disclosure statement for personal use only · 2012. 11. 22. · westpac new zealand limited 1...

Westpac New Zealand LimitedDisclosure Statement For the year ended 30 September 2012

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Index 1 Generalinformationanddefinitions

1 Generalmatters

4 Creditratings

5 Guaranteearrangements

6 Pendingproceedingsorarbitration

6 Conditionsofregistration

9 Othermaterialmatters

9 Auditors

10 Reviewofoperations

25 Directors’statement

26 Indextofinancialstatements

104 Independentauditors’report

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Westpac New Zealand Limited 1

General information and definitionsCertainoftheinformationcontainedinthisDisclosureStatementisrequiredbysection81oftheReserveBankofNewZealandAct1989(‘Reserve Bank Act’)andtheRegisteredBankDisclosureStatements(NewZealandIncorporatedRegisteredBanks)Order(No2)2012(‘Order’).InthisDisclosureStatement,referenceismadeto:

■■ WestpacNewZealandLimited(otherwisereferredtoasthe‘Bank’).■■ WestpacNewZealandLimitedanditscontrolledentities(otherwisereferredtoasthe‘Banking Group’).ControlledentitiesoftheBankasat30September2012aresetoutinNote25.

WordsandphrasesnotdefinedinthisDisclosureStatement,butdefinedbytheOrder,havethemeaninggivenbytheOrderwhenusedinthisDisclosureStatement.AllamountsreferredtointhisDisclosureStatementareinNewZealanddollarsunlessotherwisestated.

General matters

Registered BankTheBankwasincorporatedasWestpacNewZealandLimitedundertheCompaniesAct1993(CompanyNumber1763882)on14February2006.TheheadofficeoftheBankissituatedatWestpaconTakutaiSquare,16TakutaiSquare,Auckland1010,NewZealandandtheaddressforserviceofprocessontheBankisWestpaconTakutaiSquare,53GalwayStreet,Auckland1010,NewZealand.TheBankisasubsidiaryofWestpacNewZealandGroupLimited(‘WNZGL’),aNewZealandcompany,whichinturnisawholly-ownedsubsidiaryofWestpacOverseasHoldingsNo.2PtyLimited(‘WOHL’),anAustraliancompany.WOHLis,inturn,awholly-ownedsubsidiaryofWestpacBankingCorporation,anAustraliancompany(‘Ultimate Parent Bank’).TheUltimateParentBankisincorporatedinAustraliaundertheAustralianCorporationsAct2001anditsaddressforserviceofprocessisLevel20,WestpacPlace,275KentStreet,Sydney,NewSouthWales2000,Australia.At30September2011,WNZGLhadadirectqualifyinginterestin85%ofthevotingsecuritiesoftheBank,andWOHLhadadirectqualifyinginterestin15%ofthevotingsecuritiesoftheBank.On9May2012,theBankrepurchased20,000BVotingsharesfromWOHL(representingallofthevotingsecuritiesoftheBankthatWOHLhadadirectqualifyinginterestin).Theseshareswereimmediatelycancelledonrepurchase.FollowingthisrepurchaseofBVotingshares,WNZGLhasadirectqualifyinginterestin100%ofthevotingsecuritiesoftheBank.TheUltimateParentBankhasanindirectqualifyinginterestin100%ofthevotingsecuritiesoftheBank.WNZGLhastheabilitytodirectlyappointupto100%oftheBoardofDirectorsoftheBank(the‘Board’)and,asindirectholdingcompaniesoftheBank,boththeUltimateParentBankandWOHLhavetheabilitytoindirectlyappointupto100%oftheBoard.Inaddition,theUltimateParentBankhasthepowerundertheBank’sconstitutiontodirectlyappointupto100%oftheBoardfromtimetotimebygivingwrittennoticetotheBank.AllappointmentstotheBoardmustbeapprovedbytheReserveBankofNewZealand(‘Reserve Bank’)(refertotheBank’sconditionsofregistrationonpage6ofthisDisclosureStatementfordetailsoftheReserveBank’sapprovalprocess).Until1November2006,theUltimateParentBankoperatedthroughabranchinNewZealand.Effective1November2006,theUltimateParentBankhasoperatedinNewZealandthroughbothabranchoftheUltimateParentBank(‘NZ Branch’)(carryingonfinancialmarketsoperations,andinstitutionalbankingactivitiesuntil1November2011)andtheBank(alocallyincorporatedsubsidiaryoftheUltimateParentBankcarryingontheUltimateParentBank’sNewZealandconsumerandbusinessbankingoperations).On1November2011,theNZBranchtransferredadditionalbusinessactivitiesandassociatedemployeestotheBank(refertoNote2Businesscombination–transferofoperationsforfurtherdetails).

Limits on material financial support by the Ultimate Parent BankTheUltimateParentBankisanauthoriseddeposit-takinginstitution(‘ADI’)undertheBankingAct1959ofAustralia(‘Australian Banking Act’)and,assuch,issubjecttoprudentialregulationandsupervisionbytheAustralianPrudentialRegulationAuthority(‘APRA’).APRAhasthepowertoprescribeprudentialrequirementswhichmayaffecttheabilityoftheUltimateParentBanktoprovidematerialfinancialsupporttotheBank.PursuanttocurrentAPRArequirements,andunlessAPRAprovidesotherwise,theUltimateParentBankmustcomplywith,amongotherprudentialrequirements,APRA’sPrudentialStandardAPS222AssociationswithRelatedEntities(‘APS 222’).APS222includesthefollowingprudentialrequirements:

■■ theUltimateParentBank’sexposuretotheBank(beingarelatedADIasdefinedinAPS222)mustnotexceed50%oftheUltimateParentBank’sLevel1capitalbase(asdefinedinAPS222);

■■ theUltimateParentBankmustnotholdunlimitedexposurestotheBank(suchasageneralguaranteecoveringanyoftheBank’sobligations);

■■ theUltimateParentBankmustnotenterintocross-defaultclauseswherebyadefaultbytheBankonanobligation(whetherfinancialorotherwise)isdeemedtotriggeradefaultoftheUltimateParentBankinitsobligations;

■■ whendetermininglimitsonacceptablelevelsofexposuretotheBank,theBoardofDirectorsoftheUltimateParentBankmusthaveregardto:■ thelevelofexposuresthatwouldbeapprovedtothirdpartiesofbroadlyequivalentcreditstatus;and■ theimpactontheUltimateParentBank’sstand-alonecapitalandliquiditypositions,anditsabilitytocontinueoperating,

intheeventofafailurebytheBankoranyotherrelatedentitytowhichitisexposed.

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General matters (continued)TheUltimateParentBankcomplieswiththerequirementssetbyAPRAinrespectoftheextentoffinancialsupportthatisprovidedtotheBank.Section13A(3)oftheAustralianBankingActprovidesthat,intheeventthattheUltimateParentBankbecomesunabletomeetitsobligationsorsuspendspayment,theassetsoftheUltimateParentBankinAustraliaaretobeavailabletosatisfytheliabilitiesoftheUltimateParentBankinthefollowingorder:

■■ first,certainobligationsoftheUltimateParentBanktoAPRA(ifany)arisingunderDivision2AAofPartIIoftheAustralianBankingActinrespectofamountspayablebyAPRAtoholdersof‘protectedaccounts’(asdefinedintheAustralianBankingAct)aspartofthefinancialclaimsscheme(‘FCS’)fortheAustralianGovernmentguaranteeof‘protectedaccounts’(includingmostdeposits)uptoA$250,000inthewinding-upoftheUltimateParentBank;

■■ second,APRA’scosts(ifany)inexercisingitspowersandperformingitsfunctionsrelatingtotheUltimateParentBankinconnectionwiththeFCS;

■■ third,theUltimateParentBank’sliabilities(ifany)inAustraliainrelationto‘protectedaccounts’thataccount-holderskeepwiththeUltimateParentBank;

■■ fourth,theUltimateParentBank’sdebts(ifany)totheReserveBankofAustralia;■■ fifth,theUltimateParentBank’sliabilities(ifany)underan‘industrysupportcontract’thatiscertifiedbyAPRAinaccordancewiththeAustralianBankingAct;and

■■ sixth,theUltimateParentBank’sotherliabilities(ifany)intheorderoftheirpriorityapartfromtheabove.Undersection16oftheAustralianBankingAct,onthewinding-upofanADI,APRA’scostofbeingincontrolofanADI’sbusiness,orhavinganadministratorincontrolofanADI’sbusiness,isadebtduetoAPRA.DebtsduetoAPRAshallhave,subjecttosection13A(3)oftheAustralianBankingAct,priorityoverallotherunsecureddebtsofthatADI.

DirectorateTheDirectorsoftheBankatthetimethisDisclosureStatementwassignedwere:

Name:PeterDavidWilson,CANon-executive:YesCountry of Residence:NewZealandPrimary Occupation: DirectorSecondary Occupations:NoneBoard Audit Committee Member:YesIndependent Director:Yes

External Directorships:ChairmanofeachofAugustaCapitalLimitedandPFOlsenGroupLimited.DeputyChairmanofMeridianEnergyLimited.DirectorofeachofWestpacBankingCorporation1,FarmlandsTradingSocietyLimited,NZFarmingSystemsUruguayLimitedandPFOlsenLimited.MemberofNewZealandMarketsDisciplinaryTribunalandChairmanoftheSpecialDivisionofthatTribunal.

Name:PeterGrahamClare,B.Com,MBANon-executive:NoCountry of Residence:NewZealandPrimary Occupation:ChiefExecutive,WestpacNewZealandLimitedSecondary Occupations: DirectorBoard Audit Committee Member:NoIndependent Director:No

External Directorships:DirectorofeachofWestpacNewZealandGroupLimited,BTFundsManagement(NZ)Limited,BTFinancialGroup(NZ)Limited,MooreParkNomineesPtyLimited,PGClareInvestmentsPtyLimitedandBankingOmbudsmanSchemeLimited.

Name:MalcolmBailey,B.Ag.Econ.Non-executive:YesCountry of Residence:NewZealandPrimary Occupation: DirectorSecondary Occupations:NoneBoard Audit Committee Member:YesIndependent Director:Yes

External Directorships:ChairmanoftheDairyCompaniesAssociationofNZ.DirectorofFonterraCo-operativeGroupLimited.BoardMemberoftheNZUSCouncil.MemberoftheInternationalFoodandAgricultureTradePolicyCouncil.DirectorofeachofBaileyAgricultureLimited,BaileyFamilyPropertiesLimited,EmbryoTechnologiesLimited,AgricoHoldingsLimited,HopkinsFarmingGroupLimited,GleneigHoldingsLimited,PastoralDairyInvestmentsLimited,PastoralDairyInvestmentsAlphaLimited,PastoralDairyInvestmentsGammaLimited,PastoralDairyInvestmentsDeltaLimited,PastoralDairyInvestmentsEpsilonLimited,PastoralDairyInvestmentsZetaLimited,PastoralDairyInvestmentsEtaLimited,PastoralDairyInvestmentsThetaLimited,PastoralDairyInvestmentsIotaLimited,PastoralDairyKappaLimited,PastoralDairyInvestmentsLambdaLimited,PastoralDairyInvestmentsMuLimited,PastoralDairyInvestmentsNuLimited,PastoralDairyInvestmentsXiLimited,PastoralDairyInvestmentsOmicronLimited,PastoralDairyInvestmentsPiLimited,PastoralDairyInvestmentsRhoLimited,PastoralDairyInvestmentsTauLimited,PastoralDairyInvestmentsPhiLimited,PastoralDairyInvestmentsChiLimited,PastoralDiaryInvestmentsPsiLimited,PastoralDairyInvestmentsAlpha-PiLimited,PastoralDairyInvestmentsUpsilonLimitedandPastoralDairyInvestmentsOmegaLimited.

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General matters (continued)

Name:PhilipMatthewCoffey,BEc(Hons.)Non-executive:YesCountry of Residence:AustraliaPrimary Occupation:ChiefFinancialOfficer,WestpacBankingCorporationSecondary Occupations: DirectorBoard Audit Committee Member:YesIndependent Director:No

External Directorships:DirectorofMBMCPtyLtdandMBMCFuturesPtyLtd.

Name:JaniceAmeliaDawson,B.Com,FCANon-executive:YesCountry of Residence:NewZealandPrimary Occupation: DirectorSecondary Occupations:NoneBoard Audit Committee Member:Yes,ChairIndependent Director:Yes

External Directorships:DeputyChairofCountiesManukauDistrictHealthBoard.DirectorofeachofAirNewZealandLimited,MeridianEnergyLimited2,EruaLimited,GoodmanFielderLimitedandJanDawsonLimited.MemberofeachoftheCapitalInvestmentCommitteeoftheNationalHealthBoard,theCounciloftheUniversityofAuckland,theDisciplinaryTribunal–NewZealandInstituteofCharteredAccountants,theVoyagerMaritimeMuseum,theCounciloftheInternationalSailingFederationandtheEventsCommitteeoftheInternationalSailingFederation.PresidentofYachtingNewZealand.ChairoftheAuditCommitteeoftheInternationalSailingFederation.

Name:ChristopherJohnDavidMoller,BCA,DipAccounting,ACANon-executive:YesCountry of Residence:NewZealandPrimary Occupation: DirectorSecondary Occupations:NoneBoard Audit Committee Member:YesIndependent Director:Yes

External Directorships: ChairmanofeachofNewZealandTransportAgency,MeridianEnergyLimited,SKYCITYEntertainmentGroupLimitedandNewZealandCricket.DirectorofeachofUrenuiConsultantsLimited,RugbyNewZealand2011Limited,NZXLimited3,InternationalCricketCouncilandICCDevelopment(International)Limited.TrusteeofeachofNewZealandCricketFoundationInc.andWestpacRegionalStadiumTrust.

1 PeterWilsonhasannouncedthathewillretireasadirectorofWestpacBankingCorporationattheconclusionofWestpacBankingCorporation’s2012AnnualGeneralMeetingon13December2012.

2 JaniceDawsonwasappointedasadirectorofMeridianEnergyLimitedon1November2012.3 ChristopherMollerretiredasadirectorofNZXLimitedon2November2012.

AllcommunicationsmaybesenttotheDirectorsattheheadofficeoftheBankatWestpaconTakutaiSquare,16TakutaiSquare,Auckland1010,NewZealand.

Changes to Directorate

ThefollowingchangesinthecompositionoftheBoardhavebeeneffectedsince30September2011:■■ GeorgeFrazisresignedfromtheBoardwitheffectfrom13April2012;■■ PeterGrahamClarewasappointedtotheBoardwitheffectfrom13April2012;■■ RalphGrahamWatersresignedfromtheBoardwitheffectfrom1September2012;■■ MalcolmBaileywasappointedtotheBoardwitheffectfrom1September2012;and■■ PeterDavidWilsonwasredesignatedfromnon-IndependentDirectortoIndependentDirector(forthepurposesoftheReserveBankdocumententitled‘CorporateGovernance’(BS14)datedMarch2011)witheffectfrom1April2012.

Conflicts of interest policyTheBoardhasadoptedaproceduretoensurethatconflictsandpotentialconflictsofinterestbetweentheDirectors’dutytotheBankandtheirpersonal,professionalorbusinessinterestsareavoidedordealtwith.TheBank’spolicyisconsistentwiththeconflictsofinterestpolicyoftheUltimateParentBankanditssubsidiaries(‘Ultimate Parent Bank Group’).Accordingly,eachDirectormust:(a) givenoticetotheBoardofanydirectorindirectinterestinanycontractorproposedcontractwiththeBankassoonas

practicableaftertherelevantfactshavecometothatDirector’sknowledge.Alternatively,aDirectormaygivetotheBoardageneralnoticetotheeffectthattheDirectoristoberegardedasinterestedinanypresentorprospectivecontractbetweentheBankandapersonorpersonsspecifiedinthatnotice;and

(b) inrelationtoanymatterthatistobeconsideredataDirectors’meetinginwhichthatDirectorhasamaterialpersonalinterest,notvoteonthematternorbepresentwhilethematterisbeingconsideredatthemeeting(unlesstheremainingDirectorshavepreviouslyresolvedtothecontrary).

Interested transactionsTherehavebeennotransactionsenteredintobyanyDirector,oranyimmediaterelativeorclosebusinessassociateofanyDirector,withtheBank,oranymemberoftheBankingGroup:(a) ontermsotherthanonthosewhichwould,intheordinarycourseofbusinessoftheBankoranymemberoftheBanking

Group,begiventoanyotherpersonoflikecircumstancesormeans;or(b) whichcouldotherwisebereasonablylikelytoinfluencemateriallytheexerciseofthatDirector’sduties.

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Credit ratingsTheBankhasthefollowingcreditratingswithrespecttoitslong-termseniorunsecuredobligations,includingobligationspayableinNewZealandinNewZealanddollarsasatthedatetheDirectorssignedthisDisclosureStatement.

Rating Agency Current Credit Rating Rating Outlook

FitchRatings AA- Stable

Moody’sInvestorsService Aa3 Stable

Standard&Poor’s AA- Stable

On30January2012,FitchRatings(‘Fitch’)placedtheBank’screditratingoutlookon‘ratingwatchnegative’.TheannouncementbyFitchformedpartofabroaderreviewofthedebtratingsFitchappliestothelargestbankinginstitutionsintheworld.On24February2012,theBank’screditratingissuedbyFitchwasdowngradedfromAAtoAA-witha‘stable’outlook.On9November2011,Standard&Poor’sreleaseditsnewglobalbankratingcriteriaandBankingIndustryCountryRiskAssessments(‘BICRA’)methodology.Alsoon9November2011,Standard&Poor’sannouncedtheBICRAscoreforNewZealandofthree,downfromascoreoftwounderthepreviousmethodology.On1December2011,asaresultoftheStandard&Poor’sbankratingcriteriachanges,theBank’screditratingwasloweredfromAAtoAA-witha‘stable’outlook.On27May2011,theBank’screditratingissuedbyMoody’sInvestorsServicewasdowngradedfromAa2toAa3witha‘stable’outlook.TherehavebeennootherchangestoanyoftheBank’screditratingsorratingsoutlooksinthetwoyearspriorto30September2012.Acreditratingisnotarecommendationtobuy,sellorholdsecuritiesoftheBank.Suchratingsaresubjecttorevision,qualification,suspensionorwithdrawalatanytimebytheassigningratingagency.InvestorsintheBank’ssecuritiesarecautionedtoevaluateeachratingindependentlyofanyotherrating.

Descriptions of credit rating scales1

Fitch Ratings

Moody’s Investors

ServiceStandard & Poor’s

The following grades display investment grade characteristics:

Capacitytomeetfinancialcommitmentsisextremelystrong.Thisisthehighestissuercredit rating

AAA Aaa AAA

Verystrongcapacitytomeetfinancialcommitments AA Aa AA

Strongcapacitytomeetfinancialcommitmentsalthoughsomewhatsusceptibletoadversechangesineconomic,businessorfinancialconditions

A A A

Adequatecapacitytomeetfinancialcommitments,butadversebusinessoreconomicconditionsaremorelikelytoimpairthiscapacity

BBB Baa BBB

The following grades have predominantly speculative characteristics:

Significantongoinguncertaintiesexistwhichcouldaffectthecapacitytomeetfinancialcommitmentsonatimelybasis

BB Ba BB

Greatervulnerabilityandthereforegreaterlikelihoodofdefault B B B

Likelihoodofdefaultnowconsideredarealpossibility.Capacitytomeetfinancialcommitmentsisdependentonfavourablebusiness,economicandfinancialconditions

CCC Caa CCC

Highestriskofdefault CC to C Ca CC

Obligationscurrentlyindefault RD to D C SDtoD

1 ThisisageneraldescriptionoftheratingcategoriesbasedoninformationpublishedbyFitch,Moody’sInvestorsServiceandStandard&Poor’s.

CreditratingsbyFitchandStandard&Poor’smaybemodifiedbyaplus(higherend)orminus(lowerend)signtoshowrelativestandingwithinthemajorcategories.Moody’sInvestorsServiceapplynumericmodifiers1(higherend),2or3(lowerend)toratingsfromAatoCaatoshowrelativestandingwithinthemajorcategories.Ratingsstatedinbold indicatetheBank’scurrentpositionwithinthecreditratingscales.F

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Guarantee arrangementsCertainmaterialobligationsoftheBankareguaranteedasatthedatetheDirectorssignedthisDisclosureStatement.

Government guaranteesTheBankhasaCrownWholesaleFundingGuaranteeFacilityDeedandCrownWholesaleFundingGuaranteewiththeNewZealandGovernment(‘Crown’),eachdated23February2009(togetherthe‘Wholesale Guarantee’).TheWholesaleGuaranteeclosedon30April2010fromwhichdatenonewGuaranteeEligibilityCertificatescanbeissued.GuaranteedLiabilitiesexistingasat30April2010werenotaffected.ThefollowingdescriptionoftheWholesaleGuaranteeisforgeneralinformationpurposesonlyanddoesnotpurporttobeexhaustive.FurtherinformationabouttheWholesaleGuaranteeisavailablefromtheTreasuryinternetsitewww.treasury.govt.nz.

Wholesale GuaranteeTheguarantoroftheBank’sobligationsundertheWholesaleGuaranteeistheCrown.TheCrown’saddressforserviceinrelationtotheWholesaleGuaranteeis:(a) MinisterofFinance,ParliamentBuildings,Wellington;or(b) NewZealandHighCommissionerinLondonattheaddressoftheNewZealandHighCommissioninLondonforthetime

being;or(c) NewZealandConsulandTradeCommissionerattheaddressoftheNewZealandConsulate-GeneralinNewYorkforthetime

being;ineachcasewithacopy(withdeliverymadebyhandorfacsimile)to:TheTreasurer,TheNewZealandDebtManagementOffice,1TheTerrace,Wellington,NewZealand.ThemostrecentauditedfinancialstatementsoftheCrowncanalsobeobtainedfromtheTreasuryinternetsitewww.treasury.govt.nz.TheCrownhasthefollowingcreditratingsinrespectofitslong-termobligationspayableinNewZealanddollarsasatthedatetheDirectorssignedthisDisclosureStatement.

Rating Agency The Crown’s Current Credit Rating Rating Outlook

Moody’sInvestorsService Aaa Stable

Standard&Poor’s AA+ Stable

FitchRatings AA+ Stable

On29September2011and30September2011respectively,theCrown’screditratingsissuedbyFitchRatingsandStandard&Poor’swereeachdowngradedfromAAAtoAA+witha‘stable’outlook.TherehavebeennootherchangestoanyoftheCrown’sdomesticcurrencycreditratingsorratingoutlooksinthetwoyearspriorto30September2012.Foranexplanationofthecreditratingscalesseethetableunderthesub-heading‘Descriptionsofcreditratingscales’onpage4ofthisDisclosureStatement.

Obligations guaranteed

TheobligationsguaranteedbytheCrownundertheWholesaleGuaranteeareobligationsoftheBanktopaymoneytoaBeneficiary(asdefinedbelow)underaGuaranteedLiability.A‘GuaranteedLiability’isaliabilitytopayprincipalorinterestinrespectofwhichtheCrownhasissuedaGuaranteeEligibilityCertificateundertheWholesaleGuarantee.TheCrown:(a) guaranteestoeachBeneficiarythepaymentbytheBankofanyGuaranteedLiabilityowedtothatBeneficiary;and(b) undertakestoeachBeneficiarythat,iftheBankdoesnotpayanyGuaranteedLiabilityowedtothatBeneficiaryonitsdue

date,theCrownwillpaythatGuaranteedLiability.Inthiscontext,a‘Beneficiary’meanseachpersontowhomaGuaranteedLiabilityisowed,excludinga‘RelatedParty’oftheBankasthattermisdefinedintheWholesaleGuaranteeandanyoneactingasanomineeof,ortrusteefor,aRelatedParty.TheCrownhasissuedGuaranteeEligibilityCertificatesinrespectofpaymentobligationsoftheBankundercertainnotesissuedbytheBank.TheCrownhasalsoissuedGuaranteeEligibilityCertificatesinrespectofpaymentobligationsoftheBankasguarantorofcertainnotesissuedbyWestpacSecuritiesNZLimited(‘WSNZL’),acontrolledentityoftheBank.CopiesoftheGuaranteeEligibilityCertificatesissued,whichprovidefurtherdetailsoftheobligationsoftheBankguaranteedbytheCrownundertheWholesaleGuarantee,areavailableontheNewZealandTreasuryinternetsitewww.treasury.govt.nz.

Limits on the amount of obligations guaranteed

TheobligationsoftheCrowninrespectofaGuaranteedLiabilityarelimitedtotherelevantpaymentobligationsoftheBankinrespectofprincipalandinterestundertheparticulardebtsecuritiesthatarespecifiedintherelevantGuaranteeEligibilityCertificate.

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Guarantee arrangements (continued)Material conditions applicable to the guarantee

ThematerialconditionsapplicabletotheWholesaleGuarantee,otherthannon-performancebytheBank,aresummarisedbelow:(a) TheCrownisnotliableinrespectofanyGuaranteedLiabilitythathasbeenamendedinanyrespectwithoutthepriorwritten

consentoftheCrown.(b) TheCrownisnotliableinrespectofanyGuaranteedLiabilityuntiltheCrownreceivesawrittendemandforthatpayment

thatcomplieswiththerequirementssetoutintheWholesaleGuarantee.(c) SpecialconditionsmaybespecifiedintheGuaranteeEligibilityCertificateinrespectofaparticularGuaranteedLiability.TheCrownhasalsoimposedarequirementthatlocallyincorporatedregisteredbankshavingthebenefitoftheWholesaleGuaranteemaintainanadditional2%TierOneCapitalratiobuffer,abovetheregulatoryminimum4%TierOneCapitalratio.TheBankcomplieswiththisrequirement.

Expiry of the Wholesale Guarantee

ForeachGuaranteedLiabilitytheguaranteeundertheWholesaleGuaranteewillexpireatmidnightonthedatefalling30daysaftertheearlierof:(a) thescheduledmaturitydateofthesecurityunderwhichthatGuaranteedLiabilityarises;and(b) thedatefallingfiveyearsaftertheissuedateofthesecurityunderwhichthatGuaranteedLiabilityarises.ThereisnoprovisionforthewithdrawaloftheWholesaleGuaranteeinrespectofaGuaranteedLiability.TherehavebeennochangestothetermsoftheWholesaleGuaranteesincethedateofsigningoftheBank’sDisclosureStatementfortheyearended30September2011.

Pending proceedings or arbitrationTherearenopendinglegalproceedingsorarbitrationatthedateofthisDisclosureStatementinvolvinganymemberoftheBankingGroup,whetherinNewZealandorelsewhere,thatmayhaveamaterialadverseeffectontheBankingGrouportheBank.ThecontingentliabilitiesoftheBankingGroupandtheBankaresetoutinNote28Commitmentsandcontingentliabilities.

Conditions of registration TheconditionsofregistrationimposedontheBank,whichappliedfrom31August2012,areasfollows:1. ThattheBankingGroupcomplieswiththefollowingrequirements:

(a)theTotalCapitalratiooftheBankingGroupcalculatedinaccordancewiththeReserveBankofNewZealand(‘Reserve Bank’)document‘Capitaladequacyframework(internalmodelsbasedapproach)’(BS2B)datedAugust2012isnotlessthan8%;

(b)theTierOneCapitalratiooftheBankingGroupcalculatedinaccordancewiththeReserveBankdocument‘Capitaladequacyframework(internalmodelsbasedapproach)’(BS2B)datedAugust2012isnotlessthan4%;and

(c)theCapitaloftheBankingGroupcalculatedinaccordancewiththeReserveBankdocument‘Capitaladequacyframework(internalmodelsbasedapproach)’(BS2B)datedAugust2012isnotlessthan$30million.

ForthepurposesofthisconditionofregistrationthescalarreferredtointheReserveBankdocument‘Capitaladequacyframework(internalmodelsbasedapproach)’(BS2B)datedAugust2012is1.06.

1A.That:(a)theBankhasaninternalcapitaladequacyassessmentprocess(‘ICAAP’)thataccordswiththerequirementssetoutin

thedocument‘Guidelinesonabank’sinternalcapitaladequacyassessmentprocess(‘ICAAP’)’(BS12)datedDecember2007;

(b)underitsICAAPtheBankidentifiesandmeasuresits‘othermaterialrisks’definedasallmaterialrisksoftheBankingGroupthatarenotexplicitlycapturedinthecalculationofTierOneandTotalCapitalratiosundertherequirementssetoutinthedocument‘Capitaladequacyframework(internalmodelsbasedapproach)’(BS2B)datedAugust2012;and

(c)theBankdeterminesaninternalcapitalallocationforeachidentifiedandmeasured‘othermaterialrisk’.1B.ThattheBankingGroupcomplieswithallrequirementssetoutintheReserveBankdocument‘Capitaladequacyframework

(internalmodelsbasedapproach)’(BS2B)datedAugust2012.2. ThattheBankingGroupdoesnotconductanynon-financialactivitiesthatinaggregatearematerialrelativetoitstotal

activities. Inthisconditionofregistration,themeaningof‘material’isbasedongenerallyacceptedaccountingpractice.3. ThattheBankingGroup’sinsurancebusinessisnotgreaterthan1%ofitstotalconsolidatedassets. Forthepurposesofthisconditionofregistration,theBankingGroup’sinsurancebusinessisthesumofthefollowingamounts

forentitiesintheBankingGroup:(a)ifthebusinessofanentitypredominantlyconsistsofinsurancebusinessandtheentityisnotasubsidiaryofanother

entityintheBankingGroupwhosebusinesspredominantlyconsistsofinsurancebusiness,theamountoftheinsurancebusinesstosumisthetotalconsolidatedassetsofthegroupheadedbytheentity;and

(b)iftheentityconductsinsurancebusinessanditsbusinessdoesnotpredominantlyconsistofinsurancebusinessandtheentityisnotasubsidiaryofanotherentityintheBankingGroupwhosebusinesspredominantlyconsistsofinsurancebusiness,theamountoftheinsurancebusinesstosumisthetotalliabilitiesrelatingtotheentity’sinsurancebusinessplustheequityretainedbytheentitytomeetthesolvencyorfinancialsoundnessneedsofitsinsurancebusiness:

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Conditions of registration (continued) IndeterminingthetotalamountoftheBankingGroup’sinsurancebusiness:

(a)allamountsmustrelatetoonbalancesheetitemsonly,andmustcomplywithgenerallyacceptedaccountingpractice;and

(b)ifproductsorassetsofwhichaninsurancebusinessiscomprisedalsocontainanon-insurancecomponent,thewholeofsuchproductsorassetsmustbeconsideredpartoftheinsurancebusiness.

Forthepurposesofthisconditionofregistration, ‘insurancebusiness’meanstheundertakingorassumptionofliabilityasaninsurerunderacontractofinsurance: ‘insurer’and‘contractofinsurance’havethesamemeaningasprovidedinsections6and7oftheInsurance(Prudential

Supervision)Act2010.4. Thattheaggregatecreditexposures(ofanon-capitalnatureandnetofanyallowancesforimpairment)oftheBanking

Grouptoallconnectedpersonsdonotexceedtherating-contingentlimitoutlinedinthefollowingmatrix:

Credit rating1 Connected exposure limit (% of the Banking Group’s Tier One Capital)

AA/Aa2andabove 75

AA-/Aa3 70

A+/A1 60

A/A2 40

A-/A3 30

BBB+/Baa1andbelow 15

1 ThistableusestheratingscalesofStandard&Poor’s,FitchRatingsandMoody’sInvestorsService(FitchRatings’scaleisidenticaltoStandard&Poor’s).

Withintherating-contingentlimit,creditexposures(ofanon-capitalnatureandnetofanyallowancesforimpairment)tonon-bankconnectedpersonsshallnotexceed15%oftheBankingGroup’sTierOneCapital.

Forthepurposesofthisconditionofregistration,compliancewiththerating-contingentconnectedexposurelimitisdeterminedinaccordancewiththeReserveBankdocumententitled‘Connectedexposurespolicy’(BS8)datedJune2011.

5. Thatexposurestoconnectedpersonsarenotonmorefavourableterms(e.g.asrelatestosuchmattersascreditassessment,tenor,interestrates,amortisationschedulesandrequirementforcollateral)thancorrespondingexposurestonon-connectedpersons.

6. ThattheBankcomplieswiththefollowingcorporategovernancerequirements:(a)theBoardoftheBankmusthaveatleastfivedirectors;(b)themajorityoftheBoardmembersmustbenon-executivedirectors;(c)atleasthalfoftheBoardmembersmustbeindependentdirectors;(d)analternatedirector:

(i) foranon-executivedirectormustbenon-executive;and(ii)foranindependentdirectormustbeindependent;

(e)atleasthalfoftheindependentdirectorsoftheBankmustbeordinarilyresidentinNewZealand;(f)thechairpersonoftheBoardoftheBankmustbeindependent;and(g)theBank’sconstitutionmustnotincludeanyprovisionpermittingadirector,whenexercisingpowersorperformingduties

asadirector,toactotherthaninwhatheorshebelievesisthebestinterestsofthecompany(i.e.theBank). Forthepurposesofthisconditionofregistration,‘non-executive’and‘independent’havethesamemeaningasintheReserve

Bankdocumententitled‘CorporateGovernance’(BS14)datedMarch2011.7. Thatnoappointmentofanydirector,chiefexecutiveofficer,orexecutivewhoreportsorisaccountabledirectlytothechief

executiveofficer,ismadeinrespectoftheBankunless:(a)theReserveBankhasbeensuppliedwithacopyofthecurriculumvitaeoftheproposedappointee;and(b)theReserveBankhasadvisedthatithasnoobjectiontothatappointment.

8. ThatapersonmustnotbeappointedaschairpersonoftheBoardoftheBankunless:(a)theReserveBankhasbeensuppliedwithacopyofthecurriculumvitaeoftheproposedappointee;and(b)theReserveBankhasadvisedthatithasnoobjectiontothatappointment.

9. ThattheBankhasaBoardauditcommittee,orotherseparateboardcommitteecoveringauditmatters,thatmeetsthefollowingrequirements:(a)themandateofthecommitteemustinclude:ensuringtheintegrityoftheBank’sfinancialcontrols,reportingsystemsand

internalauditstandards;(b)thecommitteemusthaveatleastthreemembers;(c)everymemberofthecommitteemustbeanon-executivedirectoroftheBank;(d)themajorityofthemembersofthecommitteemustbeindependent;and(e)thechairpersonofthecommitteemustbeindependentandmustnotbethechairpersonoftheBank.

Forthepurposesofthisconditionofregistration,‘non-executive’and‘independent’havethesamemeaningasintheReserveBankdocumententitled‘CorporateGovernance’(BS14)datedMarch2011.

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Conditions of registration (continued)10.ThatasubstantialproportionoftheBank’sbusinessisconductedinandfromNewZealand.11.ThattheBankhaslegalandpracticalabilitytocontrolandexecuteanybusiness,andanyfunctionsrelatingtoanybusiness,

oftheBankthatarecarriedonbyapersonotherthantheBank,sufficienttoachieve,undernormalbusinessconditionsandintheeventofstressorfailureoftheBankorofaserviceprovidertotheBank,thefollowingoutcomes:(a)thattheBank’sclearingandsettlementobligationsdueonadaycanbemetonthatday;(b)thattheBank’sfinancialriskpositionsonadaycanbeidentifiedonthatday;(c)thattheBank’sfinancialriskpositionscanbemonitoredandmanagedonthedayfollowinganyfailureandonsubsequent

days;and(d)thattheBank’sexistingcustomerscanbegivenaccesstopaymentsfacilitiesonthedayfollowinganyfailureandon

subsequentdays. Forthepurposesofthisconditionofregistration,theterm‘legalandpracticalabilitytocontrolandexecute’isexplainedin

theReserveBankdocumententitled‘OutsourcingPolicy’(BS11)datedJanuary2006.12.That:

(a)thebusinessandaffairsoftheBankaremanagedby,orunderthedirectionorsupervisionof,theBoardoftheBank;(b)theemploymentcontractofthechiefexecutiveofficeroftheBankorpersoninanequivalentposition(together‘CEO’)is

withtheBank,andthetermsandconditionsoftheCEO’semploymentagreementaredeterminedby,andanydecisionsrelatingtotheemploymentorterminationofemploymentoftheCEOaremadeby,theBoardoftheBank;and

(c)allstaffemployedbytheBankhavetheirremunerationdeterminedby(orunderthedelegatedauthorityof)theBoardortheCEOoftheBankandareaccountable(directlyorindirectly)totheCEOoftheBank.

13. That,forthepurposesofcalculatingtheBank’scapitalratiosonasolobasis,acreditconversionfactorofzeroisonlyappliedtoaguaranteeofafinancingsubsidiary’sfinancialobligationsif,insubstance,theguaranteedoesnotcreateariskoflossfortheBank.

14.ThattheBankingGroupcomplieswiththefollowingquantitativerequirementsforliquidity-riskmanagement:(a)theone-weekmismatchratiooftheBankingGroupisnotlessthan0%attheendofeachbusinessday;(b)theone-monthmismatchratiooftheBankingGroupisnotlessthan0%attheendofeachbusinessday;and(c)theone-yearcorefundingratiooftheBankingGroupisnotlessthan70%attheendofeachbusinessday.

Forthepurposesofthisconditionofregistration,theratiosidentifiedmustbecalculatedinaccordancewiththeReserveBankdocumentsentitled‘LiquidityPolicy’(BS13)datedMarch2011and‘LiquidityPolicyAnnex:LiquidAssets’(BS13A)datedDecember2011.

15.ThattheBankhasaninternalframeworkforliquidityriskmanagementthatisadequateintheBank’sviewformanagingtheBank’sliquidityriskataprudentlevel,andthat,inparticular:(a)isclearlydocumentedandcommunicatedtoallthoseintheorganisationwithresponsibilityformanagingliquidityand

liquidityrisk;(b)identifiesresponsibilityforapproval,oversightandimplementationoftheframeworkandpoliciesforliquidityrisk

management;(c)identifiestheprincipalmethodsthattheBankwilluseformeasuring,monitoringandcontrollingliquidityrisk;and(d)considersthematerialsourcesofstressthattheBankmightface,andpreparestheBanktomanagestressthrougha

contingencyfundingplan.16.Thatnomorethan10%oftotalassetsmaybebeneficiallyownedbyaSPV. Forthepurposesofthiscondition: ‘totalassets’meansallassetsoftheBankingGroupplusanyassetsheldbyanySPVthatarenotincludedintheBanking

Group’sassets: ‘SPV’meansaperson:

(a)towhomanymemberoftheBankingGrouphassold,assigned,orotherwisetransferredanyasset;(b)whohasgranted,ormaygrant,asecurityinterestinitsassetsforthebenefitofanyholderofanycoveredbond;and(c)whocarriesonnootherbusinessexceptforthatnecessaryorincidentaltoguaranteetheobligationsofanymemberof

theBankingGroupunderacoveredbond: ‘coveredbond’meansadebtsecurityissuedbyanymemberoftheBankingGroup,forwhichrepaymenttoholdersis

guaranteedbyaSPV,andinvestorsretainanunsecuredclaimontheissuer.17.That:

(a)nomemberoftheBankingGroupmaygiveeffecttoaqualifyingacquisitionorbusinesscombinationthatmeetsthenotificationthreshold,anddoesnotmeetthenon-objectionthreshold,unless:(i) thebankhasnotifiedtheReserveBankinwritingoftheintendedacquisitionorbusinesscombinationandatleast10

workingdayshavepassed;and(ii)atthetimeofnotifyingtheReserveBankoftheintendedacquisitionorbusinesscombination,theBankprovidedthe

ReserveBankwiththeinformationrequiredundertheReserveBankofNewZealandBankingSupervisionHandbookdocument‘SignificantAcquisitionsPolicy’(BS15)datedDecember2011;and

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Conditions of registration (continued)(b)nomemberoftheBankingGroupmaygiveeffecttoaqualifyingacquisitionorbusinesscombinationthatmeetsthenon-

objectionthresholdunless:(i) thebankhasnotifiedtheReserveBankinwritingoftheintendedacquisitionorbusinesscombination;(ii)atthetimeofnotifyingtheReserveBankinwritingoftheintendedacquisitionorbusinesscombination,theBank

providedtheReserveBankwiththeinformationrequiredundertheReserveBankofNewZealandBankingSupervisionHandbookdocument‘SignificantAcquisitionsPolicy’(BS15)datedDecember2011;and

(iii)theReserveBankhasgiventhebankanoticeofnon-objectiontothesignificantacquisitionorbusinesscombination. Forthepurposesofthisconditionofregistration,‘qualifyingacquisitionorbusinesscombination’,‘notificationthreshold’

and‘non-objectionthreshold’havethesamemeaningasintheReserveBankofNewZealandBankingSupervisionHandbookdocument‘SignificantAcquisitionsPolicy’(BS15)datedDecember2011.

Intheseconditionsofregistration:■■ ‘BankingGroup’meansWestpacNewZealandLimited’sfinancialreportinggroupasdefinedinsection2(1)oftheFinancialReportingAct1993;and

■■ ‘generallyacceptedaccountingpractice’hasthesamemeaningasinsection2oftheFinancialReportingAct1993.TheBank’sconditionsofregistrationwereamendedinAugust2012torefertotheupdatedReserveBankdocument‘Capitaladequacyframework(internalmodelsbasedapproach)(BS2B)’datedAugust2012.BS2BwasamendedtoincludeamethodologyforcalculatingsolocapitalratiosonaBaselIImodellingbasis.AsthecalculationofsolocapitalratiosisonlyrequiredforthepurposeofdisclosureundertheOrder,amendmentsarealsorequiredtotheOrderforthenewmethodologytohaveanyeffect.Theamendedconditionsofregistrationaresetoutaboveandapplywitheffectfromandincluding31August2012.TheBank’sconditionsofregistrationwerefurtheramendedsubsequenttobalancedate,inOctober2012.Thechangerelatestoanincreaseintheminimumone-yearcorefundingratioinconditionofregistration14from70%to75%witheffectfrom1January2013.

Other material mattersTherearenomattersrelatingtothebusinessoraffairsoftheBankandtheBankingGroupwhicharenotcontainedelsewhereintheDisclosureStatementandwhichwould,ifdisclosed,materiallyaffectthedecisionofapersontosubscribefordebtsecuritiesofwhichtheBankoranymemberoftheBankingGroupistheissuer.

AuditorsPricewaterhouseCoopersPricewaterhouseCoopersTower188QuayStreetAuckland,NewZealand

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Review of operations

Disclosure regarding forward-looking statementsThisDisclosureStatementcontainsstatementsthatconstitute“forward-lookingstatements”withinthemeaningofsection21EoftheUnitedStatesSecuritiesExchangeActof1934.Forward-lookingstatementsarestatementsaboutmattersthatarenothistoricalfacts.Forward-lookingstatementsappearinanumberofplacesinthisDisclosureStatementandincludestatementsregardingtheintent,belieforcurrentexpectationswithrespecttothebusinessandoperations,marketconditionsandresultsofoperationsandfinancialconditionoftheBankingGroupincluding,withoutlimitation,futureloanlossprovisionsandfinancialsupporttocertainborrowers.Wordssuchas“will”,“may”,“expect”,“intend”,“seek”,“would”,“should”,“could”,“continue”,“plan”,“estimate”,“anticipate”,“believe”,“probability”,“risk”,orothersimilarwordsareusedtoidentifyforward-lookingstatements.Theseforward-lookingstatementsreflecttheBankingGroup’scurrentviewswithrespecttofutureeventsandaresubjecttochange.Certainrisks,uncertaintiesandassumptionsare,inmanyinstances,beyondtheBankingGroup’scontrol,andhavebeenmadebaseduponmanagement’sexpectationsandbeliefsconcerningfuturedevelopmentsandtheirpotentialeffectupontheBankingGroup.TherecanbenoassurancethatfuturedevelopmentswillbeinaccordancewiththeBankingGroup’sexpectationsorthattheeffectoffuturedevelopmentsontheBankingGroupwillbethoseanticipated.ActualresultscoulddiffermateriallyfromthosewhichtheBankingGroupexpects,dependingontheoutcomeofvariousfactorsincluding,butnotlimitedto:

■■ theeffectof,andchangesin,laws,regulations,taxationoraccountingstandardsorpracticesandgovernmentpolicy,particularlychangestoliquidity,leverageandcapitalrequirements;

■■ thestabilityofNewZealand,AustralianandinternationalfinancialsystemsanddisruptionstofinancialmarketsandanylossesorbusinessimpactstheBankingGrouporitscustomersorcounterpartiesmayexperienceasaresult;

■■ marketvolatility,includinguncertainconditionsinfunding,equityandassetmarkets;■■ adverseasset,creditorcapitalmarketconditions;■■ changestothecreditratingsoftheBankortheUltimateParentBank;■■ levelsofinflation,interestrates,exchangeratesandmarketandmonetaryfluctuations;■■ marketliquidityandinvestorconfidence;■■ changesineconomicconditions,consumerspending,savingandborrowinghabitsinNewZealand,AustraliaandinothercountriesinwhichtheBankingGrouporitscustomersorcounterpartiesconducttheiroperationsandtheBankingGroup’sabilitytomaintainortoincreasemarketshareandcontrolexpenses;

■■ theeffectsofcompetitioninthegeographicandbusinessareasinwhichtheBankingGroupconductsitsoperations;■■ reliabilityandsecurityoftheBankingGroup’stechnologyandrisksassociatedwithchangestotechnologysystems;■■ thetimelydevelopmentandacceptanceofnewproductsandservicesandtheperceivedoverallvalueoftheseproductsandservicesbycustomers;

■■ theeffectivenessoftheBankingGroup’sriskmanagementpolicies,includingitsinternalprocesses,systemsandemployees;■■ theoccurrenceofenvironmentalchangeorexternaleventsincountriesinwhichtheBankingGrouporitscustomersorcounterpartiesconducttheiroperations;

■■ internalandexternaleventswhichmayadverselyimpacttheBankingGroup’sreputation;■■ changesinpolitical,socialoreconomicconditionsinanyofthemajormarketsinwhichtheBankingGrouporitscustomersorcounterpartiesoperate;

■■ thesuccessofstrategicdecisionsinvolvingbusinessexpansionandintegrationofnewbusinesses;and■■ variousotherfactorsbeyondtheBankingGroup’scontrol.Theabovelistisnotexhaustive.Whenrelyingonforward-lookingstatementstomakedecisionswithrespecttotheBankingGroup,investorsandothersshouldcarefullyconsidertheforegoingfactorsandotheruncertaintiesandevents.TheBankingGroupisundernoobligationanddoesnotintendtoupdateanyforward-lookingstatementscontainedinthisDisclosureStatement,whetherasaresultofnewinformation,futureeventsorotherwise,afterthedateofthisDisclosureStatement.InformationcontainedinoraccessiblethroughthewebsitesmentionedinthisDisclosureStatementdoesnotformpartofthisreportunlesswespecificallystatethatitisincorporatedbyreferenceandformspartofthisreport.AllreferencesinthisDisclosureStatementtowebsitesareinactivetextualreferencesandareforinformationonly.

OverviewTheBankisoneofNewZealand’slargestbankingorganisationsandprovidesawiderangeofconsumer,businessandinstitutionalbankingproductsandservicestoconsumers,smalltomediumsizedbusinesses,largecorporateandinstitutionalcustomersandtheNewZealandGovernment.On1November2011,theNZBranchtransferredadditionalbankingoperationstotheBankpursuanttotheWestpacNewZealandAct2011.Theseactivitiesincluded:

■■ institutionalcustomerdeposits;■■ institutionalcustomertransactionalbanking;■■ institutionalcustomerlending(otherthantradefinanceactivities);■■ debtcapitalmarketsactivitiescarriedoutinassistingcorporatecustomerstoobtainfunding,suchasloansyndicationandsecuritisationarrangements,butexcludingthedebtsecuritiesteamactivities,suchasarrangementofcommercialpaperandbondprogrammes;

■■ corporateadvisory;and■■ institutionalcustomerforeigncurrencyaccounts.

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Review of operations (continued)TheresultsoftheadditionalbankingoperationstransferredfromtheNZBranchtotheBankwerenotincludedintheBank’sfinancialstatementsforthefinancialyearended30September2011.Thetransferconsistedof$6.4billionofassets-primarilyloanstocorporatecustomers($6.3billion)and$5.3billionofliabilities-primarilydeposits($5.1billion).87fulltimeequivalentemployeesweretransferredfromtheNZBranchtotheBank.RefertoNote2Businesscombination–transferofoperationsforfurtherinformationregardingthetransfer.

Presentation of financial informationThefinancialstatementsincludedwithinthisDisclosureStatementhavebeenpreparedinaccordancewiththeaccountingpoliciesdescribedinNote1tothefinancialstatements,whichareinaccordancewithGenerallyAcceptedAccountingPracticeinNewZealand(‘NZ GAAP’),NewZealandEquivalentstoInternationalFinancialReportingStandards(‘NZ IFRS’)andotherauthoritativepronouncementsoftheExternalReportingBoard,asappropriateforprofit-orientedentities.TheyalsocomplywithInternationalFinancialReportingStandards(‘IFRS’)asissuedbytheInternationalAccountingStandardsBoard.Inaddition,thefinancialstatementsincludesupplementaryinformationrequiredbytheOrder.ThefinancialstatementsincludedwithinthisDisclosureStatementarebasedonthegeneralprinciplesofhistoricalcostaccounting,asmodifiedbythefairvalueaccountingforavailable-for-salefinancialassets,financialassetsandfinancialliabilitiesatfairvaluethroughprofitorlossandallderivativecontracts.Thegoingconcernconceptandtheaccrualsbasisofaccountinghavebeenadopted.AllamountsareexpressedinNewZealanddollarsunlessotherwisestated.Exceptasotherwiseexpresslyindicated,averagebalancesheetamountsforthefinancialyearsended30September2012,2011,2010,and2009arebasedondailyaveragesandforthefinancialyearended30September2008arebasedonmonth-endaverages.Certaincomparativeinformationhasbeenrestatedtoensureconsistenttreatmentwiththecurrentreportingperiod.Wheretherehasbeenamaterialrestatementofcomparativeinformationthenatureof,andthereasonfor,therestatementisdisclosedintherelevantnote.

Currency of presentation, exchange rates and certain definitions

Itemsincludedwithinthefinancialstatementsaremeasuredusingthecurrencyoftheprimaryeconomicenvironmentinwhichtherespectiveentityoperates(the‘functional currency’).ThefinancialstatementsarepresentedinNewZealanddollars,whichistheBank’sfunctionalandpresentationcurrency.ForeigncurrencymonetaryassetsandliabilitieshavebeentranslatedintoNewZealanddollarsattherateofforeignexchangeprevailingasattheapplicablereportingdate.TransactionsdenominatedinaforeigncurrencyareconvertedtoNewZealanddollarsattheexchangeratesineffectatthedateofthetransaction.ForeignexchangedifferencesrelatingtomonetaryitemsandgainsandlossesarisingfromforeignexchangedealingsbytheBankingGrouphavebeenincludedintheincomestatement,exceptwheredeferredinequityasqualifyingcashflowhedges.

Critical accounting estimates, judgments and assumptions

TheapplicationoftheBank’saccountingpoliciesnecessarilyrequirestheuseofestimates,judgmentsandassumptions.Shoulddifferentestimates,judgmentsorassumptionsbeapplied,theresultingvalueswouldchange,impactingthenetassetsandincomeoftheBankingGroup.TheBank’sBoardAuditCommitteereviewstheaccountingpolicieswhicharesensitivetotheuseofestimates,judgmentsandassumptionsaspartofitsreviewoftheintegrityofthefinancialstatementsandDisclosureStatements.TheestimatesandassumptionsusedandthevalueoftheresultingassetandliabilitybalancesinthefinancialstatementsaredescribedinNote1tothefinancialstatements.Thejudgments,apartfromthoseinvolvingestimations,thatmanagementhasmadeinapplyingtheaccountingpoliciesandthathavethemostsignificantimpactontheamountsrecognisedinthefinancialstatementsareasdescribedinNote1tothefinancialstatements.

