	30/09/2015
	NZ$m	NZ$m	NZ$m	NZ$m
Securities sold under agreements to repurchase	77	47	76	47
Residential mortgages pledged as security for covered bonds	10,265	7,547	6,218	5,335
Assets pledged as collateral for UDC secured investments	2,665	2,441	1,592	1,736

UDC Secured Investments are secured by a security interest granted under the Trust Deed over all of UDC Finance Limited's (UDC) present and future assets and undertakings, to Trustees Executors Limited, as supervisor. The assets subject to the security interest comprise mainly loans to UDC's customers and certain plant and equipment. The security interest secures all amounts payable by UDC on the UDC Secured Investments and all other moneys payable by UDC under the Trust Deed.

Collateral accepted as security for assets[1]

ANZ New Zealand has received collateral in relation to reverse repurchase agreements. These transactions are governed by standard industry agreements.

The fair value of collateral received and sold or repledged is as follows:

The fair value of collateral received and sold or repledged is as follows:
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Collateral received on standard reverse repurchase agreements
Fair value of assets which can be sold	231	339
Fair value of assets sold or repledged	141	269

1 Excludes the amounts disclosed as collateral paid and received in the balance sheet that relate to derivative liabilities and derivative assets respectively. The terms and conditions of the collateral agreements are included in the standard CSA that forms part of the ISDA.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

45

NOTES TO THE FINANCIAL STATEMENTS

22. OFFSETTING

The following information relates to financial assets and liabilities which have not been set off in the balance sheet but for which ANZ New Zealand has enforceable master netting agreements in place with counterparties. No financial assets and liabilities have been set off in the balance sheet.

balance sheet.
Gross amounts presented in the balance sheet 30/09/2016 NZ$m	Related amounts not offset 1 Financial
	Net amounts instruments Cash collateral
	NZ$m NZ$m NZ$m
Financial assets
Collateral paid 1,405	- (1,332) 73
Trading securities2 77	(76) - 1
Derivative financial instruments 7,442	(7,086) (333) 23
Financial liabilities
Collateral received 358	- (333) 25
Securities sold under agreements to repurchase3 76	(76) - -
Derivative financial instruments 8,718	(7,086) (1,332) 300
30/09/2015 Financial assets
Collateral paid 1,139	- (1,112) 27
Trading securities2 47	(47) - -
Derivative financial instruments 6,923	(6,194) (704) 25
Financial liabilities
Collateral received 960	- (704) 256
Securities sold under agreements to repurchase3 47	(47) - -
Derivative financial instruments 7,342	(6,194) (1,112) 36

1 ANZ New Zealand enters into derivatives and repurchase and reverse repurchase agreements with various counterparties which are governed by industry standard master netting agreements. ANZ New Zealand 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 note 21.

3 Included in deposits and other borrowings, see note 15.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

46

NOTES TO THE FINANCIAL STATEMENTS

23. CREDIT RELATED COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES

	30/09/2016 30/09/2015 NZ$m NZ$m
Contract amount of:
Credit related commitments - facilities provided
Undrawn facilities1	27,046 26,675
Guarantees and contingent liabilities
Guarantees and letters of credit	850 1,002
Performance related contingencies	1,611 1,452
Totalguarantees and contingent liabilities	2,461 2,454
Total Credit Related Commitments, Guarantees and Contingent Liabilities	29,507 29,129

1 The comparative amount for undrawn facilities has been reduced by NZ$5,518 million following a review of the composition of commitments.

These guarantees and contingent liabilities relate to transactions that ANZ New Zealand has entered into as principal, including guarantees, standby letters of credit and documentary letters of credit.

Documentary letters of credit involve the issue of letters of credit guaranteeing payment in favour of an exporter secured against an underlying shipment of goods or backed by a confirmatory letter of credit from another bank.

Performance related contingencies are liabilities that oblige ANZ New Zealand to make payments to a third party should the customer fail to fulfil the non-monetary terms of the contract.

To reflect the risk associated with these transactions, they are subjected to the same credit origination, portfolio management and collateral requirements as customers that apply for loans. The contract amount represents the maximum potential amount that could be lost if the counterparty fails to meet its financial obligations. As the facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements.

Other contingent liabilities

In June 2013, litigation funder Litigation Lending Services (NZ) Limited filed a representative action against the Bank regarding certain fees charged to New Zealand customers. The representative action has been settled with the Bank making a contribution to the claimants’ costs. The Bank has not admitted liability and all claims against it have been formally discontinued.

ANZ New Zealand has other contingent liabilities in respect of actual and possible claims and court proceedings.

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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

47

NOTES TO THE FINANCIAL STATEMENTS

24. OTHER ASSETS

	30/09/2016	30/09/2015
	NZ$m	NZ$m
Accrued interest and prepaid discounts	397	426
Accrued commission	22	22
Share-based payments asset	103	83
Prepaid expenses	19	24
Other assets	160	185
Total other assets	701	740

25. GOODWILL AND OTHER INTANGIBLE ASSETS

	30/09/2016	30/09/2015
	NZ$m	NZ$m
Goodwill	3,233	3,233
Software	76	139
Other intangibles	115	120
Total goodwill and other intangible assets	3,424	3,492

26. PAYABLES AND OTHER LIABILITIES

	30/09/2016	30/09/2015
	NZ$m	NZ$m
Creditors	60	121
Accrued interest and unearned discounts	451	514
Defined benefits plan obligations	28	43
Accrued charges	170	243
Securities short sold (classified as held for trading)	157	309
Liability for acceptances	27	52
Share-based payments liability	86	65
Life insurance contract liabilities - reinsurance	128	107
Other liabilities	30	73
Total payables and other liabilities	1,137	1,527

27. PROVISIONS

	30/09/2016	30/09/2015
	NZ$m	NZ$m
Employee annual and long service leave	126	129
Other1	80	62
Total provisions	206	191

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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

