Australia and New Zealand Banking Group Ltd. - Audit Report / Information 2016

BASEL III PILLAR 3 2016 DISCLOSURE AS AT 30 SEPTEMBER 2016 APS 330: PUBLIC DISCLOSURE

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ANZ Basel III Pillar 3 disclosure September 2016

Important notice

This document has been prepared by Australia and New Zealand Banking Group Limited (ANZ) to meet its disclosure obligations under the Australian P r u d e n t i a l Regulation Authority (APRA) A D I Prudential Standard (APS) 330: Public Disclosure.

ANZ Basel III Pillar 3 disclosure September 2016

TABLE OF CONTENTS[1]

Chapter 1 – Highlights ........................................................................................................ 3
Chapter 2 – Introduction .................................................................................................... 5
Purpose of this document ............................................................................................. 5
Chapter 3 - Risk appetite and governance ............................................................................ 6
Risk types… ................................................................................................................ 6
Risk appetite framework ............................................................................................... 7
Risk management governance ...................................................................................... 7
Chapter 4 – Capital reporting and measurement ................................................................... 9
Chapter 5 – Capital and capital adequacy ........................................................................... 10
Table 1 Common disclosure template....................................................................... 10
Table 2 Main features of capital instruments ............................................................. 21
Table 6 Capital adequacy ....................................................................................... 21
Chapter 6 – Credit risk ..................................................................................................... 26
Table 7 Credit risk – General disclosures .................................................................. 26
Table 8 Credit risk – Disclosures for portfolios subject to the Standardised approach and
supervisory risk weights in the IRB approach ................................................. 42
Table 9 Credit risk – Disclosures for portfolios subject to Advanced IRB approaches ...... 43
Table 10 Credit risk mitigation disclosures ................................................................. 53
Table 11 General disclosures for derivative and counterparty credit risk ........................ 58
Chapter 7 – Securitisation ................................................................................................ 62
Table 12 Banking Book - Securitisation disclosures ...................................................... 65
Trading Book - Securitisation disclosures ...................................................... 74
Chapter 8 – Market risk .................................................................................................... 78
Table 13 Market risk – Standard approach ................................................................. 78
Table 14 Market risk – Internal models approach ........................................................ 79
Chapter 9 - Operational risk .............................................................................................. 83
Table 15 Operational risk ........................................................................................ 83
Chapter 10 – Equities ...................................................................................................... 88
Table 16 Equities – Disclosures for banking book positions ........................................... 88
Chapter 11 – Interest Rate Risk in the Banking Book ............................................................ 90
Table 17 Interest Rate Risk in the Banking Book ......................................................... 90
Chapter 12 – Leverage and Liquidity Coverage Ratio ............................................................ 93
Glossary.......... ............................................................................................................... 96

1 Each table reference adopted in this document aligns to those required by APS 330 to be disclosed at half year.

ANZ Basel III Pillar 3 disclosure September 2016

Chapter 1 – Highlights

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* Internationally Comparable methodology aligns with APRA’s

information paper entitled International Capital Comparison Study (13 July 2015). Basel III Internationally Comparable ratios do not include an estimate of the Basel I capital floor requirement.

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Strong capital position September 2016

• Capital ratios have declined in the half to September 2016 due to the impact of higher capital requirements for Australian residential mortgages. This was partly offset by a reduction in credit risk weighted assets in Institutional due to the strategic repositioning of that business and capital benefits from earnings generation (net of 2016 Interim dividend payment). • ANZ’s capital ratios are in excess of APRA’s Capital Conservation Buffer (CCB) requirements. The CCB incorporates an additional 1% Domestically Systemic Important Bank (D-SIB) CET1 requirement.

EAD up $5.1bn to $894bn for 2H16

• Underlying movement mainly driven by reduction in Corporate asset class from book contraction within Institutional as part of the strategic repositioning of that business, offset by growth in Residential Mortgage asset class from Australia and New Zealand region.

*Exposure at Default is post Credit Risk Mitigation (CRM) and does not include Securitisation, Equities or Other Assets.

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Impaired Assets up 10% HoH

• Increase in Impaired Assets HoH driven by Australian Corporate & Commercial business, Institutional, and New Zealand Agriculture business.

ANZ Basel III Pillar 3 disclosure September 2016

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Provision coverage remains sound

• The total Provision ratio decreased by 4bps HoH to 1.19% driven by higher Credit Risk Weighted Assets (following changes in mortage risk weightings) in conjunction with an increase in individual provision balance. Collective Provision ratio decreased by 4bps HoH to 0.82% (0.88% prior to revised Risk Weight treatment for Australia Mortgages) and continues to provide adequate coverage.

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Credit Risk Weighted Assets (CRWA) increased by $17.7bn HoH.

• Increase related to ‘other’ predominantly driven by $26bn regulator imposed increase to Australian Mortgages Risk Weight.

• FX movements increased CRWA by $3.7bn, mainly driven by depreciation of AUD against US and NZ currencies.

• Portfolio contraction decreased CRWA by $11.8bn, driven by reduction in Institutional Corporate assets and partially offset by an increase in Australia and New Zealand Residential Mortgages.

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*Exposure at Default is post Credit Risk Mitigation (CRM) and does not include Securitisation, Equities or Other Assets.

ANZ Basel III Pillar 3 disclosure September 2016

Chapter 2 - Introduction

Purpose of this document

This document has been prepared in accordance with the Australian Prudential Regulation Authority (APRA) ADI Prudential Standard (APS) 330: Public Disclosure.

APS 330 mandates the release to the investment community and general public of information relating to capital adequacy and risk management practices. APS 330 was established to implement Pillar 3 of the Basel Committee on Banking Supervision’s framework for bank capital adequacy[2] . In simple terms, the Basel framework consists of three mutually reinforcing ‘Pillars’:

Pillar 1 Minimum capital requirement	Pillar 2 Supervisory review process	Pillar 3 Market discipline
Minimum capital requirements for Credit Risk, Operational Risk, Market Risk and Interest Rate Risk in the Banking Book	Firm-wide risk oversight, Internal Capital Adequacy Assessment Process (ICAAP), consideration of additional risks, capital buffers and targets and risk concentrations, etc.	Regular disclosure to the market of qualitative and quantitative aspects of risk management, capital adequacy and underlying risk metrics

APS 330 requires the publication of various levels of information on a quarterly, semi-annual and annual basis. This document is the annual disclosure.

Basel in ANZ

In December 2007, ANZ received accreditation for the most advanced approaches permitted under Basel for credit risk and operational risk, complementing its accreditation for market risk. Effective January 2013, ANZ adopted APRA requirements for Basel III with respect to the measurement and monitoring of regulatory capital.

Verification of disclosures

These Pillar 3 disclosures have been verified in accordance with Board approved policy, including ensuring consistency with information contained in ANZ’s Financial Report and in Pillar 1 returns provided to APRA. In addition ANZ’s external auditor has performed an agreed upon procedure review with respect to these disclosures.

Comparison to ANZ’s Financial Reporting

These disclosures have been produced in accordance with regulatory capital adequacy concepts and rules, rather than in accordance with accounting policies adopted in ANZ’s financial reports. As such, there are different areas of focus and measures in some common areas of disclosures. These differences are most pronounced in the credit risk disclosures, for instance:

The principal method for measuring the amount at risk is Exposure at Default (EAD), which is the estimated amount of exposure likely to be owed on a credit obligation at the time of default. Under the Advanced Internal Ratings Based (AIRB) approach in APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk, banks are accredited to provide their own estimates of EAD for all exposures (drawn, commitments or contingents) reflecting the current balance as well as the likelihood of additional drawings prior to default.
Loss Given Default (LGD) is an estimate of the amount of losses expected in the event of default. LGD is essentially calculated as the amount at risk (EAD) less expected net recoveries from realisation of collateral as well as any post default repayments of principal and interest.
Most credit risk disclosures split ANZ’s portfolio into regulatory asset classes, which span areas of ANZ’s internal divisional and business unit organisational structure.

Unless otherwise stated, all amounts are rounded to AUD millions.

2 Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards: A Revised Framework, 2004.

ANZ Basel III Pillar 3 disclosure September 2016

Chapter 3 – Risk appetite and governance

Risk types: ANZ is exposed to a broad range of inter-related business risks.

Credit risk is the risk of financial loss resulting from a counterparty falling to fulfill its obligations, or from a decrease in credit quality of a counterparty resulting in a loss in value.
Market risk stems from ANZ’s trading and balance sheet activities and is the risk to ANZ’s earnings arising from changes in interest rates, foreign exchange rates, credit spreads, volatility, correlations or from fluctuations in bond, commodity or equity prices.
Securitisation risk is the risk of credit related losses greater than expected due to a securitisation failing to operate as anticipated, or of the values and risks accepted or transferred, not emerging as expected.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The definition includes legal risk, and the risk of reputation loss, or damage arising from inadequate or failed internal processes, people and systems, but excludes strategic risk.
Equity risk is the risk of financial loss arising from the unexpected reduction in value of equity investments not held in the trading book including those of the Group’s joint ventures and associates.
Capital adequacy risk is the risk of loss arising from ANZ failing to maintain the level of capital required by prudential regulators and other key stakeholders (shareholders, debt investors, depositors, rating agencies etc.) to support ANZ's consolidated operations and risk appetite. Losses include those arising from diminished reputation, a reduction in investor/counter-party confidence, regulatory non-compliance (e.g. fines and banking licence restrictions) and an inability for ANZ to continue to do business
Compliance risk is defined as the probability and impact of an event that results in a failure to act in accordance with laws, regulations, industry standards and codes, internal policies and procedures and principles of good governance as applicable to ANZ’s businesses.
Liquidity and Funding risk is the risk that the Group is unable to meet its payment obligations as they fall due, including repaying depositors or maturing wholesale debt, or that the Group has insufficient capacity to fund increases in assets.
Reputation risk[3] is defined as the risk of loss caused by adverse perceptions of ANZ held by the public, the media, depositors, shareholders, investors, regulators, or rating agencies that directly or indirectly impact earnings, capital adequacy or value. Reputation Risk can arise as a result of poor control processes or a result of unexpected risks crystallising (e.g. credit, market or operational risks).
Insurance risk is defined as the risk of unexpected losses resulting from worse than expected claims experience (variation in timing and amount of insurance claims due to incidence or nonincidence of death, sickness, disability or general insurance claims) and includes inadequate or inappropriate underwriting, claims management, reserving, insurance concentrations, reinsurance management, product design and pricing which will expose an insurer to financial loss and the consequent inability to meet its liabilities.
Reinsurance risk - Reinsurance is an agreement in which one insurer (‘the reinsurer’) indemnifies another insurer for all or part of the risk of a policy originally issued and assumed by that other insurer. Reinsurance is a risk transfer tool between the insurer and reinsurer. The main risk that arises with reinsurance is counterparty credit risk. This is the risk that a reinsurer fails to meet their contractual obligations, i.e. to pay reinsurance claims when due. This risk is measured by assigning a counterparty credit rating or probability of default. Reinsurance counterparty credit risk is mitigated by restricting counterparty exposures on the basis of financial strength and concentration.
Strategic risks are risks that affect or are created by an organisation’s business strategy and strategic objectives. Where the strategy leads to an increase in other Key Material Risks (e.g. Credit Risk, Market Risk, Operational Risk) the risk management strategies associated with these risks form the primary controls.

3 Regulatory Capital is calculated in accordance with the definition of Operational Risk outlined in APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk, and therefore excludes reputation risk considerations.

ANZ Basel III Pillar 3 disclosure September 2016

Risk Appetite Framework

ANZ's Board is ultimately responsible for ANZ’s risk management framework, which includes the Group Risk Appetite Statement (RAS). The Group RAS is the document which clearly and concisely sets out the Board’s expectations regarding the degree of risk that ANZ is prepared to accept in pursuit of its strategic objectives and business plan.

The articulation of risk appetite and risk tolerances is central to a risk appetite statement. ANZ’s Group RAS conveys the following:

The degree of risk ( risk appetite ) that ANZ is prepared to accept in pursuit of its strategy, objectives and business plans with consideration of its shareholders’ and customers’ best interests.
For each material risk, ANZ has set the maximum level of risk ( risk tolerance ) that it is willing to operate within, expressed as a risk limit and based on its risk appetite, risk profile and capital strength. Risk tolerances translate risk appetite into operational limits for the day-to-day management of material risks, where possible.
The process for ensuring that risk tolerances are set at an appropriate level, based on an estimate of the impact in the event that a risk tolerance is breached, and the likelihood that each material risk is realised.
The process for monitoring compliance with each risk tolerance and for taking appropriate action in the event that it is breached; and
The timing and process for review of the risk appetite and risk tolerances.

Risk management governance

ANZ’s Board has ultimate responsibility for establishing processes, and monitoring the effectiveness of the processes for risk management. There are three key committees focused on risks that impact regulatory capital.

regulatory capital.
Risk Committee	The Board is principally responsible for overseeing the establishment by management of a sound risk management culture with an operational structure and the necessary resources to facilitate effective risk management throughout ANZ, and which in turn supports the ability of ANZ to operate consistently within its risk appetite and approves the risk appetite within which management is expected to operate and including ANZ’s risk appetite statement and risk management strategy; The purpose of the Risk Committee is to assist the Board of Directors in the effective discharge of its responsibilities for business, market, credit, equity and other investment, financial, operational, liquidity and reputational risk management and for the management of the Group’s compliance obligations. The Risk Committee also assists the Board by providing an objective non-executive oversight of the implementation by management of ANZ’s risk management framework and its related operation and by enabling an institution-wide view of ANZ’s current and future risk position relative to its risk appetite and capital strength. The Committee meets at least four times annually.
Audit Committee	Assists the Board of Directors in reviewing: financial reporting principles and policies, controls and procedures; the effectiveness of ANZ's internal control and risk management framework; the integrity of ANZ’s financial statements and the independent audit thereof and compliance with related legal and regulatory requirements; due diligence procedures; prudential supervision procedures; and other regulatory requirements to the extent relating to financial reporting and for reviewing reports from major subsidiary audit committees. It is also responsible for the appointment and evaluation of the external auditor. The committee meets at least four times annually.
Governance Committee	Amongst other matters, the Committee reviews the development of and approves all other corporate governance policies and principles applicable to ANZ and ensures an appropriate Board and Committee structure is in place. It ensures there is a robust and effective process for evaluating the performance of the Board, Board Committee and Non-Executive Directors. It also approves corporate sustainability objectives and reviews their progress in achieving them. The Committee meets at least twice annually.

The above Committees are exclusively comprised of non-executive directors. Members, including the chairperson are appointed by the Board and serve at the discretion of the Board and for such term or terms as the Board determines. Internal Audit provides independent and objective assurance around ANZ’s risk management and control effectiveness.

ANZ Basel III Pillar 3 disclosure September 2016

Executive Management Committees are responsible for co-ordination of risk matters for each of the areas of risk management. The Executive Committees most relevant to the risks described above and overall capital management at ANZ are as follows:

Group Asset and Liability Committee (GALCO) GALCO is responsible for the oversight and strategic management of the ANZ’s balance sheet, liquidity and funding positions and capital management activities. The committee meets at least four times annually. Capital Management Policy Committee (CMPC) CMPC is responsible for the oversight and control of the Group’s capital and portfolio measurement framework, addressing economic and regulatory capital requirements and is also responsible for making capital management and portfolio measurement related recommendations to the Risk Committee and ANZ Board. The committee meets six times per year or on an ‘as required’ basis. CMPC is a sub-committee of GALCO. Credit and Market Risk Committee (CMRC) CMRC is responsible for the oversight and control of credit, market, insurance and material financial risks across the ANZ Group. The committee meets monthly, with additional meetings as required. Credit Ratings System Oversight Committee (CRSOC) CRSOC oversees and controls the internal ratings system for credit risk in the wholesale and retail sectors, including credit model approvals and performance monitoring. CRSOC is assisted in its rating systems governance role by the Wholesale Ratings Working Group and the Retail Ratings Working Group. The committee meets at least four times per year or more frequently if required. Operational Risk Executive Committee (OREC) OREC is responsible for oversight of Operational Risk and Compliance Risk expected and unexpected risk profile and the related Control Environment. The committee meets at least four times annually. Reputation Risk Committee (RRC) RRC is responsible for assisting ANZ businesses, Risk, Corporate Affairs, and Legal in partnership to effectively manage reputation risk in relation to environmental, social, business, and regulatory issues across ANZ. The committee meets at least four times annually. Stress Testing Oversight Committee (STOC) STOC is responsible for the oversight and control of the Group’s stress testing framework, modeling and processes. The Committee meets at least three times per year, with additional meetings at the discretion of the Chair. STOC is a sub-committee of CMPC.

Processes and procedures relating to the operation of each of the Management Committees are documented in the committee charters.

September 2016

ANZ Basel III Pillar 3 disclosure

Chapter 4 – Capital reporting and measurement

Capital reporting and measurement

To ensure that a n Authorised D eposit-takin g Institution (ADI) is adeq u ately capital i sed on both a st a ndalone and group basis, APRA adopts a tiered app r oach to the m easuremen t of an ADI’s capi t al adequacy b y assessing t he ADI’s financial strengt h at three lev e ls:

L evel 1 - being the ADI i.e. Australia a n d New Zealand Banking G roup Limited , consolidate d with A PRA approved subsidiarie s , to form the ADI’s Extend e d Licensed Entity (ELE).
L evel 2 - be i ng the consolidated gro u p for financial reporting purposes a d justed to e xclude assoc i ates activitie s and certain s ubsidiaries excluded under APS 001: D e finitions tha t u ndertake the following bu s iness activiti e s:
Insurance businesses (including fri e ndly societie s and health funds).
Acting a s manager, responsible ent i ty, approved trustee, trus t ee or similar role in relation to funds m a nagement.
Non-fina n cial (commercial) operati o ns.
Securitis a tion special p urpose vehi c les to which a ssets have b e en transferr e d in accorda n ce with AP R A's requirem e nts as set out in APS 120: Securitisatio n .

 L evel 3 - the c onsolidated group for fina n cial reporting purposes.

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Refer to Note 3 3 of ANZ’s 2 0 16 Annual R eport for a list of all m a terial subsi d iaries and a brief des c ription of the i r key activiti e s.

ANZ measures capital adequac y monthly an d reports for prudential purposes on a L evel 1 and L e vel 2 basi s . This Pillar 3 report is ba s ed on the Le v el 2 prudential structure.

APR A is extendi n g its prudential supervisi o n framework to Conglo m erate Grou p s via the Level 3 fra m ework which will regulate a bancassur a nce group s u ch as ANZ as a single ec o nomic entit y with minimum capital r equirements and addition a l monitoring of risk expos u re levels.

In August 2016, A PRA confir m ed the defer r al of capital requirements for Conglo m erate Groups until 201 9 at the earliest, to allow final form o f the capital requirements arising fro m Financial S y stem Inq u iry (FSI) re c ommendatio n s and international initi a tives that a re already in progress t o be determined.

The non-capital c omponents o f the Level 3 framework covering gro u p governan c e, risk expo s ures, intr a group trans a ctions and other risk m anagement and complia n ce require m ents will become effe c tive on 1 Jul y 2017. ANZ is not expec t ing any mat e rial impact o n its operatio n s based upon the curr e nt version o f these standards.

ANZ Basel III Pillar 3 disclosure September 2016

Chapter 5 – Capital and Capital Adequacy

Table 1 Common Disclosure template

The head of the Level 2 Group to which this prudential standard applies is Australia and New Zealand Banking Group Limited.

Table 1 of this chapter consists of a Common Disclosure template that assists users in understanding the differences between the application of the Basel III reforms in Australia and those rules as detailed in the document Basel III: A global regulatory framework for more resilient banks and banking systems, issued by the Bank for International Settlements. The common disclosure template in this chapter is the post January 2018 version as ANZ is fully applying the Basel III regulatory adjustments, as implemented by APRA. The capital conservation and countercyclical buffers referred to in rows 64 to 67 commenced on 1 January 2016 and the phase out period for capital instruments began on 1 January 2013.

The information in the lines of the template have been mapped to ANZ’s Level 2 balance sheet, which adjusts for non-consolidated subsidiaries as required under APS 001: Definitions. Where this information cannot be mapped on a one to one basis, it is provided in an explanatory table. ANZ’s material non-consolidated subsidiaries are also listed in this chapter.

Restrictions on Transfers of Capital within ANZ

ANZ operates branches and locally incorporated subsidiaries in many countries. These operations are capitalised at an appropriate level to cover the risks in the business and to meet local prudential requirements. This level of capitalisation may be enhanced to meet local taxation and operational requirements. Any repatriation of capital from subsidiaries or branches is subject to meeting the requirements of the local prudential regulator and/or the local central bank. Apart from ANZ’s operations in New Zealand, local country capital requirements do not impose any material call on ANZ’s capital base. ANZ undertakes banking activities in New Zealand principally through its wholly owned subsidiary, ANZ Bank New Zealand Limited, which is subject to minimum capital requirements as set by the Reserve Bank of New Zealand (RBNZ). The RBNZ adopted the Basel II framework, effective from 1 January 2008 and Basel III reforms from 1 January 2013 and ANZ Bank New Zealand Limited has been accredited to use the advanced approach for the calculation of credit risk and operational risk. ANZ Bank New Zealand Limited maintains a buffer above the minimum capital base required by the RBNZ. This capital buffer has been calculated via the ICAAP undertaken for ANZ Bank New Zealand Limited, to ensure ANZ Bank New Zealand Limited is appropriately capitalised under stressed economic scenarios.

ANZ Basel III Pillar 3 disclosure September 2016

Table 1 Common disclosure template

					Sep 16 $M	Reconciliation Table Reference
Common Equity Tier 1 Capital: instruments and reserves
1	Directly issued qualifying ordinary shares (and equivalent for mutually-owned entities) capital				28,965	Table A
2	Retained earnings				27,119	Table B
3	Accumulated other comprehensive income (and other reserves)				1,074	Table C
4	Directly issued capital subject to phase out from CET1 (only applicable to mutually-owned companies)				n/a
5	Ordinary share capital issued by subsidiaries and held by third parties (amount allowed in group CET1)				50	Table D
6 Common Equity Tier 1 capital before regulatory adjustments					57,208
Common Equity Tier 1 capital : regulatory adjustments
7	Prudential valuation adjustments				-
8	Goodwill (net of related tax liability)				3,912	Table E
9	Other intangibles other than mortgage servicing rights (net of related tax liability)				4,244	Table F
10	Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)				16	Table J
11	Cash-flow hedge reserve				329
12	Shortfall of provisions to expected losses				700	Table G
13	Securitisation gain on sale				-
14	Gains and losses due to changes in		own credit risk	on fair valued liabilities	4
15	Defined benefit superannuation fund net assets				88	Table H
16	Investments in own shares (if not already netted off paid-in capital on reported balance sheet)				-
17	Reciprocal cross-holdings in common equity				-
	Investments in the capital of banking, financial and insurance entities that are outside the scope of
18	regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10%				-
	of the issued share capital (amount		above 10% threshold)
	Significant investments in the ordinary shares of			banking, financial and insurance entities that are
19	outside the scope of regulatory consolidation, net of eligible short positions (amount above 10%				1,951	Table I
	threshold)
20	Mortgage service rights (amount above 10% threshold)				n/a
21	Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability)				-
22	Amount exceeding the 15% threshold				-
23		of which: significant investments in the ordinary shares of financial entities			-
24		of which: mortgage servicing rights			n/a
25		of which: deferred tax assets arising from temporary differences			-
26	National specific regulatory adjustments (sum of rows 26a - 26j)				6,697
26a		of which: treasury shares			-
26b		of which: offset to dividends declared under a dividend reinvestment plan (DRP), to the extent that the dividends are used to purchase new ordinary shares issued by the ADI			-
26c		of which: deferred fee income			(238)
26d		of which: equity investments in	financial institutions not reported in rows 18, 19 and 23		4,833	Table I
26e		of which: deferred tax assets not reported in rows 10, 21 and 25			883	Table J
26f		of which: capitalised expenses			1,148	Table K
26g		of which: investments in commercial (non-financial) entities that are deducted under APRA prudential requirements			30	Table L
26h		of which: covered bonds in excess of asset cover in pools			-
26i		of which: undercapitalisation of a non-consolidated subsidiary			-
26j		of which: other national specific	regulatory adjustments not reported in rows 26a to 26i		41
27	Regulatory adjustments applied to CET1 due to deductions			insufficient Additional Tier 1 and Tier 2 to cover	-
28	Total regulatory adjustments to CET1				17,941
29	Common Equity Tier 1 Capital (CET1)				39,267

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ANZ Basel III Pillar 3 disclosure September 2016

34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiarie and held by third parties (amount allowed in group AT1)	34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiarie and held by third parties (amount allowed in group AT1)
35 of which: instruments issued by subsidiaries subject to phase out
36 Additional Tier 1 Capital before regulatory adjustments

Additional Tier 1 Capital: regulatory adjustments
37 Investments in own Additional Tier 1 instruments
38 Reciprocal cross-holdings in Additional Tier 1 instruments
Investments in the capital of banking, financial and insurance entities that are outside the scope of
39 regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10%
of the issued share capital (amount above 10% threshold)
40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions)
41 National specific regulatory adjustments (sum of rows 41a - 41c)
41a of which: holdings of capital instruments in group members by other group members on behalf of third parties
41b of which: investments in the capital of financial institutions that are outside the scope of regulatory consolidations not reported in rows 39 and 40
41c of which: other national specific regulatory adjustments not reported in rows 41a and 41b
42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions
43 Total regulatory adjustments to Additional Tier 1 capital
44 Additional Tier 1 capital (AT1)
45 Tier 1 Capital (T1=CET1+AT1)

Tier 2 Capital: instruments and provisions
46 Directly issued qualifying Tier 2 instruments
47 Directly issued capital instruments subject to phase out from Tier 2
48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group T2)
49 of which: instruments issued by subsidiaries subject to phase out
50 Provisions
51 Tier 2 Capital before regulatory adjustments

Tier 2 Capital: regulatory adjustments
52 Investments in own Tier 2 instruments
53 Reciprocal cross-holdings in Tier 2 instruments
Investments in the Tier 2 capital of banking, financial and insurance entities that are outside the
54 scope of regulatory consolidation, net of eligible short positions, where the ADI does not own more
than 10% of the issued share capital (amount above 10% threshold)
55 Significant investments in the Tier 2 capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions
56 National specific regulatory adjustments (sums of rows 56a - 56c)
56a of which: holdings of capital instruments in group members by other group members on behalf of third parties
56b of which: investments in the capital of financial institutions that are outside the scope of regulatory consolidation not reported in rows 54 and 55

56c of which: other national specific regulatory adjustments not reported in rows 56a and 56b	-
57 Total regulatory adjustments to Tier 2 capital	159
58 Tier 2 capital (T2)	10,328
59 Total capital (TC=T1+T2)	58,613
60 Total risk-weighted assets based on APRA standards	408,582

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ANZ Basel III Pillar 3 disclosure September 2016

			Sep 16	Reconciliation Table
			$M	Reference
Capital ratios and buffers
61	Common Equity Tier 1 (as a percentage of risk-weighted assets)		9.6%
62	Tier 1 (as a percentage of risk-weighted assets)		11.8%
63	Total capital (as a percentage of risk-weighted assets)		14.3%
64	Buffer requirement (minimum CET1 requirement of 4.5% plus capital conservation buffer of 2.5% plus any countercyclical buffer requirements expressed as a percentage of risk-weighted assets)		8.014%
65		of which: capital conservation buffer requirement	3.5%4
66		of which: ADI-specific countercyclical buffer requirements	0.014%
67		of which: G-SIB buffer requirement (not applicable)	n/a
68 Common Equity Tier 1 available to meet buffers (as a percentage of risk-weighted assets)			5.1%
National minima (if different from Basel III)
69 National Common Equity Tier 1 minimum ratio (if different from Basel III minimum)			n/a
70 National Tier 1 minimum ratio (if different from Basel III minimum)			n/a
71 National total capital minimum ratio (if different from Basel III minimum)			n/a
Amount below thresholds for deductions (not risk-weighted)
72 Non-significant investments in the capital of other financial entities			104
73 Significant investments in the ordinary shares of financial entities			4,792	Table I
74 Mortgage servicing rights (net of related tax liability)			n/a
75 Deferred tax assets arising from temporary differences (net of related tax liability)			883	Table J
Applicable caps on the inclusion of provisions in Tier 2
76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap)			267
77 Cap on inclusion of provisions in Tier 2 under standardised approach			445
78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap)			-
79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approach			1,899
Capital		instruments subject to phase-out arrangements (only application between 1 January
2018 to		1 January 2022)
80 Current cap on CET1 instruments subject to phase out arrangements			n/a
81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities)			n/a
82 Current cap on AT1 instruments subject to phase out arrangements			3,589
83 Amount excluded from AT1 instruments due to cap (excess over cap after redemptions and maturities)			-
84 Current cap on T2 instruments subject to phase out arrangements			4,122
85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities)			1,474

Counter Cyclical Capital Buffer

Counter Cyclical Capital Buffer
Geographic breakdown of Private Sector Credit	Hong Kong	Sweden	Norway	Other	Total
Exposures	$M	$M	$M	$M	$M
RWA for all private sector credit exposures	5,747	423	276	317,418	323,864
Jurisdictional buffer set by national authorities	0.625%	1.500%	1.500%	0.000%	n/a
Countercyclical buffer requirement	0.011%	0.002%	0.001%	0.000%	0.014%

From 1 January 2016, ADIs are required to hold capital buffers determined by the national authority of jurisdictions where they have private sector credit exposures based on credit conditions in those markets. The countercyclical capital buffer is designed to ensure that ADIs build up capital buffers when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk. This additional buffer can then be released during periods of stress, to reduce the risk of the supply of credit being impacted by regulatory capital requirements. The countercyclical capital buffer is to be applied by extending the range of the capital conservation buffer, which also came into effect from 1 January 2016.