Selected consolidated financial and operating data

Thefollowingselectedfinancialinformationasat,andforthefinancialyearsended,30September2012,2011,2010,2009and2008(respectively‘2012’,‘2011’,‘2010’,‘2009’and‘2008’)isderivedfromthefinancialstatements.Thisinformationshouldbereadtogetherwiththefinancialstatements.

Impact of transferred business activities on performance for 2012

Thefinancialperformancefortheyearended30September2012waspositivelyimpactedbythetransferofadditionalbankingoperationstotheBankfromtheNZBranch.Thetransferofadditionalbankingoperationswascompletedon1November2011,increasingtheamountofassets,liabilitiesandnetassetswithintheBankingGroupandmakingitdifficulttocomparetheresultsfortheyearended30September2012withtheresultsfortheprioryears.Accordingly,thefollowingdiscussionandreviewoftheBankingGroup’soperationsfocusesprimarilyonthekeyfactorsaffectingperformanceintheyearended30September2012comparedtotheyearended30September2011,excludingtheimpactofthetransferofadditionalbankingoperationson1November2011.F

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Review of operations (continued)Historical summary of financial statements1

The Banking Group

Year Ended YearEnded YearEnded YearEnded YearEnded$ millions 30-Sep-12 30-Sep-11 30-Sep-10 30-Sep-09 30-Sep-08

Income statementInterestincome 3,836 3,521 3,501 3,988 4,327Interestexpense (2,337) (2,205) (2,337) (2,672) (3,052)

Net interest income 1,499 1,316 1,164 1,316 1,275Non-interestincome 356 308 291 363 380

Net operating income 1,855 1,624 1,455 1,679 1,655Operatingexpenses (807) (771) (704) (708) (709)Impairmentchargesonloans (190) (224) (334) (620) (170)

Operating profit 858 629 417 351 776Shareofprofitofassociateaccountedforusingequitymethod 1 1 1 - 48

Profit before income tax expense 859 630 418 351 824Incometaxexpense (246) (197) (132) (103) (262)

Profit after income tax expense 613 433 286 248 562

Profit after income tax expense attributable to: OwnersoftheBankingGroup 610 429 283 245 559 Non-controllinginterests 3 4 3 3 3

613 433 286 248 562

Dividends paid or provided (484) (2) (4) (328) (335)

Balance sheetTotalassets 68,822 60,656 55,179 54,509 52,295Totalimpairedassets 867 794 742 670 278Totalliabilities 63,026 56,160 51,131 50,745 47,380Totalequity 5,796 4,496 4,048 3,764 4,915

1 Theamountsfortheyearsended30SeptemberhavebeenextractedfromtheauditedfinancialstatementsoftheBankingGroup.

Impact of transferred business activities on the Banking Group1

The Banking Group

Pre-existing Transferred$ millions Operations Operations

2 Total

For the year ended 30 September 2012Interestincome 3,543 293 3,836 Interestexpense (2,181) (156) (2,337)

Net interest income 1,362 137 1,499 Non-interestincome 322 34 356

Net operating income 1,684 171 1,855 Operatingexpenses (788) (19) (807)Impairmentchargesonloans (178) (12) (190)Shareofprofitofassociateaccountedforusingequitymethod 1 - 1

Profit before income tax expense 719 140 859 Incometaxexpense (206) (40) (246)

Profit after income tax expense 513 100 613

Profit after income tax expense attributable to: OwnersoftheBankingGroup 510 100 610 Non-controllinginterests 3 - 3

513 100 613

1 TheamountshavebeenextractedfromtheauditedfinancialstatementsoftheBankingGroup.RefertoNote2Businesscombination–transferofoperationsforfurtherdetails.

2 Representsthe11monthresultofthetransferredbusinessoperationssincetheacquisitiondateon1November2011,asincludedintheBankingGroup’sconsolidatedincomestatement.

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Review of operations (continued)Overview of performance – 2012 vs 2011ProfitafterincometaxexpenseattributabletoownersoftheBankingGroupincreased$181millionor42.2%to$610millionfor2012,comparedto$429millionfor2011.Excludingtheimpactofthetransferofadditionalbankingoperations,profitafterincometaxexpenseattributabletoownersoftheBankingGroupwas$510millionfortheyearended30September2012,anincreaseof$81millionor18.9%comparedtotheyearended30September2011.Thisincreasewasprimarilyaresultofanincreaseinnetinterestincomeof$46millionandacontinueddeclineinimpairmentchargesonloans,whichdecreased$46million.Whiletheglobaleconomicenvironmenthasdeteriorated,theNewZealandeconomyhasseenamoderaterecoveryduringthe2012financialyear,supportedbyfavourablegrowingconditionsintheagriculturalsector,acceleratingpost-earthquakeconstructioninCanterbury,andanimprovinghousingmarket.ThelevelofNewZealandhousingdelinquenciesandotherimpairedassetshasdeclined,easingpressureonfinancialinstitutions.NewZealandborrowinggrowthhaspickedupbutremainssubdued,ashouseholdsandbusinessescontinuetofocusonpayingdowndebt.Thelabourmarket,whichhasbeenbroadlyflatoverthepasttwoyears,softenedfurtherinthefourthquarterofthe2012financialyear,withtheunemploymentratenow7.3%.TheBankingGroup’sfinancialperformancefortheyearended30September2012reflectedcontinuedmomentuminthebusinessachievedthroughongoinginvestmentintheBank,togetherwiththeimplementationoffurtherproductivityandefficiencyimprovements.TheBankingGroup’sbalancesheetcontinuedtoshowgoodgrowth,withgrowthincustomerdepositsmorethanfundinglendinggrowth.This,togetherwitheffectivemarginmanagement,ledtotheincreaseinnetinterestincome.ThedeclineinimpairmentchargesonloanswasduetoimprovementsincreditdecisioningprocessestogetherwithdeclinesinconsumerdelinquenciesandanimprovementintheNewZealandeconomy.

■■ Netinterestincomeincreased$183millionor13.9%to$1,499millionfor2012,comparedto$1,316millionfor2011.Theincreaseinnetinterestincomewasprimarilyattributabletoincreasedloansanddepositsasaresultofthetransferofadditionalbankingoperationstogetherwithhigherhousingandbusinesslendingmargins.

Excludingtheimpactofthetransferofadditionalbankingoperationsof$137million,netinterestincomeincreased$46millionor3.5%to$1,362millionfor2012comparedto2011.

■■ Non-interestincomeincreased$48millionor15.6%to$356millionfor2012,comparedto$308millionfor2011,primarilyduetonon-interestincomeofthetransferredbusinessoperationsinrespectoffeesandcommissionsof$34million.

Non-interestincomeexcludingtheimpactofthetransferofadditionalbankingoperationsincreased$14millionor4.5%to$322millionfor2012comparedto2011.Thisincreasewasprimarilyduetoanincreaseinothernon-interestincome,mainlyinrelationtoinsurancerecoveries.

■■ Operatingexpensesincreased$36millionor4.7%to$807millionfor2012,comparedto$771millionfor2011,duetoexpensesattributabletothetransferredbankingoperationsof$19millionandanincreaseintheexpensesoftheexistingoperationsof$17million.Excludingtheimpactofthetransferofadditionalbankingoperations,operatingexpensesincreased$17millionor2.2%to$788million.Ongoingproductivityinitiativesresultedinsavingsthroughreducedaveragefull-timeequivalentemployees,howeverthiswasmorethanoffsetbyanincreasedinvestmentinthebusiness,aninflationaryincreaseinsalariesandanincreaseinoccupancycostsfollowingthemoveintoanewheadofficebuilding.

■■ Impairmentchargesonloansdecreased$34millionor15.2%to$190millionfor2012,comparedto$224millionfor2011.Impairmentchargesattributabletothetransferredbankingoperationswere$12million.Impairmentchargesonloansexcludingtheimpactofthetransferofadditionalbankingoperationsdecreased$46millionor20.5%to$178millionfor2012comparedto2011.Thisdecreasereflectsthecontinuedimprovementinassetqualityoftheoverallportfolioduetoimprovementsincreditdecisioningprocessestogetherwithdeclinesinconsumerdelinquenciesandthemoderateeconomicrecoveryduringthe2012financialyear.

■■ Totalassetsasat30September2012increased$8.2billionor13.5%to$68.8billionfrom$60.7billionasat30September2011,primarilyduetotheimpactofthetransferofadditionalbankingoperations.Loansincreased$8.2billion,primarilyduetogrossinstitutionalcustomerlendingof$6.7billionasat30September2012,whichincreased$280millionagainsttransferredbalancesof$6.4billion.Excludingtheimpactofthetransferofadditionalbankingoperations,totalassetsincreased$1.2billionor2.0%to$61.9billion.Increasesinloansandavailable-for-salesecuritiesof$1.6billionand$1.2billion,respectively,werepartiallyoffsetbydecreasesintradingsecuritiesandamountsduefromrelatedentities,down$1.2billionand$263millionrespectively.

■■ Totalliabilitiesincreased$6.9billionor12.2%to$63.0billionasat30September2012from$56.2billionasat30September2011,primarilyduetotheimpactofthetransferofadditionalbankingoperationsandadditionalrelatedentityborrowings,whichwasdrawntofundboththepurchaseoftheassetsandliabilitiesrelatingtothebusinessactivitiestransferredfromtheNZBranchandtopurchaseadditionalliquidassetsrequiredtobeheldbytheBankingGroupasaresultofthetransfer.Totaldepositsincreased$8.5billion,primarilyduetoinstitutionalcustomerdepositsof$5.9billionasat30September2012,whichincreased$792millionagainsttransferredbalancesof$5.1billion.Excludingtheimpactofthetransferofadditionalbankingoperationsandamountsduetorelatedentities,totalliabilitiesdecreased$1.9billionor3.5%to$51.5billionasat30September2012.Adecreaseindebtissuesof$4.7billionwaspartiallyoffsetbyanincreaseincustomerdeposits(depositsatamortisedcost)of$2.8billion.

■■ Totalequityasat30September2012increased$1.3billionto$5.8billion,from$4.5billionasat30September2011.Thiswasprimarilyduetoanissuanceofsharecapitalof$1.1billiontoWNZGL(refertoNote2forfurtherdetails)andprofitafterincometaxexpenseattributabletoownersoftheBankingGroupfortheyearof$610million,partiallyoffsetbydividendstoWNZGLof$480million,togetherwithincreasesintheavailable-for-salesecuritiesreserveandthecashflowhedgereserveof$49millionand$10million,respectively.

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Review of operations (continued)Income statement review – 2012 vs 2011Net interest income

The Banking Group

Year Ended YearEnded$ millions 30-Sep-12 30-Sep-11

Interestincome 3,836 3,521Interestexpense (2,337) (2,205)

Net interest income 1,499 1,316

Increase/(decrease) in net interest income1: Due to change in volume 341 80 Due to change in rate (162) (143) Othermovements2 4 215

Change in net interest income 183 152

1 Changesinnetinterestincomeduetovolumeandratehavebeencalculatedonthemovementinaveragebalancesandthechangeintheinterestratesonaverageinterestearningassetsandaverageinterestbearingliabilities.Changesduetobothvolumeandratehavebeenallocatedinproportiontotherelationshipoftheabsolutedollaramountofeachchangetothetotal.

2 OthermovementsincludethenetimpactofTreasurybalancesheetmanagementactivitiesandthechangeinnetinterestincomeonamountsdueto/(duefrom)relatedentities,whichcannotbepracticallyallocatedbetweenchangesduetovolumeorrate.

Netinterestincomeincreased$183millionor13.9%to$1,499millionfor2012,comparedto$1,316millionfor2011.Theincreaseinnetinterestincomewasprimarilyattributabletoincreasedloansanddepositsasaresultofthetransferofadditionalbankingoperationstogetherwithhigherhousingandbusinesslendingmargins,partiallyoffsetbyhigherinterestexpenseonrelatedentityborrowingsinrelationtothefundingofthetransferofadditionalbankingoperations.Excludingtheimpactofthetransferofadditionalbankingoperations,netinterestincome increased$46millionor3.5%to$1,362millionfor2012comparedto2011.Thisincreasereflectedanincreaseininterestincomeof$22millionandareductionininterestexpenseof$24million.

■■ The$22millionincreaseininterestincomewasduetoincreasesininterestincomeearnedonNewZealandGovernmentandsupranationalbonds(categorisedasavailable-for-salesecurities)andcashandbalanceswithcentralbanksof$78millionand$19million,respectively,partiallyoffsetbydecreasesininterestincomereceivedonloansandtradingsecuritiesof$69millionand$6million,respectively.Thedecreaseininterestincomeonloanswasduetoaloweraverageinterestrateonloans,whichdecreasedto6.27%comparedto6.72%for2011.

■■ The$24milliondecreaseininterestexpensewasprimarilyduetoreductionsintheamountofinterestpaidondepositsanddebtissues,of$19millionand$3million,respectively.ThesereductionswerepartiallyoffsetbytheimpactofTreasurybalancesheetmanagementactivitiesandinterestonamountsduetorelatedentities.

Netinterestincomeoftheadditionalbankingoperationscontributed$137millionforyearended30September2012.

Interest spread and margin

The Banking Group


Netinterestincome 1,499 1,316Averageinterestearningassets 64,874 54,698Averageinterestbearingliabilities 56,031 47,005Averagenetnon-interestbearingliabilitiesandequity 8,843 7,693

Interestspread1(%) 1.74 1.75

Benefitofnetnon-interestbearingliabilitiesandequity2(%) 0.57 0.66

Netinterestmargin3(%) 2.31 2.41

1 Interestspreadisthedifferencebetweentheaverageyieldonallinterestearningassetsandtheaverageratepaidonallinterestbearingliabilities.2 Thebenefitofnetnon-interestbearingliabilitiesandequityisdeterminedbyapplyingtheaveragerateofinterestpaidonallinterestbearingliabilitiestotheaverage

levelofnetnon-interestbearingfunds(i.e.averagenon-interestbearingliabilitiesplusaverageequitylessaveragenon-interestearningassets)asapercentageofaverageinterestearningassets.

3 Netinterestmarginiscalculatedbydividingnetinterestincomebyaverageinterestearningassets.

Netinterestmargindecreased10basispointsto2.31%for2012comparedto2.41%for2011.NetinterestmarginwasnegativelyaffectedbytheimpactofTreasurybalancesheetmanagementactivities.Thesewerepartlyoffsetbylowerholdingsofdebtissuesandimprovednetinterestmarginforhousingandbusinesslending.F

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The Banking Group


Feesandcommissions 336 299 Gainsonineffectivehedges 1 1 Othernon-interestincome 19 8

Total non-interest income 356 308

Non-interestincomeincreased$48millionor15.6%to$356millionfor2012,comparedto$308millionfor2011.Non-interestincomeexcludingtheimpactofthetransferofadditionalbankingoperationsincreased$14millionor4.5%to$322millionfor2012comparedto2011.This$14millionincreasewasprimarilyduetoanincreaseinothernon-interestincome,mainlyinrelationtoinsurancerecoveries.Non-interestincomeforthetransferredbankingoperationswas$34million,primarilyconsistingoffeesandcommissions.

Operating expenses

The Banking Group


Salariesandotherstaffexpenses 410 392Equipmentandoccupancyexpenses 106 97Otherexpenses 291 282

Total operating expenses 807 771

Operatingexpensesincreased$36millionor4.7%to$807millionfor2012,comparedto$771millionfor2011.Operatingexpensesattributabletothetransferredbankingoperationswere$19million.Operatingexpensesexcludingtheimpactofthetransferofadditionalbankingoperationsincreased$17millionor2.2%to$788millionfor2012comparedto2011,primarilydueto:

■■ Salariesandotherstaffexpensesincreasedby$4millionor1.0%.Althoughongoingproductivityinitiativesresultedinsavingsthroughreducedaveragefull-timeequivalentemployees,thiswasmorethanoffsetbyaninflationaryincreaseinsalaries.

■■ Equipmentandoccupancyexpensesincreasedby$8millionor8.2%,followingtherecognitionofthefullannualcostofmovingintoanewheadofficebuildingandopeningnewbranchesin2011.

■■ Otherexpensesincreased$5millionor1.8%,reflectingtheincreasedinvestmentinthebusiness,inparticulartechnology.

Impairment charges

The Banking Group


Impairmentchargesonloans 190 224

Impairmentchargestoaveragegrossloans(%) 0.33 0.44

Impairmentchargesonloansdecreased$34millionor15.2%to$190millionfor2012,comparedto$224millionfor2011.Impairmentchargesattributabletothetransferredbankingoperationswere$12million.Theimpairmentchargesonloanstoaveragegrossloansratiodecreased0.11%to0.33%asat30September2012,comparedto0.44%asat30September2011.Thisdecreasewasduetoboththe$34millionreductioninimpairmentchargesonloansandtheincreaseinaveragegrossloans,whichgrew13.9%for2012,followingthetransferofadditionalbankingoperations.Impairmentchargesonloansexcludingtheimpactofthetransferofadditionalbankingoperationsdecreased$46millionor20.5%to$178millionfor2012comparedto2011.Thisdecreasereflectsthecontinuedimprovementinassetqualityoftheoverallportfolioduetoimprovementsincreditdecisioningprocessestogetherwithdeclinesinconsumerdelinquenciesandthemoderateeconomicrecoveryduringthe2012financialyear.

Income tax expense

The Banking Group


Incometaxexpense 246 197

Incometaxexpenseasapercentageofprofitbeforeincometaxexpense(%) 28.6 31.3

Incometaxexpenseincreased$49millionor24.9%to$246millionfor2012,comparedwith$197millionfor2011.Incometaxexpenseexcludingtheimpactofthetransferofadditionalbankingoperationsincreased$9millionor4.6%to$206millionfor2012comparedto2011.Overall,thisincreasewasprimarilydrivenbyanincreaseintaxableincome,partiallyoffsetbythereductioninthecorporatetaxratefrom30.0%to28.0%whichwasenactedbytheNewZealandGovernmentinMay2010.Theeffectivetaxratefortheyearended2012was28.6%,whichisbroadlyinlinewiththeNewZealandcorporatetaxrate.Theeffectivetaxratefortheyearended2011of31.3%wasimpactedbytheone-offremeasurementofdeferredtaxbalancesduetothechangeinthecorporatetaxrate.

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Review of operations (continued)Overview of performance – 2011 vs 2010 ProfitafterincometaxexpenseattributabletoownersoftheBankingGroupincreased$146millionor51.6%to$429millionfor2011,comparedto$283millionfor2010.Thisincreaseresultedprimarilyfromanincreaseinnetinterestincomeof$152millionandacontinueddeclineinimpairmentchargesonloans,whichdecreased$110million,partiallyoffsetbyanincreaseinoperatingexpenses.TheNewZealandeconomycontinuedtorecover,aslabourmarketsshowedpositivesignsandhouseholdsappearedconfidenttomodestlyincreasespendingalbeitatthesametimecontinuingtosaveand/orlimittheirborrowing.TheBankingGroup’sfinancialperformancefortheyearended30September2011reflectedcontinuedinvestmentinsalesandservicecapabilityresultinginmarketsharegains.This,togetherwithgoodmarginmanagement,ledtoanincreaseinnetinterestincome.Improvementsinhousingdelinquenciesandareductioninbusinessstressedloansin2011resultedinadecreaseinimpairmentchargesonloansfromthatrecordedfor2010.

Income statement review – 2011 vs 2010Net interest income

The Banking Group

YearEnded YearEnded$ millions 30-Sep-11 30-Sep-10

Interestincome 3,521 3,501Interestexpense (2,205) (2,337)

Net interest income 1,316 1,164

Increase/(decrease) in net interest income1: Duetochangeinvolume 80 78 Duetochangeinrate (143) (220) Othermovements2 215 (10)

Change in net interest income 152 (152)

1 Changesinnetinterestincomeduetovolumeandratehavebeencalculatedonthemovementinaveragebalancesandthechangeintheinterestratesonaverageinterestearningassetsandaverageinterestbearingliabilities.Changesduetobothvolumeandratehavebeenallocatedinproportiontotherelationshipoftheabsolutedollaramountofeachchangetothetotal.


Netinterestincomeincreased$152millionor13.1%to$1,316millionfor2011,comparedto$1,164millionfor2010.Thisincreasereflectedanincreaseininterestincomeof$20millionandareductionininterestexpenseof$132million.Theincreaseininterestincomewasprimarilyduetointerestincomeof$26milliongeneratedonavailable-for-salesecuritiesfortheyearended30September2011astheBankingGrouppurchasedgovernmentbondsthroughoutthecourseofthefinancialyear,anda$7millionincreaseininterestearnedonloans.Theincreaseininterestincomeonloanswasduetoincreasedlendingvolumesastheaveragebalanceofnetloansgrewby$1.1billionor2.2%comparedto2010.Thedecreaseininterestexpensewasduetoareductioninthenetamountofinterestpaidtorelatedentitiesandthenetimpactofbalancesheetmanagementactivitiesof$215millionanda$19millionreductionininterestexpenseoncertificatesofdepositsastheBankingGroupreducedrelianceonthissourceoffunding.Thisreductionwaspartiallyoffsetasinterestexpensepaidondepositsatamortisedcost(customerdeposits)increased$110million.Thisincreaseininterestexpenseondepositsfromcustomerswasprimarilyduetogrowthindepositbalances,asratespaidonatcallandtermdepositsonlymarginallyimprovedduringthe2011financialyear.Customerdepositsasat2011increased9.2%comparedto2010acrossbothConsumerandBusinessBanking.Termdepositswithashorttermcontinuedtobethepreferreddepositproductinthelowinterestrateenvironmentmakingup57.6%ofcustomerdeposits.Netinterestincomefortheyearended30September2010wasalsoadverselyimpactedbytheadditionalcostassociatedwiththeBank’sparticipationinthedepositguaranteeschemeandthereviseddepositguaranteeschemewiththeNewZealandGovernment.

Interest spread and margin The Banking Group


Netinterestincome 1,316 1,164Averageinterestearningassets 54,698 53,704Averageinterestbearingliabilities 47,005 47,240Averagenetnon-interestbearingliabilitiesandequity 7,693 6,464

Interestspread1(%) 1.75 1.57

Benefitofnetnon-interestbearingliabilitiesandequity2(%) 0.66 0.60

Netinterestmargin3(%) 2.41 2.17

1 Interestspreadisthedifferencebetweentheaverageyieldonallinterestearningassetsandtheaverageratepaidonallinterestbearingliabilities.2 Thebenefitofnetnon-interestbearingliabilitiesandequityisdeterminedbyapplyingtheaveragerateofinterestpaidonallinterestbearingliabilitiestotheaverage

levelofnetnon-interestbearingfunds(i.e.averagenon-interestbearingliabilitiesplusaverageequitylessaveragenon-interestearningassets)asapercentageofaverageinterestearningassets.

3 Netinterestmarginiscalculatedbydividingnetinterestincomebyaverageinterestearningassets.

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Review of operations (continued)Netinterestmarginincreased24basispointsto2.41%for2011comparedto2.17%for2010.Netinterestmarginimprovedasexistingcustomersrefinancedloansuponexpiryoffixedterms,whichrepricedtonewproductswithawiderspreadinbothbusinessandhousinglending.Thelowinterestrateenvironmentresultedinasustainedshiftinconsumerpreferencefromfixedtovariablehousingloans,athighermargins.Netinterestmarginintheyearended2010wasalsoadverselyimpactedbytheadditionalcostassociatedwiththeBank’sparticipationinthedepositguaranteeschemeandthereviseddepositguaranteeschemewiththeNewZealandGovernment.

Non-interest income The Banking Group


Feesandcommissions 299 287Gainsonineffectivehedges 1 3Othernon-interestincome 8 1

Total non-interest income 308 291

Non-interestincomeincreased$17millionor5.8%to$308millionfor2011,comparedto$291millionfor2010.Thisincreasewasprimarilyduetoanincreaseinfeeincomeduetohighertransactionalvolumesandaone-offgaininothernon-interestincomeontheretirementofdamagedproperty,plantandequipment.

Operating expenses The Banking Group


Salariesandotherstaffexpenses 392 354Equipmentandoccupancyexpenses 97 95Otherexpenses 282 255

Total operating expenses 771 704

Operatingexpensesincreased$67millionor9.5%to$771millionfor2011,comparedto$704millionfor2010.Salariesandotherstaffexpensesincreased$38millionor10.7%drivenprimarilybyanincreasedinvestmentinfrontlinesalesandservicecapabilities.ThisinvestmentispartoftheBank’sfocusondeliveringserviceexcellencetocustomersintheirlocalcommunity,whichalsoincludedtheopeningofsixnewbranchesduringthe2011financialyearinadditiontotheeightopenedinthe2010financialyear.Otherexpenses,whichincludeoutsourcing,consultancyandprofessionalfees,softwareamortisationcosts,advertising,training,travelandrelatedentitymanagementfees,increased$27millionor10.6%,whichwascausedprimarilybyanincreaseinconsultancyfeesandotherprofessionalservicescharges.Salaryinflation,additionalleasecostsforthenewbranchesandamovetothenewheadofficebuilding,inadditiontorestructuringcoststosupportproductivityinitiatives,alsocontributedtothisincreaseintotaloperatingexpensescomparedtothe2010financialyear.

Impairment charges The Banking Group


Impairmentchargesonloans 224 334

Impairmentchargestoaveragegrossloans(%) 0.44 0.67

Impairmentchargesonloansdecreased$110millionor32.9%to$224millionfor2011,comparedto$334millionfor2010.Thisimprovementwasdrivenbya$134millionimprovementincollectivelyassessedprovisions,partiallyoffsetbyanincreaseinwrite-offsof$3million.Inaddition,impairmentchargesin2010ontheindividuallyassessedprovisionbenefittedfromareducedcharge,whichwas$12milliongreaterin2011.Theimprovementinthecollectivelyassessedprovisionisprimarilyduetocontinuedinvestmentinthecreditdecisionprocess,continuedrecoveryintheNewZealandeconomyandthecontinuedimprovementintheBank’sloanbookcomparedtotheyearended2010.Businessstressedloansalsoimproved.Theincreaseintheindividuallyassessedprovisionwasprimarilyattributabletoloanswithinthecommercialpropertysector,whichbecamefurtherstressedandmovedfromthecollectivelyassessedprovisiontobeingindividuallyassessed.Theimpairmentchargesonloanstoaveragegrossloansratiodecreased0.23%to0.44%asat30September2011,comparedto0.67%asat30September2010.Thisdecreasewasduetoboththe$110millionreductioninimpairmentchargesonloansandthe2.3%growthinaveragegrossloans.

Income tax expense The Banking Group


Incometaxexpense 197 132

Incometaxexpenseasapercentageofprofitbeforeincometaxexpense(%) 31.3 31.6

Incometaxexpenseincreased$65millionor49.2%to$197millionfor2011,comparedwith$132millionfor2010.Thisincreasewasprimarilydrivenbyanincreaseintaxableincome.Theeffectivetaxratefortheyearended2011was31.3%,whichwasslightlylowerthantheeffectivetaxratefortheyearended2010of31.6%andhigherthantheNewZealandcorporatetaxrateof30%.ThiswasprimarilytheresultoftheNewZealandGovernmentenactingareductioninthecorporatetaxratefrom30%to28%inMay2010whichappliedtotheBankingGroupwitheffectfrom1October2011.Accordingly,deferredtaxbalanceshavebeenremeasuredat28%totheextenttheunderlyingtemporarydifferencesareexpectedtoreverseafter1October2011.Theimpactofthisremeasurementintheyearended30September2011isanadditionaldeferredtaxexpenseof$9millionwhichprimarilyrelatestoprovisionsforimpairmentchargesonloans.

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Review of operations (continued)Distribution of assets, liabilities and equity: interest rates and interest differential Volume and rate movement

Thefollowingtableallocateschangesinnetinterestincomebetweenchangesinvolumeandchangesininterestratefor2012,2011and2010foreachmajorcategoryofinterestearningassetandinterestbearingliability.Volumeandratevarianceshavebeencalculatedbasedonthemovementinaveragebalancesandthechangesintheinterestratesonaverageinterestearningassetsandaverageinterestbearingliabilities.Thevariancescausedbychangesinbothvolumeandratehavebeenallocatedinproportiontotherelationshipoftheabsolutedollaramountofeachchangetothetotal.

The Banking Group

Year Ended YearEnded 30-Sep-12 30-Sep-11

Change Change Change Change Due to Due to Other Due to Due to Other$ millions Volume Rate movements

1 Total Volume Rate movements

1 Total

Interest earning assetsCashandbalanceswithcentralbanks 30 (11) - 19 15 (11) - 4

Tradingsecurities - (6) - (6) (25) 8 - (17)

Available-for-salesecurities 94 (16) - 78 26 - - 26

Loans(includingimpairedloans) 483 (259) - 224 76 (69) - 7

Total change in interest income 607 (292) - 315 92 (72) - 20

Interest bearing liabilitiesDuetootherfinancialinstitutions 2 - - 2 - - - -

Deposits2 277 (140) - 137 39 52 - 91

Tradingliabilities - - - - (19) - - (19)

Debtissues (13) 10 - (3) (8) 19 - 11

Other - - (4) (4) - - (215) (215)

Total change in interest expense 266 (130) (4) 132 12 71 (215) (132)

Total change in net interest income3 341 (162) 4 183 80 (143) 215 152

The Banking Group

YearEnded 30-Sep-10

Change Change Due to Due to Other$ millions Volume Rate movements

1 Total

Interest earning assetsCashandbalanceswithcentralbanks (7) 1 - (6)Tradingsecurities 13 (44) - (31)Loans(includingimpairedloans) 124 (574) - (450)

Total change in interest income 130 (617) - (487)

Interest bearing liabilitiesDeposits2 (24) (279) - (303)Tradingliabilities (64) - - (64)Debtissues 140 (118) - 22Other - - 10 10

Total change in interest expense 52 (397) 10 (335)

Total change in net interest income3 78 (220) (10) (152)


2 Depositsincludesdepositsatfairvalue(includingcertificatesofdeposit)anddepositsatamortisedcost.3 Totalchangeinnetinterestincomehasbeencalculatedasthetotalchangeininterestincomeminusthetotalchangeininterestexpense.

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Review of operations (continued)Average balance sheets and analysis of net interest earnings

Thefollowingtableshowsthemajorcategoriesofinterestearningassetsandinterestbearingliabilities,andtherespectiveinterestratesthatwereearnedorpaidasatandforthefinancialyearsended30September2012,2011and2010.Theinterestrateswerecalculatedbydividingtheamountofinterestreceivedorpaidbytheaverageinterestearningassetsandinterestbearingliabilitiesrespectively.Interestincomefiguresincludeinterestincomeonnon-accrualloanstotheextentcashpaymentsinthenatureofinteresthavebeenreceived.Non-accrualloansareincludedundertheinterestearningassetcategory‘‘Loans’’.Loanswithindividuallyassessedimpairmentprovisionsheldagainstthem,excludingrestructuredloans,areclassifiedasnon-accrualforUnitedStatesSecuritiesandExchangeCommission(‘US SEC’)reportingpurposes.

The Banking Group

Year Ended YearEnded YearEnded 30-Sep-12 30-Sep-11 30-Sep-10

Interest Interest Interest Average Income/ Average Average Income/ Average Average Income/ Average$ millions Balance Expense Rate

1 Balance Expense Rate

1 Balance Expense Rate

1

AssetsInterest earning assets

Cashandbalances

withcentralbanks 1,422 30 2.11 379 11 2.90 119 7 5.88

Tradingsecurities 3,397 94 2.77 3,392 100 2.95 4,306 117 2.72

Available-for-salesecurities 2,487 104 4.18 540 26 4.81 - - -

Loans(includingimpairedloans) 57,568 3,608 6.27 50,387 3,384 6.72 49,279 3,377 6.85

Total interest earning assets and interest income 64,874 3,836 5.91 54,698 3,521 6.44 53,704 3,501 6.52

Non-interest earning assets 1,513 1,523 1,466

Total assets 66,387 56,221 55,170

LiabilitiesInterest bearing liabilities

Duetootherfinancial

institutions 71 2 2.82 - - - - - -

Deposits 38,676 1,364 3.53 31,510 1,227 3.89 30,458 1,136 3.73

Tradingliabilities 8 - - 2 - - 403 19 4.71

Debtissues 15,137 392 2.59 15,657 395 2.52 15,990 384 2.40

Other2 2,139 579 N/A (164) 583 N/A 389 798 N/A

Total interest bearing liabilities and interest expense 56,031 2,337 4.17 47,005 2,205 4.69 47,240 2,337 4.95

Non-interest bearing

liabilities 4,660 4,833 3,911

Total liabilities 60,691 51,838 51,151

Net assets/net interest

income/net yield3 5,696 1,499 2.31 4,383 1,316 2.41 4,019 1,164 2.17

Total equity 5,696 4,383 4,019

1 Calculatedasinterestincome/expensedividedbythecorrespondingaveragebalance.2 Includesnetdueto/(duefrom)relatedentities(includingperpetualsubordinatednotes)andthenetimpactofTreasurybalancesheetmanagementactivities.3 Netyieldiscalculatedbydividingnetinterestincomebytotalinterestearningassets.

2012 vs 2011

Averageinterestearningassetsincreased$10.2billionor18.6%in2012comparedto2011,primarilyduetotheimpactofthetransferofadditionalbankingoperations.Averageloansincreased$7.2billionprimarilyduetogrossinstitutionalcustomerlendingtransferredbalancesof$6.4billion.Excludingtheimpactofthetransferofadditionalbankingoperations,grosslendinggrewat2.9%fortheyear.Averageavailable-for-salesecuritiesincreased$1.9billionto$2.5billion,followingthepurchaseofNewZealandGovernmentbondsandsupranationalsecurities,heldaspartofastrategicliquidityportfolio.Averageinterestbearingliabilitiesincreased$9.0billionor19.2%in2012comparedto2011,primarilyduetotheimpactofthetransferofadditionalbankingoperationsandadditionalrelatedentityborrowings.Averageamountsduetorelatedentitiesincreased$2.3billionin2012comparedto2011,primarilyasaresultoftheadditionalloantofundboththepurchaseoftheassetsandliabilitiesrelatingtothebusinessactivitiestransferredfromtheNZBranchandtopurchaseadditionalliquidassetsrequiredtobeheldbytheBankingGroupasaresultofthetransfer.Averagedepositsasat30September2012increased$7.2billion,wheretheaveragebalanceofcustomerdepositsincreased$7.7billion,partiallyoffsetbyareductionintheaveragebalanceofcertificatesofdepositsof$552million.Customerdepositsincreasedduetotransferredbalancesof$5.1billionandorganicgrowthof$2.6billion.

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Review of operations (continued)2011 vs 2010Averageinterestearningassetsincreased$994millionor1.9%in2011comparedto2010,primarilyduetogrowthinaverageloansof$1,108millionin2011.Thesecondhalfof2011alsosawtheintroductionofanewinterestbearingassetclassofavailable-for-sale-securitieswheregovernmentbondsarebeingheldtogenerateincomefromsurplusfunding,contributing$540milliontotheincreaseinaverageinterestearningassets.Theincreaseintheaveragebalancesofloansandavailable-for-salesecuritieshasbeenpartiallyoffsetbyadecreaseintheaveragebalanceoftradingsecuritiesof$914million.HomelendingwithinConsumerBankinggrewthroughout2011atanannualrateof2.7%.BusinessBankinglendinggrew2.0%in2011comparedto2010.TheBusinessBankinglendinggrowthincludedgrowthof4.5%inlendingtotheagriculturalsector.Averageinterestbearingliabilitiesdecreased$235millionor0.5%in2011comparedto2010.Theaveragebalanceoftradingliabilitiesdecreased$401millionandtheaveragebalanceofdebtissuesdecreased$333million,astheBankingGroupdecreaseditsholdingsofshort-termcommercialpaperthroughouttheyear.Theaverageinterestbearingbalanceofnetduefromrelatedentitiesdecreased$553millioncomparedto2010.Thesedecreaseswerepartiallyoffsetbyanincreaseinaveragedepositswhichincreasedby$1,052millionor3.5%comparedto2010,astheaveragebalanceofcustomerdepositsincreased$1,804millionoffsetbyareductionincertificatesofdepositsof$752million.TheaveragebalanceofcustomerdepositsincreasedastheBank’sinvestmentinfrontlinesalesandservicecapabilitiesgrewmarketshare.Theincreaseinaveragecustomerdepositsmorethanoffsetthefundinggapcreatedbythelowercertificatesofdepositissuance,asaresultoftheReserveBank’sBS13liquidityrequirements,andtradingliabilities,followingtheexpiryoftherepurchaseagreementsenteredintowiththeReserveBanktomeetliquidityrequirementsduringtheglobalfinancialcrisis.

Balance sheet review1

Consolidated Balance Sheet The Banking Group

$ millions 30-Sep-12 30-Sep-11 30-Sep-10 30-Sep-09 30-Sep-08

AssetsCashandbalanceswithcentralbanks 1,595 1,215 522 213 110Duefromotherfinancialinstitutions 322 699 3 3 3Derivativefinancialinstruments 10 85 17 22 12Tradingsecurities 2,040 3,261 2,587 4,421 1,973Available-for-salesecurities 2,694 1,518 44 37 35Loans 59,422 51,250 50,034 48,174 46,795Duefromrelatedentities 1,527 1,517 830 576 2,349Currenttaxassets - - - 10 -Investmentinassociate 48 48 48 48 48Goodwillandotherintangibleassets 598 567 567 575 579Property,plantandequipment 162 154 127 92 76Deferredtaxassets 209 194 257 196 132Otherassets 195 148 143 142 183

Total assets 68,822 60,656 55,179 54,509 52,295

LiabilitiesDuetootherfinancialinstitutions 3 100 - - -Deposits 43,390 34,886 32,466 32,495 32,227Derivativefinancialinstruments 360 84 - - -Tradingliabilities - - - 1,885 -Debtissues 12,914 17,630 15,439 12,369 11,102Currenttaxliabilities 48 45 14 - 69Provisions 83 70 73 76 67Otherliabilities 579 569 541 524 696

Total liabilities excluding related entities liabilities 57,377 53,384 48,533 47,349 44,161Perpetualsubordinatednotes 970 970 970 970 970Duetorelatedentities 4,679 1,806 1,628 2,426 2,249

Total related entities liabilities 5,649 2,776 2,598 3,396 3,219

Total liabilities 63,026 56,160 51,131 50,745 47,380

Net assets 5,796 4,496 4,048 3,764 4,915

EquitySharecapital 4,600 3,470 3,470 3,470 3,250Preferencesharecapital - - - - 1,300Retainedprofits 1,079 967 548 284 344Available-for-salesecuritiesreserve 80 31 25 18 16Cashflowhedgereserve 30 20 (1) (15) (3)

Total equity attributable to owners of the Banking Group 5,789 4,488 4,042 3,757 4,907Non-controllinginterests 7 8 6 7 8

Total equity 5,796 4,496 4,048 3,764 4,915

1 Theamountsasat30SeptemberhavebeenextractedfromtheauditedfinancialstatementsoftheBankingGroup.

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Review of operations (continued)Assets – 2012 vs 2011Totalassetsasat30September2012increased$8.2billionor13.5%to$68.8billionfrom$60.7billionasat30September2011,primarilyduetotheimpactofthetransferofadditionalbankingoperations.Loansincreased$8.2billion,primarilyduetogrossinstitutionalcustomerlendingof$6.7billionasat30September2012,whichincreased$280millionagainsttransferredbalancesof$6.4billion.Excludingtheimpactofthetransferofadditionalbankingoperations,totalassetsincreased$1.2billionor2.0%to$61.9billion.Increasesinloansandavailable-for-salesecuritiesof$1.6billionand$1.2billion,respectively,werepartiallyoffsetbydecreasesintradingsecuritiesandamountsduefromrelatedentities.

■■ Grosslendinggrew2.9%duringtheyear.■■ Available-for-salesecuritiesincreased$1.2billionto$2.7billion,followingthepurchaseofNewZealandGovernmentbondsandsupranationalsecurities,heldaspartofastrategicliquidityportfolio.

■■ Tradingsecuritiesandamountsduefromrelatedentitiesdecreased$1.2billionand$263million,respectively.

Liabilities and equity – 2012 vs 2011

Totalliabilitiesincreased$6.9billionor12.2%to$63.0billionasat30September2012from$56.2billionasat30September2011,primarilyduetotheimpactofthetransferofadditionalbankingoperationsandadditionalrelatedentityborrowings.Amountsduetorelatedentitiesincreased$2.9billionor159.1%to$4.7billionasat30September2012from$1.8billionasat30September2011,primarilytofundboththepurchaseoftheassetsandliabilitiesrelatingtothebusinessactivitiestransferredfromtheNZBranchandtopurchaseadditionalliquidassetsrequiredtobeheldbytheBankingGroupasaresultofthetransfer.Depositsasat30September2012increased$8.5billion,wheredepositsatamortisedcost(customerdeposits,bothatcallandterm)increased$8.6billion,partiallyoffsetbyareductionindepositsatfairvalue(significantlycomprisingcertificatesofdeposit)of$133million.Institutionalcustomerdepositsasat30September2012increased$792millionto$5.9billionagainsttransferredbalancesof$5.1billion.Excludingtheimpactofthetransferofadditionalbankingoperationsandamountsduetorelatedentities,totalliabilities decreased$1.9billionor3.5%to$51.5billionasat30September2012.Adecreaseindebtissuesof$4.7billionwaspartiallyoffsetbyanincreaseincustomerdeposits(depositsatamortisedcost)of$2.8billion.

■■ Debtissuesdecreased$4.7billionor26.7%to$12.9billionasat30September2012from$17.6billionasat30September2011.Thisdecreasewasduetoa$3.6billionnetdebtrepaymentand$1.1billionreductionindebtduetofairvalueandforeignexchangerevaluations.

■■ Inacompetitivemarket,overallcustomerdepositsgrewat8.4%fortheyearended30September2012,primarilyduetogrowthinretailtermdepositsandpersonalandbusinessonlinesavingsproducts.

Totalequityasat30September2012increased$1.3billionto$5.8billion,from$4.5billionasat30September2011.Thiswasprimarilyduetoanissuanceofsharecapitalof$1.1billiontoWNZGL(refertoNote2forfurtherdetails)andprofitafterincometaxexpenseattributabletoownersoftheBankingGroupfortheyearof$610million,partiallyoffsetbydividendstoWNZGLof$480million,togetherwithincreasesintheavailable-for-salesecuritiesreserveandthecashflowhedgereserveof$49millionand$10million,respectively.

Assets – 2011 vs 2010

Totalassetsasat30September2011increased$5.5billionor9.9%to$60.7billionfrom$55.2billionasat30September2010,primarilyduetoincreasesinavailable-for-salesecuritiesandloansof$1.5billionand$1.2billion,respectively,andtoalesserextentcashandbalanceswithcentralbanks,duefromotherfinancialinstitutionsandtradingsecurities.Available-for-salesecuritiesincreasedto$1.5billionfollowingthepurchaseofNewZealandGovernmentbondsandsupranationalsecurities,heldaspartofastrategicliquidityportfolio.Loansincreased$1.2billionduetoanincreaseingrosshousingloansof$837millionandgrossnon-housingloansof$357million.GrossloanswithinConsumerBankinggrewat2.7%fortheyearended30September2011.Cashandbalanceswithcentralbanksincreased$693millionto$1.2billionastheBanktookoverresponsibilityforthesettlementaccountwiththeReserveBank,previouslycontrolledbytheNZBranch.AssumingcontrolofthissettlementaccountformedpartofpreparatoryundertakingsinadvanceofthetransferofbankingoperationsfromtheNZBranchtotheBank.Otherliquidassetholdings,includingamountsduefromotherfinancialinstitutionsandtradingsecurities,increasedby$696millionand$674million,respectively,mainlyduetonewinter-bankplacementsandincreasedholdingsofcertificatesofdeposit.

Liabilities and equity – 2011 vs 2010

Totalliabilitiesincreased$5.0billionor9.8%to$56.2billionasat30September2011from$51.1billionasat30September2010,primarilyduetoincreasesindepositsanddebtissuesof$2.4billionand$2.2billion,respectively.Theseincreasesfundedbothloanandliquidassetgrowthin2011.Depositsasat30September2011increased$2.4billionasdepositsatamortisedcost(customerdeposits,bothatcallandterm)increased$2.8billion,partiallyoffsetbyareductionindepositsatfairvalue(significantlycomprisingcertificatesofdeposit)of$346million.Overallcustomerdepositsincreased9.0%comparedto2010with8.7%and10.4%growthintheConsumerandBusinessBankingdepositssegmentsrespectively.Debtissuesincreased$2.2billionor14.2%to$17.6billionasat30September2011from$15.4billionasat30September2010.Thisincreasewasduetoa$2.7billionnetdebtissuancepartiallyoffsetbya$477millionreductionindebtduetofairvalueandforeignexchangerevaluations.Theincreaseindebtissueswasinshort-termcommercialpaperandanincreaseinlong-termnon-domesticissuanceastheBankingGrouplauncheditsinauguralcoveredbondof€1.0billion($1.8billion)during2011.Totalequityasat30September2011increased$448millionto$4.5billion,from$4.0billionasat30September2010.ThiswasprimarilyduetoprofitafterincometaxexpenseattributabletoownersoftheBankingGroupof$429millionfortheyearended30September2011,asreflectedinretainedprofitsanda$21millionincreaseinthecashflowhedgereserve.Nonewsharecapitalwasissuedduringtheyearended30September2011.

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Review of operations (continued)Return on equity and assetsThefollowingtablesetsouttheBankingGroup’sreturnonassets,returnonequity,dividendpayoutratioandequitytoassetsratiosfor2012,2011and2010,respectively.

The Banking Group

% 30-Sep-12 30-Sep-11 30-Sep-10

Returnonassets1 0.92 0.77 0.52Returnonequity2 10.76 9.88 7.12Dividendpayoutratioonordinaryshares3 79.17 - -

Equitytoassetsratio4 8.58 7.80 7.28

1 Calculatedasprofitafterincometaxexpensedividedbyaveragetotalassets.2 Calculatedasprofitafterincometaxexpensedividedbyaveragetotalequity.3 CalculatedasdividendsdeclaredperordinarysharedividedbyprofitafterincometaxexpenseattributabletoownersoftheBankingGroupperweightedaverage

ordinaryshare.4 Calculatedasaveragetotalequitydividedbyaveragetotalassets.

Asset quality The Banking Group


Impaired assetsIndividuallyimpairedassets: Gross 867 794 742 670 278 Impairmentprovisions (276) (224) (301) (150) (65)

Net 591 570 441 520 213Pastdueassets90+days:1

Gross 184 256 397 347 221 Impairmentprovisions (22) (29) (54) (46) (24)

Net 162 227 343 301 197

Net impaired assets 753 797 784 821 410

Provisions for impairment charges and credit commitmentsIndividuallyassessedprovisions 276 224 301 150 65Collectivelyassessedprovisions 364 375 457 405 257

Total provisions for impairment charges and credit commitments 640 599 758 555 322Less:provisionforcreditcommitments (35) (26) (29) (35) (22)

Total provisions for impairment charges 605 573 729 520 300

Asset qualityTotalimpairmentprovisionstototalimpairedassets1(%) 28.4 24.1 31.2 19.3 17.8Totalimpairedassetstogrossloans1(%) 1.75 2.03 2.24 2.09 1.06Totalprovisionsforimpairmentchargestogrossloans(%) 1.01 1.11 1.44 1.07 0.64Totalprovisionsforimpairmentchargestototalimpairedassets1(%) 57.6 54.6 64.0 51.1 60.1

Collectivelyassessedprovisionstonon-housingnon-performingloans(%) 42.2 49.4 61.8 70.2 109.8

1 Pastdueassets90+dayswithcollectivelyassessedimpairmentprovisionsheldagainstthemareclassifiedasimpairedassetsforUSSECreportingpurposes.UnderNZIFRS,theseassetsarenotincludedwithinimpairedassetsandthecorrespondingimpairmentprovisionontheseassetsisincludedwithinthecollectivelyassessedprovisions.

2012 vs 2011

Asat30September2012,totalimpairedassetsasapercentageofgrossloanswas1.75%,adecreaseof0.28%from2.03%asat30September2011.Thisdecreasereflectsthewrite-offofimpairedloans,acontinuedimprovementintheassetqualityoftheoverallportfolioandthemoderaterecoveryoftheNewZealandeconomy.Theincreaseinthegrossloanbookhasalsocontributedtothereductionintheratio.Totalimpairmentprovisionstototalimpairedassetscoveragewas28.4%asat30September2012,whichwasanincreasefrom24.1%asat30September2011.Thisincreasewasprimarilydrivenbyanincreaseinindividuallyassessedprovisionsontransferredinstitutionallending.Totalprovisionsforimpairmentchargestogrossloanswas1.01%asat30September2012,adecreasefrom1.11%asat30September2011,reflectingadecreaseincollectivelyassessedprovisions,andanincreaseingrossloans.Potentialproblemloans,beingthoseloansconsideredsubstandardbutnotyetimpaired,were$304millionasat30September2012,representinganetdecreaseof$106millionfrom30September2011.Thenetflowwasintotheimpairedloanscategory.Loansareconsideredpotentiallyproblematicwherefacilitiesarefullycurrentastointerestandprincipalobligations;however,thecustomerdemonstratessignificantweaknessindebtserviceorsecuritycoveragethatjeopardisesrepaymentofthedebtwithinitscurrentcontractualterms.Intheeventtheseweaknessesarenotrectified,possiblelossofprincipalorinterestcouldoccur.

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Review of operations (continued)2011 vs 2010

Asat30September2011,totalimpairedassetsasapercentageofgrossloanswas2.03%,adecreaseof0.21%from2.24%asat30September2010.Thisdecreasereflectstherealisationofsomeassetsaswriteoffs,andanimprovingoverallportfolioduetotheimprovedcreditdecisionprocessandtheNewZealandeconomyshowingcontinuedsignsofrecovery.Theincreaseinthegrossloanbookhasalsocontributedtothereductionintheratio.Totalimpairmentprovisionstototalimpairedassetscoveragewas24.1%asat30September2011whichwasadecreasefrom31.2%asat30September2010.Thisdecreasewasprimarilydrivenbythewritedownagainsttheprovisionofseveralassetsinthepropertysector.Totalprovisionsforimpairmentchargestogrossloanswas1.11%asat30September2011,adecreasefrom1.44%asat30September2010,reflectingthedecreaseinindividuallyassessedprovisionsheldfollowingthewritedownofassets.Potentialproblemloans,beingthoseloansconsideredsubstandardbutnotyetimpaired,were$410millionasat30September2011,representinganetdecreaseof$454millionfrom30September2010.The$454millionnetdecreasewasprimarilyduetoadecreaseof$449millioninloansdeterioratingandshiftingtoindividuallyimpairedassets,includingsixinthepropertysector.Thiswasoffsetbya$52millionincreaseattributabletothreecustomerloansidentifiedasnewpotentialproblemloansinthesameperiod.

Summary for loan loss experienceAnalysis of the allowance for loan losses

Thefollowingtableprovidesananalysisoftheallowanceforloanlossesasatandfortheyearsended30September2012,2011,2010,2009and2008.