48

NOTES TO THE FINANCIAL STATEMENTS

28. SHARE CAPITAL AND INITIAL HEAD OFFICE ACCOUNT

	Number of issued shares	NZ$ millions
	30/09/2016 30/09/2015	30/09/2016 30/09/2015
Ordinary shares
At beginning and end of the year	381,655,112 381,655,112	1,453 1,453
Shares cancelled on amalgamation1	(3,500,000) -	(3) -
Ordinaryshares at end of theyear	378,155,112 381,655,112	1,450 1,453
Redeemable preference shares
At beginning of the year	5,504,884,529 4,903,692,932	6,594 5,929
Issued during the year	- 611,191,597	- 675
Redeemed during the year	- (10,000,000)	- (10)
Redeemable preference shares at end of theyear	5,504,884,529 5,504,884,529	6,594 6,594
Paid in share capital	5,883,039,641 5,886,539,641	8,044 8,047
NZ Branch initial head office account	- -	11 11
Total ANZ New Zealand share capital & initial head office account	5,883,039,641 5,886,539,641	8,055 8,058

1 The issued share capital of ANZ Securities (NZ) Limited was not issued to a member of ANZ New Zealand and was cancelled on amalgamation with South Pacific Merchant Finance Limited, a subsidiary of the Bank, on 30 September 2016.

Ordinary shares

All ordinary shares share equally in dividends and any proceeds available to ordinary shareholders on winding up. 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.

During the year ended 30 September 2016 ANZ Holdings (New Zealand) Limited (ANZH) paid ordinary dividends of NZ$1,320 million (2015: NZ$1,630 million) to the Immediate Parent Company (equivalent to NZ$3.49 (2015: NZ$4.31) per share).

Redeemable preference shares

All redeemable preference shares (RPS) were issued by ANZH to members of the Overseas Banking Group. RPS carry no voting rights and are redeemable by ANZH providing notice in writing to holders of the RPS. Dividends are payable at the discretion of the directors of ANZH and are non-cumulative.

There are seven classes of RPS, relating to issues in 1988, 2005, 2007, 2008, 2009, 2014 and 2015. ANZH did not pay any dividends on RPS during the years ended 30 September 2016 and 30 September 2015.

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

Head office account

The NZ Branch capital comprises the initial head office account only. The head office account is the funds provided by the Ultimate Parent Bank on the creation of the NZ Branch. It is non-interest bearing and there is no fixed date of repayment.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

49

NOTES TO THE FINANCIAL STATEMENTS

29. CAPITAL ADEQUACY

Capital management policies

ANZ New Zealand’s core capital objectives are to:

• Protect the interests of depositors, creditors and shareholders

• Ensure the safety and soundness of ANZ New Zealand’s capital position

• Ensure that the capital base supports ANZ New Zealand’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 ANZ New Zealand’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.

ANZ New Zealand 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 ANZ New Zealand’s overall risk profile and financial positions, taking into account its strategic focus and business plan

• Support the economic risk capital requirements of the business.

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

ANZ New Zealand has complied with all externally imposed capital requirements to which it is subject during the current and comparative periods.

Basel III capital ratios			Ultimate Parent	Bank
	Overseas Banking Group		(Extended Licensed Entity)
	30/09/2016	30/09/2015	30/09/2016	30/09/2015
Unaudited
Common equity tier 1 capital	9.6%	9.6%	9.7%	9.6%
Tier 1 capital	11.8%	11.3%	12.1%	11.6%
Total capital	14.3%	13.3%	14.7%	13.7%

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 2016 and for the comparative prior periods.

The Overseas Banking Group is required to publicly disclose Pillar 3 financial information as at 30 September 2016. The Overseas Banking Group’s Pillar 3 disclosure document for the quarter ended 30 September 2016, 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.

Market risk

ANZ New Zealand’s aggregate market risk exposures below have been calculated in accordance with the RBNZ document BS2B. The peak end-of-day market risk exposures are for the half-year ended 30 September 2016.

	Implied risk weighted exposure	Implied risk weighted exposure	Notional capital charge	Notional capital charge	Peak
	Period end	Peak	Period end	Peak	occurred on
Unaudited 30/09/2016	NZ$m	NZ$m	NZ$m	NZ$m
Interest rate risk	8,506	9,367	680	749	15/09/2016
Foreign currency risk	35	130	3	10	17/05/2016
Equity risk	1	2	-	-	29/06/2016
	8,542		683

Australia and New Zealand Banking Group Limited - ANZ New Zealand

50

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 ANZ New Zealand'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.

		30/09/2016
	On-balance	Off-balance
Unaudited	sheet	sheet		Total
	NZ$m	NZ$m		NZ$m
LVR range
Does not exceed 60%	29,335	4,760		34,095
Exceeds 60% and not 70%	15,317	1,499		16,816
Exceeds 70% and not 80%	19,324	1,604		20,928
Does not exceed 80%	63,976	7,863		71,839
Exceeds 80% and not 90%	4,657	198		4,855
Exceeds 90%	2,011	211		2,222
Total	70,644	8,272		78,916

Reconciliation of mortgage related amounts

Unaudited			30/09/2016
		Not	e NZ$m
Term loans - housing		13 73,330
Less: fair value hedging adjustment		(154)
Less: housing loans made to corporate customers		(2,532)
On-balance sheet retail mortgage exposures		18 70,644
Add: off-balance sheet retail mortgage exposures		8,272
Total retail mortgage exposures as per LVR analysis		78,916

Australia and New Zealand Banking Group Limited - ANZ New Zealand

51

NOTES TO THE FINANCIAL STATEMENTS

30. SUBSIDIARIES

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

Principal subsidiaries	Nature of business
Members of the Banking Group
ANZ Bank New Zealand Limited	Registered bank
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
Karapiro Investments Limited	Investment
Kingfisher NZ Trust 2008-11	Securitisation entity
OnePath Life (NZ) Limited	Insurance
UDC Finance Limited	Asset finance
Other operating members of ANZ New Zealand (together with the NZ Branch, the "Relevant Members")
ANZ Capel Court Limited (New Zealand Branch)2	Securitisation services
ANZ Holdings (New Zealand) Limited	Holding company

1 ANZ New Zealand does not own ANZNZ Covered Bond Trust and Kingfisher NZ Trust 2008-1. Control exists as ANZ New Zealand retains substantially all the risks and rewards of the operations. Details of ANZ New Zealand’s interest in consolidated structured entities is included in note 31. 2 Incorporated in Australia and registered in New Zealand as an Overseas ASIC Company.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

52

NOTES TO THE FINANCIAL STATEMENTS

31. STRUCTURED ENTITIES, TRANSFERRED FINANCIAL ASSETS, FIDUCIARY ACTIVITIES AND INSURANCE

Structured entities

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

Consolidated structured entities

Kingfisher NZ Trust 2008-1 (the Kingfisher Trust)

ANZ New Zealand 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 2016 and 30 September 2015 ANZ New Zealand 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.