The ADI specific buffer is the weighted average of the jurisdictional buffers advised by the relevant national authorities.

4 Includes 1.0% buffer applied by APRA to ADI’s deemed as domestic systemically important.

ANZ Basel III Pillar 3 disclosure September 2016

The following table shows ANZ's consolidated balance sheet and the adjustments required to derive the Level 2 balance sheet. The adjustments remove the external assets and liabilities of the entities deconsolidated for prudential purposes and reinstate any intragroup assets and liabilities, treating them as external to the Level 2 group.

	Balance	Adjustments	Balance	Template and
	Sheet as in		sheet under	Reconciliation
	published		scope of	Table
	financial		regulatory	Reference
	statements		consolidation
Assets	($m)	($m)	($m)
Cash	48,675	(5)	48,670
Settlement balances owed to ANZ	21,951	-	21,951
Collateral Paid	12,723	-	12,723
Trading securities	47,188	-	47,188
of which: Financial Institutions capital instruments			10	Table N
of which: Financial Institutions equity investments			-
of which: Investments in the capital of financial institutions			64	Table N
Derivative financial instruments	87,496	(3)	87,493
Available-for-sale assets	63,113	(1,363)	61,750
of which: Financial institutions equity instruments			828	Table I
of which: Other entities equity investments			21	Table L
Net loans and advances	575,852	(129)	575,723
of which: deferred fee income			(238)	Row 26c
of which: collective provision			(2,876)	Table G
of which: individual provisions			(1,307)	Table G
of which: capitalised brokerage			1,063	Table K
of which: Financial Institutions equity exposures			-	Table I
of which: Other equity exposures			-	Table L
of which: CET1 margin lending adjustment			41	Row 26j
of which: AT1 margin lending adjustment			1	Table M
Regulatory deposits	2,296	-	2,296
Due from controlled entities	-	91	91
of which: Significant investments in the Tier 2 capital of
banking, financial and insurance entities that are outside			85	Table N
the scope of regulatory consolidation
Shares in controlled entities	-	4,775	4,775
of which: Investment in deconsolidated financial subsidiaries			4,370	Table I
of which: AT1 significant investment in banking, financial
and insurance entities that are outside the scope of			405	Table M
regulatory consolidation
Investments in associates	4,272	(3)	4,269
of which: Financial Institutions			4,260	Table I
of which: Other Entities			9	Table L
Current tax assets	126	-	126
Deferred tax assets	623	147	770	Table J
of which: Deferred tax assets that rely on future profitability			16	Table J
Goodwill and other intangible assets	7,672	(1,917)	5,755
of which: Goodwill			3,551	Table E
of which: Software			2,202	Table F
of which: other intangible assets			2	Table F
Investments backing policy liabilities	35,656	(35,656)	-
Premises and equipment	2,205	(2)	2,203
Other assets	5,021	(1,367)	3,654
of which: Defined benefit superannuation fund net assets			110
Total Assets	914,869	(35,432)	879,437

ANZ Basel III Pillar 3 disclosure September 2016

	Balance	Adjustments	Balance	Template and
	Sheet as in		sheet under	Reconciliation
	published		scope of	Table
	financial		regulatory	Reference
	statements		consolidation
Liabilities	($m)	($m)	($m)
Settlement balances owed by ANZ	10,625	(1)	10,624
Collateral Received	6,386	-	6,386
Deposits and other borrowings	588,195	5,361	593,556
Derivative financial instruments	88,725	(5)	88,720
Due to controlled entities	-	796	796
Current tax liabilities	188	(195)	(7)
Deferred tax liabilities	227	(262)	(35)	Table J
of which: related to intangible assets			63	Table F
of which: related to capitalised expenses			4	Table K
of which: related to defined benefit super assets			22	Table H
Policy liabilities	36,145	(36,145)	-
External unit holder liabilities (life insurance funds)	3,333	(3,333)	-
Provisions	1,209	(47)	1,162
Payables and other liabilities	8,865	(1,252)	7,613
Debt Issuances	91,080	10	91,090
Subordinated Debt	21,964	17	21,981
of which: Directly issued qualifying Additional Tier 1 instruments			6,612	Table M
of which: Directly issued capital instruments subject to phase out from Additional Tier 1			2,408	Table M
of which: Additional Tier 1 Instruments issued by subsidiaries held by third parties			473	Table M
of which: Directly issued capital instruments subject to phase out from Tier 2			5,530	Table N
of which: Directly issued qualifying Tier 2 instruments			6,162	Table N
of which: instruments issued by subsidiaries subject to phase out			796	Table N
Total Liabilities	856,942	(35,056)	821,886

Net Assets	57,927	(376)	57,551
	Balance	Adjustments	Balance	Template and
	Sheet as in		sheet under	Reconciliation
	published		scope of	Table
	financial		regulatory	Reference
	statements		consolidation
Shareholders’ equity	($m)	($m)	($m)
Ordinary Share Capital	28,765	395	29,160	Table A
of which: Share reserve			195	Table A & C
Reserves	1,078	(129)	949	Table C
of which: Cash flow hedging reserves			329	Row 11
Retained earnings	27,975	(638)	27,337	Table B
Share capital and reserves attributable to shareholders of the Company	57,818	(372)	57,446
Non-controlling interest	109	(4)	105	Table D
Total shareholders’ equity	57,927	(376)	57,551

ANZ Basel III Pillar 3 disclosure September 2016

The following reconciliation tables provide additional information on the difference between Table 1 Common Disclosure template and the Level 2 balance sheet.

		Sep 16	Table 1
Table	A	$M	Reference
	Issued capital	29,160
less	Reclassification to reserves	(195)	Table C
	Regulatory Directly Issued qualifying ordinary shares	28,965	Row 1
		Sep 16	Table 1
Table	B	$M	Reference
	Retained earnings	27,337
less	Regulatory reclassification from significant investments in the ordinary shares of banking, financial andinsurance entitiesoutside the scopeof regulatoryconsolidation	(218)	Table I
	Retained earnings	27,119	Row 2
		Sep 16	Table 1
Table	C	$M	Reference
	Reserves	949
add	Reclassification from Issued Capital	195	Table A
less	Non qualifying reserves	(70)
	Reserves for Regulatory capital purposes (amount allowed in group CET1)	1,074	Row 3
		Sep 16	Table 1
Table	D	$M	Reference
	Non-controlling interests	105
less	Surplus capital attributable to minority shareholders	(55)
	Ordinary share capital issued by subsidiaries and held by third parties	50	Row 5
		Sep 16	Table 1
Table	E	$M	Reference
	Goodwill	3,551
add	Goodwill component of investments in financial associates	361	Table I
	Goodwill (net of related tax liability)	3,912	Row 8
		Sep 16	Table 1
Table	F	$M	Reference
	Software	2,202
	Other intangible assets	2
less	Associated deferred tax liabilities	(63)
add	Regulatory reclassification from significant investments in the ordinary shares of banking, financial and insurance entities outside the scope of regulatory consolidation	2,103	Table I
	Other intangibles other than mortgage servicing rights (net of related tax liability)	4,244	Row 9

ANZ Basel III Pillar 3 disclosure September 2016

		Sep 16	Table 1
Table	G	$M	Reference
	Qualifying collective provision
	Collective provision	(2,876)
less	Non-qualifying collective provision	350
less	Standardised collective provision	267	Row 50
less	Non-defaulted expected loss	2,959
	Non-Defaulted: Expected Loss - Eligible Provision Shortfall	700
	Qualifying individual provision
	Individual provision	(1,307)
add	Additional individual provisions for partial write offs	(509)
less	Standardised individual provision	195
add	Collective provision on advanced defaulted	(304)
less	Defaulted expected loss	1,909
	Defaulted: Expected Loss - Eligible Provision Shortfall	-
	Gross deduction	700	Row 12
		Sep 16	Table 1
Table	H	$M	Reference
	Defined benefit superannuation fund net assets	110
less	Associated deferred tax liabilities	(22)
	Defined benefit superannuation fund net assets	88	Row 15
		Sep 16	Table 1
Table	I	$M	Reference
Investment in deconsolidated financial subsidiaries		4,370
less Regulatory reclassification to Retained Earnings and Other Intangible Assets		(2,321)	Tables B & F
add Investment in financial associates		4,260
add Investment in financial institutions Available for Sale		795
less Goodwill component of investments in financial associates		(361)	Table E
less Amount below 10% threshold of CET 1		(4,792)	Row 73
Significant investments in the ordinary shares of banking, financial and insurance entities
that are outside the scope of regulatory consolidation, net of eligible short positions		1,951	Row 19
(amount above 10% threshold)
add Amount below the 10% threshold of CET 1		4,792	Row 73
Investments in the capital of banking, financial and insurance entities that are outside the scope of
add regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10%		-
of the issued share capital – trading security exposures
Investments in the capital of banking, financial and insurance entities that are outside the scope of
add regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10%		33
of the issued share capital - Available for Sale exposures
Investments in the capital of banking, financial and insurance entities that are outside the scope of
regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10%		-
of the issued share capital - Loan exposures
Investments in the capital of banking, financial and insurance entities that are outside the scope of
regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10%		8
of the issuedshare capital -Undrawn
Equity investment in financial institutions not reported in rows 18, 19 and 23		4,833	Row 26d
Deduction for equity holdings in financial institutions - APRA regulations		6,784

	Sep 16	Table 1
Table J	$M	Reference
Deferred tax assets	770
add Deferred tax liabilities	35
Deferred tax asset less deferred tax liabilities	805
less Deferred tax assets that rely on future profitability	(16)	Row 10
add Deferred tax liabilities on intangible assets, capitalised expenses and defined benefit superannuation assets	89
add Impact of calculating the deduction on a jurisdictional basis	5
Deferred tax assets not reported in rows 10, 21 and 25 of the Common Disclosure Template	883	Row 26e

ANZ Basel III Pillar 3 disclosure September 2016

		Sep 16	Table 1
Table	K	$M	Reference
Capitalised brokerage costs		1,063
Capitalised debt and capital issuance expenses		89
less Associated deferred tax liabilities		(4)
Capitalised expenses		1,148	Row 26f
		Sep 16	Table 1
Table	L	$M	Reference
Investments in non-financial Available for Sale equities		21
Investments in non financial associates		9
Non financial equity exposures (loans)		-
Equity exposures to non financial entities		30	Row 26g
		Sep 16	Table 1
Table	M	$M	Reference
Directly issued qualifying Additional Tier 1 Capital Instruments classified as liabilities		6,612
add Issue costs		51
less Fair value adjustment		(28)
Directly issued qualifying Additional Tier 1 Capital Instruments classified as liabilities		6,635	Row 30
Directly issued capital instruments subject to phase out from Additional Tier 1 – loan capital		2,408
add Issue costs		-
less Transitional adjustment		-
Directly issued capital instruments subject to phase out from Additional Tier 1		2,408	Row 33
Additional Tier 1 instruments issued by subsidiaries held by third parties		473
add Issue costs		5
Surplus capital attributable to third party holders		(97)
add AT1 Instruments issued by subsidiaries and held by third parties (amounts allowed in Group AT1)		381	Row34
Additional Tier 1 capital before regulatory adjustments		9,424	Row 36
less Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatoryconsolidation		(405)	Row 40
Other national specific regulatory adjustments not reported		(1)	Row 41
Additional Tier 1 capital		9,018	Row 44
		Sep 16	Table 1
Table	N	$M	Reference
Directly issued capital instruments subject to phase out from Tier 2		5,530
add Issue costs		41
less Amortisation of Tier 2 Capital Instruments subject to Phase out		(442)
less Fair value adjustment		(329)
less Transition adjustment		(1,474)
Directly issued capital instruments subject to phase out from Tier 2		3,326	Row 47
Instruments issued by subsidiaries subject to phase out from Tier 2		796
less Surplus capital attributable to third party holders		(64)
Instruments issued by subsidiaries subject to phase out from Tier 2		732	Row 49
add Directly issued qualifying Tier 2 instruments		6,162	Row 46
add Provisions		267	Table G
Tier 2 capital before regulatory adjustments		10,487	Row 51
less Investments in own Tier 2 instruments (trading limit)		(10)	Row 52
less Significant investments in the Tier 2 capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions		(85)	Row 55
less Investments in the capital of financial institutions that are outside the scope of regulatory consolidation not reported in rows 54 and 55		(64)	Row 56b
Tier 2 capital		10,328	Row 58

ANZ Basel III Pillar 3 disclosure September 2016

The following table provides details of entities included within the accounting scope of consolidation but excluded from regulatory consolidation.

but excluded from regulatory consolidation.
Entity	Activity	Total Assets	Total Liabilities
		($M)	($M)
ACN 003 042 082 Limited	Investment	134	-
ACN 008 647 185 Pty Ltd	Corporate	-	-
ANZ ILP Pty Ltd	Incorporated Legal Practice	1	-
ANZ Insurance Broker Co Ltd	Insurance Broker	17	-
ANZ Investment Services (New Zealand) Limited	Funds Manager	41	15
ANZ Lenders Mortgage Insurance Pty Limited	Mortgage insurance	2,398	1,937
ANZ Life Assurance Company Pty Ltd	Insurance	-	-
ANZ New Zealand Investments Limited	Funds Manager	110	25
ANZ New Zealand Investments Nominees Limited	Trustee/Nominee	-	-
ANZ Private Equity Management Limited	Investment	-	-
ANZ Self Managed Super Ltd	Investment	-	-
ANZ Specialist Asset Management Limited	Trustee/Nominee	14	7
ANZ Wealth Alternative Investments Management Pty Ltd	Investment	1,475	1,474
ANZ Wealth Australia Limited	Holding Company / Corporate	2,763	-
ANZ Wealth New Zealand Limited	Holding Company	490	-
ANZcover Insurance Private Ltd	Captive-Insurance	163	109
AUT Administration Pty Ltd	Corporate	1	-
Capricorn Financial Advisers Pty Ltd	Advice	-	2
Elders Financial Planning Pty Ltd	Advice	9	1
Financial Investment Network Group Pty Ltd	Advice	105	1
Financial Lifestyle Solutions Pty Limited	Advice	4	2
Financial Planning Hotline Pty Ltd	Advice	-	-
Financial Services Partners Holdings Pty Limited	Holding Company / Advice	2	-
Financial Services Partners Incentive Co Pty Limited	Advice	-	-
Financial Services Partners Management Pty Limited	Advice	-	-
Financial Services Partners Pty Ltd	Advice	3	3
FSP Funds Management Limited	Advice	1	-
FSP Group Pty Limited	Holding Company / Advice	17	1
FSP Portfolio Administration Limited	Advice	1	-
FSP Super Pty Limited	Advice	6	-
Integrated Networks Pty Limited	Holding Company / Advice	44	-
Mercantile Mutual Financial Services Pty Ltd	Investment	-	-
Millennium 3 Financial Services Group Pty Ltd	Advice	42	17
Millennium 3 Financial Services Pty Ltd	Advice	16	8
Millennium 3 Mortgage Platform Services Pty Limited	Advice	-	-
Millennium 3 Professional Services Pty Ltd	Advice	1	-
Nova Pacific Holdings Pty Limited	Investment	-	-
OASIS Asset Management Limited	Investment	11	4
OASIS Fund Management Limited	Superannuation	6	4
OneAnswer Nominees Limited	Trustee/Nominee	-	-
OnePath Administration Pty Ltd	Corporate	76	34
OnePath Custodians Pty Ltd	Superannuation	49	4
OnePath Financial Planning Pty Ltd	Advice	1	-
OnePath Funds Management Limited (RE)	Investment	66	20
OnePath General Insurance Pty Ltd	Insurance	166	103
OnePath Investment Holdings Pty Ltd	Investment	7	-
OnePath Life (NZ) Limited	Insurance	883	315
OnePath Life Australia Holdings Pty Ltd	Holding Company / Corporate	3,000	-
OnePath Life Limited	Insurance	39,954	37,363
Polaris Financial Solutions Pty Limited	Advice	-	-

ANZ Basel III Pillar 3 disclosure September 2016

	Activity	Total Assets	Total Liabilities
Entity		($M)	($M)
RI Advice Group Pty Ltd	Advice	13	2
RI Central Coast Pty Ltd	Advice	1	-
RI Gold Coast Pty Ltd	Advice	1	-
RI Maroochydore Pty Ltd	Advice	-	-
RI Newcastle Pty Ltd	Advice	2	-
RI Parramatta Pty Ltd	Advice	1	-
RI Rockhampton & Gladstone Pty Ltd	Advice	2	-
RI Townsville Pty Ltd	Advice	-	-
Rieas Pty Ltd	Advice	-	-
Shout for Good Pty Ltd	Corporate	-	-
SIL Nominees Pty Limited	Investment	-	-
Tandem Financial Advice Pty Limited	Advice	-	-
Union Investment Company Pty Limited	Advice	-	-

ANZ Basel III Pillar 3 disclosure September 2016

Table 2 Main features of capital instruments

As the main features of ANZ’s capital instruments are updated on an ongoing basis, ANZ has provided this information separately in the Regulatory Disclosures section of its website.

Table 3 Capital adequacy, Table 4 Credit risk, Table 5 Securitisation

The above tables are produced at the ‘quarters ending’ 30 June and 31 December.

Table 6 Capital adequacy

Capital management

ANZ pursues an active approach to capital management, which is designed to protect the interests of depositors, creditors and shareholders. This involves the on-going review and Board approval of the level and composition of ANZ’s capital base, assessed against the following key policy objectives:

Regulatory compliance such that capital levels exceed APRA’s, ANZ’s primary prudential supervisor, minimum Prudential Capital Ratios (PCRs) both at Level 1 (the Company and specified subsidiaries) and Level 2 (ANZ consolidated under Australian prudential standards), along with US Federal Reserve’s minimum Level 2 requirements under ANZ’s Foreign Holding Company Licence in the United States of America;
Capital levels are aligned with the risks in the business and to meet strategic and business development plans through ensuring that available capital exceeds the level of Economic Capital. Economic Capital is an internal estimate of capital levels required to support risk and unexpected losses above a desired target solvency level; and
An appropriate balance between maximising shareholder returns and prudent capital management principles.

ANZ achieves these objectives through an Internal Capital Adequacy Assessment Process (ICAAP) whereby ANZ conducts detailed strategic and capital planning over a medium term time horizon.

Annually, ANZ conducts a detailed strategic planning process over a three year time horizon, the outcomes of which are embodied in the Strategic Plan. This process involves forecasting key economic variables which Divisions use to determine key financial data for their existing business. New strategic initiatives to be undertaken over the planning period and their financial impact are then determined. These processes are used for the following:

Reviewing capital ratios, targets, and levels of different classes of capital against ANZ’s risk profile and risk appetite outlined in the Strategic Plan. ANZ’s capital targets reflect the key policy objectives above, and the desire to ensure that under specific stressed economic scenarios capital levels have sufficient capital to remain above both Economic Capital and PCR requirements;
Stress tests are performed under different economic conditions to ensure a comprehensive review of ANZ’s capital position both before and after mitigating actions. The stress tests determine the level of additional capital (i.e. the ‘stress capital buffer’) needed to absorb losses that may be experienced during an economic downturn; and
Stress testing is integral to strengthening the predictive approach to risk management and is a key component in managing risks, asset writing strategies and business strategies. It creates greater understanding of the impacts on financial performance through modeling relationships and sensitivities between geographic, industry and Divisional exposures under a range of macroeconomic scenarios. ANZ has a dedicated stress testing team within Risk Management that models and reports to management and the Board’s Risk Committee on a range of scenarios and stress tests.

Results are subsequently used to:

Recalibrate ANZ’s management targets for minimum and operating ranges for its respective classes of capital such that ANZ will have sufficient capital to remain above both Economic Capital and regulatory requirements; and
Identify the level of organic capital generation and hence determine current and future capital issuance requirements for Level 1 and Level 2.

From these processes, a capital plan is developed and approved by the Board which identifies the capital issuance requirements, capital securities maturity profile, and options around capital products, timing and markets to execute the capital plan under differing market and economic conditions.

The capital plan is maintained and updated through a monthly review of forecast financial performance, economic conditions and development of business initiatives and strategies. The Board and senior management are provided with monthly updates of ANZ’s capital position. Any actions required to ensure ongoing prudent capital management are submitted to the Board for approval.

ANZ Basel III Pillar 3 disclosure September 2016

Regulatory environment

ANZ’s regulatory capital calculation is governed by APRA’s Prudential Standards which adopt a riskbased capital assessment framework based on the Basel III capital measurement standards. This riskbased approach requires eligible capital to be divided by total risk weighted assets (RWAs), with the resultant ratio being used as a measure of an Authorised Deposit-taking Institution’s (ADIs) capital adequacy. APRA determines PCRs for Common Equity Tier 1 (CET1), Tier 1 and Total Capital, with capital as the numerator and RWAs as the denominator.

Regulatory capital is divided into Tier 1, carrying the highest capital elements, and Tier 2, which has lower capital elements, but still adds to the overall strength of the ADI.

Tier 1 capital is comprised of Common Equity Tier 1 capital less deductions and Additional Tier 1 capital instruments. Common Equity Tier 1 capital comprises shareholders’ equity adjusted for items which APRA does not allow as regulatory capital or classifies as lower forms of regulatory capital. Common Equity Tier 1 capital includes the following significant adjustments:

Reserves excluding the hedging reserve and reserves of insurance and funds management subsidiaries excluded for Level 2 purposes;
Retained earnings excluding retained earnings of insurance and funds management subsidiaries excluded for Level 2 purposes, but includes capitalised deferred fees forming part of loan yields that meet the criteria set out in the prudential standard;
Inclusion of qualifying treasury shares; and
Current year net of tax earnings less profits of insurance and funds management subsidiaries excluded for Level 2 purposes.

Additional Tier 1 capital instruments are high quality components of capital that provide a permanent and unrestricted commitment of funds, are available to absorb losses, are subordinated to the claims of depositors and senior creditors in the event of the winding up of the issuer and provide for fully discretionary capital distributions.

Deductions from the capital base comprise mainly deductions to the Common Equity Tier 1 component. These deductions are largely intangible assets, investments in insurance and funds management entities and associates, capitalised expenses (including loan and origination fees), and the amount of regulatory expected losses (EL) in excess of eligible provisions.

Tier 2 capital mainly comprises perpetual subordinated debt instruments and dated subordinated debt instruments which have a minimum term of five years at issue date.

Total Capital is the sum of Tier 1 capital and Tier 2 capital.

In addition to the prudential capital oversight that APRA conducts over the Company and the Group, the Company’s branch operations and major banking subsidiary operations are overseen by local regulators such as the Reserve Bank of New Zealand, the US Federal Reserve, the UK Prudential Regulation Authority, the Monetary Authority of Singapore, the Hong Kong Monetary Authority and the China Banking Regulatory Commission who may impose minimum capitalisation rates on those operations.

Throughout the financial year, the Company and the Group maintained compliance with the minimum Common Equity Tier 1, Tier 1 and Total Capital ratios set by APRA and the US Federal Reserve (as applicable) as well as applicable capitalisation rates set by regulators in countries where the Company operates branches and subsidiaries.

Regulatory development

There are a number of matters currently outstanding that may have an impact on ANZ’s regulatory capital in the future. Details of these matters are available in ANZ’s 2016 Full Year Results Announcement Group Results section, page 51 and 52, available on ANZ’s website: shareholder.anz.com/pages/results-announcement.

ANZ Basel III Pillar 3 disclosure September 2016

Table 6 Capital adequacy - Capital Ratio and Risk Weighted Assets

The following table provides the composition of capital used for regulatory purposes and capital adequacy ratios.

