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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 4, 2015 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): Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Act of 1934. Yes No x If “Yes” is marked, indicate the file number assigned to the registrant in connection with Rule 12g3-2(b):82- Index to Exhibits The information contained in Exhibit 1 to this Report on Form 6-K shall be incorporated by reference in the prospectus relating to the Registrant’s debt securities contained in the Registrant’s Registration Statement on Form F-3 (File No. 333-185478), as such prospectus may be amended or supplemented from time to time. Index to Exhibits Exhibit No. Description 1 Westpac Group March 2015 Pillar 3 Report – Incorporating the requirements of APS 330 2 Westpac Group Half Year 2015 Presentation & Investor Discussion Pack 3 Appendix 3A.1 – Notification of dividend / distribution 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 4, 2015 By: /s/ Sean Crellin Sean Crellin Director, Legal Exhibit 1 Pillar 3 report Table of contents Executive summary Introduction Risk appetite and risk types Controlling and managing risk Group structure Capital Overview Credit risk management Credit risk exposures Credit risk mitigation Counterparty credit risk Securitisation Market risk Operational risk Equity risk Interest Rate Risk in the Banking Book Liquidity risk Appendices Appendix I – Regulatory capital reconciliation Appendix II – Regulatory consolidation Appendix III – Level 3 entities’ asset and liabilities Appendix IV – Regulatory expected loss Appendix V – APS330 quantitative requirements Glossary Disclosure regarding forward-looking statements 3 5 6 7 12 14 18 25 51 54 56 67 71 73 75 77 78 84 88 90 91 94 99 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 APRA’s implementation of Basel III. 2 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Executive summary Pillar 3 Executive Summary Westpac’s common equity Tier 1 (CET1) capital ratio was 8.8% at 31 March 2015, 21 basis points lower than recorded at 30 September 2014. This half, 18 basis points of organic capital generation was more than offset by a 39 basis point reduction from other items. Other items included implementing revised RWA models (19 basis point decrease), with residential mortgages model changes having the largest impact, foreign currency translation impacts on RWA (14 basis point decrease) and the impact of lower interest rates on the revaluation of the defined benefit accounting obligation (6 basis point decrease). 31 March 2015 The Westpac Group at Level 2 Common equity Tier 1 (CET1) capital after deductions $m Risk weighted assets (RWA) $m Common equity Tier 1 capital ratio % Additional Tier 1 capital % Tier 1 capital ratio % Tier 2 capital % Total regulatory capital ratio % 30,388 346,823 8.8 1.5 10.3 1.8 12.1 30 September 2014 29,724 331,387 9.0 1.6 10.6 1.7 12.3 31 March 2014 28,455 322,498 8.8 1.5 10.3 1.8 12.1 More specifically, the movement in the CET1 capital ratio over the half included: Organic capital generation of 18 basis points from: First Half 2015 cash earnings of $3.8 billion (109 basis point increase); The 2014 final dividend payment net of Dividend Reinvestment Plan (DRP) share issuance (72 basis point decrease); Increases in RWA excluding modelling changes and foreign currency translation impacts (7 basis point decrease); and Other movements include higher capitalised expenditure (6 basis point decrease), higher deduction for regulatory expected loss (2 basis point decrease) and other items (4 basis point decrease). Other items totalling a 39 basis point decrease: Modelling changes for the determination of probability of default for residential mortgages increased RWA $8.5 billion (22 basis point decrease). Other modelling changes for specialised lending and other retail products had a net impact of reducing RWA by $1.1 billion (3 basis point increase); Currency movements increased credit RWA $5.4 billion (14 basis point decrease), mostly reflecting the value of New Zealand exposures increasing from the depreciation of the A$ against the NZ$; and An increase in the accounting obligation for the defined benefit plan reflecting the impact of lower interest rates (6 basis point decrease). Common Equity Tier 1 capital ratio movement for First Half 2015 Westpac Group March 2015 Pillar 3 report | 3 Pillar 3 report Executive summary This half, RWA increased $15.4 billion (or 4.7%) reflecting a rise in credit RWA of $21.6 billion, with non-credit RWA $6.1 billion lower. The rise in credit RWA was principally due to: Modelling changes which increased RWA $7.4 billion. These included changes to the determination of probability of default for mortgages ($8.5 billion increase), changes to the approach to assigning exposures to regulatory slotting categories for specialised lending exposures ($1.7 billion decrease) and changes to risk estimates for other retail exposures ($0.6 billion increase); $5.4 billion from the depreciation in the A$ mostly related to our New Zealand operations ; $1.9 billion from higher mark-to-market related credit risk related to derivative counterparty exposures ; Improvements in asset quality which led to a reduction in RWA of $2.1 billion; and Growth in the portfolio (excluding the above items) added $9.0 billion to credit RWA over the half. The decline in non-credit RWA was predominately due to lower interest rate risk in the banking book (IRRBB) RWA. The reduction in IRRBB RWA is due to a reduction in exposure to interest rate movements in the regulatory banking book and an increase in the embedded gain from falling market interest rates. Risk weighted assets $m Credit risk Market risk Operational risk Interest rate risk in the banking book Other Total 31 March 2015 303,026 7,900 30,136 1,596 4,165 346,823 30 September 2014 281,459 8,975 29,340 7,316 4,297 331,387 31 March 2014 272,038 10,610 28,474 8,459 2,917 322,498 Over the half, exposure at default (EAD) increased $38.8 billion (up 4.5%). Most of the rise was due to the depreciation in the Australian dollar and growth in residential mortgage and corporate lending. Two classification changes have been introduced this half (prior periods have not been restated for the classification changes): Business lending under $1 million secured by residential mortgages have been moved from the residential mortgage category to the small business lending category ($2.0 billion of EAD and $0.6 billion of RWA at 31 March 2015) in line with APRA requirements; and In the exposure at default by industry classification table (page 28) all residential mortgage exposures are now reported under the retail lending category. This change has been applied for consistency with industry practice and the treatment of other consumer exposures such as credit cards and personal loans. 4 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Int roduc tion 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. The Structure of Westpac’s Pillar 3 Report as at 31 March 2015 This report describes Westpac’s risk management practices and presents the prudential assessment of Westpac’s 1 capital adequacy as at 31 March 2015. The sections are arranged as follows: ‘Risk Appetite and Risk Types’ defines the risks that Westpac manages; ‘Controlling and Managing Risk’ outlines the responsibilities of the Board of Directors of Westpac and executive risk management committees; ‘Group Structure’ defines the bases of measurement adopted by APRA and describes the principles of consolidation used for the purposes of determining Westpac’s capital adequacy; ‘Capital Overview’ describes Westpac’s capital management strategy and presents the capital adequacy ratios for the Westpac Group; ‘Credit Risk Management’ describes Westpac’s approach to managing credit risk; ‘Credit Risk Exposures’ tabulates Westpac’s credit risk exposures, including impaired and past due loans and loan impairment provisions; ‘Credit Risk Mitigation’ describes how Westpac reduces its credit risk by using collateral, guarantees or credit derivatives; ‘Counterparty Credit Risk’ describes Westpac’s exposure to credit risk arising from its management of derivatives and securities financing transactions; ‘Securitisation’ explains how Westpac participates in the securitisation market; ‘Market Risk’ describes Westpac’s approach to managing market risk; ‘Operational Risk’ describes Westpac’s operational risk management approach; ‘Equity Risk’ describes Westpac’s equity positions; ‘Interest Rate Risk in the Banking Book’ describes Westpac’s approach to managing the structural interest rate risk incurred in its banking book; ‘Liquidity Risk’ describes Westpac’s approach to managing liquidity risk; ‘Appendix I – Regulatory capital reconciliation’ contains the reconciliation between Westpac’s statutory and regulatory balance sheets and the common disclosure template as required by Attachment A of APS330; ‘Appendix II – Regulatory consolidation’ lists all the entities that form part of the Westpac Group. ‘Appendix III – Level 3 entities’ assets and liabilities’ contains the standalone assets and liability balances for all the legal entities excluded from the regulatory scope of consolidation; ‘Appendix IV – Regulatory expected loss’ sets out how the capital deduction for regulatory expected loss is derived; and A cross-reference between the quantitative disclosures in this report and the quantitative disclosures required by Attachments A, C, D and E of APS330 is provided in Appendix V on page 91. Capital instruments included in regulatory capital The reporting requirements for capital instruments under Attachment B of APS330 can be found on the regulatory disclosures section of the Westpac website 2 and are not included within this report. These disclosures are updated when the following occurs: A new capital instrument is issued that will form part of regulatory capital; or 