The Banking Group


Balanceofprovisionsforimpairmentchargesandcreditcommitments (individuallyandcollectivelyassessed)atbeginningoftheyear 599 758 555 322 220Provisionsacquiredinabusinesscombination 97 - - - -Charge-offs: Overdrafts (29) (28) (16) (12) (3) Moneymarketloans - (1) - (21) - Termloans: Housing (49) (98) (69) (44) (14) Non-housing (131) (225) (28) (251) (8)

Total New Zealand (209) (352) (113) (328) (25)

Recoveries: Overdrafts (4) (4) (5) - (2) Moneymarketloans (1) - - - - Termloans: Housing (36) (30) (22) (16) (11) Non-housing (20) (12) (24) (5) (9)

Total New Zealand (61) (46) (51) (21) (22)

Chargetotheincomestatement1 214 239 367 582 149

Balanceofprovisionsforimpairmentchargesandcreditcommitments (individuallyandcollectivelyassessed)atendoftheyear 640 599 758 555 322

Total charge-offs, net of recoveries (148) (306) (62) (307) (3)Ratioofnetcharge-offstoaverageloansoutstandingduringtheyear(%) 0.26 0.61 0.13 0.64 0.01

1 Chargetotheincomestatementrepresentsothermovementsinallowancesforloanlossesthatarenotincludedelsewhereinthetable.Consequently,thiscannotbedirectlyreconciledtoimpairmentchargesonloansunderNZIFRS,asreportedintheincomestatement.

Totalprovisionsforimpairmentchargesandcreditcommitmentsasat30September2012increased$41millionto$640millioncomparedto2011.Theimpactoftheadditionoftheinstitutionalportfoliowaslargelyabsorbedbyimprovementsintheretailandbusinessportfolios.Excludingtheimpactoftheadditionalinstitutionalportfolio,thedecreaseintotalprovisionsforimpairmentchargesandcreditcommitmentswasprimarilydrivenbythemoderaterecoveryoftheNewZealandeconomyaswellasthewritingoffofimpairedloans.During2012,theBankingGroup’simpairmentchargestotheincomestatementdecreased$25millionto$214million,reflectingthemoderaterecoveryoftheNewZealandeconomy.Aggregateprovisionsforimpairmentchargesasat30September2011decreased$159millionto$599millioncomparedto2010.ThedecreasewasprimarilydrivenbytheimprovedcreditdecisionprocessandtheimprovementsintheNewZealandeconomy.During2011theBankingGroup’simpairmentchargesonloanschargedtotheincomestatementdecreased$128millionto$239million.Thechargetotheincomestatementprimarilyreflectsthemovementincollectivelyassessedprovisionsandnewindividuallyassessedprovisions,wherethedecreaseof$128millionwasdrivenbythecontinuedstabilisationintheoverallmarket.Thecommercialpropertymarket,inparticularresidentialapartmentdevelopmentproperties,continuedtocreatethemostconcern.

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Review of operations (continued)Allocation of the allowance for loan lossesThefollowingtableprovidesabreakdownoftheallocationoftheallowanceforloanlossesasat30September2012,2011,2010,2009and2008.

The Banking Group

30-Sep-12 30-Sep-11

As a % % of Loans Asa% %ofLoans of Total In Each ofTotal InEach Impairment Category to Impairment Categoryto Provisions Total Gross Provisions TotalGross $ millions on Loans Loans $millions onLoans Loans

Individually assessed provisions by loan categoryOverdrafts 27 4.22 2.43 4 0.67 1.82Creditcardoutstandings - - 2.18 - - 2.45Moneymarketloans 79 12.33 1.94 2 0.33 1.10Termloans: Housing 38 5.94 59.95 64 10.68 67.71 Non-housing 118 18.44 32.94 127 21.21 26.52Other 14 2.19 0.56 27 4.51 0.40

Total individually assessed provisions 276 43.12 N/A 224 37.40 N/A

Totalcollectivelyassessedprovisions 364 56.88 N/A 375 62.60 N/A

Total impairment provisions on loans 640 100.00 100.00 599 100.00 100.00

The Banking Group

30-Sep-10 30-Sep-09

Asa% %ofLoans Asa% %ofLoans ofTotal InEach ofTotal InEach Impairment Categoryto Impairment Categoryto Provisions TotalGross Provisions TotalGross $millions onLoans Loans $millions onLoans Loans

Individually assessed provisions by loan categoryOverdrafts 29 3.83 1.98 27 4.87 2.17Creditcardoutstandings - - 2.46 - - 2.43Moneymarketloans - - 1.16 - - 1.18Termloans: Housing 80 10.55 67.47 66 11.89 66.91 Non-housing 188 24.80 26.37 53 9.55 26.67Other 4 0.53 0.56 4 0.72 0.64

Total individually assessed provisions 301 39.71 N/A 150 27.03 N/A

Totalcollectivelyassessedprovisions 457 60.29 N/A 405 72.97 N/A

Total impairment provisions on loans 758 100.00 100.00 555 100.00 100.00

The Banking Group

30-Sep-08

Asa% %ofLoans ofTotal InEach Impairment Categoryto Provisions TotalGross $millions onLoans Loans

Individually assessed provisions by loan categoryOverdrafts 3 0.93 2.42Creditcardoutstandings - - 2.44Moneymarketloans - - 1.26Termloans: Housing 34 10.56 66.58 Non-housing 27 8.39 26.76Other 1 0.31 0.54

Total individually assessed provisions 65 20.19 N/A

Totalcollectivelyassessedprovisions 257 79.81 N/A

Total impairment provisions on loans 322 100.00 100.00

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Directors’ statementEachDirectoroftheBankbelieves,afterdueenquiry,thatasatthedateonwhichthisDisclosureStatementissigned,theDisclosureStatement:(a) containsalltheinformationthatisrequiredbytheOrder;and(b) isnotfalseormisleading.EachDirectoroftheBankbelieves,afterdueenquiry,thatovertheyearended30September2012:(a) theBankhascompliedwiththeconditionsofregistrationimposedonitpursuanttosection74oftheReserveBankAct;(b) creditexposurestoconnectedpersonswerenotcontrarytotheinterestsoftheBankingGroup;and(c) theBankhadsystemsinplacetomonitorandcontroladequatelytheBankingGroup’smaterialrisks,includingcreditrisk,

concentrationofcreditrisk,interestraterisk,currencyrisk,equityrisk,liquidityrisk,operationalriskandotherbusinessrisks,andthatthosesystemswerebeingproperlyapplied.

ThisDisclosureStatementhasbeensignedbyalltheDirectors:

PeterDavidWilson

Peter Graham Clare

MalcolmBailey

PhilipMatthewCoffey

JaniceAmeliaDawson

ChristopherJohnDavidMoller

Datedthis21stdayofNovember2012

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Index to financial statementsIndex 27 Incomestatements 28 Statementsofcomprehensiveincome 29 Statementsofchangesinequity 30 Balancesheets 31 Statementsofcashflows 32 NotestotheFinancialStatements 32 Note1Statementofaccountingpolicies 45 Note2Businesscombination–transferofoperations 48 Note3Netinterestincome 48 Note4Non-interestincome 49 Note5Operatingexpenses 49 Note6Auditors’remuneration 50 Note7Impairmentchargesonloans 50 Note8Incometaxexpense 50 Note9Imputationcreditaccount 51 Note10Duefromotherfinancialinstitutions 51 Note11Tradingsecurities 52 Note12Available-for-salesecurities 52 Note13Loans 54 Note14Creditquality,impairedassetsandprovisionsforimpairmentchargesonloans 56 Note15Goodwillandotherintangibleassets 56 Note16Deferredtaxassets 57 Note17Otherassets 57 Note18Duetootherfinancialinstitutions 57 Note19Deposits 58 Note20Debtissues 59 Note21Provisions 59 Note22Otherliabilities 59 Note23Perpetualsubordinatednotes 60 Note24Sharecapital 61 Note25Relatedentities 63 Note26Derivativefinancialinstruments 66 Note27Fairvalueoffinancialinstruments 71 Note28Commitmentsandcontingentliabilities 72 Note29Segmentinformation 73 Note30Superannuationcommitments 74 Note31Keymanagementpersonnel 74 Note32Securitisation,fundsmanagementandotherfiduciaryactivities 75 Note33Insurancebusiness 75 Note34Capitaladequacy 78 Note35Riskmanagement 80 35.1Complianceandoperationalrisk 80 35.2Fundingandliquidityrisk 86 35.3Creditrisk 97 35.4Marketrisk 100 Note36Concentrationoffunding 101 Note37Concentrationofcreditexposures 102 Note38Creditexposurestoconnectedpersonsandnon-bankconnectedpersons 103 Note39Eventsafterthereportingdate 104 Independentauditors’reportF

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Income statementsfortheyearended30September

The Banking Group The Bank

Year Ended YearEnded Year Ended YearEnded$ millions Note 30-Sep-12 30-Sep-11 30-Sep-12 30-Sep-11

Interestincome 3 3,836 3,521 3,819 3,504Interestexpense 3 (2,337) (2,205) (2,336) (2,205)

Net interest income 1,499 1,316 1,483 1,299

Non-interestincome: Feesandcommissions 4 336 299 335 297 Netineffectivenessonqualifyinghedges 4 1 1 1 1 Othernon-interestincome 4 19 8 7 (4)

Total non-interest income 356 308 343 294

Net operating income 1,855 1,624 1,826 1,593Operatingexpenses 5 (807) (771) (809) (767)Impairmentchargesonloans 7 (190) (224) (180) (225)

Operating profit 858 629 837 601 Shareofprofitofassociateaccountedforusingequitymethod 1 1 1 1

Profit before income tax expense 859 630 838 602 Incometaxexpense 8 (246) (197) (236) (189)

Profit after income tax expense 613 433 602 413

Profit after income tax expense attributable to: OwnersoftheBankingGroup 610 429 602 413 Non-controllinginterests 3 4 - -

613 433 602 413

Theaccompanyingnotes(numbered1to39)formpartof,andshouldbereadinconjunctionwith,thesefinancialstatements.

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Statements of comprehensive income fortheyearended30September


Year Ended YearEnded Year Ended YearEnded$ millions 30-Sep-12 30-Sep-11 30-Sep-12 30-Sep-11

Profit after income tax expense 613 433 602 413Other comprehensive income:Available-for-salesecurities: Netunrealisedgainsfromchangesinfairvalueofavailable-for-salesecurities 66 8 66 8 Exchangedifferences (6) (2) (6) (2)Cashflowhedges: Netgainsfromchangesinfairvalueofcashflowhedges 4 18 4 18 Transferredtotheincomestatement 10 11 10 11 Actuariallossesonemployeedefinedbenefitsuperannuationschemes (25) (15) (25) (15)Incometaxrelatingtocomponentsofothercomprehensiveincome (8) (3) (8) (3)

Other comprehensive income net of tax 41 17 41 17

Total comprehensive income 654 450 643 430

Total comprehensive income attributable to: OwnersoftheBankingGroup 651 446 643 430 Non-controllinginterests 3 4 - -

654 450 643 430


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Statements of changes in equityfortheyearended30September

The Banking Group

Available- Total for-sale Cash Flow before Non- Non- Share Retained Securities Hedge controlling controlling$ millions Capital Profits Reserve Reserve Interests Interests Total

As at 1 October 2010 3,470 548 25 (1) 4,042 6 4,048

Year ended 30 September 2011Profitafterincometaxexpense - 429 - - 429 4 433Netgainsfromchangesinfairvalue - - 8 18 26 - 26Exchangedifferences - - (2) - (2) - (2) Incometaxeffect - - - (5) (5) - (5)Transferredtoincomestatement - - - 11 11 - 11 Incometaxeffect - - - (3) (3) - (3)Actuariallossesondefinedbenefitobligations - (15) - - (15) - (15) Incometaxeffect - 5 - - 5 - 5

Total comprehensive income for the year ended 30 September 2011 - 419 6 21 446 4 450

Transactionwithowners: Dividendspaidonordinaryshares - - - - - (2) (2)

As at 30 September 2011 3,470 967 31 20 4,488 8 4,496

Year ended 30 September 2012Profitafterincometaxexpense - 610 - - 610 3 613 Netgainsfromchangesinfairvalue - - 66 4 70 - 70 Exchangedifferences - - (6) - (6) - (6) Income tax effect - - (11) (1) (12) - (12) Transferredtoincomestatement - - - 10 10 - 10 Income tax effect - - - (3) (3) - (3) Actuariallossesondefinedbenefitobligations - (25) - - (25) - (25) Income tax effect - 7 - - 7 - 7

Total comprehensive income for the year ended 30 September 2012 - 592 49 10 651 3 654 Transactionwithowners: Ordinarysharecapitalissued 1,130 - - - 1,130 - 1,130 Dividendspaidonordinaryshares - (480) - - (480) (4) (484)

As at 30 September 2012 4,600 1,079 80 30 5,789 7 5,796

The Bank

Available- for-sale Cash Flow Share Retained Securities Hedge$ millions Capital Profits Reserve Reserve Total

As at 1 October 2010 3,470 502 25 (1) 3,996

Year ended 30 September 2011Profitafterincometaxexpense - 413 - - 413Netgainsfromchangesinfairvalue - - 8 18 26Exchangedifferences - - (2) - (2) Incometaxeffect - - - (5) (5)Transferredtoincomestatement - - - 11 11 Incometaxeffect - - - (3) (3)Actuariallossesondefinedbenefitobligations - (15) - - (15) Incometaxeffect - 5 - - 5

Total comprehensive income for the year ended 30 September 2011 - 403 6 21 430

As at 30 September 2011 3,470 905 31 20 4,426

Year ended 30 September 2012Profitafterincometaxexpense - 602 - - 602 Netgainsfromchangesinfairvalue - - 66 4 70 Exchangedifferences - - (6) - (6) Income tax effect - - (11) (1) (12) Transferredtoincomestatement - - - 10 10 Income tax effect - - - (3) (3) Actuariallossesondefinedbenefitobligations - (25) - - (25) Income tax effect - 7 - - 7

Total comprehensive income for the year ended 30 September 2012 - 584 49 10 643

Transactionwithowners: Ordinarysharecapitalissued 1,130 - - - 1,130 Dividendspaidonordinaryshares - (480) - - (480)

As at 30 September 2012 4,600 1,009 80 30 5,719


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Balance sheets asat30September


$ millions Note 2012 2011 2012 2011

AssetsCashandbalanceswithcentralbanks 1,595 1,215 1,595 1,215Duefromotherfinancialinstitutions 10 322 699 322 699 Derivativefinancialinstruments 26 10 85 10 85Tradingsecurities 11 2,040 3,261 2,040 3,261Available-for-salesecurities 12 2,694 1,518 2,694 1,518Loans 13,14 59,422 51,250 59,303 51,107Duefromrelatedentities 25 1,527 1,517 10,377 9,511Investmentsincontrolledentities - - 281 281Investmentinassociate 25 48 48 - -Goodwillandotherintangibleassets 15 598 567 598 567Property,plantandequipment 162 154 15 15 Deferredtaxassets 16 209 194 189 176Otherassets 17 195 148 171 129

Total assets 68,822 60,656 77,595 68,564

LiabilitiesDuetootherfinancialinstitutions 18 3 100 3 100 Deposits 19 43,390 34,886 42,670 34,390Derivativefinancialinstruments 26 360 84 360 84Debtissues 20 12,914 17,630 2,674 1,598Currenttaxliabilities 48 45 37 37Provisions 21 83 70 83 70Otherliabilities 22 579 569 503 472

Total liabilities excluding related entities liabilities 57,377 53,384 46,330 36,751Perpetualsubordinatednotes 23 970 970 970 970Duetorelatedentities 25 4,679 1,806 24,576 26,417

Total related entities liabilities 5,649 2,776 25,546 27,387

Total liabilities 63,026 56,160 71,876 64,138

Net assets 5,796 4,496 5,719 4,426

EquitySharecapital 24 4,600 3,470 4,600 3,470Retainedprofits 1,079 967 1,009 905 Available-for-salesecuritiesreserve 80 31 80 31Cashflowhedgereserve 30 20 30 20

Total equity attributable to owners of the Banking Group 5,789 4,488 5,719 4,426Non-controllinginterests 7 8 - -

Total equity 5,796 4,496 5,719 4,426

Interestearninganddiscountbearingassets 67,935 59,737 76,558 67,476Interestanddiscountbearingliabilities 57,999 52,060 66,834 60,006


SignedonbehalfoftheBoardofDirectors.

P.Wilson J.A.Dawson21November2012 21November2012

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Statements of cash flows fortheyearended30September



Cash flows from operating activitiesInterestincomereceived 3,821 3,527 3,803 3,510Interestexpensepaid (2,343) (2,205) (2,322) (2,227)Non-interestincomereceived 347 306 344 301Netdecrease/(increase)intradingsecurities 3,178 (674) 3,178 (674)Netmovementinderivativefinancialinstruments 339 16 339 16 Operatingexpensespaid (761) (682) (785) (693)Income tax paid (220) (151) (215) (149)

Net cash provided by operating activities 4,361 137 4,342 84

Cash flows from investing activitiesPurchaseofavailable-for-salesecurities (1,179) (1,468) (1,179) (1,468)Proceedsfrommaturitiesofavailable-for-salesecurities 63 - 63 -Netloansadvancedtocustomers (2,026) (1,440) (2,040) (1,457)Netincreaseinduefromrelatedentities (10) (687) (866) (1,180)Purchaseofcapitalisedcomputersoftware (67) (44) (67) (44)Purchaseofproperty,plantandequipment (35) (55) (4) (1)Netcashacquiredfromthetransferofadditionalbankingoperations (154) - (154) -

Net cash used in investing activities (3,408) (3,694) (4,247) (4,150)

Cash flows from financing activitiesIssueofordinarysharecapital 1,130 - 1,130 -Netincreaseindeposits 3,444 2,420 3,220 2,241Net(decrease)/increaseindebtissues (4,716) 2,191 1,076 (584)Net(decrease)/increaseinduetorelatedentities (227) 237 (4,941) 3,701Paymentofdividends (484) (2) (480) -

Net cash (used in)/provided by financing activities (853) 4,846 5 5,358

Net increase in cash and cash equivalents 100 1,289 100 1,292Cashandcashequivalentsatbeginningoftheyear 1,814 525 1,814 522

Cash and cash equivalents at end of the year 1,914 1,814 1,914 1,814

Cash and cash equivalents at end of the year comprise: Cashandbalanceswithcentralbanks 1,595 1,215 1,595 1,215 Duefromotherfinancialinstitutions(net) 319 599 319 599

1,914 1,814 1,914 1,814

Reconciliation of profit after income tax expense to net cash provided by operating activitiesProfitafterincometaxexpense 613 433 602 413Adjustments: Impairmentchargesonloans 190 224 180 225 Computersoftwareamortisationcosts 38 42 38 42 Depreciationonproperty,plantandequipment 27 22 4 4 (Gain)/lossondisposalofproperty,plantandequipment - (7) - 1 Lossondisposalofcomputersoftware - 2 - 2 Share-basedpayments 5 15 5 15 Movementinotherassets (25) 8 (20) 13 Movementinotherliabilities (30) 15 (5) (8) Movementincurrentanddeferredtax (5) 94 (6) 92 Taxlossestransferredtorelatedentities 46 (45) 42 (49) Taxoncashflowhedgereserve (4) (8) (4) (8) Taxonavailable-for-salesecuritiesreserve (11) - (11) - Movementintradingsecurities 3,178 (674) 3,178 (674) Movementinderivativefinancialinstruments 339 16 339 16

Net cash flows provided by operating activities 4,361 137 4,342 84


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Notestothefinancialstatements

Note 1 Statement of accounting policies

1.1 General accounting policiesStatutory baseThesefinancialstatementshavebeenpreparedandpresentedinaccordancewiththeFinancialReportingAct1993,theReserveBankofNewZealandAct1989(‘Reserve Bank Act’)andtheRegisteredBankDisclosureStatements(NewZealandIncorporatedRegisteredBanks)Order(No2)2012(‘Order’).TheBank’sfinancialstatementsareforWestpacNewZealandLimitedasaseparateentityandtheconsolidatedfinancialstatementsarefortheBankingGroup,whichcomprisestheBankanditscontrolledentities.ThesefinancialstatementscomplywithGenerallyAcceptedAccountingPracticeinNewZealand(‘NZ GAAP’),applicableNewZealandequivalentstoInternationalFinancialReportingStandards(‘NZ IFRS’)andotherauthoritativepronouncementsoftheExternalReportingBoard,asappropriateforprofit-orientedentities.ThesefinancialstatementsalsocomplywithInternationalFinancialReportingStandards(‘IFRS’),asissuedbytheInternationalAccountingStandardsBoard.ThesefinancialstatementswereauthorisedforissuebytheBoardon21November2012.TheBoardhasthepowertoamendthefinancialstatementsaftertheyareauthorisedforissue.

Basis of preparationThefinancialstatementsarebasedonthegeneralprinciplesofhistoricalcostaccounting,asmodifiedbythefairvalueaccountingforavailable-for-salefinancialassets,financialassetsandfinancialliabilitiesatfairvaluethroughprofitorlossandallfinancialderivativecontracts.Thegoingconcernconceptandtheaccrualsbasisofaccountinghavebeenadopted.AllamountsinthesefinancialstatementshavebeenroundedinmillionsofNewZealanddollarsunlessotherwisestated.Thesameaccountingpoliciesandmethodsofcomputationhavebeenfollowedinpreparingthesefinancialstatementsthatwereusedinpreparingthefinancialstatementsfortheyearended30September2011,exceptasamendedforthechangesrequiredduetotheadoptionofthenewandrevisedaccountingstandardsasexplainedinNote1.3Changesinaccountingpolicies.Certaincomparativeinformationhasbeenrestatedtoensureconsistenttreatmentwiththecurrentreportingperiod.Wheretherehasbeenamaterialrestatementofcomparativeinformationthenatureof,andthereasonfor,therestatementisdisclosedintherelevantnote.

Principles of consolidationTheconsolidatedfinancialstatementsincorporatetheassetsandliabilitiesofallsubsidiaries(includingspecialpurposeentities)controlledbytheBankandtheresultsofthosesubsidiaries.TheeffectsofalltransactionsbetweenentitiesintheBankingGroupareeliminated.Controlexistswhentheparententityhasthepower,directlyorindirectly,togovernthefinancialandoperatingpoliciesofanentitysoastoobtainbenefitsfromitsactivities.Thedefinitionofcontrolisbasedonthesubstanceratherthanthelegalformofanarrangement.Inassessingcontrol,potentialvotingrightsthatarepresentlyexercisableorconvertiblearetakenintoaccount.Subsidiariesarefullyconsolidatedfromthedateonwhichcontrolcommencesandtheyarede-consolidatedfromthedateonwhichthatcontrolceases.TheacquisitionmethodofaccountingisusedtoaccountfortheacquisitionofsubsidiariesbytheBankingGroup.ChangesintheBankingGroup’sownershipinterestinasubsidiaryaftercontrolisobtainedthatdonotresultinalossofcontrolareaccountedforastransactionswithequityholdersintheircapacityasequityholders.Anydifferencebetweentheamountbywhichthenon-controllinginterestisadjustedandthefairvalueoftheconsiderationpaidorreceivedisrecogniseddirectlyinequity.WhentheBankingGroupceasestocontrolasubsidiary,anyretainedinterestintheentityisremeasuredtoitsfairvalue,withanyresultinggainorlossrecognisedintheincomestatement.TheBankingGroupmayinvestinorestablishspecialpurposeentitiestoenableittoundertakespecifictypesoftransactions.WheretheBankingGroupcontrolssuchentities,theyareconsolidatedintotheBankingGroup’sfinancialresults.Theinterestofnon-controllingshareholdersisstatedattheirproportionofthenetprofitandnetassetsofasubsidiaryattributabletoequityintereststhatarenotowned,directlyorindirectlybytheBank.Lossesareattributedtothenon-controllinginterestevenifthatresultsinadeficitbalance.

Foreign currencyItemsincludedinthefinancialstatementsofeachoftheBankingGroup’sentitiesaremeasuredusingthecurrencyoftheprimaryeconomicenvironmentinwhichtheentityoperates(the‘functional currency’).ThefinancialstatementsoftheBankandtheBankingGrouparepresentedinNewZealanddollars,whichistheBank’sfunctionalandpresentationcurrency.ForeigncurrencymonetaryassetsandliabilitieshavebeentranslatedintoNewZealanddollarsattherateofforeignexchangeprevailingasatreportingdate.TransactionsdenominatedinaforeigncurrencyareconvertedtoNewZealanddollarsattheexchangeratesineffectatthedateofthetransaction.Foreignexchangedifferencesrelatingtomonetaryitems,andgainsandlossesarisingfromforeignexchangedealingsbytheBankingGroup,havebeenincludedintheincomestatement,exceptwheredeferredinequityasqualifyingcashflowhedges.

1.2 Particular accounting policies

Revenue recognition

Interest income

Interestincomeforallinterestearningfinancialassetsincludingthoseatfairvalueisrecognisedintheincomestatementusingtheeffectiveinterestmethod.

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Note 1 Statement of accounting policies (continued)Theeffectiveinterestmethodisamethodofcalculatingtheamortisedcostofafinancialassetorafinancialliabilityandofallocatingtheinterestincomeorinterestexpenseovertherelevantperiod.Theeffectiveinterestrateistheratethatexactlydiscountsestimatedfuturecashpaymentsorreceiptsthroughtheexpectedlifeofthefinancialinstrumenttothenetcarryingamountofthefinancialassetorfinancialliability.Whencalculatingtheeffectiveinterestrate,cashflowsareestimatedbaseduponallcontractualtermsofthefinancialinstrument(e.g.prepaymentoptions),butdonotconsiderfuturecreditlosses.Thecalculationincludesallfeesandotheramountspaidorreceivedbetweenpartiestothecontractthatareanintegralpartoftheeffectiveinterestrate,transactioncostsandallotherpremiumsordiscounts.Interestrelatingtoimpairedloansisrecognisedusingtheloan’soriginaleffectiveinterestratebasedonthenetcarryingvalueoftheimpairedloanaftergivingeffecttoimpairmentchargesorforavariablerateloan,thecurrenteffectiveinterestratedeterminedunderthecontract.Thisrateisalsousedtodiscountthefuturecashflowsforthepurposeofmeasuringtheimpairmentcharges.Forloansthathavebeenimpaired,thismethodresultsincashreceiptsbeingapportionedbetweeninterestandprincipal.

Fee and commission income

Feesandcommissionsaregenerallyrecognisedonanaccrualsbasisovertheperiodduringwhichtheserviceisperformed.Allfeesrelatingtothesuccessfuloriginationorsettlementofaloan(togetherwiththerelateddirectcosts)aredeferredandrecognisedasanadjustmenttotheeffectiveinterestrateontheloan.

Other dividend income

Dividendsonquotedsharesarerecognisedontheex-dividenddate.Dividendsonunquotedsharesarerecognisedwhenthecompany’srighttoreceivepaymentisestablished.

Gain or loss on sale of property, plant and equipment

Thegainorlossarisingonthedisposalorretirementofproperty,plantandequipmentisdeterminedasthedifferencebetweenthesaleproceedslesscostsofdisposalandthecarryingamountoftherespectiveassetandisrecognisedintheincomestatementasnon-interestincome.

Expense recognition

Interest expense

Interestexpense,includingpremiumsordiscountsandassociatedexpensesincurredontheissueoffinancialliabilities,isrecognisedintheincomestatementusingtheeffectiveinterestmethod.

Impairment charges on loans and receivables carried at amortised cost

Thechargerecognisedintheincomestatementforimpairmentonloansandreceivablescarriedatamortisedcostreflectsthenetmovementintheprovisionsforindividuallyassessedandcollectivelyassessedloans,write-offsandrecoveriesofimpairmentspreviouslywrittenoff.

Leasing

Operatingleasepaymentsarerecognisedintheincomestatementasanexpenseonastraight-linebasisovertheleasetermunlessanothersystematicbasisismorerepresentativeofthetimepatternofthebenefitreceived.Incentivesreceivedonenteringintooperatingleasesarerecognisedasliabilitiesandamortisedasareductionofrentalexpenseonastraight-linebasisovertheleaseterm.

Commissions and other fees

Externalcommissionsandothercostspaidtoacquireloansarecapitalisedandamortisedusingtheeffectiveinterestmethod.Allotherfeesandcommissionsarerecognisedintheincomestatementovertheperiodinwhichtherelatedserviceisreceived.

Share-based payment

CertainemployeesareentitledtoparticipateinoptionandshareownershipschemesgrantedbytheUltimateParentBank.Thefairvalueofperformanceoptions,performancesharerightsandunhurdledsharerightsprovidedtoemployeesasshare-basedpaymentsisrecognisedasanexpensewithacorrespondingamountpayabletotheUltimateParentBank.Thefairvalueismeasuredatthegrantdateandisrecognisedovertheperiodinwhichtheservicesarereceivedwhichistheexpectedvestingperiodduringwhichtheemployeeswouldbecomeentitledtoexercisetheperformanceoption,performancesharerightorunhurdledshareright.Thefairvalueofperformanceoptions,performancesharerightsandunhurdledsharerightsisestimatedatgrantdateusingaBinomial/MonteCarlosimulationpricingmodelincorporatingthevestingandperformancehurdlefeaturesofthegrants.Thefairvalueoftheperformanceoptions,performancesharerightsandunhurdledsharerightsexcludestheimpactofanynon-marketvestingconditionssuchastheparticipants’continuedemploymentwiththeBankingGroup.Thenon-marketvestingconditionsareincludedinassumptionsusedwhendeterminingthenumberofperformanceoptions,performancesharerightsandunhurdledsharerightsexpectedtobecomeexercisableforwhichanexpenseisrecognised.Asateachreportingdatetheseassumptionsarerevisedandtheexpenserecognisedineachyeartakesintoaccountthemostrecentestimates.

Taxation

Income tax

Incometaxexpenseontheprofitfortheyearcomprisescurrenttaxandmovementindeferredtaxbalances.Currenttaxistheexpectedtaxpayableonthetaxableincomeforthefinancialyear,usingtaxratesthathavebeenenactedorsubstantivelyenactedasatthebalancedate,andanyadjustmenttotaxpayableinrespectofpreviousyears.

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Note 1 Statement of accounting policies (continued)Deferredtaxisaccountedforusingthebalancesheetmethod,providingfortemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesinthefinancialstatementsandthecorrespondingamountsusedfortaxationpurposes.Deferredtaxassetsandliabilitiesarenotrecognisedifthetemporarydifferencearisesfromgoodwill,theinitialrecognitionofassetsandliabilitiesthataffectneitheraccountingnortaxableprofit(otherthaninabusinesscombination),ordifferencesrelatingtoinvestmentsinsubsidiariestotheextentthattheywillprobablynotreverseintheforeseeablefuture.Theamountofdeferredtaxprovidedisbasedontheexpectedmannerofrealisationorsettlementofthecarryingamountofassetsandliabilities,usingtaxratesthathavebeenenactedorsubstantivelyenactedasatthebalancedatethatareexpectedtoapplywhentheliabilityissettledortheassetisrealised.Currentanddeferredtaxesattributabletoamountsrecognisedinothercomprehensiveincomearealsorecognisedinothercomprehensiveincome.Exceptasnotedabove,deferredtaxliabilitiesarerecognisedforalltaxabletemporarydifferencesanddeferredtaxassetsarerecognisedtotheextentthatitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichtheassetcanbeutilised.ForpresentationpurposesdeferredtaxassetsanddeferredtaxliabilitieshavebeenoffsetwheretheyrelatetoincometaxesleviedbythesametaxationauthorityonthesametaxableentityorgroupofentitiesintheBankingGroup.

Goods and services tax

Revenue,expensesandassetsarerecognisednetofgoodsandservicestax(‘GST’)excepttotheextentthatGSTisnotrecoverablefromtheInlandRevenue.Inthesecircumstances,GSTisrecognisedaspartoftheexpenseorthecostoftheasset.

Business combinations

External acquisitions

Theacquisitionmethodofaccountingisusedtoaccountforexternalbusinesscombinations.Costismeasuredasthefairvalueoftheassetsgiven,equityinstrumentsissuedorliabilitiesincurredorassumedatthedateofexchange.Acquisition-relatedcostsareexpensedasincurred.Whereequityinstrumentsareissuedinanacquisition,thevalueoftheinstrumentsistheirpublishedmarketpriceasatthedateofexchange.Transactioncostsarisingontheissueofequityinstrumentsarerecogniseddirectlyinequity.Identifiableassetsacquiredandliabilitiesandcontingentliabilitiesassumedinabusinesscombinationaremeasuredinitiallyattheirfairvalueattheacquisitiondate.Foreachbusinesscombination,thenon-controllinginterestismeasuredeitheratfairvalueorattheproportionateshareoftheacquiree’sidentifiablenetassets.Theexcessofthecostofacquisition,theamountofanynon-controllinginterestintheacquireeandtheacquisitiondatefairvalueofanypreviousequityinterestintheacquireeoverthefairvalueoftheidentifiablenetassetsacquiredisrecordedasgoodwill.Wheresettlementofanypartofcashconsiderationisdeferred,theamountspayableinthefuturearediscountedtotheirpresentvalueasatthedateofexchange.ThediscountrateusedistheBankingGroup’sincrementalborrowingrate.

Common control transactions

ThepredecessormethodofaccountingisusedtoaccountforbusinesscombinationsbetweenentitiesintheBankingGroup.AssetsacquiredandliabilitiesassumedinacommoncontroltransactionaremeasuredinitiallyattheacquisitiondateatthecarryingvaluefromtheUltimateParentBank’sperspective.Theexcessofcostofacquisitionovertheinitialcarryingvaluesoftheentity’sshareofthenetassetsacquiredisrecordedaspartofacommoncontrolreserve.

Assets

Financial assets

TheBankingGroupclassifiesitsfinancialassetsinthefollowingcategories:financialassetsatfairvaluethroughprofitorloss,loansandreceivablesandavailable-for-salesecurities.Managementdeterminestheclassificationofitsfinancialassetsatinitialrecognition.

■■ Financial assets at fair value through profit or loss Thiscategoryhastwosub-categories:first,financialassetsheldfortradingandsecond,thosedesignatedatfairvalue

throughprofitorlossatinception.Afinancialassetisclassifiedinthiscategoryifacquiredprincipallyforthepurposeofsellingitinthenearterm,ifitispartofaportfoliooffinancialassetsthataremanagedtogetherandforwhichthereisevidenceofarecentpatternofshort-termprofittaking,ifitisaderivativethatisnotadesignatedhedginginstrument,orifsodesignatedonacquisitionbymanagement.Thisdesignationmayonlybemadeifthefinancialassetcontainsanembeddedderivative,itismanagedonafairvaluebasisinaccordancewithadocumentedriskmanagementstrategy,orifdesignatingitatfairvaluereducesanaccountingmismatch.

■■ Loans and receivables Loansandreceivablesarenon-derivativefinancialassetswithfixedordeterminablepaymentsthatarenotquotedinan

activemarket.TheyarisewhentheBankingGroupprovidesmoney,goodsorservicesdirectlytoadebtorwithnointentionoftradingthereceivable.

■■ Available-for-sale securities Available-for-salesecuritiesarenon-derivativefinancialassetsthataredesignatedasavailable-for-saleorthatarenot

classifiedaseitherfinancialassetsatfairvaluethroughprofitorlossorloansandreceivables.Otherinvestments,whichcompriseunlistedequitysecuritiesthatdonothaveaquotedpriceinanactivemarketandwherefairvaluecannotbeestimatedwithinareasonablerangeofprobableoutcomes,arecarriedatcost.

Recognition and measurement of financial assets

Purchasesandsalesoffinancialassetsatfairvaluethroughprofitorlossandavailable-for-salearerecognisedonthetrade-date,thedateonwhichtheBankingGroupcommitstopurchaseorselltheasset.Loansandreceivablesarerecognisedwhencashisadvancedtotheborrower.Financialassetsatfairvaluethroughprofitorlossarerecognisedinitiallyatfairvalue.Allotherfinancialassetsarerecognisedinitiallyatfairvalueplusdirectlyattributabletransactioncosts.

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Note 1 Statement of accounting policies (continued)Available-for-salefinancialassetsandfinancialassetsatfairvaluethroughprofitorlossaresubsequentlycarriedatfairvalue.Loansandreceivablesaresubsequentlycarriedatamortisedcostusingtheeffectiveinterestmethod.Realisedandunrealisedgainsorlossesarisingfromchangesinthefairvalueoffinancialassetsatfairvaluethroughprofitorlossareincludedintheincomestatementintheperiodinwhichtheyarise.Gainsandlossesarisingfromchangesinthefairvalueofavailable-for-salefinancialassetsarerecognisedinothercomprehensiveincome,untilthefinancialassetisderecognisedorimpaired,atwhichtimethecumulativegainorlosspreviouslyrecognisedinothercomprehensiveincomeisrecognisedintheincomestatement.Dividendsonavailable-for-saleequityinstrumentsarerecognisedintheincomestatementwhentherighttoreceivepaymentisestablished.Foreignexchangegainsorlossesandinterest,calculatedusingtheeffectiveinterestratemethod,onavailable-for-saledebtinstrumentsarealsorecognisedintheincomestatement.Thefairvaluesofquotedinvestmentsinactivemarketsarebasedoncurrentbidprices.Ifthemarketforafinancialassetisnotactive,theBankingGroupestablishesfairvalueusingvaluationtechniques.Theseincludetheuseofrecentarm’slengthtransactions,discountedcashflowanalysis,optionpricingmodelsandothervaluationtechniquescommonlyusedbymarketparticipants.

Derecognition of financial assets

Afinancialasset(or,whereapplicable,apartofafinancialassetorpartofagroupofsimilarfinancialassets)isderecognisedwhere:

■■ therightstoreceivecashflowsfromtheassethaveexpired;or■■ theentityhastransferreditsrightstoreceivecashflowsfromtheassetorhasassumedanobligationtopaythereceivedcashflowsinfull,withoutmaterialdelay,toathirdpartyundera‘pass-through’arrangementandcannotsellorre-pledgetheassetotherthantothetransferee;and

■■ eithertheBankingGrouphastransferredsubstantiallyalltherisksandrewardsoftheasset,ortheBankingGrouphasneithertransferrednorretainedsubstantiallyalltherisksandrewardsoftheasset,buthastransferredcontroloftheasset.

AsituationmayarisewheretheBankingGrouptransfersitsrighttoreceivecashflowsfromanassetorhasenteredintoapass-througharrangement.InsomecasestheBankingGroupwouldhaveneithertransferrednorretainedsubstantiallyalltherisksandrewardsoftheassetnortransferredcontroloftheseassets.ShouldthisoccurtotheextentthattheBankingGrouphascontinuinginvolvementintheasset,theassetcontinuestoberecognisedonthebalancesheet.

Cash and balances with central banks

Cashandbalanceswithcentralbanksincludecashatbranches,centralbanksettlementaccountbalancesandnostrobalances.Theyarebroughttoaccountatthefacevalueorthegrossvalueoftheoutstandingbalance,whereappropriate.Thesebalanceshaveamaturityoflessthanthreemonths.

Due from other financial institutions

Duefromotherfinancialinstitutionsincludesloansandsettlementaccountbalancesduefromotherfinancialinstitutions.Theyareaccountedforasloansandreceivablesandsubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod.

Derivative financial instruments

Derivativefinancialinstruments,includingforwards,futures,swapsandoptions,arerecognisedinthebalancesheetatfairvalue.Fairvalueisobtainedfromquotedmarketprices,independentdealerpricequotations,discountedcashflowmodelsandoptionpricingmodels,whichincorporatecurrentmarketandcontractualpricesfortheunderlyinginstrument,timetoexpiry,yieldcurvesandvolatilityoftheunderlyinginstrument.Alsoincludedinthedeterminationofthefairvalueofderivativesisacreditvaluationadjustment(‘CVA’).Wherethederivativehasapositivefairvalue(asset),thiscreditadjustmentistoreflectthecreditworthinessofthecounterparty.Wherethederivativehasanegativefairvalue(liability),thiscreditadjustmentreflectstheBankingGroup’sowncreditrisk.Thesecreditadjustmentsaretakenintoaccountafterconsideringanyrelevantcollateralormasternettingagreements.

Trading securities

Tradingsecuritiesincludedebtandequityinstrumentswhichareactivelytradedandsecuritiespurchasedunderanagreementtoresell.Theyareaccountedforasfinancialassetsatfairvaluethroughprofitorloss.Certainbonds,notesandcommercialbillsaredesignatedatfairvaluethroughprofitorloss.Thisdesignationmayonlybemadeifthefinancialassetcontainsanembeddedderivative,itismanagedonafairvaluebasisinaccordancewithadocumentedriskmanagementstrategy,orifdesignatingitatfairvaluereducesanaccountingmismatch.

Available-for-sale securities

Available-for-salesecuritiesarepublicandotherdebtandequitysecuritiesthataredesignatedasavailable-for-saleorthatarenotclassifiedaseitherfinancialassetsatfairvaluethroughprofitorlossorloansandreceivables.Theaccountingpolicyforavailable-for-salesecuritiesissetoutabove.

Loans

Loansincludeadvances,overdrafts,housingloans,creditcardandotherpersonallendingandtermloans.Theaccountingpolicyforloansandreceivablesissetoutabove.Securityisobtainedif,basedonanevaluationofthecustomer’screditworthiness,itisconsiderednecessaryforthecustomer’soverallborrowingfacility.Securitywouldnormallyconsistofassetssuchascashdeposits,receivables,inventory,plantandequipment,realestateorinvestments.Loanproductsthathavebothamortgageanddepositfacilityarepresentedonagrossbasisinthebalancesheet,segregatingtheloananddepositcomponentintotherespectivebalancesheetlineitems.Interestearnedonthisproductispresentedonanetbasisintheincomestatementasthisreflectshowthecustomerischarged.

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Note 1 Statement of accounting policies (continued)Due from related entities

ThisamountincludesamountsduefromcontrolledentitiesoftheBankingGroupandallotherentitiescontrolledbytheUltimateParentBank.

Impairment of financial assets

Impairedfinancialassetsinclude:■■ individuallyimpairedassets,whicharedefinedasassetswhereanindividualprovisionhasbeenraisedtocovertheexpectedlossforwhichfullrecoveryofprincipalisdoubtful;and

■■ restructuredassets,whicharedefinedasassetsinwhichtheoriginalcontractualtermshavebeenformallymodifiedtoprovideforconcessionsofinterestorprincipalforreasonsrelatedtothefinancialdifficultiesofthecustomer.

Assetsthatareinarrearsbasedupontheircontractualterms,butnotyetimpaired,arereportedseparatelyas‘pastdueassets’.Assets,notclassifiedasimpairedassetsorpastdueassets,inwhichthecounterpartyis(a)inreceivership,liquidation,bankruptcy,statutorymanagementoranyformofadministrationinNewZealand;or(b)inanyotherequivalentformofvoluntaryorinvoluntaryadministrationinanoverseasjurisdiction,arereportedseparately.Theseareknownas‘otherassetsunderadministration’.Thefollowingaccountingpoliciesapplytotheimpairmentoffinancialassets:

i) Assets carried at amortised costTheBankingGroupassessesateachbalancedatewhetherthereisobjectiveevidencethatafinancialassetorgroupoffinancialassetsisimpaired.Afinancialassetoragroupoffinancialassetsisimpairedandimpairmentchargesarerecognisedifthereisobjectiveevidenceofimpairmentasaresultofoneormoreeventsthatoccurredaftertheinitialrecognitionoftheasset(a‘loss event’)andthatlossevent(orevents)hasanimpactontheestimatedfuturecashflowsofthefinancialassetorgroupoffinancialassetsthatcanbereliablyestimated.ObjectiveevidencethatafinancialassetorgroupoffinancialassetsisimpairedincludesobservabledatathatcomestotheattentionoftheBankingGroupaboutthefollowinglossevents:(a) significantfinancialdifficultyoftheissuerorobligor;(b) abreachofcontract,suchasadefaultordelinquencyininterestorprincipalpayments;(c) theBankingGroupgrantingtotheborrower,foreconomicorlegalreasonsrelatingtotheborrower’sfinancialdifficulty,a

concessionthattheBankingGroupwouldnototherwiseconsider;(d) itbecomingprobablethattheborrowerwillenterbankruptcyorotherfinancialreorganisation;(e) thedisappearanceofanactivemarketforthatfinancialassetbecauseoffinancialdifficulties;or(f) observabledataindicatingthatthereisameasurabledecreaseintheestimatedfuturecashflowsfromagroupoffinancial

assetssincetheinitialrecognitionofthoseassets,althoughthedecreasecannotyetbeidentifiedwiththeindividualfinancialassetsintheBankingGroup,including:(a)adversechangesinthepaymentstatusofborrowersintheBankingGroup;or(b)nationalorlocaleconomicconditionsthatcorrelatewithdefaultsontheassetsintheBankingGroup.

TheBankingGroupfirstassesseswhetherobjectiveevidenceofimpairmentexistsindividuallyforfinancialassetsthatareindividuallysignificant,andindividuallyorcollectivelyforfinancialassetsthatarenotindividuallysignificant.IftheBankingGroupdeterminesthatnoobjectiveevidenceofimpairmentexistsforanindividuallyassessedfinancialasset,whethersignificantornot,itincludestheassetinagroupoffinancialassetswithsimilarcreditriskcharacteristicsandcollectivelyassessesthemforimpairment.Assetsthatareindividuallyassessedforimpairmentandforwhichanimpairmentlossis,orcontinuestobe,recognisedarenotincludedinacollectiveassessmentofimpairment.Ifthereisobjectiveevidencethatanimpairmentonloansandreceivableshasbeenincurred,theamountofthechargeismeasuredasthedifferencebetweentheasset’scarryingamountandthepresentvalueofestimatedfuturecashflows(excludingfuturecreditlossesthathavenotbeenincurred)discountedatthefinancialasset’soriginaleffectiveinterestrate.Thecarryingamountoftheassetisreducedthroughtheuseofaprovisionaccountandtheamountofthelossisrecognisedintheincomestatement.Ifaloanhasavariableinterestrate,thediscountrateformeasuringanyimpairmentisthecurrenteffectiveinterestratedeterminedunderthecontract.Thecalculationofthepresentvalueoftheestimatedfuturecashflowsofacollateralisedfinancialassetreflectsthecashflowsthatmayresultfromforeclosurelesscostsforobtainingandsellingthecollateral,whetherornotforeclosureisprobable.Forthepurposesofacollectiveevaluationofimpairment,financialassetsaregroupedonthebasisofsimilarcreditriskcharacteristics(i.e.onthebasisoftheBankingGroup’sgradingprocessthatconsidersassettype,industry,geographicallocation,collateraltype,pastduestatusandotherrelevantfactors).Thosecharacteristicsarerelevanttotheestimationoffuturecashflowsforgroupsofsuchassetsbybeingindicativeofthedebtors’abilitytopayallamountsdueaccordingtothecontractualtermsoftheassetsbeingevaluated.FuturecashflowsforagroupoffinancialassetsthatarecollectivelyevaluatedforimpairmentareestimatedonthebasisofthecontractualcashflowsoftheassetsintheBankingGroupandhistoricallossexperienceforassetswithcreditriskcharacteristicssimilartothoseinthegroup.Historicallossexperienceisadjustedonthebasisofcurrentobservabledatatoreflecttheeffectsofcurrentconditionsthatdidnotaffecttheperiodonwhichthehistoricallossexperienceisbasedandtoremovetheeffectsofconditionsinthehistoricalperiodthatdonotexistcurrently.Estimatesofchangesinfuturecashflowsforgroupsofassetsreflect,andaredirectionallyconsistentwith,changesinrelatedobservabledatafromperiodtoperiod(e.g.changesinunemploymentrates,propertyprices,paymentstatus,orotherfactorsindicativeofchangesintheprobabilityoflossesinthegroupandtheirmagnitude).ThemethodologyandassumptionsusedforestimatingfuturecashflowsarereviewedregularlybytheBankingGrouptoreduceanydifferencesbetweenlossestimatesandactuallossexperience.Whenaloanisuncollectable,itiswrittenoffagainsttherelatedprovisionforloanimpairment.Suchloansarewrittenoffafterallthenecessaryprocedureshavebeencompletedandtheamountofthelosshasbeendetermined.Subsequentrecoveriesofamountspreviouslywrittenoffdecreasetheamountofthechargeforloanimpairmentintheincomestatement.If,inasubsequentperiod,theamountoftheimpairmentchargedecreasesandthedecreasecanberelatedobjectivelytoaneventoccurringaftertheimpairmentwasrecognised(suchasanimprovementinthedebtor’screditrating),thepreviouslyrecognisedimpairmentchargeisreversedbyadjustingtheprovisionaccount.Theamountofthereversalisrecognisedintheincomestatement.

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Note 1 Statement of accounting policies (continued)ii) Available-for-sale

TheBankingGroupassessesateachreportingdatewhetherthereisobjectiveevidencethatafinancialassetoragroupoffinancialassetsisimpaired.Fordebtinstrumentsclassifiedasavailable-for-sale,impairmentisdeterminedusingthesamemethodologyasNote1–Impairmentoffinancialassets(i)Assetscarriedatamortisedcost.Forequityinvestmentsclassifiedasavailable-for-sale,asignificantorprolongeddeclineinthefairvalueofthesecuritybelowitscostisalsoconsideredindeterminingwhethertheassetsareimpaired.Ifanysuchevidenceexistsforavailable-for-salefinancialassets,thecumulativeloss–measuredasthedifferencebetweentheacquisitioncostandthecurrentfairvalue,lessanyimpairmentchargeonthatfinancialassetpreviouslyrecognisedintheincomestatement–isremovedfromothercomprehensiveincomeandrecognisedintheincomestatement.If,inasubsequentperiod,thefairvalueofadebtinstrumentclassifiedasavailable-for-saleincreasesandtheincreasecanbeobjectivelyrelatedtoaneventoccurringaftertheimpairmentchargewasrecognisedintheincomestatement,theimpairmentchargeisreversedthroughtheincomestatement.Subsequentreversalofimpairmentchargesonequityinstrumentsisnotrecognisedintheincomestatement.

Investments in controlled entities and associates

InvestmentsincontrolledentitiesareinitiallyrecordedbytheBankingGroupinthebalancesheetatcost.Thecostofanacquisitionismeasuredatthefairvalueoftheassetsgivenup,sharesissuedorliabilitiesundertakenatthedateofacquisition.Investmentsincontrolledentitiesarewritten-downtotheirrecoverableamount,whereappropriate.AssociatesareentitiesoverwhichtheBankingGrouphassignificantinfluencebutnotcontrol.Investmentsinassociatesareaccountedforintheparententityfinancialstatementsusingthecostmethodandintheconsolidatedfinancialstatementsusingtheequitymethodofaccounting,afterinitiallybeingrecognisedatcost.TheBankingGroup’sshareofitsassociates’post-acquisitionprofitsorlossesisrecognisedintheincomestatement,anditsshareofpost-acquisitionmovementsinreservesisrecognisedinreserves.Thecumulativepost-acquisitionmovementsareadjustedagainstthecarryingamountoftheinvestment.Dividendsreceivablefromassociatesarerecognisedasdividendincomeintheparententity’sincomestatement,whileintheconsolidatedfinancialstatementstheyreducethecarryingamountoftheinvestment.

