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

 

November 4, 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 September 2019 Pillar 3 Report – Incorporating the requirements of APS 330

 

Disclosure regarding forward-looking statements

 

The information contained in this Report on Form 6-K contains statements that constitute “forward-looking statements” within the meaning of section 21E of the U.S. Securities Exchange Act of 1934.  Forward-looking statements are statements about matters that are not historical facts.  Forward-looking statements appear in a number of places in this Report and include statements regarding our intent, belief or current expectations with respect to our business and operations, market conditions, results of operations and financial condition.

 

We use words such as ‘will’, ‘may’, ‘expect’, ‘indicative’, ‘intend’, ‘seek’, ‘would’, ‘should’, ‘could’, ‘continue’, ‘plan’, ‘aim’, ‘probability’, ‘risk’, ‘forecast’, ‘likely’, ‘estimate’, ‘anticipate’, ‘believe’ or other similar words to identify forward-looking statements.  These forward-looking statements reflect our current views with respect to future events and are subject to change, certain risks, uncertainties and assumptions which are, in many instances, beyond our control and have been made based upon management’s expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations or that the effect of future developments on us will be those anticipated.  Should one or more of the risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results could differ materially from the expectations described in this Report.  Factors that may impact on the forward-looking statements made include, but are not limited to, those described in the section entitled ‘Risk factors’ in Westpac’s 2019 Interim Financial Results on Form 6-K filed with the U.S. Securities and Exchange Commission.  When relying on forward-looking statements to make decisions with respect to us, investors and others should carefully consider such factors and other uncertainties and events.  We are under no obligation, and do not intend, to update any forward-looking statements contained in this Report, whether as a result of new information, future events or otherwise, after the date of this Report.

 


 

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:    November 4, 2019

By:  /s/ Leisha White                           

 

Leisha White

 

Practice Leader

 


Exhibit 1

 

GRAPHIC

 


 

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

32

Credit risk mitigation

56

Counterparty credit risk

58

Securitisation

61

Market risk

71

Funding and 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

Remuneration

85

Appendices

 

Appendix I – Regulatory capital reconciliation

92

Appendix II – Entities included in regulatory consolidation

98

Appendix III – Level 3 entities’ assets and liabilities

101

Appendix IV – Regulatory expected loss

102

Appendix V – APS330 quantitative requirements

103

Glossary

106

Disclosure regarding forward-looking statements

111

 

 

 

 

 

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 September 2019 Pillar 3 report

 


 

Pillar 3 report

Executive summary

 

 

 

 

30 September 2019

31 March 2019

30 September 2018

Level 2 Regulatory capital structure

 

 

 

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

45,752

44,680

45,239

Risk weighted assets (RWA) $m

428,794

419,819

425,384

Common equity Tier 1 capital ratio %

10.67

10.64

10.63

Additional Tier 1 capital %

2.17

2.20

2.15

Tier 1 capital ratio %

12.84

12.84

12.78

Tier 2 capital %

2.79

1.78

1.96

Total regulatory capital ratio %

15.63

14.62

14.74

APRA leverage ratio %

5.68

5.72

5.84

Level 1 Regulatory capital structure

 

 

 

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

46,380

43,850

42,988

Risk weighted assets (RWA) $m

422,475

409,231

409,240

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

10.98

10.72

10.50

 

Westpac’s common equity Tier 1 (CET1) capital ratio was 10.67% at 30 September 2019, up 3 basis points from 31 March 2019, as organic capital generation was largely offset by other items. This included Second Half 2019 cash earnings of $3,553 million (83 basis points). Cash earnings for Second Half 2019 were impacted by additional provisions for estimated customer refunds, payments, associated costs, and litigation ($488 million before tax), and provisions for costs associated with the restructuring of the Wealth business ($51 million before tax). These provisions for customer remediation and wealth restructuring costs are referred to as ‘notable items’1 (13 basis points). Excluding these notable items, organic capital growth was 51 basis points.

 

 

The 51 basis point organic capital growth included:

 

l         Second Half 2019 cash earnings, excluding notable items (92 basis point increase);

 

l         The 2019 interim dividend payment, net of dividend reinvestment plan (DRP) share issuance (48 basis point decrease);

 

l         Ordinary RWA (before regulatory measurement changes, and excluding IRRBB) grew slightly (4 basis point decrease), mainly driven by increases in credit RWA, and mark to market CVA;

 

l        Reduction in interest rate risk in the banking book (IRRBB) RWA (17 basis point increase), driven by an increase in the embedded gain from falling interest rates; and

 

l         A 6 basis point reduction from other capital movements, largely driven by movements in regulatory deductions.

