UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

May 7, 2019

 

Commission File Number 1-10167

 

WESTPAC BANKING CORPORATION

(Translation of registrant’s name into English)

 

275 KENT STREET, SYDNEY, NEW SOUTH WALES 2000, AUSTRALIA

(Address of principal executive office)

 

 

Indicate by check mark whether the registrant files or will file annual reports

under cover of Form 20-F or Form 40-F.

 

Form 20-F               x                        Form 40-F                         

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation   S-T Rule 101(b)(1):  __________

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  __________

 


 

Incorporation by Reference

 

The information contained in Exhibit 1 to this Report on Form 6-K shall be incorporated by reference in the prospectuses relating to the Registrant’s securities contained in the Registrant’s Registration Statements on Form F-3 (File Nos. 333-228295, 333-228294 and 333-220373), as such prospectuses may be amended or supplemented from time to time.

 

Index to Exhibits

 

Exhibit
No.

 

Description

 

 

 

1

 

Westpac Banking Corporation Pillar 3 Report March 2019 – Incorporating the requirements of APS 330

 


 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

WESTPAC BANKING CORPORATION

 

(Registrant)

 

 

 

 

 

 

 

Date:    May 7, 2019

By:  /s/ Yvette Adiguzel                     

 

Yvette Adiguzel

 

Associate Director

 


Exhibit 1

 

 


 

Pillar 3 report

Table of contents

 

 

 

Structure of Pillar 3 report

 

Executive summary

3

Introduction

6

Risk appetite and risk types

7

Controlling and managing risk

8

Group structure

14

Capital overview

16

Leverage ratio

20

Credit risk management

22

Credit risk exposures

31

Credit risk mitigation

55

Counterparty credit risk

58

Securitisation

61

Market risk

71

Liquidity risk management

75

Liquidity coverage ratio

76

Net stable funding ratio

77

Operational risk

79

Equity risk

81

Interest Rate Risk in the Banking Book

83

Appendices

 

Appendix I – Regulatory capital reconciliation

85

Appendix II – Entities included in regulatory consolidation

91

Appendix III – Level 3 entities’ asset and liabilities

94

Appendix IV – Regulatory expected loss

95

Appendix V – APS330 quantitative requirements

96

Glossary

99

Disclosure regarding forward-looking statements

104

 

 

 

 

In this report references to ‘Westpac’, ‘Westpac Group’, ‘the Group’, ‘we’, ‘us’ and ‘our’ are to Westpac Banking Corporation and its controlled entities (unless the context indicates otherwise).

 

In this report, unless otherwise stated or the context otherwise requires, references to ‘$’, ‘AUD’ or ‘A$’ are to Australian dollars.

 

Any discrepancies between totals and sums of components in tables contained in this report are due to rounding.

 

In this report, unless otherwise stated, disclosures reflect the Australian Prudential Regulation Authority’s (APRA) implementation of Basel III.

 

Information contained in or accessible through the websites mentioned in this report does not form part of this report unless we specifically state that it is incorporated by reference and forms part of this report.  All references in this report to websites are inactive textual references and are for information only.

 

 

 

 

 

2 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Executive summary

 

 

 

 

31 March 2019

30 September 2018

31 March 2018

The Westpac Group at Level 2

 

 

 

Common equity Tier 1 (CET1) capital after deductions $m

44,680

45,239

43,639

Risk weighted assets (RWA) $m

419,819

425,384

415,744

Common equity Tier 1  capital ratio %

10.64

10.63

10.50

Additional Tier 1 capital %

2.20

2.15

2.31

Tier 1 capital ratio %

12.84

12.78

12.81

Tier 2 capital %

1.78

1.96

2.02

Total regulatory capital ratio %

14.62

14.74

14.83

APRA leverage ratio %

5.72

5.84

5.75

Level 1 common equity Tier 1 capital ratio (CET1) %

10.72

10.50

10.40

 

 

Westpac’s common equity Tier 1 (CET1) capital ratio was 10.64% at 31 March 2019, up 1 basis point from 30 September 2018. This included First Half 2019 cash earnings of $3,296 million (79 basis points). Cash earnings for First Half 2019 were impacted by additional provisions for estimated customer refunds and payments (and associated costs) ($896 million before tax), and provisions for costs associated with the reset of the Wealth business ($190 million before tax). These provisions for customer remediation and wealth reset costs are referred to as ‘notable items’. Excluding these notable items, which reduced the CET1 ratio by 25 basis points 1 , organic capital growth was 27 basis points.

 

 

 

 

The 27 basis point organic capital growth included:

 

l        First Half 2019 cash earnings, excluding notable items (96 basis point increase);

 

l        The 2018 final dividend payment, net of Dividend Reinvestment Plan (DRP) share issuance (69 basis point decrease);

 

l        Ordinary RWA (before FX movements and regulatory measurement changes) fell slightly (7 basis point increase), mainly driven by reductions in non-credit RWA, with credit RWA slightly higher over the half; and,

 

l        A 7 basis point reduction from other movements, primarily driven by movements in fair value on economic hedges (3 basis point decrease) and regulatory expected loss in excess of eligible provisions (2 basis point decrease).

 

Other items reduced the CET1 capital ratio by 26 basis points. This was primarily driven by the impact of notable items (25 basis point decrease).

 

 

 

 

 

 

 

 

 


1   The impact of notable items on the CET1 ratio includes the capital deduction for the associated deferred tax assets.

 

Westpac Group March 2019 Pillar 3 report | 3

 


 

Pillar 3 report

Executive summary

 

 

 

 $m

31 March 2019

30 September 2018

31 March 2018

Risk weighted assets at Level 2

 

 

 

Credit risk

362,762

362,749

361,391

Market risk

8,338

6,723

7,406

Operational risk

38,641

39,113

30,866

Interest rate risk in the banking book

7,076

12,989

12,875

Other

3,002

3,810

3,206

Total RWA

419,819

425,384

415,744

Total Exposure at Default

1,029,817

1,021,926

1,013,355

 

 

Risk Weighted Assets

 

Total RWA decreased $5.6 billion or 1.3% this half:

 

l       Credit Risk RWA was little changed, with key movements including:

 

o      Adoption of AASB 9 reduced RWA $3.9 billion. Under the changes, certain defaulted loans (mostly mortgages) now carry higher accounting impairment provisions and therefore RWA is reduced.

 

o      Regulatory modelling updates for corporate and bank exposures reduced RWA by $1.0 billion.

 

These were offset by:

 

o      Portfolio growth, which increased RWA by $0.9 billion.

 

o      Changes to the credit quality of the portfolio, which increased RWA by $1.4 billion.

 

o      Foreign currency translation impacts which increased RWA by $2.1 billion from the appreciation of the NZ$.

 

o      An increase in mark-to-market related credit risk RWA of $0.5 billion.

 

l       Non-credit RWA decreased $5.6 billion or 8.9%. The main driver was a $5.9 billion reduction in interest rate risk in the banking book driven by lower interest rate risk exposure and an increase in the embedded gain.

 

 

Additional Tier 1 and Tier 2 capital movement for First Half 2019

 

During the half, Westpac:

 

l       Issued $1.42 billion of Additional Tier 1 capital (Westpac Capital Notes 6), of which approximately $0.72 billion comprised reinvestment by the holders of Westpac Capital Notes (net 17 basis points increase).

 

l       Redeemed $0.66 billion of Additional Tier 1 capital (residual Westpac Capital Notes) (16 basis points decrease).

 

l       Redeemed $1.0 billion of Tier 2 capital instruments (24 basis points decrease).

 

 

Exposure at Default

 

Over the half, exposure at default (EAD) increased $7.9 billion (up 0.8%), primarily due to growth in corporate exposures of $6.6 billion.

 

 

Leverage Ratio

 

The leverage ratio represents the amount of Tier 1 capital relative to exposure 1 . At 31 March 2019, Westpac’s leverage ratio was 5.72%, down 12 basis points since 30 September 2018.

 

 

Liquidity Coverage Ratio (LCR)

 

The LCR requires banks to hold sufficient high-quality liquid assets (HQLA), as defined in APS210 Liquidity, to withstand 30 days under a regulatory-defined acute stress scenario. Westpac’s LCR as at 31 March 2019 was 138% (30 September 2018: 133%) and the average LCR for the quarter ending 31 March 2019 was 134% 2 .

 

 

 

 

 

 

 

 

 

 

 


1   As defined under Attachment D of APS110: Capital Adequacy

2   Calculated as a simple average of the daily observations over the 31 March 2019 quarter.

 

4 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Executive summary

 

 

 

 

Net Stable Funding Ratio (NSFR)

 

The Group is required to maintain a NSFR, designed to encourage longer-term funding resilience, of at least 100%. Westpac had a NSFR of 113% at 31 March 2019 (30 September 2018: 114%). The ratio has remained relatively stable since 30 September 2018 as an increase in loans was funded by an increase in wholesale funding.

 

 

AASB 9 Financial Instruments 1

 

Westpac adopted AASB 9 on 1 October 2018. While the adoption of AASB 9 had an immaterial impact on Westpac’s capital ratios (2 basis point increase) it had an impact on the components of the capital ratios with CET1 capital down $0.3 billion, and RWA down $3.9 billion.