Goodwill and other intangible assets

Goodwillrepresentsamountsarisingontheacquisitionofbusinesses.PriortotherevisedNZIFRS3Business Combinations (‘NZ IFRS 3’),goodwillrepresentedtheexcessofpurchaseconsideration,includingdirectlyattributableexpensesassociatedwiththeacquisition,overthefairvalueoftheBankingGroup’sshareoftheidentifiablenetassetsoftheacquiredbusiness.GoodwillarisingontheacquisitionofabusinesssubsequenttotheadoptionoftherevisedNZIFRS3representstheexcessofthepurchaseconsideration,theamountofanynon-controllinginterestintheacquireeandtheacquisitiondatefairvalueofanypreviousequityinterestintheacquiree,overtheacquisitiondatefairvalueofnetidentifiableassetsacquired.Allgoodwillisconsideredtohaveanindefinitelife.Goodwillistestedforimpairmentannuallyandwheneverthereisanindicationthatitmaybeimpaired,andiscarriedatcostlessanyaccumulatedimpairment.Gainsorlossesonthedisposalofanentityincludethecarryingamountofgoodwillrelatingtotheentitysold.Goodwillisallocatedtocash-generatingunitsforthepurposeofimpairmenttesting.Cash-generatingunits(‘CGU’)arethesmallestidentifiablegroupsofassetsthatgeneratecashinflowsthatarelargelyindependentofthecashinflowsfromotherassetsorgroupsofassets.Goodwillwaslasttestedforimpairmentasat30September2012andnoimpairmenthasbeenrecognisedintheincomestatement.Otherintangibleassetsarestatedatcostlessaccumulatedamortisationandimpairment.Otherintangibleassetsconsistofacquiredandinternallydevelopedcomputersoftware.Acquiredcomputersoftwarelicencesarecapitalisedonthebasisofthecostsincurredtoacquireandbringtousethespecificsoftware.Internalandexternalcostsdirectlyincurredinthepurchaseordevelopmentofcomputersoftware,includingsubsequentupgradesandenhancements,arerecognisedasintangibleassetswhenitisprobablethattheywillgeneratefutureeconomicbenefitsattributabletotheBankingGroup.Theseassets(bothacquiredandinternallydevelopedcomputersoftware)areamortisedusingthestraight-linemethodtoallocatethecostoftheassetlessanyresidualvalueovertheirestimatedusefullivesofthreeyears.

Property, plant and equipment

Property,plantandequipmentiscarriedatcostlessaccumulateddepreciationandimpairment.Costisthefairvalueoftheconsiderationprovidedplusincidentalcostsdirectlyattributabletotheacquisition.Othersubsequentexpenditureiscapitalisedonlywhenitincreasesthefutureeconomicbenefitsembodiedintheitemofproperty,plantandequipment.Allotherexpenditureisrecognisedintheincomestatementasanexpenseasincurred.Impairmentisrecognisedasanoperatingexpenseintheincomestatement.Depreciationiscalculatedusingthestraight-linemethodtoallocatethecostofassetslessanyresidualvalueovertheirestimatedusefullivesasfollows:

■■ Leaseholdimprovements Upto10years■■ Furnitureandequipment 3to15years

Other assets

Otherassetsincludeaccruedinterestreceivable,tradedebtorsandprepayments.

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Note 1 Statement of accounting policies (continued)Impairment of non-financial assets

ThecarryingamountoftheBankingGroup’snon-financialassets,otherthandeferredtaxassets,arereviewedateachbalancedatetodeterminewhetherthereisanyindicationofimpairment.Ifsuchanindicationexists,theasset’srecoverableamountisestimated.AnimpairmentisrecognisedwheneverthecarryingamountofanassetortheCGUtowhichitisallocatedexceedsitsrecoverableamount.Withtheexceptionofgoodwill(forwhichimpairmentchargesarenotreversed),whereanimpairmentchargesubsequentlyreverses,thecarryingamountoftheasset(orCGU)isincreasedtotherevisedestimateofitsrecoverableamount,suchthattheincreasedcarryingamountdoesnotexceedthecarryingamountthatwouldhavebeendeterminedhadnoimpairmentchargebeenrecognisedfortheasset(orCGU)inprioryears.Impairmentchargesandreversalsofimpairmentchargesarerecognisedintheincomestatement.Therecoverableamountofanassetisthegreaterofitsfairvaluelesscosttosellandvalue-in-use.Inassessingvalue-in-use,estimatedfuturecashflowsarediscountedtotheirpresentvalueusingapre-taxdiscountratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheasset.Foranassetthatdoesnotgeneratelargelyindependentcashinflows,therecoverableamountisdeterminedfortheCGUtowhichtheassetbelongs.

LiabilitiesFinancial liabilities

TheBankingGroupclassifiesitsfinancialliabilitiesinthefollowingcategories:financialliabilitiesatfairvaluethroughprofitorlossandfinancialliabilitiesatamortisedcost.

■■ Financial liabilities at fair value through profit or loss

Thiscategoryhastwosub-categories:first,financialliabilitiesheldfortradingandsecond,thosedesignatedatfairvaluethroughprofitorlossatinception.Afinancialliabilityisclassifiedinthiscategoryifincurredprincipallyforrepurchasingitinthenearterm,ifitispartofaportfoliooffinancialliabilitiesthataremanagedtogetherandforwhichthereisevidenceofarecentpatternofshort-termprofittaking,ifitisaderivativethatisnotadesignatedhedginginstrument,orifsodesignatedoninitialrecognitionbymanagement.Thisdesignationmayonlybemadeifthefinancialliabilitycontainsanembeddedderivative,itismanagedonafairvaluebasisinaccordancewithadocumentedriskmanagementstrategy,orifdesignatingitatfairvaluereducesanaccountingmismatch.

■■ Financial liabilities at amortised cost

Thiscategoryincludesallfinancialliabilitiesotherthanthoseatfairvaluethroughprofitorloss.Liabilitiesinthiscategoryaremeasuredatamortisedcost.

Recognition and measurement of financial liabilities

Financialliabilitiesareinitiallyrecognisedatfairvaluelesstransactioncostsexceptwheretheyaresubsequentlymeasuredatfairvalue,inwhichcasetransactioncostsareexpensedasincurred.Theyaresubsequentlymeasuredatamortisedcostexceptforderivativesandliabilitiesatfairvalue,whichareheldatfairvaluethroughprofitorloss.Financialliabilitiesarerecognisedwhenanobligationarises.

Derecognition of financial liabilities

Afinancialliabilityisderecognisedwhentheobligationundertheliabilityisdischarged,cancelledorexpires.Whereanexistingfinancialliabilityisreplacedbyanotherfromthesamelenderonsubstantiallydifferentterms,orthetermsofanexistingfinancialliabilityaresubstantiallymodified,suchanexchangeormodificationistreatedasaderecognitionoftheoriginalliabilityandtherecognitionofanewliability,andthedifferenceintherespectivecarryingamountsisrecognisedintheincomestatement.

Due to other financial institutions

Duetootherfinancialinstitutionsincludesdeposits,vostrobalancesandsettlementaccountbalancesduetootherfinancialinstitutions.Theyaremeasuredatamortisedcost.

Deposits at fair value

Depositsatfairvaluerepresentcertificatesofdeposits.Theyareclassifiedatfairvaluethroughprofitorlossastheyaremanagedaspartofatradingportfolio.

Deposits at amortised cost

Depositsatamortisedcostincludenon-interestbearingdepositsrepayableatcallandinterestbearingdeposits.Theyaremeasuredatamortisedcost.

Derivative financial instruments

Derivativefinancialinstruments,includingforwards,futures,swapsandoptions,arerecognisedinthebalancesheetatfairvalue.Fairvaluesareobtainedfromquotedmarketprices,independentdealerpricequotations,discountedcashflowmodelsandoptionpricingmodels,whichincorporatecurrentmarketandcontractualpricesfortheunderlyinginstrument,timetoexpiry,yieldcurvesandvolatilityoftheunderlyinginstrument.AlsoincludedinthedeterminationofthefairvalueofderivativesisaCVA.Wherethederivativehasapositivefairvalue(asset),thiscreditadjustmentistoreflectthecreditworthinessofthecounterparty.Wherethederivativehasanegativefairvalue(liability),thiscreditadjustmentreflectstheBankingGroup’sowncreditrisk.Thesecreditadjustmentsaretakenintoaccountafterconsideringanyrelevantcollateralormasternettingagreements.

Trading liabilities

Securitiessoldunderrepurchaseagreementsandsecuritiessoldshortareclassifiedastradingliabilities.Theyareaccountedforasfinancialliabilitiesatfairvaluethroughprofitorloss.

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Note 1 Statement of accounting policies (continued)Debt issues

Debtissuesarebonds,notesandcommercialpaperthathavebeenissuedbytheBankingGroup.Theyareeitheraccountedforatamortisedcostoratfairvaluethroughprofitorloss.Iftheliabilityisaccountedforatamortisedcostitisinitiallyrecordedatcost,whichisthefairvalueoftheconsiderationreceived,netoftransactioncosts.Subsequently,thedebtismeasuredusingtheeffectiveinterestmethod.Iftheliabilityisaccountedforatfairvaluethroughprofitorloss,thedebtissueisinitiallyrecognisedatthefairvalueoftheconsiderationreceived.Debtissuesaremeasuredatfairvaluethroughprofitorlosstoreduceanaccountingmismatch,whicharisesfromassociatedderivativesbeingexecutedforriskmanagementpurposes.

Financial guarantees

Financialguaranteecontractsarerecognisedasfinancialliabilitiesatthetimetheguaranteeisissued.TheliabilityisinitiallymeasuredatfairvalueandsubsequentlyatthehigheroftheamountdeterminedinaccordancewithNZIAS37Provisions, Contingent Liabilities and Contingent Assetsandtheamountinitiallyrecognisedlesscumulativeamortisation,whereappropriate.Thefairvalueofafinancialguaranteecontractisdeterminedasthepresentvalueofthedifferenceinnetcashflowsbetweenthecontractualpaymentsunderthedebtinstrumentandthepaymentsthatwouldberequiredwithouttheguarantee,ortheestimatedamountthatwouldbepayabletoathirdpartyforassumingtheobligation.

Other liabilities

Otherliabilitiesincludeaccruedinterestpayable,amountsoutstandingonthecreditcardloyaltyprogramme,tradecreditors,otheraccruedexpensesandthedeficitarisingfromthedefinedbenefitsuperannuationscheme.

Perpetual subordinated notes

PerpetualsubordinatednotesaremeasuredatamortisedcostandqualifyasUpperTierTwoCapital,asdefinedbytheReserveBankofNewZealand(‘Reserve Bank’)forcapitaladequacypurposes.

Due to related entities

ThisamountincludesamountsduetocontrolledentitiesoftheBankingGroupandallotherentitiescontrolledbytheUltimateParentBank.

Employee entitlementsWages and salaries, annual leave and sick leave

Liabilitiesforwagesandsalaries,includingnon-monetarybenefitsandannualleaveexpectedtobesettledwithin12monthsofthebalancedate,arerecognisedasprovisionsinrespectofemployees’servicesuptothebalancedateandaremeasuredattheamountsexpectedtobepaidwhentheliabilitiesaresettled.Noprovisionismadefornon-vestingsickleaveasthepatternofsickleavetakenindicatesthatnoadditionalliabilitywillarisefornon-vestingsickleave.

Long service leave

Liabilitiesforlongserviceleaveexpectedtobesettledwithin12monthsofthebalancedatearerecognisedintheprovisionforlongserviceleaveandaremeasuredattheamountsexpectedtobepaidwhentheliabilitiesaresettled.Liabilitiesforlongserviceleaveandotherdeferredemployeebenefitsexpectedtobesettledmorethan12monthsfromthebalancedatearerecognisedintheprovisionforlongserviceleaveandaremeasuredatthepresentvalueoffuturepaymentsexpectedtobemadeinrespectofservicesprovidedbyemployeesuptothebalancedate.Considerationisgiventoexpectedfuturewageandsalarylevels,experienceofemployeedepartureandperiodsofservice.Expectedfuturepaymentsarediscountedtotheirnetpresentvalueusingmarketyieldsatthebalancedateongovernmentbondswithtermsthatmatchascloselyaspossibletotheestimatedtimingoffuturecashflows.

Superannuation obligations

Obligationsforcontributionstothedefinedcontributionsuperannuationschemearerecognisedasanexpenseintheincomestatementasincurred.Theassetorliabilityrecognisedinthebalancesheetinrespectofthedefinedbenefitsuperannuationschemeisthepresentvalueofthedefinedbenefitobligationasatthereportingdatelessthefairvalueofthescheme’sassets.Thepresentvalueofthedefinedbenefitobligationisdeterminedbydiscountingtheestimatedfuturecashflowsusinginterestratesofgovernmentbondsthathavetermstomaturityapproximatingthetermsoftherelatedsuperannuationliability.Thecalculationisperformedannuallybyanindependentqualifiedactuaryusingtheprojectedunitcreditmethod.Theactuarialvaluationofschemeobligationsisdependentuponaseriesofassumptions,thekeyonesbeingpriceinflation,earningsgrowth,mortality,morbidityandinvestmentreturnsassumptions.Differentassumptionscouldsignificantlyaltertheamountofdifferencebetweenschemeassetsandobligations,andthesuperannuationcostchargedtotheincomestatement.Actuarialgainsandlossesrelatedtothedefinedbenefitsuperannuationschemearerecordeddirectlyinretainedearnings.Thenetdeficitwithintheschemeisrecognisedanddisclosedseparatelyin‘Otherliabilities’asretirementbenefitdeficit.

Termination benefits

Liabilitiesforterminationbenefitsarerecognisedwhenadetailedplanforterminationshasbeendeveloped(andiswithoutrealisticpossibilityofwithdrawal)andavalidexpectationhasbeenraisedinthoseemployeesaffectedthattheterminationswillbecarriedout.Liabilitiesforterminationbenefitsarerecognisedwithin‘Otherliabilities’unlessthetimingoramountisuncertain,inwhichcasetheyarerecognisedasprovisions.Liabilitiesforterminationbenefitsexpectedtobesettledwithin12monthsaremeasuredatamountsexpectedtobepaidwhentheyaresettled.Amountsexpectedtobesettledmorethan12monthsfromthebalancedatearemeasuredattheestimatedcashoutflows,discountedusingmarketyieldsatthebalancedateongovernmentbondswithtermstomaturitythatmatch,ascloselyaspossible,theestimatedfuturepayments,wheretheeffectofdiscountingismaterial.

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Note 1 Statement of accounting policies (continued)ProvisionsNon-lending losses

Non-lendinglossesareanylossesthathavenotarisenasaconsequenceofanimpairedcreditdecision.Thoseprovisionsincludelitigationandassociatedcosts,fraudsandthecorrectionofoperationalissues.Aprovisionisrecognisedwhereitisprobablethattherewillbeanoutflowofeconomicresources.

Provision for impairment on credit commitments

Provisionismadeforlossesincurredasaresultofthecommitmenttoextendcredit.

Provision for restructuring

Aprovisionforrestructuringisrecognisedwherethereisademonstrablecommitmentandadetailedplansuchthatthereislittleornodiscretiontoavoidpaymentstootherpartiesandtheamountcanbereliablyestimated.

Equity and reserves

Ordinary shares

Ordinarysharesarerecognisedattheamountpaidupperordinaryshare,netofdirectlyattributableissuecosts.

Available-for-sale securities reserve

Theavailable-for-salesecuritiesreservecomprisesthechangesinthefairvalueofavailable-for-salesecurities,netoftax.Thesechangesarerecognisedintheincomestatementasotherincomewhentheassetiseitherderecognisedorimpaired.

Cash flow hedge reserve

Thecashflowhedgereservecomprisesthefairvaluegainsandlossesassociatedwiththeeffectiveportionofdesignatedcashflowhedginginstruments.

Non-controlling interests

Non-controllinginterestsrepresentstheshareinthenetassetsofsubsidiariesattributabletoequityintereststhatarenotowneddirectlyorindirectlybytheparententity.

HedgingTheBankingGroupusesderivativeinstrumentsaspartofitsassetandliabilitymanagementactivitiestomanageexposurestointerestrateandforeigncurrency,includingexposuresarisingfromforecasttransactions.TheBankingGroupentersintoderivativetransactionsthatprovideeconomichedgesforriskexposures,butdonotmeettherequirementsforhedgeaccountingtreatment.Gainsandlossesonthesederivativetransactionsarerecordedintheincomestatement.TheBankingGroupalsoentersintoderivativetransactionsthataredesignatedandqualifyaseitherfairvaluehedgesorcashflowhedgesforrecognisedassetsandliabilitiesorforecasttransactions.Themethodofrecognisingthefairvaluegainorlossonderivativesdependsonthenatureofthehedgingrelationship.Hedgingrelationshipsareoftwotypes:

■■ fairvaluehedge:ahedgeofthechangeinfairvalueofrecognisedassetsorliabilitiesorunrecognisedfirmcommitments;and■■ cashflowhedge:ahedgeofvariabilityinhighlyprobablefuturecashflowsattributabletoarecognisedassetorliability,orahighlyprobableforecasttransaction.

TheBankingGroupuseshedgeaccountingforderivativesdesignatedinthiswaywhencertaincriteriaaremet.Atthetimeafinancialinstrumentisdesignatedasahedge,theBankingGroupformallydocumentstherelationshipbetweenthehedginginstrumentandhedgeditem,togetherwiththemethodsthatwillbeusedtoassesstheeffectivenessofthehedgingrelationship.TheBankingGroupformallyassesses,bothattheinceptionofthehedgeandonanongoingbasis,whetherthehedgingderivativeshavebeenhighlyeffectiveinoffsettingchangesinthefairvalueorcashflowsofthehedgeditems.Ahedgeisregardedashighlyeffectiveif,atinceptionandthroughoutitslife,theBankingGroupcanexpectchangesinthefairvalueorcashflowsofthehedgeditemtobealmostfullyoffsetbythechangesinthefairvalueorcashflowsofthehedginginstrument,andactualresultsofthehedgearewithinarangeof80%to125%ofthesechanges.Hedgeineffectivenessrepresentstheamountbywhichthechangesinthefairvalueofthehedgingderivativedifferfromchangesinthefairvalueofthehedgeditemortheamountbywhichchangesinthecashflowsofthehedgingderivativedifferfromchanges(orexpectedchanges)inthepresentvalueofthecashflowsofthehedgeditem.

Fair value hedge

Changesinthefairvalueofderivativesthataredesignatedandqualifyasfairvaluehedgesarerecordedintheincomestatement,togetherwithanychangesinthefairvalueofthehedgedassetorliabilitythatareattributedtothehedgedrisk.Ifthehedgenolongermeetsthecriteriaforhedgeaccounting,anypreviousadjustmenttothecarryingamountofahedgeditemrecognisedatamortisedcostisamortisedtotheincomestatementovertheperiodtomaturity.

Cash flow hedge

Theeffectiveportionofchangesinthefairvalueofderivativesthataredesignatedandqualifyascashflowhedgesisrecognisedinothercomprehensiveincome.Thegainorlossrelatingtoanyineffectiveportionisrecognisedimmediatelyintheincomestatement.Amountsaccumulatedinothercomprehensiveincomearetransferredtotheincomestatementintheperiodsinwhichthehedgeditemaffectsprofitorloss.Whenahedginginstrumentexpiresorissold,terminatedorexercised,orwhenthehedgenolongermeetsthecriteriaforhedgeaccounting,anycumulativegainorlossexistinginothercomprehensiveincomeatthattimeremainsinothercomprehensiveincomeandisrecognisedintheperiodinwhichthehedgeditemaffectsprofitorloss.Whenaforecasttransactionisnolongerexpectedtooccur,thecumulativegainorlossthatwasreportedinothercomprehensiveincomeisimmediatelytransferredtotheincomestatement.

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Note 1 Statement of accounting policies (continued)Embedded derivativesIncertaininstancesaderivativemaybeembeddedinahostcontract.Ifthehostcontractisnotcarriedatfairvaluethroughprofitorloss,theembeddedderivativeisseparatedfromthehostcontractandaccountedforasastand-alonederivativeinstrumentatfairvaluewheretheeconomiccharacteristicsandrisksoftheembeddedderivativearenotcloselyrelatedtotheeconomiccharacteristicsandrisksofthehostcontract.

Loan securitisationTheBankingGroup,throughitsloansecuritisationprogramme,packagesandsellsloans(principallyhousingmortgageloans)assecuritiestoinvestors.Insuchtransactions,theBankingGroupprovidesanequitableinterestintheloanstoinvestorswhoprovidefundingtotheBankingGroup.Securitisedloansthatdonotqualifyforderecognitionandtheassociatedfundingareincludedinloansanddebtissuesrespectively.

LeasesLeasesareclassifiedaseitherfinanceleasesoroperatingleases.Underafinancelease,substantiallyalltherisksandrewardsincidentaltolegalownershiparetransferredtothelessee.Incontrast,anoperatingleaseexistswheretherisksoftheleasedassetsremainwiththelessor.Initscapacityasalessor,theBankingGroupprimarilyoffersfinanceleases.TheBankingGrouprecognisestheassetsheldunderfinanceleaseinthebalancesheetasloansatanamountequaltothenetinvestmentinthelease.TherecognitionoffinanceincomeisbasedonapatternreflectingaconstantperiodicreturnontheBankingGroup’snetinvestmentinthefinancelease.Financeleaseincomeisincludedwithinnetinterestincomeintheincomestatement.Initscapacityasalessee,theBankingGroupmainlyleasesproperty,plantandequipmentunderoperatingleases.Paymentsduetothelessorunderoperatingleasesarechargedtoequipmentandoccupancyexpenseonastraight-linebasisoverthetermofthelease.

OffsettingFinancialassetsandfinancialliabilitiesareoffsetandthenetamountreportedinthebalancesheetwhenthereisalegallyenforceablerighttosetofftherecognisedamountsandthereisanintentiontosettleonanetbasis,ortorealisetheassetandsettletheliabilitysimultaneously.

Segment reportingOperatingsegmentsarereportedinamannerconsistentwiththeinternalreportingprovidedtothechiefoperatingdecision-maker.Thechiefoperatingdecision-makeristhepersonorgroupthatallocatesresourcestoandassessestheperformanceoftheoperatingsegmentsofanentity.TheBankingGrouphasdeterminedthattheBank’sexecutiveteamisitschiefoperatingdecision-maker.Alltransactionsbetweenbusinesssegmentsareconductedonanarm’slengthbasis,withinter-segmentrevenueandcostsbeingeliminatedatheadoffice.Incomeandexpensesdirectlyassociatedwitheachsegmentareincludedindeterminingbusinesssegmentperformance.

Statement of cash flows

Basis of presentation

ThestatementofcashflowshasbeenpresentedinaccordancewithNewZealandInternationalAccountingStandard(‘NZ IAS’)7Statement of Cash Flows withnettingofcertainitemsasdisclosedbelow.

Cash and cash equivalents

Cashandcashequivalentsreflectthebalanceofcashandliquidassetsusedintheday-to-daycashmanagementoftheBankingGroup,whicharereadilyconvertibleattheinvestor’sorcustomer’soptionandincludetheinterbankbalancesarisingfromthedailyReserveBanksettlementprocess.

Netting of cash flows

Certaincashflowshavebeennettedinordertoprovidemoremeaningfuldisclosure,asmanyofthecashflowsarereceivedanddisbursedonbehalfofcustomersandreflecttheactivitiesofthosecustomersratherthantheBankingGroup.

1.3 Changes in accounting policiesAsaresultofthenewandrevisedaccountingstandardswhichbecameoperativefortheannualreportingperiodcommencing1October2011,thefollowingstandards,interpretationsandamendmentshavebeenadoptedwitheffectfrom1October2011:

■■ NZIFRS7Financial Instruments: Disclosures (‘NZ IFRS 7’):■ Theamendmentsaddanexplicitstatementthatqualitativedisclosureshouldbemadeinthecontextofthequantitative

disclosurestobetterenableuserstoevaluateanentity’sexposuretorisksarisingfromfinancialinstruments.Inaddition,certaindisclosurerequirementshavebeenamendedorremoved.

■ Amendments to NZ IFRS 7 Disclosures – Transfers of Financial Assets –Theamendmentsrequireadditionaldisclosuresaboutthetransferoffinancialassets,includinginrespectofthenatureofthefinancialassetsinvolvedandtherisksassociatedwiththem.

■■ NZIAS1Presentation of Financial Statements–Theamendmentsclarifythatananalysisofothercomprehensiveincomebyitemisrequiredtobedisclosedeitherinthestatementofchangesinequityorinthenotestothefinancialstatements.

■■ NZIAS24Related Party Disclosures–Themainchangestothestandardsimplifythedefinitionofarelatedpartyandclarifyitsintendedmeaning.

■■ NZIAS34Interim Financial Reporting–TheamendmentsaddexamplestothelistofsignificanteventsortransactionsthatrequiredisclosureunderNZIAS34.

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Note 1 Statement of accounting policies (continued)■■ NewZealandEquivalenttoInternationalFinancialReportingInterpretationsCommittee(‘NZ IFRIC’)13Customer Loyalty

Programmes–Theamendmentsclarifythefairvalueofawardcreditsandtakeintoaccounttheamountofdiscountsorincentivesthatotherwisewouldbeofferedtocustomersthathavenotearnedtheawardcredits.

■■ NZIFRIC14–The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction–Theamendmentsremovetheunintendedconsequencearisingfromthetreatmentofprepaymentswhenthereisaminimumfundingrequirement.Theseamendmentsresultinprepaymentsofcontributionsincertaincircumstancesbeingrecognisedasanassetratherthananexpense.

■■ Amendments to NZ IFRS 7: Disclosure Amendments to Appendix E New Zealand-specific additional disclosure requirements applicable to financial institutions–Theamendmentsreplacetheterm‘financialinstitutions’withtheterm‘deposittakers’.TheamendmentsalsoremoveregisteredbanksfromitsscopeasthedisclosurerequirementshavebeenrelocatedtotheOrder.

■■ Amendments to NZ IFRSs to Harmonise with IFRS and Australian Accounting Standards–TheamendmentsremovecertainNewZealand-specificdisclosuresandrelocatecertainNewZealand-specificdisclosurerequirementstoanewstandard.TheBankingGrouphaschosentocontinuedisclosingcertaininformationnolongerrequiredasaresultofthisjointTrans-TasmanConvergenceproject.

■■ FinancialReportingStandard44New Zealand Additional Disclosures–ThisisapplicableonlytoNewZealandandisaconsequenceofthejointTrans-TasmanConvergenceprojectoftheAustralianAccountingStandardsBoardandFinancialReportingStandardsBoard.ThisstandardcontainsNewZealand-specificdisclosuresthatwerepreviouslylocatedinotherNZIFRSsandalsorevisescertaindisclosures.

AdoptionofthesenewandrevisedaccountingstandardshasnotresultedinanymaterialchangetotheBankingGroup’sreportedresultorfinancialposition.

1.4 Future accounting developmentsThefollowingnewstandards,interpretationsandamendmentshavebeenissued,butarenotyeteffectiveandhavenotbeenearlyadoptedbytheBankingGroup:

■■ Disclosures–Offsetting Financial Assets and Financial Liabilities(AmendmentstoNZIFRS7)wasissuedinFebruary2012andwillbeeffectivetotheBankingGroupinthe2014financialyear.Theamendmentrequiresdisclosureofinformationthatwillenableuserstoevaluatetheeffectorpotentialeffectofnettingarrangements,includingrightsofset-offassociatedwithrecognisedfinancialassetsandfinancialliabilitiesontheBankingGroup’sbalancesheet.Theamendmentisexpectedtoresultinadditionaldisclosures.

■■ NZIFRS9Financial Instruments–Ifthisstandardisnotearlyadopteditwillbeeffectiveforthe30September2016financialyearend.Themajorchangesunderthestandardarethat:■ itreplacesthemultipleclassificationandmeasurementmodelsinNZIAS39Financial Instruments: Recognition and

Measurementwithasinglemodelthathastwoclassificationcategories:amortisedcostandfairvalue;■ afinancialassetismeasuredatamortisedcostiftwocriteriaaremet:a)theobjectiveofthebusinessmodelistohold

thefinancialassetsforthecollectionofthecontractualcashflows;andb)thecontractualcashflowsundertheinstrumentsolelyrepresentthepaymentofprincipalandinterest;

■ ifafinancialassetiseligibleforamortisedcostmeasurement,anentitycanelecttomeasureitatfairvalueifiteliminatesorsignificantlyreducesanaccountingmismatch;

■ therewillbenoseparationofanembeddedderivativewheretheinstrumentisafinancialasset;■ equityinstrumentsmustbemeasuredatfairvalue,however,anentitycanelectoninitialrecognitiontopresentthefair

valuechangesonanequityinvestmentdirectlyinothercomprehensiveincome.Thereisnosubsequentrecyclingoffairvaluegainsandlossestoprofitorloss,however,dividendsfromsuchinvestmentswillcontinuetoberecognisedinprofitorloss;and

■ ifanentityholdsaninvestmentinasset-backedsecuritiesitmustdeterminetheclassificationofthatinvestmentbylookingthroughtotheunderlyingassetsandassessthecreditqualityoftheinvestmentcomparedwiththeunderlyingportfolioofassets.Ifanentityisunabletolookthrough,thentheinvestmentmustbemeasuredatfairvalue.

ThereissuedversionofthestandardinDecember2010includedtherequirementsforclassificationandmeasurementoffinancialinstrumentsincludingbothfinancialassetsandfinancialliabilitiesaswellasrecognitionandderecognitionrequirementsforfinancialinstruments.Themainadditionalchangeasaresultofthereissuedversionrelatestothemeasurementoffinancialliabilities.Specifically,theportionofachangeoffairvaluerelatingtotheentity’sowncreditriskforfinancialliabilitiesmeasuredatfairvalueutilisingthefairvalueoptionispresentedinothercomprehensiveincome,exceptwhenthatwouldcreateanaccountingmismatch.Ifsuchamismatchwouldbecreatedorenlarged,theentityisrequiredtopresentallchangesinfairvalue(includingtheeffectsofchangesinthecreditriskoftheliability)inprofitorloss.

ThestandardwillimpacttheclassificationandmeasurementoftheBankingGroup’sfinancialinstruments.■■ NZIFRS10Consolidated Financial Statements (‘NZ IFRS 10’)andNZIFRS12Disclosure of Interests in Other Entities (‘NZ IFRS 12’)–ThesenewstandardswereissuedinJune2011andareapplicabletotheBankingGroupinthe2014financialyear.Thenewconsolidationstandardchangesthedefinitionofcontrolandrequiresthatitbeappliedtoallentitiestodeterminewhethercontrolexists.Thenewdefinitionfocusesontheneedforbothpowerandexposuretovariabilityofreturnsinorderforcontroltobepresent.Thenewdisclosurestandardincreasesthedisclosurerequirementsforbothconsolidatedandunconsolidatedentities.ThenewstandardsarenotexpectedtohaveamaterialimpactontheBankingGroup.

■■ NZIFRS13Fair Value Measurement (‘NZ IFRS 13’)–ThenewstandardwasissuedinJune2011andisapplicabletotheBankingGroupinthe2014financialyear.Thenewstandardreplacesexistingguidanceonfairvaluemeasurementinseveralstandardswithasingle,unifieddefinitionoffairvalueandaframeworkformeasuringanddisclosingfairvalues.NZIFRS13appliestoallassetsandliabilitiesmeasuredatfairvalue,notjustfinancialinstruments.ThenewstandardisnotexpectedtohaveamaterialimpactontheBankingGroup.

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Note 1 Statement of accounting policies (continued)■■ Presentation of Items of Other Comprehensive Income (AmendmentstoNZIAS1)–TheamendmentswereissuedinAugust2011andareapplicabletotheBankingGroupinthe2013financialyear.Undertheamendedstandard,theformatofothercomprehensiveincomewillneedtobechangedtoseparateitemsthatmightberecycledtonetprofitfromitemsthatwillnotberecycled.Itemsincludedinothercomprehensiveincomethatmayberecycledintoprofitorlossinfutureperiodsincludegainsorlossesoncashflowhedges.Thosethatwillnotberecycledincludefairvaluechangesonowncreditriskforfinancialliabilitiesdesignatedatfairvalueanddefinedbenefitsactuarialgainsandlosses.ItisnotexpectedtohaveamaterialimpactontheBankingGroup.

■■ NZIAS19Employee Benefits(‘NZ IAS 19’)–TheamendmentswereissuedinAugust2011andareapplicabletotheBankingGroupinthe2014financialyear.Theamendmentsrequireentitiestoaccountimmediately,inretainedearnings,forallestimatedchangesinthecostofprovidingthesebenefitsandallchangesinthevalueofplanassets(oftenreferredtoastheremovalofthe‘corridoramount’).Theamendmentsalsocontainanewpresentationapproachthatclearlydistinguishesthedifferentcomponentsofthecostofthesebenefits.MinimalimpactisexpectedontheBankingGroupasaresultofthesechangesastheBankingGroup’scurrentaccountingandpresentationtreatmentisinlinewiththenewamendments.Twoareasofimpactwillbethechangeinthemeasurementofpensionexpenseandadditionaldisclosurestoprovideclearerinformationabouttherisksarisingfromdefinedbenefitplans.

■■ NZIAS27Separate Financial Statements–TheamendmentswereissuedinJune2011andareapplicabletotheBankingGroupinthe2014financialyear.TheamendmentsremovetheaccountinganddisclosurerequirementsforconsolidatedfinancialstatementsasaresultoftheissuanceofNZIFRS10.ItisnotexpectedtohaveamaterialimpactontheBankingGroup.

■■ NZIAS28Investments in Associates and Joint Ventures –ThestandardwasissuedinJune2011andisapplicabletotheBankingGroupinthe2014financialyear.ThisstandardsupersedesNZIAS28Investments in AssociatesasaresultoftheissuanceofNZIFRS12.ItisnotexpectedtohaveamaterialimpactontheBankingGroup.

■■ OffsettingFinancialAssetsandFinancialLiabilities(AmendmentstoNZIAS32FinancialInstruments:Presentation(‘NZ IAS 32’))wasissuedinFebruary2012andwillbeeffectivetotheBankingGroupinthe2015financialyear.TheamendmentprovidesapplicationguidancetoaddressinginconsistenciesappliedtooffsettingcriteriaprovidedinNZIAS32,includingclarifyingthemeaningofcurrentlegallyenforceablerightsofset-offandthatsomegrosssettlementsystemsmaybeconsideredastheequivalenttonetsettlement.TheamendmentisnotexpectedtohaveamaterialimpactontheBankingGroup.

■■ Annual Improvements 2009 – 2011 CyclewasissuedinJune2012andwillbeeffectivetotheBankingGroupinthe2014financialyear.Theamendmentsrelatetothefollowing:■ NZIAS1–clarifiesthedifferencebetweenvoluntaryadditionalcomparativeinformationandtheminimumrequired

comparativeinformation.Generally,theminimumrequiredcomparativeperiodisthepreviousperiod.■ NZIAS32–clarifiesthatincometaxesarisingfromdistributionstoequityholdersareaccountedforinaccordancewith

NZIAS12Income Taxes.■ NZIAS34–clarifiestherequirementsinNZIAS34relatingtosegmentinformationfortotalassetsandliabilitiesforeach

reportablesegmenttoenhanceconsistencywiththerequirementsinNZIFRS8Operating Segments. TheamendmentsarenotexpectedtohaveamaterialimpactontheBankingGroup.

1.5 Critical accounting estimates, judgment and assumptionsTheapplicationoftheBankingGroup’saccountingpoliciesnecessarilyrequirestheuseofestimates,judgmentandassumptions.Shoulddifferentestimates,judgmentsorassumptionsbeapplied,theresultingvalueswouldchange,impactingthenetassetsandincomeoftheBankandtheBankingGroup.

Critical accounting estimates and assumptionsThenatureofestimatesandassumptionsusedandthevalueoftheresultingassetandliabilitybalancesareincludedinthepoliciesbelow.

Fair value of financial instruments

Financialinstrumentsclassifiedasheldfortradingordesignatedatfairvaluethroughprofitorlossandfinancialassetsclassifiedasavailable-for-salearerecognisedinthefinancialstatementsatfairvalue.Allderivativesaremeasuredandrecognisedatfairvalue.Thefairvalueofafinancialinstrumentistheamountatwhichtheinstrumentcouldbeexchangedinacurrenttransactionbetweenwillingparties,otherthaninaforcedorliquidationsale.Financialinstrumentsareeitherpricedwithreferencetoaquotedmarketpriceforthatinstrumentorbyusingavaluationmodel.Wherethefairvalueiscalculatedusingfinancialmarketpricingmodels,themethodologyusedistocalculatetheexpectedcashflowsunderthetermsofeachspecificcontractandthendiscountthesevaluesbacktothepresentvalue.Thesemodelsuseastheirbasisindependentlysourcedmarketparametersincluding,forexample,interestrateyieldcurves,equitiesandcommoditiesprices,optionvolatilitiesandcurrencyrates.Mostmarketparametersareeitherdirectlyobservableorareimpliedfrominstrumentprices.Furthermore,profitsorlossesarerecogniseduponinitialrecognitiononlywhensuchprofitscanbemeasuredbyreferencetoobservablecurrentmarkettransactionsorvaluationtechniquesbasedonobservablemarketinputs.Intheeventthatinputsintovaluationtechniquesarenon-marketobservableanyday-oneprofitorlossisamortisedoverthelifeofthetransaction.Thecalculationoffairvalueforanyfinancialinstrumentmayalsorequireadjustmentofthequotedpriceormodelvaluetoreflectthecostofcreditrisk(wherenotembeddedinunderlyingmodelsorpricesused).Theprocessofcalculatingfairvalueonilliquidinstrumentsorfromavaluationmodelmayrequireestimationofcertainpricingparameters,assumptionsormodelcharacteristics.Theseestimatesarecalibratedagainstindustrystandards,economicmodelsandobservedtransactionprices.ThefairvalueoffinancialinstrumentsisprovidedinNote27aswellasthemechanismbywhichfairvaluehasbeenderived.

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Note 1 Statement of accounting policies (continued)AnegligibleproportionoftheBankingGroup’stradingderivativesarevalueddirectlyfromquotedprices,themajoritybeingvaluedusingappropriatevaluationtechniques,usingobservablemarketinputs.Thefairvalueofsubstantiallyallsecuritiespositionscarriedatfairvalueisdetermineddirectlyfromquotedpricesorobservablemarketinputs.

Provisions for impairment charges on loans and credit commitments

TheBankingGroup’sloanimpairmentprovisionsareestablishedtorecogniseincurredimpairmentinitsportfolioofloans.Aloanisimpairedwhenthereisobjectiveevidencethateventsoccurringsincetheloanwasrecognisedhaveaffectedexpectedcashflowsfromtheloan.Theimpairmentchargeisthedifferencebetweenthecarryingvalueoftheloanandthepresentvalueofestimatedfuturecashflowscalculatedattheloan’soriginaleffectiveinterestrateforfixedrateloansandtheloan’scurrenteffectiveinterestrateforvariablerateloans.Provisionsforloanimpairmentrepresentmanagement’sestimateoftheimpairmentchargesincurredintheloanportfoliosasatthebalancedate.Changestotheprovisionsforloanimpairmentandchangestotheprovisionsforundrawncontractuallycommittedfacilitiesandguaranteesprovidedarereportedintheincomestatementaspartoftheimpairmentchargesonloans.TherearetwocomponentstotheBankingGroup’sloanimpairmentprovisions,individualandcollective,asfollows:(a) Individualcomponent–allimpairedloansthatexceedspecifiedthresholdsareindividuallyassessedforimpairment.

IndividuallyassessedloansprincipallycomprisetheBankingGroup’sportfolioofcommercialloanstomediumandlargebusinesses.Impairmentisrecognisedasthedifferencebetweenthecarryingvalueoftheloanandthediscountedvalueofmanagement’sbestestimateoffuturecashrepaymentsandproceedsfromanysecurityheld(discountedattheloan’soriginaleffectiveinterestrateforfixedrateloansandtheloan’scurrenteffectiveinterestrateforvariablerateloans).Relevantconsiderationsthathaveabearingontheexpectedfuturecashflowsaretakenintoaccount,includingthebusinessprospectsforthecustomer,therealisablevalueofcollateral,theBankingGroup’spositionrelativetootherclaimants,thereliabilityofcustomerinformationandthelikelycostanddurationofthework-outprocess.Subjectivejudgmentsaremadeinthisprocess.Furthermore,judgmentscanchangewithtimeasnewinformationbecomesavailableoraswork-outstrategiesevolve,resultinginrevisionstotheimpairmentprovisionasindividualdecisionsaretaken.

(b) Collectivecomponent–thisismadeupoftwoelements:loanimpairmentprovisionsforimpairedloansthatarebelowindividualassessmentthresholds(collectiveimpairedloanprovisions)andforloanimpairmentsthathavebeenincurredbuthavenotbeenseparatelyidentifiedatthebalancedate(incurredbutnotreportedprovisions).Theseareestablishedonaportfoliobasistakingintoaccountthelevelofarrears,collateral,pastlossexperienceanddefaultsbasedonportfoliotrends.Themostsignificantfactorsinestablishingtheseprovisionsaretheestimatedlossratesandtherelatedemergenceperiod.Theemergenceperiodforeachloanproducttypeisdeterminedthroughdetailedstudiesoflossemergencepatterns.Loanfileswherelosseshaveemergedarereviewedtoidentifytheaveragetimeperiodbetweenobservablelossindicatoreventsandthelossbecomingidentifiable.Theseportfoliosincludecreditcardreceivablesandotherpersonaladvancesincludingmortgages.Thefuturecreditqualityoftheseportfoliosissubjecttouncertaintiesthatcouldcauseactualcreditlossestodiffermateriallyfromreportedloanimpairmentprovisions.Theseuncertaintiesincludetheeconomicenvironment,notablyinterestratesandtheireffectoncustomerspending,unemploymentlevels,paymentbehaviourandbankruptcyrates.

TheprovisionsforimpairmentonloansaredisclosedinNotes13and14whilsttheprovisionsforimpairmentoncreditcommitmentsaredisclosedinNote21.TheimpairmentchargereflectedintheincomestatementisdisclosedinNote7.

Goodwill

Goodwillrepresentsamountsarisingontheacquisitionofbusinesses.PriortotherevisedNZIFRS3Business Combinations,goodwillrepresentedtheexcessofpurchaseconsideration,includingdirectlyattributableexpensesassociatedwiththeacquisition,overthefairvalueoftheBankingGroup’sshareoftheidentifiablenetassetsoftheacquiredbusiness.GoodwillarisingontheacquisitionofabusinesssubsequenttotheadoptionoftherevisedNZIFRS3representstheexcessofthepurchaseconsideration,theamountofanynon-controllinginterestintheacquireeandtheacquisitiondatefairvalueofanypreviousequityinterestintheacquiree,overtheacquisitiondatefairvalueofidentifiablenetassetsacquired.Thedeterminationofthefairvalueofassetsandliabilitiesoftheacquiredbusinessesrequirestheexerciseofmanagementjudgment.Differentfairvalueswouldresultinchangestothegoodwillbalanceandtothepost-acquisitionperformanceoftheacquisition.Todetermineifgoodwillisimpaired,thecarryingvalueoftheidentifiedCGUtowhichthegoodwillisallocated,includingtheallocatedgoodwill,iscomparedtoitsrecoverableamount.RecoverableamountisthehigheroftheCGU’sfairvaluelesscoststosellanditsvalue-in-use.Value-in-useisthepresentvalueofexpectedfuturecashflowsfromtheCGU.Determinationofappropriatecashflowsanddiscountratesforthecalculationofvalue-in-useissubjective.FairvalueistheamountobtainableforthesaleoftheCGUinanarm’slengthtransactionbetweenknowledgeableandwillingparties.Theassumptionsappliedtodetermineifanyimpairmentexistsalongwiththecarryingamountofgoodwill,areoutlinedinNote15.

Superannuation obligations

TheBankingGroupoperatesadefinedbenefitsuperannuationscheme.Forthisscheme,actuarialvaluationsofthescheme’sobligationsandthefairvaluemeasurementsofthescheme’sassetsareperformedannuallyinaccordancewiththerequirementsofNZIAS19.Theactuarialvaluationofschemeobligationsisdependentuponaseriesofassumptions,thekeyonesbeingpriceinflation,earningsgrowth,mortality,morbidityandinvestmentreturnsassumptions.Differentassumptionscouldsignificantlyaltertheamountofthedifferencebetweenschemeassetsandobligations,andthesuperannuationcostchargedtotheincomestatement.ThecarryingamountandtheprimaryassumptionsusedinthecalculationofsuperannuationdefinedbenefitobligationaredisclosedinNote22andNote30.

Provisions (other than loan impairment losses)

Provisionsareheldinrespectofarangeofobligationssuchasemployeeentitlements,restructuringcosts,litigationcostsandnon-lendinglossesasdisclosedinNote21.Someoftheprovisionsinvolvesignificantjudgmentaboutthelikelyoutcomeofvariouseventsandestimatedfuturecashflows.Paymentswhichareexpectedtobeincurredaftermorethanoneyeararediscountedataratewhichreflectsbothcurrentinterestratesandtherisksspecifictothatprovision.

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Note 1 Statement of accounting policies (continued)Critical accounting judgmentsThejudgments,apartfromthoseinvolvingestimations,thatmanagementhasmadeinapplyingtheBankingGroup’saccountingpoliciesandthathavethemostsignificantimpactontheamountsrecognisedinthefinancialstatementsareasfollows:

Income taxes

TheBankingGroupissubjecttoincometaxesinNewZealandandjurisdictionswhereithasforeignoperations.Significantjudgmentisrequiredindeterminingtheprovisionforincometaxes.Therearemanytransactionsandcalculationsundertakenduringtheordinarycourseofbusinessforwhichtheultimatetaxoutcomeisunclear.Provisionsfortaxareheldtoreflecttheseuncertainties.TheBankingGroupestimatesitstaxliabilitiesbasedontheBankingGroup’sunderstandingofthetaxlaw.Wherethefinaloutcomeofthesemattersisdifferentfromtheamountsinitiallyrecorded,suchdifferenceswillimpactthecurrentanddeferredtaxprovisionsintheperiodwhensuchdeterminationsaremade.

Securitisation and the consolidation of special purpose vehicles

TheBankingGroupsponsorstheformationofspecialpurposevehicles(‘SPV’)intheordinarycourseofbusiness,primarilytoprovidefundingandfinancialservicesproductstoitscustomers.SPVsaretypicallysetupforasingle,pre-definedpurpose,havealimitedlifeandgenerallyarenotoperatingentitiesnordotheyhaveemployees.ThemostcommonformofSPVstructureinvolvestheacquisitionoffinancialassetsbytheSPVthatarefundedbytheissuanceofsecuritiestoexternalinvestors(securitisation).RepaymentofthesecuritiesisdeterminedbytheperformanceoftheassetsacquiredbytheSPV.UnderNZGAAP,anSPVisconsolidatedandreportedaspartoftheBankingGroupifitiscontrolledbytheparententityinlinewithNZIAS27Consolidated and Separate Financial StatementsordeemedtobecontrolledinapplyingNZSIC12Consolidation – Special Purpose Entities.Thedefinitionofcontrolisbasedonthesubstanceratherthanthelegalformofthearrangement.AsitcansometimesbedifficulttodeterminewhethertheBankingGroupcontrolsanSPV,managementmakesjudgmentsabouttheBankingGroup’sexposuretotheassociatedrisksandrewards,aswellasitsabilitytomakeoperationaldecisionsfortheSPV.

Note 2 Business combination – transfer of operationsUntil1November2006,theUltimateParentBankconducteditsoperationsinNewZealandthroughabranchstructure.Onthatdate,andafterextensiveconsultationwiththeReserveBankofNewZealand(‘Reserve Bank’),theUltimateParentBankadoptedadualoperatingmodelincludingalocallyincorporatedsubsidiary,theBank,toconductitsconsumerandbusinessbankingoperationsinNewZealand,andabranchoftheUltimateParentBank(‘NZ Branch’)toconductitsinstitutionalandfinancialmarketsoperations.FollowinganindependentreviewofthestructureoftheoperatingmodeloftheUltimateParentBank’sbusinessinNewZealand,theReserveBank,theBankandtheUltimateParentBankreachedagreementonchangestotheoperatingmodel.On1November2011,assetsandliabilitiesassociatedwithcertainbusinessactivitiesformerlyconductedbytheNZBranchweretransferredtotheBank.ThetransferoccurredpursuanttotheWestpacNewZealandAct2011.ThefollowingbusinessactivitiesweretransferredtotheBank:

■■ institutionalcustomerdeposits;■■ institutionalcustomertransactionalbanking;■■ institutionalcustomerlending(otherthantradefinancingactivities);■■ debtcapitalmarketsactivitiescarriedoutinassistingcorporatecustomerstoobtainfunding,suchasloansyndicationandsecuritisationarrangements,butexcludingthedebtsecuritiesteamactivities,suchasarrangementofcommercialpaperandbondprogrammes;

■■ corporateadvisory;and■■ institutionalcustomerforeigncurrencyaccounts.TheNZBranchhasretained:

■■ financialmarketsoperationsforexternalcustomers,includingsalesandtradingofcapitalmarketsproductsandforeignexchangeforcorporateandinstitutionalcustomers;

■■ pricingandriskmanagementforinterestrate,foreignexchangeandcommodityproductsforconsumer,businessandinstitutionalcustomersoftheBank;

■■ tradingofcapitalmarketsproductsandforeignexchangeasprincipal;■■ globalintra-groupfinancingfunctions;■■ correspondentbankrelationships;■■ debtsecuritiesteamactivities,suchasarrangementofcommercialpaperandbondprogrammes;and■■ internationalbusiness,includingtradefinanceactivitiesbutexcludingcustomerforeigncurrencyaccounts.TheacquisitioninvolvedthetransfertotheBankof$6,446millionofassetsconsistingprimarilyofloanstocorporatecustomersof$6,336millionand$5,303millionofliabilitiesconsistingprimarilyofdepositsof$5,060million.Forthefinancialyearended30September2011,thebusinessactivitiestransferredfromtheNZBranchtotheBankaccountedfornetoperatingincomeof$166million(30September2010:$163million)andprofitafterincometaxexpenseof$114million(30September2010:$103million).

Funding of acquisitionTofundthepurchaseoftheassetsandliabilitiesrelatingtothebusinessactivitiestransferredfromtheNZBranch(aswellastheadditionalliquidassetsrequiredtobeheldbytheBankingGroupasaresultofthetransfer),aloanof$3.1billionwasprovidedtotheBankbytheNZBranchandtheBankraised$1,130millioninadditionalsharecapital.

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Note 2 Business combination – transfer of operations (continued) Theloanof$3.1billionisforaperiodofthreeyearsandwaspricedattheNewZealandBankBillReferenceRateplusamarginthatreflectedmarketpricingon1November2011.TheBankissuedatotalof1,130millionadditionalordinarysharesfor$1persharetotheBank’simmediateparentcompany,WestpacNewZealandGroupLimited(‘WNZGL’),inconnectionwiththetransfer.On28October2011,theBankissued900millionordinarysharesfor$1pershare,andon31October2011,theBankissuedanadditional230millionordinarysharesfor$1pershare.Immediatelypriortotheissuanceoftheseadditional230millionordinaryshares,theBankpaidadividendtoWNZGLof$230million.

Compliance with condition of registration 14 and BS13 requirements (unaudited) Asaresultofthetransferofthebusinessactivitiessetoutabove,theBankingGroupisrequiredtoholdadditionalliquidassetsinordertocomplywithconditionofregistration14,whichrelatestoliquidity,andtheReserveBankdocumentLiquidity Policy (BS13).TheseliquidassetswereacquiredthroughacombinationofonmarketpurchasesandapurchaseofliquidassetsfromtheNZBranch.TheBankingGroupwascompliantwithbothconditionofregistration14andBS13immediatelyfollowingthetransferon1November2011.