1 2 A capital instrument is redeemed, converted into CET1, written off, or its terms and conditions are changed. Westpac also takes risk in subsidiaries that are outside the scope of the Level 2 regulatory consolidation of the Westpac Group and this risk is not described in this report. http://www.westpac.com.au/about-westpac/investor-centre/financial-information/basel-iii-risk-reports/ Westpac Group March 2015 Pillar 3 report | 5 Pillar 3 report Risk appetite and risk types Westpac’s vision is to be one of the world’s great service companies, helping our customers, communities and people to prosper and grow. Westpac’s appetite for risk is influenced by a range of factors, including whether a risk is considered consistent with its strategy (core risk) and whether an appropriate return can be achieved from taking that risk. Westpac has a lower appetite for risks that are not part of its strategy. Westpac seeks to achieve an appropriate return on risk and prices its products accordingly. Risk appetite cannot be defined by a single figure, having many dimensions and representing an amalgam of top-down requirements (including Westpac’s target debt rating and regulatory requirements) and bottom-up aggregates (such as risk concentration limits). Westpac uses a capital model as the basis of risk measurement, calibrated to its target debt rating. Westpac distinguishes between different types of risk and takes an integrated approach toward managing them. Overview of risk types Key risks Other risks credit risk - the risk of financial loss where a customer or counterparty fails to meet their financial obligations to Westpac; liquidity risk - the risk that the Group will be unable to fund assets and meet obligations as they come due; 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; 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 and reputation risk; and compliance Risk - the risk of legal or regulatory sanction, financial or reputation loss, arising from our failure to abide by the compliance obligations required of us. business risk - the risk associated with the vulnerability of a line of business to changes in the business environment; environmental, social and governance risk – the risk that the Group damages its reputation or financial performance due to failure to recognise or address material existing or emerging sustainability related environmental, social or governance issues; equity risk - the potential for financial loss arising from movements in equity values. Equity risk may be direct, indirect or contingent; insurance risk - the risk of mis-estimation of the expected cost of insured events, volatility in the number or severity of insured events, and mis-estimation of the cost of incurred claims; 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 reputation risk - the risk to earnings or capital from negative public opinion resulting from the loss of reputation or public trust and standing. 6 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Controlling and managing risk Westpac manages the risks that affect our business as they influence our performance, reputation and future success. Effective risk management involves taking an integrated approach to risk and reward, and enables us to both increase financial growth opportunities and mitigate potential loss or damage. We adopt a Three Lines of Defence approach to risk management (see page 11) which reflects our culture of ‘risk is everyone’s business’ and that all employees are responsible for identifying and managing risk and operating within the Group’s desired risk profile. Westpac’s Risk Management Strategy identifies risk culture as an essential element of risk management. We embed risk culture and maintain an awareness of risk management responsibilities through regular communication, training and other targeted approaches that support our risk management framework. The Board is responsible for reviewing and approving our overall risk management strategy, including determining our appetite for risk. The Board has delegated to the Board Risk & Compliance Committee responsibility for providing recommendations to the Board on the Westpac Group’s risk-reward strategy, setting risk appetite, approving frameworks, policies and processes for managing risk, and determining whether to accept risks beyond management’s approval discretion. Risk management governance structure Board reviews and approves our overall Risk Management Strategy. Board Risk & Compliance Committee (BRCC) provides recommendations to the Board on Westpac Group’s risk-reward strategy; sets risk appetite; reviews and approves the frameworks for managing risk, including capital, credit, liquidity, market, operational, compliance and reputation risk; reviews and approves the limits and conditions that apply to credit risk approval authority delegated to the CEO, CFO and CRO and any other officers of the Westpac Group to whom the Board has delegated credit approval authority; monitors the risk profile, performance, capital levels, exposures against limits and the management and control of our risks; monitors changes anticipated in the economic and business environment and other factors considered relevant to our risk profile and risk appetite; oversees the development and ongoing review of key policies that support our frameworks for managing risk; and may approve accepting risks beyond management’s approval discretion. From the perspective of specific types of risk, the Board Risk & Compliance Committee role includes: 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; liquidity risk – approving key policies and limits supporting the Liquidity Risk Management Framework, including our annual funding strategy and liquidity requirements, and recovery and resolution plans and monitoring the liquidity risk profile; market risk – approving key policies and limits supporting the Market Risk Management Framework, including, but not limited to, the Value at Risk and Net Interest Income at Risk limits, and monitoring the market risk profile; operational risk – monitoring the operational risk profile, the performance of operational risk management and controls, and the development and ongoing review of operational risk policies supporting the Operational Risk Management Framework; reputation risk – reviewing and approving the Reputation Risk Management Framework and reviewing the monitoring of the performance of reputation risk management and controls: and compliance risk – reviewing compliance risk 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. Westpac Group March 2015 Pillar 3 report | 7 Pillar 3 report Controlling and managing risk Risk management governance structure (continued) The Board Risk & Compliance Committee also: Board Committees with a Risk Focus approves the Internal Capital Adequacy Assessment Process and in doing so reviews the outcomes of enterprise wide stress testing, sets the preferred capital ranges for regulatory capital having regard to Westpac internal economic capital measures, and reviews and monitors capital levels for consistency with the Westpac Group’s risk appetite; provides relevant periodic assurances to the Board Audit Committee regarding the operational integrity of the risk management framework; and refers to other Board Committees any matters that come to the attention of the Board Risk & Compliance Committee that are relevant for those respective Board Committees. Board Audit Committee oversees the integrity of financial statements and financial reporting systems, and matters relating to taxation risks. Board Remuneration Committee (BRC) reviews any matters raised by the BRCC with respect to risk-adjusted remuneration. Board Technology Committee Executive Team oversees the technology strategy, implementation, and risks associated with major technology programs. Westpac Executive Team (ET) executes the Board-approved strategy; assists with the development of the Board Statement of Risk Appetite; delivers the Group’s various strategic and performance goals within the approved risk appetite; and monitors key risks within each business unit, capital adequacy and the Group’s reputation. 8 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Controlling and managing risk Risk management governance structure (continued) Executive risk committees Westpac Group Executive Risk Committee (RISKCO) leads the optimisation of credit, operational, compliance and market risk-reward across the Group; oversees the embedding of the Risk Management Strategy in the Group’s approach to risk governance; oversees risk-related management frameworks and key supporting policies; oversees the Group’s credit, operational, compliance, and market risk profiles; oversees reputation risk and Environmental, Social and Governance (ESG) risk management frameworks and key supporting policies; and 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) leads the optimisation of funding and liquidity risk-reward across the Group; reviews the level and quality of capital to ensure that it is commensurate with the Group’s risk profile, business strategy and risk appetite; oversees the Liquidity Risk Management Framework and key policies; oversees the funding and liquidity risk profile and balance sheet risk profile; and identifies emerging funding and liquidity risks and appropriate actions to address these. Westpac Group Remuneration Oversight Committee (ROC) provides assurance that the remuneration arrangements across the Group have been examined from a People, Risk and Finance perspective; responsible for ensuring that risk is embedded in all key aspects of our remuneration framework; reviews and makes recommendations to the CEO for recommendation to the Board Remuneration Committee on the 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; reviews and monitors the remuneration arrangements (other than for Group Executives) for Responsible Persons (as defined in