 

Other items reduced the CET1 capital ratio by 48 basis points, principally:

 

l         Operational risk overlays comprising the Culture, Governance and Accountability (CGA) self-assessment overlay imposed by APRA (16 basis point reduction), and an increase in the overlay to better align Westpac to the standardised approach (5 basis point reduction);

 

l         Implementation of APRA’s new derivatives capital standard (14 basis point reduction)2; and

 

l         Notable items (13 basis point reduction).

 


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

2 APRA prudential standard APS180 Counterparty Credit Risk became effective on 1 July 2019 and implements the standardised approach to counterparty credit risk (SA-CCR)

 

Westpac Group September 2019 Pillar 3 report | 3

 


 

Pillar 3 report

Executive summary

 

 

 

$m

30 September 2019

31 March 2019

30 September 2018

Risk weighted assets at Level 2

 

 

 

Credit risk

367,864

362,762

362,749

Market risk

9,350

8,338

6,723

Operational risk

47,680

38,641

39,113

Interest rate risk in the banking book

530

7,076

12,989

Other

3,370

3,002

3,810

Total RWA

428,794

419,819

425,384

 

 

 

 

Total Exposure at Default

1,054,178

1,029,817

1,021,926

 

Risk Weighted Assets

 

Total RWA increased $9.0 billion or 2.1% this half:

 

l        Credit risk RWA increased $5.1 billion over the half. This included a $5.3 billion increase from implementation of APRA’s new derivatives capital standard1. The remaining movements comprised:

 

o        An increase in mark-to-market related credit risk of $2.0 billion, mostly due to lower interest rates;

 

o        Changes to credit quality and portfolio mix, which reduced RWA by $2.3 billion;

 

o        Foreign currency translation impacts which reduced RWA by $0.7 billion; and

 

o        Business growth which increased RWA by $0.8 billion.

 

l        Non-credit RWA increased $3.9 billion over the half, driven by:

 

o        An increase of $9.0 billion in operational risk RWA, mainly from operational risk overlays2;

 

o        A decrease of $6.5 billion in interest rate risk in the banking book RWA, driven by an increase in the embedded gain from falling interest rates; and

 

o        An increase of $1.0 billion in market risk RWA and an increase of $0.4 billion in other assets RWA.

 

Supplementary capital movement for Second Half 2019

 

During the half, Westpac issued $4.2 billion of Tier 2 capital instruments, increasing the total regulatory capital ratio by 99 basis points. The higher new issuance was in response to APRA’s increased total capital requirements to be met by 1 January 2024.

 

Exposure at Default

 

Exposure at default (EAD) increased $24 billion (or 2%), primarily due to implementation of the standardised approach to counterparty credit risk which increased EAD by $16 billion.

 

Leverage Ratio

 

The leverage ratio represents the amount of Tier 1 capital relative to exposure3.  At 30 September 2019, Westpac’s leverage ratio was 5.68%, down 4 basis points since 31 March 2019.

 

Liquidity Coverage Ratio (LCR)

 

Westpac’s average LCR for the quarter ending 30 September 2019 was 132%4 (31 March 2019: 134%).

 

Net Stable Funding Ratio (NSFR)

 

Westpac’s NSFR at 30 September 2019 was 112% (31 March 2019: 113%). The reduction in the Group’s NSFR over the half mainly reflects changes in the treatment of certain loans which increased the Group’s required stable funding.

 

 

 

 

 

 


1  APRA prudential standard APS180 Counterparty Credit Risk became effective on 1 July 2019 and implements the revised standardised approach to counterparty credit risk (SA-CCR)

2  This includes the $500 million capital overlay applied by APRA in response to Westpac’s Culture, Governance and Accountability (CGA) self-assessment, which translates to a $6.25 billion increase in RWA. This also includes a $165 million increase in the operational risk capital overlay to align Westpac’s operational risk capital with the standardised approach, which translates to a $2.1 billion increase in RWA.

3  As defined under Attachment D of APS110: Capital Adequacy

4  Calculated as a simple average of the daily observations over the 30 September 2019 quarter.

 

4 | Westpac Group September 2019 Pillar 3 report

 


 

Pillar 3 report

Executive summary

 

 

 

Implementation of APRA’s new derivative capital standard

 

APRA prudential standard APS180 Counterparty Credit Risk became effective on 1 July 2019 and implements the Standardised Approach to Counterparty Credit Risk (SA-CCR). The following tables detail the transition impacts of this change on key Pillar 3 metrics.