ANZ New Zealand 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

ANZ New Zealand also has an interest in unconsolidated securitisation entities through the provision of funding facilities or holding bonds or notes issued by such entities. ANZ New Zealand’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. As at 30 September 2016, NZ$19,656 million of assets were held in the Kingfisher Trust and the Covered Bond Trust (2015: NZ$16,071 million).

Repurchase transactions

Securities sold subject to repurchase agreements are not derecognised when substantially all the risks and rewards of ownership remain with the Bank. See note 21 for details of securities sold under agreements to repurchase. The amount of trading securities encumbered through repurchase agreements is shown in note 22. The carrying amount of the associated liabilities is not materially different to the amount of trading securities subject to the repurchase agreement.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

53

NOTES TO THE FINANCIAL STATEMENTS

Funds management and other fiduciary activities

Funds management

Certain entities that form part of ANZ New Zealand act as trustee and/or manager for a number of unit trusts and investment and superannuation funds. ANZ New Zealand provides private banking services to a number of clients, including investment advice and portfolio management. ANZ New Zealand 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 ANZ New Zealand, they are not included in these financial statements. ANZ New Zealand 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. ANZ New Zealand 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 ANZ New Zealand and are recorded as liabilities in the balance sheet. At 30 September 2016, NZ$3,698 million of funds under management were invested in ANZ New Zealand's own products or securities (2015: NZ$3,100 million).

Custodial services

ANZ New Zealand provides custodial services to customers in respect of assets that are beneficially owned by those customers.

	30/09/2016	30/09/2015
	NZ$m	NZ$m
Kiwisaver and other managed funds	11,219	9,147
The Bonus Bonds Trust	3,561	3,277
ANZ PIE Fund1	953	794
Discretionary Investment Management Service (DIMS)2	7,007	6,020
Other investment portfolios2	3,745	3,502
Total funds under management	26,485	22,740
Funds under custodial arrangements	7,408	6,535
Other funds held or managed subject to fiduciary responsibilities	1,927	1,547
Funds management fee income from structured entities	156	137

1 ANZ New Zealand established, and is considered to be the sponsor of, the ANZ PIE Fund. The ANZ PIE Fund invests only in deposits with the Bank. ANZ New Zealand 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.

Insurance business

ANZ New Zealand conducts insurance business through its subsidiary OnePath Life (NZ) Limited (OnePath Life).

ANZ New Zealand’s aggregate amount of insurance business comprises the total consolidated assets of OnePath Life of NZ$926 million (2015: NZ$884 million), which is 0.6% (2015: 0.6%) of the total consolidated assets of ANZ New Zealand.

Risk management

The Bank and entities that form part of ANZ New Zealand 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 ANZ New Zealand. The policies and procedures include comprehensive and prominent disclosure of information regarding products, and formal and regular review of operations and policies by management.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

54

NOTES TO THE FINANCIAL STATEMENTS

32. RELATED PARTY DISCLOSURES

Key management personnel

Key management personnel (KMP) are defined as directors and those executives who report directly to the Bank’s Chief Executive Officer with responsibility for the strategic direction and management of a major revenue generating division or who control material revenue and expenses.

Loans made to directors and other KMP are made in the ordinary course of business on normal commercial terms and conditions no more favourable than those given to other employees or customers, including the term of the loan, security required and the interest rate.

All other transactions with KMP and their related parties are made on terms equivalent to those that prevail in arm’s length transactions. These transactions generally involve the provision of financial and investment services. All such transactions that have occurred with KMP and their related parties have been trivial or domestic in nature. In this context, transactions are only disclosed when they are considered of interest to the users of the financial statements in making and evaluating decisions about the allocation of scarce resources.

	Year to	Year to
	30/09/2016	30/09/2015
	NZ$000	NZ$000
Key management personnel compensation
Salaries and short-term employee benefits	11,303	12,698
Post-employment benefits	280	220
Other long-term benefits	88	77
Termination benefits	79	-
Share-based payments expense	4,123	5,076
Total compensation of keymanagement personnel	15,873	18,071
Loans to key management personnel	16,652	12,693

Transactions with other related parties

The NZ Branch and ANZ New Zealand 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 ANZ New Zealand employees. Transactions with related parties outside of ANZ New Zealand 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 ANZ New Zealand 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

Transactions with related parties
	Year to	Year to
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Ultimate Parent Bank and subsidiaries not part of ANZ New Zealand
Interest income	6	12
Interest expense	279	426
Other operating income	19	35
Operating expenses	64	64
Preference shares redeemed	-	(10)
Immediate Parent Company
Interest expense	57	74
Preference shares issued	-	675
Associates
Interest expense	-	3
Direct fee expense	10	8
Dividends received	2	89
Share of associates' profit	5	5

Australia and New Zealand Banking Group Limited - ANZ New Zealand

55

NOTES TO THE FINANCIAL STATEMENTS

Balances with related parties

Balances with related parties
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Ultimate Parent Bank and subsidiaries not part of ANZ New Zealand
Cash	47	55
Settlement balances receivable	31	86
Collateral paid	375	-
Derivative financial instruments	4,335	3,937
Other assets	108	97
Associates
Investments in associates	7	4
Total due from related parties	4,903	4,179
Ultimate Parent Bank and subsidiaries not part of ANZ New Zealand
Settlement balances payable	106	98
Collateral received	-	688
Deposits and other borrowings	6,105	7,344
Derivative financial instruments	5,302	3,843
Payables and other liabilities	42	47
Subordinated debt	288	302
Immediate Parent Company
Deposits and other borrowings	1,766	1,766
Payables and other liabilities	4	5
Associates
Payables and other liabilities	1	-
Total due to related parties	13,614	14,093