the Group’s Statutory Officers Fit and Proper Policy), risk and financial control personnel, 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 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. Westpac Group March 2015 Pillar 3 report | 9 Pillar 3 report Controlling and managing risk Risk management governance structure (continued) Group and divisional risk management Enterprise Risk develops the Group-level risk management frameworks for approval by the BRCC; directs the review and development of key policies supporting the risk management frameworks; establishes risk concentration limits and monitors risk concentrations; and monitors emerging risk issues. Compliance Function develops the Group-level compliance framework for approval by the BRCC; directs the review and development of compliance policies, compliance plans, controls and procedures; monitors compliance developments; and and regulatory obligations and emerging regulatory reports on compliance standards. Divisional Risk Management Independent internal review Group Assurance Divisional business units 10 | Westpac Group March 2015 Pillar 3 report develops division-specific policies, risk appetite statements, controls, procedures, and monitoring and reporting capability that align to the frameworks approved by the BRCC. reviews the adequacy and effectiveness of management controls for risk. Business Units responsible for identifying, evaluating and managing the risks that they originate within approved risk appetite policies; and establish and maintain appropriate risk management controls, resources and self-assurance processes. 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-assurance 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-assurance processes. The 2nd Line of Defence – Establishment of risk management frameworks and policies and risk management oversight Our 2nd Line of Defence is a separate risk advisory, control and monitoring function which establishes frameworks, policies, limits and processes for the management, monitoring and reporting of risk. It also evaluates and opines on the adequacy and effectiveness of 1st Line controls and application of frameworks and policies and, where necessary, requires improvement and monitors the 1st Line’s progress toward remediation of identified deficiencies. Our 2nd Line of Defence has three layers: our executive risk committees lead the optimisation of risk-reward by overseeing the development of risk appetite statements, risk management frameworks, policies and risk concentration controls, and monitoring Westpac’s risk profile for alignment with approved appetites and strategies; our Enterprise Risk function is independent from the business divisions, reports to the Chief Risk Officer (CRO), and establishes and maintains the Group-wide risk management frameworks, policies and concentration limits that are approved by the Board Risk & Compliance Committee. It also reports on Westpac’s risk profile to executive risk committees and the Board Risk & Compliance Committee; and divisional risk areas are responsible for developing division-specific risk appetite statements, policies, controls, procedures, monitoring and reporting capability, which align to the Board’s Statement of Risk Appetite and the risk management frameworks approved by the Board Risk & Compliance Committee. These risk areas are independent of the Divisions’ 1st Line business areas, with each divisional CRO having a direct reporting line to the CRO. The 3rd Line of Defence – Independent assurance Our Group Assurance function independently evaluates the adequacy and effectiveness of the Group’s overall risk management framework and controls. Our overall risk management approach is summarised in the following diagram: Westpac Group March 2015 Pillar 3 report | 11 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: 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; 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 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: insurance; acting as manager, responsible entity, approved trustee, trustee or similar role in relation to funds management; non-financial (commercial) operations; or 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 2 3 APS110 Capital Adequacy outlines the overall framework adopted by APRA for the purpose of assessing the capital adequacy of an ADI. Impaired assets and provisions held in Level 3 entities are excluded from the tables in this report. Refer to Note 1 of Westpac’s 2014 Annual Report for further details. 12 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Group structure Westpac New Zealand Limited Westpac New Zealand Limited (WNZL), a wholly owned subsidiary entity 1 , 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. For the purposes of determining Westpac’s capital adequacy, Westpac New Zealand Limited is 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 (including Australia, New Zealand and the United Kingdom) 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. 7 Westpac has an internal limit structure and approval process governing credit exposures to related entities. This 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. 1 2 Other subsidiary banking entities in the Group include Westpac Bank of Tonga, Westpac Bank-PNG-Limited, Westpac Bank Samoa Limited and Westpac Europe Limited. In January 2015, Westpac announced that it had entered into an agreement to sell its banking operations in Samoa, Cook Islands, Solomon Islands, Vanuatu and Tonga to the Bank of South Pacific Limited. Completion of the sale is expected to occur in Second Half 2015 and is subject to the parties obtaining necessary statutory, regulatory and third party approvals. 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 2015 Pillar 3 report | 13 Pillar 3 report Capital overview Capital Structure 1 This table shows Westpac’s capital resources under APS111 Capital Adequacy: Measurement of Capital. $m Tier 1 capital Common equity Tier 1 capital Paid up ordinary capital Treasury shares Equity based remuneration Foreign currency translation reserve Accumulated other comprehensive income Non-controlling interests - other Retained earnings Less retained earnings in life and general insurance, funds management and securitisation entities Deferred fees Total common equity Tier 1 capital Deductions from common equity Tier 1 capital Goodwill (excluding funds management entities) Deferred tax assets Goodwill in life and general insurance, funds management and securitisation entities Capitalised expenditure Capitalised software Investments in subsidiaries not consolidated for regulatory purposes Regulatory expected loss in excess of eligible provisions 2 General reserve for credit losses adjustment Securitisation Equity Investments Regulatory adjustments to fair value positions Other Tier 1 deductions Total deductions from common equity Tier 1 capital Total common equity Tier 1 capital after deductions Additional Tier 1 capital Basel III complying instruments Basel III non complying instruments Total Additional Tier 1 capital Net Tier 1 regulatory capital Tier 2 capital Basel III complying instruments Basel III non complying instruments Eligible general reserve for credit loss Basel III transitional adjustment Total Tier 2 capital Deductions from Tier 2 capital Investments in subsidiaries not consolidated for regulatory purposes Holdings of own and other financial institutions Tier 2 capital instruments Total deductions from Tier 2 capital Net Tier 2 regulatory capital Total regulatory capital 1 2 31 March 2015 30 September 2014 31 March 2014 27,237 (304 ) 1,020 (203 ) 137 63 21,275 26,943 (239 ) 935 (240 ) 125 60 20,641 26,954 (240 ) 885 (303 ) 90 48 19,556 (1,286 ) 107 48,046 (1,223 ) 135 47,137 (1,124 ) 118 45,984 (9,019 ) (1,330 ) (9,076 ) (1,354 ) (9,196 ) (1,401 ) (1,255 (1,404 (1,932 (1,348 (734 (107 (7 (388 (127 (7 (17,658 30,388 ) ) ) ) ) ) ) ) ) ) ) 2,694 2,660 5,354 35,742 (1,253 (1,212 (1,921 (1,327 (650 (133 (7 (341 (132 (7 (17,413 29,724 ) ) ) ) ) ) ) ) ) ) ) (1,264 (1,076 (1,903 (1,321 (694 (92 (8 (367 (203 (4 (17,529 28,455 ) ) ) ) ) ) ) ) ) ) ) 2,694 2,579 5,273 34,997 1,383 3,466 4,849 33,304 2,538 4,045 59 (67 ) 6,575 1,925 3,899 78 5,902 1,925 3,966 67 5,958 (140 ) (62 ) (202 ) 6,373 42,115 (140 ) (58 ) (198 ) 5,704 40,701 (140 ) (106 ) (246 ) 5,712 39,016 The capital structure for 31 March 2014 has not been restated following the adoption of new or revised accounting standards this period (refer to Note 1 of Westpac’s 2014 Annual Report for further details). An explanation of the relationship between this deduction, regulatory expected loss and provisions for impairment charges is contained in Appendix II. 14 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Capital overview Capital management strategy Westpac’s approach seeks to balance the fact that capital is an expensive form of funding with the need to be adequately capitalised. 