 

 

Risk Weighted Assets

Off-balance sheet, Market Related

$m

30 June 2019

1 July 2019

Movement

Corporate

5,125

6,420

1,295

Business lending

-

-

-

Sovereign

171

259

88

Bank

2,090

3,130

1,040

Residential mortgages

-

-

-

Australian credit cards

-

-

-

Other retail

-

-

-

Small business

-

-

-

Specialised lending

964

1,488

524

Securitisation

69

42

27

Standardised

53

145

92

Mark-to-market related credit risk1

8,203

10,441

2,238

Total

16,675

21,925

5,250

Exposure at default

Off-balance sheet, Market Related

$m

30 June 2019

1 July 2019

Movement

Corporate

11,522

16,882

5,360

Business lending

-

-

-

Sovereign

2,544

4,913

2,369

Bank

7,379

10,056

2,677

Residential mortgages

-

-

-

Australian credit cards

-

-

-

Other retail

-

-

-

Small business

-

-

-

Specialised lending

1,318

2,042

724

Securitisation

196

124

72

Standardised

2,655

7,886

5,231

Total

25,614

41,903

16,289

 

 

 

 

 

 

 

 

 

 

 

 

 


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

 

Westpac Group September 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 30 September 2019.

 

In addition to this report, the regulatory disclosures section of the Westpac website1 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 September 2019 Pillar 3 report

 


 

Pillar 3 report

Risk appetite and risk types

 

 

 

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 that result in material impacts on our customers, our staff, our reputation, our regulatory relationships and/or 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 risks. The annual review of the Westpac Group Risk Management Framework, Westpac’s annual Group Risk Management Strategy, Westpac Group Risk Appetite Statement and the establishment of additional controls through supporting frameworks and policies all play vital roles

 

Overview of key risk types

 

l        governance risk – the risk that the right information does not get to the right people or governance fora in the right format and timeframe to empower decision making. It is driven by organisational structures and relationships including between the Board, management, its shareholders and other stakeholders, which leads to deficient decision making, poor accountability and ineffective structures and processes;

 

l        risk culture – the risk that our culture does not promote and reinforce behavioural expectations or structures to identify, understand, discuss and act on risks. This leads to ineffective risk management, poor risk awareness, risk-taking outside of risk appetite that is tolerated and a culture where key learnings are not integrated into Group-wide and customer outcomes, impeding continuous improvement;

 

l        strategic risk – the risks arising from key elements of the strategic objectives and business plans;

 

l        capital adequacy risk- the risk that the firm has an insufficient level or composition of capital to support its normal business activities and to meet its regulatory capital requirements under normal operating environments or stressed conditions (both actual and as defined for internal planning or regulatory testing purposes). This includes the risk from Westpac’s pension plans;

 

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

 

l        funding and liquidity risk - the risk that Westpac cannot meet its payment obligations or that it does not have the appropriate amount, tenor and composition of funding and liquidity to support its assets;

 

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 includes legal and regulatory risk but excludes strategic risk;

 

l        conduct and compliance risk - the risk of failing to abide by compliance obligations required of us or otherwise failing to have behaviours and practices that deliver suitable, fair and clear outcomes for our customers and that support market integrity;

 

l        cyber risk – the potential for loss or harm to the business and stakeholders related to the use of technology;

 

l        reputational risk - the risk that an action, inaction, transaction, investment or event will reduce trust in Westpac’s integrity and competence by clients, counterparties, investors regulators, employees or the public; and

 

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. This includes climate change related risks.

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2019 Pillar 3 report | 7

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

We have adopted the Three Lines of Defence model to aid in holistic end-to-end management of risk, within which all employees play an active role. This necessitates co-operation between businesses and functions, such that there are no gaps in risk coverage. Effective risk management enables:

 

l     accurate measurement of our risk profile and to balance risk and reward within our risk appetite, optimising financial growth opportunities and mitigating potential loss or damage;

 

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

 

l     deliver suitable, fair, clear and transparent 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 Group’s overall risk management framework, the Westpac Group Risk Management Framework, Westpac’s annual Group 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 establish a view of the Group’s current and future risk position relative to its risk appetite and capital strength; review and approve frameworks, policies and processes for managing risk; and review and, where appropriate, approve risks beyond the approval discretion provided to management.

 

Risk management governance structure as at 30 September 2019

 

Board

l     approves Westpac’s Risk Management Framework, Westpac’s annual Risk Management Strategy and Westpac’s Group Risk Appetite Statement; and

 

l     makes annual declaration to APRA on risk management.

 

Board Risk & Compliance
Committee (BRCC)

l     assists the Board to consider and approve the Group’s overall risk framework for managing risk;

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

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

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

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 and performance;

l     oversight of our credit portfolio;

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     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 September 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 and monitoring the market risk profile;

l     operational risk – approving key policies supporting the Operational Risk Management Framework, and monitoring the performance of operational 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     sustainability risk – reviewing and approving the Sustainability Risk Management Framework; and

l     compliance risk – reviewing and approving the Westpac Group Compliance Management Framework and Financial Crime Risk Management Framework and supporting policies and standards and monitoring the performance of compliance and financial crime risk management and controls.