 

 

Change in loan impairment provisions

 

The following table summarises the AASB 9 transition impact on loan impairment provisions:

 

1 October 2018

                     AAS Provisions

GRCL

Total Regulatory

$m

IAPs

CAPs

Total

Adjustment

Provisions

Specific Provisions

 

 

 

 

 

for impaired loans

422

328

750

NA

750

for defaulted but not impaired loans

NA

522

522

NA

522

for Stage 2

NA

1,392

1,392

NA

1,392

Total Specific Provisions 2

422

2,242

2,664

NA

2,664

General Reserve for Credit Loss 2

NA

1,380

1,380

NA

1,380

Total provisions for impairment charges

422

3,622

4,044

NA

4,044

 

 

 

 

 

 

30 September 2018

                     AAS Provisions

GRCL

Total Regulatory

$m

IAPs

CAPs

Total

Adjustment

Provisions

Specific Provisions

 

 

 

 

 

for impaired loans

422

231

653

NA

653

for defaulted but not impaired loans

NA

205

205

NA

205

Total Specific Provisions

422

436

858

NA

858

General Reserve for Credit Loss

NA

2,195

2,195

356

2,551

Total provisions for impairment charges

422

2,631

3,053

356

3,409

 

 

Summary of changes in other Pillar 3 disclosures

 

The following table summarises the AASB 9 transition impact on key Pillar 3 metrics:

 

 

Credit Risk Weighted

Regulatory Expected

Expected Loss for

Specific Provisions

 

Assets

Loss

non-defaulted assets

for Impaired Loans

$m

30-Sep-18

1-Oct-18

30-Sep-18

1-Oct-18

30-Sep-18

1-Oct-18

30-Sep-18

1-Oct-18

Corporate

69,584

69,464

552

562

471

471

54

56

Business lending

35,417

35,187

657

676

442

442

173

177

Sovereign

1,644

1,644

2

2

2

2

-

-

Bank

6,606

6,606

8

8

8

8

-

-

Residential mortgages

132,734

129,633

1,272

1,540

1,048

1,048

103

118

Australian credit cards

6,313

6,296

358

359

304

304

50

51

Other retail

13,777

13,628

604

623

465

465

137

157

Small business

16,329

16,015

453

483

339

339

77

127

Specialised Lending

57,043

57,043

836

836

588

588

47

52

Securitisation

5,918

5,918

-

-

-

-

-

-

Standardised

17,384

17,384

-

-

-

-

12

12

Total

362,749

358,818

4,742

5,089

3,667

3,667

653

750

 

 

 

 


1   Refer to the Westpac 2019 Interim Results for further details on AASB 9.

2   Provisions classified according to APRA’s letter dated 4 July 2017 “Provisions for regulatory purposes and AASB 9 financial instruments”.

 

Westpac Group March 2019 Pillar 3 report | 5

 


 

Pillar 3 report

Introduction

 

 

 

Westpac Banking Corporation is an Authorised Deposit-taking Institution (ADI) subject to regulation by APRA. APRA has accredited Westpac to apply advanced models permitted by the Basel III global capital adequacy regime to the measurement of its regulatory capital requirements. Westpac uses the Advanced Internal Ratings-Based approach (Advanced IRB) for credit risk and the Advanced Measurement Approach (AMA) for operational risk.

 

In accordance with APS330 Public Disclosure, financial institutions that have received this accreditation, such as Westpac, are required to disclose prudential information about their risk management practices on a semi-annual basis. A subset of this information must be disclosed quarterly.

 

This report describes Westpac’s risk management practices and presents the prudential assessment of Westpac’s capital adequacy as at 31 March 2019.

 

In addition to this report, the regulatory disclosures section of the Westpac website 1  contains the reporting requirements for:

 

l         Capital instruments under Attachment B of APS330; and

 

l         The identification of potential Global-Systemically Important Banks (G-SIB) under Attachment H of APS330 (disclosed annually).

 

Capital instruments disclosures are updated when:

 

l         A new capital instrument is issued that will form part of regulatory capital; or

 

l         A capital instrument is redeemed, converted into CET1 capital, written off, or its terms and conditions are changed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1    http://www.westpac.com.au/about-westpac/investor-centre/financial-information/regulatory-disclosures/

 

6 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 Report

Risk appetite and risk types

 

 

 

The Westpac Group’s vision is to be one of the world’s great service companies, helping our customers, communities and people to prosper and grow.

 

The Westpac Group’s appetite for risk is informed by our strategic objectives and business plans, regulatory rules and ratios, and the potential for adverse outcomes to result in material impacts on our customers, our staff, our reputation, our regulatory relationships and our financial position including the potential for capital and liquidity ratios to fall below target levels in stressed scenarios.

 

The Westpac Group distinguishes between different types of risk and takes an integrated approach toward identifying, assessing and managing all risks including through the annual review of the Westpac Group Risk Management Strategy, Westpac Group Risk Appetite Statement and the establishment of additional controls through supporting frameworks and policies.

 

Overview of key risk types

 

l          credit risk - the risk of financial loss where a customer or counterparty fails to meet their financial obligations to the Group;

 

l          liquidity risk - the risk that the Group will be unable to fund assets and meet obligations as they become due;

 

l          market risk - the risk of an adverse impact on earnings resulting from changes in market factors, such as foreign exchange rates, interest rates, commodity prices and equity prices. This includes interest rate risk in the banking book - the risk to interest income from a mismatch between the duration of assets and liabilities that arises in the normal course of business activities;

 

l          operational risk - the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition is aligned to the regulatory (Basel II) definition, including legal and regulatory risk but excluding strategic risk;

 

l          conduct risk - the risk that the provision of our services and products results in unsuitable or unfair outcomes for our stakeholders or undermines market integrity;

 

l          compliance risk - the risk of legal or regulatory sanction, financial or reputational loss, arising from our failure to abide by the compliance obligations required of us;

 

l          business risk - the risks arising from our strategic objectives and business plans;

 

l          sustainability risk - the risk of reputational or financial loss due to failure to recognise or address material existing or emerging sustainability related environmental, social or governance issues;

 

l          equity risk - the potential for financial loss arising from movements in equity values. Equity risk may be direct, indirect or contingent;

 

l          insurance risk - the risk in our licensed regulated insurance entities of claims costs being greater than expected, due to a failure in product design, underwriting, reinsurance arrangements or an increase in severity and frequency of insured events;

 

l          related entity (contagion) risk - the risk that problems arising in other Westpac Group members compromise the financial and operational position of the authorised deposit-taking institution in the Westpac Group; and

 

l          reputation risk - the risk of the loss of reputation, stakeholder confidence, or public trust and standing.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group March 2019 Pillar 3 report | 7

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

We have adopted a Three Lines of Defence approach to risk management which reflects our culture of ‘risk is everyone’s business’ in which all employees are responsible for identifying, assessing and managing risk and operating within the Group’s desired risk profile. Effective risk management enables us to:

 

l        accurately measure our risk profile and balance risk and reward within our risk appetite, optimising financial growth opportunities and mitigating potential loss or damage;

 

l        protect Westpac Group’s depositors, policyholders and investors by maintaining a balance sheet with sound credit quality and buffers over regulatory minimums;

 

l        deliver suitable, fair and clear outcomes for our customers that support market integrity;

 

l        embed adequate controls to guard against excessive risk or undue risk concentration; and

 

l        meet our regulatory and compliance obligations.

 

The Board is responsible for approving the Westpac Group Risk Management Strategy and Westpac Group Risk Appetite Statement and for monitoring the effectiveness of risk management by the Westpac Group.

 

The Board has delegated to the Board Risk & Compliance Committee responsibility to review and recommend the Westpac Group Risk Management Strategy and Westpac Group Risk Appetite Statement to the Board for approval; set risk appetite consistent with the Westpac Group Risk Appetite Statement; approve frameworks, policies and processes for managing risk (consistent with the Westpac Group Risk Management Strategy and Westpac Group Risk Appetite Statement); and review and, where appropriate, approve risks beyond the approval discretion provided to management.

 

Risk management governance structure

 

Board

l        approves our overall Westpac Group Risk Management Strategy and the Westpac Group Risk Appetite Statement; and

 

l        makes annual declaration to APRA on risk management.

 

Board Risk & Compliance Committee (BRCC)

l        reviews and recommends the Risk Management Strategy and Westpac Group Risk Appetite Statement to the Board for approval;

l        reviews and monitors the risk profile and controls of the Group consistent with the Westpac Group Risk Appetite Statement;

l        reviews and approves the frameworks, policies and processes for managing risk;

l        reviews and approves the limits and conditions that apply to credit risk approval authority delegated to the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Chief Risk Officer (CRO) and any other officers of the Westpac Group to whom the Board has delegated credit approval authority;

l        monitors the alignment of the Westpac Group’s risk profile and controls with risk appetite, and oversees the identification, management and reporting of our risks inherent in the Westpac Group’s operations;

l        monitors changes anticipated for the economic and business environment including consideration of emerging risks and other factors considered relevant to our risk profile and risk appetite;

l        assists the Board to make its annual declaration to APRA on risk management under APRA prudential standard CPS220 Risk Management;

l        reviews and where appropriate approves risks beyond the approval discretion provided to management; and

l        assists the Board to oversee compliance management within the Group.