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: the development of a capital management strategy, including preferred capital range, capital buffers and contingency plans; consideration of both economic and regulatory capital requirements; a process that challenges the capital measures, coverage and requirements which incorporates amongst other things, the impact of adverse economic scenarios; and consideration of the perspectives of external stakeholders including rating agencies, equity investors and debt investors. Westpac’s preferred capital range At 31 March 2015, Westpac’s preferred range for its CET1 capital ratio was 8.75%-9.25%. The CET1 preferred range takes into consideration: Current regulatory minimums, including capital conservation and D-SIB buffers; Stress testing to calibrate an appropriate buffer against a downturn; and Quarterly volatility of capital ratios under Basel III due to the half and yearly cycle of dividend payments. Westpac’s capital adequacy ratios % The Westpac Group at Level 2 Common equity Tier 1 capital ratio Additional Tier 1 capital Tier 1 capital ratio Tier 2 capital Total regulatory capital ratio The Westpac Group at Level 1 Common equity Tier 1 capital ratio Additional Tier 1 capital Tier 1 capital ratio Tier 2 capital Total regulatory capital ratio 31 March 2015 30 September 2014 31 March 2014 8.8 1.5 10.3 1.8 12.1 9.0 1.6 10.6 1.7 12.3 8.8 1.5 10.3 1.8 12.1 8.7 1.7 10.4 2.1 12.5 9.2 1.8 11.0 1.9 12.9 8.9 1.7 10.6 2.0 12.6 31 March 2015 30 September 2014 31 March 2014 11.6 11.6 11.6 11.9 11.9 11.9 12.2 12.2 12.2 W estpac New Zealand Limited’s capital adequacy ratios % Westpac New Zealand Limited Common equity Tier 1 capital ratio Additional Tier 1 capital Tier 1 capital ratio Tier 2 capital Total regulatory capital ratio Westpac Group March 2015 Pillar 3 report | 15 Pillar 3 report Capital overview Capital requirements This table shows risk weighted assets and associated capital requirements9 for each risk type included in the regulatory assessment of Westpac’s capital adequacy. The 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 2015 $m Credit risk Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Mark-to-market related credit risk 3 Total Market risk Operational risk 4 Interest rate risk in the banking book Other assets 5 Total IRB Approach Standardised Approach 2 Total Risk Weighted Assets Total Capital Required 1 77,516 32,352 1,310 7,842 73,337 6,432 12,095 7,614 53,741 4,431 276,670 4,631 1,299 1,179 135 3,214 4,706 352 10,840 26,356 82,147 33,651 2,489 7,977 76,551 6,432 16,801 7,614 54,093 4,431 10,840 303,026 7,900 30,136 1,596 4,165 346,823 6,572 2,692 199 638 6,124 515 1,344 609 4,327 355 867 24,242 632 2,411 128 333 27,746 30 September 2014 $m Credit risk Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Mark-to-market related credit risk 3 Total Market risk Operational risk 4 Interest rate risk in the banking book Other assets 5 Total IRB Approach Standardised Approach 2 Total Risk Weighted Assets Total Capital Required 1 70,199 33,125 1,627 8,745 63,071 6,069 10,653 6,311 53,162 4,845 257,807 4,679 1,213 851 121 2,830 4,735 318 8,905 23,652 74,878 34,338 2,478 8,866 65,901 6,069 15,388 6,311 53,480 4,845 8,905 281,459 8,975 29,340 7,316 4,297 331,387 5,990 2,747 198 709 5,272 486 1,231 505 4,279 388 712 22,517 718 2,347 585 344 26,511 1 2 3 4 5 Capital requirements are expressed as 8% of total risk weighted assets. Westpac’s Standardised risk weighted assets are categorised based on their equivalent IRB categories. Mark-to-market related credit risk is measured under the standardised approach. It is also known as Credit Valuation Adjustment (CVA) risk. APRA approved the AMA approach for the calculation of Lloyds operational risk RWA from December 2014. For periods prior to December 2014 Westpac applied the partial use approach, as approved by APRA, and the business acquired from Lloyds was measured under the Standardised approach as defined under APS114 Capital Adequacy: Standardised Approach to Operational Risk. Other assets include cash items, unsettled transactions, fixed assets and other non-interest earning assets. 16 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Capital overview 31 March 2014 $m Credit risk Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Mark-to-market related credit risk 3 Total Market risk Operational risk 4 Interest rate risk in the banking book Other assets 5 Total 1 2 3 4 5 IRB Approach Standardised Approach 2 Total Risk Weighted Assets Total Capital Required 1 68,540 33,446 1,387 8,638 62,179 6,188 10,265 6,508 48,047 5,521 250,719 4,735 1,108 810 115 2,417 4,645 232 7,257 21,319 73,275 34,554 2,197 8,753 64,596 6,188 14,910 6,508 48,279 5,521 7,257 272,038 10,610 28,474 8,459 2,917 322,498 5,862 2,764 176 700 5,168 495 1,193 521 3,862 442 580 21,763 849 2,278 677 233 25,800 Capital requirements are expressed as 8% of total risk weighted assets. Westpac’s Standardised risk weighted assets are categorised based on their equivalent IRB categories. Mark-to-market related credit risk and is measured under the standardised approach. It is also known as Credit Valuation Adjustment (CVA) risk. APRA approved the AMA approach for the calculation of Lloyds operational risk RWA from December 2014. For periods prior to December 2014 Westpac applied the partial use approach, as approved by APRA, and the business acquired from Lloyds was measured under the Standardised approach as defined under APS114 Capital Adequacy: Standardised Approach to Operational Risk. Other assets include cash items, unsettled transactions, fixed assets and other non-interest earning assets. Westpac Group March 2015 Pillar 3 report | 17 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 CRO is responsible for the effectiveness of overall risk management throughout Westpac, including credit risk. Authorised officers have delegated authority to approve credit risk exposures, including customer risk grades, other credit parameters and their ongoing review. A portion of consumer lending is subject to automated scorecard-based approval. Our largest exposures are approved by our most experienced credit officers. Line business management is responsible for managing credit risks accepted in their business and for maximising 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, there are policies covering risk appetite statements, ESG 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. 18 | Westpac Group March 2015 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. Credit Officer decisions are subject to reviews to ensure consistent quality. Divisional operational units are responsible for maintaining accurate and timely recording of all credit risk approvals and changes to customer and facility data. These units 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. 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 are transaction managed when the exposure is in excess of $1 million, or when the exposure includes complex products. 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, 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. Mapping of Westpac risk grades The table below shows the current alignment between Westpac’s 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 B C D AAA to AA– A+ to A– BBB+ to BBB– BB+ to B+ Westpac Rating Watchlist Special mention Substandard/default Default Aaa to Aa3 A1 to A3 Baa1 to Baa3 Ba1 to B1 E F G H 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. Westpac Group March 2015 Pillar 3 report | 19 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. 1 APS Asset Class Sub - asset class Westpac category Segmentation criteria Corporate Corporate Corporate All transaction - managed customers not elsewhere classified where annual turnover exceeds $50m 1 . SME Corporate Business Lending All transaction - managed customers not elsewhere classified where annual turnover is $50m 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 All program - managed exposures secured by residential mortgages 3 . Qualifying Revolving Retail Australian Credit Cards Program - managed credit cards with low volatility in loss rates . The New Zealand cards portfolio does not currently meet the criteria for Qualifying Revolving Retail and is classified in Other Retail . Other Retail Small Business Program-managed under $1 million 4 . Other Retail All other program - managed lending to retail customers , including New Zealand credit cards . Includes all NZ agribusiness loans, regardless of turnover. business lending exposures 2 3 4 Excludes large diversified property groups and property trusts, which appear in the Corporate asset class. Comparative period business lending under $1 million fully secured by residential property were included. Comparative period business lending under $1 million fully secured by residential property were exluded. 20 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk management Mapping of Credit risk approach to Basel categories and exposure types Approach Transaction-Managed Portfolios APS asset class Corporate Sovereign Bank Types of exposures Direct lending Contingent lending Derivative counterparty Asset warehousing Underwriting Secondary market trading Foreign exchange settlement Other intra-day settlement obligations 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 Program-Managed Portfolios Internal ratings process for transaction-managed portfolios The process for assigning and approving individual customer PDs and facility LGDs involves: 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; Authorised officers evaluate the recommendations and approve the final CRG and facility LGDs. Credit officers may override line business unit recommendations; 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 Authorised officers decisions are subject to reviews to ensure consistent quality. 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 the homogeneity of risk characteristics that have historically proven predictive in determining whether 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 allocates economic capital to all exposures. Economic capital includes both credit and non-credit components. Economic credit capital is allocated 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 - Impairment provisions are held by Westpac to cover credit losses that are incurred 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 2015 Pillar 3 report | 21 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, emergence periods, level of arrears and recent past experience. 