Australia and New Zealand Banking Group Ltd. — Audit Report / Information 2017

Aug 14, 2017

2017

BASEL III PILLAR 3 DISCLOSURE

AS AT 30 JUNE 2017 APS 330: PUBLIC DISCLOSURE

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Important notice

This document has been prepared by Australia and New Zealand Banking Group Limited (ANZ) to meet its disclosure obligations under the Australian Prudential Regulation Authority (APRA) ADI Prudential Standard (APS) 330: Public Disclosure.

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ANZ Basel III Pillar 3 disclosure

June 2017

Table 3 Capital adequacy - Capital ratios and Risk Weighted Assets

	Jun 17	Mar 17	Dec 16
Risk weighted assets(RWA)	**$M **	**$M **	**$M **
Subject to Advanced Internal Rating Based (IRB) approach
Corporate	126,250	127,544	132,930
Sovereign	6,914	6,718	6,850
Bank	13,493	14,267	15,260
Residential Mortgage	95,528	86,218	86,450
Qualifying Revolving Retail	7,339	7,513	7,276
Other Retail	31,560	31,004	31,715
Credit risk weighted assets subject to Advanced IRB approach	281,084	273,264	280,481
Credit risk Specialised Lending exposures subject to slotting approach1	32,832	33,896	34,838
Subject to Standardised approach
Corporate	16,464	16,264	20,658
Residential Mortgage	2,283	2,354	2,472
Other Retail	3,068	3,131	3,295
Credit risk weighted assets subject to Standardised approach	21,815	21,749	26,425
Credit Valuation Adjustment and Qualifying Central Counterparties	7,822	8,168	9,326
Credit risk weighted assets relating to securitisation exposures	1,179	1,171	1,263
Other assets	3,753	3,561	3,412
Total credit risk weighted assets	348,485	341,809	355,745
Market risk weighted assets	6,395	6,323	7,122
Operational risk weighted assets	38,738	38,576	38,833
Interest rate risk in the banking book (IRRBB) risk weighted assets	10,947	10,332	10,645
Total risk weighted assets	404,565	397,040	412,345
Capital ratios(%)
Level 2 Common Equity Tier 1 capital ratio	9.8%	10.1%	9.5%
Level 2 Tier 1 capital ratio	11.8%	12.1%	11.4%
Level 2 Total capital ratio	14.1%	14.5%	14.0%

Credit Risk Weighted Assets (CRWA)

Total CRWA increased $6.7 billion (1.9%) from March 2017 to $348.5 billion at June 2017. This is driven by an increase in IRB Residential Mortgage asset class predominantly due to the implementation of ANZ's revised Mortgage Capital Model. This is partially offset by improved portfolio mix to lower risk exposures in our Institutional business driving the decrease seen in AIRB Corporate, Specialised Lending, and Bank asset classes.

Market Risk, Operational Risk and IRRBB Risk Weighted Assets (RWA)

IRRBB RWA increased over the quarter due to a decline in embedded gains.

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

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ANZ Basel III Pillar 3 disclosure

June 2017

Table 4 Credit risk exposures

Exposure at Default in Table 4 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 Securitisation, Equities or Other Assets exposures.

Table 4(a) part (i): Period end and average Exposure at Default[2]

				Jun 17
				Average	Individual
				Exposure	provision
		Risk Weighted	Exposure	at Default for	charge for	Write-offs for
		Assets	at Default	three months	three months	three months
**Advanced IRBapproach **		$M	$M	$M	$M	$M
Corporate		126,250	230,179	229,424	64	59
Sovereign		6,914	132,241	131,523	-	-
Bank		13,493	47,305	46,510	5	8
Residential Mortgage		95,528	363,733	359,211	21	8
Qualifying Revolving Retail		7,339	22,216	22,245	53	71
Other Retail		31,560	42,673	42,400	126	131
Total Advanced IRB approach		281,084	838,347	831,313	269	277
Specialised Lending		32,832	38,251	38,474	(1)	1
Standardised approach
Corporate		16,464	17,428	17,147	(2)	4
Residential Mortgage		2,283	6,237	6,357	1	-
Other Retail		3,068	3,048	3,168	41	48
Total Standardised approach		21,815	26,713	26,672	40	52
	Credit Valuation Adjustment and Qualifying Central Counterparties	7,822	10,027	9,892	-	-
Total		343,553	913,338	906,351	308	330

2 Average Exposure at Default for quarter is calculated as the simple average of the balances at the start and the end of each three month period.