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

commitments to related parties as follows:
	30/09/2016	30/09/2015
	NZ$m	NZ$m
Financial guarantees provided to the Ultimate Parent Bank	152	183

Australia and New Zealand Banking Group Limited - ANZ New Zealand

56

NOTES TO THE FINANCIAL STATEMENTS

33. CAPITAL EXPENDITURE AND OPERATING LEASE COMMITMENTS

	30/09/2016	30/09/2015
	NZ$m	NZ$m
Contracts for outstanding capital expenditure
Not later than 1 year	5	12
Future minimum lease payments under non-cancellable operating leases
Not later than 1 year	87	47
Later than 1 year but not later than 5 years	217	258
Later than 5 years	151	197
Total operatinglease commitments	455	502
Total commitments	460	514

34. COMPENSATION OF AUDITORS

	Year to	Year to
	30/09/2016	30/09/2015
	NZ$000	NZ$000
Compensation of auditors (KPMG New Zealand)
Audit or review of financial statements1	2,301	2,246
Other services:2
Prudential and regulatory services3	262	119
Offer documents assurance or review	100	155
Other assurance services4	67	126
Total other services	429	400
Total compensation of auditors relatingto ANZ New Zealand	2,730	2,646
Fees paid on behalf of certain managed funds and not recharged2,5	33	35
Total compensation of auditors	2,763	2,681

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

2 Comparative amounts have been updated to conform with current period classification, and to exclude NZ$68,000 of fees that were recharged to managed funds.

3 Includes fees for reviews and controls reports required by regulations.

4

4 Includes fees for controls reports, comfort letters and other agreed upon procedures engagements. 5

Amounts relate to the ANZ PIE Fund and certain other funds, and include fees for audits of annual financial statements and audits of summary financial statements for inclusion in offer documents, comfort letters and other agreed upon procedures engagements.

It is ANZ New Zealand’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.

35. CONCENTRATIONS OF CREDIT RISK TO INDIVIDUAL COUNTERPARTIES

ANZ New Zealand measures its concentration of credit risk using actual exposures for bank counterparties and limits for non bank counterparties.

For the three months ended 30 September 2016 there were no individual counterparties (excluding connected parties, governments and banks with long term credit ratings of A- or above) where ANZ New Zealand’s period end or peak end-of-day credit exposure equalled or exceeded 10% of the Overseas Banking Group’s equity (as at the end of the period).

This credit exposure information does not include exposures to counterparties if they are booked outside New Zealand.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

57

NOTES TO THE FINANCIAL STATEMENTS

36. RISK MANAGEMENT FRAMEWORK

ANZ New Zealand 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 ANZ New Zealand business units to meet their performance objectives.

ANZ New Zealand 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 of the Ultimate Parent Bank and operates within a comprehensive framework comprising:

• The Boards of the entities making up ANZ New Zealand (the Boards) providing leadership, setting risk appetite/strategy and monitoring progress

• A strong framework for development and maintenance of ANZ New Zealand-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 as it is deemed to apply to each entity across ANZ New Zealand

• Business unit level accountability, as the “first line of defence”, for the management of risks in alignment with ANZ New Zealand’s strategy

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

ANZ New Zealand 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 ANZ New Zealand’s response to emerging risk issues and trends, and that the requisite culture and practices are in place across ANZ New Zealand, are conducted within ANZ New Zealand and also by the Ultimate Parent Bank. The Boards have responsibility for reviewing all aspects of risk management.

The Boards have ultimate responsibility for overseeing the effective deployment of risk management frameworks, policies and processes within New Zealand. The Bank’s Risk Committee assists the Boards in this function. The role of the Risk Committee is to assist the Boards 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.

ANZ New Zealand’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.

Financial risk management

Refer to note 18 for detailed disclosures on ANZ New Zealand'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 ANZ New Zealand’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 ANZ New Zealand’s operational risk framework and associated ANZ New Zealand-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 through business unit Risk Forums. The Bank’s Operational Risk Executive Committee (OREC) undertakes the governance function through the bi-monthly monitoring of operational risk performance across ANZ New Zealand. The Boards and Risk Management conduct effective oversight through the approval of operational risk policies and frameworks and monitoring key operational risk metrics.

Compliance

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

Risk Management, in conjunction with business unit staff ensure ANZ New Zealand 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 ANZ New Zealand’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 Board and the Risk Committee of the Ultimate Parent Bank Board conduct Board and Executive oversight.

The Bank’s Audit Committee has responsibility for reviewing for ensuring the integrity of ANZ New Zealand's financial controls, reporting systems and internal audit standards. It meets at least four times a year and reports directly to the Board of the Bank. All members of the Bank’s Audit Committee are non-executive directors.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

58

NOTES TO THE FINANCIAL STATEMENTS

Internal Audit

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 Internal Audit is direct to the Chair of the Bank’s Audit Committee, with a direct communication line to the Chief Executive Officer of the Bank and the external auditor.

The Internal Audit Plan is developed utilising a risk based approach and is refreshed on a quarterly basis. The Bank’s 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 Committees of the Ultimate Parent Bank and the Bank as appropriate, Risk Committee and management. These results influence the performance assessment of business heads.