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: 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; All models materially impacting the risk rating process are periodically reviewed in accordance with Westpac’s model risk policy; Specific credit risk estimates (including PD, LGD and EAD levels) are overseen, reviewed annually and approved by the Credit Risk Estimates Committee (a sub-committee of RISKCO); Credit Risk Assurance undertake an independent annual end-to-end technical and operational review of the overall process; and 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 RISKCO and BRCC quarterly. It details the current level of impairment losses, stressed exposures, delinquency trends, provisions, impaired assets and key performance metrics. It 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. 22 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk management Summary credit risk disclosure 31 March 2015 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised Lending Securitisation Standardised 2 Total 30 September 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised Lending Securitisation Standardised 2 Total 31 March 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised Lending Securitisation Standardised 2 Total 1 2 Exposure at Default 134,554 48,516 52,961 27,868 471,495 20,728 14,379 19,345 61,793 23,878 20,887 896,404 Exposure at Default 120,132 48,476 51,746 32,565 455,481 20,383 12,418 16,689 59,188 22,109 18,430 857,617 Exposure at Default 113,971 49,730 40,567 32,761 439,765 19,949 12,148 16,784 52,854 22,702 17,531 818,762 Risk Weighted Assets 77,516 32,352 1,310 7,842 73,337 6,432 12,095 7,614 53,741 4,431 26,356 303,026 Risk Weighted Assets 70,199 33,125 1,627 8,745 63,071 6,069 10,653 6,311 53,162 4,845 23,652 281,459 Risk Weighted Assets 68,540 33,446 1,387 8,638 62,179 6,188 10,265 6,508 48,047 5,521 21,319 272,038 Regulatory Expected Loss 1 801 745 2 14 916 336 497 223 1,054 4,588 Regulatory Expected Loss for non-defaulted exposures 504 424 2 9 770 263 403 128 618 3,121 Regulatory Expected Loss 1 827 768 3 22 811 304 456 213 1,232 4,636 Regulatory Expected Loss for non-defaulted exposures 475 470 3 17 680 246 380 108 681 3,060 Regulatory Expected Loss 1 897 875 3 15 837 323 452 219 1,343 4,964 Regulatory Expected Loss for non-defaulted exposures 507 456 3 10 687 258 369 114 653 3,057 Impaired Loans 513 427 5 258 104 157 101 484 3 96 2,148 Specific Provisions for Impaired Loans 214 231 7 93 71 101 45 209 56 1,027 Actual Losses for the 6 months ended 35 53 45 129 95 31 49 34 471 Impaired Loans 504 467 5 238 78 129 94 738 3 84 2,340 Specific Provisions for Impaired Loans 251 215 5 94 58 83 42 255 44 1,047 Actual Losses for the 12 months ended 171 234 121 288 190 72 174 52 1,302 Impaired Loans 591 613 4 301 93 145 100 916 130 2,893 Specific Provisions for Impaired Loans 294 330 4 116 64 91 46 335 63 1,343 Actual Losses for the 6 months ended 111 119 58 136 87 14 60 12 597 Includes regulatory expected losses for defaulted and non-defaulted exposures. Includes mark-to-market related credit risk. Westpac Group March 2015 Pillar 3 report | 23 Pillar 3 report Credit risk management Loan impairment provisions Provisions for loan impairment losses represent management’s best estimate of the losses incurred in the loan portfolios as at the balance date. There are two components of Westpac’s loan impairment provisions: individually assessed provisions (IAPs) and collectively assessed provisions (CAPs). In determining IAPs, relevant considerations that have a bearing on the expected future cash flows are taken into account, for example: the business prospects of the customer; the realisable value of collateral; Westpac’s position relative to other claimants; the reliability of customer information; and the likely cost and duration of the work-out process. These judgements and estimates can change with time as new information becomes available or as work-out strategies evolve, resulting in revisions to the impairment provision as individual decisions are made. CAPs are established on a portfolio basis taking into account: the level of arrears; collateral; past loss experience; expected defaults based on portfolio trends; and the economic environment. The most significant factors in establishing these provisions are estimated loss rates and the related emergence periods. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ from reported loan impairment provisions. These uncertainties include: differences between the expected and actual economic environment; interest rates and unemployment levels; repayment behaviour; and bankruptcy rates. 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 AAS are classified as specific provisions. All CAPs raised under AAS are either classified into specific provisions or a GRCL. A GRCL adjustment is made for the amount of GRCL that Westpac reports for regulatory purposes under APS220 in addition to provisions reported by Westpac under AAS. For capital adequacy purposes the GRCL adjustment is deducted from CET1. Eligible GRCL is included in Tier 2 capital. 24 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Loan impairment provisions 31 March 2015 $m Specific Provisions for impaired loans for defaulted but not impaired loans General Reserve for Credit Loss Total provisions for impairment charges 30 September 2014 $m Specific Provisions for impaired loans for defaulted but not impaired loans General Reserve for Credit Loss Total provisions for impairment charges 31 March 2014 $m Specific Provisions for impaired loans for defaulted but not impaired loans General Reserve for Credit Loss Total provisions for impairment charges IAPs 806 NA NA 806 IAPs 867 NA NA 867 IAPs 1,139 NA NA 1,139 AAS Provisions CAPs 221 130 2,348 2,699 AAS Provisions CAPs 180 114 2,320 2,614 AAS Provisions CAPs 204 127 2,321 2,652 GRCL Adjustment Total 1,027 130 2,348 3,505 NA NA 107 107 Total 1,047 114 2,320 3,481 Total 1,343 127 2,321 3,791 GRCL Adjustment NA NA 133 133 GRCL Adjustment NA NA 92 92 Total Regulatory Provisions 1,027 130 2,455 3,612 Total Regulatory Provisions 1,047 114 2,453 3,614 Total Regulatory Provisions 1,343 127 2,413 3,883 Westpac Group March 2015 Pillar 3 report | 25 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 2015 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation 2 Standardised Total On balance sheet 59,160 36,688 48,182 14,967 396,973 10,228 11,324 14,809 48,456 16,061 17,990 674,838 Off-balance sheet Non-market related Market related 59,364 16,030 11,828 2,086 2,693 1,913 10,988 74,522 10,500 3,055 4,536 13,337 7,696 121 1,513 1,384 190,350 31,216 Total Exposure at Default 134,554 48,516 52,961 27,868 471,495 20,728 14,379 19,345 61,793 23,878 20,887 896,404 Average 6 months ended 1 127,787 48,631 53,188 31,109 464,828 20,586 13,591 17,684 60,344 22,400 19,351 879,499 30 September 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation 2 Standardised Total On balance sheet 54,013 37,409 46,182 15,496 382,388 10,057 10,622 12,926 45,418 14,787 16,975 646,273 Off-balance sheet Non-market related Market related 51,121 14,998 11,067 3,272 2,292 1,806 15,263 73,093 10,326 1,796 3,763 13,770 7,243 79 1,455 178,712 32,632 Total Exposure at Default 120,132 48,476 51,746 32,565 455,481 20,383 12,418 16,689 59,188 22,109 18,430 857,617 Average 12 months ended 3 115,250 49,739 43,660 32,862 439,987 19,918 12,053 16,753 54,629 22,546 16,229 823,626 31 March 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation 2 Standardised Total On balance sheet 52,527 38,068 35,572 18,068 369,704 9,950 10,368 12,786 41,827 14,633 16,184 619,687 Off-balance sheet Non-market related Market related 51,131 10,313 11,662 3,441 1,554 1,739 12,954 70,061 9,999 1,780 3,998 11,027 7,902 167 1,347 174,087 24,988 Total Exposure at Default 113,971 49,730 40,567 32,761 439,765 19,949 12,148 16,784 52,854 22,702 17,531 818,762 Average 6 months ended 4 113,322 50,146 38,953 32,803 432,153 19,645 11,818 16,711 51,763 22,772 14,889 804,975 1 2 3 4 Average is based on exposures as at 31 March 2015, 31 December 2014 and 30 September 2014. EAD associated with securitisations is for the banking book only. Average is based on exposures as at 30 September 2014, 30 June 2014, 31 March 2014, 31 December 2013 and 30 September 2013. Average is based on exposures as at 31 March 2014, 31 December 2013 and 30 September 2013. 26 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Exposure at Default by measurement method 31 March 2015 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Total IRB Approach 134,554 48,516 52,961 27,868 471,495 20,728 14,379 19,345 61,793 23,878 875,517 Standardised Approach 6,056 1,295 1,179 135 5,651 6,223 348 20,887 Total Exposure at Default 140,610 49,811 54,140 28,003 477,146 20,728 20,602 19,345 62,141 23,878 896,404 30 September 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Total IRB Approach 120,132 48,476 51,746 32,565 455,481 20,383 12,418 16,689 59,188 22,109 839,187 Standardised Approach 4,750 1,209 851 121 4,964 6,222 313 18,430 Total Exposure at Default 124,882 49,685 52,597 32,686 460,445 20,383 18,640 16,689 59,501 22,109 857,617 31 March 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Total IRB Approach 113,971 49,730 40,567 32,761 439,765 19,949 12,148 16,784 52,854 22,702 801,231 Standardised Approach 4,760 1,100 810 115 4,362 6,155 229 17,531 Total Exposure at Default 118,731 50,830 41,377 32,876 444,127 19,949 18,303 16,784 53,083 22,702 818,762 Westpac Group March 2015 Pillar 3 report | 27 Pillar 3 report Credit risk exposures Exposure at Default by industry classification 31 March 2015 $m Corporate Business lending Sovereign Bank Residential mortgages 4 Australian credit cards Other retail Small business 4 Specialised lending Securitisation Standardised Total 1 2 3 4 Finance & insurance 19,867 2,510 13,631 27,439 Government administration & defence 136 1 38,560 65 Manufacturing 23,825 4,341 54 72 Mining 9,701 740 124 - Property 10,147 140 4 Property services & business services 8,914 5,630 4 4 - - - - - - - - 2,586 1,364 125 1,070 195 1,524 2,602 1,901 23 213 228 364 22,886 3,999 200 1,170 30 400 269 1,335 60 52,870 17 513 107 415 313 17,345 9,709 92,060 40,257 30,061 12,155 65,215 17,989 Accommodation, cafes & restaurants 2,066 5,911 - Agriculture, forestry & fishing 8,654 6,802 2 - Construction 3,144 3,479 59 - - 601 1,864 235 154 8,967 Transport & storage 10,325 2,621 51 2 Utilities 3 11,588 387 48 - Retail lending - Other 1,082 1,331 131 Total Exposure at Default 134,554 48,516 52,961 27,868 - - - 471,495 - 471,495 2,729 1,526 210 20,728 14,379 - 1,048 20,728 14,379 19,345 1,900 140 1,546 12 1,218 2,888 322 1,437 20 55 8,412 202 2,605 61,793 23,878 20,887 19,729 30,024 17,735 13,745 515,014 6,399 896,404 Services 1 Trade 2 8,364 16,741 5,351 9,272 449 38 78 14 Includes education, health & community services, cultural & recreational services and personal & other services. Includes wholesale trade and retail trade. Includes electricity, gas & water, and communication services. All business lending under $1m secured by residential property has been moved to the small business category ($2.0 billion of EAD and $0.6 billion of RWA as at 31 March 2015). For prior periods, business lending secured by residential property was recorded under residential mortgages. All residential mortgage exposures which are not business lending are now reported under the retail lending industry classification to align with our treatment of other consumer exposures such as credit cards and personal loans. 