	Sep 16	Mar 16		Sep 15
Risk weighted assets(RWA)	$M	$M		$M
Subject to Advanced Internal Rating Based (IRB) approach
Corporate	130,799	139,643	150,165
Sovereign	6,634	6,185		6,664
Bank	14,884	15,061		17,445
Residential Mortgage	84,275	57,218		54,996
Qualifying Revolving Retail	7,334	7,744		7,546
Other Retail	31,360	30,681		32,990
Credit risk weighted assets subject to Advanced IRB approach	275,286	256,532	269,806

Credit risk Specialised Lending exposures subject to slotting approach5	36,100	35,066		32,240

Subject to Standardised approach
Corporate	20,459	22,149		25,341
Residential Mortgage	2,493	2,616		2,882
Other Retail	3,277	3,550		3,625
Credit risk weighted assets subject to Standardised approach	26,229	28,315		31,848

Credit Valuation Adjustment and Qualifying Central Counterparties	9,371	9,147		11,046
Credit risk weighted assets relating to securitisation exposures	1,203	1,194		1,156
Other assets	3,844	4,054		3,655
Total credit risk weighted assets	352,033	334,308	349,751
Market risk weighted assets	6,188	6,059		6,868
Operational risk weighted assets	38,661	37,688		37,885
Interest rate risk in the banking book (IRRBB) risk weighted assets	11,700	10,280		7,433
Total risk weighted assets	408,582	388,335	401,937
Capital ratios(%)6
Level 2 Common Equity Tier 1 capital ratio 8.5% 9.6%		8.2% n/a 9.8%		9.6%
Level 2 Tier 1 capital ratio	11.8%	11.6%		11.3%
Level 2 Total capital ratio	14.3%	13.7%		13.3%
Level 1: Extended licensed Common Equity Tier 1 capital ratio	9.7%	10.2%		9.6%
Level 1: Extended licensed entity Tier 1 capital ratio	12.1%	12.2%		11.6%
Level 1: Extended licensed entity Total capital ratio	14.7%	14.4%		13.7%
Other significant Authorised Deposit-taking Institution (ADI) or overseas bank subsidiary:
ANZ Bank New Zealand Limited –Common Equity Tier 1 capital ratio	10.0%	10.0%		10.5%
ANZ Bank New Zealand Limited - Tier 1 capital ratio	13.2%	12.2%		12.7%
ANZ Bank New Zealand Limited - Total capital ratio	13.7%	12.8%		13.6%

5 Specialised Lending exposures subject to slotting approach are those where the main servicing and repayment is from the asset being financed, and includes specified commercial property development/investment lending, project finance and object finance.

6 ANZ Bank New Zealand Limited’s capital ratios have been calculated in accordance with Reserve Bank of New Zealand prudential standards

ANZ Basel III Pillar 3 disclosure September 2016

Credit Risk Weighted Assets (CRWA)

Total CRWA increased $2.3billion (1%) from September 2015 to $352 billion at September 2016, including a $4.3 billion decrease due to foreign currency movements. The increase in IRB Residential Mortgage asset class includes an upward impact for the APRA determined correlation adjustment. Underlying portfolio growth in Australia and New Zealand contributed further to the increase in IRB Residential Mortgage and Specialised Lending asset classes. These increases were partially offset by portfolio contraction in our Institutional business which contributed to the decrease mainly seen in AIRB Corporate, Standardised Corporate and Bank asset classes.

Market Risk, Operational Risk and IRRBB RWA

Traded Market Risk RWA decreased AUD 0.7 billion (9.9%) over the year due to improved portfolio diversification and reduced specific risk exposure.

Increase in IRRBB RWA due to an increase in repricing and yield curve risk combined with a decrease in embedded gains.

The Operational Risk RWA increased by 2% since September 2015 with growth in Australia, New Zealand, and Asia Retail offset by a reduction in Institutional in line with portfolio contraction.

International capital ratio comparisons

Internationally comparable details

One of the main purposes of the Pillar 3 disclosures is to facilitate comparisons of banks, both within and across jurisdictions. International investors should be aware that there are a number of features of APRA’s implementation of Basel III that have the effect of making key capital adequacy ratios appear lower than would be the case if they were calculated under the rules in other jurisdictions.

The following table details the material differences between APRA’s Basel III prudential requirements and those of the Basel Committee on Banking Supervision (BCBS) as at 20 September 2015 on an Internationally Comparable basis. The Internationally Comparable capital ratios methodology is aligned with APRA’s information paper entitled International Capital Comparison Study (13 July 2015). The Basel III Internationally Comparable ratios do not include an estimate of the Basel I capital floor.

ANZ’s CET1, Tier 1 and Total Capital ratios as at 30 September 2016 on an Internationally Comparable basis were 14.5%, 17.4% and 20.7% respectively.

CET1 Tier 1 Capital Total Capital	CET1 Tier 1 Capital Total Capital
Regulatory Capital Frameworks Comparison
Basel III - APRA 9.6% 11.8% 14.3%
Differences relating to capital
Investments in FI's and deconsolidated entities 0.9% 0.9% 0.9%
Deferred Tax Assets 0.1% 0.1% 0.1%
Net Capitalised Expenses	0.2% 0.2% 0.2%
Differences related to risk weighted assets
Mortgages – 20% LGD floor & 15% correlation 1.1% 1.3% 1.6%
IRRBB RWA (APRA Pillar 1 approach) 0.3% 0.4% 0.4%
Specialised Lending (Advanced treatment) 0.6% 0.7% 0.8%
Unsecured Corporate Lending LGD 1.1% 1.3% 1.6%
Undrawn Corporate EAD 0.4% 0.5% 0.5%
Other RWA items 0.2% 0.2% 0.3%
Total Adjustments 4.9% 5.6% 6.4%
Basel III - Internationally Comparable 14.5% 17.4% 20.7%

ANZ Basel III Pillar 3 disclosure September 2016

The table below provides an explanation of the material differences between APRA’s Basel III capital rules and the International Comparable basis with the impact of converting APRA Basel III capital ratios to Internationally Comparable Basel III capital ratios.

Item	Description	Movement in ratio, APRA to Internationally Comparable
Significant investments in Financial Institutions (FI’s) and other deconsolidated subsidiaries	APRA requires full deduction against CET1 for investment in insurance and banking associates. On an Internationally Comparable basis, these investments are subject to concessional threshold before a deduction is required.	Increase ratio
Deferred Tax Assets	APRA requires all deferred tax assets, including those relating to temporary differences, to be deducted 100% from CET1. On an Internationally Comparable basis, deferred tax assets relating to temporary differences are first subject to concessional threshold before any deduction is required.	Increase ratio
Interest rate risk in the banking book (IRRBB)	APRA requires the inclusion of IRRBB within RWA Pillar 1 requirement. This is not required under the Basel III framework.	Increase ratio
Mortgages – 20% Loss Given Default (LGD) floor and 15% Correlation factor	APRA imposes a floor of 20% on the downturn Loss Given Default (LGD) used in advanced credit models for determining credit RWA’s for residential mortgages versus Basel framework of 10%. Additionally, from July 16, APRA also requires a higher correlation factor above the Basel framework 15% to raise average risk weighting of Australian residential mortgages to at least 25%.	Increase ratio
Specialised Lending	APRA requires the supervisory slotting approach be used in determining credit RWA for specialised lending exposures. The Internationally Comparable basis allows for the advanced internal ratings based approach to be used instead when calculating RWA for these exposures.	Increase ratio
Unsecured Corporate Lending LGD	Adjustment to align ANZ’s unsecured corporate lending LGD to 45% to be consistent with banks in other jurisdictions. The 45% LGD rate is also used in the Foundation Internal Ratings-based approach (FIRB).	Increase ratio
Undrawn Corporate Lending Exposure at Default (EAD)	To adjust ANZ’s credit conversion factors (CCF) for undrawn corporate loan commitments to 75% (also used in FIRB approach) to align with banks in other jurisdictions.	Increase ratio

ANZ Basel III Pillar 3 disclosure September 2016

Chapter 6 –Credit risk

Table 7 Credit risk – General disclosures

Definition of credit risk

Credit risk is the risk of financial loss resulting from a counterparty failing to fulfil its obligations, or from a decrease in credit quality of a counterparty resulting in a loss in value.

Regulatory approval to use the Advanced Internal Ratings-based approach

ANZ has been given approval by APRA to use the Advanced Internal Ratings-based approach to credit risk, under APS 113. As an AIRB bank, ANZ’s internal models generate the inputs into regulatory capital adequacy to determine the risk weighted exposure calculations for both on and offbalance sheet exposures, including undrawn portions of credit facilities, committed and contingent exposures and expected loss (EL) calculations.

ANZ’s internal models are used to generate three key risk components that serve as inputs to the IRB approach to credit risk:

PD is an estimate of the level of the risk of borrower default
EAD is defined as the expected facility exposure at the date of default
LGD is an estimate of the potential economic loss on a credit exposure, incurred as a consequence of obligor default.

There are, however, several small portfolios (mainly retail and local corporates in Asia Pacific) where ANZ applies the Standardised approach to credit risk, under APS 112 Capital Adequacy: Standardised Approach to Credit Risk.

Credit risk management framework and policies

ANZ has a comprehensive framework to manage credit risk and support sound growth for appropriate returns. The framework is top down, being defined by credit principles and policies. Credit policies, requirements and procedures cover all aspects of the credit life cycle such as transaction structuring, risk grading, initial approval, ongoing management and problem debt management, as well as specialist policy topics. The effectiveness of the credit risk management framework is assessed through various compliance and monitoring processes. These, together with portfolio selection, define and guide the credit process, organisation and staff.

Organisation

As described in Chapter 3, The Credit and Market Risk Committee (CMRC) is a senior executive level committee responsible for the oversight and control of credit, market, insurance and material financial risks across the ANZ Group. The Credit Rating System Oversight Committee (CRSOC) supports the CMRC, by providing oversight and control of the internal ratings system for credit risk in the wholesale and retail sectors, including credit model approvals and performance monitoring.

The primary responsibility for prudent and profitable management of credit risk assets and customer relationships rests with the business units. An independent credit risk management function is staffed by risk specialists. Independence is achieved by having all credit risk staff ultimately report to the CRO, even where they are embedded in business units. Risk provides independent credit assessment and approval on lending decisions, and also performs key roles in portfolio management such as development and validation of credit risk measurement systems, loan asset quality reporting, and development of credit policies and requirements.

The authority to make credit decisions is delegated by the Board to the CEO who in turn delegates authority to the CRO. The CRO in turn delegates some of his credit discretion to individuals as part of a ‘cascade’ of authority from senior to the most junior credit officers. Within ANZ, credit approval for material judgmental lending is made on a ‘dual approval’ basis, jointly by the business writer in the business unit and the respective independent credit risk officer. Individuals must be suitably skilled and accredited in order to be granted and retain a credit discretion. Credit discretions are reviewed on an annual basis, and may be varied based on the holder’s performance.

Programmed credit assessment typically covers retail and some small business lending, and refers to the automated assessment of credit applications using a combination of scoring (application and behavioural), policy rules and external credit reporting information. Where an application does not meet the automated assessment criteria it will be referred out for manual assessment, with assessors considering the decision tool recommendation.

ANZ Basel III Pillar 3 disclosure September 2016

Portfolio direction and performance

The credit risk management framework contains several important portfolio direction and performance tools which enable Risk to play a fundamental role in monitoring the direction and performance of the portfolio. These include:

Group and divisional level risk appetite strategies, business writing strategies & segment transaction guidelines are prepared by the businesses and set out appetite, planned portfolio growth, capital usage and risk/return profile, and also identify areas that may require attention to mitigate and improve risk management.
Regular portfolio reviews.
Exposure concentration limits, covering single customers, industries and cross border risk, to ensure a diversified portfolio.

ANZ uses portfolio monitoring and analysis tools, technologies and techniques to assist with portfolio risk assessment and management. These assist in:

Monitoring, analysing and reporting ANZ’s credit risk profile and progress in meeting portfolio objectives.
Calculating and reporting ANZ’s collective provision, economic capital, expected loss, regulatory RWA and regulatory expected loss.
Assessing the impact of emerging issues, and conducting ad hoc investigations and analysis.
Validating rating/scoring tools and credit estimates.
Ongoing review and refinement of ANZ's credit risk measurement and policy framework.

Reporting – overview and definitions

Credit risk management information systems, reporting and analysis are managed centrally and at the divisional and business unit level.

Periodic reporting provides confirmation of the effectiveness of processes, highlights emerging issues requiring attention and allows monitoring of portfolio trends by all levels of management and the Board.

Examples of reports include EAD, portfolio mix, risk grade profiles and migrations, RWAs, large exposure reporting, credit watch and control lists, impaired assets and provisions. Within the retail segments, monthly reporting packs are prepared that focus on such aspects as scoring and delinquency/slippage monitoring.

Exposure at Default

Exposure at Default is defined as the expected facility exposure at the date of default. Unless otherwise stated, throughout this disclosure EAD represents credit exposure net of offsets for credit risk mitigation such as guarantees, credit derivatives, netting and financial collateral.

Past Due Facilities

Facilities where a contractual payment has not been met or the customer is outside of contractual arrangements for a material length of time are deemed past due. Past due facilities include those operating in excess of approved arrangements or where scheduled repayments are outstanding but do not include impaired assets.

Impaired Assets

A facility for which there is doubt about timely payment of principal, interest and fees being achieved and / or a material credit obligation which is not well secured is 90 days or more past due. It includes all problem assets, off-balance sheet exposures and assets brought to ANZ’s balance sheet through the enforcement of security.

Restructured Items

A facility in which the original contractual terms have been modified to provide concessions of interest, principal, or other payments due, or for an extension in maturity for a non-commercial period for reasons related to the financial difficulties of the entity.

ANZ Basel III Pillar 3 disclosure September 2016

Collective Provisions

As well as holding individual provisions for credit loss, ANZ also holds a collective provision to cover credit losses which have been incurred but have not yet been specifically identified.

Calculation of the collective provision involves placing exposures in pools of similar assets with similar risk characteristics. The required collective provision is estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the collective pool and includes an allowance for inherent risk associated with the design and use of models. The initial calculation from historical loss experience may be adjusted based on current observable data such as changed economic conditions, and to take account of the impact of inherent risk of large concentrated losses within the portfolio.

The methodology underpinning calculation of collective provision from historical experience is predominantly based around the product of an exposure’s probability of default (PD), loss given default (LGD) and EAD. ANZ uses slightly different PD, LGD and EAD factors in the calculation of regulatory capital and regulatory EL, due to the different requirements of APRA and accounting standards. The key differences are:

ANZ must use more conservative LGD assumptions for regulatory capital purposes, such as the 20% LGD floor for retail mortgages and downturn LGD factors.
ANZ must use cycle-adjusted PDs for regulatory capital purposes, but uses point-in-time estimates to calculate provisions.

Essentially these differences reflect the effects of the credit cycle on credit losses. Point-in-time refers to losses at any given point in the credit cycle, cycle-adjusted refers to adjusting estimates to reflect a full credit cycle and downturn refers to losses at the worst of the cycle and is the most conservative estimate to use. Regardless of the adjustments, the starting point for all estimates is the output of the rating/scoring models and tools to satisfy the “in use” test[7] .

Individual Provisions

Individual provisions are assessed on a case-by-case basis for all individually managed impaired assets taking into consideration factors such as the realisable value of security (or other credit mitigants), the likely return available upon liquidation or bankruptcy, legal uncertainties, estimated costs involved in recovery, the market price of the exposure in secondary markets and the amount and timing of expected receipts and recoveries.

Write-offs

Facilities are written off against the related provision for impairment when they are assessed as partially or fully uncollectable, and after proceeds from the realisation of any collateral have been received. Where individual provisions recognised in previous periods have subsequently decreased or are no longer required, such impairment losses are reversed in the current period income statement.

Definition of default

ANZ uses the following definition of default:

ANZ considers that the customer is unlikely to pay its credit obligations in full, without recourse to actions such as realising security, or
the customer is at least 90 days past due on a credit obligation, or
the customer’s overdraft or other revolving facility/(ies) have been continuously outside approved limits for 90 or more consecutive days.

Specific provision and General Reserve for Credit Losses

Due to definitional differences, there is a difference in the split between ANZ’s individual provision and collective provision for accounting purposes and the specific provision and general reserve for credit losses (GRCL) for regulatory purposes. This does not impact total provisions, and essentially relates to the classification of collectively assessed provisions on defaulted accounts. The disclosures in this document are based on individual provisions and collective provisions, for ease of comparison with other published results.

7 One of the key criteria for regulatory acceptance of a rating model is that the outputs must be used in a wide range of ongoing management activities, to demonstrate that the model is used in day-to-day management of exposures and not just for regulatory capital calculation.

ANZ Basel III Pillar 3 disclosure September 2016

In order to provide better alignment to the prudential reporting of other IRB accredited ADIs, ANZ has changed the reporting of exposure at default (EAD) from a pre credit risk mitigation basis to post credit risk mitigation basis.

Exposure at Default in Table 7 represents credit exposure net of offsets for credit risk mitigation such as guarantees, credit derivatives, netting and financial collateral. It includes Advanced IRB, Specialised Lending and Standardised exposures, however does not include Securitisations, Equities or Other Assets exposures.

The March 2016 and September 2015 EAD values have been restated to provide comparative post credit risk mitigation basis EAD figures.

Table 7(b) part (i): Period end and average Exposure at Default[8]

			Sep 16
			Average	Individual
			Exposure	provision
	Risk Weighted	Exposure	at Defau	charge for	Write-offs for
	Assets	at Default	for half year	half year	half year
Advanced IRB approach	$M	$M	$M	$M	$M
Corporate	130,799	229,317	235,169	466	468
Sovereign	6,634	120,933	119,576	2	2
Bank	14,884	48,875	49,001	-	-
Residential Mortgage	84,275	348,394	342,854	33	17
Qualifying Revolving Retail	7,334	22,395	22,406	104	141
Other Retail	31,360	42,291	41,617	251	275
Total Advanced IRB approach	275,286	812,205	810,623	856	903

Specialised Lending	36,100	40,458	39,933	(1)	8

Standardised approach
Corporate	20,459	21,254	21,875	107	61
Residential Mortgage	2,493	6,851	7,017	2	3
Other Retail	3,277	3,279	3,416	83	91
Total Standardised approach	26,229	31,384	32,308	192	155

Credit Valuation Adjustment and Qualifying Central Counterparties	9,371	10,448	9,071	-	-

Total	346,986	894,495	891,935	1,047	1,066

8 Average Exposure at Default for half year is calculated as the simple average of the balances at the start and the end of each six month period.

ANZ Basel III Pillar 3 disclosure September 2016

			Mar 16
			Average	Individual
			Exposure	provision
	Risk Weighted	Exposure	at Defau	charge for	Write-offs for
	Assets	at Default	for half year	half year	half year
Advanced IRB approach	$M	$M	$M	$M	$M
Corporate	139,643	241,020	248,323	325	139
Sovereign	6,185	118,219	118,710	2	-
Bank	15,061	49,127	51,702	-	-
Residential Mortgage	57,218	337,314	330,244	10	16
Qualifying Revolving Retail	7,744	22,417	22,253	96	130
Other Retail	30,681	40,943	43,647	258	250
Total Advanced IRB approach	256,532	809,040	814,879	691	535

Specialised Lending	35,066	39,407	38,559	6	6

Standardised approach
Corporate	22,149	22,491	24,313	115	7
Residential Mortgage	2,616	7,182	7,497	(2)	4
Other Retail	3,550	3,556	3,596	82	104
Total Standardised approach	28,315	33,229	35,406	195	115

Credit Valuation Adjustment and Qualifying Central Counterparties	9,147	7,693	7,353	-	-

Total	329,060	889,369	896,197	892	656

			Sep 15
			Average	Individual
			Exposure	provision
	Risk Weighted	Exposure	at Defau	charge for	Write-offs for
	Assets	at Default	for half year	half year	half year
Advanced IRBapproach	$M	$M	$M	$M	$M
Corporate	150,165	255,628	252,666	157	183
Sovereign	6,664	119,201	112,614	(2)	-
Bank	17,445	54,276	58,127	-	-
Residential Mortgage	54,996	323,174	316,986	9	17
Qualifying Revolving Retail	7,546	22,088	22,011	102	145
Other Retail	32,990	46,351	46,236	279	272
Total Advanced IRB approach	269,806	820,718	808,640	545	617

Specialised Lending	32,240	37,710	37,592	(15)	61

Standardised approach
Corporate	25,341	26,134	26,334	57	48
Residential Mortgage	2,882	7,811	7,540	-	4
Other Retail	3,625	3,635	3,459	68	85
Total Standardised approach	31,848	37,580	37,333	125	137

Credit Valuation Adjustment and Qualifying Central Counterparties	11,046	7,013	6,198	-	-

Total	344,940	903,021	889,763	655	815

September 2016

ANZ Basel III Pillar 3 disclosure

Table 7(b) part (ii): Exposure at Default by portfolio type[9]

				A Average for h alf	A Average for h alf
		Sep 16	Mar 16	Sep 15	year Sep 16
Portf olio Type		$M	$M	$M	$M
Cash		27,054	31,759	17,405	29,4 07
Conti other ngents liabilitie off-balance sh s, commitments eet exposures , and	1 54,142		160,920	162,535	157,5 31
Deriv atives		41,641	39,263	45,160	40,4 51
Settle ment Balances		16,662	20,026	39,216	18,3 44
Inves tment Securitie s		58,426	43,579	37,811	51,0 03
NetL oans, Advances & Acceptances	5 63,545		557,810	560,743	560,6 78
Other assets		3,134	5,405	3,888	4,2 70
Tradi ng Securities		29,891	30,607	36,263	30,2 49
Tota l exposures	8	94,495	889,369	903,021	891,9 33

9 Av e rage for half y e ar is calculate d as the simple a verage of the balances at the start and the eend of each six m onth period.

ANZ Basel III Pillar 3 disclosure September 2016

Table 7(c): Geographic distribution of Exposure at Default

		Sep 16
			Asia Pacific,
			Europe and
	Australia	New Zealand	Americas	Total
Portfolio Type	$M	$M	$M	$M
Corporate	122,934	48,553	79,084	250,571
Sovereign	45,457	11,469	64,007	120,933
Bank	23,684	5,562	19,629	48,875
Residential Mortgage	274,291	74,104	6,850	355,245
Qualifying Revolving Retail	22,395	-	-	22,395
Other Retail	30,232	12,083	3,255	45,570
Qualifying Central Counterparties	6,905	1,651	1,892	10,448
Specialised Lending	29,392	10,601	465	40,458
Total exposures	555,290	164,023	175,182	894,495

	Mar 16
	Asia Pacific, Europe and

	Australia New Zealand Americas Total
Portfolio Type	$M $M $M $M
Corporate	128,785 45,653 89,073 263,511
Sovereign	34,905 11,681 71,633 118,219
Bank	26,487 2,340 20,300 49,127
Residential Mortgage	270,025 67,289 7,182 344,496
Qualifying Revolving Retail	22,417 - - 22,417
Other Retail	29,187 11,784 3,528 44,499
Qualifying Central Counterparties	3,643 1,530 2,520 7,693
Specialised Lending	29,276 9,709 422 39,407
Total exposures	544,725 149,986 194,658 889,369

		Sep 15
			Asia Pacific,
			Europe and
	Australia	New Zealand	Americas	Total
Portfolio Type	$M	$M	$M	$M
Corporate	128,966	45,922	106,874	281,762
Sovereign	33,520	10,859	74,822	119,201
Bank	28,733	2,433	23,110	54,276
Residential Mortgage	257,901	65,273	7,811	330,985
Qualifying Revolving Retail	22,088	-	-	22,088
Other Retail	34,561	11,822	3,603	49,986
Qualifying Central Counterparties	3,859	1,589	1,565	7,013
Specialised Lending	28,033	9,240	437	37,710
Total exposures	537,661	147,138	218,222	903,021

ANZ Basel III Pillar 3 disclosure

Table 7(d): Industry distribution of Exposure at Default[10][11 ]

Sep 16

	Agriculture,			Electricity,	Entertainment,	Financial,	Government
	Forestry, Fishing	Business		Gas & Water	Leisure &	Investment &	and Official			Property	Wholesale		Transport &
	& Mining	Services	Construction	Supply	Tourism	Insurance	Institutions	Manufacturing	Personal	Services	Trade	Retail Trade	Storage	Other	Total
Portfolio Type	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M
Corporate	42,860	9,875	6,161	9,007	12,900	28,248	3,455	41,971	2,124	19,328	25,299	14,292	16,193	18,858	250,571
Sovereign	1,514	‐	44	590	9	64,277	52,213	1,177	‐	384	27	‐	455	243	120,933
Bank	182	10	2	27	8	48,476	‐	48	‐	‐	45	10	2	65	48,875
Residential Mortgage	‐	‐	‐	‐	‐	‐	‐	‐	355,245	‐	‐	‐	‐	‐	355,245
Qualifying Revolving Retail	‐	‐	‐	‐	‐	‐	‐	‐	22,395	‐	‐	‐	‐	‐	22,395
Other Retail	3,423	2,717	3,953	105	2,301	650	10	1,588	18,437	1,250	1,216	4,288	1,473	4,159	45,570
Qualifying Central Counterparties	‐	‐	‐	‐	‐	10,448	‐	‐	‐	‐	‐	‐	‐	‐	10,448
Specialised Lending	1,155	6	170	1,718	423	2	‐	5	‐	35,137	11	6	1,127	698	40,458
Total exposures	49,134	12,608	10,330	11,447	15,641	152,101	55,678	44,789	398,201	56,099	26,598	18,596	19,250	24,023	894,495
% of Total	5.5%	1.4%	1.2%	1.3%	1.7%	17.0%	6.2%	5.0%	44.5%	6.3%	3.0%	2.1%	2.2%	2.7%	100.0%

10 Property Services includes Commercial property operators, Residential property operators, Retirement village operators/developers, Real estate agents, Non-financial asset investors and Machinery and equipment hiring and leasing.