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’s stress testing, sets the target capital ranges for regulatory capital and reviews and monitors capital levels for consistency with Westpac’s risk appetite;

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

l     reviews and approves other risk management frameworks1 and the monitoring of performance under those frameworks (as appropriate);

l     forms a view on Westpac’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 relevant matters that come to the attention of the Board Risk & Compliance; and

l     in its capacity as the Westpac Group’s US Risk Committee, oversees the key risks, risk management framework and policies of Westpac’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 Westpac, in the context that these policies and practices reflect Westpac’s risk management framework, including making recommendations to the Board for the adjustment of variable components of remuneration for relevant employees including as a result of risk or compliance failures.

Board Technology Committee (BTC)

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

 

 

 

 

 

1  Additional frameworks include the Equity Risk Management Framework, Related Entity Risk Management Framework, and Insurance Risk Management Framework.

 

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

l     approves position statements that guide Westpac’s response to sustainability issues; and

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

 

Executive risk committees

Westpac Group Executive Risk Committee (RISKCO)

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

l     oversees the effectiveness of the Risk Management Framework and the execution of the Risk Management Strategy;

l     monitors and reviews Westpac’s risk profile for all identified material risks;

l     shapes and promotes a strong risk culture; and

l     oversees emerging 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 Westpac;

l     reviews the level and quality of capital to ensure that it is commensurate with Westpac’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     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     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.

 

 

Westpac Group Operational Risk Committee (OPCO)

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

l     oversees Westpac’s operational risk profile; and

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

 

 

 

 

10 | Westpac Group September 2019 Pillar 3 report

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Risk management governance structure (continued)

 

 

Westpac Group Remuneration Oversight Committee (ROC)

l     supporting the CEO, BRC and the Board by reviewing and approving remuneration frameworks, guidelines and short term variable reward plans underpinning the Board-approved Westpac Group Remuneration Policy from a Human Resources, Risk (including Compliance), Finance and Legal perspective and in line with external requirements;

l     assisting the BRC and the Board in fulfilling its responsibility to oversee remuneration policies and practices of Westpac in the context that these policies and practices fairly and responsibly reward individuals having regard to customer and shareholder interests, long term financial soundness and prudential risk management;

l     recommending to the CEO for recommendation to the BRC remuneration arrangements for Responsible Persons, risk and financial control employees, Material Risk Takers and other individuals whose activities may impact the financial soundness of Westpac below the Group Executive level; and

l     recommending to the CEO for recommendation to the BRC the criteria and rationale for determining the total quantum of Westpac’s variable reward pool.

 

 

Prudential Reporting and Compliance Committee

l     oversees from a Group-wide perspective, Westpac’s compliance with prudential requirements and regulatory reporting;

l     oversees the effective management of prudential compliance breaches, incidents or issues including remediation actions; and

l     monitors and reviews ongoing prudential governance activities, including changes to prudential standards.

 

 

Reputation Risk Committee

l     reviews issues with material reputation risk that arise in the operations of Westpac’s business to mitigate reputation risk and detrimental customer impacts.

 

 

Westpac Group Financial Crime Risk Committee

l     oversees Anti-Money Laundering and Counter-Terrorism Financing, Anti-Bribery and Corruption, Sanctions and Tax Transparency within the context of the risk appetite approved by the Board;

l     reviews and oversees the Financial Crime Risk Management Framework, key supporting policies, programs and standards;

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2019 Pillar 3 report | 11

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Risk management governance structure (continued)

 

Risk function

Risk Function

l     promotes a strong risk culture;

l     owns the design and content of the Risk Management Framework;

l     defines the structure and  coverage of risk appetite;

l     defines the annual risk strategy to execute the Risk Management Framework ensuring the management of risks in alignment with risk appetite and business strategy;

l     establishes risk policies, procedures and limits;

l     measures and reports on risk levels; and

l     provides oversight of and direction on the management of risks.

 

Independent internal review

Group Audit

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

 

Divisional business units
and Functions

Business Units and Functions

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 September 2019 Pillar 3 report

 


 

Pillar 3 report

Controlling and managing risk

 

 

 

Roles and responsibilities

 

Our Three Lines of Defence approach is designed on a functional basis and covers all employees within Westpac.

 

The First Line of Defence – Business and support: manages the risks they originate

 

The First Line proactively identifies, evaluates, owns and manages the risks in their business/domain. It also ensures that business activities are within approved risk appetite and policies. The First Line of defence is accountable for ‘self-certification’. In managing its risk, the First Line is required to establish and maintain appropriate governance structures, controls, resources and self-assessment processes, including issue identification, recording and escalation procedures.