28 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures 30 September 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total 1 2 3 Accommodation, cafes & restaurants 2,320 5,676 - Agriculture, forestry & fishing 7,480 6,790 3 - Construction 2,879 3,513 6 992 1,266 491 1,729 183 179 9,841 17 17,285 Property 9,210 197 11 Property services & business services 8,085 5,774 5 14 Services 1 7,303 5,372 613 74 Trade 2 15,736 9,469 73 11 Transport & storage 8,047 2,537 91 3 Utilities 3 10,290 462 351 - Retail lending - Other 979 1,054 139 Exp at D 12 4 5 3 140 11,347 6,015 4,870 3,780 653 214 418,605 - 45 187 1,234 2,239 1,674 2,210 1,417 180 20,383 12,418 - 932 2 1 1 1,326 168 9,416 50,451 16 469 72,935 112 410 875 23,529 1,071 140 1,699 22,816 29 1,534 32,842 3,122 564 16,434 1,389 72 12,958 8,274 459,680 162 647 3,913 5 2 1 85 Finance & insurance 20,178 2,515 24,666 32,224 Government administration & defence 88 1 25,048 - Manufacturing 20,840 4,350 813 34 Mining 6,697 766 83 49 2,751 3,480 45 1,323 2,216 1,144 132 904 628 579 12,572 444 20,933 1,939 107,523 242 881 26,437 29 610 533 29,436 Includes education, health & community services, cultural & recreational services and personal & other services. Includes wholesale trade and retail trade. Includes electricity, gas & water, and communication services. Westpac Group March 2015 Pillar 3 report | 29 Pillar 3 report Credit risk exposures 31 March 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total 1 2 3 Accommodation, cafes & restaurants 1,977 5,846 - Agriculture, forestry & fishing 7,690 6,613 2 - Construction 2,868 3,491 10 1,003 1,298 496 1,768 241 178 9,741 Property 9,215 119 1 Property services & business services 7,597 5,804 4 16 Services 1 7,189 5,601 703 64 Trade 2 14,178 10,201 76 15 Transport & storage 8,697 2,720 95 6 Utilities 3 10,164 375 386 - Retail lending - Other 915 1,128 102 To Expos at Defa 113,9 49,7 40,5 32,7 141 11,152 6,052 4,897 3,847 666 228 402,714 - 439,7 187 1,181 2,187 1,649 2,239 1,445 174 19,949 12,148 - 1,177 19,9 12,1 16,7 32 605 596 1,169 189 45,987 16 362 118 386 850 1,039 140 1,123 32 1,934 1,270 513 1,639 69 8,122 157 527 52,8 22,7 17,5 28,853 9,714 68,033 23,014 22,405 32,522 15,412 13,035 442,933 4,006 818,7 Finance & insurance 15,963 2,618 14,216 32,507 Government administration & defence 112 1 24,389 - Manufacturing 20,197 4,448 642 40 Mining 7,209 765 54 - 2,802 3,542 47 1,376 2,170 1,065 129 917 59 624 521 546 21,555 1,644 844 17,430 12,486 93,656 25,522 Includes education, health & community services, cultural & recreational services and personal & other services. Includes wholesale trade and retail trade. Includes electricity, gas & water, and communication services. 30 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Exposure at Default by geography 1 1 31 March 2015 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Australia 93,488 44,513 43,482 22,676 425,202 20,728 10,814 16,909 55,455 21,700 16,561 771,528 New Zealand 19,995 4,003 4,803 856 45,813 3,565 2,436 6,338 2,178 89,987 Americas 4,905 4,531 37 9,473 Asia 13,244 145 4,290 480 823 18,982 Europe 2,922 9 2,931 Pacific 3,503 3,503 Total Exposure at Default 134,554 48,516 52,961 27,868 471,495 20,728 14,379 19,345 61,793 23,878 20,887 896,404 30 September 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Australia 86,725 44,646 29,997 26,428 414,359 20,383 9,160 14,479 53,960 20,481 14,651 735,269 New Zealand 17,250 3,830 4,746 1,017 40,632 3,258 2,210 5,228 1,628 79,799 Americas 3,796 16,139 133 20,068 Asia 9,461 864 4,975 490 727 16,517 Europe 2,900 12 2,912 Pacific 3,052 3,052 Total Exposure at Default 120,132 48,476 51,746 32,565 455,481 20,383 12,418 16,689 59,188 22,109 18,430 857,617 31 March 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Australia 80,053 45,728 28,354 29,431 397,830 19,949 8,862 14,468 47,950 21,253 14,120 707,998 New Zealand 18,151 4,002 4,982 1,829 41,426 3,286 2,316 4,880 1,449 82,321 Americas 3,716 6,009 102 9,827 Asia 9,366 1,222 1,356 509 711 13,164 Europe 2,685 43 24 2,752 Pacific 2,700 2,700 Total Exposure at Default 113,971 49,730 40,567 32,761 439,765 19,949 12,148 16,784 52,854 22,702 17,531 818,762 Geographic segmentation of exposures is based on the location of the office in which these items were booked. Westpac Group March 2015 Pillar 3 report | 31 Pillar 3 report Credit risk exposures Exposure at Default by residual contractual maturity 31 March 2015 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total On demand 14,568 3,192 614 4,350 34,781 20,728 3,271 2,552 613 69 1,455 86,193 < 12 months 28,607 10,469 14,079 5,955 6,712 240 1,461 16,608 6,108 684 90,923 1 to < 3 years 53,475 23,231 13,802 10,628 31,022 5,130 5,735 28,506 4,916 8,563 185,008 3 to < 5 years 30,101 6,612 10,502 5,523 12,343 3,540 4,755 11,053 2,713 3,526 90,668 > 5 years 7,803 5,012 13,964 1,412 386,637 2,198 4,842 5,013 10,072 6,659 443,612 Total Exposure at Default 134,554 48,516 52,961 27,868 471,495 20,728 14,379 19,345 61,793 23,878 20,887 896,404 30 September 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total On demand 12,646 3,171 1,086 3,481 33,677 20,383 3,030 2,090 569 147 1,467 81,747 < 12 months 23,744 10,788 24,973 5,266 6,973 216 1,442 16,292 7,323 595 97,612 1 to < 3 years 53,081 22,760 6,870 19,007 32,844 3,699 5,360 27,408 4,251 6,332 181,612 3 to < 5 years 24,770 6,395 6,755 4,169 11,263 3,413 4,416 9,864 3,201 3,578 77,824 > 5 years 5,891 5,362 12,062 642 370,724 2,060 3,381 5,055 7,187 6,458 418,822 Total Exposure at Default 120,132 48,476 51,746 32,565 455,481 20,383 12,418 16,689 59,188 22,109 18,430 857,617 31 March 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total On demand 8,210 3,346 934 1,547 32,118 19,949 3,046 2,155 551 157 1,509 73,522 < 12 months 26,935 11,323 14,533 7,478 7,265 198 1,447 15,505 8,196 610 93,490 1 to < 3 years 51,742 22,679 6,674 19,715 34,823 3,559 5,598 24,993 4,380 5,824 179,987 3 to < 5 years 21,557 6,584 5,324 3,912 10,421 3,375 4,276 7,283 2,727 3,437 68,896 > 5 years 5,527 5,798 13,102 109 355,138 1,970 3,308 4,522 7,242 6,151 402,867 Total Exposure at Default 113,971 49,730 40,567 32,761 439,765 19,949 12,148 16,784 52,854 22,702 17,531 818,762 32 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Impaired and past due loans The following tables disclose the crystallisation of credit risk as impairment and loss. Analysis of exposures 90 days past due not impaired, impaired loans, related provisions and actual losses is broken down by concentrations reflecting Westpac’s asset categories, industry and geography. Impaired and past due loans by portfolio 31 March 2015 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Items past 90 days not impaired 116 310 37 1,683 115 118 22 2,401 Impaired Loans 513 427 5 258 104 157 101 484 3 96 2,148 Specific Provisions for Impaired Loans 214 231 7 93 71 101 45 209 56 1,027 Specific Provisions to Impaired Loans 42 % 54 % 140 % 36 % 68 % 64 % 45 % 43 % 58 % 48 % Actual Losses for the 6 months ended 35 53 45 129 95 31 49 34 471 30 September 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Items past 90 days not impaired 81 249 1,607 2 87 181 34 2,241 Impaired Loans 504 467 5 238 78 129 94 738 3 84 2,340 Specific Provisions for Impaired Loans 251 215 5 94 58 83 42 255 44 1,047 Specific Provisions to Impaired Loans 50 % 46 % 100 % 39 % 74 % 64 % 45 % 35 % 52 % 45 % Actual Losses for the 12 months ended 171 234 121 288 190 72 174 52 1,302 31 March 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Items past 90 days not impaired 86 395 1,615 1 85 213 17 2,412 Impaired Loans 591 613 4 301 93 145 100 916 130 2,893 Specific Provisions for Impaired Loans 294 330 4 116 64 91 46 335 63 1,343 Specific Provisions to Impaired Loans 50 % 54 % 100 % 39 % 69 % 63 % 46 % 37 % 48 % 46 % Actual Losses for the 6 months ended 111 119 58 136 87 14 60 12 597 Westpac Group March 2015 Pillar 3 report | 33 Pillar 3 report Credit risk exposures Impaired and past due loans by industry classification 31 March 2015 $m Accommodation, cafes & restaurants Agriculture, forestry & fishing Construction Finance & insurance Government administration & defence Manufacturing Mining Property, Property services & business services Services 1 Trade 2 Transport & storage Utilities 3 Retail lending Other Total Items past 90 days not impaired 28 117 100 74 43 15 238 41 102 56 7 1,570 10 2,401 Impaired Loans 103 122 58 48 292 113 703 39 102 33 1 485 49 2,148 Specific Provisions for Impaired Loans 56 51 38 21 86 65 357 23 64 32 1 229 4 1,027 Specific Provisions to Impaired Loans 54% 42% 66% 44% 29% 58% 51% 59% 63% 97% 100% 47% 8% 48% Actual Losses for the 6 months ended 11 13 20 19 8 3 58 9 26 14 1 286 3 471 30 