Assets and liabilities transferred from NZ Branch to the Bank as at 1 November 2011 Assets and Liabilities Transferred As at 1 November $ millions 2011

AssetsCashandbalanceswithcentralbanks 58 Loans 6,336 Deferredtaxassets 28 Otherassets 24

Total assets 6,446

LiabilitiesDuetootherfinancialinstitutions 212 Deposits 5,060 Provisions 12 Otherliabilities 19

Total liabilities 5,303

Net assets acquired 1,143

Contingent liabilities and commitments transferred from the NZ Branch to the Bank as at 1 November 2011

The Bank As at 1 November$ millions 2011

Contingent liabilities and commitmentsTransaction-relatedcontingentitems 421 Short-term,self-liquidatingtrade-relatedcontingentliabilities 107 Othercommitmentstoprovidefinancialservices 6,464

Total contingent liabilities and commitments 6,992

Consideration paid for the business transferred from the NZ Branch to the Bank on 1 November 2011 The Bank As at 1 November $ millions 2011

Consideration transferredIntragrouppayables 3,100 Tradingsecurities (1,957)

Total consideration transferred 1,143

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Note 2 Business combination – transfer of operations (continued)Impact of the transferred business activities on the Banking Group

The Banking Group

Pre-existing Transferred$ millions Note Operations Operations

1 Total


Net interest income 1,362 137 1,499

Non-interestincome: Feesandcommissions 4 302 34 336 Netineffectivenessonqualifyinghedges 4 1 - 1 Othernon-interestincome 4 19 - 19

Total non-interest income 322 34 356

Net operating income 1,684 171 1,855 Operatingexpenses (788) (19) (807) Impairmentchargesonloans 7 (178) (12) (190) Shareofprofitofassociateaccountedforusingequitymethod 1 - 1

Profit before income tax expense 719 140 859 Incometaxexpense (206) (40) (246) Profit after income tax expense 513 100 613


Impact of the transferred business activities on the Bank The Bank

Pre-existing Transferred$ millions Note Operations Operations

1 Total


Net interest income 1,346 137 1,483

Non-interestincome: Feesandcommissions 4 301 34 335 Netineffectivenessonqualifyinghedges 4 1 - 1 Othernon-interestincome 4 7 - 7


Net operating income 1,655 171 1,826 Operatingexpenses (790) (19) (809) Impairmentchargesonloans 7 (168) (12) (180) Shareofprofitofassociateaccountedforusingequitymethod 1 - 1

Profit before income tax expense 698 140 838 Incometaxexpense (196) (40) (236) Profit after income tax expense 502 100 602

1 Representsthe11monthresultofthetransferredbusinessoperationssincetheacquisitiondateon1November2011,asincludedintheBank’sincomestatement.

Transferred business activities for the year ended 30 September 2012 The Banking Group and the Bank

Pre-acquisition Transferred$ millions result

1 Operations

2 Total

For the year ended 30 September 2012Interestincome 46 293 339 Interestexpense (30) (156) (186)

Net interest income 16 137 153

Non-interestincome: Feesandcommissions 4 34 38


Net operating income 20 171 191 Operatingexpenses (2) (19) (21) Impairmentchargesonloans 2 (12) (10)

Profit before income tax expense 20 140 160 Incometaxexpense (5) (40) (45)

Profit after income tax expense 15 100 115

1 Representsthepre-acquisitionresultofthetransferredbusinessoperationsfrom1October2011through31October2011.2 Representsthe11monthresultofthetransferredbusinessoperationssincetheacquisitiondateon1November2011,asincludedintheBankingGroup’sconsolidated

incomestatement.

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Note 3 Net interest income


Year Ended YearEnded Year Ended YearEnded $ millions 30-Sep-12 30-Sep-11 30-Sep-12 30-Sep-11

Interest incomeCashandbalanceswithcentralbanks 30 11 30 11 Tradingsecurities 94 100 94 100 Available-for-salesecurities 104 26 104 26 Loans 3,557 3,334 3,540 3,317Impairedassets 51 50 51 50

Total interest income1 3,836 3,521 3,819 3,504

Interest expenseDuetootherfinancialinstitutions 2 - 2 -Deposits 1,364 1,227 1,338 1,207Debtissues 392 395 144 168Other2 579 583 852 830

Total interest expense3 2,337 2,205 2,336 2,205

Net interest income 1,499 1,316 1,483 1,299

1 Totalinterestincomeforfinancialassetsthatarenotatfairvaluethroughprofitorlossis$3,742million(30September2011:$3,421million)fortheBankingGroupand$3,725million(30September2011:$3,404million)fortheBank.

2 Includesnetinterestexpensedueto/(duefrom)relatedentities(includingperpetualsubordinatednotes)andthenetimpactofTreasurybalancesheetmanagementactivities(refertonote25).

3 Totalinterestexpenseforfinancialliabilitiesthatarenotatfairvaluethroughprofitorlossis$2,170million(30September2011:$1,970million)fortheBankingGroupand$2,292million(30September2011:$2,144million)fortheBank.

Note 4 Non-interest income



Fees and commissionsTransactionfeesandcommissions 230 210 225 206 Lendingfees(loanandrisk) 56 55 56 54 Managementfeesreceivedfromrelatedentities 3 3 6 5 Insurancecommissionsreceived 35 30 35 30Othernon-riskfeeincome 12 1 13 2

Total fees and commissions 336 299 335 297

Net ineffectiveness on qualifying hedges 1 1 1 1

Other non-interest incomeNetunrealisedgains/(losses)onderivativesheldfortrading 3 (4) 3 (4)Dividend income 2 3 - -Gain/(loss)ondisposalofproperty,plantandequipment - 7 - (1)Other 14 2 4 1

Total other non-interest income 19 8 7 (4)

Total non-interest income 356 308 343 294

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Note 5 Operating expenses



Salaries and other staff expensesSalariesandwages 360 334 358 332Employeeentitlements 10 7 10 7Superannuationcosts: Definedcontributionscheme 25 23 25 23Share-basedpayments 5 15 5 15 Restructuringcosts 4 3 4 3Other 6 10 6 10

Total salaries and other staff expenses 410 392 408 390

Equipment and occupancy expensesOperatingleaserentals: Relatedentities - - 98 82 Other 62 60 8 7Depreciation: Leaseholdimprovements 16 10 - - Furnitureandequipment 11 12 4 4 Equipmentrepairsandmaintenance 9 7 3 3Electricity,waterandrates 2 2 - -Other 6 6 1 1

Total equipment and occupancy expenses 106 97 114 97

Other expensesSoftwareamortisationcosts 38 42 38 42 Non-lendinglosses 3 2 3 2 Consultancyfeesandotherprofessionalservices 67 70 63 68Auditors’remuneration(refertoNote6) 2 2 2 2 Stationery 12 12 12 12 Postageandfreight 18 17 15 17Advertising 28 28 28 28Training 3 4 3 4 Travel 10 10 10 10 Outsourcing 93 80 93 80Relatedentities-managementfees(refertoNote25) 4 6 9 9 Other 13 9 11 6

Total other expenses 291 282 287 280

Total operating expenses 807 771 809 767

Note 6 Auditors’ remuneration


Year Ended YearEnded Year Ended YearEnded $'000s 30-Sep-12 30-Sep-11 30-Sep-12 30-Sep-11

Auditor of the parent entityAuditandreviewoffinancialreport 968 966 784 789Otherauditrelatedwork1 165 138 165 138Otherassuranceservices2 278 367 278 367

Total audit and other assurance services 1,411 1,471 1,227 1,294

Taxation compliance and advice 30 30 30 30Otherservices3 267 318 267 302

Total non-audit fees 297 348 297 332

Total remuneration for audit and non-audit services 1,708 1,819 1,524 1,626

1 Sarbanes-OxleyreportingtotheUltimateParentBankanditssubsidiaries(‘Ultimate Parent Bank Group’).2 Primarilyassuranceprovidedoncertainfinancialinformation,includingtheissueofcomfortlettersinrelationtodebtissuanceprogrammes.3 Assuranceandadvisoryservicesrelatingtootherregulatoryandcompliancematters.

ItistheBankingGroup’spolicytoengagetheexternalauditorsonassignmentsadditionaltotheirstatutoryauditdutiesonlyiftheirindependenceisnotimpairedorseentobeimpaired,andwheretheirexpertiseandexperiencewiththeBankingGroupisimportant.AllamountsdisclosedaboveareGSTexclusive.

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Note 7 Impairment charges on loans


For the year ended For the year ended 30 September 2012 30 September 2012

Other Other Loans for Loans for Loans for Loans for Residential Consumer Business Residential Consumer Business$ millions Mortgages Purposes Purposes Total Mortgages Purposes Purposes Total

Collectivelyassessedprovisions (5) (6) (57) (68) (6) (5) (57) (68) Individuallyassessedprovisions 23 - 192 215 23 - 182 205 Baddebtswritten-offdirectlytothe incomestatement 2 43 29 74 2 42 29 73 Interestadjustments (4) (10) (17) (31) (4) (9) (17) (30)

Total impairment charges on loans 16 27 147 190 15 28 137 180


Fortheyearended Fortheyearended 30September2011 30September2011

Other Other Loansfor Loansfor Loansfor Loansfor Residential Consumer Business Residential Consumer Business$ millions Mortgages Purposes Purposes Total Mortgages Purposes Purposes Total

Collectivelyassessedprovisions (14) (35) (33) (82) (15) (34) (33) (82)Individuallyassessedprovisions 80 - 187 267 80 - 187 267Baddebtswritten-offdirectlytothe incomestatement 5 44 23 72 5 41 23 69Interestadjustments (6) (12) (15) (33) (4) (10) (15) (29)

Total impairment charges on loans 65 (3) 162 224 66 (3) 162 225

Note 8 Income tax expense



Income tax expenseCurrenttax: Currentyear 230 145 216 136 Prioryearadjustments (1) (2) - (2)Deferredtax(refertoNote16): Currentyear–impactofchangeintaxrate - 9 - 8 Currentyear–other 16 44 19 46 Prioryearadjustments 1 1 1 1

Total income tax expense 246 197 236 189

Profit before income tax expense 859 630 838 602

Taxcalculatedattaxrateof28%(2011:30%) 241 189 235 181Impact of change in tax rate on deferred tax - 9 - 8Expensesnotdeductiblefortaxpurposes 1 - 1 -Prioryearadjustments - (1) 1 (1)Otheritems 4 - (1) 1

Total income tax expense 246 197 236 189

InMay2010theNewZealandGovernmentenactedareductionincompanytaxratesfrom30%to28%,whichappliedtotheBankandBankingGroupfrom1October2011.Accordingly,thedeferredtaxeswereremeasuredat28%totheextentthattheunderlyingtemporarydifferenceswereexpectedtoreversefrom1October2011onwards.Asaresultofthischangeintaxrate,theBankandBankingGrouprecordedadditionaldeferredtaxexpensesof$8millionand$9millionrespectivelyintheincomestatementfortheyearended30September2011.

Note 9 Imputation credit account



Balanceatbeginningoftheyear 524 372 507 358Imputationcreditsattachedtodividendsreceived 1 2 - -Imputationcreditsattachedtodividendspaid (2) (1) - -Incometaxpayments 313 151 309 149

Balance at end of the year 836 524 816 507

TheNZBranchandtheBankformedanimputationgroupwitheffectfrom1April2012.

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Note 10 Due from other financial institutions

The Banking Group and the Bank

$ millions 2012 2011

Loansandadvancestootherbanks 322 699

Total due from other financial institutions 322 699

Duefromotherfinancialinstitutions: At call - 670 Term 322 29


Amountsexpectedtoberecoveredwithin12months 322 699 Amountsexpectedtoberecoveredafter12months - -


Note 11 Trading securities


$ millions 2012 2011 2010

Trading securities NZcorporatesecurities: Certificatesofdeposit 1,549 2,007 1,206 Corporatebonds 372 219 - NZGovernmentsecurities 119 1,035 1,381

Total trading securities 2,040 3,261 2,587

Amountsexpectedtoberecoveredwithin12months 1,742 3,042 2,587Amountsexpectedtoberecoveredafter12months 298 219 -

Total trading securities 2,040 3,261 2,587

Asat30September2012notradingsecuritiesintheBankingGroupandtheBank(30September2011:nil,30September2010:nil)wereencumberedthroughrepurchaseagreements.Asat30September2012theBankingGroupheldnotaxexemptsecurities(30September2011:nil,30September2010:nil).AtaxexemptsecurityisaUSsecurityforwhichtheincomeproducedisfreefromfederal,stateandlocaltaxes.MostUStaxexemptsecuritiescomeintheformofmunicipalbonds,whichrepresentobligationsofastate,territoryormunicipality.Tradingsecuritiesdecreased$1,221millionintheyearended30September2012duetoreductionsofNZGovernmentsecuritiesandcertificatesofdeposit.Reductionsintheseassetspartiallyfundedthepurchaseoflonger-datedavailable-for-salesecurities.Tradingsecuritiesincreased$674millionintheyearended30September2011duetothepurchaseofcertificatesofdeposits.

Maturity profile of trading securities The Banking Group

Weighted 1 Year After 1 Year After 5 Years After 10 Average$ millions or Less to 5 Years to 10 Years Years Total Yield (%)

As at 30 September 2012Certificatesofdeposit 1,549 - - - 1,549 2.64Corporatebonds 74 249 49 - 372 3.92NZGovernmentsecurities 119 - - - 119 2.66

Total trading securities 1,742 249 49 - 2,040

As at 30 September 2011Certificatesofdeposit 2,007 - - - 2,007 2.77Corporatebonds - 169 50 - 219 4.12NZGovernmentsecurities 1,035 - - - 1,035 2.47

Total trading securities 3,042 169 50 - 3,261

As at 30 September 2010Certificatesofdeposit 1,206 - - - 1,206 3.12NZGovernmentsecurities 1,381 - - - 1,381 2.95

Total trading securities 2,587 - - - 2,587

Book value and market value of debt securities > 10% of equity TheBankingGrouphastotalholdingsofdebtsecuritiesfromone(30September2011:three,30September2010:two)financialinstitution,ratedAA-byStandard&Poor’sat30September2012,thebookandmarketvalueofwhichwas$725million(30September2011:$1,867million,30September2010:$1,027million).Thisholdingexceeded10%oftheBankingGroup’stotalequityasatsuchdate.

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Note 12 Available-for-sale securities


$ millions 2012 2011 2010

NZGovernmentsecurities 2,154 1,302 -NZdebtsecurities 56 - -Overseasdebtsecurities 414 166 -Overseasequitysecurities 70 50 44

Total available-for-sale securities 2,694 1,518 44

Amountsexpectedtoberecoveredwithin12months 26 61 -Amountsexpectedtoberecoveredafter12months 2,668 1,457 44

Total available-for-sale securities 2,694 1,518 44

Asat30September2012,noavailable-for-salesecuritieswerepledgedascollateralforBankingGroupliabilities(30September2011:nil,30September2010:nil).

Note 13 Loans


$ millions 2012 2011 2010 2009 2012 2011 2010 2009

Overdrafts 1,460 945 1,003 1,056 1,460 945 1,003 1,056

Creditcardoutstandings 1,311 1,270 1,250 1,182 1,240 1,197 1,176 1,113

Moneymarketloans 1,165 571 590 574 1,165 571 590 574

Termloans:

Housing 35,986 35,086 34,249 32,587 35,935 35,022 34,171 32,494

Non-housing 19,769 13,743 13,386 12,985 19,760 13,733 13,375 12,985

Other 336 208 285 310 334 208 285 310

Total gross loans 60,027 51,823 50,763 48,694 59,894 51,676 50,600 48,532

Provisionsforimpairmentchargesonloans (605) (573) (729) (520) (591) (569) (725) (517)

Total net loans 59,422 51,250 50,034 48,174 59,303 51,107 49,875 48,015

Amountsexpectedtoberecovered

within12months 7,611 6,567 7,087 6,936 7,543 6,497 6,928 6,924

Amountsexpectedtoberecovered

after12months 51,811 44,683 42,947 41,238 51,760 44,610 42,947 41,091

Total net loans 59,422 51,250 50,034 48,174 59,303 51,107 49,875 48,015

Asat30September2012,$3.1billionofhousingloansareusedbytheBankingGrouptosecuretheobligationsofWestpacSecuritiesNZLimited(‘WSNZL’)undertheBank’sGlobalCoveredBondProgramme(‘CB Programme’)(30September2011:$2.5billion).ThesehousingloanswerenotderecognisedfromtheBank’sbalancesheetinaccordancewiththeaccountingpolicesoutlinedinNote1(refertoNote25fordetailsoftheCBProgramme).Asat30September2012,theNewZealanddollarequivalentofbondsissuedbyWSNZLundertheCBProgrammewas$2.0billion(30September2011:$1.8billion).TherepurchasecashamountoftheBankingGroup‘srepurchaseagreementswiththeReserveBankusingresidentialmortgage-backedsecuritiesissuedbyWestpacNZSecuritisationLimited(‘WNZSL’)asat30September2012wasnil(30September2011:nil,30September2010:nil,30September2009:$1,814million)withnounderlyingsecurities(30September2011:nil,30September2010:nil,30September2009:$2,253million)providedunderthearrangement.MovementsinimpairedassetsandprovisionsforimpairmentchargesonloansareoutlinedinNote14.TheBankingGrouphasnoloansorotherreceivablesinNewZealanddollarsorforeigncurrenciesoutstandingtoborrowersinforeigncountries,referredtoascross-borderoutstandings,thatequalorexceed0.75%oftheBankingGroup’stotalassetsasat30September2012(30September2011:nil,30September2010:nil,30September2009:nil).

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Note 13 Loans (continued)Maturities of loans and sensitivities of loans to changes in interest ratesThefollowingtableshowstheBankingGroup’scontractualmaturitydistributionofallloans.

The Banking Group

1 Year or 1 Year to$ millions Less 5 Years After 5 Years Total

As at 30 September 2012Overdrafts 1,270 184 6 1,460 Creditcardoutstandings 1,301 10 - 1,311 Moneymarketloans 1,165 - - 1,165 Termloans: Housing 352 812 34,822 35,986 Non-housing 9,792 8,067 1,910 19,769 Other 336 - - 336

Total gross loans 14,216 9,073 36,738 60,027 Provisionsforimpairmentchargesonloans (442) (97) (66) (605)

Total net loans 13,774 8,976 36,672 59,422

As at 30 September 2011Overdrafts 813 126 6 945Creditcardoutstandings 1,259 11 - 1,270Moneymarketloans 571 - - 571Termloans: Housing 408 815 33,863 35,086 Non-housing 3,809 7,719 2,215 13,743Other 135 73 - 208

Total gross loans 6,995 8,744 36,084 51,823Provisionsforimpairmentchargesonloans (428) (73) (72) (573)

Total net loans 6,567 8,671 36,012 51,250

Thefollowingtableshowstheinterestratesegmentationofgrossloanswheretheprincipaliscontractuallydueafteroneyearfromthebalancedate.

The Banking Group

2012 2011

Loans at Loans at Loansat Loansat Variable Fixed Variable Fixed Interest Interest Interest Interest$ millions Rates Rates Total Rates Rates Total

Interestratesegmentationofgrossloansmaturingafteroneyear: NZMarket1 18,283 27,528 45,811 17,357 27,471 44,828

1 IntheNewZealandmarket‘loansatfixedinterestrates’referstoloansthatarefixedforallorforaportionofthetermoftheloans.

Loan concentrationsThefollowingtableprovidesananalysisoftheconcentrationoftheBankingGroup’sloanportfoliobyborrowercategory.TherelevantcategorisationfortheBankingGroupisbyindustrysectorastheseborrowersareengagedinsimilaractivitiesandwouldbesimilarlyimpactedbyeconomicconditions.

The Banking Group


Accommodation,cafesandrestaurants 550 534Agriculture 6,348 5,718Construction 1,436 1,240Financeandinsurance 2,091 939Forestryandfishing 233 142 Government,administrationanddefence 657 512 Manufacturing 2,176 1,296Mining 489 69 Property 9,539 8,741Propertyservicesandbusinessservices 2,052 1,646Services 2,614 2,313Trade 3,112 2,468Transportandstorage 1,301 776Utilities 1,307 212 Retail lending 26,083 25,136Other 39 81

Total gross loans 60,027 51,823Provisionsforimpairmentchargesonloans (605) (573)

Total net loans 59,422 51,250

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Note 14 Credit quality, impaired assets and provisions for impairment charges on loans


2012 2012

Other Other Loans for Loans for Loans for Loans for Residential Consumer Business Residential Consumer Business$ millions Mortgages Purposes Purposes Total Mortgages Purposes Purposes Total

Neither past due nor impaired 34,733 1,660 21,008 57,401 34,682 1,595 21,008 57,285

Past due assetsLessthan30dayspastdue 917 105 348 1,370 917 101 348 1,366

Atleast30daysbutlessthan60days

pastdue 99 20 13 132 99 19 13 131


pastdue 48 10 15 73 48 9 15 72

Atleast90dayspastdue 65 15 104 184 65 14 104 183

Total past due assets1 1,129 150 480 1,759 1,129 143 480 1,752

Individually impaired assets2

Balanceatbeginningoftheyear 196 - 598 794 196 - 598 794

Additions 201 - 389 590 201 - 379 580

Amountswrittenoff (51) - (189) (240) (51) - (189) (240)

Individuallyimpairedassetsacquired

inabusinesscombination - - 118 118 - - 118 118

Returned to performing or repaid (222) - (173) (395) (222) - (173) (395)

Balance at end of the year 124 - 743 867 124 - 733 857

Total gross loans3 35,986 1,810 22,231 60,027 35,935 1,738 22,221 59,894

Individually assessed provisions


Impairmentchargesonloans:

Newprovisions 59 - 217 276 59 - 207 266

Recoveries (17) - (9) (26) (17) - (9) (26)

Reversalofpreviouslyrecognised

impairmentchargesonloans (19) - (16) (35) (19) - (16) (35)


Interestadjustments - - 6 6 - - 6 6

Individuallyassessedprovisionsacquired



Collectively assessed provisions

Balanceatbeginningoftheyear 66 69 240 375 65 66 240 371

Impairmentchargesonloans (5) (6) (57) (68) (6) (5) (57) (68)

Collectivelyassessedprovisionsacquired


Balance at end of the year 61 63 240 364 59 61 240 360

Totalprovisionsforimpairmentcharges

onloansandcreditcommitments 99 63 478 640 97 61 468 626

Provisionforcreditcommitments

(refertoNote21) - - (35) (35) - - (35) (35)

Total provisions for impairment charges on loans 99 63 443 605 97 61 433 591

Total net loans 35,887 1,747 21,788 59,422 35,838 1,677 21,788 59,303

Asat30September2012,theBankingGrouphadnootherinterestbearingassetsthatwouldberequiredtobedisclosedasnon-accrual4,pastdue,restructuredorpotentialproblemloans4,ifsuchassetswereloans.1 PastdueassetsarenotimpairedassetsunderNZIFRS.2 TheBankandBankingGrouphadanundrawnbalanceof$14milliononindividuallyimpairedassetsunderloansforbusinesspurposesasat30September2012.3 TheBankandBankingGroupdidnothaveotherassetsunderadministrationasat30September2012.4 Loanswithindividuallyassessedimpairmentprovisionsheldagainstthem,excludingrestructuredloans,areclassifiedasnon-accrualfortheUnitedStatesSecurities

andExchangeCommission(‘US SEC’)reportingpurposes.Potentialproblemloansarefacilitiesthatareperformingandnolossisexpected,butthecustomerdemonstratessignificantweaknessindebtservicingorsecuritycoverthatcouldjeopardiserepaymentofdebtoncurrenttermsifnotrectified.

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Note 14 Credit quality, impaired assets and provisions for impairment charges on loans (continued)


2011 2011

Other Other Loansfor Loansfor Loansfor Loansfor Residential Consumer Business Residential Consumer Business$ millions Mortgages Purposes Purposes Total Mortgages Purposes Purposes Total

Neither past due nor impaired 33,696 1,618 13,851 49,165 33,632 1,554 13,851 49,037

Past due assetsLessthan30dayspastdue 933 96 323 1,352 933 91 312 1,336


pastdue 114 19 42 175 114 17 42 173


pastdue 52 10 19 81 52 10 19 81

Atleast90dayspastdue 95 16 145 256 95 15 145 255

Total past due assets1 1,194 141 529 1,864 1,194 133 518 1,845

Individually impaired assets2


Additions 317 - 497 814 317 - 497 814


Returnedtoperformingorrepaid (320) - (62) (382) (320) - (62) (382)


Total gross loans3 35,086 1,759 14,978 51,823 35,022 1,687 14,967 51,676

Individually assessed provisionsBalanceatbeginningoftheyear 80 - 221 301 80 - 221 301

Impairmentchargesonloans:

Newprovisions 110 - 203 313 110 - 203 313

Recoveries (20) - (10) (30) (20) - (10) (30)

Reversalofpreviouslyrecognised

impairmentchargesonloans (10) - (6) (16) (10) - (6) (16)


Interestadjustments 2 - 6 8 2 - 6 8


Collectively assessed provisionsBalanceatbeginningoftheyear 80 104 273 457 80 100 273 453

Impairmentchargesonloans (14) (35) (33) (82) (15) (34) (33) (82)

Balance at end of the year 66 69 240 375 65 66 240 371

Totalprovisionsforimpairmentcharges

onloansandcreditcommitments 130 69 400 599 129 66 400 595

Provisionforcreditcommitments

(refertoNote21) - - (26) (26) - - (26) (26)

Total provisions for impairment charges on loans 130 69 374 573 129 66 374 569

Total net loans 34,956 1,690 14,604 51,250 34,893 1,621 14,593 51,107

Asat30September2011,theBankingGrouphadnootherinterestbearingassetsthatwouldberequiredtobedisclosedasnon-accrual4,pastdue,restructuredorpotentialproblemloans4,ifsuchassetswereloans.1 PastdueassetsarenotimpairedassetsunderNZIFRS.2 TheBankandBankingGrouphadanundrawnbalanceof$6milliononindividuallyimpairedassetsunderloansforbusinesspurposesasat30September2011.3 TheBankandBankingGroupdidnothaveotherassetsunderadministrationasat30September2011.4 Loanswithindividuallyassessedimpairmentprovisionsheldagainstthem,excludingrestructuredloans,areclassifiedasnon-accrualforUSSECreportingpurposes.

Potentialproblemloansarefacilitiesthatareperformingandnolossisexpected,butthecustomerdemonstratessignificantweaknessindebtservicingorsecuritycoverthatcouldjeopardiserepaymentofdebtoncurrenttermsifnotrectified.

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Note 15 Goodwill and other intangible assets



GoodwillCost 477 477Accumulated impairment - -

Net carrying amount of goodwill 477 477

Computer softwareCost 382 314Accumulatedamortisationandimpairment (261) (224)

Net carrying amount of computer software 121 90

Total goodwill and other intangible assets 598 567

GoodwillisallocatedtoandtestedatleastannuallyforimpairmentasapartofitsidentifiedCGUs.TheoperatingsegmentofRetailBankingistheCGUtowhichthegoodwillhasbeenallocated.TherecoverableamountoftheCGUisdeterminedannuallybasedonvalue-in-usecalculations.Thesecalculationswerelastperformedat30September2012.Thesecalculationsusediscountedcashflowprojectionsbasedonanapprovedtwo-yearstrategicbusinessplan.Whilethestrategicbusinessplanassumescertaineconomicconditions,theforecastisnotreliantononeparticularassumption.Thesebusinessforecastsappliedbymanagementareconsideredappropriateastheyarebasedonpastexperienceandareconsistentwithobservablecurrentmarketinformation.Thegrowthratesafter2014areassumedtobezeroforallCGUsforthepurposeofgoodwillimpairmenttesting.ThediscountrateusedisthebeforetaxequivalentoftheBankingGroup’scostofcapitalof15.3%asat30September2012(30September2011:15.3%).AreasonablypossiblechangeinthesekeyassumptionswouldnotcausetheCGU’scarryingamounttoexceeditsrecoverableamount.

Note 16 Deferred tax assets


$ millions 2012 2011 2012 2011

Deferred tax assets are attributable to the following: Property,plantandequipment 9 7 (1) (4) Provisionsforimpairmentchargesonloans 179 168 175 166 Provisionforemployeeentitlements 29 26 29 26 Cashflowhedges (15) (14) (15) (14) Othertemporarydifferences 7 7 1 2


Toberecoveredwithin12months 156 134 147 126 Toberecoveredafter12months 53 60 42 50


The deferred tax charge in income tax expense comprises the following temporary differences: Property,plantandequipment 2 - 3 - Provisionsforimpairmentchargesonloans (17) (54) (19) (55) Provisionforemployeeentitlements (4) 1 (4) 1 Othertemporarydifferences 2 (1) - (1)

Total deferred tax charge (17) (54) (20) (55)

Deferredtaxacquiredinbusinesscombination 28 - 28 - Other (2) - (1) -

Total deferred tax charge – other 26 - 27 -

The deferred tax charge in equity comprises the following temporary differences: Cashflowhedges (1) (5) (1) (5) Provisionforemployeeentitlements 7 5 7 5

Total deferred tax charge 6 - 6 -

Asat30September2012,theaggregatetemporarydifferencesassociatedwithinvestmentsinsubsidiariesforwhichdeferredtaxliabilitieshavenotbeenrecognisedwerenil(30September2011:nil).

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Note 17 Other assets


$ millions 2012 2011 2012 2011

Accruedinterestreceivable 150 113 150 112 Tradedebtorsandprepayments 39 29 15 12 Accountfeesandcommissionsreceivable 3 2 3 2 Other 3 4 3 3

Total other assets 195 148 171 129

Amountsexpectedtoberecoveredwithin12months 195 148 171 129 Amountsexpectedtoberecoveredafter12months - - - -

Total other assets 195 148 171 129

IncludedinaccruedinterestreceivableoftheBankandtheBankingGroupasat30September2012werebalancesthatamountedto$5million(30September2011:$4million)whichrelatedtoaccruedinterestonhousingloanssoldtoaspecialpurposeentityundertheCBProgramme(refertoNote25fordetailsoftheCBProgramme).

Note 18 Due to other financial institutions



Interestbearing 3 100

Total due to other financial institutions 3 100

Duetootherfinancialinstitutions: At call 3 100


Amountsexpectedtobesettledwithin12months 3 100 Amountsexpectedtobesettledafter12months - -


Note 19 Deposits


$ millions 2012 2011 2010 2012 2011 2010

Deposits at fair valueCertificatesofdeposit 1,423 1,556 1,902 1,423 1,556 1,902

Total deposits at fair value 1,423 1,556 1,902 1,423 1,556 1,902

Deposits at amortised costNon-interestbearing,repayableatcall 2,969 2,699 2,410 2,969 2,699 2,410Otherinterestbearing: At call 15,931 11,403 10,294 15,931 11,403 10,294 Term 23,067 19,228 17,860 22,347 18,732 17,543

Total deposits at amortised cost 41,967 33,330 30,564 41,247 32,834 30,247

Total deposits 43,390 34,886 32,466 42,670 34,390 32,149

Amountsexpectedtobesettledwithin12months 41,385 32,979 31,531 40,666 32,506 31,217Amountsexpectedtobesettledafter12months 2,005 1,907 935 2,004 1,884 932

Total deposits 43,390 34,886 32,466 42,670 34,390 32,149

Average deposit balances and average rates paid by type of deposits The Banking Group

For the Year Ended 30 September 2012 2011 2010

Average Average Average Average Average Average $ millions Balance Rate (%) Balance Rate(%) Balance Rate(%)

New ZealandCertificatesofdeposit 1,545 2.72 2,097 2.96 2,849 2.84Non-interestbearing,repayableatcall 2,855 N/A 2,553 N/A 2,341 N/AOtherinterestbearing: At call 15,526 2.75 10,864 2.78 10,531 2.69 Term 21,605 4.14 18,549 4.65 17,078 4.52

Total New Zealand 41,531 3.29 34,063 3.60 32,799 3.46

Other overseas - - - - - -

Total deposits 41,531 3.29 34,063 3.60 32,799 3.46

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Note 19 Deposits (continued)Maturity profile of deposits in excess of $100,000Certificatesofdepositareissuedforaminimumof$100,000.Thematurityprofileofcertificatesofdepositandtermdepositsgreaterthan$100,000issuedbytheBankingGroupwereasfollows.

The Banking Group

More Than More Than 3 Months up 6 Months up$ millions Up to 3 Months to 6 Months to 1 Year Over 1 Year Total

30 September 2012Certificatesofdepositinexcessof$100,000 278 1,041 104 - 1,423 Termdepositsinexcessof$100,000 8,354 3,887 2,130 1,395 15,766

30 September 2011Certificatesofdepositinexcessof$100,000 1,449 97 10 - 1,556Termdepositsinexcessof$100,000 7,243 3,504 1,116 1,227 13,090

30 September 2010Certificatesofdepositinexcessof$100,000 1,719 167 16 - 1,902Termdepositsinexcessof$100,000 5,940 3,599 1,885 641 12,065

Asat30September2012,2011and2010,therewerenocertificatesofdepositortermdepositsissuedbyforeignofficesthatweregreaterthan$100,000.

Priority of financial liabilities in the event of liquidation

IntheunlikelyeventthattheBankwasputintoliquidationorceasedtotrade,claimsofsecuredcreditorsandthosecreditorssetoutintheSeventhScheduleoftheCompaniesAct1993wouldrankaheadoftheclaimsofunsecuredcreditors.DepositsfromcustomersareunsecuredandrankequallywithotherunsecuredliabilitiesoftheBank,andsuchliabilitiesrankaheadofanysubordinatedinstrumentsissuedbytheBank.

Note 20 Debt issues


$ millions 2012 2011 2010 2012 2011 2010

Short-term debtCommercial paper 4,033 7,229 6,546 - - -

Total short-term debt 4,033 7,229 6,546 - - -

Long-term debtNon-domesticmedium-termnotes 6,207 8,803 6,711 - - -Domesticmedium-termnotes 2,674 1,598 2,182 2,674 1,598 2,182

Total long-term debt 8,881 10,401 8,893 2,674 1,598 2,182

Total debt issues 12,914 17,630 15,439 2,674 1,598 2,182

Debtissuesatamortisedcost 8,851 9,903 8,893 2,674 1,598 2,182Debtissuesatfairvalue 4,063 7,727 6,546 - - -


Movement in debt issuesBalanceatbeginningoftheyear 17,630 15,439 12,369 1,598 2,182 2,203Issuanceduringtheyear 12,589 17,788 22,961 1,386 72 404Repaymentsduringtheyear (16,196) (15,120) (19,797) (310) (656) (425)Effectofforeignexchangemovementsduringtheyear (1,188) (534) (240) - - -Effectoffairvaluemovementsduringtheyear 79 57 146 - - -

Balance at end of the year 12,914 17,630 15,439 2,674 1,598 2,182

Amountsexpectedtobesettledwithin12months 5,284 9,992 7,179 69 295 632Amountsexpectedtobesettledafter12months 7,630 7,638 8,260 2,605 1,303 1,550


Asat30September2012,theBankingGroupandtheBankhadNewZealandGovernmentguaranteeddebtof$1,970millionand$674milliononissue(30September2011:$4,073millionand$674million,30September2010:$4,141millionand$665million)respectively.ForfurtherinformationonNewZealandGovernmentguaranteeddebtrefertoGuaranteearrangementsonpage5.

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Note 20 Debt issues (continued)Short-term debtThefollowingtablesetsoutdetailsoftheBankingGroup’sUSandEurocommercialpapershort-termdebtasat30September2012,2011and2010.

The Banking Group

$ millions 2012 2011 2010

US commercial paperOutstandingatyearend 4,033 7,229 6,201 Approximateweightedaverageinterestrateontheoutstandingbalance(%) 0.52 0.31 0.37Maximumamountoutstandingatanymonthend 7,432 7,494 9,032Approximateaverageamountoutstanding 5,437 6,497 7,376 Approximateweightedaverageinterestrateontheaverageamountoutstanding(%) 0.48 0.35 0.34

Euro commercial paperOutstandingatyearend - - 345 Approximateweightedaverageinterestrateontheoutstandingbalance(%) N/A N/A 1.62Maximumamountoutstandingatanymonthend - 776 2,559Approximateaverageamountoutstanding - 343 743 Approximateweightedaverageinterestrateontheaverageamountoutstanding(%) N/A 0.93 0.74

Total short-term debt 4,033 7,229 6,546

Note 21 Provisions


Annual Leave Impairment Long Service and Other Non-lending on Credit$ millions Leave Staff Benefits Losses Commitments Total

Balanceasat1October2011 7 35 2 26 70 Additionalprovisionsrecognised - 23 3 9 35 Utilisedduringtheyear (2) (17) (3) - (22)

Balance as at 30 September 2012 5 41 2 35 83

Balanceasat1October2010 7 36 1 29 73Additionalprovisionsrecognised - 14 2 - 16Utilisedduringtheyear - (15) (1) (3) (19)

Balance as at 30 September 2011 7 35 2 26 70

ProvisionsrepresentcoststheBankingGroupandtheBankexpecttoincurasaresultofpastevents,wherethetimingofpaymentisuncertain.Provisionsexpectedtobeutilisedbeyond12monthsasat30September2012are$40million(30September2011:$33million)fortheBankingGroupandtheBank.

Note 22 Other liabilities


$ millions 2012 2011 2012 2011

Accruedinterestpayable 338 325 275 242 Creditcardloyaltyprogramme 31 30 31 30Retirementbenefitdeficit 77 57 77 57Tradecreditorsandotheraccruedexpenses 80 78 79 77Other 53 79 41 66

Total other liabilities 579 569 503 472

Amountsexpectedtobesettledwithin12months 502 488 426 391Amountsexpectedtobesettledafter12months 77 81 77 81

Total other liabilities 579 569 503 472

Note 23 Perpetual subordinated notesPerpetualsubordinatednoteshavebeenissuedtoWNZGLandconstituteUpperTierTwoCapitaloftheBankingGroup.Thenoteshavenomaturitydate,butmayberedeemedatparonlyattheoptionoftheBank.ThenotespayquarterlydistributionsprovidedthatatthetimepaymentismadetheBankwillbesolventimmediatelyafterpayment.ThenotesaredirectandunsecuredobligationsoftheBankandaresubordinatedtotheclaimsofallcreditors(includingdepositors)oftheBankotherthanthosecreditorswhoseclaimsagainsttheBankareexpressedtorankequallywithoraftertheclaimsofthenoteholder.



Perpetualsubordinatednotes 970 970

Total perpetual subordinated notes 970 970

On21November2012,thedirectorsoftheBankresolvedtorepay$470millionoftheperpetualsubordinatednotes.

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Note 24 Share capital

Ordinary shares fully paid The Banking Group and the Bank

2012 2011 Number of Numberof Shares Issued SharesIssued and Authorised andAuthorised

Balanceatbeginningoftheyear 3,470,001,000 3,470,001,000Sharesissuedduringtheyear 1,130,000,000 -

Balance at end of the year 4,600,001,000 3,470,001,000

InaccordancewiththeReserveBankdocument‘Capitaladequacyframework(internalmodelsbasedapproach)’(BS2B)ordinarysharecapitalisclassifiedasTierOneCapital.Theordinaryshareshavenoparvalue.SubjecttotheconstitutionoftheBank,eachordinaryshareoftheBankcarriestherighttoonevoteonapollatmeetingsofshareholders,therighttoanequalshareindividendsauthorisedbytheBoardandtherighttoanequalshareinthedistributionofthesurplusassetsoftheBankintheeventofliquidation.TheBankissuedatotalof1,130millionadditionalordinarysharesfor$1persharetotheBank’simmediateparentcompany,WNZGL(refertoNote2).On28October2011,theBankissued900millionordinarysharesfor$1pershare,andon31October2011,theBankissuedanadditional230millionordinarysharesfor$1pershare,eachtoWNZGL.Immediatelypriortotheissuanceoftheseadditional230millionordinaryshares,theBankpaidadividendtoWNZGLof$230million(5.26centspershare).On30May2012,thedirectorsoftheBankpaidadividendof$250millionontheordinarysharesonissuetoWNZGL(5.44centspershare).TheaggregateamountofdividendspaidbytheBankontheordinarysharesfortheyearended30September2012was$480million(30September2011:nil).DividendspaidperordinarysharebytheBankfortheyearended30September2012were10.7centspershare(30September2011:nil).

B Voting shares fully paid The Banking Group and the Bank

2012 2011 Number of Numberof Shares Issued SharesIssued and Authorised andAuthorised

Balance at beginning of the year 20,000 20,000Sharesrepurchasedandcancelledduringtheyear (20,000) -

Balance at end of the year - 20,000

On9May2012,theBankrepurchasedtheBVotingsharesfromWestpacOverseasHoldingsNo.2PtyLimited.Eachsharewasrepurchasedfor$1pershare.Theseshareswereimmediatelycancelledonrepurchase.TherewerenoBVotingsharesonissueasat30September2012(30September2011:20,000)withnilaggregateparvalue(30September2011:$0.02million).TheBVotingshareswereclassifiedasUpperTierTwoCapital.TheholderofeachBVotingsharewasentitledtocast31,250votes(which,asatthedateofissue,carriedanentitlementto20%ofthevotingrightsentitledtobecastonapollatameetingofshareholdersoftheBank).NodividendswerepayableonBVotingshares.IntheeventofliquidationoftheBank,aholderofaBVotingsharewasentitledtoreceivetheamountoftheissuepriceofeachBVotingshareheld,andinprioritytoamountspaidtoholdersofordinaryshares,butwasnotentitledtoanyfurtheramountofanysurplusassets.

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Note 25 Related entities

Banking GroupTheBankisacontrolledentityofWNZGL.TheUltimateParentBankoftheBankisWestpacBankingCorporation.TheBankingGroupconsistsoftheBankandallofitscontrolledentities.Asat30September2012theBankhadthefollowingcontrolledentities:

Name of Entity Principal Activity Notes

WestpacNZOperationsLimited

AotearoaFinancialServicesLimited1

Number120Limited

TheHomeMortgageCompanyLimited

TheWarehouseFinancialServicesLimited

WestpacNZCoveredBondHoldingsLimited

WestpacNZCoveredBondLimited

Westpac(NZ)InvestmentsLimited

WestpacNZLeasingLimited

WestpacNZSecuritisationHoldingsLimited

WestpacNZSecuritisationLimited

WestpacSecuritiesNZLimited

WestpacTermPIEFund

Holdingcompany

Non-tradingcompany

Financecompany

Residentialmortgagecompany

Financialservicescompany

Holdingcompany

Guarantor

Propertyleasingcompany

Financecompany

Holdingcompany

Fundingcompany

Fundingcompany

Portfolioinvestmententity

51%owned

9.5%owned2

9.5%indirectlyowned2

Incorporated6September20113

9.5%owned4

9.5%indirectlyowned4

Notowned.Controlledbycontractualarrangements

1 On30June2011,WestpacNZOperationsLimited(‘WNZO’)acquired100%ofthesharesissuedbyAotearoaFinancialServicesLimited(‘AFS’)fromWestpacCapital-NZ-Limited(awholly-ownedsubsidiaryoftheUltimateParentBank).AFSisanon-tradingcompany.ThetransferdidnothaveasignificantimpactontheBankingGroup’sfinancialpositionandresultsofoperations.

2 WestpacNZCoveredBondHoldingsLimited(‘WNZCBHL’)anditswholly-ownedsubsidiarycompany,WestpacNewZealandCoveredBondLimited(‘WNZCBL’),wereincorporatedon22November2010.TheBankingGroup,throughitssubsidiary,WNZO,hasaqualifyinginterestof9.5%inWNZCBHL.TheBankisconsideredtocontrolbothWNZCBHLandWNZCBLbasedoncontractualarrangementsputinplace,andassuchbothWNZCBHLandWNZCBLareconsolidatedwithinthefinancialstatementsoftheBankingGroup.

3 WestpacNZLeasingLimited(‘WNZLL’)wasincorporatedon6September2011.WNZLLdidnothaveasignificantimpactontheBankingGroup’sfinancialpositionasat30September2011and2012ortheresultsofoperationsfortheyearended30September2011and2012.

4 WestpacNZSecuritisationHoldingsLimited(‘WNZSHL’)anditswholly-ownedsubsidiarycompany,WNZSL,wereincorporatedon14October2008.TheBankingGroup,throughitssubsidiaryWNZO,hasaqualifyinginterestof9.5%inWNZSHL.TheBankisconsideredtocontrolbothWNZSHLandWNZSLbasedoncontractualarrangementsputinplace,andassuchbothWNZSHLandWNZSLareconsolidatedwithinthefinancialstatementsoftheBankingGroup.

AllentitiesintheBankingGroupare100%ownedunlessotherwisestated.AlltheentitieswithintheBankingGrouphaveabalancedateof30SeptemberandareincorporatedinNewZealand,exceptWestpacTermPIEFundwhichhasabalancedateof31March.Transactionsandbalanceswithrelatedpartiesaredisclosedseparatelyinthesefinancialstatements.

Investment in associateTheBankholds18.8%(30September2011:15%)ofCardsNZLimited’sequityplusoneVisaInc.accesspreferenceshareissuedbyCardsNZLimited.CardsNZLimitedhasabalancedateof30September.TheBankingGrouphasonissueapromissorynotetoCardsNZLimitedinrelationtothepurchaseofVisaIncshares.Thepromissorynotebearsinterestatmarketratesandwillbedefeasedthroughanin-kinddistributionuponliquidationofCardsNZLimited.

Nature of transactions TheBankingGrouphasintragrouptransactionswithmembersoftheUltimateParentBankGrouponcommercialterms,includingtheprovisionofmanagementandadministrativeservicesanddataprocessingfacilities.Suchtransactionsarenotconsideredtobematerialeitherindividuallyorinaggregate.LoanfinanceandcurrentaccountbankingfacilitiesareprovidedbytheBankandtheUltimateParentBanktomembersoftheBankingGrouponnormalcommercialterms.Theinterestpaidontheseloansandtheinterestearnedonthesedepositsisatmarketrates.

Transactions with the Ultimate Parent Bank

ManagementfeesarepaidbytheBanktotheUltimateParentBankformanagementandadministrationservices(consistingofsalariesandotherheadofficeexpenses)providedbytheUltimateParentBank.ThetotalamountchargedbytheUltimateParentBankfortheyearended30September2012was$4million(30September2011:$6million).TheNZBranchprovidesfinancialmarketservices,foreigncurrency,tradeandinterestrateriskproductstothecustomersoftheBank.TheBankreceivescommissionfromthesesales.Commissionreceivedfortheyearended30September2012was$4million(30September2011:$4million).Includedininterestexpense–otherfortheyearended30September2012isinterestexpenseof$125million(30September2011:$nil)onrelatedentityborrowingsinrelationtothetransferofadditionalbankingoperations.

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Note 25 Related entities (continued)Transactions with controlled entities of the Banking Group

RentalexpensesarepaidbytheBanktoWestpac(NZ)InvestmentsLimited.Thetotalchargefortheyearended30September2012was$98million(30September2011:$82million).WSNZLprovidesoffshorefundingtotheBank.ManagementfeesarepaidbytheBankfortheseservices.Managementfeespaidfortheyearended30September2012were$5million(30September2011:$3million).TheBankguaranteesallpaymentobligationsinrespectofdebtsecuritiesissuedbycontrolledentitiesoftheBankingGroup,otherthanWNZSL.ManagementfeesarepaidbymembersoftheBankingGroupforcertainoperatingcostsincurredbytheBank.ManagementfeespaidtotheBankfortheyearended30September2012were$6million(30September2011:$5million).InOctober2008,WNZSLwassetupaspartoftheBank’sinternalmortgage-backedsecuritisationprogramme.UnderthisprogrammetheBanksoldhousingloanstoWNZSL(refertoNote32).ThepurchaseofthesehousingloanswasfundedbyWNZSL’sissuanceofresidentialmortgage-backedsecurities(‘RMBS’).TheseRMBSarecurrentlyheldbytheBankandareincludedin“Duefromrelatedentities”below.ThehousingloanswerenotderecognisedfromtheBank’sfinancialstatementsinaccordancewiththeaccountingpolicesoutlinedinNote1.Accordingly,anequivalentamountofliabilitiesassociatedwiththetransferredhousingloansisrecognised(intheformofa“deemedloan”fromWNZSL)whichisincludedin“Duetorelatedentities”below.TheRMBSandtheliabilitytoWNZSLarefullyeliminatedintheBankingGroup’sfinancialstatements.RefertoNote28CommitmentsandcontingentliabilitiesforadescriptionoftheBankingGroup’sobligationtorepurchasehousingloanssoldtoWNZSL.WNZCBLisaspecialpurposeentityestablishedtopurchasefromtimetotime,andhold,housingloans(‘cover pool’)andtoprovideafinancialguarantee(inadditiontothatoftheBank)inrespectofobligationsunderthecoveredbondsissuedfromtimetotimebyWSNZLundertheCBProgramme.ThatfinancialguaranteeissupportedbyWNZCBLgrantingsecurityinfavourofthecoveredbondholdersoverthecoverpool.Theinitialcoverpoolcomprisedhousingloanswithavalueof$2.75billion,thepurchaseofwhichwasfundedbyanintercompanyloanmadebytheBanktoWNZCBL.Theamountofthecoverpoolwasincreasedto$3.75billioninMarch2012.TheintercompanyloanmadebytheBanktoWNZCBLtofundtheinitialpurchase(andsubsequentfurtherpurchasewhichincreasedthecoverpool)isincludedintheBank’s“Duefromrelatedentities”below.ThehousingloanspurchasedbyWNZCBLwerenotderecognisedfromtheBank’sfinancialstatements(andthereforetheBankandtheBankingGrouprecognisesthesehousingloans)inaccordancewiththeaccountingpoliciesoutlinedinNote1.Forthisreason,theBankrecognisesaliabilityowedtoWNZCBL(intheformofa“deemedloan”fromWNZCBL)ofanamountequivalenttothesumofthevalueofthehousingloans,cashandunpaidaccruedinterestarisingfrom,andinrespectof,thehousingloansandtheassetperformancefee,andisincludedintheBank’s“Duetorelatedentities”below.Overtime,thecompositionofthecoverpoolwillinclude,inadditiontohousingloans,cash(representingcollectionsofprincipalandinterestfromtheunderlyinghousingloans)andaccruedinterest(representingaccruedandunpaidinterestontheoutstandinghousingloans).Asat30September2012,theassetsofWNZCBLwere$3.76billion(30September2011:$2.76billion),comprisinghousingloans,accruedinterestandcash.RefertoNote13LoansandNote17OtherassetsfortheamountsofhousingloansandaccruedinterestreceivablerespectivelyrelatingtotheassetssecuringtheobligationsofWSNZLundertheCBProgramme.RefertoNote28CommitmentsandcontingentliabilitiesforadescriptionoftheBankingGroup’sobligationtorepurchasehousingloanssoldtoWNZCBL.AllloanssoldbytheBanktoWNZSLandWNZCBLarelegallyownedbyWNZSLandWNZCBLrespectively,andthereforetheBankdoesnothaveanyrighttosellorgrantsecurityoverthoseloans.

Transactions with other controlled entities of the Ultimate Parent Bank

ManagedfundproductsaresoldbytheBankonbehalfofmembersoftheUltimateParentBankGroup.TheBankreceivescommissionfromthesesales.Commissionreceivedfortheyearended30September2012was$5million(30September2011:$5million).DerivativetransactionsareenteredintowithothermembersoftheUltimateParentBankGroup,includingtheBankingGroup,inthenormalcourseofbusiness.Managementsystemsandoperationalcontrolsareinplacetomanageanyresultinginterestrateorcurrencyrisk.Accordingly,itisnotenvisagedthatanyliabilityresultinginmateriallosswillarisefromthesetransactions.LifeandgeneralinsuranceproductsaresoldbytheBankonbehalfofothermembersoftheUltimateParentBankGroup.TheBankreceivescommissiononthesesales.Lifeandgeneralinsurancecommissionsreceivedfortheyearended30September2012were$23millionand$12millionrespectivelyfromWestpacLife-NZ-Limited(30September2011:$21millionand$9million).RefertoNote23fordetailsoftheperpetualsubordinatednotesheldbyrelatedentities.