 

The Second Line of Defence – Risk: provides oversight, insight and control of First Line activities

 

The Second Line sets frameworks, policies, limits and standards for use across Westpac. The Second Line reviews and challenges First Line activities and decisions that may materially affect Westpac’s risk position, and independently evaluate the effectiveness of First Line’s controls, monitoring, compliance, and monitors progress towards mitigating risks. In addition, the Second Line provides insights to the First Line, assisting in developing, maintaining and enhancing the business’ approach to risk management. The Second Line analyses and reports on the aggregated risk profile of Westpac to ensure end-to-end oversight of risk and can accept risks outside of the business’ risk appetite.

 

The Third Line of Defence – Audit: provides independent audit

 

The Third Line is an independent assurance function that evaluates and opines on the adequacy and effectiveness of both First and Second Line risk management approaches and tracks remediation progress, with the aim of providing the Board, and senior executives, with comfort that Westpac’s governance, risk management and internal controls are operating effectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 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 adequacy1 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 basis2.

 

The Westpac Group

 

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

 

 

Accounting consolidation3

 

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 31 of Westpac’s 2019 Annual Report for further details.

 

14 | Westpac Group September 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 Entities1. 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 September 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.

 

 

30 September

31 March

30 September

$m

2019

2019

2018

 

 

 

 

Common equity Tier 1 capital

 

 

 

Paid up ordinary capital

37,508

36,351

36,054

Treasury shares

(575)

(571)

(507)

Equity based remuneration

1,548

1,527

1,441

Foreign currency translation reserve

(199)

(331)

(379)

Accumulated other comprehensive income

(68)

15

(11)

Non-controlling interests - other

58

54

55

Retained earnings

27,188

26,949

27,883

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

(1,407)

(1,289)

(1,218)

Deferred fees

267

234

258

Total common equity Tier 1 capital

64,320

62,939

63,576

Deductions from common equity Tier 1 capital

 

 

 

Goodwill (excluding funds management entities)

(8,648)

(8,665)

(8,644)

Deferred tax assets

(2,034)

(1,710)

(1,169)

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

(940)

(941)

(942)

Capitalised expenditure

(1,719)

(1,778)

(1,838)

Capitalised software

(2,019)

(1,881)

(1,792)

Investments in subsidiaries not consolidated for regulatory purposes

(1,540)

(1,522)

(1,567)

Regulatory expected loss in excess of eligible provisions1

(1,106)

(1,148)

(1,312)

General reserve for credit losses adjustment

-

-

(356)

Defined benefit superannuation fund surplus

(73)

(66)

(78)

Equity investments

(425)

(482)

(570)

Regulatory adjustments to fair value positions

(63)

(65)

(68)

Other Tier 1 deductions

(1)

(1)

(1)

Total deductions from common equity Tier 1 capital

(18,568)

(18,259)

(18,337)

Total common equity Tier 1 capital after deductions

45,752

44,680

45,239

Additional Tier 1 capital

 

 

 

Basel III complying instruments

9,299

9,216

9,144

Basel III transitional instruments

-

-

-

Total Additional Tier 1 capital

9,299

9,216

9,144

Net Tier 1 regulatory capital

55,051

53,896

54,383

 

 

 

 

Tier 2 capital

 

 

 

Basel III complying instruments

11,645

7,143

8,025

Basel III transitional instruments

519

495

486

Eligible general reserve for credit loss

62

66

54

Basel III transitional adjustment

-

-

-

Total Tier 2 capital

12,226

7,704

8,565

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

(115)

(103)

(93)

Total deductions from Tier 2 capital

(255)

(243)

(233)

Net Tier 2 regulatory capital

11,971

7,461

8,332

Total regulatory capital

67,022

61,357

62,715

 

 

 

 

 

 

 

 

 

 

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 September 2019 Pillar 3 report

 


 

Pillar 3 report

Capital overview

 

 

 

Capital management strategy

 

Westpac’s approach to capital management seeks to ensure that it is adequately capitalised as an ADI. Westpac evaluates its approach to capital management 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 regulatory and economic 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 ‘unquestionably strong’ capital benchmarks, Westpac will seek to operate with a CET1 capital ratio above 10.5% in March and September as measured under the existing capital framework. Additional buffers may also be held to reflect challenging or uncertain environments. 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 levels once APRA finalises its review of the capital adequacy framework.

 

Total regulatory capital developments

 

On 9 July 2019 APRA announced that it will require the major banks (including Westpac) to lift Total Regulatory Capital by three percentage points of RWA by 1 January 2024 in order to boost loss absorbing capacity and support orderly resolution. APRA also confirmed that its overall long term target of an additional four to five percentage points of loss absorbing capacity remains unchanged, and that it will consider the most feasible alternative method of sourcing the remaining one to two percentage points, taking into account the particular characteristics of the Australian financial system.