From the perspective of specific types of risk, the Board Risk & Compliance  Committee’s role includes:

l        credit risk – approving key policies and limits supporting the Credit Risk Management Framework, and monitoring the risk profile, performance and management of our credit portfolio;

l        liquidity risk – approving key policies and limits supporting the Liquidity Risk Management Framework, including our annual funding strategy, recovery and resolution plans and monitoring the liquidity position and requirements;

 

 

 

 

8 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Risk management governance structure (continued)

 

 

l        market risk – approving key policies and limits supporting the Market Risk Management Framework, including, but not limited to, the Value at Risk limits and Net Interest Income at Risk limits and monitoring the market risk profile;

l        operational risk – approving key policies supporting both the Operational Risk Management Framework and the Financial Crime Risk Management Framework, and monitoring the performance of operational and financial crime risk management and controls;

l        conduct risk – reviewing and approving the Westpac Group Conduct Framework and reviewing and monitoring the performance of conduct risk management and controls;

l        reputation risk – reviewing and approving the Reputation Risk Management Framework, and reviewing and monitoring the performance of reputation risk management and controls; and

l        compliance risk – reviewing and approving the Westpac Group Compliance Management Framework and reviewing compliance processes and our compliance with applicable laws, regulations and regulatory requirements, discussing with management and the external auditor any material correspondence with regulators or government agencies and any published reports that raise material issues and reviewing complaints and whistleblower concerns.

 

The Board Risk & Compliance Committee also:

l        oversees and approves the Internal Capital Adequacy Assessment Process and in doing so reviews the outcomes of Westpac Group stress testing, sets the target capital ranges for regulatory capital and reviews and monitors capital levels for consistency with the Westpac Group’s risk appetite;

l        provides relevant periodic assurances and reports (as appropriate) to the Board Audit Committee;

l        reviews and approves other risk management frameworks 1  and the monitoring of performance under those frameworks (as appropriate);

l        forms a view on Westpac Group’s risk culture and oversees the identification of, and steps taken to address, any desirable changes to risk culture and periodically reports to the Board;

l        refers to the Board or any other Board Committees any matters that come to the attention of the Board Risk & Compliance Committee that are relevant for the Board or the respective Board Committees; and

l        in its capacity as the Westpac Group’s US Risk Committee, oversees the key risks, risk management framework and policies of Westpac Group’s US operations.

 

Board Committees with a Risk Focus

Board Audit Committee  (BAC)

l        oversees the integrity of financial statements and financial reporting systems and matters relating to taxation risks.

Board Remuneration Committee (BRC)

l        oversees remuneration policies and practices of the Westpac Group, in the context that these policies and practices reflect Westpac’s risk management framework, including making recommendations to the Board for the reduction or lapsing of incentive based equity grants to relevant employees as a result of risk or compliance failures.

Board Technology Committee (BTC)

l        oversees the implementation of the Westpac Group’s technology strategy, including risks associated with major technology programs.

 

 

 

 

  Additional frameworks include the Sustainability Risk Management Framework, Equity Risk Management Framework, Related Entity Risk Management Framework, Financial Crime Risk Management Framework, and Insurance Risk Management Framework.

 

Westpac Group March 2019 Pillar 3 report | 9

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Risk management governance structure (continued)

 

Executive Team

Westpac Executive Team (ET)

l        executes the Board-approved strategy;

l        delivers the Westpac Group’s various strategic and performance goals within the approved risk appetite; and

l        monitors key risks within each business unit, capital adequacy and the Westpac Group’s reputation.

 

Executive risk committees

Westpac Group Executive Risk Committee (RISKCO)

l        leads the management and oversight of material risks across the Westpac Group within the context of the risk appetite approved by the Board;

l        oversees the embedding of the Risk Management Strategy in the Group’s approach to risk governance;

l        oversees risk-related management frameworks and key supporting policies;

l        oversees the Group’s material risks;

l        oversees reputation risk and sustainability risk management frameworks, compliance and conduct management frameworks and key supporting policies; and

l        identifies emerging credit, operational, compliance and market risks and allocates responsibility for assessing impacts and implementing appropriate actions to address these.

 

 

Westpac Group Asset & Liability Committee (ALCO)

l        leads the optimisation of funding and liquidity risk-reward across the Group;

l        reviews the level and quality of capital to ensure that it is commensurate with the Group’s risk profile, business strategy and risk appetite;

l        oversees the Liquidity Risk Management Framework and key policies;

l        oversees the funding and liquidity risk profile and balance sheet risk profile; and

l        identifies emerging funding and liquidity risks and appropriate actions to address these.

 

 

Westpac Group Credit Risk Committee (CREDCO)

l        leads the optimisation of credit risk-reward across the Group;

l        reviews and oversees the Credit Risk Management Framework and key supporting policies;

l        oversees Westpac’s credit risk profile; and

l        identifies emerging credit risks, allocates responsibility for assessing impacts, and responds as appropriate.

 

 

Westpac Group Market Risk Committee (MARCO)

l        leads the optimisation of market risk, equity risk and insurance risk across the Group;

l        reviews and oversees the Market Risk, Equity Risk and Insurance Risk Management Frameworks and key market risk management policies;

l        reviews policies and limits for managing traded and non-traded market risk; and

l        reviews and oversees the market risk, equity risk and insurance risk profile.

 

 

 

 

 

 

10 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Risk management governance structure (continued)

 

 

Westpac Group Operational Risk and Financial Crime Committee (OFCO)

l        leads the optimisation of operational risk across the Group;

l        reviews and oversees the Operational Risk and Financial Crime Risk Management Frameworks and key supporting policies;

l        oversees Westpac’s operational risk and financial crime risk profile; and

l        identifies emerging operational and financial crime risks, and appropriate actions to address these.

 

 

Westpac Group Remuneration Oversight Committee (ROC)

l        provides assurance that the remuneration arrangements across the Group are considered from a Human Resources, Risk, Finance, Legal and Compliance perspective in line with external requirements;

l        reviews and makes recommendations to the CEO for recommendation to the BRC on the Westpac Group Remuneration Policy and provides assurance that remuneration arrangements across the Group encourage behaviour that supports Westpac’s long-term financial soundness and the Risk Management Framework;

l        reviews and monitors the remuneration arrangements (other than for Group Executives) for Responsible Persons (as defined in the Group Fit and Proper Policy), risk and financial control employees, and all other employees for whom a significant portion of total remuneration is based on performance and whose activities, either individually or collectively, may affect the financial soundness of Westpac; and

l        reviews and recommends to the CEO for recommendation to the BRC the criteria and rationale for determining the total quantum of the Group variable reward pool.

 

Risk and Compliance functions

Risk Function

l        assists the Board, Board Committees and senior management to establish, maintain and review the Risk Management Strategy, supporting risk management frameworks and policies and risk appetite;

l        documents and monitors risk appetite across all risk types and classes (including financial crime), risk limits and authorities;

l        notifies the Board or Board Committees of any significant breach, or material deviation from the Risk Management Strategy, supporting risk management frameworks and policies or risk appetite;

l        monitors and provides advice on risk policies, procedures, incidents and issues including emerging risk issues;

l        monitors and provides assurance including testing risk controls as the 2nd Line of Defence;

l        monitors and maintains the required resources and capabilities (including Risk systems and Risk data) to support the Risk Management Strategy; and

l        oversees the management of credit risk and making credit decisions in accordance with delegations from the Board.

Compliance Function

l        assists the Board, Board Committees and senior management to establish, maintain and review the Compliance Management Framework;

l        designs, implements and monitors key compliance processes and policies in support of the Compliance Management Framework;

 

 

 

 

 

 

 

Westpac Group March 2019 Pillar 3 report | 11

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Risk management governance structure (continued)

 

 

l        provides independent advice on compliance matters;

l        develop and deliver compliance training to relevant employees as required;

l        reports on the performance of the Compliance Management Framework; and

l        maintains resources with the skills and tools required to fulfil their compliance responsibilities and supports the strategy.

 

Independent internal review

Group Audit

l        reviews the adequacy and effectiveness of management controls over risk.

Divisional business units

Business Units

l        responsible for identifying, evaluating and managing the risks that they originate within approved risk appetite and policies; and

l        establish and maintain appropriate risk management and compliance controls, resources and self-assessment processes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Roles and responsibilities

 

Our approach to risk management is that ‘risk is everyone’s business’ and that responsibility and accountability for risk begins with the business units that originate the risk.

 

The 1st Line of Defence – Risk identification, risk management and self-assessment

 

Divisional business units are responsible for identifying, evaluating and managing the risks that they originate within approved risk appetite and policies. They are required to establish and maintain appropriate risk management controls, resources and self-assessment processes.

 

The 2nd Line of Defence – Establishment of risk management frameworks and policies and risk management oversight

 

Risk and compliance advisory, control assurance, and monitoring functions which establish frameworks, policies, limits, and processes for the management, monitoring, and reporting of risk. The 2nd Line evaluates and provides assurance over the adequacy and effectiveness of 1st Line controls and application of frameworks and policies and monitors the 1st Line’s progress toward remediation of identified deficiencies. The 2nd Line can also approve certain risks outside the authorities granted to the 1st Line.

 

The 3rd Line of Defence – Independent assurance

 

Group Audit is an independent assurance function that evaluates and opines on the adequacy and effectiveness of both 1st and 2nd Line risk management approaches and tracks remediation progress, with the aim of providing the Board, and senior executives, with comfort that the Group’s governance, risk management and internal controls are operating effectively.