Transactions with associates

In2008,theBankingGrouppurchasedVisaIncsharesfromCardsNZLimitedatfairvaluetotalling$48million.Thepurchasewassatisfiedthroughtheissueofaninterestbearingpromissorynote.$1millioninterestwaspaidonthepromissorynoteduringtheyearended30September2012(30September2011:$1million).F

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Note 25 Related entities (continued)Due from and to related entities


$ millions 2012 2011 2012 2011

Due from related entitiesParentcompanies1 1,509 1,459 1,509 1,459ControlledentitiesoftheBankingGroup - - 8,850 8,000OthermembersoftheOverseasBankingGroup 18 58 18 52

Total due from related entities 1,527 1,517 10,377 9,511

Amountsexpectedtoberecoveredwithin12months 1,527 1,517 1,593 1,724Amountsexpectedtoberecoveredafter12months - - 8,784 7,787

Total due from related entities 1,527 1,517 10,377 9,511

Due to related entitiesParentcompanies1 4,631 1,758 4,622 1,635ControlledentitiesoftheBankingGroup - - 19,906 24,734AssociatesoftheBankingGroup 48 48 48 48

Total due to related entities 4,679 1,806 24,576 26,417

Amountsexpectedtobesettledwithin12months 1,531 1,758 7,657 12,283Amountsexpectedtobesettledafter12months 3,148 48 16,919 14,134

Total due to related entities 4,679 1,806 24,576 26,417

1 ParentcompaniesincludetheUltimateParentBank(includingtheNZBranch)andallintermediateparentcompaniesoftheBank.

Other group investmentsTheBankingGrouphadsignificantnon-controllingshareholdingsinthefollowingNewZealandbasedentitiesasat30September2012:

Name Shares Held by Beneficial Interest Nature of Business

PaymarkLimited WestpacNZOperationsLimited 25% EFTPOSSettlements

InterchangeandSettlementLimited WestpacNZOperationsLimited 14% Paymentsprocessingclearinghouse

PaymentsNZLimited WestpacNewZealandLimited 23% Paymentssystem

TheBankingGroupdoesnothavesignificantinfluenceovertheseentitiesandthereforetheyarenotclassifiedasassociates.ThetotalcarryingamountoftheBankingGroup’ssignificantnon-controllingshareholdingsintheaboveinvestments,andtheircontributiontotheresultsoftheBankingGroup,arenotmaterialeitherindividuallyorinaggregate.TheBankacquired23%ofthesharesofPaymentsNZLimitedon1October2010.PaymentsNZLimitedownsthegovernanceframeworkfortheNewZealandpaymentssystem.TheconsiderationpaidfortheseshareswasnotmaterialtotheBankortheBankingGroup.

Note 26 Derivative financial instrumentsDerivativecontractsincludeforwards,futures,swapsandoptions,allofwhicharebilateralcontractsorpaymentexchangeagreements,whosevaluesderivefromthevalueofanunderlyingasset,referencerateorindex.Aforwardcontractobligesonepartytobuyandtheothertosell,aspecificunderlyingproductorinstrumentataspecificprice,amountanddateinthefuture.Aforwardrateagreementisanagreementbetweentwopartiesestablishingacontractinterestrateonanotionalprincipaloveraspecifiedperiodcommencingataspecificfuturedate.Afuturescontractissimilartoaforwardcontract.Afuturescontractobligesitsownertobuyaspecificunderlyingcommodityorfinancialinstrumentataspecifiedpriceonthecontractmaturitydate(ortosettlethevalueforcash).Futuresareexchangetraded.Aswaptransactionobligesthetwopartiestothecontracttoexchangeaseriesofcashflowsatspecifiedintervalsknownaspaymentorsettlementdates.Anoptioncontractgivestheoptionholdertheright,butnottheobligation,tobuyorsellaspecifiedamountofagivencommodityorfinancialinstrumentataspecifiedpriceduringacertainperiodoronaspecificdate.Thewriteroftheoptioncontractisobligedtoperformiftheholderexercisestherightcontainedtherein.Certainleveragedderivativesincludeanexplicitleveragefactorinthepaymentformula.Theleveragefactorhastheeffectofmultiplyingthenotionalamountsuchthattheimpactofchangesintheunderlyingpriceorpricesmaybegreaterthanthatindicatedbythenotionalamountalone.TheBankingGrouphasnosignificantexposuretothosetypesoftransactions.Thenotionalamountsofcertaintypesoffinancialinstrumentsprovideabasisforcomparisonwithinstrumentsrecognisedonthebalancesheet,butdonotnecessarilyindicatetheamountsoffuturecashflowsinvolvedorthecurrentfairvalueoftheinstrumentsand,therefore,donotindicatetheBankingGroup’sexposuretocreditorpricerisks.

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Note 26 Derivative financial instruments (continued)Thederivativeinstrumentsbecomefavourable(assets)orunfavourable(liabilities)asaresultoffluctuationsinmarketinterestratesorforeignexchangeratesrelativetotheirterms.Thenotionalamountofthederivativefinancialinstrumentsonhandistheaggregatenotionalorcontractualamountsofinstrumentsthatarebothfavourableandunfavourable.TheBankingGroupusesderivativesasanend-useraspartofitsassetandliabilitymanagementactivities.Derivativeswithrelatedpartiesareincludedinduefrom/duetorelatedentities.

HedgingTheBankingGroupentersintoderivativetransactionsthataredesignatedandqualifyaseitherfairvaluehedgesorcashflowhedgesforrecognisedassetsandliabilitiesorforecasttransactions.Italsoentersintoderivativetransactionsthatprovideeconomichedgesforriskexposures,butdonotmeettherequirementsforhedgeaccountingtreatment.

Fair value hedges

TheBankingGrouphedgespartofitsexistinginterestrateriskresultingfromanypotentialdecreaseinthefairvalueoffixedrateassetsdenominatedinlocalcurrency,usingswaps.

Cash flow hedges

TheBankingGrouphedgesaportionofthecashflowsfromfloating-ratecustomerdeposits,termdepositsandloans,usingswaps.TheBankingGroupalsohedgesexposuretoforeigncurrencyprincipalandinterestcashflowsfromfloating-ratemedium-termdebtissuancethroughtheuseofcross-currencyswaps.

Dual fair value and cash flow hedges

TheBankingGrouphedgesfixedrateforeigncurrencydenominatedmedium-termdebtissuanceusingcross-currencyswaps,designatedasfairvaluehedgesofforeigninterestratesandcashflowhedgesofforeignexchangerates.

Derivatives held with external counterparties The Banking Group and the Bank

2012

Fair Value Fair Value $ millions Notional Asset (Liability)

Held for trading derivativesInterest rate derivativesSwaps 216 9 -

Total held for trading derivatives 216 9 -

Fair value hedging derivativesInterest rate derivativesSwaps 2,550 1 (234) Foreign exchange derivativesSwaps1 1,548 - (101)

Total fair value hedging derivatives 4,098 1 (335)

Cash flow hedging derivativesForeign exchange derivativesSwaps 416 - (25)

Total cash flow hedging derivatives 416 - (25)

Total derivatives 4,730 10 (360)

1 Includedwithinforeignexchangeswapsarederivativesdesignatedinbothcashflowandfairvaluehedgerelationshipsunderthedualdesignationstrategy.


2011

FairValue FairValue$ millions Notional Asset (Liability)

Held for trading derivativesInterest rate derivativesSwaps 307 12 -

Total held for trading derivatives 307 12 -

Fair value hedging derivativesInterest rate derivativesSwaps 1,336 - (84)Foreign exchange derivativesSwaps1 1,766 73 -


Total derivatives 3,409 85 (84)


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Note 26 Derivative financial instruments (continued)Derivatives held with related entities


2012

Fair Value Fair Value $ millions Notional Asset (Liability)

Held for trading derivativesInterest rate derivativesForwards 6,350 - - Swaps 5,388 5 (34) Foreign exchange derivativesSwaps 5,316 2 (318)

Total held for trading derivatives 17,054 7 (352)

Fair value hedging derivativesInterest rate derivativesSwaps 8,070 - (69) Foreign exchange derivativesSwaps1 3,413 10 (585)


Cash flow hedging derivativesInterest rate derivativesSwaps 9,742 130 (62) Foreign exchange derivativesSwaps 284 - (22)

Total cash flow hedging derivatives 10,026 130 (84)

Total derivatives 38,563 147 (1,090)



2011

FairValue FairValue$ millions Notional Asset (Liability)

Held for trading derivativesInterest rate derivativesForwards 6,585 1 (1)Swaps 2,211 1 (66)Foreign exchange derivativesSwaps 8,617 390 (125)

Total held for trading derivatives 17,413 392 (192)

Fair value hedging derivativesInterest rate derivativesSwaps 6,402 - (122)Foreign exchange derivativesSwaps1 5,750 48 (767)


Cash flow hedging derivativesInterest rate derivativesSwaps 8,594 134 (96)Foreign exchange derivativesSwaps 319 20 (7)

Total cash flow hedging derivatives 8,913 154 (103)

Total derivatives 38,478 594 (1,184)


Underlyingcashflowsfromcashflowhedges,asaproportionoftotalcashflows,areexpectedtooccurinthefollowingperiods:


2012

Less Than 1 Month to 3 Months to 1 Year to 2 Years to 3 Years to 4 Years to Over% 1 Month 3 Months 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years

Cashinflows(assets) 1 5 39 12 39 2 1 1 Cashoutflows(liabilities) 2 4 38 12 40 2 1 1

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Note 26 Derivative financial instruments (continued) The Banking Group and the Bank

2011

LessThan 1Monthto 3Monthsto 1Yearto 2Yearsto 3Yearsto 4Yearsto Over% 1Month 3Months 1year 2Years 3Years 4Years 5Years 5Years

Cashinflows(assets) 1 5 23 53 11 2 2 3Cashoutflows(liabilities) 2 9 21 52 9 2 2 3

Fortheyearended30September2012,thehedgeineffectivenessrecognisedinrelationtocashflowhedgeswasnil(30September2011:nil)intheBankingGroupandtheBank.Fortheyearended30September2012,a$1milliongainonfairvaluehedgeswasrecognisedduetohedgeineffectiveness(30September2011:$1milliongain)intheBankingGroupandtheBank.FortheBankingGroupandtheBank,thechangeinthefairvalueofhedginginstrumentsdesignatedasfairvaluehedgesfortheyearended30September2012wasa$7millionloss(30September2011:$81milliongain)whilethechangeinthefairvalueofthehedgeditems,attributedtothehedgeriskfortheyearended30September2012wasan$8milliongain(30September2011:$80millionloss).

Note 27 Fair value of financial instrumentsQuotedmarketprices,whenavailable,areusedasthemeasureoffairvalues.Wherequotedmarketpricesdonotexist,fairvaluespresentedareestimatesderivedusingpresentvaluesorothermarketacceptedvaluationtechniques.Thesetechniquesinvolveuncertaintiesandareaffectedbytheassumptionsusedandjudgmentsmaderegardingriskcharacteristicsofvariousfinancialinstruments,discountrates,estimatesoffuturecashflows,futureexpectedlossexperienceandotherfactors.Changesinassumptionscouldsignificantlyaffecttheseestimatesandtheresultingfairvalues.NZIFRS7requiresthedisclosureofthefairvalueofthosefinancialinstrumentsnotalreadycarriedatfairvalueinthebalancesheet.Fairvalueforfinancialinstrumentshasbeendeterminedasfollows:

Certain short-term financial instrumentsForcashandshort-termliquidassets,amountsduefromotherfinancialinstitutionswithmaturitiesoflessthanthreemonths,andothertypesofshort-termfinancialinstrumentsrecognisedinthebalancesheetunder‘otherassets’and‘otherliabilities’,thecarryingamountisequivalenttofairvalue.

Trading securities and available-for-sale securitiesFortradingsecuritiesandavailable-for-salesecurities,thefairvalues,whicharealsothecarryingamounts,arebasedonquotedmarketpriceswhereavailable.Whereaquotedpriceisnotavailable,thefairvalueofsuchinstrumentsisdeterminedbyapplyingadiscountedcashflowapproachthatusesadiscountratewhichreflectsthetermsofsuchinstrumentsandthetimingofcashflows.

Floating rate financial instrumentsForfloatingratefinancialinstruments,includingvariablerateloans,withnosignificantchangeincreditrisk,thecarryingamountisareasonableestimateoffairvalue.

Due from other financial institutions and fixed rate loansThefairvaluesforamountsduefromotherfinancialinstitutionswithmaturitiesofthreemonthsormoreandfullyperformingfixedrateloanshavebeenestimatedbyreferencetocurrentratesatwhichsimilaradvanceswouldbemadetofinancialinstitutionsandotherborrowerswithasimilarcreditratingandthesameremainingmaturities.Foramountsduefromotherfinancialinstitutionswithmaturitiesoflessthanthreemonths,thecarryingvalueisareasonableestimateoffairvalue.

Due to other financial institutions, deposits and debt issuesThefairvalueofdemanddepositsistheamountpayableondemandasatthereportingdate.Forotherliabilitieswithmaturitiesoflessthanthreemonths,thecarryingamountisareasonableestimateoffairvalue.Forliabilitieswithmaturitiesofthreemonthsorlonger,fairvalueshavebeenbasedonquotedmarketprices,wheresuchpricesexist.Otherwise,fairvalueshavebeenestimatedusingtheratescurrentlyofferedforsimilarliabilitiesofsimilarremainingmaturities.

Perpetual subordinated notes Perpetualsubordinatednotesarecarriedatamortisedcost,whichapproximatesthefairvalueasthesearefloatingratenotes.

Exchange rate and interest rate contractsForexchangerateandinterestratecontracts,fairvaluesareobtainedfromquotedmarketprices,discountedcashflowmodelsoroptionpricingmodelsasappropriate.Thecarryingamountandfairvalueforthesecontractsareincludedinderivativefinancialinstrumentsandamountsduefrom/torelatedentities,asapplicable.

Other financial assets and liabilitiesForallotherfinancialassetsandliabilities,thecarryingamountapproximatesfairvalue.Theseitemsareeithershort-terminnature,repricefrequentlyorareofahighcreditrating.

Interest rates used for determining fair valueThefollowingratesusedtodiscountestimatedcashflows,whereapplicable,arebasedonthewholesalemarketsyieldcurveatthereportingdateplusanappropriateconstantcreditspread:


% 2012 2011

Loans 2.63 - 8.20 2.68-7.94Deposits 0.10 - 4.99 0.15-7.85Debtissues 0.01 - 3.46 0.01-3.91

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Note 27 Fair value of financial instruments (continued)ThetablesbelowsummarisethecategoriesoffinancialinstrumentsandthecarryingvalueandfairvalueofallfinancialinstrumentsoftheBankingGroupandtheBank.

The Banking Group

2012

Classified at Fair Value through Profit or Loss

Designated Available- Financial Held upon for-sale Liabilities at Total for Initial Loans and Financial Amortised Carrying Estimated$ millions Trading Recognition Hedging Receivables Assets Cost Amount Fair Value

Financial assetsCashandbalanceswithcentralbanks - - - 1,595 - - 1,595 1,595

Duefromotherfinancialinstitutions - - - 322 - - 322 322

Derivativefinancialinstruments 9 - 1 - - - 10 10

Tradingsecurities 2,040 - - - - - 2,040 2,040

Available-for-salesecurities - - - - 2,694 - 2,694 2,694

Loans - - - 59,422 - - 59,422 59,537

Duefromrelatedentities 393 - - 1,134 - - 1,527 1,527

Otherassets - - - 195 - - 195 195

Total financial assets 2,442 - 1 62,668 2,694 - 67,805 67,920

Financial liabilitiesDuetootherfinancialinstitutions - - - - - 3 3 3

Deposits 1,423 - - - - 41,967 43,390 43,474

Derivativefinancialinstruments - - 360 - - - 360 360

Debtissues - 4,063 - - - 8,851 12,914 12,902

Otherliabilities - - - - - 502 502 502

Perpetualsubordinatednotes - - - - - 970 970 970

Duetorelatedentities 345 - 598 - - 3,736 4,679 4,679

Total financial liabilities 1,768 4,063 958 - - 56,029 62,818 62,890

The Banking Group

2011

ClassifiedatFairValue throughProfitorLoss

Designated Available- Financial Held upon for-sale Liabilitiesat Total for Initial Loansand Financial Amortised Carrying Estimated$ millions Trading Recognition Hedging Receivables Assets Cost Amount FairValue






Loans - - - 51,250 - - 51,250 51,418

Duefromrelatedentities - - - 1,517 - - 1,517 1,517

Otherassets - - - 148 - - 148 148



Deposits 1,556 - - - - 33,330 34,886 34,965


Debtissues - 7,727 - - - 9,903 17,630 17,259



Duetorelatedentities (200) - 790 - - 1,216 1,806 1,806


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Note 27 Fair value of financial instruments (continued) The Bank

2012

Classified at Fair Value through Profit or Loss

Designated Available- Financial Held upon for-sale Liabilities at Total for Initial Loans and Financial Amortised Carrying Estimated$ millions Trading Recognition Hedging Receivables Assets Cost Amount Fair Value






Loans - - - 59,303 - - 59,303 59,418

Duefromrelatedentities 393 - - 9,984 - - 10,377 10,377

Otherassets - - - 171 - - 171 171



Deposits 1,423 - - - - 41,247 42,670 42,752


Debtissues - - - - - 2,674 2,674 2,771



Duetorelatedentities 345 4,067 598 - - 19,566 24,576 24,576


The Bank

2011

ClassifiedatFairValue throughProfitorLoss

Designated Available- Financial Held upon for-sale Liabilitiesat Total for Initial Loansand Financial Amortised Carrying Estimated$ millions Trading Recognition Hedging Receivables Assets Cost Amount FairValue






Loans - - - 51,107 - - 51,107 51,275

Duefromrelatedentities - - - 9,511 - - 9,511 9,511

Otherassets - - - 129 - - 129 129



Deposits 1,556 - - - - 32,834 34,390 34,468


Debtissues - - - - - 1,598 1,598 1,653



Duetorelatedentities (200) 7,924 790 - - 17,903 26,417 26,417


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Note 27 Fair value of financial instruments (continued)Fair valuation control framework

TheBankingGroupusesawellestablishedFairValuationControlFrameworktodeterminethefairvalueoffinancialassetsandliabilities.TheframeworkconsistsofpoliciesandproceduresthatensuretheBankingGroupisincompliancewithrelevantaccounting,industryandregulatorystandards.Thisframeworkincludesdetailsontheapproachtakenwithrespecttotherevaluationoffinancialinstruments,independentpriceverification,fairvalueadjustmentsandfinancialreporting.ThemethodofdeterminingafairvalueaccordingtotheFairValuationControlFrameworkfallsintooneoftwomainapproaches:

■■ Mark-to-market:wherethevaluationusesindependentunadjustedquotedmarketprices.■■ Mark-to-model:wherevaluationtechniquesareusedtodeterminethevaluation.Valuationtechniquesoftenrequireadjustmentstoensurecorrectfairvaluerepresentation.TheBankingGroup’svaluationadjustmentsinclude:

■■ CVA:Somemarketandmodelderivedvaluationsassumesimilarcreditqualityforallcounterparties.Tocorrectforthisassumption,aCVAisemployedonthemajorityofderivativepositionswhichreflectsthemarketviewofthecounterpartycreditrisk.Aderivativevaluationadjustment(‘DVA’)isemployedtoadjustfortheBankingGroup’sowncreditrisk.TheBankingGroupusesaMonteCarlosimulationmethodologytocalculatetheexpectedfuturecreditexposureforallderivativeexposuresincludinginputsregardingprobabilitiesofdefault(‘PDs’)andlossgivendefault(‘LGD’).PDsarederivedfrommarketobservedcreditspreadsbyreferencetocreditdefaultswap(‘CDS’)sectorcurvesfortherelevanttenorstocalculateCVA,andtheUltimateParentBank’sCDScurvefortherelevanttenorstocalculateDVA.PDsarethenappliedtothehorizonofpotentialexposurestoderiveboththeCVAandDVA.

■■ Bid-offerspreadsadjustment:Thefairvalueoffinancialassetsandfinancialliabilitiesshouldreflectbidpricesforassetsandofferpricesforliabilities.Pricesareadjustedtoreflectcurrentbid-offerspreads.

Thefairvaluesoflargeholdingsoffinancialinstrumentsarebasedonamultipleoftheestimatedvalueofasingleinstrumentanddonotincludeblockadjustmentsforthesizeoftheholding.

Fair value hierarchy

TheBankingGroupcategorisesallfairvaluemeasurementsaccordingtothefollowingfairvaluehierarchy:■■ Quotedmarketprice(Level1) Thisvaluationtechniqueusesrecentunadjustedquotedpricesforidenticalassetsorliabilitiesinactivemarketswherethe

pricerepresentsactualandregularlyoccurringmarkettransactionsonanarm’slengthbasis.Financialinstrumentsincludedinthiscategoryaremainlyinvestmentsinlistedequitysecurities.

■■ Valuationtechniqueusingobservableinputs(Level2) Thisvaluationtechniqueisusedforfinancialinstrumentswherequotedmarketpricesarenotavailablesopricesarederived

fromstandardvaluationmodels,andinputstothesemodelsaredirectlyobservable.Thevaluationtechniquesincludetheuseofdiscountedcashflowanalysis,optionpricingmodelsandothervaluationtechniqueswidelyusedandacceptedbymarketparticipants.Financialinstrumentsincludedinthiscategoryaremainlyoverthecounterderivativeswithobservablemarketinputsandfinancialinstrumentswithfairvaluederivedfromconsensuspricingwithsufficientcontributors,includinginterestrateswaps,foreigncurrencyswaps,andtradingsecuritiesincludinggovernmentbondsandfloatingratenotes.

■■ Valuationtechniquewithsignificantnon-observableinputs(Level3) Thisvaluationtechniqueisusedwhereatleastonesignificantinputisnotobservableandrelianceisplacedonreasonable

assumptionsbasedonmarketconditions.Theseestimatesarecalibratedagainstindustrystandards,economicmodelsandobservabletransactionpriceswherepossible.Financialinstrumentsincludedinthiscategoryshowilliquidityinthemarket.Somevaluationsrelyonestimationfromrelatedmarketsorproxies.

TheBankandtheBankingGroupdidnotholdanyfinancialinstrumentsintheLevel3categoryasat30September2012(30September2011:nil).

Valuation techniques, valuation inputs and asset classification

Avarietyofvaluationtechniquesareusedtoderivethefairvalueofeachinstrument.Mark-to-marketisthepreferredvaluationtechniqueforallproducts.Howevermodellingtechniquesareusedtoderivefairvaluewhenmarketsareilliquidandpricesarenotquoted.Thespecificvaluationtechniques,theobservabilityoftheinputsusedinvaluationmodelsandthesubsequentclassificationforeachsignificantproductcategoryareoutlinedbelow:

Interest rate derivatives

Theseareproductswithapay-offlinkedtointerestratesi.e.NewZealandBankBillReferenceRate(‘BKBM’),LondonInterBankOfferRateorinflationrates.Theseproductsincludeinterestrateswaps,swaptions,caps,floors,collarsandothercomplexinterestratederivatives.Fortheseinstruments,asmarketpricesareunavailable,theBankingGroupusesvaluationmodelstoderivefairvalue.ThemodelsareindustrystandardandmostlyemployaBlack-Scholesframeworktocalculatetheexpectedfuturevalueofpaymentsbyproduct,whichisdiscountedbacktoapresentvalue.Themodel’sinterestrateinputsarebenchmarkinterestratessuchasBKBMandactivebrokerquotedinterestratesintheswap,bondandfuturesmarkets.Interestratevolatilitiesaresourcedthroughaconsensusdataprovider.Assuch,theinputparametersintothemodelsaredeemedmarketobservableandthereforeinterestratederivativesarecategorisedasLevel2instruments.

Foreign exchange (‘FX’) swaps, forwards and other FX derivatives

FXswapsandforwardsarenottradedonexchanges.FXswapandforwardvaluationsarederivedfromconsensusdataproviders.BothsimpleandcomplexderivativesarevaluedusingindustrystandardmodelswhichrevolvearoundaBlack-Scholesframework.TheinputstothecalculationincludeFXspotrates,interestratesandFXvolatilities.TheseinputsaremarketobservableorprovidedbyconsensusdataprovidersandthereforeFXswapsandforwardsarecategorisedasLevel2instruments.

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Note 27 Fair value of financial instruments (continued)Debt market products

Governmentbonds,commercialpaperandnotesgenerallydonothavequotedmarketprices.TheBankingGroupusesvaluationmodelstoderivethefairvalueoftheseinstruments.Thevaluationtechniquesarestandardandmainlyuseadiscountedcashflowapproach.ThemainmodelinputsareobservedinstrumentdatausedtoderivethediscountcurvesandthereforedebtmarketproductsareclassifiedasLevel2instruments.

Certificates of deposit

ThefairvalueofcertificatesofdeposituseadiscountedcashflowapproachusingmarketratesofferedfordepositsofsimilarremainingmaturitiesandarethereforeclassifiedasLevel2instruments.

Debt issues at fair value

Whereaquotedpriceisnotavailable,thefairvalueofdebtissuesusesadiscountedcashflowapproach,usingadiscountratewhichreflectsthetermsoftheinstrumentandthetimingofcashflowsadjustedformarketobservablechangesintheapplicablecreditratingoftheBankingGroup.TheseinstrumentsarethereforeclassifiedasLevel2instruments.

Disclosure of fair value

Duetothenumberofdifferentvaluationmodelsusedandtheunderlyingassumptionsmaderegardinginputsselected,suchastimingandamountsoffuturecashflows,discountrates,creditriskandvolatility,itisoftendifficulttocomparethefairvalueinformationdisclosedhereagainstfairvalueinformationdisclosedbyotherfinancialinstitutions.Thefairvaluesdisclosedinthisnoterepresentestimatesatwhichtheinstrumentscouldbeexchanged.However,theintentionistoholdmanyoftheseinstrumentstomaturityandthusitispossiblethattherealisedamountmaydiffertotheamountsdisclosedinthetablesbelow.Therewerenomaterialamountsofchangesinfairvalue,estimatedusingavaluationtechniquebutincorporatingsignificantnon-observableinputs,thatwererecognisedintheincomestatementsoftheBankingGroupandtheBankduringtheyearended30September2012(September2011:nomaterialchangesinfairvalue).TherehavebeennosignificanttransfersbetweenLevels1and2duringtheyearended30September2012(30September2011:nosignificanttransfers).Therehavealsobeennosignificanttransfersinto/outofLevel3duringtheyearended30September2012(30September2011:nosignificanttransfers).Thefollowingtablessummarisethebasisforthedeterminationofthefairvaluesoffinancialinstrumentsthataremeasuredatfairvalueafterinitialrecognition:


2012 2012

Valuation Valuation Techniques Techniques Quoted (Market Quoted (Market Market Observable Market Observable Prices Inputs) Prices Inputs)$ millions (Level 1) (Level 2) Total (Level 1) (Level 2) Total

Financial assetsDerivativefinancialinstruments - 10 10 - 10 10 Tradingsecurities - 2,040 2,040 - 2,040 2,040 Available-for-salesecurities 70 2,624 2,694 70 2,624 2,694 Duefromrelatedentities - 393 393 - 393 393

Total financial assets carried at fair value 70 5,067 5,137 70 5,067 5,137

Financial liabilitiesDeposits - 1,423 1,423 - 1,423 1,423 Derivativefinancialinstruments - 360 360 - 360 360 Debtissuesatfairvalue - 4,063 4,063 - - - Duetorelatedentities - 943 943 - 5,010 5,010

Total financial liabilities carried at fair value - 6,789 6,789 - 6,793 6,793

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Note 27 Fair value of financial instruments (continued) The Banking Group The Bank

2011 2011

Valuation Valuation Techniques Techniques Quoted (Market Quoted (Market Market Observable Market Observable Prices Inputs) Prices Inputs)$ millions (Level1) (Level2) Total (Level1) (Level2) Total

Financial assetsDerivativefinancialinstruments - 85 85 - 85 85Tradingsecurities - 3,261 3,261 - 3,261 3,261Available-for-salesecurities 50 1,468 1,518 50 1,468 1,518

Total financial assets carried at fair value 50 4,814 4,864 50 4,814 4,864

Financial liabilitiesDeposits - 1,556 1,556 - 1,556 1,556Derivativefinancialinstruments - 84 84 - 84 84Debtissuesatfairvalue - 7,727 7,727 - - -Duetorelatedentities - 590 590 - 8,514 8,514

Total financial liabilities carried at fair value - 9,957 9,957 - 10,154 10,154

Note 28 Commitments and contingent liabilities


$ millions 2012 2011 2012 2011

Commitments for capital expenditureDuewithinoneyear 4 2 - -

Other expenditure commitments: Oneyearorless 95 89 95 89 Betweenoneandfiveyears 293 306 293 306 Overfiveyears - 34 - 34

Total other expenditure commitments 388 429 388 429

Lease commitments (all leases are classified as operating leases)Premisesandsites 219 230 - -Motorvehicles 8 8 8 8

Total lease commitments 227 238 8 8

Lease commitments are due as follows: Oneyearorless 44 44 3 4 Betweenoneandfiveyears 117 104 5 4 Overfiveyears 66 90 - -

Total lease commitments 227 238 8 8

Other contingent liabilities and commitmentsDirectcreditsubstitutes 80 78 80 78Loancommitmentswithcertaindrawdown 177 164 177 164 Transaction-relatedcontingentitems 796 257 796 257Short-term,self-liquidatingtrade-relatedcontingentliabilities 397 339 397 339Othercommitmentstoprovidefinancialservices 19,030 11,403 18,886 11,334

Total other contingent liabilities and commitments 20,480 12,241 20,336 12,172

TheBankingGroupispartytofinancialinstrumentswithoff-balancesheetcreditriskinthenormalcourseofbusinesstomeetthefinancingneedsofitscustomersandinmanagingitsownriskprofile.Thesefinancialinstrumentsincludecommitmentstoextendcredit,billendorsements,financialguarantees,standbylettersofcreditandunderwritingfacilities.TheBankingGroup’sexposuretocreditlossintheeventofnon-performancebytheotherpartytosuchfinancialinstrumentsisrepresentedbythecontractornotionalamountofthoseinstruments.However,somecommitmentstoextendcreditandprovideunderwritingfacilitiescanbecancelledorrevokedatanytimeattheBankingGroup’soption.TheBankingGroupusesthesamecreditpoliciesinmakingcommitmentsandconditionalobligationsasitdoesforon-balancesheetfinancialinstruments.TheBankingGrouptakescollateralwhereitisconsiderednecessarytosupportbothonandoff-balancesheetfinancialinstrumentswithcreditrisk.TheBankingGroupevaluateseachcustomer’screditworthinessonacase-by-casebasis.Theamountofcollateraltaken,ifdeemednecessary,ontheprovisionofafinancialfacilityisbasedonmanagement’screditevaluationofthecounterparty.Thecollateraltakenvaries,butmayincludecashdeposits,receivables,inventory,plantandequipment,realestateandinvestments.

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Note 28 Commitments and contingent liabilities (continued)TheBankingGroupisobligedtorepurchaseanyloansoldtoand:(a) heldbytheWestpacHomeLoanTrust(‘HLT’)whereitisdiscoveredwithin120daysofsalethatthoseloanswerenoteligible

forsalewhensold;(b) heldbyWNZSL(pursuanttoitssecuritisationprogramme)wheretheloanceasestoconformtocertaintermsandconditions

oftheWNZSLsecuritisationprogramme;(c) heldbyWNZCBL(pursuanttotheCBProgramme)where:

(i) itisdiscoveredthattherehasbeenamaterialbreachofasalewarranty(oranysuchsalewarrantyismateriallyuntrue);(ii) theloanbecomesmateriallyimpairedorisenforcedpriortothesecondmonthlycoveredbondpaymentdatefallingafter

theassignmentoftheloan;or(iii) atthecut-offdaterelatingtotheloantherewerearrearsofinterestandthatloansubsequentlybecomesadelinquent

loanpriortothesecondmonthlycoveredbondpaymentdatefallingaftertheassignmentoftheloan.ItisnotenvisagedthatanyliabilityresultinginmateriallosstotheBankingGroupwillarisefromtheseobligations.TheBankguaranteesthedueandpunctualpaymentofallsumspayabletotheholdersofthedebtsecuritiesissuedbyitsindirect,wholly-ownedsubsidiary,WSNZL,theproceedsofwhichareimmediatelyon-lenttotheBank.Theaggregateamountofoutstandingprincipalandinterestasat30September2012was$10,041million(30September2011:$15,945million).Astheproceedsofthedebtissuancesareimmediatelyon-lenttotheBank,theaggregateamountguaranteedisalreadyreflectedintheBank’sBalancesheetaspartoftheamountsduetorelatedentities.Inaddition,theBankingGroup(throughWNZCBL)guaranteescoveredbondsissuedbyWSNZL(refertoNote13forfurtherdetails).

Other contingent liabilitiesTheBankingGrouphasothercontingentliabilitiesinrespectofactualandpotentialclaimsandproceedings.AnassessmentoftheBankingGroup’slikelylossinrespectofthesemattershasbeenmadeonacase-by-casebasisandprovisionhasbeenmadeinthesefinancialstatementswhereappropriate.Westpac(NZ)InvestmentsLimited(‘WNZIL’),asubsidiaryoftheBank,leasesthemajorityofthepropertiesitoccupies.Asisnormalpractice,theleaseagreementscontain‘makegood’provisionswhichrequireWNZIL,uponterminationofthelease,toreturnthepremisestothelessorintheoriginalcondition.ThemaximumamountpayablebyWNZILuponvacationofallleasedpremisessubjecttotheseprovisionsasat30September2012wasestimatedtobe$22million(30September2011:$22million).Noamounthasbeenrecognisedforthe$22millioninestimatedmaximumvacationpaymentsastheBankingGroupbelievesitishighlyunlikelythatWNZILwouldincuramaterialoperatinglossasaresultofsuch‘makegood’provisionsinthenormalcourseofitsbusinessoperations.

Other commitmentsAsat30September2012,theBankingGrouphadcommitmentsinrespectofinterestswaptransactions,provisionofcredit,underwritingfacilitiesandotherarrangementsenteredintointhenormalcourseofbusiness.TheBankingGrouphasmanagementsystemsandoperationalcontrolsinplacetomanageinterestrate,currencyandcreditrisks(refertoNote35).Accordingly,itisnotenvisagedthatanyliabilityresultinginamateriallosstotheBankingGroupwillarisefromthesetransactionstotheextentthataprovisionhasnotbeenprovidedforundertheBankingGroup’susualpractices.

Note 29 Segment informationTheBankingGroupoperatespredominantlyintheconsumer,businessandinstitutionalbankingsectorswithinNewZealand.Onthisbasis,nogeographicalsegmentinformationisprovided.Thebasisofsegmentreportingreflectsthemanagementofthebusiness,ratherthanthelegalstructureoftheBankingGroup.Thereisnodifferenceinaccountingmeasurementbetweenmanagementandlegalstructures.Theoperatingsegmentresultshavebeenpresentedonamanagementreportingbasisandconsequentlyinternalchargesandtransferpricingadjustmentshavebeenreflectedintheperformanceofeachoperatingsegment.Intersegmentpricingisdeterminedonacostrecoverybasis.TheBankingGroupdoesnotrelyonanysinglemajorcustomerforitsrevenuebase.TheBankingGroup’soperatingsegmentsaredefinedbythecustomerstheyserveandtheservicestheyprovide.TheBankingGrouphasidentifiedthefollowingmainoperatingsegments:

■■ RetailBankingprovidesfinancialservicesforprivateindividuals;■■ Wealthprovidesfinancialservicesforhighnetworthindividuals,fundsmanagementandinsurancedistribution;■■ BusinessBankingprovidesfinancialservicesforsmalltomediumsizedenterprisecustomers,corporatesandagriculturalbusinesses.BusinessBankingalsoprovidesdomestictransactionalbankingtotheNewZealandGovernment;and

■■ InstitutionalBankingprovidesabroadrangeoffinancialservicestolargecorporate,institutionalandgovernmentcustomers1.

RetailBankingandWealthhavebeenaggregatedanddisclosedastheConsumerBankingreportablesegment.BusinessBankingandInstitutionalBankingconstituteseparatereportablesegments.Reconcilingitemsprimarilyrepresent:

■■ businessunitsthatdonotmeetthedefinitionofoperatingsegmentsunderNZIFRS8;■■ eliminationentriesonconsolidationoftheresults,assetsandliabilitiesoftheBankingGroup’scontrolledentitiesinthepreparationoftheconsolidatedfinancialstatementsoftheBankingGroup;

■■ resultsofcertainentitiesincludedformanagementreportingpurposes,butexcludedfromtheconsolidatedfinancialstatementsoftheBankingGroupforstatutoryfinancialreportingpurposes;and

■■ resultsofcertainbusinessunitsexcludedformanagementreportingpurposes,butincludedwithintheconsolidatedfinancialstatementsoftheBankingGroupforstatutoryfinancialreportingpurposes.

Comparativeinformationfornetoperatingincomefromexternalcustomersandnetinternaloperatingincomehasbeenchangedtoensureconsistentpresentationwiththecurrentreportingperiod.

1 On1November2011,theNZBranchtransferredadditionalinstitutionalbankingbusinessactivitiesandassociatedemployeestotheBank(refertoNote2forfurtherdetails).FurtherinformationontheNZBranchisavailableinWestpacBankingCorporation’smostrecentlypublishedDisclosureStatement.

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Note 29 Segment information (continued) The Banking Group

Consumer Business Institutional Reconciling$ millions Banking Banking Banking

1 Items

2 Total

Year ended 30 September 2012Netinterestincome 810 495 137 57 1,499 Non-interestincome 304 88 34 (70) 356

Net operating income 1,114 583 171 (13) 1,855

Netoperatingincomefromexternalcustomers 1,485 1,037 193 (860) 1,855 Netinternaloperatingincome (371) (454) (22) 847 -

Net operating income 1,114 583 171 (13) 1,855

Depreciation (2) - - (25) (27)Softwareamortisationcosts - - - (38) (38)Otheroperatingexpenses (196) (74) (19) (453) (742)

Total operating expenses (198) (74) (19) (516) (807)

Impairmentchargesonloans (38) (144) (12) 4 (190)

Shareofprofitofassociateaccountedforusingequitymethod - - - 1 1

Profit before income tax expense 878 365 140 (524) 859

Total gross loans 31,383 22,129 6,713 (198) 60,027 Total deposits 24,744 11,371 5,852 1,423 43,390

Year ended 30 September 2011Netinterestincome 755 472 - 89 1,316Non-interestincome 283 81 - (56) 308

Net operating income 1,038 553 - 33 1,624

Netoperatingincomefromexternalcustomers 1,548 1,079 - (1,003) 1,624Netinternaloperatingincome (510) (526) - 1,036 -

Net operating income 1,038 553 - 33 1,624

Depreciation (2) - - (20) (22)Softwareamortisationcosts - - - (42) (42)Otheroperatingexpenses (206) (76) - (425) (707)

Total operating expenses (208) (76) - (487) (771)

Impairmentchargesonloans (64) (167) - 7 (224)

Shareofprofitofassociateaccountedforusingequitymethod - - - 1 1

Profit before income tax expense 766 310 - (446) 630

Total gross loans 30,625 21,421 - (223) 51,823Total deposits 22,908 10,387 - 1,591 34,886


2 Includedinthereconcilingitemsfortotaloperatingexpensesis$548million(30September2011:$500million)ofheadofficeoperatingexpenses,whicharenotallocatedtoabusinessunitthatmeetsthedefinitionofanoperatingsegment.

Note 30 Superannuation commitmentsTheBankingGrouphasahybrid(definedcontributionanddefinedbenefit)superannuationschemeforstaffinNewZealand.Contributions,asspecifiedintherulesofthescheme,aremadebytheBankingGroupasrequired.Thedefinedbenefitschemehasbeenclosedtonewmemberssince1April1990.Anactuarialvaluationoftheschemeisundertakeneverythreeyears,withthelastactuarialassessmentofthefundingstatusundertakenasat30June2011.Contributionstothedefinedbenefitschemeareataratesufficienttokeeptheschemesolvent,andcontributionsarecurrentlybeingmadetothedefinedbenefitschemeattherateof12%(beforeemployer’ssuperannuationcontributiontax)ofmembers’salaries.TheBankingGrouphasnomaterialobligationsinrespectofpost-retirementbenefitsotherthanpensions.F

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Note 30 Superannuation commitments (continued)ThebelowtabledetailsthePrimaryactuarialassumptionsusedinthecalculationsofthedefinedbenefitschemeliability:


% 2012 2011

Primary actuarial assumptions used in the above calculationsDiscountrate 2.5 3.2Expectedreturnonschemeassets-activemembers(endofyear) 6.0 6.0Expectedreturnonschemeassets-pensioners 6.0 6.0Rateofincreaseinsalaries 3.5 3.5Rateofincreaseforpensions 2.5 2.5

Asset allocationCash 0.9 0.6Equityinstruments 57.1 55.0Debtinstruments 42.0 44.4

Total asset allocation 100.0 100.0

ThecarryingvalueoftheretirementbenefitdeficitisdisclosedaspartofNote22.

Note 31 Key management personnel

Key management personnel compensation KeymanagementpersonnelaredefinedasbeingDirectorsandseniormanagementoftheBankingGroup.Theinformationrelatingtothekeymanagementpersonneldisclosedincludestransactionswiththoseindividuals,theirclosefamilymembersandtheircontrolledentities.


Year Ended YearEnded $'000s 30-Sep-12 30-Sep-11

Salariesandothershort-termbenefits 11,484 11,293Post-employmentbenefits 653 892Otherterminationbenefits 210 763Share-basedpayments 3,282 3,457

Total key management compensation 15,629 16,405

TheDirectorshavereceivedremunerationfromtheBankingGroupandtheseamountsareincludedinthetableabove.

Loans and deposits with key management personnelAllloansanddepositsaremadeintheordinarycourseofbusinessoftheBankandtheBankingGroup,onanarm’slengthbasisandonnormalcommercialtermsandconditions.Loansareontermsofrepaymentthatrangebetweenvariable,fixedrateuptofiveyearsandinterestonlyloans,allofwhichareinaccordancewiththeBankingGroup’slendingpolicies.Asat30September2012noprovisionshavebeenrecognisedinrespectofloansgiventokeymanagementpersonnelandtheirrelatedparties(30September2011:nil).

Other key management personnel transactionsAllothertransactionswithkeymanagementpersonnel,theirrelatedentitiesandotherrelatedpartiesareconductedonanarm’slengthbasisinthenormalcourseofbusinessandoncommercialtermsandconditions.Thesetransactionsprincipallyinvolvetheprovisionoffinancialandinvestmentservices.

Note 32 Securitisation, funds management and other fiduciary activities

SecuritisationAsat30September2012theBankandtheBankingGrouphadsecuritisedloansamountingto$215million(30September2011:$305million),whichhadbeensoldbytheBankandtheBankingGrouptoexternalpartiesbeingtheHLTandtheWestpacMortgageInvestmentFund(‘MIF’)viatheHLT.HLTandMIFwereestablished,pursuanttotrustdeedsbetweenBTFundsManagement(NZ)LimitedandTheNewZealandGuardianTrustCompanyLimited,withtheprincipalpurposeofinvestinginhousingloansoriginatedbytheBank.Thepurchaseofthesehousingloanshasbeenfundedwiththeproceedsofunitssubscribedfor,andissuedto,retailinvestorsinNewZealand.TheBankandtheBankingGroupreceivefeesforvariousservicesprovidedtoHLTandMIFonanarm’slengthbasis,includingservicingfees.Thesefeesarerecognisedoverthefinancialperiodsinwhichthecostsareborne.ThesecuritisedassetshavebeenderecognisedfromthefinancialstatementsoftheBankandtheBankingGroupastherisksandrewardsoftheassetshavebeensubstantiallytransferredtoexternalparties.TheBankhasa$5.0billion(30September2011:$5.0billion)internalmortgage-backedsecuritisationprogramme.WNZSLissuedresidentialmortgage-backedsecuritiestofundthepurchaseofhousingloansfromtheBank.ThosesecuritiesarecurrentlyheldbytheBank.Themostseniorratedsecurities(30September2012:$4.75billion,30September2011:$4.75billion)qualifyaseligiblecollateralforrepurchaseagreementswiththeReserveBank.HoldingaportionofmortgagesinsecuritisedformatenablestheBanktomaintainareadilyavailablesourceofcashshouldmarketconditionsbecomedifficult.IttakesadvantageoftheReserveBank’sguidelinesforitsovernightreverserepofacilityandopenmarketoperations,whichallowsbanksinNewZealandtoofferresidentialmortgage-backedsecurities(securedbyresidentialmortgageassetsfromtheirownbalancesheets)ascollateralfortheReserveBank’srepurchaseagreements.

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Note 32 Securitisation, funds management and other fiduciary activities (continued)Funds management and other fiduciary activitiesTheBankmarketstheproductsofBTFundsManagement(NZ)Limited,amemberoftheUltimateParentBankGroup,throughitsbranches,advisorynetworkandprivatebank.TheBankderivesdistributionfeesfromthesaleofmanagedfundproducts,superannuationandunittrustsmarketedonbehalfofBTFundsManagement(NZ)Limited.TheBankalsoprovidesinvestmentadvicetoanumberofclients,whichincludestheprovisionofotherfiduciaryactivities.WestpacTermPIE(‘Term PIE’)isadministeredbytheBankingGroup(refertoNote25forfurtherdetails)andinvestsindepositswiththeBank.TheBankisconsideredtocontroltheTermPIE,andassuchtheTermPIEisconsolidatedwithinthefinancialstatementsoftheBankingGroup.Asat30September2012$720million(30September2011:$496million)offundsundermanagementwereinvestedbytheTermPIEintheBank’sdeposits.

Marketing and distribution of insurance productsTheBankmarketsanddistributesbothlifeandgeneralinsuranceproducts.ThelifeinsuranceproductsareunderwrittenbyWestpacLife-NZ-Limited,amemberoftheUltimateParentBankGroup,andbyexternalthirdpartyinsurancecompanies.Thegeneralinsuranceproductsarefullyunderwrittenbyexternalthirdpartyinsurancecompanies.DisclosurestatementsaremadeinallmarketingmaterialthattheproductsareunderwrittenbythosecompaniesandthattheBankdoesnotguaranteetheobligationsof,oranyproductsissuedby,thosecompanies.

Risk managementTheBankingGroup’sriskmanagementframework(refertoNote35)willhelpminimisethepossibilitythatanydifficultiesarisingfromtheaboveactivitieswouldimpactadverselyontheBankingGroup.Furthermore,duringtheyearended30September2012:

■■ financialservicesprovidedbyanymemberoftheBankingGrouptoentitieswhichconductthetrust,custodial,securitisation,fundsmanagementandotherfiduciaryactivitiesdescribedabove,oronwhosebehalfinsuranceproductsaremarketedordistributed,havebeenprovidedonarm’slengthtermsandconditionsandatfairvalue;and

■■ assetspurchasedbyanymemberoftheBankingGroupfromentitieswhichconductthetrust,custodial,securitisation,fundsmanagementandotherfiduciaryactivitiesspecifiedabove,oronwhosebehalfinsuranceproductsaremarketedordistributed,havebeenpurchasedonarm’slengthtermsandconditionsandatfairvalue.

Peak aggregate funding provided to entitiesTheBankingGroupdidnotprovideanyfundingtoentitiesconductingfundsmanagementandotherfiduciaryactivities,orinsuranceproductmarketinganddistributionactivitiesdescribedinthisnote,duringtheyearended30September2012(30September2011:nil).

Note 33 Insurance businessTheBankingGroupdoesnotconductanyinsurancebusiness(asthattermisdefinedintheOrder).

Note 34 Capital adequacyTheinformationcontainedinthisnotehasbeenderivedinaccordancewiththeBankingGroup’sconditionsofregistrationwhichrelatetocapitaladequacyandthedocument‘Capitaladequacyframework(internalmodelsbasedapproach)’(BS2B)issuedbytheReserveBank.TheBankingGroupmaintainsanactivelymanagedcapitalbasetocoverrisksinherentinthebusiness.TheadequacyoftheBankingGroup’scapitalismonitoredusing,amongothermeasures,therulesandratiosestablishedbytheBaselCommitteeonBankingSupervisionandadoptedbytheReserveBankinsupervisingtheBankingGroup.Duringtheyearended30September2012theBankingGroupcompliedinfullwithallitsexternallyimposedcapitalrequirements.

Capital managementTheprimaryobjectivesoftheBankingGroup’scapitalmanagementaretoensuretheBankingGroupcomplieswithexternallyimposedcapitalrequirementsandmaintainsstrongcreditratingsandhealthycapitalratiosinordertosupportitsbusinessandmaximiseshareholders’value.TheBankingGroupmanagesitscapitalstructureandmakesadjustmentsinlightofchangesineconomicconditionsandtheriskcharacteristicsofitsactivities.Inordertomaintainoradjustthecapitalstructure,theBankingGroupmayadjusttheamountofdividendpaymentstoshareholders,reducediscretionaryexpenditure,return/issuecapitaltoshareholdersorissuecapitalsecurities.Nochangesweremadeintheobjectives,policiesandprocessesduringtheyearended30September2012.Threeindependentprocesses,undertakenbyDirectorsandseniormanagementoftheBank,aredesignedtoensurethattheBankingGroup’scapitalisadequatetosupportitscurrentandfutureactivities:1. TheBoardhasapprovedariskappetitestatement.Thisstatementoutlinesthetargetdebtrating,targetcapitalratiosand

thedegreeofearningsvolatilitythatisacceptable.Capitalratiosaresetatahigherlevelthanrequiredbytheregulator,whichbothreducestheriskofbreachingtheconditionsofregistrationandprovidesinvestorconfidence.TheBankingGroupactivelymonitorsitscapitaladequacyaspartoftheannualBankingGroupinternalcapitaladequacyassessmentprocess(‘ICAAP’)andreportsthistoseniormanagementandtheBoard.

2. TheBankingGroupcalculatesthecapitalrequiredtobeheldforitscurrentriskprofileandforecaststheestimatedcapitalpositionbasedonexpectedfutureactivities.TheforecastcapitalrequiredisassessedagainstthetargetrangesthathavebeenapprovedbytheBoardinregardtocapitalratios.

3. TheUltimateParentBankGrouptakescapitalconsiderationsintoaccountduringitsBoardStrategyReview(‘BSR’).TheBSRisanannualprocesswherethecurrentstrategicdirectionoftheUltimateParentBankGroupisreviewedandrefinementsaremade.

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Note 34 Capital adequacy (continued)Summary of ICAAPTheBankingGroup’sICAAPoutlinestheBankingGroup’sapproachtoensuringithassufficientavailablecapitaltomeetminimumcapitalrequirements,evenunderstressedscenarios.TheReserveBankdocument‘GuidelinesonaBank’sInternalCapitalAdequacyAssessmentProcess(ICAAP)’(BS12)reinforcesthisinternaldisciplinebyincorporatingaspecificrequirementthattheboardofaNewZealandincorporatedbankhasadutytoensurethatcapitalheldbythebankiscommensuratewiththelevelandextentofitsrisks.TheBankingGroup’sICAAPisfoundedonthecoreprinciplethatitstargetlevelofcapitalisdirectlyrelatedtoitsriskappetiteandcorrespondingriskprofile.EconomicCapitalprovidesaconnectionbetweenthesetwoprinciples,andiscalibratedtotheBankingGroup’stargetseniordebtrating,oneofthekeyparametersdefinedintheriskappetitestatement.TheICAAPalsotakesaccountofstresstesting,regulatorydevelopments,minimumprudentialcapitalratiosandpeergroupcomparatives.