 

Further details of APRA’s regulatory changes are set out in the Significant Developments section of Westpac’s 2019 Annual Report.

 

Westpac’s capital adequacy ratios

 

%

30 September 2019

31 March 2019

30 September 2018

The Westpac Group at Level 2

Common equity Tier 1 capital ratio

10.7

10.6

10.6

Additional Tier 1 capital

2.2

2.2

2.2

Tier 1 capital ratio

12.8

12.8

12.8

Tier 2 capital

2.8

1.8

1.9

Total regulatory capital ratio

15.6

14.6

14.7

 

 

 

 

The Westpac Group at Level 1

 

 

 

Common equity Tier 1 capital ratio

11.0

10.7

10.5

Additional Tier 1 capital

2.2

2.3

2.3

Tier 1 capital ratio

13.2

13.0

12.8

Tier 2 capital

2.9

1.8

2.0

Total regulatory capital ratio

16.1

14.8

14.8

 

Westpac New Zealand Limited’s capital adequacy ratios

 

%

30 September 2019

31 March 2019

30 September 2018

Westpac New Zealand Limited

Common equity Tier 1 capital ratio

11.3

11.7

11.7

Additional Tier 1  capital

2.6

2.8

2.8

Tier 1 capital ratio

13.9

14.5

14.5

Tier 2 capital

2.0

2.0

2.1

Total regulatory capital ratio

15.9

16.5

16.6

 

 

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

 

Westpac Group September 2019 Pillar 3 report | 17

 


 

Pillar 3 report

Capital overview

 

 

 

Capital requirements

 

This table shows risk weighted assets and associated capital requirements1 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.

 

30 September 2019

IRB

Standardised

Total Risk

Total Capital

$m

Approach

Approach2

Weighted Assets

Required1

Credit risk

 

 

 

 

Corporate

74,807

1,166

75,973

6,078

Business lending

35,470

950

36,420

2,914

Sovereign

2,068

1,069

3,137

251

Bank

8,339

46

8,385

671

Residential mortgages

131,629

5,010

136,639

10,931

Australian credit cards

5,089

-

5,089

407

Other retail

12,395

894

13,289

1,063

Small business

16,090

-

16,090

1,287

Specialised lending

55,262

518

55,780

4,462

Securitisation

5,749

-

5,749

460

Mark-to-market related credit risk3

-

11,313

11,313

905

Total

346,898

20,966

367,864

29,429

Market risk

 

 

9,350

748

Operational risk

 

 

47,680

3,814

Interest rate risk in the banking book

 

 

530

42

Other assets4

 

 

3,370

270

Total

 

 

428,794

34,303

 

 

 

 

 

31 March 2019

IRB

Standardised

Total Risk

Total Capital

$m

Approach

Approach2

Weighted Assets

Required1

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 risk3

-

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 assets4

 

 

3,002

240

Total

 

 

419,819

33,585

 

 

 

 

 

 

 

 

 

 

 

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.

 

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Pillar 3 report

Capital overview

 

 

 

30 September 2018

IRB

Standardised

Total Risk

Total Capital

$m

Approach

Approach2

Weighted Assets

Required1

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 risk3

-

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 assets4

 

 

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.

 

Westpac Group September 2019 Pillar 3 report | 19

 


 

Pillar 3 report

Leverage ratio

 

 

 

Leverage ratio

 

The following table summarises Westpac’s leverage ratio at 30 September 2019. This has been determined using APRA’s definition of the leverage ratio as specified in APS110 Capital Adequacy.

 

$ billion

30 September 2019

30 June 2019

31 March 2019

31 December 2018

Tier 1 Capital

55.1

53.7

53.9

53.6

Total Exposures

968.8

946.7

942.4

936.0

Leverage ratio

5.7%

5.7%

5.7%

5.7%

 

 

Leverage ratio disclosure

 

$m

 

30 September
2019

On-balance sheet exposures

 

1

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

860,848

2

(Asset amounts deducted in determining Tier 1 capital)

(18,586)

3

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

842,262

 

 

Derivative exposures

 

4

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

21,636

5

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

21,987

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)

(2,485)

8

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

-

9

Adjusted effective notional amount of written credit derivatives

4,942

10

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

(4,862)

11

Total derivative exposures (sum of rows 4 to 10)

41,218

SFT exposures

 

12

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

6,833

13

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

-

14

Counterparty credit risk exposure for SFT assets

4,777

15

Agent transaction exposures

-

16

Total SFT exposures (sum of rows 12 to 15)