 

Our overall risk management approach is summarised in the following diagram:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group March 2019 Pillar 3 report | 13

 


 

Pillar 3 report

Group structure

 

 

 

Westpac seeks to ensure that it is adequately capitalised at all times. APRA applies a tiered approach to measuring Westpac’s capital adequacy 1  by assessing financial strength at three levels:

 

l       Level 1, comprising Westpac Banking Corporation and its subsidiary entities that have been approved by APRA as being part of a single ‘Extended Licensed Entity’ (ELE) for the purposes of measuring capital adequacy;

 

l       Level 2, the consolidation of Westpac Banking Corporation and all its subsidiary entities except those entities specifically excluded by APRA regulations. The head of the Level 2 group is Westpac Banking Corporation; and

 

l       Level 3, the consolidation of Westpac Banking Corporation and all its subsidiary entities.

 

Unless otherwise specified, all quantitative disclosures in this report refer to the prudential assessment of Westpac’s financial strength on a Level 2 basis 2 .

 

The Westpac Group

 

The following diagram shows the Level 3 conglomerate group and illustrates the different tiers of regulatory consolidation.

 

 

Accounting consolidation 3

 

The consolidated financial statements incorporate the assets and liabilities of all subsidiaries (including structured entities) controlled by Westpac. Westpac and its subsidiaries are referred to collectively as the ‘Group’. The effects of all transactions between entities in the Group are eliminated. Control exists when the parent entity is exposed to, or has rights to, variable returns from its involvement with an entity, and has the ability to affect those returns through its power over that entity. Subsidiaries are fully consolidated from the date on which control commences and they are no longer consolidated from the date that control ceases.

 

Group entities excluded from the regulatory consolidation at Level 2

 

Regulatory consolidation at Level 2 covers the global operations of Westpac and its subsidiary entities, including other controlled banking, securities and financial entities, except for those entities involved in the following business activities:

 

l       insurance;

 

l       acting as manager, responsible entity, approved trustee, trustee or similar role in relation to funds management;

 

l       non-financial (commercial) operations; or

 

l       special purpose entities to which assets have been transferred in accordance with the requirements of APS120 Securitisation.

 

Retained earnings and equity investments in subsidiary entities excluded from the consolidation at Level 2 are deducted from capital, with the exception of securitisation special purpose entities.

 

 

1   APS110 Capital Adequacy outlines the overall framework adopted by APRA for the purpose of assessing the capital adequacy of an ADI.

2    Impaired assets and provisions held in Level 3 entities are excluded from the tables in this report.

3   Refer to Note 35 of Westpac’s 2018 Annual Report for further details.

 

14 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Group Structure

 

 

 

Subsidiary banking entities

 

Westpac New Zealand Limited (WNZL), a wholly owned subsidiary entity, is a registered bank incorporated in New Zealand and regulated by the Reserve Bank of New Zealand. WNZL uses the Advanced IRB approach for credit risk and the AMA for operational risk. Other subsidiary banking entities in the Group include Westpac Bank-PNG-Limited and Westpac Europe Limited. For the purposes of determining Westpac’s capital adequacy subsidiary banking entities are consolidated at Level 2.

 

Restrictions and major impediments on the transfer of funds or regulatory capital within the Group

 

Minimum capital (‘thin capitalisation’) rules

 

Tax legislation in most jurisdictions in which the Group operates prescribes minimum levels of capital that must be retained in that jurisdiction to avoid a portion of the interest costs incurred in the jurisdiction ceasing to be tax deductible. Capital for these purposes includes both contributed capital and non-distributed retained earnings. Westpac seeks to maintain sufficient capital/retained earnings to comply with these rules.

 

Tax costs associated with repatriation

 

Repatriation of retained earnings (and capital) may result in tax being payable in either the jurisdiction from which the repatriation occurs or Australia on receipt of the relevant amounts. This cost would reduce the amount actually repatriated.

 

Intra-group exposure limits

 

Exposures to related entities are managed within the prudential limits prescribed by APRA in APS222 Associations with Related Entities 1 . Westpac has an internal limit structure and approval process governing credit exposures to related entities. This limit structure and approval process, combined with APRA’s prudential limits, is designed to reduce the potential for unacceptable contagion risk.

 

Prudential regulation of subsidiary entities

 

Certain subsidiary banking, insurance and trustee entities are subject to local prudential regulation in their own right, including capital adequacy requirements and investment or intra-group exposure limits. Westpac seeks to ensure that its subsidiary entities are adequately capitalised and adhere to regulatory requirements at all times. There are no capital deficiencies in subsidiary entities excluded from the regulatory consolidation at Level 2.

 

On 15 November 2017, the RBNZ advised WNZL of changes to its conditions of registration resulting from its review of WNZL’s compliance with the RBNZ’s ‘Capital Adequacy Framework (Internal Models Based Approach) (BS2B). The changes to WNZL’s conditions of registration came into effect on 31 December 2017 and increase the minimum Total Capital ratio, Tier 1 Capital ratio and Common Equity Tier 1 Capital ratio of WNZL and its controlled entities by 2%. WNZL has also undertaken to the RBNZ to maintain the Total Capital ratio of WNZL and its controlled entities above 15.1%. WNZL and its controlled entities retain an appropriate amount of capital to comply with the increased minimum ratios.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1   For the purposes of APS222, subsidiaries controlled by Westpac, other than subsidiaries that form part of the ELE, represent ‘related entities’. Prudential and internal limits apply to intra-group exposures between the ELE and related entities, both on an individual and aggregate basis.

 

Westpac Group March 2019 Pillar 3 report | 15

 


 

Pillar 3 report

Capital overview

 

 

 

Capital Structure

 

This table shows Westpac’s capital resources under APS111 Capital Adequacy: Measurement of Capital.

 

 

31 March

30 September

31 March

$m

2019

2018

2018

 

 

 

 

Common equity Tier 1 capital

 

 

 

Paid up ordinary capital

36,351

36,054

35,168

Treasury shares

(571)

(507)

(506)

Equity based remuneration

1,527

1,441

1,414

Foreign currency translation reserve

(331)

(379)

(522)

Accumulated other comprehensive income

15

(11)

(14)

Non-controlling interests - other

54

55

50

Retained earnings

26,949

27,883

27,122

Less retained earnings in life and general insurance, funds management and securitisation entities

(1,289)

(1,218)

(1,238)

Deferred fees

234

258

254

Total common equity Tier 1 capital

62,939

63,576

61,728

Deductions from common equity Tier 1 capital

 

 

 

Goodwill (excluding funds management entities)

(8,665)

(8,644)

(8,656)

Deferred tax assets

(1,710)

(1,169)

(1,116)

Goodwill in life and general insurance, funds management and securitisation entities

(941)

(942)

(1,032)

Capitalised expenditure

(1,778)

(1,838)

(1,867)

Capitalised software

(1,881)

(1,792)

(1,628)

Investments in subsidiaries not consolidated for regulatory purposes

(1,522)

(1,567)

(1,532)

Regulatory expected loss in excess of eligible provisions 1

(1,148)

(1,312)

(1,192)

General reserve for credit losses adjustment

-

(356)

(339)

Defined benefit superannuation fund surplus

(66)

(78)

-

Equity investments

(482)

(570)

(680)

Regulatory adjustments to fair value positions

(65)

(68)

(46)

Other Tier 1 deductions

(1)

(1)

(1)

Total deductions from common equity Tier 1 capital

(18,259)

(18,337)

(18,089)

Total common equity Tier 1 capital after deductions

44,680

45,239

43,639

Additional Tier 1 capital

 

 

 

Basel III complying instruments

9,216

9,144

9,041

Basel III transitional instruments

-

-

566

Total Additional Tier 1 capital

9,216

9,144

9,607

Net Tier 1 regulatory capital

53,896

54,383

53,246

 

 

 

 

Tier 2 capital

 

 

 

Basel III complying instruments

7,143

8,025

8,102

Basel III transitional instruments

495

486

473

Eligible general reserve for credit loss

66

54

55

Basel III transitional adjustment

-

-

-

Total Tier 2 capital

7,704

8,565

8,630

Deductions from Tier 2 capital

 

 

 

Investments in subsidiaries not consolidated for regulatory purposes

(140)

(140)

(140)

Holdings of own and other financial institutions Tier 2 capital instruments

(103)

(93)

(83)

Total deductions from Tier 2 capital

(243)

(233)

(223)

Net Tier 2 regulatory capital

7,461

8,332

8,407

Total regulatory capital

61,357

62,715

61,653

 

 

 

 

 

 

 

 

 

 

1      An explanation of the relationship between this deduction, regulatory expected loss and provisions for impairment charges is contained in Appendix IV.

 

16 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Capital overview

 

 

 

Capital management strategy

 

Westpac’s approach to capital management seeks to balance the fact that capital is an expensive form of funding with the need to be adequately capitalised as an ADI. Westpac considers the need to balance efficiency, flexibility and adequacy when determining sufficiency of capital and when developing capital management plans.