September 2014 $m Accommodation, cafes & restaurants Agriculture, forestry & fishing Construction Finance & insurance Government administration & defence Manufacturing Mining Property, Property services & business services Services 1 Trade 2 Transport & storage Utilities 3 Retail lending Other Total Items past 90 days not impaired 43 65 54 31 39 10 274 46 117 22 8 1,521 11 2,241 Impaired Loans 111 137 265 111 185 111 726 53 147 36 11 403 44 2,340 Specific Provisions for Impaired Loans 60 56 65 45 72 53 337 35 80 23 9 208 4 1,047 Specific Provisions to Impaired Loans 54% 41% 25% 41% 39% 48% 46% 66% 54% 64% 82% 52% 9% 45% Actual Losses for the 12 months ended 31 70 40 28 84 14 265 62 62 45 1 588 12 1,302 31 March 2014 $m Accommodation, cafes & restaurants Agriculture, forestry & fishing Construction Finance & insurance Government administration & defence Manufacturing Mining Property, Property services & business services Services 1 Trade 2 Transport & storage Utilities 3 Retail lending Other Total Items past 90 days not impaired 48 125 64 24 38 22 317 50 140 36 4 1,519 25 2,412 Impaired Loans 130 168 310 130 192 100 942 96 232 42 2 498 51 2,893 Specific Provisions for Impaired Loans 66 79 74 62 111 38 450 60 129 25 2 239 8 1,343 Specific Provisions to Impaired Loans 51% 47% 24% 48% 58% 38% 48% 63% 56% 60% 100% 48% 16% 46% Actual Losses for the 6 months ended 12 39 32 18 10 13 111 43 10 30 274 5 597 1 2 3 Includes education, health & community services, cultural & recreational services and personal & other services. Includes wholesale trade and retail trade. Includes electricity, gas & water, and communication services. 34 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Impaired and past due loans by geography 1 31 March 2015 $m Australia New Zealand Americas Asia Europe Pacific Total Items past 90 days not impaired 2,203 176 22 2,401 Impaired Loans 1,579 518 3 48 2,148 Specific Provisions for Impaired Loans 825 171 31 1,027 Specific Provisions to Impaired Loans 52% 33% 65% 48% Actual Losses for the 6 months ended 433 24 2 11 1 471 30 September 2014 $m Australia New Zealand Americas Asia Europe Pacific Total Items past 90 days not impaired 2,134 85 2 20 2,241 Impaired Loans 1,818 410 3 53 56 2,340 Specific Provisions for Impaired Loans 852 139 2 20 34 1,047 Specific Provisions to Impaired Loans 47% 34% 67% 38% 61% 45% Actual Losses for the 12 months ended 1,115 156 17 14 1,302 31 March 2014 $m Australia New Zealand Americas Asia Europe Pacific Total Items past 90 days not impaired 2,294 100 1 17 2,412 Impaired Loans 2,330 393 6 79 85 2,893 Specific Provisions for Impaired Loans 1,117 141 2 30 53 1,343 Specific Provisions to Impaired Loans 48% 36% 33% 38% 62% 46% Actual Losses for the 6 months ended 478 101 15 3 597 1 Geographic segmentation of exposures is based on the location of the office in which these items were booked. Westpac Group March 2015 Pillar 3 report | 35 Pillar 3 report Credit risk exposures Movement in provisions for impairment $m Collectively assessed provisions Balance at beginning of the period Provisions raised Write-offs Interest adjustment Exchange rate and other adjustments Closing balance Individually assessed provisions Balance at beginning of the period Provisions raised Write-backs Write-offs Interest adjustment Exchange rate and other adjustments Closing balance Total provisions for impairment losses on loans and credit commitments General reserve for credit losses adjustment Total provisions plus general reserve for credit losses 36 | Westpac Group March 2015 Pillar 3 report For the 6 months ended 31 March 2015 2,614 266 (330 ) 98 51 2,699 867 293 (155 ) (204 ) (12 ) 17 806 3,505 107 3,612 For the 6 months ended 30 September 2014 For the 6 months ended 31 March 2014 2,652 221 (371 ) 98 14 2,614 2,585 284 (331 ) 91 23 2,652 1,139 335 (189 (392 (11 (15 867 1,364 349 (244 ) (314 ) (23 ) 7 1,139 3,481 133 3,614 ) ) ) ) 3,791 92 3,883 Pillar 3 report Credit risk exposures Portfolios subject to the standardised approach This table presents exposures subject to the standardised approach. As at 31 March 2015, exposures subject to the standardised approach and categorised by risk weight are primarily Westpac Pacific, the Lloyds asset finance portfolios, Asian retail exposures, the margin lending portfolio, self-managed superannuation fund and reverse mortgages portfolios and some other small portfolios. Mark-to-market related credit risk and qualifying central clearing counterparties exposure 1 is also included in the standardised approach. 31 March 2015 Risk Weight % 0% 2% 20% 35% 50% 75% 100% 150% Default fund contributions 1 Mark-to-market related credit risk Total Total Exposure at Default $m 279 1,692 1,548 1,102 2,536 1,810 11,844 19 57 20,887 Risk Weighted Assets $m 34 310 386 1,268 1,358 11,844 28 288 10,840 26,356 30 September 2014 Risk Weight % 0% 2% 20% 35% 50% 75% 100% 150% Mark-to-market related credit risk Total Total Exposure at Default $m 245 72 1,554 1,008 2,266 1,385 11,880 20 18,430 Risk Weighted Assets $m 1 311 353 1,133 1,040 11,880 29 8,905 23,652 31 March 2014 Risk Weight % 0% 2% 20% 35% 50% 75% 100% 150% Mark-to-market related credit risk Total Total Exposure at Default $m 235 27 1,595 953 2,009 1,282 11,403 27 17,531 Risk Weighted Assets $m 1 319 334 1,004 961 11,403 40 7,257 21,319 1 Portfolios subject to the standardised approach now include exposures to qualifying central clearing counterparties used to clear derivative transactions. Derivative counterparty exposure and initial margin are risk weighted at 2%. Default fund contributions to qualifying central clearing counterparties are shown separately and are subject to higher risk weights. Westpac Group March 2015 Pillar 3 report | 37 Pillar 3 report Credit risk exposures Portfolios subject to supervisory risk-weights in the IRB approach Exposures subject to supervisory risk-weights in the IRB approach include assets categorised as specialised lending, where a regulatory capital ‘slotting’ approach applies. Westpac currently has property finance and project finance credit risk exposures categorised as specialised lending. The ‘Credit Risk Management’ section of this report describes the mapping of Westpac risk grades to both external rating equivalents and regulatory capital ‘slots’. Property finance 31 March 2015 $m Strong Good Satisfactory Weak Default Total Risk Weight 70% 90% 115% 250% NA Exposure at Default 16,086 27,970 8,148 437 792 53,433 Regulatory Expected Loss 64 224 228 35 434 985 Risk Weighted Assets 11,260 25,173 9,370 1,093 46,896 30 September 2014 $m Strong Good Satisfactory Weak Default Total Risk Weight 70% 90% 115% 250% NA Exposure at Default 10,852 28,048 10,719 649 905 51,173 Regulatory Expected Loss 43 224 300 52 453 1,072 Risk Weighted Assets 7,596 25,243 12,327 1,623 46,789 31 March 2014 $m Strong Good Satisfactory Weak Default Total Risk Weight 70% 90% 115% 250% NA Exposure at Default 8,881 25,036 11,123 711 1,156 46,907 Regulatory Expected Loss 36 200 311 57 579 1,183 Risk Weighted Assets 6,217 22,531 12,792 1,777 43,317 38 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Project finance 31 March 2015 $m Strong Good Satisfactory Weak Default Total Risk Weight 70% 90% 115% 250% NA Exposure at Default 5,402 2,396 361 197 4 8,360 Regulatory Expected Loss 22 19 10 16 2 69 Risk Weighted Assets 3,781 2,156 415 493 6,845 30 September 2014 $m Strong Good Satisfactory Weak Default Total Risk Weight 70% 90% 115% 250% NA Exposure at Default 5,266 2,121 223 208 197 8,015 Regulatory Expected Loss 21 17 6 17 99 160 Risk Weighted Assets 3,687 1,909 256 521 6,373 31 March 2014 $m Strong Good Satisfactory Weak Default Total Risk Weight 70% 90% 115% 250% NA Exposure at Default 4,120 1,135 264 208 220 5,947 Regulatory Expected Loss 16 9 7 17 111 160 Risk Weighted Assets 2,884 1,021 304 521 4,730 Westpac Group March 2015 Pillar 3 report | 39 Pillar 3 report Credit risk exposures Portfolios subject to IRB approaches Westpac has classified its transaction-managed exposures by the external credit rating to which the internally assigned credit risk grade aligns, as outlined in the ‘Credit Risk Management’ section of this report. Westpac’s internal rating system consists of more risk grades than does the range of external grades, and as a result, PD will vary from portfolio to portfolio for the same external grade. Westpac’s program-managed exposures are classified by PD band. The average PD within a band likewise varies from portfolio to portfolio. For non-defaulted exposures, regulatory expected loss is defined as the product of PD, LGD and EAD. For defaulted exposures, regulatory expected loss is based upon best estimates of loss. Expected loss is calculated at the facility level and then aggregated. However, multiplying the aggregates of the PD, LGD and EAD, as reported in the tables below (e.g. $133,847m x 0.84% x 45%), does not always equal the aggregate regulatory expected loss ($504m) because the product of two averages does not equal the average of a product. Corporate portfolio by external credit rating 31 March 2015 $m AAA AA A BBB BB B Other Subtotal Default Total 30 September 2014 $m AAA AA A BBB BB B Other Subtotal Default Total 31 March 2014 $m AAA AA A BBB BB B Other Subtotal Default Total 1 2 Outstandings 1 409 3,366 17,186 34,796 24,756 676 1,553 82,742 594 83,336 Committed Undrawn 2 16 2,726 11,858 23,703 11,907 301 537 51,048 32 51,080 Exposure at Default 426 6,137 29,143 58,495 36,582 976 2,088 133,847 707 134,554 Probability of Default 0.01% 0.03% 0.07% 0.22% 1.29% 3.70% 22.45% 0.84% NA 1.36% Loss Given Default 23% 37% 48% 48% 41% 40% 47% 45% 49% 45% Regulatory Expected Loss 1 11 62 187 15 228 504 297 801 Risk Weighted Assets 46 803 8,161 28,529 32,305 1,296 5,155 76,295 1,221 77,516 Average Risk Weight 11% 13% 28% 49% 88% 133% 247% 57% 173% 58% Outstandings 1 353 3,126 16,718 29,833 23,060 804 1,705 75,599 556 76,155 Committed Undrawn 2 1 1,652 11,215 19,672 10,543 135 605 