11,610

Other off-balance sheet exposures

 

17

Off-balance sheet exposure at gross notional amount

197,957

18

(Adjustments for conversion to credit equivalent amounts)

(124,201)

19

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

73,756

Capital and total exposures

 

20

Tier 1 Capital

55,051

21

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

968,846

 

 

Leverage ratio %

 

22

Leverage ratio

5.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20 | Westpac Group September 2019 Pillar 3 report

 


 

Pillar 3 report

Leverage ratio

 

 

 

Summary comparison of accounting assets versus leverage ratio exposure measure

 

$m

 

30 September
2019

1

Total consolidated assets as per published financial statements

906,626

2

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

(9,086)

 

 

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

11,359

5

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

4,777

6

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

73,756

 

 

7

Other adjustments

(18,586)

8

Leverage ratio exposure

968,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 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. The Group Chief Credit Officer is responsible for the effectiveness of credit risk management, including credit approval decisioning beyond business authority level and appointing our most senior authorised credit officers. 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 originated 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 September 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 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 September 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 million1.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 properties2.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 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 September 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 September 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

30 September 2019

Exposure

Weighted

Expected

non-defaulted

Impaired

for Impaired

the 12 months

$m

at Default

Assets

Loss1

exposures

Loans

Loans

ended

Corporate

139,173

74,807

523

473

135

50

30

Business lending

54,570

35,470

635

431

316

168

54

Sovereign

90,960

2,068

2

2

-

-

-

Bank

28,761

8,339

10

10

-

-

-

Residential mortgages

559,018

131,629

1,642

1,088

414

127

111

Australian credit cards

17,541

5,089

328

248

121

80

340

Other retail

15,951

12,395

582

417

283

165

354

Small business

33,365

16,090

512

351

367

152

78

Specialised Lending

65,553

55,262

748

557

69

29

13

Securitisation

26,774

5,749

-

-

-

-

-

Standardised2

22,512

20,966

-

-

58

21

2

Total

1,054,178

367,864

4,982

3,577

1,763

792

982

 

 

 

 

 

 

 

 

 

 

 

 

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

Loss1

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

-

-

-

-

-

Standardised2

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

Loss1

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

-

-

-

-

-

Standardised2

18,166

17,384

-

-

24

12

1

Total

1,021,926

362,749

4,742

3,667

1,416

653

948

 

 

 

 

 

 

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

2       Includes mark-to-market related credit risk.

 

Westpac Group September 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 and 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 risk grades since origination of the financial asset. An internal risk grade assessed using both quantitative and qualitative factors. The number of notches (changes) in the internal risk grade that Westpac uses to represent a significant increase in credit risk is determined on a sliding scale where the number of notches will generally be greater for a financial asset with a lower credit risk compared to a financial asset with a higher credit risk.

 

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.

 

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 exposure thresholds. Those financial assets in stage 3 above the specified exposure 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 i.e. base case, 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 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 September 2019 Pillar 3 report

 


 

 

Pillar 3 report

Credit risk management

 

 

 

Expected credit loss provision

 

30 September 2019

 

A-IFRS Provisions

 

GRCL

Total Regulatory

$m

IAPs

CAPs

Total

Adjustment

Provisions

Specific Provisions

 

 

 

 

 

for impaired loans

412

380

792

NA

792

for defaulted but not impaired loans

NA

554

554

NA

554

For Stage 2

NA

1,234

1,234

NA

1,234

Total Specific Provision1

412

2,168

2,580

NA

2,580

General Reserve for Credit Loss1

NA

1,344

1,344

NA

1,344

Total provisions for ECL

412

3,512

3,924

NA

3,924

 

 

 

 

 

 

 

 

 

 

 

 

31 March 2019

 

A-IFRS 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 Provision1

433

2,189

2,622

NA

2,622

General Reserve for Credit Loss1

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Westpac Group September 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.

 

For the 12 months ended

 

 

Non-

Collectively

Individually

 

30 September 2019

Performing

performing

assessed

assessed

 

$m

Stage 1

Stage 2

Stage 3

provisions

provisions

Total

Provision for impairment charges as at 30 September 2018

-

-

-

2,631

422

3,053

Restatement for adoption of AASB 9

877

1,884

1,272

(2,631)

(422)

980

Restated provision for ECL as at 1 October 2018

877

1,884

1,272

-

-

4,033

Transfers in/(out) of Stage 1

1,458

(1,404)

(54)

 

 

-

Transfers in/(out) of Stage 2

(242)

956

(714)

 

 

-

Transfers in/(out) of Stage 3

(5)

(621)

626

 

 

-

Business activity during the year

179

(19)

(330)

 

 

(170)