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

37. NZ BRANCH AND OVERSEAS BANKING GROUP INFORMATION

NZ Branch Funding		30/09/2016
		NZ$m
Total liabilities of the NZ Branch less amounts due to related parties		1,146
Overseas Banking Group Profitability and Size		30/09/2016
		AUDm
Profit for the year ended 30/09/20161		5,720
Net profit after tax for the 12 months to 30/09/2016 as a percentage of average total assets		0.63%
Total assets		914,869
Percentage change in total assets in the 12 months to 30/09/2016		2.81%

1 Net profit after tax for the year includes AUD 11 million of profit attributable to non-controlling interests.

Overseas Banking Group asset quality	30/09/2016
	AUDm
Gross impaired assets	3,173
Gross impaired assets as a percentage of total assets	0.3%
Individual provision	1,307
Individual provision as a percentage of gross impaired assets	41.2%
Collective provision	2,876

Australia and New Zealand Banking Group Limited - ANZ New Zealand

59

HISTORICAL SUMMARY OF FINANCIAL STATEMENTS

	Year to	Year to	Year to	Year to	Year to
	30/09/2016	30/09/2015	30/09/2014	30/09/2013	30/09/2012
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Interest income	6,770	7,417	6,799	6,461	6,568
Interest expense	3,741	4,537	4,034	3,820	3,859
Net interest income	3,029	2,880	2,765	2,641	2,709
Non-interest income	832	1,157	1,063	795	905
Operating income	3,861	4,037	3,828	3,436	3,614
Operating expenses	1,600	1,513	1,490	1,513	1,743
Credit impairment charge / (release)	147	76	(9)	66	202
Profit before income tax	2,114	2,448	2,347	1,857	1,669
Income tax expense	572	677	636	488	404
Profit after income tax	1,542	1,771	1,711	1,369	1,265
Dividends paid	(1,320)	(1,630)	(2,335)	(720)	(485)
Share capital issued	-	665	969	-	-
	As at	As at	As at	As at	As at
	30/09/2016	30/09/2015	30/09/2014	30/09/2013	30/09/2012
	NZ$m	NZ$m	NZ$m	NZ$m	NZ$m
Total impaired assets	433	404	668	936	1,405
Total assets	166,706	155,530	138,528	129,853	130,983
Total liabilities	155,539	144,670	128,447	120,111	121,827
Equity & head office account	11,167	10,860	10,081	9,742	9,156

The amounts included in this summary have been taken from the audited financial statements of ANZ New Zealand.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

60

GENERAL DISCLOSURES

General Matters

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

The address for service for the Ultimate Parent Bank is ANZ Centre Melbourne, Level 9, 833 Collins Street, Docklands, Victoria 3008, Australia.

Financial Statements of the Ultimate Parent Bank and Overseas Banking Group

Copies of the most recent publicly available financial statements of the Ultimate Parent Bank and Overseas Banking Group will be provided immediately, free of charge, to any person requesting a copy where request is made at the Registered Office. The most recent publicly available financial statements for the Ultimate Parent Bank and Overseas Banking Group can also be accessed at the internet address anz.com.

Ranking of local creditors in liquidation

Certain creditors of the Ultimate Parent Bank are given a statutory priority under Australian law. Unsecured creditors of the NZ Branch could be expected to rank behind such claims.

Specifically, pursuant to section 13A(3) of the Banking Act of the Commonwealth of Australia (the Banking Act), if an Authorised Deposit-Taking Institution (ADI) (which includes the Ultimate Parent Bank) becomes unable to meet its obligations or suspends payment, the assets of the ADI in Australia are available to meet the ADI's liabilities in the following order:

• (a) first, the ADI's liabilities (if any) to APRA because of the rights APRA has against the ADI because of section 16AI of the Banking Act

• (b) second, the ADI's debts (if any) to APRA under section 16AO of the Banking Act

• (c) third, the ADI's liabilities (if any) in Australia in relation to protected accounts that account-holders keep with the ADI. Broadly, this includes, among other things, certain deposit accounts with the Ultimate Parent Bank that are situated in Australia and recorded in Australian dollars

• (d) fourth, the ADI’s debts (if any) to the Reserve Bank of Australia

• (e) fifth, the ADI’s liabilities (if any) under an industry support contract that is certified by APRA under section 11CB of the Banking Act

• (f) sixth, the ADI's other liabilities in the order of their priority (apart from section 13A(3)).

Unsecured creditors of the NZ Branch could be expected to rank as a creditor pursuant to the sixth paragraph, together with other unsecured creditors of the Ultimate Parent Bank that do not otherwise have a priority claim under preceding paragraphs.

Section 86 of the Reserve Bank Act 1959 of the Commonwealth of Australia provides that notwithstanding anything contained in any law relating to the winding-up of companies, but subject to section 13A(3) of the Banking Act, debts due to the Reserve Bank of Australia by any ADI shall, in a winding-up, have priority over all other debts.

Section 13A(3) of the Banking Act affects all of the unsecured liabilities of the NZ Branch, which as at 30 September 2016, amounted to $nil (2015: nil).

Requirement to hold excess assets over deposit liabilities

Section 13A(4) of the Banking Act states that it is an offence for an ADI not to hold assets (excluding goodwill and any assets or other amount excluded by the prudential standards for the purposes of that subsection) in Australia of a value that is equal to or greater than the total amount of its deposit liabilities in Australia, unless APRA has authorised the ADI to hold assets of a lesser value. During the year ended 30 September 2016, the Ultimate Parent Bank has at all times held assets (excluding goodwill and any assets or other amounts prescribed by APRA) in Australia of not less than the value of the Ultimate Parent Bank's total deposit liabilities in Australia.

Section 13E of the Banking Act states that APRA may give the Ultimate Parent Bank a direction that requires it to increase its level of capital in the circumstances specified in that section.

The requirements of the Banking Act have the potential to impact the management of the liquidity of ANZ New Zealand.

Guarantors

No material obligations of the NZ Branch are guaranteed as at 23 November 2016.

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 2016 of NZ$6,218 million, pursuant to a guarantee which is secured over a pool of assets. The Covered Bond Guarantor’s address for service is Level 9, 34 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 31.

Under section 13A(1) of the Banking Act, in certain circumstances APRA may investigate the affairs of an ADI, appoint a person to investigate the affairs of an ADI, take control of an ADI’s business or appoint an administrator to take control of the ADI’s business. Section 16(1) and (2) of the Banking Act provide that, despite anything contained in any law relating to the winding-up of companies, but subject to section 13A(3) of the Banking Act, the debts of an ADI to APRA in respect of APRA's costs (including costs in the nature of remuneration and expenses) of being in control of the ADI's business, or of having an administrator in control of the ADI's business, are a debt due to APRA and have priority in a winding-up of the ADI over all other unsecured debts.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

61

GENERAL DISCLOSURES

Other Matters

APRA has reviewed the level of exposures that can be provided to the respective New Zealand banking subsidiaries and branches (New Zealand operations) of the four Australian parent banks, including the Ultimate Parent Bank.