Banking Group capital summary The Banking Group

2012 2011 $ millions Unaudited Unaudited

Tier One CapitalIssuedandfullypaidupordinarysharecapital 4,600 3,470Revenueandsimilarreserves1 597 599 Currentyear'sretainedprofits 592 419 Minorityinterests 7 8Less deductions from Tier One CapitalGoodwill (477) (477)Otherintangibleassets (121) (90)Cashflowhedgereserve (30) (20)Deferredtaxassetdeduction - (71)Expectedlossexcessovereligibleallowance (69) (61)

Total Tier One Capital 5,099 3,777

Tier Two CapitalUpper Tier Two CapitalPerpetualsubordinatednotes 970 970BVotingshares2 N/A -

Total Upper – Tier Two Capital 970 970

Less deductions from Tier Two CapitalExpectedlossexcessovereligibleallowance (69) (61)Lower Tier Two Capital - -

Total Tier Two Capital 901 909

Total Capital 6,000 4,686

1 Revenueandsimilarreservesconsistofthecashflowhedgereserve,available-for-salesecuritiesreserveandpriorperiods’retainedprofits.2 RefertoNote24fordetailsoftherepurchaseandcancellationoftheBVotingshares.

Basel IITheBaselIIFrameworkisbuiltonthreemutuallyreinforcingpillars.Pillar1setsoutthemechanicsforminimumcapitaladequacyrequirementsforcredit,tradedmarketandoperationalrisks.Pillar2relatestotheinternalassessmentofcapitaladequacyandthesupervisoryreviewprocess.Pillar3dealswithmarketdisclosureandmarketdiscipline.ThetablebelowisdisclosedinaccordancewithClause15ofSchedule11totheOrderandrepresentsthecapitaladequacycalculationbasedontheReserveBankdocument‘Capitaladequacyframework(internalmodelsbasedapproach)’(BS2B).

The Banking Group

2012 2011 % Unaudited Unaudited

Capital adequacy ratiosTier One Capital ratio 12.0 10.5Total Capital ratio 14.1 13.0

Reserve Bank minimum ratiosTier One Capital ratio1 4.0 4.0Total Capital ratio 8.0 8.0

1 Inadditiontothisminimum4%,locallyincorporatedregisteredbankshavingthebenefitoftheWholesaleFundingGuaranteeFacilityarerequiredtomaintainanadditional2%TierOneCapitalratiobuffer.Seethe‘WholesaleGuarantee’sectiononpage5formoreinformation.

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Note 34 Capital adequacy (continued)Banking Group Pillar I total capital requirement

2012

Risk-weighted Total Exposure or Exposure After Implied Risk- Credit Risk weighted Total Capital Mitigation Exposure Requirement $ millions Unaudited Unaudited Unaudited

Credit risk Exposuressubjecttotheinternalratingsbasedapproach 81,578 32,146 2,570 Equityexposures 70 223 18 Specialisedlendingsubjecttotheslottingapproach 4,856 4,715 377 Exposuressubjecttothestandardisedapproach 2,310 820 66

Total credit risk 88,814 37,904 3,031 Operational risk N/A 3,888 311 Market risk N/A 775 63 Supervisory adjustment N/A - -

Total 88,814 42,567 3,405

Pillar II capital for other material riskTheBankingGroup’sICAAPidentifies,reviewsandmeasuresadditionalmaterialrisksthatmustbecapturedwithintheBankingGroup’scapitaladequacyassessmentprocess.TheseothermaterialrisksarethosenotcapturedbyPillarIregulatorycapitalrequirementsandconsistoffundingliquidityrisk,reputationalrisk,environmental,socialandgovernancerisk,businessrisk,modelriskandsubsidiaryrisk.TheBankingGroup’sinternalcapitalallocationforothermaterialrisksis:

The Banking Group

2012 2011 $ millions Unaudited Unaudited

Internal capital allocationOthermaterialrisk 517 553

Basel IThetablebelowisdisclosedinaccordancewithClause16ofSchedule11totheOrderandrepresentsthecapitaladequacycalculationbasedontheBaselICapitaladequacyframework.ForthepurposesofcalculatingthecapitaladequacyratiosfortheBank,wholly-ownedandwholly-fundedsubsidiariesoftheBankingGroupareconsolidatedwiththeBank.Inthiscontext,wholly-fundedbytheBankmeanstherearenoliabilities(includingoff-balancesheetobligations)toanyoneotherthantheBank,theInlandRevenueortradecreditors,whereaggregateexposuretotradecreditorsdoesnotexceed5%ofthesubsidiary’sshareholders’equity.Wholly-ownedbytheBankmeansthatallequityissuedbythesubsidiaryisheldbytheBank.

The Bank

2012 2011 % Unaudited Unaudited

Capital adequacy ratiosTier One Capital ratio 8.7 8.1Total Capital ratio 10.2 10.2

Ultimate Parent Bank Group Basel II capital adequacy ratios 2012 2011 % Unaudited Unaudited

Ultimate Parent Bank Group1

Tier One Capital ratio 10.3 9.7Total Capital ratio 11.7 11.0

Ultimate Parent Bank (Extended Licensed Entity)1, 2

Tier One Capital ratio 10.1 9.6Total Capital ratio 11.8 11.4

1 ThecapitalratiosrepresentinformationmandatedbyAustralianPrudentialRegulationAuthority(‘APRA’).2 ThecapitalratiosoftheUltimateParentBank(ExtendedLicensedEntity)arepubliclyavailableintheUltimateParentBankGroup’sBaselIIPillar3report.This

informationismadeavailabletousersviatheUltimateParentBank’swebsite(www.westpac.com.au).

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Note 34 Capital adequacy (continued)BaselIIcameintoeffecton1January2008.TheUltimateParentBankGroupisaccreditedbyAPRAtousetheAdvancedInternalRatingsBased(‘Advanced IRB’)approachforcreditrisk,theAdvancedMeasurementApproach(‘AMA’)foroperationalriskandtheinternalmodelapproachforInterestRateRiskintheBankingBook(‘IRRBB’)forcalculatingregulatorycapital(knownas‘AdvancedAccreditation’)andisrequiredbyAPRAtoholdminimumcapitalatleastequaltothatspecifiedundertheAdvancedIRBandAMAmethodologies.UnderNewZealandregulationsthismethodologyisreferredtoasBaselII(internalratingsbased)approach.WiththisaccreditationtheUltimateParentBankGroupisrequiredtodiscloseadditionaldetailedinformationonitsriskmanagementpracticesandcapitaladequacyonaquarterlyandasemi-annualbasis.ThisinformationismadeavailabletousersviatheUltimateParentBank’swebsite(www.westpac.com.au).TheaimistoallowthemarkettobetterassesstheUltimateParentBankGroup’sriskandrewardassessmentprocessandhenceincreasethescrutinyoftheseprocesses.TheUltimateParentBankGroup,andtheUltimateParentBank(ExtendedLicensedEntity)asdefinedbyAPRA,exceededtheminimumcapitaladequacyrequirementsasspecifiedbyAPRAasat30September2012.APRAspecifiesaminimumprudentialcapitalratiofortheUltimateParentBankGroup,whichisnotmadepubliclyavailable.Since2012theUltimateParentBankGroup’scapitalratioshavebeenmeasuredusingthenewBasel2.5standards,whichbecameeffectivefrom1January2012.Thesestandardsprincipallyinvolvedchangesinriskweightedassetsappliedtomarketriskandtosecuritisation.

Note 35 Risk management

GeneralTheBankingGroupregardsthemanagementofrisktobeafundamentalmanagementactivityperformedatalllevelsofitsbusiness.Supportingthisapproachisariskgovernanceframeworkthatincludescoreriskprinciplesaswellaspoliciesandprocessesformeasuringandmonitoringrisk(‘Risk Governance Framework’).

Risk management framework and governanceTheBoardisresponsiblefordeterminingtheBank’sappetiteforrisk.TheBankisultimatelyasubsidiaryoftheUltimateParentBankand,therefore,amemberofthegroupofcompaniescomprisingtheUltimateParentBankanditssubsidiaries.Accordingly,theBankingGroup’sRiskGovernanceFrameworkiscloselyalignedwiththeUltimateParentBank’sRiskGovernanceFramework(‘Group Risk Governance Framework’).TheBoardissupportedbytheBank’sBoardAuditCommittee(‘Bank’s BAC’)andtheBank’sBoardRiskManagementCommittee(‘Bank’s BRMC’),whicharesubcommitteesoftheBoardresponsibleformonitoringriskmanagementperformanceandcontrolsacrosstheBankingGroup.TheBank’sBACcomprisesfiveDirectorsoftheBankallofwhomarenon-executiveandofwhichfourareindependent.TheBank’sBACassiststheBoardinfulfillingitsresponsibilitiesinrelationtoexternalreportingoffinancialinformation,internalcontrolofoperationalriskandtheefficiencyandeffectivenessofauditandcompliancewithlawsandregulations.Itreviewstheinterimandannualfinancialstatements,theactivitiesoftheBankingGroup’sauditorsandmonitorstherelationshipbetweenmanagementandtheexternalauditors.TheBank’sBRMCcomprisesallofthenon-executiveDirectorsoftheBoard.TheBank’sBRMChaspowerdelegatedbytheBoardtosetriskappetitesandapproveframeworks,policiesandprocessesforthemanagementofrisk.TheBank’sBRMCapprovestheRiskGovernanceFrameworkatleasteverytwoyears.TheBank’sRiskGovernanceFrameworkisdesignedtoreflectthateveryoneintheBankisresponsibleforidentifyingandmanagingriskandoperatingwithintheBank’sdesiredriskprofile.Effectiveriskmanagementisaboutachievingabalancedapproachtoriskandreward,andenablestheBanktobothincreasefinancialgrowthopportunitiesandmitigatepotentiallossordamage.Optimisationandmitigationstrategiesareequallyimportant,alongwithmaintaininganappropriatesegregationofduties.TheRiskGovernanceFrameworkisownedbytheBank’sChiefRiskOfficer(‘CRO’).Implementationisachievedthroughdevelopingpolicies,controls,processesandproceduresforidentifyingandmanagingriskarisingfromtheBank’sactivities.

Risk typesTheBankmaintainsariskrewardorientedapproachtocreatingshareholdervalueutilisingarangeofsupportingframeworkscoveringallmaterialriskclasses.TheBankdistinguishesbetweendifferentrisktypesandtakesanintegratedapproachtomanagingthem.Thesekeyrisksare:

■■ Creditrisk:theriskoffinanciallosswhereacustomerorcounterpartyfailstomeettheirfinancialobligations;■■ Liquidityrisk:theriskthattheBankwillnotbeabletofunditsassetsandmeetobligationsastheycomedue,withoutincurringunacceptablelosses;

■■ Marketrisk:theriskofanadverseimpactonearningsresultingfromchangesinmarketfactors,suchasforeignexchangerates,interestrates,commoditypricesandequityprices.Thisincludesinterestrateriskinthebankingbook–therisktointerestincomefromamismatchbetweenthedurationofassetsandliabilitiesthatarisesinthenormalcourseofbusinessactivities;

■■ Operationalrisk:theriskoflossresultingfrominadequateorfailedinternalprocesses,humanerrorormisconduct,orfromexternalevents.Itincludes,amongotherthings,technologyrisk,modelriskandoutsourcingrisk;and

■■ Compliancerisk:theriskoflegalorregulatorysanction,andfinancialorreputationallossarisingfromtheBankingGroup’sfailuretoabidebythecomplianceobligationsrequiredoftheBankingGroup.

Otherrisksinclude:■■ Businessrisk:theriskassociatedwiththevulnerabilityofalineofbusinesstochangesinthebusinessenvironment;■■ Environmental,SocialandGovernancerisk:TheriskthattheBankdamagesitsreputationorfinancialperformanceduetofailuretorecogniseoraddressmaterialexistingoremergingsustainabilityrelatedenvironmental,socialandgovernanceissues;

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Note 35 Risk management (continued)■■ Reputationrisk:therisktoearningsorcapitalarisingfromnegativepublicopinion,resultingfromthelossofreputationorpublictrustandstanding;and

■■ Subsidiary(contagion)risk:theriskthatproblemsarisinginothermembersoftheBankingGroupmaycompromisethefinancialpositionoftheBank.

Theessentialelementsofsoundriskmanagementinclude:■■ ahealthyriskculturewithstrongsupportfromtheBoard,theChiefExecutiveandtheExecutiveTeam;■■ observablelinkagesbetweenstrategy,riskappetite,riskandreward,andcapitaladequacy;■■ clearlydefinedaccountabilities,responsibilitiesandauthorities;■■ anappropriatelevelofriskmanagementresourceswiththeskillsrequiredtofulfiltheirresponsibilitiesandsupportthestrategy;

■■ clearlydefinedoperatingstructures,reportinglinesandgovernancestructures;■■ cleargoals,objectivesandincentives,includinganappropriaterisk-focusedcomponentofemployeeperformancemeasurement;

■■ processesandsystemsthatfacilitateeffective:■ riskidentification,analysis,evaluationandquantification;■ considerationofriskavoidanceormitigation;■ acceptanceandmanagementofresidualrisk;■ captureandreportingofriskdataforbothinternalandexternalpurposes;■ risk-adjustedmeasurementwheretherearerewardsfortakingrisk;and■ riskoversightandanalysis,includingstresstesting;and

■■ assuranceprocesseswhichensurethatrisk-relatedpracticesandcontrolsareappropriatelyembeddedandareeffective,andcomplywithinternal,regulatoryandlegislativerequirements.

Management assurance programmeTheBankhasanExecutiveRiskandAuditCommittee(‘Bank’s ERAC’)whichmeetsquarterly,andwhichoverseescredit,operational,complianceandreputationalriskswithinthecontextoftheBank’sriskappetiteasdeterminedbytheBank’sBoardaswellasanAssetandLiabilityCommittee(‘Bank’s ALCO’)thatleadsthemanagementofbalancesheetriskandoverseesmarketriskandequityriskwithinthecontextoftheBank’sriskappetiteasdeterminedbytheBank’sBoard.TheBankingGrouphasamanagementassuranceprogrammedesignedtoidentifythekeyoperationalandcompliancerisks,thecontrolsinplacetomitigatethoserisksandtoobtainassurancethatthosecontrolshavecontinuedtooperateeffectively.Thisprogrammeallowsseniormanagementtoaffirmtheirsatisfactionwiththequalityoftheprocessesundertheirresponsibilityandwiththeeffectivenessofthecontrolsthatsupportthatassurance.TheresultsofthisprocessarereportedtotheBank’sERAC.TheBank’sChiefExecutive(‘CE’)providesmanagementassurancetotheUltimateParentBankBoardRiskManagementCommittee(‘Ultimate Parent Bank’s BRMC’),theUltimateParentBankBoardAuditCommitteeandtheCEOoftheUltimateParentBank.ThissystemofmanagementassuranceassiststheUltimateParentBank’sBoardinsatisfyingitselfthattheBankingGroup’sriskmanagementsystemsareadequate,thattheyoperateeffectivelyandthatanydeficiencieshavebeenidentifiedandarebeingaddressed.

Independent New Zealand Assurance unitTheBankingGrouphasanindependentassuranceunit(‘New Zealand Assurance’)comprisedofaNewZealandbasedAuditteam,supportedbytheUltimateParentBankCreditRiskAssuranceandModelRiskReviewfunctions,whichreportstotheBank’sBAC,aswellastotheUltimateParentBank.NewZealandAssurance,asanindependentfunction,hasnodirectauthorityovertheactivitiesofmanagement.IthasunlimitedaccesstoalltheBankingGroup’sactivities,records,propertyandemployees.ThescopeofresponsibilityofNewZealandAssurancecoverssystemsofmanagementcontrolacrossallbusinessactivitiesandsupportfunctionsatalllevelsofmanagementwithintheBankingGroup.Thelevelofoperationalriskdeterminesthescopeandfrequencyofindividualaudits.TheHeadofNewZealandAssurancereportsonaquarterlybasis,ormoreoftenasdeemedappropriate,totheBank’sBAC,toagreethebudgetandtheannualassuranceplanandtoreportitsfindings.Inaddition,theBank’sBAChasprivatesessionswiththeHeadofNewZealandAssurance.Furthermore,theHeadofNewZealandAssurancereportstotheChairoftheBank’sBAC,andforadministrativepurposestotheNZChiefFinancialOfficer(‘CFO’),amemberoftheBank’sExecutiveTeam,andtheUltimateParentBank’sGeneralManagerGroupAssurance.

Reviews in respect of risk management systemsNewZealandAssuranceparticipatesinthesixmonthlymanagementassuranceprogrammeinordertoassesstheadequacyofthegovernanceframeworksupportingoperationalriskmanagement.GroupAssurance’sCreditRiskAssuranceandModelRiskReviewfunctionshavearollingprogrammeofcreditandmodelriskreviewsthroughoutthefinancialyear.NewZealandAssurance,withsupportfromtheUltimateParentBank’sGroupAssuranceunit,alsoperiodicallyreviewstheBank’sOperational,Market,FundingandLiquidityRiskFrameworks.ThereviewsdiscussedaboveinthissectionarenotconductedbyapartywhichisexternaltotheBankingGrouportheUltimateParentBank,thoughtheyareindependentandhavenodirectauthorityovertheactivitiesofmanagement.Withaviewtocontinuouslyimprovingitsriskmanagement,theBankcommissionedanexternalreviewofitsriskmanagementframeworkduringtheyearended30September2012.

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Note 35 Risk management (continued)35.1 Compliance and operational riskTheBank’sERAC,chairedbytheBank’sCRO,meetsquarterlyandisresponsibleforoverseeingtheeffectivenessandimplementationoftheOperationalRiskandComplianceFrameworks.ERACmonitorstheoperationalriskprofilesandtheactionplans,andhasthediscretiontoescalatematerialmatterstotheBank’sBRMCand/ortherelevantUltimateParentBankGroupRiskCommittee.

Compliance riskTheBankissubjecttoregulationandregulatoryoversight.Anysignificantregulatorydevelopmentscouldhaveanadverseeffectonhowbusinessisconductedandontheresultsofoperations.BusinessandearningsarealsoaffectedbythefiscalorotherpoliciesthatareadoptedbyvariousregulatoryauthoritiesoftheNewZealandGovernment,foreigngovernmentsandinternationalagencies.ThenatureandimpactoffuturechangesinsuchpoliciesarenotpredictableandarebeyondtheBank’scontrol.TheBankhasadedicatedOperationalRiskandCompliancefunction.EffectivecomplianceriskmanagementenablestheBanktoidentifyemergingissuesand,wherenecessary,putinplacepreventativemeasures.

Operational riskOperationalriskarisesfrominadequateorfailedprocesses,peopleandsystemsorfromexternalevents.Operationalriskhasthepotential,asaresultofthewaybusinessobjectivesarepursued,tonegativelyimpacttheBankingGroup’sfinancialperformance,customerserviceand/orreputationinthecommunityorcauseotherdamagetothebusiness.TheBankhasadedicatedOperationalRiskfunctionwhichusesitsOperationalRiskManagementFramework(whichisalignedtotheUltimateParentBankGroupOperationalRiskManagementFramework)asatooltoassistitsbusinessunitsintheachievementoftheirobjectivesthroughassistingthebusinesstounderstandandmanagethoserisksthatcouldhinderprogress.Thisframeworkoutlinesthebusinessrequirementsformanagingoperationalriskwithrespecttogovernance,riskandcontrolassessments,incidentmanagementandreportingandmonitoring.TheBankhasimplementedtheAMAmethodologyforcalculatingoperationalriskcapital.Anoutlineofthismethodology,assetoutbelow,takesintoconsiderationbothinternalandexternalfactors.

Calculating operational risk capitalThecalculationofoperationalriskcapitalisdesignedtoestimatetheamountofcapitalrequiredtowithstandlossesfromextremeunexpectedoperationalriskeventsinfutureyears.TheBankingGroupadoptsahybridapproach,relyingonavarietyofdatasourcesthatcombinesactuallossexperiencewithestimatesofpotentialfuturelossesbasedonexpertbusinessjudgment.TheOperationalRiskCapitalModel(‘ORCM’)hasbeendevelopedtoprovideareliable,reasonableandconservativeestimateofthecapitaltobeheldbytheBankingGroup’sregulatedentities.Itincludescapitalforbothexpectedandunexpectedlossesarisingfromoperationalriskevents.TheBankingGroupundertakesthreestreamsofanalysis.Eachstreamutilisesdifferentdatasetstogenerateanestimateofpotentialfinancialloss.Thethreecapitalestimatesarethenweightedandcombinedtoproduceanestimateofcapital.Threestreamsareusedtoprovideamorecomprehensiveassessmentofpossibleoperationalrisksby:

■■ coveringsmaller/frequentlossesandlarger/infrequentlossesviascenarioanalysis;■■ providingforlossespreviouslyexperiencedbytheBankingGroup;and■■ utilisinglosshistoryfrompeerswithsimilarbusinessmodels.Togetherthesethreestreamsgiveanindicationofthefuturelossesthatarepossible.Thecalculationofoperationalriskcapitaldoesnotcurrentlymakeanyadjustmentordeductionforrisksthatmaybecoveredbyinsuranceoranyexpectedlossesthatarethesubjectoffinancialprovisions.Operationriskcapitaliscalculatedquarterly.TheORCMisreviewedannuallytore-assesstheappropriatenessofthemodelframework,modelmethodology,assumptionsandtheparametersusedinthemodelinlightofindustrydevelopments,advancementsinmodellingtechniquesandchangesinthebroaderOperationalRiskManagementFramework.ThefollowingtablesetsouttheBankingGroup’simpliedrisk-weightedexposuresundertheAMAmethodologyandtheoperationalriskcapitalrequirement:

2012

Total Operational Implied Risk- Risk weighted Capital Exposure Requirement $ millions Unaudited Unaudited

Methodology implementedAdvanced Measurement ApproachOperationalrisk 3,888 311

35.2 Funding and liquidity riskLiquidityriskisthepotentialinabilitytofundassetsandmeettheBank’spaymentobligationsastheycomedue,withoutincurringunacceptablelosses.LiquidityriskisinherentintheBank’sbalancesheetduetomismatchesinthematurityofassetsandliabilities.ThisriskismanagedthroughtheBank’sBRMCapprovedliquidityriskmanagementframework.ResponsibilityforliquiditymanagementisdelegatedtotheBank’sCFOundertheoversightoftheBank’sCE.TheBank’sTreasuryunitreportstotheCFOandmanagestheliquiditypositiononadaytodaybasis.Liquidityriskpositionsaremodelledandreporteddaily.IndependentoversightisprovidedbytheHeadofMarketRiskinconjunctionwiththeBank’sCRO,withexecutiveoversightprovidedbytheBank’sALCO.ReportingofliquidityandfundingriskisprovidedtotheBank’sALCO.QuarterlyreportingispresentedtotheBank’sBRMCwhoalsoapprovethefundingstrategy,liquiditylimitsstructureandliquidityriskmanagementframework.Inaddition,reportingisalsoprovidedtotheUltimateParentBank’sBankingBookRiskCommitteeandAssetandLiabilityCommittee.

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Note 35 Risk management (continued)TheBankaimstooperateamixofretailandwholesalefunding,withemphasisonthevalueofcorefundingconsistentwiththeprinciplesinherentinBS13.Keyaspectsoftheliquiditymanagementstrategyareasfollows:

Liquidity risk management frameworkTheliquidityriskmanagementframework(the‘framework’)isownedbytheBank’sCROandapprovedbytheBank’sBRMC.Theframeworkcoversallaspectsofliquidityriskincluding:

■■ rolesandresponsibilities;■■ measurementandmodellingapproaches;■■ contingencyplanning;■■ principalframeworkcomponents,policiesandreportsalongwiththefrequencyofreviewandauthorityforapproval;■■ liquidityrisklimits;■■ scenarioscovered;■■ limitdetermination;and■■ minimumholdingsofliquidassets.TheframeworkisreviewedatleasteverytwoyearsandsubmittedtotheBank’sBRMCforendorsement.

Daily liquidity modelling and reportingTheBankissubjecttotheconditionsoftheReserveBank’sliquiditypolicy,BS13.ThefollowingmetricsarecalculatedandreportedonadailybasisinaccordancewithBS13:

■■ thelevelofliquidassetsheld;■■ theone-weekmismatchratio;■■ theone-monthmismatchratio;and■■ theone-yearcorefundingratio.Inaddition,theBankcalculatesthefollowingliquidityratiosinaccordancewiththeUltimateParentBank’sliquidityriskframeworkunderAPS210Liquidity:

■■ agoingconcernscenario;and■■ anamecrisisscenario.ReportsarecirculateddailytotheBank’sTreasury,RiskandFinancepersonnel,includingtheBank’sCROandCFO.Exceptionstointernallimitsareescalatedimmediatelytoseniormanagement,ALCOortheBoarddependingonthestatusofthelimit.

Annual funding planEachfinancialyeartheBank’sTreasuryunitundertakesacomprehensivereviewresultinginthepreparationoftheBank’sannualfundingplan.Thisreviewoutlinesthecurrentfundingstrategy,proposesafundingstrategyforthecomingfinancialyearandcoversareassuchas:

■■ trendsinglobaldebtmarkets;■■ fundingalternatives;■■ peeranalysis;■■ estimationofwholesalefundingtask;■■ estimatedmarketcapacity;■■ fundingriskanalysis;and■■ allocationoffundingcosts.TheBank’sannualfundingplanisreviewedbytheBank’sALCOpriortoapprovalbytheBank’sBRMC.

Contingency planningTreasurymaintainsaCrisisManagementActionPlandetailingbroadactionsthatshouldbetakenintheeventofafundingcrisis.Thisactionplan:

■■ definesacommitteeofseniorexecutivestomanageacrisis;■■ allocatesresponsibilitytoindividualsforkeytasks;■■ includesamediarelationsstrategy;■■ providesacontingentfundingplan;and■■ containsdetailedcontactlistsoutliningkeyregulatory,government,ratingsagenciesanddebtinvestorcontactpoints.

Sources of liquidityTheprincipalsourcesofliquidityfortheBankare:

■■ customerdeposits;■■ wholesalefunding;■■ proceedsfromsalesofmarketablesecurities;■■ repurchaseagreements;■■ principalrepaymentsonloans;■■ interestincome;and■■ feeincome.

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Note 35 Risk management (continued)Wholesale fundingThewholesalefundingbaseisdiversifiedwithrespecttoterm,investorbase,currencyandfundinginstruments.TheBankanditssubsidiary,WSNZL,maintainfundingprogrammesforbothshortandlong-termdebtinseveraljurisdictionsincludingNewZealand,EuropeandtheUnitedStates.

The Banking Group 2012 2011

Programme Programme Programme ProgrammeMarkets Issuer Type Limit Issuer Type Limit

Euro Euro Commercial Commercial Paper and Paper and Ultimate Certificate Ultimate Certificateof Parent of Deposit Parent DepositEuromarket Bank/ WSNZL1 Programme US$20 billion Bank/WSNZL1 Programme US$20billion

Programme Programme for for Issuance Issuance of Debt ofDebtEuromarket WSNZL1 Instruments US$7.5 billion WSNZL1 Instruments US$7.5billion

Global Global Covered Covered bond bondEuromarket WSNZL1 Programme €5.0 billion WSNZL1 Programme €5.0billion

Section Section 4(2) US 4(2)US Commercial Commercial Paper PaperUnitedStates WSNZL1 Programme US$10 billion WSNZL1 Programme US$10billion

Rule 144A US Rule144AUS Medium-term Medium-term Note NoteUnitedStates WSNZL1 Programme US$10 billion WSNZL1 Programme US$10billion

Medium-term Medium-term Note and Noteand Registered Registered Certificate of Certificateof Deposit DepositNewZealand The Bank Programme No limit TheBank Programme Nolimit

1 NotesissuedbyWSNZLareguaranteedbytheBank.

Liquid assetsThetablebelowshowstheBankingGroup’sholdingofliquidassetsandrepresentsthekeyliquidityinformationprovidedtomanagement.LiquidassetsincludehighqualityassetsreadilyconvertibletocashtomeettheBankingGroup’sliquidityrequirements.Inmanagement’sopinion,liquidityissufficienttomeettheBankingGroup’spresentrequirements.

The Banking Group


Cash 1,595 1,215Duefromotherfinancialinstitutions - 575Duefromotherfinancialinstitutions(includedinduefromrelatedentities) 534 -Supranationalsecurities 414 166 NZGovernmentsecurities 2,575 2,930NZpublicsecurities 206 26 NZcorporatesecurities 1,861 2,216Residentialmortgage-backedsecurities 3,992 3,992

Total liquid assets 11,177 11,120

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Note 35 Risk management (continued)Liquidity analysisThefollowingliquidityanalysisforfinancialassetsandfinancialliabilitiespresentsthecontractualundiscountedcashflowsreceivableandpayable,andisbasedontheremainingperiodasatbalancedatetothecontractualmaturity.Thetotalbalancesinthetablesbelowmaynotagreetothebalancesheetasthesetablesincorporateallcashflowsonanundiscountedbasis,whichincludebothprincipalandassociatedfutureinterestincome/expenseaccruals.

The Banking Group

2012

Less Than 1 Month to 3 Months to 1 Year to Over$ millions On Demand 1 Month 3 Months 1 Year 5 Years 5 Years Total

AssetsCashandbalanceswithcentralbanks 1,595 - - - - - 1,595

Duefromotherfinancialinstitutions - 322 - - - - 322

Derivativefinancialinstruments:

Heldfortrading 9 - - - - - 9

Heldforhedgingpurposes(netsettled) - (2) - 4 4 (3) 3

Tradingsecurities - 350 1,378 35 277 52 2,092

Available-for-salesecurities - 84 20 117 1,266 1,608 3,095

Loans 7,378 5,541 4,792 5,298 20,209 44,228 87,446

Duefromrelatedentities:

Non-derivativebalances 1,527 - - - - - 1,527

Otherassets - 195 - - - - 195

Total undiscounted financial assets 10,509 6,490 6,190 5,454 21,756 45,885 96,284

LiabilitiesDuetootherfinancialinstitutions 3 - - - - - 3

Deposits 19,529 5,914 7,171 9,324 2,180 - 44,118


Heldforhedgingpurposes(netsettled) - 11 7 44 166 33 261

Heldforhedgingpurposes(grosssettled):

Cashoutflow - - 18 69 2,464 - 2,551

Cashinflow - - - (57) (2,132) - (2,189)

Debtissues - 1,026 642 3,938 7,848 259 13,713

Otherliabilities - 502 - - - - 502

Perpetualsubordinatednotes - - - - - 970 970

Duetorelatedentities:

Non-derivativebalances 588 48 34 99 3,273 - 4,042



Heldforhedgingpurposes(netsettled) - 8 12 (5) (10) (1) 4


Cashoutflow - - 46 1,112 3,815 - 4,973

Cashinflow - - (1) (986) (3,055) - (4,042)

Total undiscounted financial liabilities 20,465 7,509 7,929 13,538 14,549 1,261 65,251

Total contingent liabilities and commitmentsLoancommitmentswithcertaindrawdown 177 - - - - - 177

Othercommitmentstoprovidefinancialservices 19,030 - - - - - 19,030

Total undiscounted contingent liabilities and commitments 19,207 - - - - - 19,207

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Note 35 Risk management (continued) The Banking Group

2011

LessThan 1Monthto 3Monthsto 1Yearto Over$ millions OnDemand 1Month 3Months 1Year 5Years 5Years Total


Duefromotherfinancialinstitutions 670 29 - - - - 699




Cashoutflow - - (20) (60) (2,139) - (2,219)

Cashinflow - - - 62 2,014 - 2,076


Available-for-salesecurities - 1 14 118 472 1,318 1,923

Loans 4,334 2,193 4,375 5,189 19,290 46,977 82,358


Non-derivativebalances 1,517 - - - - - 1,517

Otherassets - 148 - - - - 148



Deposits 13,196 5,598 6,885 7,791 2,086 - 35,556


Heldforhedgingpurposes(netsettled) - 1 4 26 60 6 97

Debtissues - 1,244 5,039 4,057 6,877 1,493 18,710




Non-derivativebalances 1,169 - - - 48 - 1,217


Heldfortrading (200) - - - - - (200)

Heldforhedgingpurposes(netsettled) - 26 36 32 (10) - 84


Cashoutflow - 22 51 2,669 3,573 1,508 7,823

Cashinflow - - (25) (2,107) (3,123) (1,376) (6,631)


Total contingent liabilities and commitments

Loancommitmentswithcertaindrawdown 164 - - - - - 164



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Note 35 Risk management (continued) The Bank

2012

Less Than 1 Month to 3 Months to 1 Year to Over$ millions On Demand 1 Month 3 Months 1 Year 5 Years 5 Years Total


Duefromotherfinancialinstitutions - 322 - - - - 322



Heldforhedgingpurposes(netsettled) - (2) - 4 4 (3) 3


Available-for-salesecurities - 84 20 117 1,266 1,608 3,095

Loans 7,310 5,541 4,792 5,298 20,202 44,183 87,326


Non-derivativebalances 1,627 - 44 131 696 8,996 11,494

Otherassets - 171 - - - - 171



Deposits 19,529 5,752 6,965 9,013 2,118 - 43,377


Heldforhedgingpurposes(netsettled): - 11 7 44 166 33 261


Cashoutflow - - 18 69 2,464 - 2,551

Cashinflow - - - (57) (2,132) - (2,189)

Debtissues - 6 21 191 2,673 259 3,150




Non-derivativebalances1 2,991 1,099 699 4,041 9,148 6,725 24,703



Heldforhedgingpurposes(netsettled) - 8 12 (5) (10) (1) 4


Cashoutflow - - 46 1,112 3,815 - 4,973

Cashinflow - - (1) (986) (3,055) - (4,042)





1 TheBankprovidesafinancialguaranteeinrelationtocommercialpaperandotherdebtsecuritiesissuedbyWSNZL,theproceedsofwhichareimmediatelyonlenttotheBank.Asaresult,thefinancialguaranteeprovidedbytheBankisreflectedaspartoftheamountsduetorelatedentities.

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Note 35 Risk management (continued) The Bank

2011

LessThan 1Monthto 3Monthsto 1Yearto Over$ millions OnDemand 1Month 3Months 1Year 5Years 5Years Total


Duefromotherfinancialinstitutions 670 29 - - - - 699




Cashoutflow - - (20) (60) (2,139) - (2,219)

Cashinflow - - - 62 2,014 - 2,076


Available-for-salesecurities - 1 14 118 472 1,318 1,923

Loans 4,334 2,193 4,302 5,188 19,284 46,915 82,216


Non-derivativebalances 1,761 10 68 230 1,543 8,910 12,522

Otherassets - 129 - - - - 129



Deposits 13,195 5,497 6,731 7,563 2,061 - 35,047


Heldforhedgingpurposes(netsettled): - 1 4 26 60 6 97

Debtissues - 2 337 65 1,434 119 1,957




Non-derivativebalances1 2,107 1,448 4,771 4,234 7,055 10,094 29,709


Heldfortrading (200) - - - - - (200)

Heldforhedgingpurposes(netsettled) - 26 36 32 (10) - 84


Cashoutflow - 22 51 2,669 3,573 1,508 7,823

Cashinflow - - (25) (2,107) (3,123) (1,376) (6,631)





1 TheBankprovidesafinancialguaranteeinrelationtocommercialpaperandotherdebtsecuritiesissuedbyWSNZL,theproceedsofwhichareimmediatelyonlenttotheBank.Asaresult,thefinancialguaranteeprovidedbytheBankisreflectedaspartoftheamountsduetorelatedentities.

35.3 Credit riskCreditriskistheriskoffinanciallossresultingfromthefailureofcustomerstohonourfullythetermsandconditionsofacontractwiththeBankingGroup.ItarisesfromtheBankingGroup’slendingactivitiesandfrominterbank,treasuryandinternationaltradeactivities.

Credit risk managementTheBankingGroupadoptstwoapproachestomanagingcreditriskdependinguponthenatureofthecustomerandproduct:

■■ Transaction-managed approach Forlargercustomers,theBankingGroupevaluatescreditrequestsbyundertakingdetailedindividualcustomerand

transactionriskanalysis(the‘transaction-managed’approach).Suchcustomersareassignedacustomerriskgrade(‘CRG’)basedontheBankingGroup’sestimateoftheirPD.EachfacilityisassignedaLGDtakingintoaccounttherealisticdistressvalueofassetsoverwhichtheBankingGroupholdssecurityandconsideringtheseniorityofexposuresinthecapitalanddebtstructureofthecustomer.ThefinalassignmentofCRGsandLGDsareapprovedbyindependentcreditofficerswithappropriateauthority.Divisionaloperationalunitsareresponsibleforensuringaccurateandtimelyrecordingofallchangestocustomerandfacilitydata.

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Note 35 Risk management (continued)■■ Program-managed approach High-volumecustomercreditportfolioswithhomogenouscreditriskcharacteristicsaremanagedonastatisticalbasis

accordingtopredeterminedobjectivecriteria(the‘program-managed’approach).Quantitativescorecardsareusedtoassignapplicationandbehaviouralscorestoenablerisk-baseddecision-makingwithintheseportfolios.Thescorecardoutcomesanddecisionsareregularlymonitoredandvalidatedagainstsubsequentcustomerperformanceandrecalibrated(orrebuilt)whenrequired.Forcapitalestimation(andotherpurposes),risk-basedcustomersegmentsarecreatedbasedonexpectedPDs,andLGDsareassignedforeachsegmentbasedonhistoricexperienceandmanagementjudgment.

TheBankingGroupisresponsibleforimplementingandoperatingwithinestablishedriskmanagementframeworksandpoliciesandhasadaptedtheUltimateParentBankGroup’screditriskpolicytotheBankingGroup’scustomerandproductset.Accordingly,theBankingGrouphasitsowncreditmanualsanddelegatedapprovalauthoritieswhichareapprovedbytheUltimateParentBankGroup.TheBankingGroupmonitorsitsportfoliotoguardagainstthedevelopmentofriskconcentrations.ThisprocessensuresthattheBankingGroup’screditriskremainswelldiversifiedthroughouttheNewZealandeconomy.TheBankingGrouphasestablishedseparatereportingandprudentiallimitsforborrowingsthatcanbeaccessedbyasinglecustomergroup.Theselimitsapplytobothborrowingequivalentsandsettlementrisk.Separatelimitsapplytocorporates,governments,financialinstitutionsandbanksandarescaledbyriskgrade.AnyexcessesoflimitsarereportedquarterlytotheBank’sBRMCalongwithastrategyaddressingtheongoingmanagementoftheexcess.Allbusinessunitsproduceregulardelinquencyreportsthatdetailexcessesanddelinquencypositions.Thesereportstriggerappropriateremedialactionconsistentwithriskmanagementproceduresalignedtocreditapprovalauthority.Delinquencyreportingisusedtomonitorportfolioperformance,originationpoliciesandcreditdecision-making.Creditpolicieswithgroup-wideimplicationsareownedbytheGroupRiskdivisionoftheUltimateParentBank(‘Ultimate Parent Bank Group Risk’)andapprovedbytheUltimateParentBankGroupCreditRiskCommittee.Compliancewiththesepoliciesisadministeredlocally.UltimateParentBankGroupRiskestablishesandmaintainsgroup-widecreditriskmanagementframework,policiesandriskconcentrationlimitswhichincorporatesoundcreditriskmanagementpractices,reflectapprovedriskappetiteandstrategyandmeetrelevantregulatoryandlegislativeobligations.WithintheseboundariestheBankingGrouphasitsowncreditapprovallimitsasdelegatedbytheUltimateParentBankGroupCreditRiskOfficer.Theseestablishahierarchyofcreditapprovallevels,alignedtocustomerriskgradesandconsistentwithnormalcustomerexposuresinthebusiness.

Credit risk mitigation, collateral and other credit enhancementsTheBankingGroupusesavarietyoftechniquestoreducethecreditriskarisingfromitslendingactivities.EnforceablelegaldocumentationestablishestheBankingGroup’sdirect,irrevocableandunconditionalrecoursetoanycollateral,securityorothercreditenhancementsprovided.TheBankingGroupincludestheeffectofcreditriskmitigationthrougheligibleguaranteeswithinthecalculationappliedtoLGD.Thevalueoftheguaranteeisnotseparatelyrecorded,andthereforenotavailablefordisclosure,underClause7ofSchedule11totheOrder.Thetablebelowdescribesthenatureofcollateralheldforfinancialassetclasses:

Cashandbalanceswithcentralbank

Theseexposuresaregenerallyconsideredtobelowriskduetothenatureofthecounterparties.Thesebalancesarenotcollateralised.

Duefromotherfinancialinstitutions

Theseexposuresaremainlytorelativelylowriskbanks(RatedA+,AA–orbetter).Thesebalancesarenotcollateralised.

Derivativefinancialinstruments Nettingagreementsaretypicallyusedtoenabletheeffectsofderivativeassetsandliabilitieswiththesamecounterpartytobeoffsetwhenmeasuringtheseexposures.Additionally,collateralisationagreementsarealsotypicallyenteredintowithmajorderivativescounterpartiestoavoidthepotentialbuildupofexcessivemark-to-marketpositions.

Tradingsecurities Theseexposuresarecarriedatfairvaluewhichreflectsthecreditrisk.Nocollateralissoughtdirectlyfromtheissuerorcounterparty.

Available-for-salesecurities Collateralisnotsoughtdirectlywithrespecttotheseexposures.

Loans Housingandotherloansforconsumerpurposesmaybesecured,partiallysecuredorunsecureddependingontheproduct.Securityistypicallytakenbyafixedand/orfloatingchargeoverpropertyorotherassets.Loansforbusinesspurposesmaybesecured,partiallysecuredorunsecured.Securityistypicallytakenbywayofafixedand/orfloatingchargeoverproperty,businessassets,orotherassets.Otherformsofcreditprotectionmayalsobesoughtortakenoutifwarranted.

Duefromsubsidiaries Theseexposuresaregenerallyconsideredtobelowriskduetothenatureofthecounterparties.Thesebalancesarenotcollateralised.

Otherassets CollateralisgenerallynotsoughtonthesebalancesexceptonaccruedinterestreceivablewhichisassumedtofollowtheprincipalamountrecordedinLoans.

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Note 35 Risk management (continued)Risk reduction

TheBankingGroupreducescreditriskexposuretoacustomerthrougheither:■■ collateralisation,wheretheexposureissecuredbyeligiblefinancialcollateralorprotection;or■■ formalset-offarrangements.

Collateral valuation and management

TheBankingGrouprevaluesexposuresandcollateralrelatedtofinancialmarketspositionsonadailybasistomonitorthenetriskposition,andformalprocessesareinplacetoensurecallsforcollateraltop-uporexposurereductionaremadepromptly.Anindependentoperationalunithasresponsibilityformonitoringthesepositions.ThecollaterisationarrangementsaredocumentedviatheSupportAnnexoftheInternationalSwapsandDerivativesAssociation(‘ISDA’)dealingagreements.TheBankingGrouponlyrecognisescashaseligiblecollateralforcreditriskmitigationbywayofriskreduction.

Netting

Riskreductionbywayofcurrentaccountset-offsisrecognisedforexposurestocreditworthycustomersdomiciledinNewZealandonly.CustomersarerequiredtoenterintoformalagreementsgivingtheBankingGrouptheunfetteredrighttoset-offgrosscreditanddebitbalancesintheirnominatedaccountstodeterminetheBank’snetexposurewithinNewZealand.Paymentandclose-outnettingisundertakenforoff-balancesheetfinancialmarkettransactionswithcounterpartieswithwhomtheBankingGrouphasenteredintolegallyenforceablemasterdealingagreementswhichallowsuchnettinginspecifiedjurisdictions.PaymentnettingallowstheBanktonetsettlementsonanydaytoreducecashflowexchangesbetweencounterparties.Close-outnettingeffectivelyaggregatespre-settlementriskexposureatthetimeofdefault,thusreducingoverallexposure.

Risk transfer

Formitigationbywayofrisktransfer,theBankingGrouponlyrecognisesunconditionalirrevocableguaranteesorstandbylettersofcreditissuedby,oreligiblecreditderivativeprotectionboughtfrom,thefollowingentities,providedtheyarenotrelatedtotheunderlyingobligor:

■■ sovereignentities;■■ publicsectorentitiesinAustraliaandNewZealand;■■ ADIsandoverseasbanks;and■■ otherentitieswithaminimumriskgradeequivalentofA3/A–.

Internal credit risk rating system TheprincipalobjectiveofthecreditriskratingsystemistoproduceareliablequantitativeassessmentofthecreditrisktowhichtheBankingGroupisexposed.TheBankingGroup’sinternalcreditriskratingsystemfortransaction-managedcustomersassignsaCRGtoeachcustomer,correspondingtotheirexpectedPDandhas20riskgradesfornon-defaultedcustomersand10riskgradesfordefaultedcustomers.Non-defaultedCRGsaremappedtoMoody’sandStandard&Poor’sexternalseniorrankingunsecuredratings.ThismappingisreviewedannuallyandallowstheBankingGrouptousetheratingagencies’long-rundefaulthistorytocalculatelong-runaveragePDs.ThetablebelowshowsthecurrentalignmentbetweentheBankingGroup’sCRGsandthecorrespondingexternalrating.Notethatonlyhigh-levelCRGgroupingsareshown.

Banking Group’s CRG Standard & Poor’s rating Moody’s rating Supervisory slotting grade

A AAAtoAA- AaatoAa3 Strong

B A+toA- A1toA3 Strong

C BBB+toBBB- Baa1toBaa3 Strong

D BB+toB+ Ba1toB1 Good/satisfactory

Banking Group rating

E Watchlist Weak

F Specificmention Weak

G Substandard/default Weak/default

H Default Default

Theretail(program-managed)portfolioissegmentedintopoolsofsimilarrisk.Segmentsarecreatedbyanalysingcharacteristicsthathavehistoricallyprovenpredictiveindeterminingifanaccountislikelytogointodefault.Customersarethengroupedaccordingtothesepredictivecharacteristicsofdefault.EachsegmentisassignedaquantifiedmeasureofitsPD,LGDandexposureatdefault(‘EAD’).

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Note 35 Risk management (continued)TheBankingGroup’screditriskratingsystemisreviewedtoensuretheratingcriteriaandproceduresareapplicabletothecurrentportfolioandexternalconditions.TheannualreviewofthecreditriskratingframeworkisapprovedbytheUltimateParentBankBRMC.ToensurethecreditriskratingsystemisappliedconsistentlyacrosstheBankingGroup,theUltimateParentBankGroup’sCreditRiskAssuranceteamindependentlyreviewsend-to-endtechnicalandoperationalaspectsoftheoverallprocess.ModelsmateriallyimpactingtheriskratingprocessarereviewedannuallyinaccordancewiththeUltimateParentBankGroup’smodelriskpolicy.Specificcreditriskestimates(includingPD,LGDandEADlevels)areoverseenandapprovedbyERACandbytheUltimateParentBankGroupCreditRiskCommitteesforutilisationwithintheBankingGroup.

Use of internal credit risk estimatesInadditiontousingthecreditriskestimatesforregulatorycapitalpurposes,theyarealsousedforthefollowingpurposes:

Economic capital

TheBankingGroupallocateseconomiccapitaltoallexposures.Economiccapitalincludesbothcreditandnon-creditcomponents.EconomiccreditcapitalisallocatedusingaframeworkthatconsidersestimatesofPD,LGD,EAD,TotalCommittedExposure(‘TCE’)andloantenoraswellasmeasuresofportfoliocompositionnotreflectedinregulatorycapitalformulae1.2

Pricing

TheBankingGrouppricesloanssoastoproduceanacceptablereturnontheeconomiccapitalallocatedtotheloan,afterexpectedcreditlosses(andothercosts)areincurred.EstimatesofeconomiccapitalandexpectedcreditlossestakeintoaccountestimatesofPD,LGDandEAD.

Provisioning

ImpairmentprovisionsarereservesheldbytheBankingGrouptocovercreditlossesthatareincurredintheloanportfolio.Individualprovisionsarecalculatedonimpairedloanstakingintoaccountmanagement’sbestestimateofthepresentvalueoffuturecashflows.Collectiveprovisionsareestablishedonaportfoliobasistakingintoaccountthelevelofarrears,collateral,pastlossexperienceandemergenceperiods.Transaction-managedportfolioprovisionsusetheriskgradingframeworkandsuitablePD,LGDandEADsassignedtoeachcustomer/facilityasthebasisforthecalculation.Program-managedportfoliosuseestimatedlossratesbasedonrecentpastexperienceastheprimarybasisofthecalculation.TheseestimatesarethenadjustedforthespecificrequirementsoftheNZIFRSaccountingstandards.

Credit approval authorities

Fortransaction-managedfacilities,theapprovalauthoritiesareallocatedbasedontheCRGwithlowerlimitsapplicableforcustomerswithahigherPD.Program-managedfacilitiesareapprovedonthebasisofapplicationscorecardoutcomesandproduct-basedapprovalauthorities.

Risk-adjusted performance measurement

Businessunitperformanceismeasuredusinganeconomicprofitframeworkwhichincorporateschargesforeconomiccreditcapitalaswellascapitalforotherrisktypes.

Regulatory capitalThecreditriskratingsystemisakeyinputtoevaluatethelevelofcapitaltobeheldagainstloansforregulatorypurposes.

Overview of internal credit risk ratings process by portfolio

(a) Transaction-managed approach (including business lending, corporate, sovereign and bank)

TheprocessforassignmentandapprovalofindividualPDsandLGDsinvolvesbusinessunitrepresentativesrecommendingtheCRGsandLGDsundercriteriaguidelines.CreditOfficersthenindependentlyevaluatetherecommendationsandapprovethefinaloutcomes.Anexpertjudgmentdecision-makingprocessisemployedtoevaluatetheCRG.Thefollowingrepresentthetypesofbusinesslending,corporate,sovereignandbankingexposuresincludedwithinthetransaction-managedportfolioapproach:

■■ directlendingexposures;■■ contingentlendingexposures;■■ pre-settlementexposures;■■ foreignexchangesettlementexposures;and■■ transactionexposures.AlloftheaboveexposurecategoriesalsoapplytoSpecialisedLending,whichisasub-assetclassofCorporateandintheBankingGroupcomprisesPropertyFinance.Regulatoryrisk-weightsarealsoappliedtoSpecialisedLending.

Definitions, methods and data for estimation and validation of PD, LGD and EAD

(i) PD

ThePDisathroughthecycleassessmentofthelikelihoodofacustomerdefaultingonitsfinancialobligationswithinoneyear.PDisrepresentedinaCRG.

(ii) LGD

TheLGDrepresentsanestimateoftheexpectedseverityofalosstotheBankingGroupshouldacustomerdefaultoccurduringaneconomicdownturn.TheBankingGroupassignsanLGDtoeachcreditfacility,assuminganeventofdefaulthasoccurred,andtakingintoaccountaconservativeestimateofthenetrealisablevalueofassetstowhichtheBankingGrouphasrecourseandoverwhichithassecurity.LGDsalsoreflecttheseniorityofexposuresinthecustomers’capitalanddebtstructure.

1 TheBankingGroupuseseconomiccapitalasthebasisforrisk-adjusteddecision-makingacrosstheBankingGroupandallowsdifferencesbetweeneconomicandregulatorycapitalwheresuchdifferencesdrivebettermedium-termtolong-termbusinessdecisions.

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Note 35 Risk management (continued)LGDestimatesarebenchmarkedagainstobservedhistoricalLGDsfrominternalandexternaldataandarecalibratedtoreflectlossesexpectedinaneconomicdownturn.ThecalculationofhistoricalLGDsisbasedonaneconomiclossandincludesallowancesforworkoutcostsandthediscountingoffuturecashflowstothedateofdefault.LGDvaluesrangefrom5%to100%.TherangeofLGDvaluesensuresthattheriskoflossisdifferentiatedacrossmanycreditfacilitiesextendedtocustomers.

(iii) EAD and Credit Conversion Factor (‘CCF’)

EADrepresentsanestimateoftheamountofcommittedexposureexpectedtobedrawnbythecustomeratthetimeofdefault.TocalculateEAD,historicaldataisanalysedtodeterminewhatproportionofundrawncommitmentsareultimatelyutilisedbycustomerswhoendupindefault.TheproportionofundrawncommitmentsultimatelyistermedtheCCF.EADthereforeconsistsofinitialoutstandingbalancesplustheCCFmultipliedbyundrawncommitments.Fortransaction-managedexposuresCCF’sareall100%.