 

Westpac evaluates these considerations through an Internal Capital Adequacy Assessment Process (ICAAP), the key features of which include:

 

l           the development of a capital management strategy, including consideration of regulatory minimums, capital buffers and contingency plans;

 

l        consideration of both economic and regulatory capital requirements;

 

l          a stress testing framework that challenges the capital measures, coverage and requirements including the impact of adverse economic scenarios; and

 

l       consideration of the perspectives of external stakeholders including rating agencies and equity and debt investors.

 

In light of APRA’s announcement on ‘unquestionably strong’ capital benchmarks on 19 July 2017, Westpac will seek to operate with a CET1 capital ratio of at least 10.5% in March and September as measured under the existing capital framework. This also takes into consideration:

 

l             current regulatory capital minimums and the capital conservation buffer (“CCB”), which together are the total CET1 requirement. In line with the above, the total CET1 requirement for Westpac is at least 8.0%, based upon an industry minimum CET1 requirement of 4.5% plus a capital buffer of at least 3.5% applicable to domestic systemically important banks (D-SIBs) 1 ;

 

l       stress testing to calibrate an appropriate buffer against a downturn; and

 

l       quarterly volatility of capital ratios due to the half yearly cycle of ordinary dividend payments.

 

 

Should the CET1 ratio fall below the total CET1 requirement restrictions on the distribution of earnings will apply. This includes restrictions on the amount of earnings that can be distributed through dividends, Additional Tier 1 capital distributions and discretionary staff bonuses.

 

Westpac will revise its target capital level once APRA finalises its review of the capital adequacy framework.

 

Westpac’s capital adequacy ratios

 

%

31 March 2019

30 September 2018

31 March 2018

The Westpac Group at Level 2

Common equity Tier 1 capital ratio

10.6

10.6

10.5

Additional Tier 1 capital

2.2

2.2

2.3

Tier 1 capital ratio

12.8

12.8

12.8

Tier 2 capital

1.8

1.9

2.0

Total regulatory capital ratio

14.6

14.7

14.8

 

 

 

 

The Westpac Group at Level 1

 

 

 

Common equity Tier 1 capital ratio

10.7

10.5

10.4

Additional Tier 1 capital

2.3

2.3

2.4

Tier 1 capital ratio

13.0

12.8

12.8

Tier 2 capital

1.8

2.0

2.1

Total regulatory capital ratio

14.8

14.8

14.9

 

Westpac New Zealand Limited’s capital adequacy ratios

 

%

31 March 2019

30 September 2018

31 March 2018

Westpac New Zealand Limited

Common equity Tier 1 capital ratio

11.7

11.7

11.8

Additional Tier 1  capital

2.8

2.8

2.8

Tier 1 capital ratio

14.5

14.5

14.6

Tier 2 capital

2.0

2.1

2.0

Total regulatory capital ratio

16.5

16.6

16.6

 

 

 

 

 

1    Noting that APRA may apply higher CET1 requirements for an individual ADI.

 

Westpac Group March 2019 Pillar 3 report | 17

 


 

Pillar 3 report

Capital overview

 

 

 

Capital requirements

 

This table shows risk weighted assets and associated capital requirements 1  for each risk type included in the regulatory assessment of Westpac’s capital adequacy. Westpac’s approach to managing these risks, and more detailed disclosures on the prudential assessment of capital requirements, are presented in the following sections of this report .

 

31 March 2019

IRB

Standardised

Total Risk

Total Capital

$m

Approach

Approach 2

Weighted Assets

Required 1

Credit risk

 

 

 

 

Corporate

73,551

1,737

75,288

6,023

Business lending

35,294

982

36,276

2,902

Sovereign

1,653

1,042

2,695

216

Bank

7,066

31

7,097

568

Residential mortgages

132,133

5,273

137,406

10,992

Australian credit cards

5,910

-

5,910

473

Other retail

13,082

944

14,026

1,122

Small business

16,092

-

16,092

1,287

Specialised lending

54,833

446

55,279

4,422

Securitisation

5,583

-

5,583

447

Mark-to-market related credit risk 3

-

7,110

7,110

569

Total

345,197

17,565

362,762

29,021

Market risk

 

 

8,338

667

Operational risk

 

 

38,641

3,091

Interest rate risk in the banking book

 

 

7,076

566

Other assets 4

 

 

3,002

240

Total

 

 

419,819

33,585

 

 

 

 

 

30 September 2018

IRB

Standardised

Total Risk

Total Capital

$m

Approach

Approach 2

Weighted Assets

Required 1

Credit risk

 

 

 

 

Corporate

69,584

1,807

71,391

5,711

Business lending

35,417

1,052

36,469

2,918

Sovereign

1,644

962

2,606

208

Bank

6,606

57

6,663

533

Residential mortgages

132,734

5,460

138,194

11,056

Australian credit cards

6,313

-

6,313

505

Other retail

13,777

993

14,770

1,182

Small business

16,329

-

16,329

1,306

Specialised lending

57,043

447

57,490

4,599

Securitisation

5,918

-

5,918

473

Mark-to-market related credit risk 3

-

6,606

6,606

528

Total

345,365

17,384

362,749

29,019

Market risk

 

 

6,723

538

Operational risk

 

 

39,113

3,129

Interest rate risk in the banking book

 

 

12,989

1,039

Other assets 4

 

 

3,810

305

Total

 

 

425,384

34,030

 

 

 

 

 

 

 

 

 

 

 

 

1       Total capital required is calculated as 8% of total risk weighted assets.

2       Westpac’s Standardised risk weighted assets are categorised based on their equivalent IRB categories.

3       Mark-to-market related credit risk is measured under the standardised approach. It is also known as Credit Valuation Adjustment (CVA) risk.

4       Other assets include cash items, unsettled transactions, fixed assets and other non-interest earning assets.

 

18 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Capital overview

 

 

 

31 March 2018

IRB

Standardised

Total Risk

Total Capital

$m

Approach

Approach 2

Weighted Assets

Required 1

Credit risk

 

 

 

 

Corporate

71,590

1,861

73,451

5,876

Business lending

34,872

996

35,868

2,869

Sovereign

1,536

841

2,377

190

Bank

6,253

46

6,299

504

Residential mortgages

129,748

5,470

135,218

10,817

Australian credit cards

6,553

-

6,553

524

Other retail

14,056

1,013

15,069

1,205

Small business

16,017

-

16,017

1,281

Specialised lending

57,239

412

57,651

4,612

Securitisation

5,869

-

5,869

470

Mark-to-market related credit risk 3

-

7,019

7,019

562

Total

343,733

17,658

361,391

28,911

Market risk

 

 

7,406

592

Operational risk

 

 

30,866

2,469

Interest rate risk in the banking book

 

 

12,875

1,030

Other assets 4

 

 

3,206

256

Total

 

 

415,744

33,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1       Total capital required is calculated as 8% of total risk weighted assets.

2       Westpac’s Standardised risk weighted assets are categorised based on their equivalent IRB categories.

3       Mark-to-market related credit risk is measured under the standardised approach. It is also known as Credit Valuation Adjustment (CVA) risk.

4       Other assets include cash items, unsettled transactions, fixed assets and other non-interest earning assets.

 

Westpac Group March 2019 Pillar 3 report | 19

 


 

Pillar 3 report

Leverage ratio

 

 

 

Leverage ratio

 

The following table summarises Westpac’s leverage ratio at 31 March 2019. This has been determined using APRA’s definition of the leverage ratio as specified in APS110 Capital Adequacy.

 

$ billion

31 March 2019

31-December 2018

30 September 2018

30 June 2018

Tier 1 Capital

53.9

53.6

54.4

52.6

Total Exposures

942.4

936.0

931.1

935.1

Leverage ratio

5.7%

5.7%

5.8%

5.6%

 

Leverage ratio disclosure

 

 

$m

 

31 March 2019

On-balance sheet exposures

 

1

On-balance sheet items (excluding derivatives and securities financing transactions (SFTs), but including collateral)

855,300

2

(Asset amounts deducted in determining Tier 1 capital)

(18,258)

3

Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of rows 1 and 2)

837,042

 

 

Derivative exposures

 

4

Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)

9,325

5

Add-on amounts for potential future credit exposure (PFCE) associated with all derivatives transactions

16,758

6

Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the Australian Accounting Standards

-

7

(Deductions of receivables assets for cash variation margin provided in derivatives transactions)

(862)

8

(Exempted central counterparty (CCP) leg of client-cleared trade exposures)

-

9

Adjusted effective notional amount of written credit derivatives

4,577

10

(Adjusted effective notional offsets and add-on deductions for written credit derivatives)

(4,488)

11

Total derivative exposures (sum of rows 4 to 10)

25,310

SFT exposures

 

12

Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions

5,106

13

(Netted amounts of cash payables and cash receivables of gross SFT assets)

-

14

Counterparty credit risk exposure for SFT assets

32

15

Agent transaction exposures

-

16

Total SFT exposures (sum of rows 12 to 15)

5,138

Other off-balance sheet exposures

 

17

Off-balance sheet exposure at gross notional amount

200,884

18

(Adjustments for conversion to credit equivalent amounts)

(126,012)

19

Other off-balance sheet exposures (sum of rows 17 and 18)

74,872

Capital and total exposures

 

20

Tier 1 Capital

53,896

21

Total exposures (sum of rows 3, 11, 16 and 19)

942,362

 

 

Leverage ratio %

 

22

Leverage ratio

5.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Leverage ratio

 

 

 

Summary comparison of accounting assets versus leverage ratio exposure measure

 

 

$m

 

31 March 2019

1

Total consolidated assets as per published financial statements

891,062

2

Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation

(8,891)

 

 

3

Adjustment for assets held on the balance sheet in a fiduciary capacity pursuant to the Australian Accounting Standards but excluded from the leverage ratio exposure measure

-

 

 

4

Adjustments for derivative financial instruments

3,545

5

Adjustment for SFTs (i.e. repos and similar secured lending)

32

6

Adjustment for off-balance sheet exposures (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)

74,872

 

 

7

Other adjustments

(18,258)

8

Leverage ratio exposure

942,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group March 2019 Pillar 3 report | 21

 


 

Pillar 3 report

Credit risk management

 

 

 

Credit risk is the potential for financial loss where a customer or counterparty fails to meet their financial obligations to Westpac. Westpac maintains a credit risk management framework and a number of supporting policies, processes and controls governing the assessment, approval and management of customer and counterparty credit risk. These incorporate the assignment of risk grades, the quantification of loss estimates in the event of default, and the segmentation of credit exposures.