APRA has confirmed that by 1 January 2021 no more than 5% of the Ultimate Parent Bank’s Level 1 Tier 1 capital can comprise nonequity exposures to its New Zealand operations during ordinary times. Exposures in excess of this limit must be reduced in equal percentages over the five year transition period and may not increase above the exposures as at 30 June 2015. This limit does not include holdings of capital instruments or eligible secured contingent funding support provided to the Bank during times of financial stress.

The Ultimate Parent Bank established a New Zealand branch which was registered on 5 January 2009. The Bank sells, from time-totime, residential loans and mortgages into the NZ Branch to provide funding for the Bank’s business. As at 30 September 2016, the NZ Branch held approximately NZ$6.0 billion of residential loans. To satisfy APRA’s requirements described above, the Bank intends to repay this funding at approximately NZ$1.6 billion per annum over the five year transition period ending 31 December 2020.

APRA has also clarified that contingent funding support by the Ultimate Parent Bank to the Bank during times of financial stress must be provided on terms that are acceptable to APRA and, in aggregate with all other exposures to its New Zealand operations, must not exceed 50% of the Ultimate Parent Bank’s Level 1 Tier 1 capital. At present, only covered bonds meet APRA’s criteria for contingent funding. On this basis, we believe that the Ultimate Parent Bank will continue to be able to provide financial support to the Bank.

Credit Rating Information

As at 23 November 2016 the Ultimate Parent 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. On 7 July 2016, Standard & Poor’s changed the outlook on the Ultimate Parent Bank from Stable to Negative. On 18 August 2016, Moody’s Investors Service changed the outlook on the Ultimate Parent Bank from Stable to Negative.

The Ultimate Parent Bank’s credit ratings are:

	Current Credit
Rating Agency	Rating	Qualification
Standard & Poor’s	AA-	Outlook Negative
Moody’s Investors Service	Aa2	Outlook Negative
Fitch Ratings	AA-	Outlook Stable

The following table describes the credit rating grades available:

	Standard &	Moody's	Fitch Ratings
	Poor's	Investors
		Service
The following grades display investmentgrade 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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

62

CONDITIONS OF REGISTRATION

Conditions of Registration, applicable as at 30 September 2016. These Conditions of Registration have applied from 1 November 2015.

The registration of Australia and New Zealand Banking Group Limited (the registered bank) in New Zealand is subject to the following conditions:

1. That the banking group does not conduct any non-financial 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 predominately 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 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 business of the registered bank in New Zealand does not constitute a predominant proportion of the total business of the registered bank.

2. That no appointment to the position of the New Zealand chief executive officer of the registered bank shall be made unless:

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

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

5. That Australia and New Zealand Banking Group Limited complies with the requirements imposed on it by the Australian Prudential Regulation Authority.

6. That Australia and New Zealand Banking Group Limited complies with the following minimum capital adequacy requirements, as administered by the Australian Prudential Regulation Authority:

7. a) Common Equity Tier 1 capital of the Australia and New Zealand Banking Group Limited is not less than 4.5 percent of risk weighted exposures;

8. b) Tier 1 capital of the Australia and New Zealand Banking Group Limited is not less than 6 percent of risk weighted exposures;

9. c) Total capital of Australia and New Zealand Banking Group Limited is not less than 8 percent of risk weighted exposures.

10. That the business of the registered bank in New Zealand is restricted to:

11. a) acquiring for fair value, and holding, mortgages originated by ANZ Bank New Zealand Limited; and

12. b) any other business for which the prior written approval of the Reserve Bank of New Zealand has been obtained; and

13. c) activities that are necessarily incidental to the business specified in paragraphs (a) and (b).

14. That the value of the mortgages held by the registered bank in New Zealand must not exceed $15 billion in aggregate.

15. That the registered bank in New Zealand does not incur any liabilities except:

16. a) to the government of New Zealand in respect of taxation and other charges;

17. b) to other branches or the head office of the registered bank;

18. c) to trade creditors and staff;

19. d) to ANZ Bank New Zealand Bank Limited in respect of activities, other than borrowing, that are necessarily incidental to the business specified in paragraphs (a) and (b) of condition 7; and

20. e) any other liabilities for which the prior written approval of the Reserve Bank has been obtained.

In these conditions of registration:-

“banking group” means the New Zealand business of the registered bank and its subsidiaries as required to be reported in group financial statements for the group’s New Zealand business under section 461B(2) of the Financial Markets Conduct Act 2013.

“business of the registered bank in New Zealand” means the New Zealand business of the registered bank as defined in the requirement for financial statements for New Zealand business in section 461B(1) of the Financial Markets Conduct Act 2013.

“generally accepted accounting practice” has the same meaning as in section 8 of the Financial Reporting Act 2013.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

63

DIRECTORATE AND AUDITOR

Any document or communication may be sent to any Director or the Chief Executive Officer – NZ Branch at the Registered Office. The document or communication should be marked for the attention of that Director or the Chief Executive Officer.

Directors’ Interests

The Board of the Ultimate Parent Bank has adopted procedures to ensure that conflicts and potential conflicts of interest between a Director’s duties to the Ultimate Parent Bank and their own interests are avoided or dealt with. Pursuant to these procedures:

• each Director should disclose to all Directors any material personal interest they have in any matter which relates to the affairs of the Ultimate Parent Bank and any other interest which the Director believes is appropriate to disclose in order to avoid an actual conflict of interest or the perception of a conflict of interest. This disclosure should be made as soon as practicable after the Director becomes aware of their interest or the need to make a disclosure.

• Director who has an interest of the type referred to in a. above in a matter that is to be considered at a Directors' meeting, must not vote on the matter nor be present while the matter is considered at the meeting, unless a majority of Directors who do not have such an interest in the matter agree that the interest should not disqualify such Director from being present while the matter is being considered and from voting on the matter. The minutes of the meeting should record the decision taken by the Directors who do not have an interest in the matter.

In addition, Standing Notices about Interests are maintained for each Director. If the Director's interests change, the Director shall disclose the change as soon as practicable and an updated Standing Notice shall be tabled at the next Board meeting and recorded in the minutes of that meeting.