11 Other industry includes Health & Community Services, Education, Communication Services and Personal & Other Services.

September 2016

ANZ Basel III Pillar 3 disclosure

								Mar 16
	Agriculture,			Electricity, Gas	Entertainment,	Financial,	Government
	Forestry, Fishing	Business		& Water	Leisure &	Investment &	and Official			Property	Wholesale		Transport &
	& Mining	Services	Construction	Supply	Tourism	Insurance	Institutions	Manufacturing	Personal	Services	Trade	Retail Trade	Storage	Other	Total
Portfolio Type	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M
Corporate	43,326	10,726	6,596	9,497	12,675	28,254	3,139	45,881	2,277	20,433	28,389	16,166	17,385	18,767	263,511
Sovereign	1,192	8	58	671	8	72,455	41,579	1,207	‐	514	33	‐	219	275	118,219
Bank	1	9	1	25	3	48,701	‐	139	‐	‐	83	9	65	91	49,127
Residential Mortgage	‐	‐	‐	‐	‐	‐	‐	‐	344,496	‐	‐	‐	‐	‐	344,496
Qualifying Revolving Retail	‐	‐	‐	‐	‐	‐	‐	‐	22,417	‐	‐	‐	‐	‐	22,417
Other Retail	3,365	2,553	3,725	102	2,194	641	9	1,497	18,306	1,220	1,156	4,178	1,430	4,123	44,499
Qualifying Central Counterparties	‐	‐	‐	‐	‐	7,693	‐	‐	‐	‐	‐	‐	‐	‐	7,693
Specialised Lending	1,046	7	160	1,633	191	7	‐	4	‐	34,518	7	3	1,139	692	39,407
Total exposures	48,930	13,303	10,540	11,928	15,071	157,751	44,727	48,728	387,496	56,685	29,668	20,356	20,238	23,948	889,369
% of Total	5.5%	1.5%	1.2%	1.3%	1.7%	17.7%	5.0%	5.5%	43.6%	6.4%	3.3%	2.3%	2.3%	2.7%	100.0%
								Sep 15
	Agriculture,			Electricity,	Entertainment,	Financial,	Government
	Forestry, Fishing	Business		Gas & Water	Leisure &	Investment &	and Official			Property	Wholesale		Transport &
	& Mining	Services	Construction	Supply	Tourism	Insurance	Institutions	Manufacturing	Personal	Services	Trade	Retail Trade	Storage	Other	Total
Portfolio Type	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M	$M
Corporate	46,094	11,259	7,412	10,447	12,360	31,946	3,260	52,562	2,081	20,699	32,185	16,081	16,692	18,684	281,762
Sovereign	1,268	9	59	677	4	77,215	37,668	1,427	‐	260	44	‐	247	323	119,201
Bank	6	8	1	20	3	53,672	‐	176	‐	2	123	72	70	123	54,276
Residential Mortgage	‐	‐	‐	‐	‐	‐	‐	‐	330,985	‐	‐	‐	‐	‐	330,985
Qualifying Revolving Retail	‐	‐	‐	‐	‐	‐	‐	‐	22,088	‐	‐	‐	‐	‐	22,088
Other Retail	3,506	2,831	4,040	117	2,156	658	11	1,537	23,095	1,172	1,169	4,221	1,468	4,005	49,986
Qualifying Central Counterparties	‐	‐	‐	‐	‐	7,013	‐	‐	‐	‐	‐	‐	‐	‐	7,013
Specialised Lending	1,040	8	166	1,495	239	3	39	6	‐	32,455	9	7	1,234	1,009	37,710
Total exposures	51,914	14,115	11,678	12,756	14,762	170,507	40,978	55,708	378,249	54,588	33,530	20,381	19,711	24,144	903,021
% of Total	5.7%	1.6%	1.3%	1.4%	1.6%	18.9%	4.5%	6.2%	41.9%	6.0%	3.7%	2.3%	2.2%	2.7%	100.0%

September 2016

ANZ Basel III Pillar 3 disclosure

Table 7(e): Residual contractual maturity of Exposure at Default[12]

			Sep 16
				No Maturity
	< 12 mths	1 - 5 years	> 5 years	Specified	Total
Portfolio Type	$M	$M	$M	$M	$M
Corporate	100,671	133,592	16,138	170	250,571
Sovereign	57,697	30,659	32,577	-	120,933
Bank	29,864	18,500	511	-	48,875
Residential Mortgage	434	6,603	316,003	32,205	355,245
Qualifying Revolving Retail	-	-	-	22,395	22,395
Other Retail	16,640	8,293	20,000	637	45,570
Qualifying Central Counterparties	4,045	3,375	2,700	328	10,448
Specialised Lending	14,161	24,510	1,732	55	40,458
Total exposures	223,512	225,532	389,661	55,790	894,495
			Mar 16
				No Maturity
	< 12 mths	1 - 5 years	> 5 years	Specified	Total
Portfolio Type	$M	$M	$M	$M	$M
Corporate	104,567	141,552	17,228	164	263,511
Sovereign	67,147	25,012	26,060	-	118,219
Bank	29,813	18,833	481	-	49,127
Residential Mortgage	405	7,044	305,260	31,787	344,496
Qualifying Revolving Retail	-	-	-	22,417	22,417
Other Retail	16,673	7,543	19,605	678	44,499
Qualifying Central Counterparties	2,892	2,643	2,158	-	7,693
Specialised Lending	13,271	24,154	1,934	48	39,407
Total exposures	234,768	226,781	372,726	55,094	889,369
			Sep 15
				No Maturity
	< 12 mths	1 - 5 years	> 5 years	Specified	Total
Portfolio Type	$M	$M	$M	$M	$M
Corporate	117,408	146,178	18,006	170	281,762
Sovereign	71,481	25,165	22,555	-	119,201
Bank	33,953	19,761	562	-	54,276
Residential Mortgage	411	7,734	291,437	31,403	330,985
Qualifying Revolving Retail	-	-	-	22,088	22,088
Other Retail	16,672	13,829	18,797	688	49,986
Qualifying Central Counterparties	3,039	2,264	1,710	-	7,013
Specialised Lending	11,574	24,033	2,054	49	37,710
Total exposures	254,538	238,964	355,121	54,398	903,021

12 No Maturity Specified predominately includes credit cards and residential mortgage equity manager accounts.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 7(f) part (i): Impaired assets[13][14] , Past due loans[15] , Provisions and Write-offs by Industry sector

			Sep 16	Sep 16
					Individual
		Impaired	Past due	Individual	provision	Write-offs
	Impaired	loans/	loans ≥	provision	charge for	for half
	derivatives	facilities	90 days	balance	half year	year
Industry Sector	$M	$M	$M	$M	$M	$M
Agriculture, Forestry, Fishing & Mining	-	1,016	93	283	108	102
Business Services	-	84	30	46	10	35
Construction	-	178	58	95	59	32
Electricity, gas and water supply	-	2	1	1	2	4
Entertainment Leisure & Tourism	-	134	44	59	51	28
Financial, Investment & Insurance	1	33	23	11	(3)	14
Government & Official Institutions	-	-	-	4	2	-
Manufacturing	6	466	36	266	322	251
Personal	-	834	1,989	284	374	422
Property Services	-	120	63	46	13	26
Retail Trade	3	221	68	76	55	38
Transport & Storage	-	88	23	25	14	36
Wholesale Trade	4	115	13	67	18	62
Other	-	72	58	44	22	16
Total	14	3,363	2,499	1,307	1,047	1,066

13 Impaired derivatives are net of credit value adjustment (CVA) of $63 million, being a market value based assessment of the credit risk of the relevant counterparties (March 2016: $63 million; September 2015: $69 million). 14 Impaired loans / facilities include restructured items of $403 million for customer facilities in which the original contractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring may consist of reduction of interest, principal or other payments legally due, or an extension in maturity materially beyond those typically offered to new facilities with similar risk (March 2016: $226 million; September 2015: $184 million).

15 For regulatory reporting, not well secured portfolio managed retail exposures have been reclassified from past due loans > 90 days to impaired loans / facilities.

September 2016

	Mar 16
	Impaired Past due Individual Individual provision
	Impaired loans/ loans ≥90 provision charge for Write-offs
	derivatives facilities days balance half year for half year
Industry Sector	$M $M $M $M $M $M
Agriculture, Forestry, Fishing &
	5 892 131 284 133 59
Mining

Business Services	- 121 39 65 27 16
Construction	- 150 82 67 46 21
Electricity, gas and water supply	- 3 1 3 1 1
Entertainment Leisure & Tourism	- 123 52 54 31 15
Financial, Investment &
	1 40 10 23 2 5
Insurance

Government & Official Institutions - - 2 2 2 -
Manufacturing 7 319 43 198 113 46
Personal - 853 1,710 233 342 415
Property Services - 96 71 57 17 11
Retail Trade - 121 112 66 42 23
Transport & Storage 1 137 23 49 36 8
Wholesale Trade 5 175 31 117 72 14
Other - 33 68 20 28 22
Total 19 3,063 2,375 1,238 892 656

				Sep 15
					Individual
		Impaired	Past due	Individual	provision
	Impaired	loans/	loans ≥90	provision	charge for	Write-offs
	derivatives	facilities	days	balance	half year	for half year
Industry Sector	$M	$M	$M	$M	$M	$M
Agriculture, Forestry, Fishing & Mining	5	799	136	221	112	76
Business Services	-	88	31	55	12	17
Construction	-	95	183	42	20	31
Electricity, gas and water supply	-	3	-	3	(1)	1
Entertainment Leisure & Tourism	-	131	38	43	33	18
Financial, Investment & Insurance	-	52	20	26	19	14
Government & Official Institutions	-	-	-	-	-	-
Manufacturing	4	258	42	145	33	50
Personal	-	869	1,434	290	337	441
Property Services	-	110	100	50	(3)	53
Retail Trade	-	139	88	60	42	28
Transport & Storage	28	164	26	29	(13)	35
Wholesale Trade	-	126	27	76	39	24
Other	-	28	74	21	25	27
Total	37	2,862	2,199	1,061	655	815

September 2016

ANZ Basel III Pillar 3 disclosure

Table 7(f) part (ii): Impaired asset, Past due loans, Provisions and Write-offs

			Sep 16	Sep 16
					Individual
		Impaired	Past due	Individual	provision	Write-offs
	Impaired	loans/	loans ≥	provision	charge for	for half
	derivatives	facilities	90 days	balance	half year	year
	$M	$M	$M	$M	$M	$M
Portfolios subject to Advanced IRB approach
Corporate	1	1,795	178	653	466	468
Sovereign	-	-	-	6	2	2
Bank	-	-	11	-	-	-
Residential Mortgage	-	220	1,981	94	33	17
Qualifying Revolving Retail	-	89	-	-	104	141
Other Retail	-	515	255	281	251	275
Total Advanced IRB approach	1	2,619	2,425	1,034	856	903

Specialised Lending	-	42	38	23	(1)	8
Portfolios subject to Standardised approach
Corporate	13	440	18	237	107	61
Residential Mortgage	-	29	11	8	2	3
Other Retail	-	233	7	5	83	91
Total Standardised approach	-	702	36	250	192	155

Qualifying Central Counterparties	-	-	-	-	-	-

Total	14	3,363	2,499	1,307	1,047	1,066

September 2016

ANZ Basel III Pillar 3 disclosure

			Mar 1616 Past due loans ≥90 days $M Individual provision balance $M Individual provision charge for half year $M Write-offs for half year $M
Impaired derivatives $M		Impaired loans/ facilities $M
Portfolios subject to Advanced IRB approach
Corporate 4		1,527	219 646 325 139
Sovereign -		2	2 6 2 -
Bank -		-	- - - -
Residential Mortgage -		212	1,815 77 10 16
Qualifying Revolving Retail -		95	- - 96 130
Other Retail -		490	270 265 258 250
Total Advanced IRB approach 4		2,326	2,306 994 691 535

Specialised Lending -		73	24 38 6 6

Portfolios subject to Standardised approach
Corporate 15		419	32 201 115 7
Residential Mortgage -		32	5 11 (2) 4
Other Retail -		213	8 (6) 82 104
Total Standardised approach 15		664	45 206 195 115

Qualifying Central Counterparties -		-	- - - -

Total 19		3,063	2,375 1,238 892 656


			Sep 1516
Impaired derivatives $M		Impaired loans/ facilities $M	Past due loans ≥90 days $M Individual provision balance $M Individual provision charge for half year $M Write-offs for half year $M
Portfolios subject to Advanced IRB approach
Corporate -		1,266	197 523 157 183
Sovereign -		2	- 4 (2) -
Bank -		-	- - - -
Residential Mortgage -		240	1,570 86 9 17
Qualifying Revolving Retail -		88	- - 102 145
Other Retail -		599	306 317 279 272
Total Advanced IRB approach -		2,195	2,073 930 545 617

Specialised Lending 28		159	62 40 (15) 61

Portfolios subject to Standardised approach
Corporate	9	294	45 75 57 48
Residential Mortgage	-	37	12 14 - 4
Other Retail	-	177	7 2 68 85
Total Standardised approach	9	508	64 91 125 137

Qualifying Central Counterparties	-	-	- - - -

Total	37	2,862	2,199 1,061 655 815

16 The corporate asset class split between advanced and standardised has been revised for March 2016 and September 2015 comparatives to better reflect the Basel treatment of the underlying assets.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 7(g): Impaired assets[17][18] , Past due loans[19] and Provisions[20] by Geography

			Sep 16
		Impaired	Past due	Individual	Collective
	Impaired	loans/	loans	provision	provision
	derivatives	facilities	≥ 90 days	balance	balance
Geographic region	$M	$M	$M	$M	$M
Australia	1	1,804	2,319	757	1,803
New Zealand	3	483	127	147	456
Asia Pacific, Europe and America	10	1,076	53	403	617
Total	14	3,363	2,499	1,307	2,876
4fii	0	0	0	0	0
RA

			Mar 16
		Impaired	Past due	Individual	Collective
	Impaired	loans/	loans	provision	provision
	derivatives	facilities	≥ 90 days	balance	balance
Geographic region	$M	$M	$M	$M	$M
Australia	7	1,771	2,145	762	1,844
New Zealand	-	330	178	123	421
Asia Pacific, Europe and America	12	962	52	353	597
Total	19	3,063	2,375	1,238	2,862
4fii	0	0	0	0	0
RA

Total 4fii RA	19 0	3,063 0	2,375 0	1,238 0	2,862 0
			Sep 15
		Impaired	Past due	Individual	Collective
	Impaired	loans/	loans	provision	provision
	derivatives	facilities	≥ 90 days	balance	balance
Geographic region	$M	$M	$M	$M	$M
Australia	33	1,621	1,949	698	1,895
New Zealand	-	400	182	147	425
Asia Pacific, Europe and America	4	841	68	216	636
Total	37	2,862	2,199	1,061	2,956

17 Impaired derivatives are net of credit value adjustment (CVA) of $63 million, being a market value based assessment of the credit risk of the relevant counterparties (March 2016: $63 million; September 2015: $69 million).

18 Impaired loans / facilities include restructured items of $403 million for customer facilities in which the original contractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring may consist of reduction of interest, principal or other payments legally due, or an extension in maturity materially beyond those typically offered to new facilities with similar risk (March 2016: $226 million; September 2015: $184 million).

19 For regulatory reporting, not well secured portfolio managed retail exposures have been reclassified from past due loans > 90 days to impaired loans / facilities.

20 Due to definitional differences, there is a variation in the split between ANZ’s Individual Provision and Collective Provision for accounting purposes and the Specific Provision and General Reserve for Credit Losses (GRCL) for regulatory purposes. This does not impact total provisions, and essentially relates to the classification of collectively assessed provisions on defaulted accounts. The disclosures in this document are based on Individual Provision and Collective Provision, for ease of comparison with other published results.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 7(h): Provision for Credit Impairment

	Half year	Half year	Half year
	Sep 16	Mar 16	Sep 15
Collective Provision	$M	$M	$M
Balance at start of period	2,862	2,956	2,914
Charge to income statement	(9)	26	40
Adjustments for exchange rate fluctuations	28	(47)	2
Esanda Dealer Finance divestment	(5)	(73)	-
Total Collective Provision	2,876	2,862	2,956
Individual Provision
Balance at start of period	1,238	1,061	1,114
New and increased provisions	1,308	1,137	951
Write-backs	(151)	(160)	(174)
Adjustment for exchange rate fluctuations	17	(26)	7
Discount unwind	(39)	(26)	(22)
Bad debts written off	(1,066)	(656)	(815)
Esanda Dealer Finance divestment	-	(92)	-
Total Individual Provision	1,307	1,238	1,061

Total Provisions for Credit Impairment	4,183	4,100	4,017

Table 7(j): Specific Provision Balance and General Reserve for Credit Losses[21]

	Sep 16
Specific Provision Balance $M	General Reserve for Credit Losses $M Total $M
Collective Provision 350	2,526 2,876
Individual Provision 1,307	- 1,307
Total Provision for Credit Impairment 1,657	2,526 4,183


	Mar 16
Specific Provision Balance $M	General Reserve for Credit Losses $M Total $M
Collective Provision 313	2,549 2,862
Individual Provision 1,238	- 1,238
Total Provision for Credit Impairment 1,551	2,549 4,100


	Sep 15
Specific Provision Balance $M	General Reserve for Credit Losses $M Total $M
Collective Provision 334	2,622 2,956
Individual Provision 1,061	- 1,061
Total Provision for Credit Impairment 1,395	2,622 4,017

21 Due to definitional differences, there is a variation in the split between ANZ’s Individual Provision and Collective Provision for accounting purposes and the Specific Provision and General Reserve for Credit Losses (GRCL) for regulatory purposes. This does not impact total provisions, and essentially relates to the classification of collectively assessed provisions on defaulted accounts. The disclosures in this document are based on Individual Provision and Collective Provision, for ease of comparison with other published results.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 8 Credit risk – Disclosures for portfolios subject to the Standardised approach and supervisory risk weights in the IRB approach

Table 8(b): Exposure at Default by risk bucket

Risk weight
	Sep 16	Mar 16	Sep 15
Standardised approach exposures	$M	$M	$M
0%	-	-	-
20%	459	255	855
35%	6,417	6,820	7,386
50%	2,067	1,417	1,406
75%	4	2	4
100%	21,834	24,056	27,098
150%	680	740	852
>150%	-	-	1
Capital deductions	-	-	-
Total	31,461	33,290	37,602
Other Asset exposures
0%	-	-	-
20%	1,202	1,172	1,191
35%	-	-	-
50%	-	-	-
75%	-	-	-
100%	3,604	3,820	3,417
150%	-	-	-
>150%	-	-	-
Capital deductions	-	-	-
Total	4,806	4,992	4,608
Specialised Lending exposures
0%	182	318	473
70%	13,052	12,156	14,005
90%	22,193	21,400	19,539
115%	4,139	4,841	3,245
250%	892	692	448
Total	40,458	39,407	37,710

September 2016

ANZ Basel III Pillar 3 disclosure

Table 9 Credit risk – Disclosures for portfolios subject to Advanced IRB approaches

Portfolios subject to the Advanced IRB (AIRB) approach

The following table summarises the types of borrowers and the rating approach adopted within each of ANZ’s AIRB portfolios:

IRB Asset Class	Borrower Type	Rating Approach
Corporate	Corporations, partnerships or proprietorships that do not fit into any other asset class	AIRB
Sovereign	Central governments Central banks Certain multilateral development banks	AIRB
Bank	Banks22 In Australia only, other authorised deposit taking institutions (ADI) incorporated in Australia	AIRB
Residential mortgages	Exposures secured by residential property	AIRB
Qualifying revolving retail	Consumer credit cards <$100,000 limit	AIRB
Other retail	Small business lending Other lending to consumers	AIRB
Specialised Lending	Income Producing Real Estate23 Project finance Object finance	AIRB – Supervisory Slotting24
Other assets	All other assets not falling into the above classes e.g. margin lending, fixed assets	AIRB – fixed risk weights

In addition, ANZ has applied the Standardised approach to some portfolio segments (mainly retail and local corporates in Asia Pacific) where currently available data does not enable development of advanced internal models for PD, LGD and EAD estimates. Under the Standardised approach, exposures are mapped to several regulatory risk weights, mainly based on the type of counterparty and its external rating.

ANZ applies its full normal risk measurement and management framework to these segments for internal management purposes, such as for economic capital. Standardised segments will be migrated to AIRB if they reach a volume that generates sufficient data for development of advanced internal models.

ANZ has not applied the Foundation IRB approach to any portfolios.

The ANZ rating system

As an AIRB bank, ANZ’s internal models generate the inputs into regulatory capital adequacy to determine the risk weighted exposure calculations for both on and off-balance sheet exposures, including undrawn portions of credit facilities, committed and contingent exposures and EL calculations. ANZ’s internal models are used to generate the three key risk components that serve as inputs to the IRB approach to credit risk:

PD is an estimate of the level of the risk of borrower default. Borrower ratings are derived by way of rating models used both at loan origination and for ongoing monitoring.
EAD is defined as the expected facility exposure at the date of default.
LGD is an estimate of the potential economic loss on a credit exposure, incurred as a consequence of obligor default and expressed as a percentage of the facility’s EAD. When measuring economic loss, all relevant factors are taken into account, including material effects of the timing of cash flows and material direct and indirect costs associated with collecting on the exposure, including realisation of collateral.

22 The IRB asset classification of investment banks is Corporate, rather than Bank.

23 Since 2009, APRA has agreed that some large, well-diversified commercial property exposures may be treated as corporate exposures, in line with the original Basel Committee’s definition of Specialised Lending.

24 ANZ uses an internal assessment which is mapped to the appropriate Supervisory Slot.

September 2016

ANZ Basel III Pillar 3 disclosure

Effective maturity is also calculated as an input to the risk weighted exposure calculation for bank, sovereign and corporate IRB asset classes.

ANZ’s rating system has two separate and distinct dimensions that:

Measure the PD, which is expressed by the Customer Credit Rating (CCR), reflecting the ability to service and repay debt.
Measure the LGD as expressed by the Security Indicator (SI) ranging from A to G. The SI is calculated by reference to the percentage of loan covered by security which can be realised in the event of default. This calculation uses standard ratios to adjust the current market value of collateral items to allow for historical realisation outcomes. The security-related SIs are supplemented with a range of other SIs which cover such factors as cash cover, mezzanine finance, intra-group guarantees and sovereign backing as ANZ’s LGD research indicates that these transaction characteristics have different recovery outcomes. ANZ’s LGD also includes recognition of the different legal and insolvency regimes in different countries, where this has been shown to influence recovery outcomes.

ANZ’s corporate PD master scale is is APRA approved, and is made up of 27 rating grades. Each level/grade is separately defined and has a range of default probabilities attached to it. The PD master scale enables ANZ’s rating system to be mapped to the gradings of external rating agencies, using the PD as a common element after ensuring that default definitions and other key attributes are aligned. The following table demonstrates this alignment (for one year PDs):

ANZ CCR	Moody’s	Standard & Poor’s	PD Range
0+ to 1-	Aaa to Aa3	AAA to AA-	0.0000-0.0346%
2+ to 3+	A1 to Baa1	A+ to BBB+	0.0347-0.1636%
3=to 4+	Baa2 to>Baa3	BBB to>BBB-	0.1637-0.4004%
4=to 6=	Ba1 to B1	BB+ to B+	0.4005-2.7550% %
6-to 7=	B2 to B3	B to B-	2.7551-9.7980%
7-to 8+	Caa to Caa3	CCC+ to CCC-	9.7981-27.1109%
8=	Ca, C	CC, C	27.1110–99.9999%
8-, 9 and 10	Default	Default	100%

In the retail asset classes, most facilities utilise credit rating scores. The scores are calibrated to PDs and used to allocate exposures to homogenous pools, along with LGD and EAD.

ANZ also uses specialised PD master scale/mappings for the sovereign asset class, based predominantly on the corporate master scale.

Use of internal estimates other than for regulatory capital purposes

ANZ’s rating system is a fundamental part of credit management and plays a key role in:

Lending discretions.
Minimum origination standards.
Concentration limits.
Portfolio reporting.
Customer profitability measurement.
Collective provision measurement.
Management of deteriorating customers (where certain CCR/SI combinations trigger increasing scrutiny).
Pricing decisions.

September 2016

ANZ Basel III Pillar 3 disclosure

PD, LGD and EAD are used in the calculation of economic capital and in the collective provisioning process. Regulatory and economic capital are calculated from the same data sources and starting from the same basis, however there are some differences between the factors used because several aspects of ANZ’s rating system are adjusted in accordance with APRA requirements for regulatory capital purposes. The most significant of these adjustments are the use for regulatory capital purposes of downturn LGDs; the imposition of a 20% LGD floor for exposures secured by Australian residential real estate and the mandatory use of the supervisory slotting approach for project finance and most commercial real estate exposures.

Controls surrounding the ratings system

ANZ’s rating system and credit risk estimates are governed by the Board Risk Committee and several executive management committees, and are underpinned by a comprehensive framework of controls that operate throughout ANZ. All policies, methodologies, model designs, model reviews, validations, responsibilities, systems and processes supporting the ratings systems are documented, and subject to review by Internal Audit.

The design, build and implementation of credit rating models resides with a specialist Group-level team. Credit rating models are owned by central Risk teams. The use (including overrides) and performance of credit rating models is monitored by the relevant business and their counterparts in Risk, and validated regularly by a separate specialist Group-level function. This cycle of design, build, implementation, monitoring and validation is overseen by the CRSOC, and informs the need for new models or recalibration of existing models.

Risk grades are an integral part of reporting to the Board and executives.

In addition, the use of the rating system’s outputs in key business unit performance measures in processes such as provisioning and the allocation of economic capital ensures that the rating system receives robust input from the business units, not just the specialist modelling teams.

Rating process by asset class

Building reliable and accurate rating tools requires balancing of many factors including data availability (external data may be used in some circumstances, where it is relevant), the size of the segment (the more customers within the segment, the more likely that statistically reliable models can be built), and the need to be able to validate the model. Rating tool approaches include:

Statistical models producing a PD or a LGD, which are developed from internal or external data on defaults.
Statistical models producing an internal rating, which involve calibrating ANZ’s models to external rating data where data on defaults is insufficient for statistical purposes (such as banks).
Hybrid statistical and expert models producing an internal rating, which use a mixture of default data and expert input.
Expert models/processes that produce an internal rating, including external rating agency replication models.

Ongoing data collection and testing processes ensure enhanced or new models are introduced as required to maintain and improve the accuracy and reliability of rating processes.

Regardless of what credit risk rating tool is used, lending staff rating a customer are required to review the model-generated PD (or CCR) and take into account any out-of-model factors or policy overlays to decide whether or not to override the model rating. Overrides of a rating model to a better rating require approval from the independent credit risk function. The significance of the model for risk grading varies with the customer segment: models will dominate risk grading of homogenous, simple and data-rich segments such as in Retail, however for complex, specialised business segments expert knowledge and the highly customised nature of transactions will influence the rating outcome.

September 2016

ANZ Basel III Pillar 3 disclosure

The following table summarises the types of internal rating approaches used in ANZ:

IRB Asset Class	Borrower type	Rating Approach
Corporate	Corporations, partnerships or proprietorships that do not fit into any other asset class	Mainly statistical models Some use of expert models and policy processes
Sovereign	Central governments Central banks Certain multilateral development banks Australian stategovernments	External rating and expert judgement
Bank	Banks In Australia only, other ADIs incorporated in Australia	Statistically-based models Review of all relevant and material information including external ratings
Residential Mortgages	Exposures secured by residential property	Statistical models
Qualifying Revolving Retail	Consumer credit cards <$100,000 limit	Statistical models
Other Retail	Small business lending Other lendingto consumers	Statistical models
Specialised Lending	Income Producing Real Estate Project finance Object finance	Expert models/Supervisory Slotting25

For the Retail Basel asset class (Residential Mortgages, Qualifying Revolving Retail and Other Retail Exposures) the large number of relatively homogenous exposures enable the development of statistically robust application scoring models for use at origination and behavioural scoring for ongoing management. As noted above, the scores are calibrated to PD, and used to allocate exposures to homogenous pools, along with LGD and EAD.