 

Structure and organisation

 

The Chief Risk Officer (CRO) is responsible for the effectiveness of overall risk management throughout Westpac, including credit risk. Authorised credit officers have delegated authority to approve credit risk exposures, including customer risk grades, other credit parameters and their ongoing review. Our largest exposures are approved by our most experienced authorised credit officers. Line business management is responsible for managing credit risks accepted in their business and for managing risk adjusted returns from their business credit portfolios, within the approved risk appetite, risk management framework and policies.

 

Credit risk management framework and policies

 

Westpac maintains a credit risk management framework and supporting policies that are designed to clearly define roles and responsibilities, acceptable practices, limits and key controls.

 

The Credit Risk Management Framework describes the principles, methodologies, systems, roles and responsibilities, reports and controls that exist for managing credit risk in Westpac. The Credit Risk Rating System policy describes the credit risk rating system philosophy, design, key features and uses of rating outcomes.

 

Concentration risk policies cover individual counterparties, specific industries (e.g. property) and individual countries. In addition, we have policies covering risk appetite statements, environmental, social and governance (ESG) risk, credit risks and the delegation of credit approval authorities.

 

At the divisional level, credit manuals embed the Group’s framework requirements for application in line businesses. These manuals include policies covering the origination, evaluation, approval, documentation, settlement and on-going management of credit risks, and sector policies to guide the extension of credit where industry-specific guidelines are considered necessary.

 

Credit approval limits govern the extension of credit and represent the formal delegation of credit approval authority to responsible individuals throughout the organisation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Credit risk management

 

 

 

Approach

 

Westpac adopts two approaches to managing credit risk depending upon the nature of the customer and the product.

 

Transaction-managed approach

 

For larger customers, Westpac evaluates credit requests by undertaking detailed individual customer and transaction risk analysis (the ‘transaction-managed’ approach). Such customers are assigned a customer risk grade (CRG) representing Westpac’s estimate of their probability of default (PD). Each facility is assigned a loss given default (LGD). The Westpac credit risk rating system has 20 risk grades for non-defaulted customers and 10 risk grades for defaulted customers. Non-defaulted CRGs down to the level of normally acceptable risk (i.e. D grade – see table below) are mapped to Moody’s and Standard & Poor’s (S&P) external senior ranking unsecured ratings. This mapping is reviewed annually and allows Westpac to integrate the rating agencies’ default history with internal historical data when calculating PDs.

 

The final assignment of CRGs and LGDs is approved by authorised credit approvers with appropriate delegated approval authority. All material credit exposures are approved by authorised Credit Officers who are part of the risk management stream and operate independently of the areas originating the credit risk proposals. Authorised Credit Officer decisions are subject to reviews to ensure consistent quality and confirm compliance with approval authority. Separate teams are responsible for maintaining accurate and timely recording of all credit risk approvals and changes to customer and facility data. These teams also operate independently of both the areas originating the credit risk proposals and the credit risk approvers. Appropriate segregation of functions is one of the key requirements of our credit risk management framework.

 

Mapping of Westpac risk grades

 

The table below shows the current alignment between Westpac’s internal CRGs and the corresponding external rating. Note that only high-level CRG groupings are shown.

 

 

Westpac customer

risk grade

Standard & Poor’s

rating

Moody’s

rating

 

 

 

 

 

A

AAA to AA–

Aaa to Aa3

 

B

A+ to A–

A1 to A3

 

C

BBB+ to BBB–

Baa1 to Baa3

 

D

BB+ to B+

Ba1 to B1

 

 

Westpac Rating

 

 

E

Watchlist

 

 

F

Special mention

 

 

G

Substandard/default

 

 

H

Default

 

 

 

For Specialised Lending Westpac maps exposures to the appropriate supervisory slot based on an assessment that takes into account borrower strength and security quality, as required by APS 113.

 

Program-managed approach

 

High-volume retail customer credit portfolios with homogenous credit risk characteristics are managed on a statistical basis according to pre-determined objective criteria (the ‘program-managed’ approach). Program-managed exposure to a consumer customer may exceed $1 million. Business customer exposures may be program managed for exposure up to $3 million. Quantitative scorecards are used to assign application and behavioural scores to enable risk-based decision making within these portfolios. The scorecard outcomes and decisions are regularly monitored and validated against subsequent customer performance and scorecards are recalibrated or rebuilt when required. For capital estimation and other purposes, risk-based customer segments are created based upon modelled expected PD, Exposure At Default (EAD) and LGD. Accounts are then assigned to respective segments based on customer and account characteristics. Each segment is assigned a quantified measure of its PD, LGD and EAD.

 

For both transaction-managed and program-managed approaches, CRGs, PDs and LGDs are reviewed at least annually.

 

 

 

Westpac Group March 2019 Pillar 3 report | 23

 


 

Pillar 3 report

Credit risk management

 

 

 

Mapping of Basel categories to Westpac portfolios

 

APS113 Capital Adequacy: Internal Ratings-Based Approach to Credit Risk, states that under the Advanced IRB approach to credit risk, an ADI must categorise banking book exposures into six broad IRB asset classes and apply the prescribed treatment for those classes to each credit exposure within them for the purposes of deriving its regulatory capital requirement. Standardised and Securitised portfolios are subject to treatment under APS112 Capital Adequacy: Standardised Approach to Credit Risk and APS120 Securitisation respectively.

 

APS Asset Class

 

 

Sub-asset class

 

 

Westpac category

 

 

Segmentation criteria

 

Corporate

 

Corporate

 

Corporate

 

All transaction-managed customers not elsewhere classified where annual turnover exceeds $50 million 1 .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SME Corporate

 

Business Lending

 

All transaction-managed customers not elsewhere classified where annual turnover is $50 million or less .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Project Finance

 

Specialised Lending-Project Finance

 

Applied to transaction-managed customers where the primary source of debt service, security and repayment is derived from the revenue generated by a completed project (e.g. infrastructure such as toll roads or railways).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income-producing Real Estate

 

Specialised Lending- Property Finance

 

Applied to transaction-managed customers where the primary source of debt service, security and repayment is derived from either the sale of a property development or income produced by one or more investment properties 2 .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sovereign

 

 

 

Sovereign

 

Applied to transaction-managed exposures backed by governments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

Bank

 

Applied to transaction-managed exposures to deposit-taking institutions and foreign equivalents.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

 

Residential Mortgages

 

Exposures secured by residential mortgages not elsewhere classified.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qualifying Revolving Retail

 

 

 

Australian Credit Cards

 

Program-managed credit cards with low volatility in loss rates. The New Zealand cards portfolio is not eligible for Qualifying Revolving Retail treatment and is classified in Other Retail.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Retail

 

 

 

Small Business

 

Program-managed business lending exposures under $1 million where complex products are not utilised by the customer.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Retail

 

All other program-managed lending to retail customers, including New Zealand credit cards.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1    Includes all NZ agribusiness loans, regardless of turnover.

2    Excludes large diversified property groups and property trusts, which appear in the Corporate asset class.

 

24 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Credit risk management

 

 

 

Mapping of Credit risk approach to Basel categories and exposure types

 

Approach

 

APS asset class

 

Types of exposures

 

 

 

 

 

Transaction-Managed Portfolios

 

Corporate

Sovereign

Bank

 

Direct lending

Contingent lending

Derivative counterparty

Asset warehousing

Underwriting

Secondary market trading

Foreign exchange settlement

Other intra-day settlement obligations

 

 

 

 

 

Program-Managed Portfolios

 

 

 

 

 

Residential mortgage

 

 

Mortgages

Equity access loans

 

 

 

 

 

 

 

 

 

 

 

 

Qualifying revolving retail

 

Australian credit cards

 

 

 

 

 

 

 

 

 

 

 

 

Other retail

 

Personal loans

Overdrafts

New Zealand credit cards

Auto and equipment finance

Business development loans

Business overdrafts

Other term products

 

 

Internal ratings process for transaction-managed portfolios

 

The process for assigning and approving individual customer PDs and facility LGDs involves:

 

l       Business unit representatives recommend the CRG and facility LGDs under the guidance of criteria set out in established credit policies. Each CRG is associated with an estimated PD;

 

l       Authorised credit officers evaluate the recommendations and approve the final CRG and facility LGDs. Authorised credit officers may override line business unit recommendations;

 

l       An expert judgement decisioning process is employed to evaluate CRG and the outputs of various risk grading models are used as one of several inputs into that process; and

 

l       Authorised credit officers’ decisions are subject to reviews to ensure consistent quality and confirm compliance with approval authority.