Net remeasurement of provision for ECL

(1,385)

874

1,647

 

 

1,136

Write-offs

-

-

(1,154)

 

 

(1,154)

Exchange rate and other adjustments

2

4

62

 

 

68

Total provision for ECL on loans and credit commitments as at 30 September 2019

884

1,674

1,355

-

-

3,913

Presented as:

 

 

 

 

 

 

Provision for ECL loans

763

1,496

1,349

 

 

3,608

Provision for ECL credit commitments

121

178

6

 

 

305

Total provision for ECL on loans and credit commitments as at 30 September 2019

884

1,674

1,355

-

-

3,913

Of which:

 

 

 

 

 

 

Individually assessed provisions

 

 

412

 

 

412

Collectively assessed provisions

884

1,674

943

 

 

3,501

Total provision for ECL on loans and credit commitments as at 30 September 2019

884

1,674

1,355

-

-

3,913

Provision for ECL on debt securities at amortised cost

9

-

-

 

 

9

Provision for ECL on debt securities at FVOCI1

2

-

-

 

 

2

Total provision for ECL as at 30 September 2019

895

1,674

1,355

-

-

3,924

 

For the 6 months ended

 

 

Non-performing

Collectively

Individually

 

31 March 2019

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 FVOCI1

2

 

 

 

 

 

2

Total provision for ECL as at 31 March 2019

928

1,711

925

433

 

 

3,997

 

 

 

 

 

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 September 2019 Pillar 3 report

 


 

Pillar 3 report

Credit risk management

 

 

 

 

For the

 

6 months

 

ended

 

30 September

$m

2018

Individually assessed provisions

 

Balance at beginning of the period

471

Provisions raised

198

Write-backs

(83)

Write-offs

(165)

Interest adjustment

(4)

Exchange rate and other adjustments

5

Closing balance

422

 

 

Collectively assessed provisions

 

Balance at beginning of the period

2,694

Provisions raised

281

Write-offs

(428)

Interest adjustment

90

Exchange rate and other adjustments

(6)

Closing balance

2,631

 

 

Total provisions for impairment losses on loans and credit commitments

3,053

General reserve for credit losses adjustment

356

Total provisions plus general reserve for credit losses

3,409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Westpac Group September 2019 Pillar 3 report | 31

 

 


 

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

 

30 September 2019

On balance

                Off-balance sheet

Total Exposure

Average

$m

sheet

Non-market related

Market related

at Default

12 months ended1

Corporate

63,994

58,903

16,276

139,173

134,619

Business lending

42,385

12,185

-

54,570

54,532

Sovereign

80,891

1,711

8,358

90,960

81,034

Bank

16,291

2,026

10,444

28,761

25,672

Residential mortgages

485,049

73,969

-

559,018

557,762

Australian credit cards

8,720

8,821

-

17,541

18,847

Other retail

12,415

3,536

-

15,951

16,628

Small business

26,520

6,845

-

33,365

33,326

Specialised lending

52,745

10,761

2,047

65,553

65,495

Securitisation2

22,559

4,037

178

26,774

26,683

Standardised

13,459

1,131

7,922

22,512

18,657

Total

825,028

183,925

45,225

1,054,178

1,033,255

 

 

 

 

 

 

31 March 2019

On balance

                Off-balance sheet

Total Exposure

Average

$m

sheet

Non-market related

Market related

at Default

6 months ended3

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

Securitisation2

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 ended4

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

Securitisation2

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

 

 

 

 

 

 

 

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

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

 

32 | Westpac Group September 2019 Pillar 3 report

 


 

Pillar 3 report

Credit risk exposures

 

 

 

Exposure at Default by measurement method

 

30 September 2019

IRB

Standardised

Total Exposure

$m

Approach

Approach

at Default

Corporate

139,173

10,580

149,753

Business lending

54,570

931

55,501

Sovereign

90,960

1,069

92,029

Bank

28,761

53

28,814

Residential mortgages

559,018

7,298

566,316

Australian credit cards

17,541

-

17,541

Other retail

15,951

2,074

18,025

Small business

33,365

-

33,365

Specialised lending

65,553

507

66,060

Securitisation

26,774

-

26,774

Total

1,031,666

22,512

1,054,178

 

 

 

 

31 March 2019

IRB

Standardised

Total Exposure

$m

Approach

Approach

at Default

Corporate

135,502

5,044

140,546

Business lending

54,299

975

55,274

Sovereign

79,572

1,042

80,614

Bank

25,471

31

25,502

Residential mortgages

558,161

7,700

565,861

Australian credit cards

18,850

-

18,850

Other retail

16,583

2,160

18,743

Small business

33,280

-

33,280

Specialised lending

64,781

437

65,218

Securitisation

25,929