Estimation of LGD and EAD

ANZ’s LGD modelling takes into account data on secured recovery, unsecured recovery rates and debt seniority, geography and internal management costs from several major data sources. Internal data is used as the basis for LGD estimation in the retail asset class, and is supplemented by external data for the corporate asset class. Given the scarcity of internal data for Bank and Sovereign Basel asset classes, LGD modelling for these classes is primarily based on external data.

EAD represents the expected facility exposure at the date of default, including an estimate of additional drawings prior to default, as well as post-default drawings that were legally committed to prior to default.

25 Specialised Lending exposures are rated with internal rating tools to produce a PD and LGD. These are used in internal processes, but not for regulatory capital purposes where the exposures are mapped to Supervisory Slots.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 9(d): Non Retail Exposure at Default subject to Advanced Internal Ratings Based (IRB) approach[26][27][28 ]

	Sep 16
	AAA A+ BBB BB+ B+
	< A+ < BBB < BB+ < B+ < CCC CCC Default Total
	$M $M $M $M $M $M $M $M
Exposure at Default
Corporate	17,682 55,341 76,479 59,068 15,883 2,409 2,455 229,317
Sovereign	101,889 13,715 2,054 1,885 1,376 14 - 120,933
Bank	20,835 22,617 3,543 1,806 49 25 - 48,875
Total	140,406 91,673 82,076 62,759 17,308 2,448 2,455 399,125
% of Total	35.2% 23.0% 20.6% 15.7% 4.3% 0.6% 0.6% 100.0%

Undrawn commitments (included in above)
Corporate 5,665 23,176 23,150 10,299 1,569 208 50 64,117
Sovereign 963 364 12 80 43 - - 1,462
Bank 15 47 40 8 1 - - 111
Total 6,643 23,587 23,202 10,387 1,613 208 50 65,690

Average Exposure at Default
Corporate 6.131 3.423 1.441 0.610 0.182 0.352 0.758 0.862
Sovereign 139.767 489.832 38.030 11.633 28.073 1.804 - 117.837
Bank 21.726 4.858 7.158 11.078 0.595 0.878 - 7.657

Exposure-weighted average Loss Given Default (%)
Corporate 55.0% 56.9% 47.9% 39.8% 35.2% 45.2% 40.7% 47.6%
Sovereign 6.1% 10.4% 39.6% 55.0% 48.2% 58.3% - 8.3%
Bank 63.5% 61.8% 62.6% 67.5% 70.3% 52.3% - 62.8%

Exposure-weighted average risk weight (%)
Corporate 19.3% 35.6% 55.2% 70.6% 89.2% 212.6% 141.8% 56.6%
Sovereign 1.4% 2.9% 42.3% 122.0% 122.5% 323.9% - 5.4%
Bank 21.3% 26.4% 64.6% 111.6% 187.5% 290.4% - 30.5%

26 In accordance with APS 330, EAD in Table 9(d) includes Advanced IRB exposures; however does not include Specialised Lending, Standardised, Securitisation, Equities or Other Assets exposures. Specialised Lending is excluded from Table 9(d) as it follows the Supervisory Slotting treatment, and a breakdown of risk weightings is provided in Table 8(b).

27 Average EAD is calculated as total EAD post risk mitigants divided by the total number of credit risk generating exposures.

28 Exposure-weighted average risk weight (%) is calculated as CRWA divided by EAD.

September 2016

ANZ Basel III Pillar 3 disclosure

				Mar	16
	AAA	A+	BBB	BB+	B+
	< A+	< BBB	< BB+	< B+	< CCC	CCC	Default	Total
	$M	$M	$M	$M	$M	$M	$M	$M
Exposure at Default
Corporate	18,036	58,829	82,853	60,082	16,516	2,481	2,223	241,020
Sovereign	94,580	18,705	1,837	1,674	1,408	15	-	118,219
Bank	17,657	26,239	3,376	1,765	89	1	-	49,127
Total	130,273	103,773	88,066	63,521	18,013	2,497	2,223	408,366
% of Total	31.9%	25.4%	21.6%	15.6%	4.4%	0.6%	0.5%	100.0%
Undrawn commitments (included in		above)
Corporate	5,960	24,942	25,537	10,719	1,844	274	56	69,332
Sovereign	655	325	9	48	23	-	-	1,060
Bank	3	389	197	9	-	-	-	598
Total	6,618	25,656	25,743	10,776	1,867	274	56	70,990
Average Exposure at Default
Corporate	6.089	3.565	1.466	0.624	0.180	0.259	0.902	0.873
Sovereign	125.502	103.340	27.831	12.134	31.986	1.698	-	99.151
Bank	13.540	3.351	2.779	3.453	0.828	0.052	-	4.353
Exposure-weighted average Loss Given Default			(%)
Corporate	55.4%	57.4%	49.5%	40.6%	36.1%	46.9%	43.9%	48.7%
Sovereign	6.0%	9.8%	42.3%	54.8%	46.0%	59.0%	-	8.4%
Bank	62.4%	62.2%	61.4%	68.4%	72.8%	70.0%	-	62.5%
Exposure-weighted average risk weight (%)
Corporate	18.6%	36.2%	57.6%	72.3%	92.3%	218.4%	144.3%	58.0%
Sovereign	1.2%	3.0%	46.9%	118.8%	113.8%	323.1%	-	5.2%
Bank	22.2%	25.8%	64.5%	115.7%	202.3%	369.8%	-	30.7%

				Sep	15
	AAA	A+	BBB	BB+	B+
	< A+	< BBB	< BB+	< B+	< CCC	CCC	Default	Total
	$M	$M	$M	$M	$M	$M	$M	$M
Exposure at Default
Corporate	20,883	64,860	89,176	59,431	17,072	2,199	2,007	255,628
Sovereign	99,425	14,188	2,438	2,600	529	21	-	119,201
Bank	17,741	29,156	4,876	2,317	177	9	-	54,276
Total	138,049	108,204	96,490	64,348	17,778	2,229	2,007	429,105
% of Total	32.2%	25.2%	22.5%	15.0%	4.1%	0.5%	0.5%	100.0%
Undrawn commitments (included in		above)
Corporate	6,229	25,739	26,460	10,116	1,889	223	80	70,736
Sovereign	564	497	5	62	3	-	-	1,131
Bank	10	81	162	12	1	-	-	266
Total	6,803	26,317	26,627	10,190	1,893	223	80	72,133
Average Exposure at Default
Corporate	7.658	4.136	1.540	0.610	0.191	0.270	0.846	0.935
Sovereign	160.363	94.588	38.692	23.214	21.178	1.949	-	121.510
Bank	18.615	4.396	4.107	5.531	1.624	0.282	-	5.815
Exposure-weighted average Loss Given Default			(%)
Corporate	57.0%	58.7%	51.0%	42.1%	36.7%	46.0%	38.8%	50.3%
Sovereign	5.8%	16.3%	43.3%	50.5%	57.3%	59.2%	-	9.0%
Bank	62.3%	62.9%	63.9%	68.4%	73.5%	74.4%	-	63.1%
Exposure-weighted average risk weight (%)
Corporate	19.4%	36.7%	59.1%	75.7%	98.2%	228.7%	141.3%	58.8%
Sovereign	1.1%	5.1%	47.8%	109.6%	150.7%	316.7%	-	5.6%
Bank	21.3%	24.9%	67.8%	118.1%	187.1%	358.6%	-	32.1%

September 2016

ANZ Basel III Pillar 3 disclosure

Table 9(d): Retail Exposure at Default subject to Advanced Internal Ratings Based (IRB) approach by risk grade

	Sep 16
	0.00% 0.11% 0.30% 0.51% 3.49% 10.09%
	<0.11% <0.30% <0.51% <3.49% <10.09% <100.0% Default Total
	$M $M $M $M $M $M $M $M
Exposure at Default
Residential Mortgage	71,052 153,769 31,086 74,795 9,619 5,816 2,257 348,394
Qualifying Revolving Retail	- 11,715 2,805 5,149 1,755 799 172 22,395
Other Retail	1,173 5,438 2,299 23,243 7,089 2,197 852 42,291
Total	72,225 170,922 36,190 103,187 18,463 8,812 3,281 413,080
% of Total	17.5% 41.4% 8.8% 25.0% 4.5% 2.1% 0.8% 100.0%

Undrawn commitments (included in above)
Residential Mortgage 6,744 17,844 1,023 7,549 159 179 - 33,498
Qualifying Revolving Retail - 9,144 2,069 2,418 605 93 31 14,360
Other Retail 626 2,201 1,306 3,106 561 85 6 7,891
Total 7,370 29,189 4,398 13,073 1,325 357 37 55,749

Average Exposure at Default
Residential Mortgage 0.242 0.224 0.209 0.253 0.270 0.278 0.249 0.234
Qualifying Revolving Retail - 0.011 0.009 0.010 0.009 0.008 0.009 0.010
Other Retail 0.006 0.012 0.010 0.025 0.011 0.011 0.020 0.016

Exposure-weighted average Loss Given Default (%)
Residential Mortgage 19.8% 19.2% 18.8% 21.9% 20.4% 20.0% 20.3% 19.9%
Qualifying Revolving Retail - 73.2% 73.2% 73.2% 73.2% 73.2% 73.2% 73.2%
Other Retail 59.1% 54.4% 74.2% 46.7% 64.1% 60.0% 53.1% 53.1%

Exposure-weighted average risk weight (%)
Residential Mortgage 9.8% 11.9% 18.2% 38.5% 112.9% 148.0% 223.8% 24.2%
Qualifying Revolving Retail - 5.2% 14.3% 39.8% 112.6% 209.5% 366.6% 32.8%
Other Retail 31.5% 37.3% 55.3% 60.0% 111.1% 178.5% 228.6% 74.2%

September 2016

ANZ Basel III Pillar 3 disclosure

	Mar 16
	0.00% 0.11% 0.30% 0.51% 3.49% 10.09%
	<0.11% <0.30% <0.51% <3.49% <10.09% <100.0% Default Total
	$M $M $M $M $M $M $M $M
Exposure at Default
Residential Mortgage	70,457 146,431 28,959 73,215 10,541 5,620 2,091 337,314
Qualifying Revolving Retail	11,546 516 2,072 5,020 2,188 905 170 22,417
Other Retail	1,131 5,254 2,192 22,733 6,650 2,144 839 40,943
Total	83,134 152,201 33,223 100,968 19,379 8,669 3,100 400,674
% of Total	20.7% 38.0% 8.3% 25.2% 4.8% 2.2% 0.8% 100.0%

Undrawn commitments (included in above)
Residential Mortgage 6,466 17,366 960 7,416 188 180 1 32,577
Qualifying Revolving Retail 9,035 515 1,372 2,330 889 115 30 14,286
Other Retail 600 2,130 1,270 3,317 548 79 6 7,950
Total 16,101 20,011 3,602 13,063 1,625 374 37 54,813

Average Exposure at Default
Residential Mortgage 0.239 0.216 0.197 0.241 0.278 0.274 0.233 0.226
Qualifying Revolving Retail 0.011 0.006 0.010 0.010 0.009 0.008 0.009 0.010
Other Retail 0.008 0.016 0.011 0.023 0.010 0.011 0.019 0.016

Exposure-weighted average Loss Given Default (%)
Residential Mortgage 19.8% 19.2% 19.1% 22.1% 20.4% 20.0% 20.4% 20.0%
Qualifying Revolving Retail 73.2% 73.2% 73.2% 73.2% 73.2% 73.2% 73.2% 73.2%
Other Retail 53.6% 46.8% 73.9% 46.5% 64.0% 60.0% 53.1% 51.9%

Exposure-weighted average risk weight (%)
Residential Mortgage 5.2% 6.6% 13.6% 29.2% 75.2% 107.9% 223.4% 17.0%
Qualifying Revolving Retail 4.9% 11.5% 14.2% 38.8% 111.5% 206.5% 337.8% 34.5%
Other Retail 31.0% 36.7% 55.1% 61.2% 112.3% 177.9% 236.8% 74.9%


Sep 15
0.00% <0.11% 0.11% <0.30% 0.30% <0.51% 0.51% <3.49% 3.49% <10.09% 10.09% <100.0% Default Total
$M $M $M $M $M $M $M $M
Exposure at Default
Residential Mortgage 69,637 139,008 27,253 70,065 10,126 5,085 2,000 323,174
Qualifying Revolving Retail 11,409 435 2,007 5,110 2,103 863 161 22,088
Other Retail 1,393 5,433 2,157 25,773 8,843 1,809 943 46,351
Total 82,439 144,876 31,417 100,948 21,072 7,757 3,104 391,613
% of Total 21.1% 37.0% 8.0% 25.8% 5.4% 2.0% 0.8% 100.0%

Undrawn commitments (included in above)
Residential Mortgage 6,249 16,935 968 7,577 182 176 2 32,089
Qualifying Revolving Retail 8,915 434 1,328 2,305 781 113 28 13,904
Other Retail 681 2,014 1,252 3,340 464 68 6 7,825
Total 15,845 19,383 3,548 13,222 1,427 357 36 53,818

Average Exposure at Default
Residential Mortgage 0.234 0.210 0.192 0.237 0.276 0.268 0.218 0.221
Qualifying Revolving Retail 0.011 0.006 0.010 0.009 0.009 0.008 0.009 0.010
Other Retail 0.010 0.017 0.011 0.022 0.011 0.010 0.019 0.016

Exposure-weighted average Loss Given Default (%)
Residential Mortgage 19.8% 19.2% 19.1% 22.3% 20.5% 20.0% 20.8% 20.1%
Qualifying Revolving Retail 73.2% 73.2% 73.2% 73.2% 73.2% 73.2% 73.2% 73.2%
Other Retail 44.9% 44.3% 73.1% 45.5% 59.3% 60.1% 49.9% 50.0%

Exposure-weighted average risk weight (%)
Residential Mortgage 5.3% 6.7% 13.7% 29.5% 75.1% 108.4% 224.7% 17.0%
Qualifying Revolving Retail 4.9% 11.6% 13.8% 39.2% 110.5% 207.5% 327.8% 34.4%
Other Retail 26.4% 34.8% 54.2% 60.0% 100.8% 182.2% 201.2% 71.2%

September 2016

ANZ Basel III Pillar 3 disclosure

Table 9(e): Actual Losses by portfolio type

	Halfyear Sep 16
	Individual provision charge	Write-offs
Basel Asset Class	$M	$M
Corporate	466	468
Sovereign	2	2
Bank	-	-
Residential Mortgage	33	17
Qualifying Revolving Retail	104	141
Other Retail	251	275
Total Advanced IRB	856	903
Specialised Lending	(1)	8
Standardised approach	192	155
Total	1,047	1,066

	Halfyear Mar 1629
	Individual provision charge	Write-offs
Basel Asset Class	$M	$M
Corporate	325	139
Sovereign	2	-
Bank	-	-
Residential Mortgage	10	16
Qualifying Revolving Retail	96	130
Other Retail	258	250
Total Advanced IRB	691	535
Specialised Lending	6	6
Standardised approach	195	115
Total	892	656

	Halfyear Sep 1529
	Individual provision charge	Write-offs
Basel Asset Class	$M	$M
Corporate	157	183
Sovereign	(2)	-
Bank	-	-
Residential Mortgage	9	17
Qualifying Revolving Retail	102	145
Other Retail	279	272
Total Advanced IRB	545	617
Specialised Lending	(15)	61
Standardised approach	125	137
Total	655	815

29 The corporate asset class split between advanced and standardised has been revised for March 2016 and September 2015 comparatives to better reflect the Basel treatment of the underlying assets.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 9(f): Average estimated vs. actual PD, EAD and LGD – Advanced IRB

			Sep 16
			Average	Average
	Average	Average	estimated to	Estimated	Average
	Estimated PD	Actual PD	actual EAD	LGD	Actual LGD
Portfolio Type	%	%	ratio	%	%
Corporate	1.57	1.08	1.13	40.99	31.65
Sovereign	0.38	nil	n/a	n/a	n/a
Bank	0.61	0.05	0.93	46.00	58.30
Specialised Lending	n/a	1.95	1.09	n/a	24.80
Residential Mortgage	0.73	0.79	1.00	20.09	3.10
Qualifying Revolving Retail	2.62	1.95	1.05	73.20	72.50
Other Retail	3.74	3.59	1.05	50.30	41.80

APS 330 Table 9f compares internal credit risk estimates used in calculating regulatory capital with realised outcomes by portfolio types. It covers the PD, EAD and LGD estimates for the IRB portfolios. Estimated PD and LGD for Specialised Lending exposures have not been provided, since APRA requires the use of supervisory slotting for Regulatory EL calculations.

Actual PD, EAD ratio, Estimated LGD and Actual LGD for Sovereign exposures have not been provided, since there were no Sovereign defaults observed in ANZ Sovereign exposures for the observation period.

The estimated PD is based on the average of the internally estimated long-run PD’s for obligors that are not in default at the beginning of each financial year over the period of observation being 2009 to 2016. The actual PD is based on the number of defaulted obligors up to FAugust 2016 compared to the total number of obligors measured.

The EAD ratio compares internally estimated EAD prior to default to realised EAD for defaulted obligors over the 7 years of observation being 2009 to August 2016. A ratio greater than 1.0 signifies that on average, the actual defaulted exposures are lower than the estimated exposures at the time of default.

The estimated LGD is the downturn LGD for accounts that defaulted at the beginning of each year during the observation period being 2009 to September 2014. The actual LGD is based on the average realised losses over the period for the accounts observed at the beginning and defaulted during the observation period. For non-retail portfolios, the estimated and actual LGDs are based on accounts that defaulted up to September 2014. Defaults occurring after September2014 have been excluded from the analysis to allow sufficient time for workout period. Actual LGD for defaults where workouts were not finalised have been estimated to approximate the final actual loss.

For retail portfolios, the estimated and actual LGDs are based on accounts that defaulted in 2011 to 2015 financial years. For the retail portfolios, defaults with non-finalised workout have been excluded from the analysis.

In assessing the accuracy of the credit risk estimates, it should be noted that the period of analysis does not cover a full economic cycle.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 10 Credit risk mitigation disclosures

Main types of collateral taken by ANZ

Collateral is used to mitigate credit risk, as the secondary source of repayment in case the counterparty cannot meet its contractual repayment obligations.[30] Types of collateral typically taken by ANZ include:

Security over residential, commercial, industrial or rural property.
Charges over business assets.
Security over specific plant and equipment.
Charges over listed shares, bonds or securities.
Charges over cash deposits.
Guarantees and pledges.

In some cases, such as where the customer risk profile is considered very sound or by the nature of the product (for instance, small limit products such as credit cards), a transaction may not be supported by collateral.

Credit policy, requirements and processes set out the acceptable types of collateral, as well as a process by which additional instruments and/or asset types can be considered for approval. ANZ’s credit risk modelling teams use historical internal loss data and other relevant external data to assist in determining the discount that each type would be expected to incur in a forced sale. The discounted value is used in the determination of a SI for LGD purposes.

Policies and processes for collateral valuation and management

ANZ has well established policies, requirements and processes around collateral valuation and management, that are reviewed regularly. The concepts of legal enforceability, certainty and current valuation are central to collateral management.

In order to achieve legal enforceability and certainty, ANZ uses standard collateral instruments or has specific documentation drawn up by external legal advisers, and where applicable, security interests are registered. The use of collateral management systems also provides certainty that the collateral has been properly taken, registered and stored.

In order to rely on the valuation of collateral assets, ANZ has developed comprehensive rules around acceptable types of valuations (including who may value an asset), the frequency of revaluations and standard extension ratios for typical asset types. Upon receipt of a new valuation, the information is used to recalculate the SI (or to reassess the adequacy of the provision, in the case of an impaired asset), thereby ensuring that the exposure has an updated LGD attached to it for risk quantification purposes.

Guarantee support

Guarantee support for lending proposals are an integral component in transaction structuring for ANZ. The guarantee of a financially strong party can help improve the PD of a transaction through its explicit support of the weaker rated borrower.

Guarantees that are recognised for risk rating purposes may be provided by parties that include associated entities, banks, sovereigns or individuals. Credit requirements provide threshold parameters to determine acceptable counterparties in achieving risk grade enhancement of the transaction.

The suitability of the guarantor is determined by risk rating that guarantor. Not all guarantees or guarantors are recognised for risk grade enhancement purposes.

Use of credit derivatives for risk mitigation

ANZ uses purchased credit derivatives to mitigate credit risk by lowering exposures to reference entities that generate high concentration risk exposures or to improve risk return performance.

30 For some products, the collateral provided is fundamental to its structuring so is not strictly the secondary source of repayment. For example, lending secured by trade receivables is typically repaid by the collection of those receivables.

September 2016

ANZ Basel III Pillar 3 disclosure

Only certain credit derivatives such as credit default swaps (CDS) are recognised for risk mitigation purposes in the determination of regulatory capital. A CDS entails the payment by one party in exchange for credit default protection payment if a credit default event on a reference asset occurs. Standard, legally enforceable documentation applies.

For regulatory capital purposes, ANZ only recognises protection using credit derivatives where they meet several policy and regulatory requirements around the strength of the protection offered such as being irrevocable.

A CDS may only be transacted with banks and non-bank financial institutions that have been credit assessed and approved by a designated specialist credit officer. All parties must meet minimum credit standards and be allocated a related credit limit. In the event that the creditworthiness of a credit protection provider falls below the minimum required to provide effective protection, the protection is no longer recognised as an effective risk mitigant for regulatory purposes.

The use of netting

Netting is a form of credit risk mitigation in that it reduces EAD, by offsetting a customer’s positive and negative balances with ANZ.

In order to apply on-balance sheet netting, the arrangement must be specifically documented with the customer and meet a number of legally enforceable requirements.

Netting is also used where the credit exposure arises from off-balance sheet market related transactions. For close-out netting to be utilised with counterparties, a legally enforceable eligible netting agreement in an acceptable jurisdiction must be in place. This means that each transaction is aggregated into a single net amount and transactions are netted to arrive at a single overall sum.

Transaction structuring to mitigate credit risk

Besides collateral, guarantee support and derivatives described above, credit risk mitigation can also be furthered by prudent transaction structuring. For example, the risk in project finance lending can be mitigated by lending covenants, loan syndication and political risk insurance.

Concentrations of credit risk mitigation

Taking collateral raises the possibility that ANZ may inadvertently increase its risk by becoming exposed to collateral concentrations. For example, in the same way that an over-exposure to a particular industry may mean that a bank is more sensitive to the fortunes of that industry, an overexposure to a particular collateral asset type may make ANZ more sensitive to the performance of that asset type.

ANZ does not believe that it has any material concentrations of collateral types, given the well diversified nature of its portfolio and conservative asset extension ratios.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 10(b): Credit risk mitigation on Standardised approach portfolios – collateral[31]

		Sep 16
	Exposure at	Eligible Financial	Other Eligible
	Default	Collateral	Collateral
	$M	$M	$M	% Coverage
Standardised approach
Corporate	21,254	4,382	2,544	32.6%
Residential Mortgage	6,851	1	-	0.0%
Other Retail	3,279	63	-	1.9%
Total	31,384	4,446	2,544	22.3%

		Mar 16	Mar 16
	Exposure at	Eligible Financial	Other Eligible
	Default	Collateral	Collateral
	$M	$M	$M	% Coverage
Standardised approach
Corporate	22,491	2,937	1,497	19.7%
Residential Mortgage	7,182	1	-	0.0%
Other Retail	3,556	14	-	0.4%
Total	33,229	2,952	1,497	13.4%

		Sep 15	Sep 15
	Exposure at	Eligible Financial	Other Eligible
	Default	Collateral	Collateral
	$M	$M	$M	% Coverage
Standardised approach
Corporate	26,134	2,742	1,414	15.9%
Residential Mortgage	7,811	18	-	0.2%
Other Retail	3,635	-	-	0.0%
Total	37,580	2,760	1,414	11.1%

31 Eligible Collateral could include cash collateral (cash, certificates deposits and bank bills issued by the lending ADI), gold bullion and highly rated debt securities.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 10(c): Credit risk mitigation – guarantees and credit derivatives

		Sep 16
			Exposures
		Exposures	covered by
	Exposure at	covered by	Credit
	Default	Guarantees	Derivatives
	$M	$M	$M	% Coverage
Advanced IRB
Corporate (incl. Specialised Lending)	269,775	4,974	589	2.1%
Sovereign	120,933	4,579	-	3.8%
Bank	48,875	10	-	0.0%
Residential Mortgage	348,394	-	-	0.0%
Qualifying Revolving Retail	22,395	-	-	0.0%
Other Retail	42,291	-	-	0.0%
Total	852,663	9,563	589	1.2%
Standardised approach
Corporate	21,254	349	26	1.8%
Residential Mortgage	6,851	-	-	0.0%
Other Retail	3,279	-	-	0.0%
Total	31,384	349	26	1.2%

Qualifying Central Counterparties	10,448	-	-	0.0%

		Mar 16
			Exposures
		Exposures	covered by
	Exposure at	covered by	Credit
	Default	Guarantees	Derivatives
	$M	$M	$M	% Coverage
Advanced IRB
Corporate (incl. Specialised Lending)	280,427	3,939	454	1.6%
Sovereign	118,219	4,353	-	3.7%
Bank	49,127	57	-	0.1%
Residential Mortgage	337,314	-	-	0.0%
Qualifying Revolving Retail	22,417	-	-	0.0%
Other Retail	40,943	-	-	0.0%
Total	848,447	8,349	454	1.0%
Standardised approach
Corporate	22,491	405	26	1.9%
Residential Mortgage	7,182	-	-	0.0%
Other Retail	3,556	-	-	0.0%
Total	33,229	405	26	1.3%

Qualifying Central Counterparties	7,693	-	-	0.0%

September 2016

ANZ Basel III Pillar 3 disclosure

		Sep 15
			Exposures
		Exposures	covered by
	Exposure at	covered by	Credit
	Default	Guarantees	Derivatives
	$M	$M	$M	% Coverage
Advanced IRB
Corporate (incl. Specialised Lending)	293,338	6,860	345	2.5%
Sovereign	119,201	4,437	-	3.7%
Bank	54,276	111	-	0.2%
Residential Mortgage	323,174	-	-	0.0%
Qualifying Revolving Retail	22,088	-	-	0.0%
Other Retail	46,351	-	-	0.0%
Total	858,428	11,408	345	1.4%
Standardised approach
Corporate	26,134	544	-	2.1%
Residential Mortgage	7,811	-	-	0.0%
Other Retail	3,635	-	-	0.0%
Total	37,580	544	-	1.4%

Qualifying Central Counterparties	7,013	-	-	0.0%

September 2016

ANZ Basel III Pillar 3 disclosure

Table 11 General disclosures for derivatives and counterparty credit risk

Definition of counterparty credit risk

Counterparty credit risk in derivative transactions arises from the risk of counterparty default before settlement date of derivative contracts and the counterparty is unable to fulfill present and future contractual payment obligations. The amount at risk may change over time as a function of the underlying market parameters up to the positive value of the contract in favour of ANZ.