 

For on-going exposures to transaction-managed customers, risk grades and facility LGDs are required to be reviewed at least annually, but also whenever material changes occur.

 

No material deviations from the reference definition of default are permitted.

 

Internal ratings process for program-managed portfolios

 

The process for assigning PDs, LGDs and EADs to the program-managed portfolio involves dividing the portfolio into a number of pools per product. These pools are created by analysing similar risk characteristics that have historically predicted that an account is likely to go into default.

 

No material deviations from the reference definition of default are permitted.

 

Internal credit risk ratings system

 

In addition to using the credit risk estimates as the basis for regulatory capital purposes, they are also used for the purposes described below:

 

Economic capital - Westpac calculates economic capital for all exposures. Economic capital includes both credit and non-credit components. Economic credit capital is calculated using a framework that considers estimates of PD, LGD, EAD, total committed exposure and loan tenor, as well as measures of portfolio composition not reflected in regulatory capital formulae.

 

Provisioning Credit provisions are held by Westpac to cover expected credit losses in the loan portfolio. Provisioning includes both individual and collective components. Individual provisions are calculated on impaired loans taking into account management’s best estimate of the present value of future cashflows.

 

Westpac Group March 2019 Pillar 3 report | 25

 


 

Pillar 3 report

Credit risk management

 

 

 

Collective provisions are established on a portfolio basis using a framework that considers PD, LGD, EAD, total committed exposure, level of arrears, recent past experience and forward looking macro-economic forecasts .

 

Risk-adjusted performance measurement - Business performance is measured using allocated capital, which incorporates charges for economic capital and regulatory capital, including credit capital and capital for other risk types.

 

Pricing - Westpac prices loans to produce an acceptable return on the capital allocated to the loan. Returns include interest income and fees after expected credit losses and other costs.

 

Credit approval - For transaction-managed facilities, approval authorities are tiered based on the CRG, with lower limits applicable for customers with a higher PD. Program-managed facilities are approved on the basis of application scorecard outcomes and product based approval authorities.

 

Control mechanisms for the credit risk rating system include:

 

l      Westpac’s credit risk rating system is reviewed annually to confirm that the rating criteria and procedures are appropriate given the current portfolio and external conditions;

 

l      All models materially impacting the risk rating process are periodically reviewed in accordance with Westpac’s model risk policy;

 

l      Specific credit risk estimates (including PD, LGD and EAD levels) are overseen, reviewed annually and supported by the Credit Risk Estimates Committee (a sub-committee of CREDCO) for approval by General Manager, Risk Analytics and Insights;

 

l      Credit Risk Assurance undertake an independent annual end-to-end technical and operational review of the overall process; and

 

l      CREDCO, RISKCO and BRCC monitor the risk profile, performance and management of Westpac’s credit portfolio and the development and review of key credit risk policies.

 

Risk reporting

 

A comprehensive report on Westpac’s credit risk portfolio is provided to CREDCO, RISKCO and BRCC quarterly. It details the current level of impairment losses, stressed exposures, delinquency trends, provisions, impaired assets and key performance metrics. It also reports on portfolio concentrations and large exposures.

 

Credit risk and asset quality are also reported to the Board each month, including details of impairment losses, stressed exposures, delinquency trends and key performance metrics.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26 | Westpac Group March 2019 Pillar 3 report

 


 

 

Pillar 3 report

Credit risk management

 

 

 

Summary credit risk disclosure

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

Expected

 

Specific

Actual

 

 

Risk

Regulatory

Loss for

 

Provisions

Losses for

31 March 2019

Exposure

Weighted

Expected

non-defaulted

Impaired

for Impaired

the 6 months

$m

at Default

Assets

Loss 1

exposures

Loans

Loans

ended

Corporate

135,502

73,551

561

468

176

79

(3)

Business lending

54,299

35,294

642

424

279

161

23

Sovereign

79,572

1,653

2

1

-

-

-

Bank

25,471

7,066

8

8

-

-

-

Residential mortgages

558,161

132,133

1,649

1,106

391

126

52

Australian credit cards

18,850

5,910

363

292

101

63

150

Other retail

16,583

13,082

640

459

297

173

162

Small business

33,280

16,092

497

345

374

148

33

Specialised Lending

64,781

54,833

798

562

118

44

10

Securitisation

25,929

5,583

-

-

-

-

-

Standardised 2

17,389

17,565

-

-

13

6

1

Total

1,029,817

362,762

5,160

3,665

1,749

800

428

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

Expected

 

Specific

Actual

 

 

Risk

Regulatory

Loss for

 

Provisions

Losses for

30 September 2018

Exposure

Weighted

Expected

non-defaulted

Impaired

for Impaired

the 12 months

$m

at Default

Assets

Loss 1

exposures

Loans

Loans

ended

Corporate

128,819

69,584

552

471

112

54

22

Business lending

53,853

35,417

657

442

294

173

99

Sovereign

79,030

1,644

2

2

-

-

-

Bank

23,648

6,606

8

8

-

-

-

Residential mortgages

553,358

132,734

1,272

1,048

309

103

89

Australian credit cards

19,639

6,313

358

304

87

50

273

Other retail

17,114

13,777

604

465

284

137

332

Small business

33,221

16,329

453

339

165

77

112

Specialised Lending

67,430

57,043

836

588

141

47

20

Securitisation

27,648

5,918

-

-

-

-

-

Standardised 2

18,166

17,384

-

-

24

12

1

Total

1,021,926

362,749

4,742

3,667

1,416

653

948

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

Expected

 

Specific

Actual

 

 

Risk

Regulatory

Loss for

 

Provisions

Losses for

31 March 2018

Exposure

Weighted

Expected

non-defaulted

Impaired

for Impaired

the 6 months

$m

at Default

Assets

Loss 1

exposures

Loans

Loans

ended

Corporate

129,865

71,590

585

455

164

94

-

Business lending

53,750

34,872

623

415

317

176

26

Sovereign

76,316

1,536

1

1

-

-

-

Bank

23,866

6,253

8

8

-

-

-

Residential mortgages

547,681

129,748

1,206

998

310

98

47

Australian credit cards

19,640

6,553

371

319

95

47

134

Other retail

17,695

14,056

607

472

290

135

173

Small business

32,904

16,017

443

329

169

77

52

Specialised Lending

66,993

57,239

855

609

167

60

1

Securitisation

26,562

5,869

-

-

-

-

-

Standardised 2

18,083

17,658

-

-

23

12

1

Total

1,013,355

361,391

4,699

3,606

1,535

699

434

 

 

 

 

 

 

1        Includes regulatory expected losses for defaulted and non-defaulted exposures.

2        Includes mark-to-market related credit risk.

 

Westpac Group March 2019 Pillar 3 report | 27

 


 

Pillar 3 report

Credit risk management

 

 

 

Loan impairment provisions

 

Westpac adopted AASB 9 from 1 October 2018.

 

Expected credit losses (ECL) are a probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant timeframe. They are determined by evaluating a range of possible outcomes and taking into account the time value of money, past events, current conditions and forecasts of future economic conditions. Westpac calculates provisions for ECL based on a three stage approach:

 

l                 Stage 1: 12 months ECL (performing) - For financial assets where there has been no significant increase in credit risk since origination, a provision for 12 months ECL is recognised.

 

l                 Stage 2: Lifetime ECL (performing) - For financial assets where there has been a significant increase in credit risk since origination but where the asset is still performing, a provision for lifetime ECL is recognised.

 

Determining when a financial asset has experienced a significant increase in credit risk is primarily based on changes in internal customer risk grades since origination of the facility. A change in an internal customer risk grade is based on both quantitative and qualitative factors. The number of changes in the internal customer risk grade that Westpac uses to represent a significant increase in credit risk is determined on a sliding scale where the number of changes will typically be higher for an exposure with a lower credit risk grade compared to an exposure with a higher credit risk grade.

 

l                 Stage 3: Lifetime ECL (non-performing) - For financial assets that are non-performing a provision for lifetime ECL is recognised. Indicators include a breach of contract with Westpac such as a default on interest or principal payments, a borrower experiencing significant financial difficulties or observable economic conditions that correlate to defaults on a group of loans.

 

Collective and individual assessment - Financial assets that are in stages 1 and 2 are assessed on a collective basis as are financial assets in stage 3 below specified thresholds. Those financial assets in stage 3 above the specified thresholds are assessed on an individual basis.

 

Expected life – Expected credit losses are determined as a lifetime ECL in stages 2 and 3.

 

In considering the lifetime timeframe, the remaining contractual life is used (adjusted where appropriate for prepayments, extensions and other options). For certain revolving credit facilities which include both a drawn and an undrawn component (e.g. credit cards and revolving lines of credit), Westpac’s contractual ability to demand repayment and cancel the undrawn commitment does not limit our exposure to credit losses up to the contractual notice period. For these facilities, the lifetime timeframe is based on historical behaviour.