Transactions with Directors and the Chief Executive Officer, NZ Branch

There are no transactions entered into by any Director, the Chief Executive Officer – NZ Branch, or any immediate relative or close business associate of any Director or the Chief Executive Officer – NZ Branch, with any part of ANZ New Zealand 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 Directors' or Chief Executive Officer – NZ Branch duties in respect of the NZ Branch and ANZ New Zealand.

Board Members as at 23 November 2016

The names, qualifications, occupation, country of residence and material external directorships of each director of the Ultimate Parent Bank as at the date this Disclosure Statement was signed were:

Chairman

David Michael Gonski, AC

BCom, LLB, FAICD(Life), FCPA Company Director Sydney, Australia

Mr Gonski is an ex-officio member of all Board Committees, including Chair of the Environmental, Sustainability and Governance Committee.

Chairman: Coca-Cola Amatil Limited and The University of New South Wales Foundation Limited Director/Member: Lowy Institute for International Policy, ASIC External Advisory Panel, Australian Philanthropic Services Limited and Advisory Committee for Optus Limited Chancellor: University of New South Wales Council President: Art Gallery of NSW Trust

Chief Executive Officer – Australia and New Zealand Banking Group Limited

Shayne Cary Elliott

B Com Chief Executive Officer and Executive Director Melbourne, Australia

Director: The Financial Markets Foundation for Children

Non-Executive Directors

Ilana Rachel Atlas

BJuris (Hons), LLB (Hons), LLM Company Director Sydney, Australia

Ms Atlas is a member of the Audit Committee, Human Resources Committee and Environmental, Sustainability and Governance Committee.

External Directorships

Chairman: The Bell Shakespeare Company Limited Director: Oakridge Wines Pty Limited, Coca-Cola Amatil Limited, Human Rights Law Centre Ltd, Treasury Corporation of New South Wales, Jawun, Westfield Corporation Limited Member: Australian Institute of Company Directors’ Corporate Governance Committee and Panel of Adara Partners Fellow: Senate of the University of Sydney

Australia and New Zealand Banking Group Limited - ANZ New Zealand

64

DIRECTORATE AND AUDITOR

Paula Jane Dwyer

BCom, FCA, SF Fin, FAICD Company Director Melbourne, Australia

Ms Dwyer is Chair of the Audit Committee and a member of the Risk Committee and Human Resources Committee.

External Directorships

Chairman: Healthscope Limited, Tabcorp Holdings Limited and Kin Group Advisory Board Director: Lion Pty Ltd Member: Kirin International Advisory Board

Sarah Jane Halton, AO, PSM

BA (Hons) Psychology, FAIM, FIPAA, NAM, Hon. FAAHMS, Hons. FACHSE, Hon. DLitt (UNSW) Company Director Canberra, Australia

External Directorships

Member: Executive Board of the Institute of Health Metrics and Evaluation at the University of Washington Board Member: Coalition for Epidemic Preparedness Innovations (Norway) Public Policy Fellow: ANU Crawford School of Public Policy Adjunct Professor: University of Sydney and University of Canberra

Lee Hsien Yang

MSc, BA Company Director Singapore

Mr Lee is Chair of the Digital Business and Technology Committee and a member of the Risk Committee and Human Resources Committee.

Ian John Macfarlane, AC

BEc (Hons), MEc, Hon DSc Syd., Hon DSc UNSW, Hon DCom Melb., Hon DLitt Macq., Hon LLD Monash Company Director Sydney, Australia

Mr Macfarlane is Chair of the Risk Committee and a member of the Environmental, Sustainability and Governance Committee and Audit Committee.

External Directorships

Director: Lowy Institute for International Policy Member: International Advisory Board of Goldman Sachs

John Thomas Macfarlane

BCom, MCom (Hons) Company Director Melbourne, Australia

Mr Macfarlane is a member of the Audit Committee, Risk Committee and Digital Business and Technology Committee.

External Directorships

Chairman: AGInvest Holdings Limited (MyFarm Limited) Director: Craigs Investment Partners Limited, Colmac Group Pty Ltd, Aikenhead Centre for Medical Discovery Limited and St. Vincent’s Institute of Medical Research

Chief Executive Officer, Australia and New Zealand Banking Group – New Zealand Branch

Anthony John Bradshaw

BCA, CA Chief Executive Officer– NZ Branch Wellington, New Zealand

External Directorships

Chairman: Civil Aviation Authority of Singapore, The Islamic Bank of Asia Limited, and General Atlantic Singapore Fund Pte Ltd

Director: Rolls-Royce Holdings plc, General Atlantic Singapore Fund FII Pte Ltd, Caldecott Inc., and Cluny Lodge Pte Ltd Member: Governing Board of Lee Kuan Yew School of Public Policy

Special Advisor: General Atlantic

Auditor

KPMG

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

Consultant: Capital International Inc Advisory Board President: INSEAD South East Asia Council

Graeme Richard Liebelt

BEc (Hons), FAICD, FTSE, FAIM Company Director Melbourne, Australia

Mr Liebelt is Chair of the Human Resources Committee, and a member of the Risk Committee, Environmental, Sustainability and Governance Committee and Digital Business and Technology Committee

External Directorships

Chairman: Amcor Limited Director: Australian Foundation Investment Company Limited, DuluxGroup Limited and Carey Baptist Grammar School

Australia and New Zealand Banking Group Limited - ANZ New Zealand

65

DIRECTORS' AND NEW ZEALAND CHIEF EXECUTIVE OFFICER'S STATEMENT

As at the date on which this Disclosure Statement is signed, after due enquiry, each Director of the Ultimate Parent Bank and the Chief Executive Officer – NZ Branch believes that:

• The Disclosure Statement contains all the information that is required by the Registered Bank Disclosure Statements (Overseas Incorporated Registered Banks) Order 2014

• The Disclosure Statement is not false or misleading.

Over the year ended 30 September 2016, after due enquiry, each Director of the Ultimate Parent Bank and the Chief Executive Officer – NZ Branch believes that:

• The Ultimate Parent Bank has complied with all Conditions of Registration that applied during that period

• The NZ Branch and the Bank had systems in place to monitor and control adequately the material risks of Relevant Members of ANZ New Zealand including credit risk, concentration of credit risk, interest rate risk, currency risk, equity risk, liquidity risk and other business risks, and that those systems were being properly applied.