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June 2017

	Mar 17
Advanced IRBapproach Risk Weighted Assets $M Exposure at Default $M	Average Exposure at Default for three months $M Individual provision charge for three months $M Write-offs for three months $M
Corporate 127,544 228,669	230,027 193 276
Sovereign 6,718 130,805	131,853 (1) 4
Bank 14,267 45,715	48,602 3 -
Residential Mortgage 86,218 354,689	354,822 21 14
Qualifying Revolving Retail 7,513 22,273	22,274 51 69
Other Retail 31,004 42,126	42,438 130 135
Total Advanced IRB approach 273,264 824,277	830,016 397 498
Specialised Lending 33,896 38,696	39,147 (1) 2
Standardised approach
Corporate 16,264 16,866	19,308 25 28
Residential Mortgage 2,354 6,476	6,628 - -
Other Retail 3,131 3,288	3,290 41 51
Total Standardised approach 21,749 26,630	29,226 66 79
Credit Valuation Adjustment and Qualifying Central Counterparties 8,168 9,756	9,619 - -
Total 337,077 899,359	908,008 462 579

	Dec 16
Advanced IRBapproach Risk Weighted Assets $M Exposure at Default $M	Average Exposure at Default for three months $M Individual provision charge for three months $M Write-offs for three months $M
Corporate 132,930 231,385	230,351 96 38
Sovereign 6,850 132,900	126,917 - -
Bank 15,260 51,489	50,182 - -
Residential Mortgage 86,450 354,954	351,674 14 8
Qualifying Revolving Retail 7,276 22,274	22,335 53 72
Other Retail 31,715 42,749	42,520 109 135
Total Advanced IRB approach 280,481 835,751	823,979 272 253
Specialised Lending 34,838 39,598	40,028 (2) 2
Standardised approach
Corporate 20,658 21,749	21,502 10 16
Residential Mortgage 2,472 6,779	6,815 - 1
Other Retail 3,295 3,291	3,285 45 51
Total Standardised approach 26,425 31,819	31,602 55 68
Credit Valuation Adjustment and Qualifying Central Counterparties 9,326 9,482	9,965 - -
Total 351,070 916,650	905,574 325 323

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June 2017

Table 4(a) part (ii): Exposure at Default by portfolio type[3]

				Average for the
	Jun 17	Mar 17	Dec 16	quarter ended
	$M	$M	$M	Jun 17
Portfolio Type				$M
Cash	33,841	33,613	32,486	33,727
Contingents liabilities, commitments, and other off-balance sheet exposures	153,303	153,607	152,531	153,455
Derivatives	40,226	40,393	45,682	40,310
Settlement Balances	20,759	18,433	19,486	19,596
Investment Securities	60,093	58,578	59,633	59,336
Net Loans, Advances & Acceptances	575,302	565,027	573,511	570,165
Other assets	2,800	3,411	3,550	3,106
Trading Securities	27,014	26,297	29,771	26,656
Total exposures	913,338	899,359	916,650	906,351

3 Average Exposure at Default for quarter is calculated as the simple average of the balances at the start and the end of each three month period.

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June 2017

Table 4(b): Impaired asset[4][5] , Past due loans[6] , Provisions and Write-offs

				Jun	17
						Individual
			Impaired	Past due	Individual	provision	Write-offs
		Impaired	loans/	loans ≥ 90	provision	charge for	for three
		derivatives	facilities	days	balance	three months	months
		$M	$M	$M	$M	$M	$M
Portfolios subject to Advanced IRB approach
Corporate		1	1,571	228	616	64	59
Sovereign		-	-	-	3	-	-
Bank		-	-	10	-	5	8
Residential Mortgage		-	245	2,125	118	21	8
Qualifying Revolving Retail		-	117	-	-	53	71
Other Retail		-	579	323	302	126	131
	Total Advanced IRB approach	1	2,512	2,686	1,039	269	277
	Specialised Lending	-	29	14	19	(1)	1
Portfolios subject to Standardised approach
Corporate		8	385	44	216	(2)	4
Residential Mortgage		-	30	25	10	1	-
Other Retail		-	226	5	6	41	48
	Total Standardised approach	8	641	74	232	40	52
	Qualifying Central Counterparties	-	-	-	-	-	-
	Total	9	3,182	2,774	1,290	308	330

4 Impaired derivatives are net of credit valuation adjustment (CVA) of $49 million, being a market value based assessment of the credit risk of the relevant counterparties (March 2017: $55 million; December 2016: $66 million).