 

Forward looking information - The measurement of ECL for each stage and the assessment of significant increase in credit risk considers information about past events and current conditions as well as reasonable and supportable projections of future events and economic conditions. Westpac considers three future macroeconomic scenarios including a base case scenario along with upside and downside scenarios.

 

The macroeconomic variables used in these scenarios, which are based on current economic forecasts, include (but are not limited to) unemployment rates, real gross domestic product growth rates and residential and commercial property price indices.

 

The macroeconomic scenarios are weighted based on Westpac’s best estimate of the relative likelihood of each scenario. The weighting applied to each of the three forward looking macroeconomic scenarios takes into account historical frequency, current trends, and forward looking conditions.

 

Regulatory classification of loan impairment provisions

 

APS220 Credit Quality requires that Westpac report specific provisions and a General Reserve for Credit Loss (GRCL). All IAPs raised under Australian Accounting Standards (AAS) are classified as specific provisions. All Collectively Assessed Provisions (CAPs) raised under AAS are either classified into specific provisions or a GRCL.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Credit risk management

 

 

 

Expected credit loss provision

 

31 March 2019

 

       AAS Provisions

 

GRCL

 

Total Regulatory

 

$m

 

IAPs

 

CAPs

 

Total

 

Adjustment

 

 Provisions

 

Specific Provisions

 

 

 

 

 

 

 

 

 

 

 

for impaired loans

 

433

 

367

 

800

 

NA

 

800

 

for defaulted but not impaired loans

 

NA

 

558

 

558

 

NA

 

558

 

For Stage 2

 

NA

 

1,264

 

1,264

 

NA

 

1,264

 

Total Specific Provision 1

 

433

 

2,189

 

2,622

 

NA

 

2,622

 

General Reserve for Credit Loss 1

 

NA

 

1,375

 

1,375

 

NA

 

1,375

 

Total provisions for ECL

 

433

 

3,564

 

3,997

 

NA

 

3,997

 

 

30 September 2018

 

       AAS Provisions

 

GRCL

 

Total Regulatory

 

$m

 

IAPs

 

CAPs

 

Total

 

Adjustment

 

Provisions

 

Specific Provisions

 

 

 

 

 

 

 

 

 

 

 

for impaired loans

 

422

 

231

 

653

 

NA

 

653

 

for defaulted but not impaired loans

 

NA

 

205

 

205

 

NA

 

205

 

Total Specific Provision

 

422

 

436

 

858

 

NA

 

858

 

General Reserve for Credit Loss

 

NA

 

2,195

 

2,195

 

356

 

2,551

 

Total provisions for impairment charges

 

422

 

2,631

 

3,053

 

356

 

3,409

 

 

31 March 2018

 

       AAS Provisions

 

GRCL

 

Total Regulatory

 

$m

 

IAPs

 

CAPs

 

Total

 

Adjustment

 

Provisions

 

Specific Provisions

 

 

 

 

 

 

 

 

 

 

 

for impaired loans

 

471

 

228

 

699

 

NA

 

699

 

for defaulted but not impaired loans

 

NA

 

190

 

190

 

NA

 

190

 

Total Specific Provision

 

471

 

418

 

889

 

NA

 

889

 

General Reserve for Credit Loss

 

NA

 

2,276

 

2,276

 

339

 

2,615

 

Total provisions for impairment charges

 

471

 

2,694

 

3,165

 

339

 

3,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1         Provisions classified according to APRA’s letter dated 4 July 2017 “Provisions for regulatory purposes and AASB 9 financial instruments”.

 

Westpac Group March 2019 Pillar 3 report | 29

 


 

Pillar 3 report

Credit risk management

 

 

 

Movement in provisions for impairment

 

Following Westpac’s adoption of AASB9 on 1 October 2018, the presentation of movement in provisions for impairments has been revised. Prior periods are shown on the basis used in previous Pillar 3 reports.

 

 

 

 

 

Non-performing

Collectively

Individually

 

 

 

Performing

CAP

IAP

Assessed

Assessed

 

$m

 

Stage 1

Stage 2

Stage 3

Provision

Provision

Total

Provision for impairment charges as at 30 September 2018

 

 

 

 

 

2,631

422

3,053

Restatement for adoption of AASB 9

 

877

1,884

850

422

(2,631)

(422)

980

Restated provision for ECL as at 1 October 2018

 

877

1,884

850

422

-

-

4,033

Net changes in provisions

 

34

(182)

457

94

 

 

403

Write-offs

 

-

-

(418)

(81)

 

 

(499)

Exchange rate and other adjustments

 

5

9

36

(2)

 

 

48

Total provision for ECL on loans and credit commitments as at 31 March 2019

 

916

1,711

925

433

 

 

3,985

Provision for ECL on debt securities at amortised cost

 

10

 

 

 

 

 

10

Provision for ECL on debt securities at FVOCI 1

 

2

 

 

 

 

 

2

Total provision for ECL as at 31 March 2019

 

928

1,711

925

433

 

 

3,997

 

 

For the

For the

 

6 months

6 months

 

ended

ended

 

30 September

31 March

$m

2018

2018

Individually assessed provisions

 

 

Balance at beginning of the period

471

480

Provisions raised

198

173

Write-backs

(83)

(67)

Write-offs

(165)

(104)

Interest adjustment

(4)

(7)

Exchange rate and other adjustments

5

(4)

Closing balance

422

471

 

 

 

Collectively assessed provisions

 

 

Balance at beginning of the period

2,694

2,639

Provisions raised

281

387

Write-offs

(428)

(430)

Interest adjustment

90

89

Exchange rate and other adjustments

(6)

9

Closing balance

2,631

2,694

 

 

 

Total provisions for impairment losses on loans and credit commitments

3,053

3,165

General reserve for credit losses adjustment

356

339

Total provisions plus general reserve for credit losses

3,409

3,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1      Impairment of debt securities at Fair Value through Other Comprehensive Income (FVOCI) is recognised in the income statement with a corresponding amount in other comprehensive income. There is no reduction of the carrying value of the debt securities which remain at fair value.

 

30 | Westpac Group March 2019 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

The following tables segment the portfolio by characteristics that provide an insight into the assessment of credit risk concentration.

 

Exposure at Default by major type

 

31 March 2019

On balance

                Off-balance sheet

Total Exposure

Average

$m

sheet

Non-market related

Market related

at Default

6 months ended 1

Corporate

66,944

57,852

10,706

135,502

133,079

Business lending

41,345

12,954

-

54,299

54,272

Sovereign

75,685

1,487

2,400

79,572

78,014

Bank

16,034

2,184

7,253

25,471

24,458

Residential mortgages

482,670

75,491

-

558,161

555,897

Australian credit cards

9,575

9,275

-

18,850

19,401

Other retail

13,145

3,438

-

16,583

16,938

Small business

26,246

7,034

-

33,280

33,279

Specialised lending

52,780

10,918

1,083

64,781

66,132

Securitisation 2

20,767

4,997

165

25,929

26,824

Standardised

13,641

1,195

2,553

17,389

17,839

Total

818,832

186,825

24,160

1,029,817

1,026,133

 

 

 

 

 

 

30 September 2018

On balance

                Off-balance sheet

Total Exposure

Average

$m

sheet

Non-market related

Market related

at Default

12 months ended 3

Corporate

62,298

54,574

11,947

128,819

128,848

Business lending

40,961

12,892

-

53,853

53,639

Sovereign

74,906

1,864

2,260

79,030

76,376

Bank

14,012

2,246

7,390

23,648

23,263

Residential mortgages

477,270

76,088

-

553,358

547,108

Australian credit cards

9,623

10,016

-

19,639

19,667

Other retail

13,536

3,578

-

17,114

17,583

Small business

26,140

7,081

-

33,221

31,858

Specialised lending

53,799

12,754

877

67,430

67,363

Securitisation 2

22,437

5,089

122

27,648

27,045

Standardised

13,926

1,190

3,050

18,166

17,985

Total

808,908

187,372

25,646

1,021,926

1,010,735

 

 

 

 

 

 

31 March 2018

On balance

                Off-balance sheet

Total Exposure

Average

$m

sheet

Non-market related

Market related

at Default

6 months ended 4

Corporate

62,625

54,926

12,314

129,865

128,758

Business lending

40,236

13,514

-

53,750

53,386

Sovereign

72,069

1,770

2,477

76,316

73,561

Bank

14,322

1,612

7,932

23,866

22,560

Residential mortgages

469,967

77,714

-

547,681

543,616

Australian credit cards

9,787

9,853

-

19,640

19,724

Other retail

14,049

3,646

-

17,695

17,795

Small business

25,820

7,084

-

32,904

31,016

Specialised lending

53,317

12,718

958

66,993

67,333

Securitisation 2

20,892

5,549

121

26,562

26,920

Standardised

13,909

1,215

2,959

18,083

17,907

Total

796,993

189,601

26,761

1,013,355

1,002,576

 

 

 

 

 

 

 

1   Average is based on exposures as at 31 March 2019, 31 December 2018, and 30 September 2018.

2   EAD associated with securitisations is for the banking book only.

3   Average is based on exposures as at 30 September 2018, 30 June 2018, 31 March 2018, 31 December 2017, and 30 September 2017.

4   Average is based on exposures as at 31 March 2018, 31 December 2017, and 30 September 2017.

 

Westpac Group March 2019 Pillar 3 report | 31

 


 

Pillar 3 report

Credit risk exposures