This Disclosure Statement is dated 23 November 2016, and has been signed by the Chairman of the Ultimate Parent Bank, on behalf of all Directors, and by the Chief Executive Officer – NZ Branch.

==> picture [168 x 34] intentionally omitted <==

David Gonski, AC Chairman, on behalf of the Directors:

==> picture [83 x 49] intentionally omitted <==

Anthony Bradshaw Chief Executive Officer – NZ Branch

Ilana Atlas Paula Dwyer Shayne Elliott David Gonski, AC Sarah Jane Halton, AO, PSM Lee Hsien Yang Graeme Liebelt Ian Macfarlane, AC John Macfarlane

Australia and New Zealand Banking Group Limited - ANZ New Zealand

66

==> picture [77 x 31] intentionally omitted <==

INDEPENDENT AUDITOR’S REPORT

To the Directors of Australia and New Zealand Banking Group Limited

Report on the ANZ New Zealand Disclosure Statement

We have audited the accompanying financial statements and supplementary information (excluding supplementary information relating to Capital Adequacy) of Australia and New Zealand Banking Group Limited – New Zealand Branch and its related entities (“ANZ New Zealand”) on pages 3 to 58 of the Disclosure Statement. The financial statements comprise the balance sheet as at 30 September 2016, 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 ANZ New Zealand. The supplementary information comprises the information that is required to be disclosed in accordance with Schedules 2, 4, 7, 9, 10, 11 and 13 of the Registered Bank Disclosure Statements (Overseas Incorporated Registered Banks) Order 2014 (as amended) (the Order).

This report is made solely to the Directors as a body. Our audit work has been undertaken so that we might state to the Directors of Australia and New Zealand Banking Group Limited those matters we are required to state to them in the auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Directors of Australia and New Zealand Banking Group Limited as a body, for our audit work, this report or any of the opinions we have formed.

Directors' responsibility for the disclosure statement

The Directors are responsible on behalf of ANZ New Zealand for the preparation of ANZ New Zealand Disclosure Statement, including financial statements prepared in accordance with Clause 25 of the Order, generally accepted accounting practice in New Zealand that is a fair presentation 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 ANZ New Zealand 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, 10, 11 and 13 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 25 of the Order and the supplementary information disclosed in accordance with Schedules 2, 4, 7, 10, 11 and 13 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 ANZ New Zealand financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in ANZ New Zealand financial statements (excluding the supplementary information relating to Capital Adequacy). 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 ANZ New Zealand’s preparation of the financial statements that present fairly 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 ANZ New Zealand’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.

Opinion on the Disclosure Statement

In our opinion the Disclosure Statement of ANZ New Zealand on pages 3 to 58 (excluding the supplementary information):

• complies with generally accepted accounting practice in New Zealand

• complies with International Financial Reporting Standards

• give a true and fair view of the financial position of ANZ New Zealand as at 30 September 2016 and of the financial performance and cash flows for the year ended on that date.

Opinion on supplementary information

In our opinion, the supplementary information (excluding supplementary information relating to Capital Adequacy) that is required to be disclosed in accordance with Schedules 2, 4, 7, 10, 11 and 13 of the Order:

• 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

Australia and New Zealand Banking Group Limited - ANZ New Zealand

67

==> picture [46 x 20] intentionally omitted <==

• is in accordance with the books and records of ANZ New Zealand in all material respects

• fairly states, in all material respects, the matters to which it relates in accordance with those Schedules.

Report on the supplementary information relating to Capital Adequacy

We have reviewed the supplementary information relating to Capital Adequacy, as disclosed in note 29 of the Disclosure Statement for the year ended 30 September 2016.

Directors’ responsibility for the supplementary information relating Capital Adequacy

The Directors are responsible for the preparation of supplementary information relating to Capital Adequacy that is required to be disclosed under Schedule 9 of the Order and prepared in accordance with the Capital Adequacy Framework (Standardised Approach) (BS2A) and described in note 29 of the Disclosure Statement.

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 NZ SRE 2410 Review of Financial Statements Performed by the Independent Auditor of the Entity issued by the New Zealand External Reporting Board. As the auditor of ANZ New Zealand, NZ SRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial statements and plan and perform the review to obtain limited assurance about whether the supplementary information relating to Capital Adequacy is, in all material respects:

• prepared in accordance with the Capital Adequacy Framework (Standardised Approach) (BS2A)

• disclosed in accordance with Schedule 9 of the Order.

A review is limited primarily to enquiries of ANZ New Zealand 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.

A review of the supplementary information relating to Capital Adequacy in accordance with NZ SRE 2410 is a limited assurance engagement. The auditor performs procedures, primarily consisting of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with International Standards on Auditing (New Zealand). Accordingly we do not express an audit opinion on the supplementary information relating to capital adequacy disclosures.

Review 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, and disclosed in note 29 of the Disclosure Statement, is not, in all material respects:

• prepared in accordance with the Capital Adequacy Framework (Standardised Approach) (BS2A)

• disclosed in accordance with Schedule 9 of the Order.

Review on other legal and regulatory requirements

In accordance with the requirements of clauses 2(1)(d) and 2(1)(e) of Schedule 1 of the Order, we report that:

• we have obtained all the information and explanations we have required

• in our opinion, proper accounting records have been kept by ANZ New Zealand, as far as appears from our examination of those records.

Independence

Our firm has provided other services to ANZ New Zealand in relation to review of regulatory returns, internal controls reports, prospectus assurance or reviews and agreed upon procedures engagements. Subject to certain restrictions partners and employees of our firm may also deal with the ANZ New Zealand on normal terms within the ordinary course of trading activities of the business of ANZ New Zealand. There are, however, certain restrictions on dealings which the partners and employees of our firm can have with ANZ New Zealand. These matters have not impaired our independence as auditors of ANZ New Zealand. The firm has no other relationship with, or interest in, ANZ New Zealand.

==> picture [99 x 41] intentionally omitted <==

Wellington 23 November 2016