Counterparty credit risk is present in market instruments (derivatives and forward contracts), and comprises:

Settlement risk, which arises where one party makes payment or delivers value in the expectation but without certainty that the counterparty will perform the corresponding obligation in a bilateral contract at settlement date.
Market replacement risk (pre-settlement risk), which is the risk that a counterparty will default during the life of a derivative contract and that a loss will be incurred in covering the position.

ANZ transacts market instruments with the following counterparties:

End users – would typically use OTC derivative instruments provided by ANZ to manage price movement risk associated with their core business activity.
Professional counterparties – ANZ may hedge price movement risks by entering into transactions with professional counterparties that conduct two way (buy and sell) business.

Counterparty credit risk requires a different method to calculate exposure at default because actual and potential market movements impact ANZ’s exposure or replacement cost. The markets covered by this treatment include the derivative activities associated with interest rate, foreign exchange, CDS, equity, commodity and repurchase agreement (repo) products.

Counterparty credit risk governance

ANZ’s counterparty credit risk management is governed by its credit principles, policies and procedures. The Market Risk function is responsible for determining the counterparty credit risk exposure methodology applied to market instruments, in the framework for counterparty credit limit management, measurement and reporting.

The counterparty credit risk associated with derivative transactions is governed by credit limit setting consistent with all credit exposures to the ANZ Group. Counterparty credit limits are approved by the appropriate credit delegation holders.

Counterparty credit risk measurement and reporting

The approach to measure counterparty credit risk exposure is based on internal models. These measures are referred to as potential credit risk exposure (PCRE) and potential future exposure (PFE) and measure the worst case credit exposure of derivative transactions at future time points. PFE is measured at the 97.5[th] percentile at future pre-described time points, and PCRE is a 97.5[th] percentile averaged over time points.

PCRE factors recognise that prices may change over the remaining period to maturity, and that risk decreases as the contract’s remaining term to maturity decreases. In general terms PCRE is calculated by applying a risk weighting or volatility factor to the face value of the notional principal of individual trades.

PFE simulates relevant risk factors in a portfolio by taking into account the relevant volatilities and correlations calibrated to historical market data.

PFE and PCRE models are also used by credit officers to establish credit limits on an uncommitted and unadvised basis, to ensure the potential volatility of the transaction value is recognised. Counterparty credit risk exposure is calculated six times per 24 hour day and excesses above approved limits are reported to account controllers and Credit officers for action.

September 2016

ANZ Basel III Pillar 3 disclosure

Credit valuation adjustment (CVA)

In determining the fair value of a derivative the Group makes a derivative credit valuation adjustment (CVA) to reflect the possibility that the counterparty may default at some point over the life of the transaction. It is calculated by applying a probability of default (PD) on the potential estimated future positive exposure of the counterparty after taking into account the impact of collateral arrangements. At 30 September 2016, the Group revised its methodology for estimating CVA to align with industry best practice. The revised methodology makes greater use of market information for determining the PD and enhanced exposure modelling, to align with leading market practice.

Wrong way risk

ANZ’s management of counterparty credit risk also considers the possibility of wrong way risk, which emerges when PD is adversely correlated with counterparty credit risk exposures.

Counterparty credit risk mitigation and credit enhancements

ANZ’s primary tools to mitigate counterparty credit risk include:

A bilateral netting master agreement (e.g. an International Swaps and Derivatives Association - ISDA) allowing close-out netting of exposures in a portfolio with offsetting contracts, with a single net payment with the same legal counterparty.
Use of collateral agreements in some transactions based on standard market documentation (i.e. ISDA master agreement with credit support annex) that governs the amount of collateral required to be posted or received by ANZ throughout the life of the contract. Some agreements are linked to external credit ratings which means in the event of a party’s (ANZ or a counterparty) external rating being downgraded, it would likely be required to lodge collateral. The operation of collateral agreements falls under policy which establishes the control framework to ensure a robust and globally consistent approach to the management of collaterised exposures.
Use of right to break clauses in the master agreement or in trade confirmation to reduce term of long dated derivative trades.
Independent limit setting, credit exposure control, monitoring and reporting of excesses against approved credit limits.
Additional termination triggers (close out of exposure) such as credit rating downgrade clauses and change in ownership clauses included in documentation.
Linking covenants and events of default in an existing loan facility agreement to the master agreement.
Use of credit derivatives to hedge counterparty credit risk exposure.
Settlement through Continuous Linked Settlement (CLS) to eliminate settlement risk for foreign exchange transactions with CLS members.
Clearing certain derivative transactions through central counterparty clearing houses.

In the event of a downgrading of ANZ’s rating by one notch from AA- to A+, as at 30 September 2016, ANZ would be required to lodge USD 132 million additional collateral with its counterparties. This represents a small percentage of ANZ's overall liquidity portfolio.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 11(b): Counterparty credit risk – net derivative credit exposure

Net derivative credit exposure
		Sep 16	Mar 16	Sep 15
		$M	$M	$M
Gross positive fair value of contracts		87,496	88,747	85,625
Netting benefits		(71,394)	(70,991)	(62,782)
Netted current credit exposure		16,102	17,756	22,843
collateral held		(5,259)	(5,473)	(7,165)
Net derivatives credit exposure		10,843	12,283	15,678
Counterparty credit risk exposure – by portfolio	type
		Sep 16	Mar 16	Sep 15
Portfolio Type		$M	$M	$M
Corporate		15,214	15,786	19,084
Sovereign		1,801	2,529	3,872
Bank		13,537	13,687	14,908
Qualifying Central Counterparties		10,120	6,450	6,491
Specialised Lending		969	810	805
Total exposures		41,641	39,263	45,160
Notional Value of Credit Derivative Hedges
		Sep 16	Mar 16	Sep 15
Product Type		$M	$M	$M
Credit Default Swaps		737	724	728
Interest Rate Swaps		-	-	-
Currency Swaps		-	-	-
Other		-	-	-
Total exposures		737	724	728

September 2016

ANZ Basel III Pillar 3 disclosure

Table 11(c): Counterparty credit risk exposure – credit derivative transactions

		Sep 16
	Protection	Protection
	Bought	Sold	Total
	$M	$M	$M
Credit derivative products used for own credit portfolio
Credit default swaps	8,397	7,796	16,193
Total notional value	8,397	7,796	16,193
Credit derivative products used for intermediation
Credit default swaps	737	737	1,474
Total return swaps	-	-	-
Total notional value	737	737	1,474
Total credit derivative notional value	9,134	8,533	17,667
		Mar 16
	Protection	Protection
	Bought	Sold	Total
	$M	$M	$M
Credit derivative products used for own credit portfolio
Credit default swaps	19,921	19,365	39,286
Total notional value	19,921	19,365	39,286
Credit derivative products used for intermediation
Credit default swaps	724	724	1,448
Total return swaps	-	-	-
Total notional value	724	724	1,448
Total credit derivative notional value	20,645	20,089	40,734

		Sep 15
	Protection	Protection
	Bought	Sold	Total
	$M	$M	$M
Credit derivative products used for own credit portfolio
Credit default swaps	22,284	21,474	43,758
Total notional value	22,284	21,474	43,758
Credit derivative products used for intermediation
Credit default swaps	728	728	1,456
Total return swaps	-	-	-
Total notional value	728	728	1,456
Total credit derivative notional value	23,012	22,202	45,214

September 2016

ANZ Basel III Pillar 3 disclosure

Chapter 7 – Securitisation

Table 12 Securitisation disclosures

Definition of securitisation and resecuritisation

A securitisation is a financial structure where the cash flow from a pool of assets is used to service obligations to at least two different tranches or classes of creditors, typically holders of debt securities, with each class or tranche reflecting a different degree of credit risk. This stratification of credit risk means that one class of creditors is entitled to receive payments from the pool before another class[32] . A resecuritisation exposure is a securitisation exposure in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is a securitisation exposure.

Securitisations may be categorised as:

Traditional securitisations, where legal ownership of the underlying asset pool is transferred to investors, with principal and interest paid from realisation of or regular cash flows from the assets. The Special Purpose Vehicle (SPV) assets are insulated from bankruptcy of the seller or servicer.
Synthetic securitisations, where credit risk is transferred to a third party but legal ownership of the underlying assets remain with the originator e.g. by using credit derivatives or guarantees.

Covered bond transactions, whereby bonds issued by ANZ are secured by assets held in a s p e c i a l purpose vehicle, are not securitisation exposures.

Securitisation Activities

ANZ’s key securitisation activities are:

Securitisation of third-party originated assets, including residential mortgages, credit cards, auto and equipment loans and trade receivables.
Investment in securities – ANZ may purchase notes issued by securitisation programs.
Securitisation of ANZ originated assets (including self securitisation) as a funding and liquidity management tool, which may or may not involve the transfer of credit risk i.e. may or may not provide regulatory capital relief.
Provision of facilities and services to securitisations or resecuritisations (where the underlying assets may be ANZ or third-party originated) e.g. structuring and arranging services, providing funding and/or swaps to securitisation vehicles and (via ANZ Capel Court Limited) trust management services. Funding may be provided via an ANZ-sponsored securitisation vehicle which is consolidated onto the Bank’s financial statements, to certain clients wishing to access securitisation.

ANZ has no affiliated entities that ANZ manages or advises and that invest in securitisation exposures that ANZ has securitised or in SPVs that ANZ sponsors.

Governance of securitisation activities

Governance of securitisation activities is overseen by the Board and executive committees described in Chapter 3, and managed in accordance with the credit risk and market risk frameworks described in Chapters 6 and 8.

Risk Management

Similar to other exposures, securitisation exposures are subject to credit, market, operational liquidity and legal risks. Roles and responsibilities are clearly outlined in ANZ’s established risk management framework of policies and procedures, including:

Appropriate risk management systems to identify, measure, monitor and manage the risks arising from its involvement in securitisation exposures;

32 APRA’s definition of securitisation includes certain cases where only one tranche or class of creditors is serviced by the cash flow from the pool of assets.

September 2016

ANZ Basel III Pillar 3 disclosure

Impact of ANZ’s involvement in securitisation exposures on its risk profile; and
How ANZ ensures that it does not provide any implicit support to its securitisation exposures.

Funding for third party originated exposures and investment in securities are via balance sheet funded arrangements where such arrangements satisfy ANZ’s credit, due diligence and other business requirements.

Many functions within ANZ are involved in securitisation activities given the range of activities undertaken and risks that need to be managed. For origination and structuring of securitisation transactions, ANZ has a specialist securitisation team with independent Risk personnel overseeing operations. Credit decisions require joint Risk and business approval. The securitisation team must be involved in all non-trading securitisation transactions across ANZ, which ensures consistent expert treatment. Where ANZ invests in instruments issued by securitisation programs, the relevant business area manages these exposures until the securitisation exposures are repaid in full or traded.

All facilities provided to or investments in securitisation programs (across both the banking and trading books) undergo initial and ongoing due diligence requirements as outlined by APRA. This due diligence is completed with input from the credit risk function and includes analysing the structure of the transaction and monitoring performance of the underlying assets of the transaction. In addition, such securitisation exposures are formally reviewed at least annually, including the risk grade.

Risk reporting of securitisation exposures

In addition to the formal credit review process for ANZ’s securitisation exposures, the type and frequency of internal reporting to the appropriate credit risk and Markets functions is as follows:

Facilities provided to securitisation programs are reported using standard credit reporting systems, distinguished by appropriate product codes. The regular reporting frequency for most of these systems is monthly.
Investments in securitisations are reported through the banking book or the trading book on a monthly basis.

The use and treatment of Credit Risk Mitigation (CRM) techniques with respect to securitisation exposures are assessed on a case-by-case basis in a manner consistent with the bank-wide CRM methodology[33] .

Regulatory capital approaches

For securitisation exposures held in ANZ’s banking book[34] , ANZ applies an IRB approach (as outlined in APS 120 Securitisation) to determine the regulatory capital charge.

Chapter 8 outlines regulatory capital treatment for securitisation exposures held in ANZ’s trading book. The operational requirements for the recognition of external credit assessments outlined in Attachment B to APS 120 apply to these exposures.

In accordance with APS 120, ANZ has a hierarchy of approaches available to quantify the credit risk of banking book securitisation exposures. The most common approaches used are the Ratings Based Approach (specifically utilising the external ratings of External Credit Assessment Iinstructions and the Internal Assessment Approach (IAA). Other approaches that may be used are Supervisory Formula Approach (SFA) and Eligible Facility Approach.

Where the use of ECAI’s is relevant, ANZ applies the ratings or the rating methodologies provided by Standard & Poor’s, Moody’s Investor Services and/or Fitch Ratings as appropriate.

33 For example, various types of analysis including quantitative analysis of credit enhancements are performed for non-externally rated transactions. Factors such as geography, facility / transaction type and ANZ’s role will determine the applicable CRM techniques to apply.

34 Exposures are classified into either the trading book or the banking book. In general terms, the trading book consists of positions in financial instruments and commodities held with trading intent or in order to hedge other elements of the trading book, and the banking book contains all other exposures. Banking book exposures are typically held to maturity, in contrast to the shorter term, trading nature of the trading book.

September 2016

ANZ Basel III Pillar 3 disclosure

IAA is applied to securitisation exposures that are not externally rated where the underlying assets are residential mortgages, equipment finance, auto loans or trade receivables. When utilising the IAA, ANZ uses a rating agency-type methodology which specifies certain stress factors, takes into account historical performance of assets and other (asset-specific) considerations such as underwriting standards.

IAA methodology is applied and maintained in accordance with APRA’s requirements and it forms part of ANZ’s overall securitisation risk-grading framework. In addition to adopting IAA for regulatory and economic capital requirements, IAA may be used for internal management purposes.

Accounting policies

The principal accounting policies governing ANZ’s securitisation activities are outlined in ANZ’s 2016 Annual Report Notes to the Financial Statements. These include the valuation, derecognition, consolidation and income recognition principles outlined in Note 1 – Significant Accounting Policies and the critical judgments applied to these policies outlined in Note 2 – Critical Estimates and Judgments Used in Applying Accounting Policies. ANZ applies these group accounting policies to its securitisation activities, as appropriate and these policies have not changed since the prior year. Note 35 – Structured Entities and Note 36 – Transfers of Financial Assets also provides details about the nature of ANZ’s securitisation activities and certain accounting policies as they specifically apply to these activities.

Financial instruments held or issued by structured entities are recognised and valued using the principles of AASB 139 Financial Instruments: Recognition and Measurement . For synthetic securitisations, any transferred credit exposure is recognised through the fair value measurement of the segregated embedded or stand-alone credit derivative established within the structure.

To the extent that ANZ has exposures intended to be securitised, they could reside in either the banking or trading book.

To the extent that ANZ has entered into contractual arrangements that could require it to provide financial support for securitised assets e.g. liquidity facilities, these are recognised in accordance with the accounting policies set out in ANZ’s 2016 Annual Report.

September 2016

ANZ Basel III Pillar 3 disclosure

Banking Book

Table 12(g): Banking Book: Traditional and synthetic securitisation exposures

		Sep 16
Traditional securitisations
	ANZ Originated	ANZ Self Securitised	ANZ Sponsored
Underlyingasset	$M	$M	$M
Residential mortgage	-	80,478	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	80,478	-

Synthetic securitisations
	ANZ Originated	ANZ Self Securitised	ANZ Sponsored
Underlying asset	$M	$M	$M
Residential mortgage	-	-	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	-	-
Aggregate of traditional and synthetic	securitisations
	ANZ Originated	ANZ Self Securitised	ANZ Sponsored
Underlyingasset	$M	$M	$M
Residential mortgage	-	80,478	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	80,478	-

September 2016

ANZ Basel III Pillar 3 disclosure

		Mar 16
Traditional securitisations
	ANZ Originated	ANZ Self Securitised	ANZ Sponsored
Underlyingasset	$M	$M	$M
Residential mortgage	-	79,806	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	79,806	-

Synthetic securitisations
	ANZ Originated	ANZ Self Securitised	ANZ Sponsored
Underlyingasset	$M	$M	$M
Residential mortgage	-	-	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	-	-
Aggregate of traditional and synthetic	securitisations
	ANZ Originated	ANZ Self Securitised	ANZ Sponsored
Underlyingasset	$M	$M	$M
Residential mortgage	-	79,806	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	79,806	-
		Sep 15
Traditional securitisations
	ANZ Originated	ANZ Self Securitised	ANZ Sponsored
Underlying asset	$M	$M	$M
Residential mortgage	-	79,355	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	79,355	-
Synthetic securitisations
	ANZ Originated	ANZ Self Securitised	ANZ Sponsored
Underlyingasset	$M	$M	$M
Residential mortgage	-	-	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	-	-
	Aggregate of traditional and synthetic		securitisations
	ANZ Originated	ANZ Self Securitised	ANZ Sponsored
Underlying asset	$M	$M	$M
Residential mortgage	-	79,355	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	79,355	-

September 2016

ANZ Basel III Pillar 3 disclosure

Table 12(h): Banking Book: Impaired and Past due loans relating to ANZ originated securitisations

			Sep 16
					Losses recognised
		ANZ Self			for the six month
	ANZ Originated	Securitised	Impaired	Past due	ended
Underlyingasset	$M	$M	$M	$M	$M
Residential mortgage	-	80,478	-	44	-
Credit cards and other personal loans	-	-	-	-	-
Auto and equipment finance	-	-	-	-	-
Commercial loans	-	-	-	-	-
Other	-	-	-	-	-
Total	-	80,478	-	44	-
			Mar 16
					Losses recognised
		ANZ Self			for the six month
	ANZ Originated	Securitised	Impaired	Past due	ended
Underlyingasset	$M	$M	$M	$M	$M
Residential mortgage	-	79,806	-	51	-
Credit cards and other personal loans	-	-	-	-	-
Auto and equipment finance	-	-	-	-	-
Commercial loans	-	-	-	-	-
Other	-	-	-	-	-
Total	-	79,806	-	51	-
			Sep 15
					Losses recognised
		ANZ Self			for the six month
	ANZ Originated	Securitised	Impaired	Past due	ended
Underlying asset	$M	$M	$M	$M	$M
Residential mortgage	-	79,355	-	36	1
Credit cards and other personal loans	-	-	-	-	-
Auto and equipment finance	-	-	-	-	-
Commercial loans	-	-	-	-	-
Other	-	-	-	-	-
Total	-	79,355	-	36	1

September 2016

ANZ Basel III Pillar 3 disclosure

Table 12(i): Banking Book: Total amount of outstanding exposures intended to be securitised

No assets from ANZ's Banking Book were intended to be securitised as at the reporting date.

Table 12(j): Banking Book: Securitisation - Summary of current period’s activity by underlying asset type and facility[35 ]

Table 12(j): Banking Book: Securitisation - Summary of current period’s activity by underlying asset type and facility35
Sep 16
Original value securitised
Securitisation activity by underlying asset type ANZ Originated $M ANZ Self Securitised $M ANZ Sponsored $M	Recognised gain or loss
	on sale
	$M
Residential mortgage - 672 -	-
Credit cards and other personal loans - - -	-
Auto and equipment finance - - -	-
Commercial loans - - -	-
Other - - -	-
Total - 672 -	-

Securitisation activity by facility provided
	Notional amount
	$M
Liquidity facilities	-
Funding facilities	317
Underwriting facilities	-
Lending facilities	-
Credit enhancements	-
Holdings of securities (excluding trading book)	(934)
Other	11
Total	(606)

==> picture [451 x 299] intentionally omitted <==

35 Activity represents net movement in outstandings.

September 2016

ANZ Basel III Pillar 3 disclosure

Mar 16	Recognised gain or loss on sale $M - - - - - - Notional amount $M - - - - - (186) 49 (137)
Original value securitised
Securitisation activity by underlying asset type ANZ Originated $M ANZ Self Securitised $M ANZ Sponsored $M	Recognised gain or loss on sale $M
Residential mortgage - 451 -	-
Credit cards and other personal loans - - -	-
Auto and equipment finance - - -	-
Commercial loans - - -	-
Other - - -	-
Total - 451 -	-

Securitisation activity by facility provided
	Notional amount
	$M
Liquidity facilities	-
Funding facilities	-
Underwriting facilities	-
Lending facilities	-
Credit enhancements	-
Holdings of securities (excluding trading book)	(186)
Other	49
Total	(137)

Sep 15	Recognised gain or loss on sale $M - - - - - - Notional amount $M - 329 - - - 240 4 573
Original value securitised
Securitisation activity by underlying asset type ANZ Originated $M ANZ Self Securitised $M ANZ Sponsored $M	Recognised gain or loss on sale $M
Residential mortgage - 5,295 -	-
Credit cards and other personal loans - - -	-
Auto and equipment finance - - -	-
Commercial loans - - -	-
Other - - -	-
Total - 5,295 -	-

Securitisation activity by facility provided
	Notional amount
	$M
Liquidity facilities	-
Funding facilities	329
Underwriting facilities	-
Lending facilities	-
Credit enhancements	-
Holdings of securities (excluding trading book)	240
Other	4
Total	573

September 2016

ANZ Basel III Pillar 3 disclosure

Table 12(k): Banking Book: Securitisation - Regulatory credit exposures by exposure type

	Sep 16 Mar 16 Sep 15
Securitisation exposure type - On balance sheet	$M $M $M
Liquidity facilities	5 5 5
Funding facilities	6,791 6,100 5,593
Underwriting facilities	- - -
Lending facilities	- - -
Credit enhancements	- - -
Holdings of securities (excluding trading book)	3,975 4,890 5,076
Protection provided	- - -
Other	152 170 168
Total	10,923 11,165 10,842


	Sep 16 Mar 16 Sep 15
Securitisation exposure type - Off balance sheet	$M $M $M
Liquidity facilities	61 62 66
Funding facilities	- - -
Underwriting facilities	- - -
Lending facilities	- - -
Credit enhancements	- - -
Holdings of securities (excluding trading book)	- - -
Protection provided	- - -
Other	- - -
Total	61 62 66


	Sep 16 Mar 16 Sep 15
Total Securitisation exposure type	$M $M $M
Liquidity facilities	66 67 71
Funding facilities	6,791 6,100 5,593
Underwriting facilities	- - -
Lending facilities	- - -
Credit enhancements	- - -
Holdings of securities (excluding trading book)	3,975 4,890 5,076
Protection provided	- - -
Other	152 170 168
Total	10,984 11,227 10,908

September 2016

ANZ Basel III Pillar 3 disclosure

Table 12(l) part (i): Banking Book: Securitisation - Regulatory credit exposures by risk weight band

	Sep 16 Mar 16 Sep 15 Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M 10,873 1,113 11,120 1,106 10,799 1,065 - - - - - - - - - - - - 50 29 45 26 43 24 61 61 62 62 66 66 0 0 - - - 1 - - - - - - 10,984 1,203 11,227 1,194 10,908 1,156 Sep 16 Mar 16 Sep 15 Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -	Sep 16 Mar 16 Sep 15 Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M 10,873 1,113 11,120 1,106 10,799 1,065 - - - - - - - - - - - - 50 29 45 26 43 24 61 61 62 62 66 66 0 0 - - - 1 - - - - - - 10,984 1,203 11,227 1,194 10,908 1,156 Sep 16 Mar 16 Sep 15 Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -	Sep 16 Mar 16 Sep 15 Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M 10,873 1,113 11,120 1,106 10,799 1,065 - - - - - - - - - - - - 50 29 45 26 43 24 61 61 62 62 66 66 0 0 - - - 1 - - - - - - 10,984 1,203 11,227 1,194 10,908 1,156 Sep 16 Mar 16 Sep 15 Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -	Sep 16 Mar 16 Sep 15 Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M 10,873 1,113 11,120 1,106 10,799 1,065 - - - - - - - - - - - - 50 29 45 26 43 24 61 61 62 62 66 66 0 0 - - - 1 - - - - - - 10,984 1,203 11,227 1,194 10,908 1,156 Sep 16 Mar 16 Sep 15 Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M Regulatory credit exposure $M Risk weighted assets $M - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Securitisation
risk weights
≤ 25%
>25 ≤ 35%
>35 ≤ 50%
>50 ≤ 75%
>75 ≤ 100%
>100 ≤ 650%
1250% (Deduction)
Total




Resecuritisation
risk weights
≤ 25%	-	-	-	-
>25 ≤ 35%	-	-	-	-
>35 ≤ 50%	-	-	-	-
>50 ≤ 75%	-	-	-	-
>75 ≤ 100%	-	-	-	-
>100 ≤ 650%	-	-	-	-
1250% (Deduction)	-	-	-	-
Total	-	-	-	-

	Sep 16	Mar 16

Total Securitisation
risk weights
≤ 25%
>25 ≤ 35%
>35 ≤ 50%
>50 ≤ 75%
>75 ≤ 100%
>100 ≤ 650%
1250% (Deduction)
Total

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ANZ Basel III Pillar 3 disclosure

Table 12(l) part (ii): Banking Book: Securitisation - Aggregate securitisation exposures deducted from Capital

No longer required under Basel III; defaulted exposures are given a risk weight of 1250% and no longer deducted from capital.

Table 12(m): Banking Book: Securitisations subject to early amortisation treatment

ANZ does not have any Securitisations subject to early amortisation treatment or using Standardised approach.

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ANZ Basel III Pillar 3 disclosure

Table 12(n): Banking Book: Resecuritisation - Aggregate amount of resecuritisation exposures retained or purchased

exposures retained or purchased
		Sep 16
	Exposures	Exposures not
	subject to CRM	subject to CRM	Total
Resecuritisation exposures retained orpurchased	$M	$M	$M
Residential mortgage	-	-	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	-	-
	Exposures to
	Guarantors
Resecuritisation exposures by credit worthiness of guarantors	$M
Credit Rating Level 1	-
Credit Rating Level 2	-
Credit Rating Level 3	-
Credit Rating Level 4	-
Credit Rating Level 5 or below	-
No Guarantor	-
Total	-
		Mar 16
	Exposures	Exposures not
	subject to CRM	subject to CRM	Total
Resecuritisation exposures retained orpurchased	$M	$M	$M
Residential mortgage	-	-	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	-	-
	Exposures to
	Guarantors
Resecuritisation exposures by credit worthiness ofguarantors	$M
Credit Rating Level 1	-
Credit Rating Level 2	-
Credit Rating Level 3	-
Credit Rating Level 4	-
Credit Rating Level 5 or below	-
No Guarantor	-
Total	-
		Sep 15
	Exposures	Exposures not
	subject to CRM	subject to CRM	Total
Resecuritisation exposures retained orpurchased	$M	$M	$M
Residential mortgage	-	-	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	-	-
	Exposures to
	Guarantors
Resecuritisation exposures by credit worthiness ofguarantors	$M
Credit Rating Level 1	-
Credit Rating Level 2	-
Credit Rating Level 3	-
Credit Rating Level 4	-
Credit Rating Level 5 or below	-
No Guarantor	-
Total	-

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ANZ Basel III Pillar 3 disclosure

Trading Book

Table 12(o): Trading Book: Traditional and synthetic securitisation exposures

No assets from ANZ's Trading Book were securitised during the reporting period.