5 Impaired loans / facilities include restructured items of $311 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 2017: $367 million; December 2016: $425 million).

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

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June 2017

			Mar	17
					Individual
		Impaired	Past due	Individual	provision	Write-offs
	Impaired	loans/	loans ≥ 90	provision	charge for	for three
	derivatives	facilities	days	balance	three months	months
	$M	$M	$M	$M	$M	$M
Portfolios subject to Advanced IRB approach
Corporate	1	1,569	207	614	193	276
Sovereign	-	-	-	3	(1)	4
Bank	-	13	11	3	3	-
Residential Mortgage	-	231	1,962	104	21	14
Qualifying Revolving Retail	-	88	-	-	51	69
Other Retail	-	552	291	289	130	135
Total Advanced IRB approach	1	2,453	2,471	1,013	397	498
Specialised Lending	-	39	30	19	(1)	2
Portfolios subject to Standardised approach
Corporate	9	382	42	222	25	28
Residential Mortgage	-	31	18	9	-	-
Other Retail	-	227	8	6	41	51
Total Standardised approach	9	640	68	237	66	79
Qualifying Central Counterparties	-	-	-	-	-	-
Total	10	3,132	2,569	1,269	462	579
			Dec	16
					Individual
		Impaired	Past due	Individual	provision	Write-offs
	Impaired	loans/	loans ≥ 90	provision	charge for	for three
	Derivatives	facilities	days	balance	three months	months
	$M	$M	$M	$M	$M	$M
Portfolios subject to Advanced IRB	approach
Corporate	-	1,878	167	715	96	38
Sovereign	-	-	-	6	-	-
Bank	-	-	11	-	-	-
Residential Mortgage	-	225	1,926	99	14	8
Qualifying Revolving Retail	-	87	-	-	53	72
Other Retail	-	524	279	276	109	135
Total Advanced IRB approach	-	2,714	2,383	1,096	272	253
Specialised Lending	-	45	34	21	(2)	2
Portfolios subject to Standardised approach
Corporate	16	389	24	235	10	16
Residential Mortgage	-	33	19	9	-	1
Other Retail	-	237	5	7	45	51
Total Standardised approach	16	659	48	251	55	68
Qualifying Central Counterparties	-	-	-	-	-	-
Total	16	3,418	2,465	1,368	325	323

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ANZ Basel III Pillar 3 disclosure

June 2017

Table 4(c): Specific Provision Balance and General Reserve for Credit Losses[7]

			Jun 17
		Specific Provision	General Reserve
		Balance	for Credit Losses	Total
		$M	$M	$M
Collective Provision		350	2,385	2,735
Individual Provision		1,290	-	1,290
Total Provision for Credit Impairment		1,640	2,385	4,025
			Mar 17
		Specific Provision	General Reserve
		Balance	for Credit Losses	Total
		$M	$M	$M
Collective Provision		350	2,435	2,785
Individual Provision		1,269	-	1,269
Total Provision for Credit Impairment		1,619	2,435	4,054
			Dec 16
		Specific Provision	General Reserve
		Balance	for Credit Losses	Total
		$M	$M	$M
Collective Provision		354	2,506	2,860
Individual Provision		1,368	-	1,368
Total Provision for Credit Impairment		1,722	2,506	4,228

7 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.

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ANZ Basel III Pillar 3 disclosure

June 2017

Table 5 Securitisation

Table 5(a) part (i): Banking Book - Summary of current period’s activity by underlying asset type and facility[8]

Table 5(a) part (i): Banking Book - Summary of current period’s activity by underlying asset type and facility8	Table 5(a) part (i): Banking Book - Summary of current period’s activity by underlying asset type and facility8
Jun 17
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 (129) 102 -	-
Credit cards and other personal loans - - -	-
Auto and equipment finance - - -	-
Commercial loans - - -	-
Other - - -	-
Total (129) 102 - -
Securitisation activity by facility provided	Notional amount $M
Liquidity facilities - - -	-
Funding facilities - - -	119
Underwriting facilities - - -	-
Lending facilities - - -	-
Credit enhancements - - -	-
Holdings of securities (excluding trading book) - - -	- (295)
Other - - -	-
Total - - -	(176)

Mar 17
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 1,750 746 -	-
Credit cards and other personal loans - - -	-
Auto and equipment finance - - -	-
Commercial loans - - -	-
Other - - -	-
Total 1,750 746 -	-
Securitisation activity by facility provided	Notional amount $M
Liquidity facilities - - -	18
Funding facilities - - -	220
Underwriting facilities - - -	-
Lending facilities - - -	-
Credit enhancements - - -	-
Holdings of securities (excluding trading book) - - -	(772)
Other - - -	80
Total - - -	(454)