(b) Retail (program-managed) asset class approach (including residential mortgages, small business and other retail)

Eachcustomerisratedusingdetailsoftheiraccountperformanceorapplicationdetailsandsegmentedintopoolsofsimilarrisk.Thesesegmentsarecreatedbyanalysingcharacteristicsthathavehistoricallyprovenpredictiveindeterminingifanaccountislikelytogointodefault.Customersarethengroupedaccordingtothesepredictivecharacteristicsofdefault.Theretail(program-managed)portfolioisdividedintoanumberofsegmentsperproductwitheachsegmentassignedaquantifiedmeasurementofitsPD,LGDandEAD.Retailassetclassexposuresincludedintheretail(program-managed)portfolioapproacharesplitintothefollowingcategoriesofproducts:

Asset sub–classes Product categories

Residentialmortgages ■■ Mortgages

Smallbusiness ■■ Equipmentfinance

■■ Businessoverdrafts

■■ Businesstermloans

■■ Businesscreditcards

Other retail ■■ Creditcards

■■ Personalloans

■■ Overdrafts

(i) PD

PDsareassignedattheretailsegmentlevelandreflectthelikelihoodofaccountswithinthatsegmenttodefault.Along-runaverageisusedtoassignaPDtoeachaccountinasegmentbasedonthesegment’scharacteristics.ThePDestimateforeachsegmentisbasedoninternaldata.Modelsareusedtohelpdetermineorestablishtheappropriateinternalratingforprogram-managedportfolios.

(ii) LGD

LGDmeasurestheproportionoftheexposurethatwillbelostifdefaultoccurs.LGDismeasuredasapercentageofEAD.TheapproachtoLGDvariesdependingonwhethertheretailproductissecuredorunsecured.Adownturnperiodisusedtoreflecttheeffectonthecollateralforsecuredproducts.Forunsecuredproducts,along-runestimateisusedforLGD.

(iii) EAD

EADrepresentsanestimateoftheamountofcommittedexposureexpectedtobedrawnbythecustomeratthetimeofdefault.TocalculateEAD,historicaldataisanalysedtodeterminewhatproportionofundrawncommitmentsareultimatelyutilisedbycustomerswhoendupindefault.

(iv) TCE

TCErepresentsthesumofon-andoff-balancesheetexposures.

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Note 35 Risk management (continued)Maximum exposure to credit risk


$ millions 2012 2011 2012 2011

Financial assetsCashandbalanceswithcentralbank 1,595 1,215 1,595 1,215Duefromotherfinancialinstitutions 322 699 322 699 Derivativefinancialinstruments 10 85 10 85Tradingsecurities 2,040 3,261 2,040 3,261Available-for-salesecurities 2,694 1,518 2,694 1,518Loans 59,422 51,250 59,303 51,107Duefromrelatedentities 1,527 1,517 10,377 9,511Otherassets 195 148 171 129

Total financial assets 67,805 59,693 76,512 67,525

Contingent liabilities and commitmentsDirectcreditsubstitutes 80 78 80 78Loancommitmentswithcertaindrawdown 177 164 177 164 Transaction-relatedcontingentitems 796 257 796 257Short-term,self-liquidatingtrade-relatedcontingentliabilities 397 339 397 339Othercommitmentstoprovidefinancialservices 19,030 11,403 18,886 11,334

Total contingent liabilities and commitments 20,480 12,241 20,336 12,172

Total maximum credit risk exposure 88,285 71,934 96,848 79,697

Summary of the Banking Group’s total credit risk as calculated under the Basel II FrameworkTheBankingGroup’stotalcreditriskundertheBaselIIframeworkasat30September2012wasasfollows:

Minimum Risk-weighted Capital Exposure Requirement $ millions Unaudited Unaudited

Internal risk baseResidentialmortgages 13,017 1,041 Other retail 2,443 195 Smallbusiness 1,174 94 Corporate/Businesslending 14,915 1,193 Sovereign 243 19 Bank 354 28 Equity 223 18 Specialisedlending:Projectandpropertyfinance 4,715 377 Standardised 820 66

Total 37,904 3,031

Mapping of Basel categories to the Banking Group portfolios

Asset Class Sub-asset Class Banking Group Category Segmentation Criteria

Corporate Corporate Corporate Alltransaction-managedcustomersnotelsewhereclassifiedwhereannualturnoverexceeds$50million.

SMEcorporate Businesslending Alltransaction-managedcustomersnotelsewhereclassifiedwhereannualturnoveris$50millionorless.

Specialisedlending Specialisedlending-property

Appliedtotransaction-managedcustomerswheretheprimarysourceofdebtservice,securityandrepaymentisderivedfromeitherthesaleofapropertydevelopmentorincomeproducedbyoneormoreinvestmentproperties.

Sovereign Sovereign Appliedtotransaction-managedcustomersidentifiedbyAustralianandNewZealandStandardIndustrialClassificationcode.

Bank Bank Appliedtotransaction-managedcustomersidentifiedbyAustralianandNewZealandStandardIndustrialClassificationcode.

Residentialmortgages Residentialmortgages Allprogram-managedexposuressecuredbyresidentialmortgagesdefinedashousinglending.

Other retail Smallbusiness Program-managedbusinesslending.

Other retail Allotherprogram-managedlendingtoretailcustomers,includingNewZealandcreditcards.

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Note 35 Risk management (continued)Credit risk exposures by asset classThe Banking Group’s credit risk exposures by asset class as at 30 September 2012 (Unaudited)

Risk- weighted Required Average Assets Regulatory TCE EAD Average PD Average LGD Risk Weight (scaled)

1 Capital

PD Band (%) $ millions $ millions % % % $ millions $ millions

Residential mortgages0.00to0.10 - - - - - - -

0.10to0.25 2,206 1,891 - 22 8 161 13

0.25to1.0 20,928 20,052 1 22 19 3,881 310

1.0to2.5 14,929 14,566 1 22 36 5,185 415

2.5to10.0 3,995 3,955 5 22 69 2,712 217

10.0to99.99 - - - - - - -

Default 496 492 100 22 219 1,078 86

Total 42,554 40,956 2 22 32 13,017 1,041

Other retail (Credit cards, personal loans, personal overdrafts)0.00to0.10 - - - - - - -

0.10to0.25 672 454 - 41 14 63 5

0.25to1.0 1,865 1,096 - 63 40 435 35

1.0to2.5 1,364 1,196 2 67 93 1,118 90

2.5to10.0 355 338 5 83 131 442 35

10.0to99.99 233 233 19 70 153 356 28

Default 18 23 100 69 125 29 2

Total 4,507 3,340 4 64 73 2,443 195

Small business

0.00to0.10 - - - - - - -

0.10to0.25 280 203 - 74 26 53 4

0.25to1.0 783 780 1 22 21 165 13

1.0to2.5 - - - - - - -

2.5to10.0 2,203 2,171 3 20 29 635 51

10.0to99.99 41 42 20 24 54 23 2

Default 114 116 100 22 258 298 24

Total 3,421 3,312 6 24 35 1,174 94

1 Asdisclosedintheconditionsofregistration,thevalueofthescalarusedindeterminingtheminimumcapitalrequirement(RequiredRegulatoryCapital)is1.06.ThefulldetailsoftheBank’sconditionsofregistrationareincludedonpage6.

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Note 35 Risk management (continued) Risk- weighted Required Average Risk Assets Regulatory TCE EAD Average PD Average LGD Weight (scaled)

1 Capital

PD Grade $ millions $ millions % % % $ millions $ millions

Banking Group - Corporate/Business lendingAAA 268 268 - 26 9 23 2

AA 1,759 1,649 - 29 12 206 16

A 3,701 3,418 - 46 26 878 70

BBB 6,735 6,297 - 44 49 3,063 245

BB 8,832 8,821 2 37 81 7,149 573

B 314 312 3 40 114 355 28

Other 1,233 1,230 20 44 222 2,730 218

Default 451 609 100 42 84 511 41

Total 23,293 22,604 5 40 66 14,915 1,193

SovereignAAA 568 568 - 10 4 24 2

AA 4,260 4,157 - 7 3 110 9

A 748 745 - 21 12 89 7

BBB 127 127 - 20 12 16 1

BB 28 28 2 35 13 4 -

B - - 3 60 164 - -

Other - - - - - - -

Default - - - - - - -

Total 5,731 5,625 - 9 4 243 19

BankAAA - - - - - - -

AA 1,847 1,845 - 60 18 331 26

A 147 147 - 60 10 15 1

BBB 77 77 - 20 10 8 1

BB - - - - - - -

B 1 - - - - - -

Other - - - - - - -

Default - - - - - - -

Total 2,072 2,069 - 58 17 354 28


ThefollowingtablesummarisestheBankingGroup’screditriskexposuresbyassetclassarisingfromundrawncommitmentsandotheroff-balancesheetexposures.Theseunauditedamountsareincludedintheabovetables.

Undrawn Commitments and Other Off-balance Market Related Sheet Amounts Contracts$ millions Value EAD Value EAD

Residentialmortgages 6,581 4,981 - - Otherretail(Creditcards,personalloans,personaloverdrafts) 2,737 1,564 - - Smallbusiness 1,105 994 - - Corporate/Businesslending 8,255 7,435 - - Sovereign 1,104 999 - - Bank 185 185 - -

Total 19,967 16,158 - -

Risk-weighted Required Average Risk Assets Regulatory TCE EAD Average PD Average LGD Weight (scaled)

1 Capital

Equity $ millions $ millions % % % $ millions $ millions

Equityholdings(notdeductedfromcapital) thatarepubliclytraded 70 70 - - 318 223 18

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Note 35 Risk management (continued)The Banking Group’s Specialised lending: Project and property finance credit risk exposures as at 30 September 2012 (Unaudited)

Risk- weighted Required Average Risk Assets Regulatory TCE EAD Weight (scaled)

1 Capital

Supervisory slotting grade $ millions $ millions % $ millions $ millions

Strong 907 907 74 673 54 Good 2,435 2,434 95 2,322 186 Satisfactory 869 870 122 1,061 85 Weak 249 249 265 659 52 Default 396 523 - - -

Total 4,856 4,983 95 4,715 377

ThefollowingtablesummarisestheBankingGroup’sSpecialisedlending:Projectandpropertyfinancecreditriskexposuresarisingfromundrawncommitmentsandotheroff-balancesheetexposures.Theseamountsareincludedintheabovetable.

Risk- weighted Required Average Risk Assets Regulatory TCE EAD Weight (scaled)

1 Capital

$ millions $ millions % $ millions $ millions

Undrawncommitmentsandotheroff-balancesheetamounts 513 513 82 422 34

The Banking Group’s credit risk exposures subject to the standardised approach as at 30 September 2012 (Unaudited)

Calculation of on-balance sheet exposures

Risk- Required Average Risk weighted Regulatory TCE EAD Weight Exposure Capital $ millions $ millions % $ millions $ millions

Property,plantandequipmentandotherassets 222 222 100 222 18 Relatedparties 1,575 1,575 29 449 36

Total on-balance sheet exposures 1,797 1,797 671 54

Calculation of off-balance sheet exposures

Credit Risk- Required Total Principal Equivalent Average Risk weighted Regulatory Amount Amount Weight Exposure Capital $ millions $ millions % $ millions $ millions

Market related contracts subject to the standardised approachForeignexchangecontracts 11,145 308 20 62 5 Interestratecontracts 35,174 205 20 41 3

Total market related contracts subject to the standardised approach 46,319 513 103 8

Standardised subtotal 48,116 2,310 774 62

After adjustment for scalar1 820 66


The Banking Group’s residential mortgages by loan-to-value ratio (‘LVR’) as at 30 September 2012 (Unaudited)InordertocalculateoriginationLVR,thecurrentexposureisthatusedintheinternalratingsbasedapproachformortgagelending.Forloansoriginatedfrom1January2008,theBankutilisesitsloanoriginationsystem.Forloansoriginatedpriorto1January2008,theoriginationLVRisnotseparatelyrecorded,andthereforenotavailablefordisclosureasrequiredunderClause4ofSchedule11oftheOrder.Fortheseloans,theBankutilisesitsdynamicLVRprocesstocalculateanoriginationLVR.ExposuresforwhichnoLVRisavailablehavebeenincludedinthe‘Exceeds90%’categoryinaccordancewiththerequirementsoftheOrder.

LVR range Exceeds Exceeds Exceeds Does not 60% and 70% and 80% and Exceeds$ millions Exceed 60% not 70% not 80% not 90% 90% Total

On-balancesheetexposures 13,510 5,772 7,982 5,607 3,022 35,893 Undrawncommitmentsandother off-balancesheetexposures 4,054 977 944 395 211 6,581

Value of exposures 17,564 6,749 8,926 6,002 3,233 42,474

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Note 35 Risk management (continued)The Banking Group’s reconciliation of residential mortgage-related amountsThetablebelowprovidestheBankingGroup’sreconciliationofamountsdisclosedinthisDisclosureStatementthatrelatetomortgagesonresidentialproperty.

The Banking Group

30-Sep-12 $ millions Unaudited

Term loans – Housing (as disclosed in Note 13) and Residential mortgages – total gross loans (as disclosed in Note 14) 35,986 Reconciling items: Unamortiseddeferredfeesandexpenses (64) Fairvaluehedgeadjustments (29) Valueofundrawncommitmentsandotheroff-balancesheetamountsrelatingtoresidentialmortgages 6,581

Residential mortgages by LVR 42,474 Reconciling item: Accruedinterestreceivable 80

Residential mortgages – TCE (as disclosed in Credit risk exposures by asset class) 42,554

Credit quality of financial assetsThetablesbelowsegregatethefinancialassetsoftheBankingGroupandtheBankbetweenfinancialassetsthatareneitherpastduenorimpaired,pastduebutnotimpairedandimpaired.Anassetisconsideredtobepastduewhenanypaymentunderthecontractualtermshasbeenmissed.Theamountincludedaspastdueistheentirecontractualbalance,ratherthantheoverdueportion.ThebreakdowninthetablesbelowdoesnotalwaysalignwiththeunderlyingbasisbywhichcreditriskismanagedwithintheBankingGroup.TheBankingGroupconsidersloansforbusinesspurposestobedelinquentafterconsideringallrelevantcircumstancessurroundingthecustomer.Residentialmortgagesandpersonalloansthataremorethanfivedayspastdueareconsideredtobedelinquent.FinancialassetsoftheBankingGroupat30September2012and2011canbedisaggregatedasfollows:

The Banking Group

2012

Neither Past Due Total Past Due But Not Carrying$ millions Nor Impaired Impaired Impaired Total Impairment Value

Cashandbalanceswithcentralbanks 1,595 - - 1,595 - 1,595 Duefromotherfinancialinstitutions 322 - - 322 - 322 Derivativefinancialinstruments 10 - - 10 - 10 Tradingsecurities 2,040 - - 2,040 - 2,040 Available-for-salesecurities 2,694 - - 2,694 - 2,694 Loans 57,401 1,759 867 60,027 (605) 59,422 Duefromrelatedentities 1,527 - - 1,527 - 1,527 Otherassets 195 - - 195 - 195

Total financial assets 65,784 1,759 867 68,410 (605) 67,805

The Banking Group

2011

Neither PastDue Total PastDue ButNot Carrying$ millions NorImpaired Impaired Impaired Total Impairment Value

Cashandbalanceswithcentralbanks 1,215 - - 1,215 - 1,215Duefromotherfinancialinstitutions 699 - - 699 - 699Derivativefinancialinstruments 85 - - 85 - 85Tradingsecurities 3,261 - - 3,261 - 3,261Available-for-salesecurities 1,518 - - 1,518 - 1,518Loans 49,165 1,864 794 51,823 (573) 51,250Duefromrelatedentities 1,517 - - 1,517 - 1,517Otherassets 148 - - 148 - 148

Total financial assets 57,608 1,864 794 60,266 (573) 59,693For

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Note 35 Risk management (continued)FinancialassetsoftheBankat30September2012and2011canbedisaggregatedasfollows:

The Bank

2012

Neither Past Due Total Past Due But Not Carrying$ millions Nor Impaired Impaired Impaired Total Impairment Value

Cashandbalanceswithcentralbanks 1,595 - - 1,595 - 1,595 Duefromotherfinancialinstitutions 322 - - 322 - 322 Derivativefinancialinstruments 10 - - 10 - 10 Tradingsecurities 2,040 - - 2,040 - 2,040 Available-for-salesecurities 2,694 - - 2,694 - 2,694 Loans 57,285 1,752 857 59,894 (591) 59,303 Duefromrelatedentities 10,377 - - 10,377 - 10,377 Otherassets 171 - - 171 - 171


The Bank

2011

Neither PastDue Total PastDue ButNot Carrying$ millions NorImpaired Impaired Impaired Total Impairment Value

Cashandbalanceswithcentralbanks 1,215 - - 1,215 - 1,215Duefromotherfinancialinstitutions 699 - - 699 - 699Derivativefinancialinstruments 85 - - 85 - 85Tradingsecurities 3,261 - - 3,261 - 3,261Available-for-salesecurities 1,518 - - 1,518 - 1,518Loans 49,037 1,845 794 51,676 (569) 51,107Duefromrelatedentities 9,511 - - 9,511 - 9,511Otherassets 129 - - 129 - 129


ThefollowinganalysisshowstheBank’sassessmentofthecoverageprovidedbycollateralheldinsupportofloanbalances.Theestimatedrealisablevalueofcollateralheldisbasedonacombinationof:

■■ formalvaluationscurrentlyheldinrespectofsuchcollateral;and■■ management’sassessmentoftheestimatedrealisablevalueofallcollateralheldgivenitsexperiencewithsimilartypesofassetsinsimilarsituationsandthecircumstancespeculiartothesubjectcollateral.

Thisanalysisalsotakesintoconsiderationanyotherrelevantknowledgeavailabletomanagementatthetime.ItistheBank’spracticetoobtainupdatedvaluationswheneithermanagementconsidersthatitcannotsatisfactorilyestimatearealisablevalueorwhenitisdeterminedtobenecessarytomovetoaforcedsaleofthecollateral.Inthetablebelow,aloanisdeemedtobe‘fullysecured’wheretheratiooftheassetamounttotheBank’scurrentestimatednetpresentvalueoftherealisablecollateralislessthanorequalto100%.Suchassetsaredeemedtobe‘partiallysecured’whenthisratioexceeds100%butnotmorethan150%,and‘unsecured’wheneithernosecurityisheld(e.g.canincludecreditcards,personalloans,andexposuretohighlyratedcorporateentities)orwherethesecuredloantoestimatedrecoverablevalueexceeds150%.


% 2012 2011 2012 2011

Fullysecured 69 75 69 75Partiallysecured 16 16 16 16 Unsecured 15 9 15 9

Total net loans 100 100 100 100

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Note 35 Risk management (continued)Financial assets that are neither past due nor impairedThecreditqualityoffinancialassetsoftheBankingGroupandtheBankthatareneitherpastduenorimpairedhavebeenassessedbyreferencetothecreditriskratingsystemadoptedinternally:

The Banking Group

2012 2011

Good/ Good/$ millions Strong Satisfactory Weak Total Strong Satisfactory Weak Total

Cashandbalanceswithcentralbanks 1,595 - - 1,595 1,215 - - 1,215

Duefromotherfinancialinstitutions 322 - - 322 699 - - 699

Derivativefinancialinstruments 10 - - 10 85 - - 85

Tradingsecurities 2,040 - - 2,040 3,261 - - 3,261

Available-for-salesecurities 2,694 - - 2,694 1,518 - - 1,518

Loans 7,794 48,226 1,381 57,401 2,248 45,503 1,414 49,165

Duefromrelatedentities 1,527 - - 1,527 1,517 - - 1,517

Otherassets 195 - - 195 148 - - 148

Total financial assets 16,177 48,226 1,381 65,784 10,691 45,503 1,414 57,608

The Bank

2012 2011

Good/ Good/$ millions Strong Satisfactory Weak Total Strong Satisfactory Weak Total

Cashandbalanceswithcentralbanks 1,595 - - 1,595 1,215 - - 1,215

Duefromotherfinancialinstitutions 322 - - 322 699 - - 699

Derivativefinancialinstruments 10 - - 10 85 - - 85

Tradingsecurities 2,040 - - 2,040 3,261 - - 3,261

Available-for-salesecurities 2,694 - - 2,694 1,518 - - 1,518

Loans 7,794 48,110 1,381 57,285 2,248 45,375 1,414 49,037

Duefromrelatedentities 10,377 - - 10,377 9,511 - - 9,511

Otherassets 171 - - 171 129 - - 129

Total financial assets 25,003 48,110 1,381 74,494 18,666 45,375 1,414 65,455

35.4 Market riskMarketriskisthepotentialforlossarisingfromadversemovementsinthelevelandvolatilityofmarketfactorssuchasforeignexchangerates,interestratesandequityprices.AstheUltimateParentBank’sfinancialmarketsbusinessinNewZealandisconductedbytheNZBranch,themarketrisksfacedbytheBankingGroupareonlyofanon-tradednature(interestrateriskinthebankingbook).Withtheexceptionoftheavailable-for-saleinvestmentinVisashares(referNote25),neithertheBankingGroupnortheBankcarriesmaterialforeigncurrencyorequitypriceriskduetotherisksbeinghedgedwiththeUltimateParentBank.

Non-traded market risk (interest rate risk in the banking book)Approach

Thebankingbookactivitiesthatgiverisetomarketriskincludelendingactivities,balancesheetfundingandcapitalmanagement.Interestrateriskandfundingandliquidityriskareinherentintheseactivities.TheBank’sTreasuryunitisresponsibleformanagingtheinterestrateriskarisingfromtheseactivities.

Asset and liability management

TheBank’sTreasuryunitmanagesthestructuralinterestratemismatchassociatedwiththetransferpricedbalancesheet,includingtheinvestmentoftheBank’scapitaltoitsagreedbenchmarkduration.Akeyriskmanagementobjectiveistohelpensurethereasonablestabilityofnetinterestincome(‘NII’)overtime.TheseactivitiesareperformedwithintheMarketRiskManagementFrameworkapprovedbytheBank’sBRMC.

NII sensitivity

NIIsensitivityismanagedintermsofthenetinterestincome-at-risk(‘NaR’)modelledoveraone-yeartimehorizonusinga99%confidenceintervalformovementsinwholesalemarketinterestrates.AsimulationmodelisusedtocalculatetheBank’spotentialNaR.TheNIIsimulationframeworkcombinestheunderlyingbalancesheetdatawithassumptionsaboutrunoffandnewbusiness,expectedrepricingbehaviourandchangesinwholesalemarketinterestrates.SimulationsusingarangeofinterestratescenariosareusedtoprovideaseriesofpotentialfutureNIIoutcomes.Theinterestratescenariosmodelledincludethoseprojectedusinghistoricalmarketinterestratevolatilityaswellas100and200basispointshiftsupanddownfromthecurrentmarketyieldcurves.Additionalstressedinterestratescenariosarealsoconsideredandmodelled.AcomparisonbetweentheNIIoutcomesfromthesemodelledscenariosindicatesthesensitivitytointerestratechanges.

Limits

TheBank’sBRMChasapprovedNaRandValue-at-risk(‘VaR’)limitsforbankingbookriskacrosstheUltimateParentBankGroup.ANaRsublimithasbeenassignedtocontrolledentitiesoftheUltimateParentBankoperatingwithinNewZealandandinadditionstructurallimits,expressedasinterestratedelta,arealsoinplacefortheseentities.

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Note 35 Risk management (continued)Risk reporting

InterestrateriskinthebankingbookriskmeasurementsystemsandpersonnelarecentralisedinSydney,Australia.Theseincludefrontofficeproductsystemswhichcapturealltreasuryfundingandderivativetransactions,thetransferpricingsystemwhichcapturesallretailtransactionsinAustraliaandNewZealand,tradedandnon-tradedVaRsystemswhichcalculateGroupTreasuryVaRandtheNIIsystemwhichcalculatesNIIandNaRfortheAustralianandNewZealandbalancesheets,includingthebalancesheetoftheBank.DailymonitoringofcurrentexposureandlimitutilisationisconductedindependentlybytheHeadofMarketRisk.ManagementreportsdetailingstructuralpositionsandVaRareproducedanddistributeddailyforusebydealersandmanagementacrossallstakeholdergroups.MonthlyandquarterlyreportsareproducedfortheUltimateParentBank’sriskforumsoftheMarketRiskCommitteeandUltimateParentBankBRMC,respectively,toensuretransparencyofmaterialmarketrisksandissues.

Risk mitigation

Marketriskarisinginthebankingbookstemsfromtheordinarycourseofbankingactivities,includingstructuralinterestraterisk(themismatchbetweenthedurationofassetsandliabilities)andcapitalmanagement.HedgingoftheBank’sexposuretointerestrateriskisundertakenusingderivatives.Thehedgeaccountingstrategyadoptedistoutiliseacombinationofthecashflowandfairvaluehedgeapproaches.Somederivativesheldforeconomichedgingpurposesdonotmeetthecriteriaforhedgeaccounting,andthereforeareaccountedforinthesamewayasderivativesheldfortrading.

Market risk notional capital charges TheBankingGroup’saggregatemarketriskexposureisderivedinaccordancewiththeReserveBankdocument‘Capitaladequacyframework(internalmodelsbasedapproach)’(BS2B)andiscalculatedonasixmonthlybasis.Theend-of-periodaggregatemarketriskexposureiscalculatedfromtheperiodendbalancesheetinformation.Thepeakend-of-dayexposureisderivedbytakingthelargestdailyinternalriskmeasureVaRduringthesix-monthperiod,comparingthistothecurrentandpreviousperiodendVaRsandcalculatingthepeakriskbyusingtheratioofthepeaktotheperiodends.Thismethodisapproximateonlyasthetwomethodsdifferintheassumedrepricingcharacteristicsofthebalancesheet.Foreachcategoryofmarketrisk,theBankingGroup’speakend-of-daycapitalchargeistheaggregatecapitalchargeforthatcategoryofmarketriskderivedinaccordancewiththeReserveBankdocument‘Capitaladequacyframework(internalmodelsbasedapproach)’(BS2B).ThefollowingtableprovidesasummaryoftheBankingGroup’scapitalchargesbyrisktypeasatbalancedateandthepeakend-of-daycapitalchargesbyrisktypeforthesixmonthsended30September2012:

The Banking Group

2012

Unaudited Implied Risk- Aggregate weighted Capital$ millions Exposure Charge

End-of-period Interestraterisk 635 51 Foreigncurrencyrisk 70 6 Equityrisk 70 6

Peak end-of-day Interestraterisk 3,988 319 Foreigncurrencyrisk 70 6 Equityrisk 70 6

VaRTheBankingGroupappliesaVaRmethodologytoitsportfolios,toestimatethemarketriskofpositionsheldandthemaximumlossesexpected,baseduponanumberofassumptionsforvariouschangesinmarketconditions.VaRisanestimateofthepotentiallossinvalue,toa99%confidencelevelassumingpositionswereheldunchangedforoneday.TheBankingGroupusesahistoricalsimulationmethodtocalculateVaRtakingintoaccountallmaterialmarketvariables.Actualoutcomesaremonitoredandthemodelisback-testeddaily.Theuseofthisapproachdoesnotpreventlossesoutsideoftheselimitsintheeventofmoresignificantmarketmovements.TheBankingGroupdoesnothaveanysignificantforeigncurrencyandequityrisk.ThefollowingtableprovidesasummaryofInterestRateRiskVaRfortheBankingGroup’snon-tradedmarketriskactivities.


Interestraterisk 0.71 1.27

Interest rate sensitivitySensitivitytointerestratesarisesfrommismatchesintheinterestratecharacteristicsofassetsandtheircorrespondingliabilityfunding.Oneofthemajorcausesofthesemismatchesistimingdifferencesintherepricingofassetsandliabilities.ThesemismatchesareactivelymanagedaspartoftheoverallinterestrateriskmanagementprocesswhichisconductedinaccordancewiththeBankingGroup’spolicyguidelines.

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Note 35 Risk management (continued)ThefollowingtablepresentsabreakdownoftheearlierofthecontractualrepricingormaturitydatesoftheBankingGroup’snetassetpositionasat30September2012.TheBankingGroupusesthiscontractualrepricinginformationasabasewhichisthenalteredtotakeaccountofconsumerbehaviourtomanageitsinterestraterisk.

The Banking Group

2012

Over Over Over 3 Months 6 Months 1 Year and up to and up to and up to Non-interest$ millions Up to 3 Months 6 months 1 Year 2 Years Over 2 Years Bearing Total

Financial assetsCashandbalanceswithcentralbanks 1,455 - - - - 140 1,595 Duefromotherfinancialinstitutions 322 - - - - - 322 Derivativefinancialinstruments - - - - - 10 10 Tradingsecurities 2,014 16 10 - - - 2,040 Available-for-salesecurities 26 - - 67 2,531 70 2,694 Loans 40,772 2,803 5,960 7,701 2,791 (605) 59,422 Duefromrelatedentities 1,467 - - - - 60 1,527 Otherassets - - - - - 195 195

Total financial assets 46,056 2,819 5,970 7,768 5,322 (130) 67,805 Non-financialassets 1,017

Total assets 68,822

Financial liabilitiesDuetootherfinancialinstitutions 3 - - - - - 3 Deposits 29,394 6,249 2,773 1,262 743 2,969 43,390 Derivativefinancialinstruments - - - - - 360 360 Debtissues 5,532 1,067 86 2,299 3,930 - 12,914 Otherliabilities - - - - - 502 502 Perpetualsubordinatednotes 970 - - - - - 970 Duetorelatedentities 3,691 - - - - 988 4,679

Total financial liabilities 39,590 7,316 2,859 3,561 4,673 4,819 62,818 Non-financialliabilities 208


Off-balance sheet financial instrumentsNetinterestratecontracts(notional): (Payable)/receivable 2,248 3,335 (2,170) (3,449) 36 - -

The Bank

2012

Over Over Over 3 Months 6 Months 1 Year and up to and up to and up to Non-interest$ millions Up to 3 Months 6 months 1 Year 2 Years Over 2 Years Bearing Total

Financial assetsCashandbalanceswithcentralbanks 1,455 - - - - 140 1,595 Duefromotherfinancialinstitutions 322 - - - - - 322 Derivativefinancialinstruments - - - - - 10 10 Tradingsecurities 2,014 16 10 - - - 2,040 Available-for-salesecurities 26 - - 67 2,531 70 2,694 Loans 40,653 2,797 5,954 7,699 2,791 (591) 59,303 Duefromrelatedentities 10,223 - - - - 154 10,377 Otherassets - - - - - 171 171

Total financial assets 54,693 2,813 5,964 7,766 5,322 (46) 76,512 Non-financialassets 1,083

Total assets 77,595

Financial liabilitiesDuetootherfinancialinstitutions 3 - - - - - 3 Deposits 29,035 6,035 2,685 1,214 732 2,969 42,670 Derivativefinancialinstruments - - - - - 360 360 Debtissues 984 - 69 1,064 557 - 2,674 Otherliabilities - - - - - 426 426 Perpetualsubordinatednotes 970 - - - - - 970 Duetorelatedentities 15,154 2,365 1,274 1,180 3,513 1,090 24,576

Total financial liabilities 46,146 8,400 4,028 3,458 4,802 4,845 71,679 Non-financialliabilities 197


Off-balance sheet financial instrumentsNetinterestratecontracts(notional): (Payable)/receivable 2,248 3,335 (2,170) (3,449) 36 - -

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Note 36 Concentration of funding


$ millions 2012 2011 2012 2011

Funding consists ofDuetootherfinancialinstitutions 3 100 3 100 Deposits 43,390 34,886 42,670 34,390Debtissues1 12,914 17,630 2,674 1,598Perpetualsubordinatednotes 970 970 970 970Duetorelatedentities2 3,691 1,173 23,486 25,647

Total funding 60,968 54,759 69,803 62,705

Analysis of funding by productCertificatesofdeposit 1,423 1,556 1,423 1,556Savingsaccounts 9,411 8,421 9,411 8,421Demanddeposits 7,552 4,768 7,552 4,768Otherdeposits 1,937 913 1,937 913Termdeposits 23,067 19,228 22,347 18,732Debtissues 12,914 17,630 2,674 1,598Perpetualsubordinatednotes 970 970 970 970

Subtotal 57,274 53,486 46,314 36,958Duetootherfinancialinstitutions 3 100 3 100 Duetorelatedentities2 3,691 1,173 23,486 25,647

Total funding 60,968 54,759 69,803 62,705

Analysis of funding by geographical areas1

NewZealand 47,256 36,121 66,945 60,301Australia 869 702 853 688UnitedKingdom 5,891 301 128 103UnitedStatesofAmerica 4,454 7,901 213 172Other 2,498 9,734 1,664 1,441

Total funding 60,968 54,759 69,803 62,705

Analysis of funding by industry sectorAccommodation,cafesandrestaurants 198 159 198 159 Agriculture 932 919 932 919 Construction 1,058 900 1,058 900 Financeandinsurance 23,305 22,176 13,483 5,869Forestryandfishing 126 113 126 113Government,administrationanddefence 1,243 911 1,243 911 Manufacturing 1,389 724 1,389 724Mining 73 65 73 65 Property 3,394 2,868 3,394 2,868Services 3,923 3,519 3,923 3,519Trade 1,194 935 1,194 935Transportandstorage 258 230 258 230Utilities 387 236 387 236Households 17,150 15,663 17,150 15,663Other 2,647 4,168 1,509 3,947

Subtotal 57,277 53,586 46,317 37,058Duetorelatedentities2 3,691 1,173 23,486 25,647

Total funding 60,968 54,759 69,803 62,705

1 Thegeographicregionusedfordebtissuesisbasedonthenatureofthedebtprogrammes.Thenatureofthedebtprogrammeisusedasaproxyforthelocationoftheoriginalpurchaser.Whenthenatureofthedebtprogrammedoesnotnecessarilyrepresentanappropriateproxy,thedebtissuesareclassifiedas‘Other’.Theseinstrumentsmayhavesubsequentlybeenon-sold.

2 Amountsduetorelatedentities,aspresentedabove,areinrespectofintragroupdepositsandborrowingsandexcludeamountswhichrelatetointragroupderivativesandotherliabilities.

AustralianandNewZealandStandardIndustrialClassificationshavebeenusedasthebasisfordisclosingindustrysectors.

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Note 37 Concentration of credit exposures


$ millions 2012 2011 2012 2011

On-balance sheet credit exposures consists ofCashandbalanceswithcentralbanks 1,595 1,215 1,595 1,215Duefromfinancialinstitutions 322 699 322 699 Derivativefinancialinstruments 10 85 10 85Tradingsecurities 2,040 3,261 2,040 3,261Available-for-salesecurities 2,694 1,518 2,694 1,518Loans 59,422 51,250 59,303 51,107Duefromrelatedentities 1,527 1,517 10,377 9,511Otherassets 195 148 171 129

Total on-balance sheet credit exposures 67,805 59,693 76,512 67,525

Analysis of on-balance sheet credit exposures by geographical areasNewZealand 65,802 57,644 74,509 65,476Australia 993 1,174 993 1,174UnitedStatesofAmerica 132 270 132 270Other 878 605 878 605


Analysis of on-balance sheet credit exposures by industry sectorAccommodation,cafesandrestaurants 551 535 551 535Agriculture 6,364 5,730 6,364 5,730Construction 1,440 1,243 1,440 1,243Financeandinsurance 4,915 4,307 4,905 4,307Forestryandfishing 234 142 234 142 Government,administrationanddefence 4,501 3,925 4,501 3,925Manufacturing 2,181 1,299 2,181 1,299Mining 490 69 490 69 Property 9,563 8,760 9,563 8,750Propertyservicesandbusinessservices 2,057 1,650 2,057 1,650Services 2,621 2,318 2,621 2,318Trade 3,120 2,473 3,120 2,473Transportandstorage 1,304 778 1,304 778Utilities 1,310 212 1,310 212 Retail lending 26,148 25,192 26,025 25,054Other 39 81 39 81

Subtotal 66,838 58,714 66,705 58,566Provisionsforimpairmentchargesonloans (605) (573) (591) (569)Duefromrelatedentities 1,527 1,517 10,377 9,511Otherassets 45 35 21 17


Off-balance sheet credit exposuresContingentliabilitiesandcommitments 20,480 12,241 20,336 12,172

Total off-balance sheet credit exposures 20,480 12,241 20,336 12,172

Analysis of off-balance sheet credit exposures by industry sectorAccommodation,cafesandrestaurants 87 82 87 81Agriculture 560 526 560 523Construction 426 343 426 341Financeandinsurance 2,551 259 2,551 258Forestryandfishing 54 50 54 50 Government,administrationanddefence 905 393 905 390Manufacturing 1,307 457 1,307 455 Mining 290 15 290 15 Propertyservicesandbusinessservices 3,269 2,093 3,269 2,081Trade 1,823 1,370 1,823 1,362Transportandstorage 699 161 699 161 Utilities 1,446 99 1,446 98Retail lending 6,838 6,393 6,694 6,357Other 225 - 225 -

Total off-balance sheet credit exposures 20,480 12,241 20,336 12,172

AustralianandNewZealandStandardIndustrialClassificationshavebeenusedasthebasisfordisclosingindustrysectors.

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Note 37 Concentration of credit exposures (continued)Analysis of credit exposures to individual counterpartiesThefollowingcreditexposuresarebasedonactualcreditexposurestoindividualcounterpartiesandgroupsofcloselyrelatedcounterparties.Thenumberofindividualbankcounterparties(whicharenotmembersofagroupofcloselyrelatedcounterparties),andgroupsofcloselyrelatedcounterpartiesofwhichabankistheparent,towhichtheBankingGrouphasanaggregatecreditexposurethatequalsorexceeds10%oftheBankingGroup’sequity:

■■ asat30September2012wasnil;and■■ inrespectofpeakend-of-dayaggregatecreditexposureforthethreemonthsended30September2012wasnil.Thenumberofindividualnon-bankcounterparties(whicharenotmembersofagroupofcloselyrelatedcounterparties),andgroupsofcloselyrelatedcounterpartiesofwhichabankisnottheparent,towhichtheBankingGrouphasanaggregatecreditexposureorpeakend-of-dayaggregatecreditexposurethatequalsorexceeds10%oftheBankingGroup’sequity:

■■ asat30September2012wasonecounterpartywithacreditratingofA-orA3orabove,oritsequivalent,havinganaggregatecreditexposurebetween15-19%;and

■■ forthethreemonthsended30September2012wasonecounterpartywithacreditratingofA-orA3orabove,oritsequivalent,havingapeakend-of-dayaggregateexposurebetween20-24%.

Thepeakend-of-dayaggregatecreditexposuretoeachindividualcounterpartyoragroupofcloselyrelatedcounterpartieshasbeencalculatedbydeterminingthemaximumend-of-dayaggregateamountofactualcreditexposureovertherelevantthree-monthperiodandthendividingthatbytheBankingGroup’sequityasattheendoftheperiod.Creditexposurestoindividualcounterparties(notbeingmembersofagroupofcloselyrelatedcounterparties)andtogroupsofcloselyrelatedcounterpartiesexcludeexposurestoconnectedpersons,tothecentralgovernmentofanycountrywithalong-termcreditratingofA-orA3orabove,oritsequivalent,ortoanybankwithalong-termcreditratingofA-orA3orabove,oritsequivalent.ThesecalculationsrelateonlytoexposuresheldinthefinancialrecordsoftheBankingGroupandwerecalculatednetofindividuallyassessedprovisions.

Note 38 Credit exposures to connected persons and non-bank connected personsTheBankingGroup’screditexposuretoconnectedpersonsisderivedinaccordancewiththeBank’sconditionsofregistrationandtheReserveBankdocument‘Connectedexposurespolicy’(BS8),isnetofindividualcreditimpairmentallowancesandexcludesadvancestoconnectedpersonsofacapitalnature.TheReserveBankdefinesconnectedpersonstobeothermembersoftheUltimateParentBankGroupandDirectorsoftheBank.ControlledentitiesoftheBankarenotconnectedpersons.Creditexposurestoconnectedpersonsarebasedonactualcreditexposuresratherthaninternallimits.Peakend-of-dayaggregatecreditexposurestoconnectedpersonsexpressedasapercentageofTierOneCapitaloftheBankingGrouphavebeenderivedbydeterminingthemaximumend-of-dayaggregateamountofcreditexposureovertheyearended30September2012andthendividingthatamountbytheBankingGroup’sTierOneCapitalasat30September2012.Creditexposurestoconnectedpersonsreportedinthetablebelowhavebeencalculatedpartiallyonabilateralnetbasisandpartiallyonagrossbasis.Nettinghasoccurredinrespectofcertaintransactionswhicharethesubjectofthebilateralnettingagreement.Onthisbasis,thereisalimitof125%oftheBankingGroup’sTierOneCapitalinrespectofthegrossamountofaggregatecreditexposuretoconnectedpersonsthatcanbenettedoffindeterminingthenetexposure.

The Banking Group

Peak End-of-day for the Year As at Ended $ millions 30-Sep-12 30-Sep-12

Creditexposurestoconnectedpersons:Ongrossbasis,beforenetting 1,837 3,016 AsapercentageofTierOneCapitaloftheBankingGroupatendoftheyear 36.0% 59.1%Amountthathasbeennettedoffindeterminingthenetexposure 536 1,125 AsapercentageofTierOneCapitaloftheBankingGroupatendoftheyear 10.5% 22.1%Onpartialbilateralnetbasis 1,301 1,891 AsapercentageofTierOneCapitaloftheBankingGroupatendoftheyear 25.5% 37.1%Creditexposurestonon-bankconnectedpersons - - AsapercentageofTierOneCapitaloftheBankingGroupatendoftheyear 0.0% 0.0%

Asat30September2012,therating-contingentlimitapplicabletotheBankingGroupwas70%ofTierOneCapital.Withinthisoverallrating-contingentlimitthereisasub-limitof15%ofTierOneCapitalwhichappliestotheaggregatecreditexposuretonon-bankconnectedpersons.Thelimitsonaggregatecreditexposurestoallconnectedpersonsandtonon-bankconnectedpersonsintheBank’sconditionsofregistrationhavebeencompliedwithatalltimesduringtheyearended30September2012.Whereabankisfundingalargeloanitiscommonpracticetosharetheriskofacustomerdefaultwithasyndicateofbanks.Thesearrangementsarecalledrisklay-offarrangements.Asat30September2012,theBankingGrouphadnoaggregatecontingentexposurestoconnectedpersonsarisingfromrisklay-offarrangementsinrespectofcreditexposurestocounterparties(excludingcounterpartiesthatareconnectedpersons).TheaggregateamountoftheBankingGroup’sindividualcreditprovisionsprovidedagainstcreditexposurestoconnectedpersonswasnilasat30September2012.

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Note 39 Events after the reporting dateWestpacNZSecuritisationNo.2Limitedwasincorporatedon2November2012.TheBank’sconditionsofregistrationwereamendedsubsequenttobalancedate,inOctober2012.Thechangerelatestoanincreaseintheminimumone-yearcorefundingratioinconditionofregistration14from70%to75%witheffectfrom1January2013.On21November2012,thedirectorsoftheBankresolvedtorepay$470millionoftheperpetualsubordinatednotes.

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Independent auditors’ report

Independent Auditors’ ReportTotheshareholderofWestpacNewZealandLimited

Report on the Financial Statements (excluding Supplementary Information Relating to Capital Adequacy)Wehaveauditedpages27to103oftheDisclosureStatementofWestpacNewZealandLimited(the‘Bank’)whichconsistsofthefinancialstatementsrequiredbyClause24oftheRegisteredBankDisclosureStatements(NewZealandIncorporatedRegisteredBanks)Order(No2)2012(the‘Order’)andthesupplementaryinformation(excludingthesupplementaryinformationrelatingtocapitaladequacydisclosedinNotes34and35)requiredbySchedules4,7,13,14,15and17oftheOrder.Thefinancialstatementscomprisethebalancesheetsasat30September2012,theincomestatements,statementsofcomprehensiveincome,statementsofchangesinequityandstatementsofcashflowsfortheyearthenended,andthenotestothefinancialstatementsthatincludeasummaryofsignificantaccountingpoliciesandotherexplanatoryinformationforboththeBankandtheBankingGroup.The‘Banking Group’comprisestheBankandtheentitiesitcontrolledat30September2012orfromtimetotimeduringthefinancialyear.

Directors’ Responsibility for the Financial StatementsTheDirectorsofWestpacNewZealandLimited(the‘Directors’)areresponsiblefortheDisclosureStatement,whichincludesfinancialstatementspreparedinaccordancewithClause24oftheOrderandgenerallyacceptedaccountingpracticeinNewZealandandthatgiveatrueandfairviewofthematterstowhichtheyrelate.TheDirectorsarealsoresponsibleforsuchinternalcontrolsastheDirectorsdeterminearenecessarytoenablethepreparationoffinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.

Inaddition,theDirectorsareresponsibleforthepreparationandfairpresentationofsupplementaryinformationintheDisclosureStatementwhichcomplieswithSchedules2,4,7,13,14,15and17oftheOrder.

Auditors’ ResponsibilityOurresponsibilityistoexpressanopiniononthefinancialstatementsandthesupplementaryinformation(excludingthesupplementaryinformationrelatingtocapitaladequacydisclosedinNotes34and35)disclosedinaccordancewithClause24andSchedules4,7,13,14,15and17oftheOrderandpresentedtousbytheDirectors.WeconductedourauditinaccordancewithInternationalStandardsonAuditing(NewZealand)andInternationalStandardsonAuditing.Thesestandardsrequirethatwecomplywithrelevantethicalrequirementsandplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreefrommaterialmisstatement.

Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthefinancialstatements.Theproceduresselecteddependontheauditors’judgement,includingtheassessmentoftherisksofmaterialmisstatementofthefinancialstatements,whetherduetofraudorerror.Inmakingthoseriskassessments,theauditorsconsidertheinternalcontrolsrelevanttotheBankandBankingGroup’spreparationoffinancialstatementsthatgiveatrueandfairviewofthematterstowhichtheyrelateinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheBankandBankingGroup’sinternalcontrols.Anauditalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofaccountingestimates,aswellasevaluatingtheoverallpresentationofthefinancialstatements.

Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforourauditopinion.

WecarryoutotherassignmentsonbehalfoftheBankandtheBankingGroupintheareasoftaxationadviceandotherassuranceandadvisoryservices.Inaddition,certainpartnersandemployeesofourfirmmaydealwiththeBank,theBankingGroupandWestpacBankingCorporationGrouponnormaltermswithintheordinarycourseoftradingactivitiesoftheBank,theBankingGroupandWestpacBankingCorporationGroup.ThesemattershavenotimpairedourindependenceasauditorsoftheBankandtheBankingGroup.WehavenootherinterestsintheBank,theBankingGrouporWestpacBankingCorporationGroup.

OpinionInouropinion,thefinancialstatementsonpages27to103(excludingthesupplementaryinformationdisclosedinaccordancewithSchedules4,7,11,13,14,15and17oftheOrderandincludedwithinthebalancesheetsandNotes14,32,33,34,35,37and38):

(i) complywithgenerallyacceptedaccountingpracticeinNewZealand;

(ii) complywithInternationalFinancialReportingStandards;and

(iii) giveatrueandfairviewofthefinancialpositionoftheBankandtheBankingGroupasat30September2012,andtheirfinancialperformanceandcashflowsfortheyearthenended.

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Inouropinion,thesupplementaryinformationdisclosedinaccordancewithSchedules4,7,13,14,15and17oftheOrderandincludedwithinthebalancesheetsandNotes14,32,33,35,37and38:

(i) hasbeenprepared,inallmaterialrespects,inaccordancewiththeguidelinesissuedundersection78(3)oftheReserveBankofNewZealandAct1989oranyconditionsofregistration;

(ii) isinaccordancewiththebooksandrecordsoftheBankandBankingGroup;and(iii) fairlystates,inallmaterialrespects,thematterstowhichitrelatesinaccordancewiththoseSchedules.

Report on Other Legal and Regulatory Requirements (excluding Supplementary Information Relating to Capital Adequacy)WealsoreportinaccordancewiththerequirementsofSections16(1)(d)and16(1)(e)oftheFinancialReportingAct1993andClauses2(1)(d)and2(1)(e)ofSchedule1oftheOrder.Inrelationtoourauditofthefinancialstatements(excludingthesupplementaryinformationrelatingtocapitaladequacydisclosedinNotes34and35)fortheyearended30September2012:

(i) wehaveobtainedalltheinformationandexplanationsthatwehaverequired;and(ii) inouropinion,properaccountingrecordshavebeenkeptbytheBankandtheBankingGroupasfaras

appearsfromanexaminationofthoserecords.

Report on the Supplementary Information Relating to Capital AdequacyWehavereviewedthesupplementaryinformationrelatingtocapitaladequacyrequiredbySchedule11oftheOrderasdisclosedinNotes34and35ofthefinancialstatementsoftheBankandtheBankingGroupfortheyearended30September2012.

Directors’ Responsibility for the Supplementary Information Relating to Capital AdequacyTheDirectorsareresponsibleforthepreparationofsupplementaryinformationrelatingtocapitaladequacythatispreparedinaccordancewiththeBank’sconditionsofregistrationandtheBank’sinternalmodelsforcreditriskandoperationalriskasaccreditedbytheReserveBankofNewZealandandisdisclosedinaccordancewithSchedule11oftheOrder.

Auditors’ ResponsibilityOurresponsibilityistoexpressanopiniononthesupplementaryinformationrelatingtocapitaladequacy,disclosedinNotes34and35,basedonourreview.

Weareresponsibleforreviewingthedisclosuresinordertostatewhether,onthebasisoftheproceduresdescribedbelow,anythinghascometoourattentionthatwouldcauseustobelievethatthesupplementaryinformationisnot,inallmaterialrespects:

(i) preparedinaccordancewiththeBank’sconditionsofregistration;(ii) preparedinaccordancewiththeBank’sinternalmodelsforcreditriskandoperationalriskasaccreditedby

theReserveBankofNewZealand;and(iii) disclosedinaccordancewithSchedule11oftheOrder

andforreportingourfindingstoyou.

WeconductedourreviewinaccordancewithreviewengagementstandardRS-1StatementofReviewEngagementStandardsissuedinNewZealand.AreviewislimitedprimarilytoenquiriesofBankandBankingGrouppersonnelandanalyticalproceduresappliedtofinancialdata,andthusprovideslessassurancethananaudit.WehavenotperformedanauditonthesupplementaryinformationrelatingtocapitaladequacydisclosedinNotes34and35and,accordingly,wedonotexpressanauditopiniononthatsupplementaryinformation.

Opinion Basedonourreviewprocedures,whicharenotanaudit,nothinghascometoourattentionthatcausesustobelievethatthesupplementaryinformationrelatingtocapitaladequacydisclosedinNotes34and35,asrequiredbySchedule11oftheOrder,isnotinallmaterialrespects:

(i) preparedinaccordancewiththeBank’sconditionsofregistration;(ii) preparedinaccordancewiththeBank’sinternalmodelsforcreditriskandoperationalriskasaccreditedby

theReserveBankofNewZealand;and(iii) disclosedinaccordancewithSchedule11oftheOrder.

Restriction on Distribution or UseThisreportismadesolelytotheBank’sshareholder.OurworkhasbeenundertakensothatwemightstatetotheBank’sshareholderthosematterswhichwearerequiredtostatetotheminanauditors’reportandfornootherpurpose.Tothefullestextentpermittedbylaw,wedonotacceptorassumeresponsibilitytoanyoneotherthantheBankandtheBank’sshareholder,forourauditwork,forthisreport,orfortheopinionswehaveformed.

CharteredAccountants Auckland21November2012

Independent auditors’ report (continued)

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Westpac New Zealand Limited

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disclosure statement for personal use only · 2012. 11. 22. · westpac new zealand limited 1...

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