Table 12(p): Trading Book: Total amount of outstanding exposures intended to be securitised

No assets from ANZ's Trading Book were intended to be securitised as at the reporting date.

Table 12(q): Trading Book: Securitisation - Summary of current year's activity by underlying asset type and facility

No assets from ANZ's Trading Book were securitised during the reporting period.

Table 12(r): Trading Book: Traditional and synthetic securitisation exposures

No assets from ANZ's Trading Book were securitised during the reporting period.

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ANZ Basel III Pillar 3 disclosure

Table 12(s): Trading Book: Securitisation – Regulatory credit exposures by exposure type

Securitisation exposure type - On balance sheet	Sep 16 $M	Mar 16 $M	Sep 15 $M
Liquidity facilities	-	-	-
Funding facilities	-	-	-
Underwriting facilities	-	-	-
Lending facilities	-	-	-
Credit enhancements	-	-	-
Holdings of securities	-	-	-
Protection provided	-	-	-
Other	-	-	-
Total	-	-	-
Securitisation exposure type - Off balance sheet	Sep 16 $M	Mar 16 $M	Sep 15 $M
Liquidity facilities	-	-	-
Funding facilities	-	-	-
Underwriting facilities	-	-	-
Lending facilities	-	-	-
Credit enhancements	-	-	-
Holdings of securities	19	-	-
Protection provided	-	-	-
Other	-	-	-
Total	19	-	-
Total Securitisation exposure type	Sep 16 $M	Mar 16 $M	Sep 15 $M
Liquidity facilities	-	-	-
Funding facilities	-	-	-
Underwriting facilities	-	-	-
Lending facilities	-	-	-
Credit enhancements	-	-	-
Holdings of securities	19	-	-
Protection provided	-	-	-
Other	-	-	-
Total	19	-	-

September 2016

ANZ Basel III Pillar 3 disclosure

Table 12(t)(i) & Table 12(u)(i): Trading Book: Aggregate securitisation exposures subject to Internal Models Approach (IMA) and the associated Capital requirements

ANZ does not have any Securitisation exposures subject to Internal Models Approach.

Table 12(t)(ii) & Table 12(u)(ii): Trading Book: Aggregate securitisation exposures subject to APS120 and the associated Capital requirements

ANZ does not have any aggregate Securitisation exposures subject to APS120 and the associated Capital requirements.

Table 12(u)(iii): Trading Book: Securitisation - Aggregate securitisation exposures deducted from Capital

ANZ has approximately AUD3,860 of securitisation exposures deducted from capital as a result of ongoing due diligence being discontinued in respect of these very small holdings, i.e. AUD40,000 original notional / AUD3,860 paid down notional

Table 12(v): Trading Book: Securitisations subject to early amortisation treatment

ANZ does not have any Securitisation exposures subject to early amortisation or using Standardised approach.

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ANZ Basel III Pillar 3 disclosure

Table 12(w): Trading Book: Resecuritisation - Aggregate amount of resecuritisation exposures retained or purchased

exposures retained or purchased
		Sep 16
	Exposures	Exposures not
	subject to CRM	subject to CRM	Total
Resecuritisation exposures retained orpurchased	$M	$M	$M
Residential mortgage	-	-	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	-	-
	Exposures to
	Guarantors
Resecuritisation exposures by credit worthiness of guarantors	$M
Credit Rating Level 1	-
Credit Rating Level 2	-
Credit Rating Level 3	-
Credit Rating Level 4	-
Credit Rating Level 5 or below	-
No Guarantor	-
Total	-
		Mar 16
	Exposures	Exposures not
	subject to CRM	subject to CRM	Total
Resecuritisation exposures retained orpurchased	$M	$M	$M
Residential mortgage	-	-	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	-	-
	Exposures to
	Guarantors
Resecuritisation exposures by credit worthiness ofguarantors	$M
Credit Rating Level 1	-
Credit Rating Level 2	-
Credit Rating Level 3	-
Credit Rating Level 4	-
Credit Rating Level 5 or below	-
No Guarantor	-
Total	-
		Sep 15
	Exposures	Exposures not
	subject to CRM	subject to CRM	Total
Resecuritisation exposures retained orpurchased	$M	$M	$M
Residential mortgage	-	-	-
Credit cards and other personal loans	-	-	-
Auto and equipment finance	-	-	-
Commercial loans	-	-	-
Other	-	-	-
Total	-	-	-
	Exposures to
	Guarantors
Resecuritisation exposures by credit worthiness ofguarantors	$M
Credit Rating Level 1	-
Credit Rating Level 2	-
Credit Rating Level 3	-
Credit Rating Level 4	-
Credit Rating Level 5 or below	-
No Guarantor	-
Total	-

September 2016

ANZ Basel III Pillar 3 disclosure

Chapter 8 – Market risk

Table 13 Market risk – Standard approach

ANZ uses the standard model approach to measure market risk capital for interest rate risk – specific risk[36] , equity specific risk and electricity trading risk factors. For internal purposes only ANZ also uses an internal model for electricity.

For interest rate risk – specific risk, ANZ’s internal VaR model captures general interest rate and credit spread risk for all products, but not the credit spread risk associated with individual issuers of interest rate products.

Table 13(b): Market risk – Standard approach[37]

	Sep 16	Mar 16	Sep 15
	$M	$M	$M
Interest rate risk	79	93	118
Equity position risk	1	1	1
Foreign exchange risk	-	-	-
Commodity risk	1	1	2
Total	81	95	121

Risk Weighted Assets equivalent	1,013	1,188	1,513

36 Specific risk is the risk that the value of a security will change due to issuer-specific factors. It applies to interest rate and equity positions related to a specific issuer.

37RWA equivalent is the capital requirement multiplied by 12.5 in accordance with APS 110.

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ANZ Basel III Pillar 3 disclosure

Table 14 Market risk – Internal models approach

Definition and scope of market risk

Market risk stems from ANZ’s trading and balance sheet activities and is the risk to ANZ’s earnings arising from changes in interest rates, foreign exchange rates, credit spreads, volatility, correlations or from fluctuations in bond, commodity or equity prices.

Market risk management of IRRBB is described in Chapter 11 and is excluded from this Chapter.

Regulatory approval to use the Internal Models Approach

ANZ has been approved by APRA to use the Internal Models Approach (IMA) under APS 116 Capital Adequacy: Market Risk for all trading portfolios except for specific interest rate risk, equity specific risk and electricity trading. ANZ uses the Standardised approach to market risk capital for these segments.

Governance of market risk

The Board Risk Committee supervision of market risk is supported by the Credit Market Risk Committee (CMRC). CMRC is responsible for the oversight and control of credit, market, insurance and material financial risks across the ANZ Group and meets at least monthly..

The Markets Risk function is a specialist risk management unit independent of the business that is responsible for:

Designing and implementing policies and procedures to ensure market risk exposures are managed within the appetite and limit framework set by the Board.
Measuring and monitoring market risk exposures, and approving counterparty and associated risks.
The ongoing effectiveness and appropriateness of the risk management framework.

Traded market risk

Traded Market Risk 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. Trading positions arise from transactions where ANZ acts as principal with customers, financial exchanges or inter-bank counterparties.

The Traded, Foreign Exchange and Commodity Market Risk Policy and accompanying procedures (together the “TFC Framework”) governs the management of traded market risk and its key components include:

A clear definition of the trading book.
A comprehensive set of requirements that promote the proactive identification and communication of risk.
A robust Value at Risk (VaR) quantification approach supplemented by comprehensive stress testing.
A comprehensive limit framework that controls all material market risks.
An independent Market Risk function with specific responsibilities.
Regular and effective reporting of market risk to executive management and the Board.

Non-Traded Market Risk

Non Traded Market Risk is the market risk associated with the management of non-traded interest rate risk, liquidity risk and foreign exchange exposures from the Group’s foreign currency capital and earnings.

Included in Non-Traded Market risk is Interest Rate Risk in the Banking Book (IRRBB). This is the risk of loss arising from adverse changes in the overall and relative level of interest rates for different tenors, differences in the actual versus expected net interest margin, and the potential valuation risk associated with embedded options in financial instruments and bank products.

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ANZ Basel III Pillar 3 disclosure

In quantifying risk, all material market risk factors need to be identified and reflected within the risk measurement approach. Non-traded market risk (or balance sheet risk) comprises the management of non-traded interest rate risk, liquidity risk, and foreign exchange exposures from the Group’s foreign currency capital and earnings.

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

Measurement of market risk

ANZ’s traded market risk management framework incorporates a risk measurement approach to quantify the magnitude of market risk within trading books. This approach and related analysis identifies the range of outcomes that can be expected over a given period of time and establishes the relative likelihood of those outcomes.

ANZ’s key tools to measure and manage traded market risk on a daily basis are VaR, sensitivities measures and stress tests. VaR is calculated using a historical simulation with a 500 day observation period for standard VaR, and a one-year stressed period for stressed VaR. Traded VaR is calculated at a 99% confidence level for one and ten-day holding periods for standard VaR, and a ten-day holding period for stressed VaR. All material market risk factors and all trading portfolios are captured within the VaR model, with the exception of specific interest rate risk, equity specific risk and electricity trading, for which capital is calculated using the Standardised approach described in Table 13(b).

Risk measurement methods and models are reviewed and validated by an independent function to comply with the prudential requirements for prudent valuation practices for positions held in the trading book contained in Attachment A of APS 111 Capital Adequacy: Measurement of Capital.

ANZ also applies a wide range of stress tests on the Group trading portfolio and to individual trading portfolios. Standard stress tests are executed daily measuring the potential loss that could arise from the largest market movements during observed since 2008 over specific holding periods. Holding periods used to calculate stress parameters differ and reflect the relative liquidity of each product type. Results from stress testing on plausible severe scenarios are also calculated daily.

VaR and stress tests are supplemented by l o s s limits and detailed control limits. Loss limits ensure that in the event of continued losses from a trading activity, the trading activity is stopped and senior management reviews before trading resumed. Where necessary, detailed control limits such as sensitivity or position limits are also in place to ensure appropriate control is exercised over a specific risk or product.

Comparison of VaR estimates to gains/losses

Back testing involves comparing VaR calculations with corresponding profit and loss to identify how often trading losses exceed the calculated VaR. For APRA back testing purposes, VaR is calculated at the 99% confidence interval with a one-day holding period.

Back testing is conducted daily, and outliers are analysed to determine whether they are the result of trading decisions, systemic changes in market conditions or issues related to the VaR model (historical data or model calibration).

ANZ uses actual and hypothetical profit and loss data. Hypothetical data is designed to remove the impacts of intraday trading and sales margins. It is calculated as the difference between the value of the prior day portfolio at prior day closing rates and the value at current day closing rates. Markets Finance calculates actual profit and loss while Market Risk calculates hypothetical profit and loss.

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ANZ Basel III Pillar 3 disclosure

Table 14(e): Value at Risk (VaR) and stressed VaR over the reporting period[38 ]

	Six months ended 30 Sep 16
	Mean Maximum Minimum Period end
99% 1 Day Value at Risk(VaR)	$M $M $M $M
Foreign Exchange	4.8 8.6 2.2 4.0
Interest Rate	7.0 15.2 4.1 4.7
Credit	3.4 4.4 2.2 3.3
Commodity	1.8 2.8 1.4 2.5
Equity	0.1 0.6 0.1 0.5

	Six months ended 31 Mar 16
	Mean Maximum Minimum Period end
99% 1 Day Value at Risk(VaR)	$M $M $M $M
Foreign Exchange	5.6 11.4 2.6 5.9
Interest Rate	11.3 20.1 6.9 9.0
Credit	3.0 4.6 2.4 2.7
Commodity	1.7 2.5 1.0 1.2
Equity	0.2 2.0 0.1 0.1

		Six months ended	30 Sep 15
	Mean	Maximum	Minimum	Period end
99% 1 Day Value at Risk(VaR)	$M	$M	$M	$M
Foreign Exchange	6.7	14.2	2.8	5.0
Interest Rate	8.3	12.9	5.5	10.1
Credit	3.8	5.4	2.9	3.5
Commodity	2.4	3.6	1.5	1.6
Equity	0.9	4.5	0.1	2.5

	Six months ended 30 Sep 16
	Mean Maximum Minimum Period end
	$M $M $M $M
99% 10 Day Stressed VaR

Foreign Exchange	31.7 53.0 13.0 27.1
Interest Rate	42.8 95.2 17.7 39.4
Credit	19.6 30.2 12.5 16.7
Commodity	8.4 16.4 5.5 8.6
Equity	1.8 3.9 0.9 3.5

	Six months ended 31 Mar 16
	Mean Maximum Minimum Period end
99% 10 Day Stressed VaR	$M $M $M $M

Foreign Exchange	29.5 59.5 11.0 33.3
Interest Rate	55.1 79.1 26.1 36.3
Credit	21.4 34.5 14.0 20.3
Commodity	11.4 20.6 5.8 6.7
Equity	1.5 3.1 0.6 1.6

	Six months ended 30 Sep 15
	Mean Maximum Minimum Period end
	$M $M $M $M
99% 10 Day Stressed VaR

Foreign Exchange	36.1 71.6 13.3 25.5
Interest Rate	67.3 161.7 38.5 45.2
Credit	26.5 40.4 19.2 23.6
Commodity	10.7 19.6 5.3 11.6
Equity	1.3 5.0 0.5 2.9

38 The Foreign exchange VaR excludes foreign exchange translation exposures outside of the trading book.

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ANZ Basel III Pillar 3 disclosure

Reporting of market risk

Market Risk reports daily VaR and stress testing results to senior management in Market Risk and the Markets business. Market Risk expediently escalates details of any limit breach to the appropriate discretion holder within Market Risk and to Group Risk, and reports to the CMRC each month.

Market Risk monitors and analyses back testing results daily and reports results to the CMRC quarterly.

Total traded market risk back testing exceptions were within the APS 116 green zone for the period.

Mitigation of market risk

The Market Risk team’s responsibilities, including the reporting and escalation processes described above, are fundamental to how market risk is managed. Market Risk has a presence in all the major dealing operations centres in Australia, New Zealand, Asia, Europe and America.

Commodities risk

Commodity price risk arises as a result of movement in prices or the implied volatilities of various commodities. All exposures are transferred to the trading book and centrally managed by the Global Markets business and monitored by Market Risk in accordance with the TFC framework.

Foreign exchange risk

Foreign exchange risk arises as a result of movements in values or the implied volatilities of exchange rates.

Exposures from ANZ’s normal operating business and trading activities are recorded in core multicurrency systems and managed within the trading book in accordance with the TFC framework.

Structural exposures from foreign investments and capital management activities are managed in accordance with policies approved by the Board Risk Committee, with the main objective of ensuring that ANZ’s capital ratio is largely protected from changes in foreign exchange. As at 30 September 2016, ANZ’s investment in ANZ Bank New Zealand Limited is the main source of the structural foreign exchange exposure.

September 2016

ANZ Basel III Pillar 3 disclosure

Chapter 9 – Operational risk

Table 15 Operational risk

Definition of operational risk

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. This definition includes legal risk, and the risk of reputation loss, or damage arising from inadequate or failed internal processes, people and systems, but excludes strategic risk.

The objective of operational risk management is to ensure that risks are identified, assessed, measured, evaluated, treated, monitored and reported in a structured environment with appropriate governance and oversight. ANZ does not expect to eliminate all risks. Rather it seeks to ensure that its residual risk exposure is managed as low as reasonably practical based on a sound risk/reward analysis in the context of an international financial institution.

ANZ has been authorised by APRA to use the advanced measurement approach (AMA) for calculation of operational risk capital requirements under APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk. This methodology applies across all of ANZ.

Operational risk governance and structure

The ANZ Board has delegated its powers to the Risk Committee to approve the ANZ Operational Risk Measurement and Management Framework which is in accordance with Australian Prudential Standard APS 115. The Operational Risk Executive Committee (OREC) is the primary senior executive management forum responsible for oversight of ANZ’s Risk Profile. The purpose of OREC is to assist the Board Risk Committee in the effective discharge of its responsibilities for operational risk management and the management of the compliance obligations of ANZBGL and its controlled entities.

Divisional Risk Committees and Business Unit Risk Forums manage and maintain oversight of operational risks supported by thresholds for escalation and monitoring. Day to day management of operational risk is the accountability of every employee. Business Units undertake operational risk activities as part of this accountability. This includes implementation of the operational risk framework and involvement in decision making processes concerning all material operational risk matters.

Three lines of defence

ANZ operates three lines of defence model for the management of Operational Risk. Each line of Defence has defined roles, responsibilities and escalation paths to support effective two way communication and management of operational risk at ANZ. There are also on-going review mechanisms in place to ensure the Operational Risk Measurement and Management Framework (ORMMF) and Compliance frameworks continue to meet organisational needs and regulatory requirements.

The Business has first line of defence responsibility for managing operational risk including obligations to:

take primary accountability for the identification, measurement and management of key risks and the related control environment;
undertake day-to-day management of risks;
promote a strong risk culture; manage risk exposure and make sustainable business decisions;
ensure operational risk information is up to date and reflective of the bank’s true operational risk position.

Operational Risk functions (Divisional and Enterprise) form the second line of defence

Division Risk is accountable for:

undertaking review and challenge of business activities and ensuring that the strategy is maintained across the division.
undertaking independent oversight of the application of the ORMMF;
coordinating, oversighting and reporting on material operational risks and change initiatives;
contributing to the identification of systemic issues and risk collation across the Division;

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ANZ Basel III Pillar 3 disclosure

Enterprise Operational Risk is accountable for:

developing and maintaining relevant policies and procedures to ensure continuing appropriateness of the Operational Risk Measurement and Management Framework (ORMMF)and to support its consistent execution;
setting and monitoring compliance with the Group Operational Risk Appetite Statements (RAS);
undertaking independent review and challenge of business activities and ensuring that the strategy is maintained across the enterprise;
leading the scenario analysis and operational risk capital calculation process;
being a central point of contact for regulators in regards to operational risk;
ensuring a strong risk management culture across the enterprise.

Internal Audit forms the third line of defence and is accountable for:

providing independent and objective assurance to management and the ANZ Board regarding compliance with policy and regulatory requirements;
performing objective assessments across all geographies, Divisions, Lines of Business and processes;
undertaking independent review of the adequacy of the ORMMF.

Collectively Internal Audit, Operational Risk functions, Divisions and Business Units are responsible for monitoring and reporting to Executive Management, the Board, Regulators and others on all matters related to the measurement and management of operational risk.

September 2016

ANZ Basel III Pillar 3 disclosure

Operational risk principles

ANZ has developed a comprehensive framework to manage operational risk and compliance which includes the following operational risk management principles:


Principle 1: Risk Governance	ANZ recognises operational risk as a primary risk category and has an effective and embedded operational risk governance structure. This includes a dedicated and independent operational risk management function and an executive committee for oversight of operational risk across ANZ, supported by organisation wide policies, procedures and systems.


Principle 2: Risk Culture	ANZ believes risk management is everyone’s responsibility and encourages a culture of prompt escalation of risk to staff sufficiently senior to drive resolution. This culture is supported by clearly articulated roles and responsibilities to ensure effective measurement and management of operational risk.


Principle 3: Risk Appetite and Objective Setting	ANZ’s Board is responsible for the overall operational risk profile and accordingly has an approved operational risk appetite, including thresholds for risk assessment and reporting that determines the risk boundaries within which the business must operate to set its strategy.


Principle 4: Risk and Control Assessment	ANZ periodically identifies and assesses its exposure to key operational risk within all existing and new products, processes, projects and systems, and assesses the key controls in place to manage these risks.


Principle 5: Loss and Incident Management	ANZ incorporates analysis of loss, incident and control failure into improving the underlying control environment by defining clearly articulated risk response strategies. This includes effective contingency and business continuity plans that enable it to operate on an ongoing basis and limit losses in the event of severe business disruption.


Principle 6: Capital Calculation	ANZ holds capital commensurate with its operational risk, and maintains comprehensive and well documented operational risk capital processes for calculating its operational risk capital, including monitoring for material changes to capital exposure.


Principle 7: Risk Monitoring and Reporting	ANZ maintains a comprehensive and sustainable approach for monitoring and reporting relevant operational risk data, and monitors material changes to operational risk exposure, including Key Risk Indicators (KRIs), to support the proactive management of operational risk across the Group.


Principle 8: Assurance and Continuous Improvement	ANZ has appropriate review processes to continuously evaluate the effectiveness and relevance of its operational risk measurement and management processes to meet organisational needs and regulatory requirements.


Principle 9: Risk Based Decision Making	ANZ ensures effective integration of day to day operational risk management with outputs from the operational risk measurement processes, to support risk based decision making.

ANZ’s operational risk framework is delivered through:

Level 1 ANZ Board Operational Risk Policy (the Principles) – approved by the Board Risk Committee, which sets out the operational risk principles for governing the overall measurement and management of operational risk across ANZ.
Level 2 Global Operational Risk Measurement and Management Policy (the Policy) – approved by the Board Risk Committee, which outlines the core standards, roles and responsibilities and minimum requirements for the way in which operational risk is measured and managed, in line with Level 1 ANZ Board Operational Risk Policy and APS 115.

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ANZ Basel III Pillar 3 disclosure

 Level 2A Global Operational Risk Procedures – owned by Enterprise Operational Risk, which detail the processes that support the consistent application of Level 1 and Level 2 Global Operational Risk Policies across ANZ. The procedures are further augmented by tools, templates, systems and on-going training.

Operational risk management

Risk and controls are managed as part of business as usual right across the organisation. Risk management, supported by a strong Risk Culture, ensures all staff are thinking about and managing risk on a daily basis – “Risk is Everyone’s Responsibility”. However, Senior Management needs visibility of key risks. These are the risks that if they materialised, would adversely affect the achievement of business objectives, ANZ’s reputation, legal and regulatory compliance or impact key processes. Day-to-day management of operational risk is the responsibility of business unit line management and staff. This includes:

primary accountability for the understanding of key risks and the related control environment;
analysis of identified risks, including assessment of inherent and residual risks This requires analysis of the potential consequences of failing to deal with the risks, the likelihood of the risks being realised and the effectiveness of the key controls in place to prevent or mitigate the risk;
evaluation of the risk to determine whether it is within Board approved risk appetite tolerances
identification and implementation of risk treatment options to improve the environment of key risks that are outside appetite;
ensuring operational risk information is up to date and reflective of the true operational risk position;
monitoring and reviewing of treatment plans, operational risks and controls, including testing of key controls and reporting on the current operational risk profile;
promoting a strong risk culture of managing risk exposure and making sustainable risk decisions;

Operational risk mitigation

In line with industry practice, ANZ obtains insurance to cover those operational risks where costeffective premiums can be obtained. In conducting their business, Business Units are advised to act as if uninsured and to not use insurance as a guaranteed mitigant for operational risk.

ANZ has business continuity, recovery and crisis management plans. The intention of the business continuity and recovery plans is to ensure critical business functions can be maintained, or restored in a timely fashion, in the event of material disruptions arising from internal or external events.

Crisis management planning at Group and country levels supplements business continuity plans in the event of a broader group or country crisis. Crisis management plans include crisis team structures, roles, responsibilities and contact lists, and are subject to testing.

Operational risk reporting

ANZ’s operational risk management framework includes “COR” a global, web-based Risk, Compliance and IT Governance tool that provides ANZ an enterprise solution for risk management. It is the source of truth and provides greater transparency and integrity of Risk, Controls, Obligations and Events information across ANZ.

The Corporate Centre and Business Unit risk functions prepare reporting. OREC’s role is to monitor the state of operational risk measurement and management and compliance management on an enterprise basis and instigate any necessary corrective actions.

ANZ has been authorised by APRA to use the advanced measurement approach (AMA) for calculation of operational risk capital requirements under APS 115. This methodology applies across all of ANZ.

ANZ’s advanced measurement approach

Enterprise Operational Risk is responsible for maintaining ANZ’s AMA for the measurement and allocation of operational risk capital.

Operational risk capital is held to protect depositors and shareholders of the bank from rare and severe unexpected losses. In order to quantify the overall operational risk profile, ANZ maintains and calculates operational risk capital (including regulatory and economic capital), on at least a six monthly basis. The capital model uses the following as data inputs:

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ANZ Basel III Pillar 3 disclosure

historical internal losses captured and reported in the Bank-wide Operational Risk platform;
relevant external losses, sourced from the Operational Risk Data Exchange (ORX), an industry data base comprising the anonymised loss data from over 60 member banks;
scenario analysis - unexpected potential loss estimates for severe but plausible risk events which are calculated using exposure models developed using business data and inputs from subject matter experts;

Operational risk modelling is performed by a specialist central function. The data inputs are combined using loss distribution approach and calculated using Monte Carlo simulations.

Once calculated, the capital is allocated to divisions based on the historic loss experience and exposure to scenarios. Understanding the divisional exposure to scenarios (and their underlying risk drivers) allows lines of business to consider capital impacts when making decisions. Accordingly, capital allocations are structured to encourage businesses to effectively manage their operational risk exposures e.g. improve controls, reduce losses etc.

Operational risk regulatory capital to meet the regulatory capital soundness standard is based on a 99.9% confidence interval in accordance with APS 115. Economic Capital is based on a 99.97% confidence interval.

Compliance

ANZ’s Compliance Function is responsible for the development and maintenance of ANZ’s Compliance Framework. Each division and business is responsible for embedding the Framework into its business operations, identifying all relevant regulatory compliance obligations and escalating and managing incidents when they occur.

Definition of compliance

At ANZ, Compliance Risk is defined as the probability and impact of an event that results in a failure to act in accordance with laws, regulations, industry standards and codes, internal policies and procedures and principles of good governance as applicable to ANZ’s businesses.

Compliance Governance and structure

The roles of the Board Risk Committee and OREC are described in Section 2.

ANZ’s Compliance Function is accountable for designing a program that enables ANZ to meet its regulatory obligations and satisfy itself that appropriate standards of good governance are met. It has also been tasked to provide assurance to the Board that material compliance risks are identified, assessed and appropriately managed by the business.