8 Activity represents net movement in outstandings.

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ANZ Basel III Pillar 3 disclosure

June 2017

Dec 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 1,871 549 -	-
Credit cards and other personal loans - - -	-
Auto and equipment finance - - -	-
Commercial loans - - -	-
Other - - -	-
Total 1,871 549 -	-
Securitisation activity by facility provided	Notional amount $M
Liquidity facilities - - -	20
Funding facilities - - -	220
Underwriting facilities - - -	-
Lending facilities - - -	-
Credit enhancements - - -	-
Holdings of securities (excluding trading book) - - -	(239)
Other - - -	68
Total - - -	69

Table 5(a) part (ii): Trading Book - Summary of current period's activity by underlying asset type and facility

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

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June 2017

Table 5(b) part (i): Banking Book – Exposure at Default by exposure type

Securitisation exposure type- On balance sheet		Jun 17 $M Mar 17 $M	Dec 16 $M
Liquidity facilities		22 23	28
Funding facilities		7,202 7,023	6,921
Underwriting facilities		- -	-
Lending facilities		- -	-
Credit enhancements		- -	-
Holdings of securities (excluding trading book)		2,909 3,204	3,737
Protection provided		- -	-
Other		173 182	162
Total		10,306 10,432	10,848

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Securitisation exposure type -Off Balance Sheet	Jun-17 $M Mar 17 $M Dec 16 **$M **
Liquidity facilities	56 57 62
Funding facilities	- - -
Underwriting facilities	- - -
Lending facilities	- - -
Credit enhancements	- - -
Holdings of securities (excluding trading book)	- - -
Protection provided	- - -
Other	- - -
Total	56 57 62
Total Securitisation exposure type	Jun-17 $M Mar 17 $M Dec 16 $M
Liquidity facilities	78 80 90
Funding facilities	7,202 7,023 6,921
Underwriting facilities	- - -
Lending facilities	- - -
Credit enhancements	- - -
Holdings of securities (excluding trading book)	2,909 3,204 3,737
Protection provided	- - -
Other	173 182 162
Total	10,362 10,489 10,910

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June 2017

Table 5(b) part (ii): Trading Book - Exposure at Default by exposure type

Securitisation exposure type - On balance sheet Jun 17 **$M **	Mar 17 $M Dec 16 **$M **
Liquidity facilities -	- -
Funding facilities -	- -
Underwriting facilities -	- -
Lending facilities -	- -
Credit enhancements -	- -
Holdings of securities 6	8 13
Protection provided -	- -
Other -	- -
Total 6	8 13
Securitisation exposure type - Off Balance Sheet Jun 17 **$M **	Mar 17 $M Dec 16 **$M **
Liquidity facilities -	- -
Funding facilities -	- -
Underwriting facilities -	- -
Lending facilities -	- -
Credit enhancements -	- -
Holdings of securities -	- -
Protection provided -	- -
Other -	- -
Total -	- -
Total Securitisation exposure type Jun 17 **$M **	Mar 17 $M Dec 16 **$M **
Liquidity facilities -	- -
Funding facilities -	- -
Underwriting facilities -	- -
Lending facilities -	- -
Credit enhancements -	- -
Holdings of securities 6	8 13
Protection provided -	- -
Other -	- -
Total 6	8 13

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June 2017

Table 18 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: Capital Adequacy. 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.

The following information is the short form data disclosure required to be published under paragraph 47 of APS 330

		Jun 17	Mar 17	Dec 16	Sep 16
Capital and total exposures		$M	$M	$M	$M
20	Tier 1 capital	47,594	48,091	47,096	48,285
21	Total exposures	925,892	906,454	927,021	904,836
Leverage ratio
22	Basel III leverage ratio	5.1%	5.3%	5.1%	5.3%

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Glossary

ADI Authorised Deposit-taking Institution. Basel III Credit Valuation CVA charge is an additional capital requirement under Basel III Adjustment (CVA) capital charge for bilateral derivative exposures. Derivatives not cleared through a 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 (CVA) Over the life of a derivative instrument, ANZ uses a CVA model to 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 (IPC) Individual provision charge is the amount of expected credit losses 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 Basel The Internationally Comparable Basel 3 CET1 ratio incorporates 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.

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June 2017

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 Counterparties QCCP is a central counterparty which is an entity that interposes (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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