ANZ’s compliance principles

The following Principles, approved by ANZ’s Board set out ANZ’s commitment to compliance:

Doing the right thing the right way - ANZ will operate to high ethical standards by promoting a culture where our people understand the importance of doing the right thing the right way and will reinforce this through its values, Code of Conduct and training programs.
Enterprise-wide approach for compliance - ANZ will adopt an enterprise-wide approach for managing compliance and ensure consistent standards are embedded in how we do business, how we conduct ourselves and the design and operation of our processes, systems and products.
Clearly defined authority and accountability - ANZ will clearly define authority and accountability for compliance management and associated decision-making across its business operations and will commit adequate resources to enable its businesses to operate in a compliant manner.
Independent compliance function – ANZ will have an independent compliance function responsible for governance, management, oversight and reporting of compliance with ANZ’s key compliance obligations.
No tolerance for deliberate non-compliance – Managing ANZ’s business to our global compliance standards and the laws of the countries in which we operate is non-negotiable. ANZ will not tolerate deliberate or negligent non-compliance. Consequences could result in severe disciplinary action such as dismissal.
Adequate risk and control environment and prompt response to deficiencies – ANZ will ensure implementation of a generally acceptable risk and control environment for managing compliance which is within our risk appetite settings. When compliance incidents are identified, ANZ will act promptly to implement meaningful corrective action.

September 2016

ANZ Basel III Pillar 3 disclosure

Chapter 10 – Equities

Table 16 Equities – Disclosures for banking book positions

Definition and categorisation of equity investments held in the banking book

Equity risk is the risk of financial loss arising from the unexpected reduction in value of equity investments not held in the trading book including those of the Group’s associates. ANZ’s equity exposures in the banking book are primarily categorised as follows:

Equity investments that are taken for strategic reasons - These transactions represent strategic business initiatives and include ANZ’s investments in partnership arrangements with financial institutions in Asia. These investments are undertaken after extensive analysis and due diligence by Group Strategy, internal specialists and external advisors, where appropriate. Board approval is required prior to committing to any investments over delegated authorities, and all regulatory notification requirements are met. Performance of these investments is monitored by both the owning business unit and Group Strategy to ensure that it is within expectations and the values of the investments are tested at least six monthly for impairment.
Equity investments on which capital gains are expected - These transactions are originated and managed by dedicated equity finance teams. These transactions represent funding solutions for known customers of ANZ and are governed by specific policies. ANZ ensures that the investment in these entities does not constitute a controlling interest in the relevant business.
Equity investments made as the result of a work out of a problem exposure - From time to time, ANZ will take an equity stake in a customer as part of a work out arrangement for problem exposures. These investments are made only where there is no other viable option available and form an immaterial part of ANZ’s equity exposures.

Valuation of and accounting for equity investments in the banking book

In line with Group Accounting Policy the accounting treatment of equity investments depends on whether ANZ has significant influence over the investee.

Investments in associates

Where significant influence exists, the investment is classified as an Investment in Associate in the financial statements. ANZ adopts the equity method of accounting for associates. ANZ’s share of the results of associates is included in the consolidated income statement. The associate investments are recognised at cost plus ANZ’s share of post acquisition net assets. Interests in associates are reviewed annually for impairment, using either market value, or a discounted cash flow methodology to assess value in-use.

Available-for-Sale Investments

Where ANZ does not have significant influence over the investee, the investment is classified as Available-for-Sale (AFS). The investment is initially recognised at fair value plus transaction costs. Changes in the fair value of the investments are recognised in an equity reserve with any impairment recognised in the income statement. When the asset is sold the cumulative gain or loss relating to the asset held in the AFS revaluation reserve is transferred to the income statement.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 16(b) and 16(c): Equities – Types and nature of Banking Book investments

			Sep 16
Equity investments			$M
	Balance sheet value		Fair value
Value of listed (publicly traded) equities		2,990	2,503
Value of unlisted (privately held) equities		2,131	2,131
Total		5,121	4,634
			Mar 16
Equity investments			$M
	Balance sheet value		Fair value
Value of listed (publicly traded) equities		3,081	2,646
Value of unlisted (privately held) equities		2,080	2,080
Total		5,161	4,726
			Sep 15
Equity investments			$M
	Balance sheet value		Fair value
Value of listed (publicly traded) equities		2,328	1,853
Value of unlisted (privately held) equities		3,157	3,157
Total		5,485	5,010
Table 16(d) and 16(e): Equities – gains (losses)
	Half Year	Half Year	Half Year
	Sep 16	Mar 16	Sep 15
Realisedgains(losses) on equity investments	$M	$M	$M
Cumulative realised gains (losses) from disposals	-	-	-
and liquidations in the reporting period
Cumulative realised losses from impairment and writedowns in the reporting period	-	(260)	-
Total	-	(260)	-
	Half Year	Half Year	Half Year
	Sep 16	Mar 16	Sep 15
Unrealised gains (losses) on equity investments	$M	$M	$M
Total unrealised gains (losses)	(84)	6	-
Reversal of prior period unrealised gains (losses) from	-	-	-
disposals and liquidations in the reporting period
Total unrealised gains (losses) included in Common Equity Tier 1, Tier 1 and/or Tier 2 capital	(84)	6	-

Table 16(f): Equities Risk Weighted Assets

From 1 January 2013 all banking book equity exposures are deducted from Common Equity Tier 1 capital.

September 2016

ANZ Basel III Pillar 3 disclosure

Chapter 11 – Interest Rate Risk in the Banking Book

Table 17 Interest Rate Risk in the Banking Book

Definition of interest rate risk in the banking book

Interest rate risk in the banking book (IRRBB) relates to the potential adverse impact of changes in market interest rates on ANZ’s future net interest income. The risk generally arises from:

Repricing and yield curve risk - the risk to earnings or market value as a result of changes in the overall level of interest rates and/or the relativity of these rates across the yield curve.
Basis risk - the risk to earnings or market value arising from volatility in the interest margin applicable to banking book items.
Optionality risk - the risk to earnings or market value arising from the existence of stand-alone or embedded options in banking book items.

Regulatory capital approach

ANZ has received approval from APRA to use the IMA for the calculation of regulatory capital for IRRBB, under APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (Advanced ADIs).

Governance

The Board Risk Committee has established a risk appetite for IRRBB and delegated authority to the Group Asset and Liability Committee (GALCO) to manage the strategic position (capital investment term) and oversee the interest rate risk arising from the repricing of asset and liabilities (mismatch risk) in the banking book. GALCO has delegated the management of this mismatch risk to the Markets business.

Market Risk is the independent function responsible for:

Designing and implementing policies and procedures to ensure that IRRBB exposure is managed within the limit framework set by the Board Risk Committee.
Monitoring and measuring IRRBB market risk exposure, compliance with limits and policies.
Ensuring ongoing effectiveness and appropriateness of the risk management framework.

Management framework

IRRBB is managed under a comprehensive measurement and reporting framework, supported by an independent Market Risk function. Key components of the framework include:

A comprehensive set of policies that promote proactive risk identification and communication.
Funds Transfer Pricing framework to transfer interest rate risk from business units so it can be managed by the Global Markets business and monitored by Markets business.
Quantifying the magnitude of risks and controlling the potential impact that changes in market interest rates can have on the net interest income and balance sheet fair value of ANZ.
Regular and effective reporting of IRRBB to executive management and the Board.

Measurement of interest rate risk in the banking book

ANZ uses the following principal techniques to quantify and monitor IRRBB:

Interest Rate Sensitivity - this is an estimate of the change in economic value of the banking book due to a 1 basis point move in a specific part of the yield curve.
Earnings at risk (EaR) - this is an estimate of the amount of income that is at risk from interest rate movements over a given holding period, expressed to a 97.5% or 99% level of statistical confidence.
Value at risk (VaR) - this is an estimate of the impact of interest rate changes on the banking book’s market value, expressed to a 99% level of statistical confidence for a given holding period.
Market Value loss limits - this mitigates the potential for embedded losses within the banking book.
Stress testing - standard and extraordinary tests are used to highlight potential risk which may not be captured by VaR, and how the portfolio might behave under extraordinary circumstances.

September 2016

ANZ Basel III Pillar 3 disclosure

The calculations used to quantify IRRBB require assumptions to be made about the repricing term of exposures that do not have a contractually defined repricing date, such as deposits with no set maturity dates, and prepayments. Changes to these assumptions require GALCO approval.

Where relevant, IRRBB techniques recognise foreign currency effects as all measures are expressed in Australian dollars.

Basis and optionality risks are measured using Monte Carlo simulation techniques, to generate a theoretical worst outcome at a specified confidence level (typically 99%) less the average outcome.

Reporting of interest rate risk in the banking book

Market Risk analyses the output of ANZ’s VaR, EaR and Stress Testing calculations daily. Compliance with the risk appetite and limit framework is reported to CMRC, GALCO and the Board Risk Committee.

IRRBB regulatory capital is calculated monthly.

ANZ’s interest rate risk in the banking book capital requirement

The IRRBB regulatory capital requirements includes a value for repricing and yield curve risk, basis and optionality risks based on a 99% confidence interval, one year holding period and a six year historical data set.

Embedded losses also make up the capital requirement and are calculated as the difference between the book value of banking book items and the current economic value.

Results of standard shock scenario

The Basel II framework sets out a standard shock scenario of a 200 basis point parallel shift change in interest rates, in order to establish a comparable test across banks. Table 17(b) that follows shows the results of this test by currency of the exposures outside the trading book.

September 2016

ANZ Basel III Pillar 3 disclosure

Table 17(b): Interest Rate Risk in the Banking Book

	Change in Economic Value

Standard Shock Scenario Stress Testing:	Sep 16 Mar 16 Sep 15
Interest rate shock applied	$M $M $M
AUD
200 basis point parallel increase	(85) (200) (17)
200 basis point parallel decrease	84 215 34

NZD
200 basis point parallel increase	(58) (82) 17
200 basis point parallel decrease	51 76 (23)

USD
200 basis point parallel increase	31 (81) (112)
200 basis point parallel decrease	(29) 92 123

GBP
200 basis point parallel increase	18 16 -
200 basis point parallel decrease	(18) (16) -

Other
200 basis point parallel increase	(53) (80) (74)
200 basis point parallel decrease	59 87 80


IRRBB regulatory capital	936 822 595
IRRBB regulatory RWA	11,700 10,280 7,433

IRRBB stress testing methodology

Stress tests within ANZ include standard and extraordinary tests. These tests are used to highlight potential risk which may not be captured by VaR, and how the portfolio might behave under extraordinary circumstances. Standard stress tests include statistically derived scenarios based on historical yield curve movements. These combine parallel shocks with twists and bends in the curve to produce a wide range of hypothetical scenarios at high statistical confidence levels, with the single worst scenario identified and reported. Extraordinary stress tests include interest rate moves from historical periods of stress as well as stresses to assumptions made about the repricing term of exposures. The rate move scenarios include daily changes over the stressed periods and the worst theoretical losses over the selected periods are each reported. Stresses of the repricing term assumptions investigate scenarios where actual repricing terms are vastly different to those modelled.

September 2016

ANZ Basel III Pillar 3 disclosure

Chapter 12 – Leverage and Liquidity Coverage Ratio

Leverage Ratio

The Leverage Ratio requirements are part of the Basel Committee on Banking Supervision (BCBS) Basel III capital framework. It is a simple, non-risk based supplement or backstop to the current risk based capital requirements and is intended to restrict the build-up of excessive leverage in the banking system.

Consistent with the BCBS definition, APRA’s Leverage Ratio compares Tier 1 Capital to the Exposure Measure (expressed as a percentage) as defined by APS 110. APRA has not finalised a minimum Leverage Ratio requirement for Australian ADIs, although the current BCBS proposal is for a minimum of 3%. Currently the Leverage Ratio is only a disclosure requirement. APRA intends to consult on the appropriate application of the Leverage Ratio as a minimum requirement for Australian ADIs once BCBS finalises its calibration for implementation as a Pillar 1 requirement by January 2018

At 30 September 2016, the Group’s Leverage Ratio of 5.3% was above the 3% minimum currently proposed by the BCBS. Table 18 below shows the Group’s Leverage Ratio calculation as at 30 September 2016 and Table 19 summarises the reconciliation of accounting assets and leverage ratio exposure measure at 30 September 2016.

	Table 18 Leverage Ratio
		Sep 16 $M	Mar 16 $M	Sep 15 $M
On-balance sheet exposures
1	On-balance sheet items (excluding derivatives and SFTs, but including collateral)	762,007	751,367	751,843
2	(Asset amounts deducted in determining Basel III Tier 1 capital)	(17,648)	(17,432)	(18,087)
3	Total on-balance sheet exposures (excluding derivatives and SFTs)	744,359	733,935	733,756

Derivative exposures
4	Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)	11,295	12,199	16,078
5	Add-on amounts for PFE associated with all derivatives transactions	27,304	26,578	27,960
6	Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the operative accounting framework	-	-	-
7	(Deductions of receivables assets for cash variation margin provided in derivatives transactions)	(9,151)	(9,821)	(8,121)
8	(Exempted CCP leg of client-cleared trade exposures)	-	-	-
9	Adjusted effective notional amount of written credit derivatives	8,535	20,019	22,115
10	(Adjusted effective notional offsets and add-on deductions for written credit derivatives)	(7,383)	(18,433)	(19,917)
11	Total derivative exposures	30,600	30,542	38,115

Securities financing transaction exposures
12	Gross SFT assets (with no recognition of netting), after adjusting for sale accounting transactions	29,937	20,928	17,319
13	(Netted amounts of cash payables and cash receivables of gross SFT assets)	(391)	(387)	(763)
14	CCR exposure for SFT assets	1,871	879	741
15	Agent transaction exposures	-	-	-
16	Total securities financing transaction exposures	31,417	21,420	17,297

Other off-balance sheet exposures
17	Off-balance sheet exposure at gross notional amount	245,189	257,836	271,129
18	(Adjustments for conversion to credit equivalent amounts)	(146,729)	(154,883)	(163,312)
19	Off-balance sheet items	98,460	102,953	107,817
Capital and Total Exposures
20	Tier 1 capital	48,285	45,062	45,484
21	Total exposures	904,836	888,850	896,985
Leverage ratio
22	Basel III leverage ratio	5.3%	5.1%	5.1%

September 2016

ANZ Basel III Pillar 3 disclosure

Table 19 Summary comparison of accounting assets vs. leverage ratio exposure measure

		Sep 16 $M	Mar 16 $M	Sep 15 $M
1	Total consolidated assets as per published financial statements	914,869	895,278	889,900
	Adjustment for investments in banking, financial, insurance or commercial
2	entities that are consolidated for accounting purposes but outside the scope of	(35,432)	(34,236)	(35,113)
	regulatory consolidation.
	Adjustment for assets held on the balance sheet in a fiduciary capacity
3	pursuant to the Australian Accounting Standards but excluded from the
	leverage ratio exposure measure	-	-	-
4	Adjustments for derivative financial instruments.	(56,893)	(58,205)	(47,510)
5	Adjustment for SFTs (i.e. repos and similar secured lending)	1,480	492	(22)
6	Adjustment for off-balance sheet exposures (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)	98,460	102,953	107,817
7	Other adjustments	(17,648)	(17,432)	(18,087)
8	Leverage ratio exposure	904,836	888,850	896,985

September 2016

ANZ Basel III Pillar 3 disclosure

Table 20 Liquidity Coverage Ratio disclosure template

		Sep 16	Sep 16		Jun 16	Mar
		Total	Total	Total	Total	Total	Total
		Unweighted	Weighted	Unweighted	Weighted	Unweighted	Weighted
		Value	Value	Value	Value	Value	Value
		$M	$M	$M	$M	$M	$M
Liquid assets, of which:
1	High-quality liquid assets (HQLA)	-	124,723	-	122,959	-	125,727
2	Alternative liquid assets (ALA)	-	45,294	-	45,299	-	45,300
3	Reserve Bank of New Zealand (RBNZ) securities	-	9,480	-	8,239	-	9,987
Cash outflows
4	Retail deposits and deposits from small business customers	205,315	24,246	206,474	24,050	207,897	23,715
5	of which: stable deposits	71,261	3,563	72,042	3,602	74,413	3,721
6	of which: less stable deposits	134,054	20,683	134,432	20,448	133,484	19,994
7	Unsecured wholesale funding	190,864	115,163	188,235	113,230	190,478	113,890
	of which: operational deposits (all
8	counterparties) and deposits in	53,531	13,307	49,626	12,336	48,979	12,156
	networks for cooperative banks
9	of which: non-operational deposits (all counterparties)	122,120	86,643	122,821	85,106	125,679	85,914
10	of which: unsecured debt	15,213	15,213	15,788	15,788	15,820	15,820
11	Secured wholesale funding		246		154		1,213
12	Additional requirements	139,640	38,131	144,004	40,546	149,890	41,456
	of which: outflows related to
13	derivatives exposures and other	26,309	26,309	28,290	28,290	27,664	27,664
	collateral requirements
14	of which: outflows related to loss of funding on debt products	-	-	-	-	-	-
15	of which: credit and liquidity facilities	113,331	11,822	115,714	12,256	122,226	13,792
16	Other contractual funding obligations	10,647	-	11,524	-	11,606	-
17	Other contingent funding obligations	103,040	4,622	111,696	5,292	111,944	4,867
18	Total cash outflows		182,408		183,272		185,141
Cash inflows
19	Secured lending (e.g. reverse repos)	17,560	1,839	16,828	2,008	15,166	1,379
20	Inflows from fully performing exposures	34,195	23,548	34,251	22,727	36,797	25,191
21	Other cash inflows	13,292	13,292	16,794	16,794	15,865	15,865
22	Total cash inflows	65,047	38,679	67,873	41,529	67,828	42,435
23	Total liquid assets	-	179,497		176,497	-	181,014
24	Total net cash outflows	-	143,729		141,743	-	142,706
25	Liquidity Coverage Ratio (%)		124.9%		124.5%		126.8%
	Number of data points used (simple average)		66		65		64

Liquidity Coverage Ratio (LCR)

ANZ’s average LCR for the 6 months to 30 September 2016 was 125% with total liquid assets exceeding net outflows by an average of $35.3b.

The main contributors to net outflows were modelled outflows associated with the bank’s corporate and retail deposit portfolios, offset by inflows from maturing loans. While cash outflows associated with derivatives are material, these are effectively offset by derivative cash inflows.

The composition of the liquid asset portfolio has remained relatively stable through the half, with HQLA securities and cash making up on average 70% of total liquid assets.

Through the period the Liquidity Coverage Ratio has remained within a range of 117% to 131%.

ANZ has a well diversified deposit and funding base avoiding undue concentrations by investor type, maturity, market source and currency.

ANZ monitors and manages its liquidity risk on a daily basis including LCR by geography and currency, ensuring ongoing compliance across the network.

September 2016

ANZ Basel III Pillar 3 disclosure

Glossary

ADI Authorised Deposit-taking Institution. Basel III Credit Valuation CVA charge is an additional capital requirement under Basel III for adjustment (CVA) capital bilateral derivative exposures. Derivatives not cleared through a charge central exchange/counterparty are subject to this additional capital charge and also receive normal CRWA treatment under Basel II principles. Collective provision (CP) Collective provision is the provision for credit losses that are inherent in the portfolio but not able to be individually identified. A collective provision may only be recognised when a loss event has already occurred. Losses expected as a result of future events, no matter how likely, are not recognised. Credit exposure The aggregate of all claims, commitments and contingent liabilities arising from on- and off-balance sheet transactions (in the banking book and trading book) with the counterparty or group of related counterparties. Credit risk The risk of financial loss resulting from the failure of ANZ’s customers and counterparties to honour or perform fully the terms of a loan or contract. Credit Valuation Adjustment Over the life of a derivative instrument, ANZ uses a CVA model to (CVA) adjust fair value to take into account the impact of counterparty credit quality. The methodology calculates the present value of expected losses over the life of the financial instrument as a function of probability of default, loss given default, expected credit risk exposure and an asset correlation factor. Impaired derivatives are also subject to a CVA. Days past due The number of days a credit obligation is overdue, commencing on the date that the arrears or excess occurs and accruing for each completed calendar day thereafter. Exposure at Default (EAD) Exposure At Default is defined as the expected facility exposure at the date of default. Impaired assets (IA) Facilities are classified as impaired when there is doubt as to whether the contractual amounts due, including interest and other payments, will be met in a timely manner. Impaired assets include impaired facilities, and impaired derivatives. Impaired derivatives have a credit valuation adjustment (CVA), which is a market assessment of the credit risk of the relevant counterparties. Impaired loans (IL) Impaired loans comprise of drawn facilities where the customer’s status is defined as impaired. Individual provision charge Impaired provision charge is the amount of expected credit losses (IPC) on financial instruments assessed for impairment on an individual basis (as opposed to on a collective basis). It takes into account expected cash flows over the lives of those financial instruments. Individual provisions (IP) Individual provisions are assessed on a case-by-case basis for all individually managed impaired assets taking into consideration factors such as the realisable value of security (or other credit mitigants), the likely return available upon liquidation or bankruptcy, legal uncertainties, estimated costs involved in recovery, the market price of the exposure in secondary markets and the amount and timing of expected receipts and recoveries. Internationally Comparable The Internationally Comparable Basel 3 CET1 ratio incorporates Basel III Capital differences between APRA and both the Basel Committee Basel III framework (including differences identified in the March 2014 Basel Committee Regulatory Consistency Assessment Programme (RCAP) on Basel III implementation in Australia) and its application in major offshore jurisdictions.

Internationally Comparable Basel III Capital

September 2016

ANZ Basel III Pillar 3 disclosure

Market risk The risk to ANZ’s earnings arising from changes in interest rates, currency exchange rates and credit spreads, or from fluctuations in bond, commodity or equity prices. ANZ has grouped market risk into two broad categories to facilitate the measurement, reporting and control of market risk: Traded market risk - the risk of loss from changes in the value of financial instruments due to movements in price factors for physical and derivative trading positions. Trading positions arise from transactions where ANZ acts as principal with clients or with the market. Non-traded market risk (or balance sheet risk) - comprises interest rate risk in the banking book and the risk to the AUD denominated value of ANZ’s capital and earnings due to foreign exchange rate movements. Operational risk The risk of loss resulting from inadequate or failed internal controls or from external events, including legal risk but excluding reputation risk. Past due facilities Facilities where a contractual payment has not been met or the customer is outside of contractual arrangements are deemed past due. Past due facilities include those operating in excess of approved arrangements or where scheduled repayments are outstanding but do not include impaired assets. Qualifying Central QCCP is a central counterparty which is an entity that interposes Counterparties (QCCP) itself between counterparties to derivative contracts. Trades with QCCP attract a more favorable risk weight calculation. Recoveries Payments received and taken to profit for the current period for the amounts written off in prior financial periods. Restructured items Restructured items comprise facilities in which the original contractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring may consist of reduction of interest, principal or other payments legally due, or an extension in maturity materially beyond those typically offered to new facilities with similar risk. Risk Weighted Assets (RWA) Assets (both on and off-balance sheet) are risk weighted according to each asset’s inherent potential for default and what the likely losses would be in the case of default. In the case of non asset backed risks (i.e. market and operational risk), RWA is determined by multiplying the capital requirements for those risks by 12.5. Securitisation risk The risk of credit related losses greater than expected due to a securitisation failing to operate as anticipated, or of the values and risks accepted or transferred, not emerging as expected. Write-Offs Facilities are written off against the related provision for impairment when they are assessed as partially or fully uncollectable, and after proceeds from the realisation of any collateral have been received. Where individual provisions recognised in previous periods have subsequently decreased or are no longer required, such impairment losses are reversed in the current period income statement.

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ANZ Basel III Pillar 3 disclosure September 2016

Average Risk Weights (Credit RWA / EAD*)

AI assistant

Australia and New Zealand Banking Group Ltd. — Audit Report / Information 2016

10425_rns_2016-11-06_f260996d-329e-4d86-a36e-a611a7788401.pdf

Important notice

TABLE OF CONTENTS[1]

Chapter 1 – Highlights

Strong capital position September 2016

EAD up $5.1bn to $894bn for 2H16

Impaired Assets up 10% HoH

Provision coverage remains sound

Credit Risk Weighted Assets (CRWA) increased by $17.7bn HoH.

Chapter 2 - Introduction

Purpose of this document

Basel in ANZ

Verification of disclosures

Comparison to ANZ’s Financial Reporting

Chapter 3 – Risk appetite and governance

Risk Appetite Framework

Risk management governance

Chapter 4 – Capital reporting and measurement

Capital reporting and measurement

Chapter 5 – Capital and Capital Adequacy

Table 1 Common Disclosure template

Restrictions on Transfers of Capital within ANZ

Table 1 Common disclosure template

Counter Cyclical Capital Buffer

Table 2 Main features of capital instruments

Table 3 Capital adequacy, Table 4 Credit risk, Table 5 Securitisation

Table 6 Capital adequacy

Capital management

Regulatory environment

Regulatory development

Table 6 Capital adequacy - Capital Ratio and Risk Weighted Assets

Credit Risk Weighted Assets (CRWA)

Market Risk, Operational Risk and IRRBB RWA

International capital ratio comparisons

Internationally comparable details

Chapter 6 –Credit risk

Table 7 Credit risk – General disclosures

Definition of credit risk

Regulatory approval to use the Advanced Internal Ratings-based approach

Credit risk management framework and policies

Organisation

Portfolio direction and performance

Reporting – overview and definitions

Exposure at Default

Past Due Facilities

Impaired Assets

Restructured Items

Collective Provisions

Individual Provisions

Write-offs

Definition of default

Specific provision and General Reserve for Credit Losses

Table 7(b) part (i): Period end and average Exposure at Default[8]

Table 7(b) part (ii): Exposure at Default by portfolio type[9]

Table 7(d): Industry distribution of Exposure at Default[10][11 ]

Table 7(e): Residual contractual maturity of Exposure at Default[12]

Table 7(h): Provision for Credit Impairment

Table 7(j): Specific Provision Balance and General Reserve for Credit Losses[21]

Table 8 Credit risk – Disclosures for portfolios subject to the Standardised approach and supervisory risk weights in the IRB approach

Table 8(b): Exposure at Default by risk bucket

Table 9 Credit risk – Disclosures for portfolios subject to Advanced IRB approaches

Portfolios subject to the Advanced IRB (AIRB) approach

The ANZ rating system

Use of internal estimates other than for regulatory capital purposes

Controls surrounding the ratings system

Rating process by asset class

Estimation of LGD and EAD

Table 9(f): Average estimated vs. actual PD, EAD and LGD – Advanced IRB

Table 10 Credit risk mitigation disclosures

Main types of collateral taken by ANZ

Policies and processes for collateral valuation and management

Guarantee support

Use of credit derivatives for risk mitigation

The use of netting

Transaction structuring to mitigate credit risk

Concentrations of credit risk mitigation

Table 11 General disclosures for derivatives and counterparty credit risk

Definition of counterparty credit risk

Australia and New Zealand Banking Group Ltd. Audit Report / Information 2016