43,823 36 43,859 Exposure at Default 354 4,816 27,946 49,486 33,578 939 2,310 119,429 703 120,132 Probability of Default 0.01% 0.03% 0.07% 0.22% 1.27% 3.70% 21.47% 0.91% NA 1.49% Loss Given Default 23% 38% 49% 48% 41% 37% 43% 46% 53% 46% Regulatory Expected Loss 1 10 51 173 13 227 475 352 827 Risk Weighted Assets 34 720 8,059 24,177 29,970 1,066 5,248 69,274 925 70,199 Average Risk Weight 10% 15% 29% 49% 89% 114% 227% 58% 132% 58% Outstandings 1 327 1,933 12,551 29,273 23,260 778 1,875 69,997 632 70,629 Committed Undrawn 2 64 1,391 10,250 20,437 10,211 198 542 43,093 55 43,148 Exposure at Default 391 3,324 22,800 49,717 33,554 977 2,419 113,182 789 113,971 Probability of Default 0.01% 0.03% 0.07% 0.21% 1.32% 3.70% 22.87% 1.02% NA 1.70% Loss Given Default 22% 44% 51% 47% 41% 41% 43% 46% 55% 46% Regulatory Expected Loss 9 51 180 15 252 507 390 897 Risk Weighted Assets 34 494 6,543 23,759 29,917 1,214 5,465 67,426 1,114 68,540 Average Risk Weight 9% 15% 29% 48% 89% 124% 226% 60% 141% 60% Outstandings are balances that were drawn down as at the reporting date and include certain off-balance sheet items. Committed undrawn balances are committed exposures that were not drawn down as at the reporting date. 40 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Business lending portfolio by external credit rating 31 March 2015 $m AAA AA A BBB BB B Other Subtotal Default Total 30 September 2014 $m AAA AA A BBB BB B Other Subtotal Default Total 31 March 2014 $m AAA AA A BBB BB B Other Subtotal Default Total 1 2 Outstandings 1 1 216 1,644 31,740 1,999 1,900 37,500 725 38,225 Outstandings 1 1 203 1,740 32,017 1,963 2,295 38,219 688 38,907 Outstandings 1 1 211 1,868 32,502 1,926 2,121 38,629 971 39,600 Committed Undrawn 2 54 88 724 9,035 266 201 10,368 24 10,392 Exposure at Default 55 303 2,360 40,637 2,264 2,097 47,716 800 48,516 Probability of Default 0.02% 0.09% 0.22% 1.62% 3.70% 23.71% 2.61% NA 4.21% Loss Given Default 60% 49% 27% 31% 32% 37% 31% 44% 31% Regulatory Expected Loss 1 211 27 185 424 321 745 Risk Weighted Assets 6 77 591 25,071 1,786 3,469 31,000 1,352 32,352 Average Risk Weight 11% 25% 25% 62% 79% 165% 65% 169% 67% Committed Undrawn 2 49 61 694 8,333 249 203 9,589 31 9,620 Exposure at Default 49 264 2,428 40,249 2,211 2,492 47,693 783 48,476 Probability of Default 0.02% 0.09% 0.22% 1.62% 3.70% 24.11% 2.81% NA 4.38% Loss Given Default 60% 47% 28% 31% 32% 37% 31% 44% 32% Regulatory Expected Loss 2 210 27 231 470 298 768 Risk Weighted Assets 5 74 636 25,007 1,777 4,185 31,684 1,441 33,125 Average Risk Weight 10% 28% 26% 62% 80% 168% 66% 184% 68% Committed Undrawn 2 51 63 821 8,829 233 209 10,206 39 10,245 Exposure at Default 52 273 2,675 41,173 2,157 2,328 48,658 1,072 49,730 Probability of Default 0.02% 0.09% 0.23% 1.60% 3.70% 23.83% 2.67% NA 4.77% Loss Given Default 60% 46% 28% 31% 33% 37% 31% 43% 32% Regulatory Expected Loss 2 211 28 215 456 419 875 Risk Weighted Assets 5 75 710 25,199 1,794 3,904 31,687 1,759 33,446 Average Risk Weight 9% 28% 27% 61% 83% 168% 65% 164% 67% Outstandings are balances that were drawn down as at the reporting date and include certain off-balance sheet items. Committed undrawn balances are committed exposures that were not drawn down as at the reporting date. Westpac Group March 2015 Pillar 3 report | 41 Pillar 3 report Credit risk exposures Sovereign portfolio by external credit rating 31 March 2015 $m AAA AA A BBB BB B Other Subtotal Default Total 30 September 2014 $m AAA AA A BBB BB B Other Subtotal Default Total 31 March 2014 $m AAA AA A BBB BB B Other Subtotal Default Total 1 2 Outstandings 1 17,175 29,238 839 612 43 47,907 47,907 Committed Undrawn 2 331 1,090 480 6 16 1,923 1,923 Exposure at Default 18,632 32,294 1,358 618 59 52,961 52,961 Probability of Default 0.01% 0.02% 0.05% 0.30% 1.89% 0.02% NA 0.02% Loss Given Default 5% 8% 20% 30% 45% 8% 8% Regulatory Expected Loss 2 2 2 Risk Weighted Assets 214 676 138 210 72 1,310 1,310 Average Risk Weight 1% 2% 10% 34% 122% 2% 2% Outstandings 1 13,177 31,609 830 878 13 46,507 46,507 Committed Undrawn 2 293 1,703 514 500 17 3,027 3,027 Exposure at Default 14,823 34,136 1,379 1,378 30 51,746 51,746 Probability of Default 0.01% 0.02% 0.05% 0.31% 2.18% 0.03% NA 0.03% Loss Given Default 5% 8% 19% 47% 33% 8% 8% Regulatory Expected Loss 3 3 3 Risk Weighted Assets 175 568 122 741 21 1,627 1,627 Average Risk Weight 1% 2% 9% 54% 70% 3% 3% Outstandings 1 13,828 19,692 1,087 938 47 35,592 35,592 Committed Undrawn 2 839 1,737 639 76 33 3,324 3,324 Exposure at Default 15,359 22,388 1,726 1,014 80 40,567 40,567 Probability of Default 0.01% 0.02% 0.06% 0.32% 1.50% 0.03% NA 0.03% Loss Given Default 5% 7% 22% 49% 34% 8% 8% Regulatory Expected Loss 3 3 3 Risk Weighted Assets 171 431 169 566 50 1,387 1,387 Average Risk Weight 1% 2% 10% 56% 62% 3% 3% Outstandings are balances that were drawn down as at the reporting date and include certain off-balance sheet items. Committed undrawn balances are committed exposures that were not drawn down as at the reporting date. 42 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Bank portfolio by external credit rating 31 March 2015 $m AAA AA A BBB BB B Other Subtotal Default Total 30 September 2014 $m AAA AA A BBB BB B Other Subtotal Default Total 31 March 2014 $m AAA AA A BBB BB B Other Subtotal Default Total 1 2 Outstandings 1 1,060 10,202 13,259 2,172 150 26,843 43 26,886 Committed Undrawn 2 25 291 172 488 488 Exposure at Default 1,060 10,525 13,746 2,344 150 27,825 43 27,868 Probability of Default 0.01% 0.03% 0.07% 0.23% 0.58% 0.07% NA 0.22% Loss Given Default 11% 56% 48% 39% 23% 49% 28% 49% Regulatory Expected Loss 2 5 2 9 5 14 Risk Weighted Assets 39 2,727 3,979 955 55 7,755 87 7,842 Average Risk Weight 4% 26% 29% 41% 37% 28% 202% 28% Outstandings 1 627 12,859 16,128 1,725 267 33 31,639 5 31,644 Committed Undrawn 2 26 212 141 379 379 Exposure at Default 627 13,410 16,357 1,866 267 33 32,560 5 32,565 Probability of Default 0.01% 0.03% 0.07% 0.22% 0.59% 40.01% 0.11% NA 0.12% Loss Given Default 12% 52% 45% 41% 21% 60% 47% 100% 47% Regulatory Expected Loss 2 5 2 8 17 5 22 Risk Weighted Assets 26 3,340 4,424 750 91 114 8,745 8,745 Average Risk Weight 4% 25% 27% 40% 34% 345% 27% 27% Outstandings 1 1,179 12,530 16,288 1,759 665 32,421 4 32,425 Committed Undrawn 2 22 301 14 337 337 Exposure at Default 1,179 12,551 16,588 1,773 665 1 32,757 4 32,761 Probability of Default 0.01% 0.03% 0.07% 0.26% 0.64% 11.85% 0.07% NA 0.09% Loss Given Default 10% 56% 49% 32% 21% 60% 49% 100% 49% Regulatory Expected Loss 2 6 1 1 10 5 15 Risk Weighted Assets 48 3,076 4,702 587 224 1 8,638 8,638 Average Risk Weight 4% 25% 28% 33% 34% 266% 26% 26% Outstandings are balances that were drawn down as at the reporting date and include certain off-balance sheet items. Committed undrawn balances are committed exposures that were not drawn down as at the reporting date. Westpac Group March 2015 Pillar 3 report | 43 Pillar 3 report Credit risk exposures Residential mortgages portfolio by PD band 31 March 2015 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 30 September 2014 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 31 March 2014 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 1 2 Outstandings 1 132,927 58,054 133,340 51,599 13,117 5,900 394,937 2,035 396,972 Committed Undrawn 2 34,628 7,627 29,877 3,506 432 39 76,109 13 76,122 Exposure at Default 167,613 65,369 162,371 54,642 13,513 5,947 469,455 2,040 471,495 Probability of Default 0.04% 0.17% 0.48% 1.43% 5.35% 22.58% 0.81% NA 1.24% Loss Given Default 20% 20% 20% 20% 20% 20% 20% 20% 20% Regulatory Expected Loss 13 22 159 160 148 268 770 146 916 Risk Weighted Assets 3,990 4,875 25,063 18,524 9,667 6,899 69,018 4,319 73,337 Average Risk Weight 2% 7% 15% 34% 72% 116% 15% 212% 16% Outstandings 1 195,607 20,167 113,862 33,941 11,978 4,824 380,379 2,008 382,387 Committed Undrawn 2 38,453 10,638 21,946 2,875 407 21 74,340 14 74,354 Exposure at Default 234,197 30,506 135,138 36,410 12,364 4,851 453,466 2,015 455,481 Probability of Default 0.07% 0.18% 0.46% 1.49% 4.78% 29.07% 0.75% NA 1.19% Loss Given Default 20% 20% 20% 21% 20% 20% 20% 20% 20% Regulatory Expected Loss 33 11 126 112 121 277 680 131 811 Risk Weighted Assets 8,919 2,485 20,960 12,782 8,372 5,219 58,737 4,334 63,071 Average Risk Weight 4% 8% 16% 35% 68% 108% 13% 215% 14% Outstandings 1 186,935 18,417 109,763 35,710 11,966 4,964 367,755 1,947 369,702 Committed Undrawn 2 37,112 9,424 21,361 2,954 416 19 71,286 20 71,306 Exposure at Default 224,191 27,533 130,463 38,272 12,357 4,990 437,806 1,959 439,765 Probability of Default 0.07% 0.18% 0.45% 1.50% 4.70% 29.56% 0.78% NA 1.22% Loss Given Default 20% 20% 20% 21% 21% 20% 20% 20% 20% Regulatory Expected Loss 31 10 121 118 119 288 687 150 837 Risk Weighted Assets 8,527 2,260 20,175 13,483 8,302 5,325 58,072 4,107 62,179 Average Risk Weight 4% 8% 15% 35% 67% 107% 13% 210% 14% Outstandings are balances that were drawn down as at the reporting date. Committed undrawn balances are committed exposures that were not drawn down as at the reporting date. 44 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Australian credit cards portfolio by PD band 31 March 2015 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 30 September 2014 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 31 March 2014 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 1 2 Outstandings 1 2,222 847 2,656 2,297 1,397 690 10,109 118 10,227 Committed Undrawn 2 11,500 2,763 2,573 2,852 708 83 20,479 15 20,494 Exposure at Default 7,542 2,282 4,167 3,948 1,934 736 20,609 119 20,728 Probability of Default 0.08% 0.19% 0.64% 1.55% 4.42% 22.60% 1.70% NA 2.26% Loss Given Default 76% 75% 77% 76% 75% 75% 76% 76% 76% Regulatory Expected Loss 5 3 21 47 64 123 263 73 336 Risk Weighted Assets 318 183 910 1,689 1,697 1,389 6,186 246 6,432 Average Risk Weight 4% 8% 22% 43% 88% 189% 30% 207% 31% Outstandings 1 2,158 846 2,751 2,256 1,330 628 9,969 90 10,059 Committed Undrawn 2 11,296 2,792 2,741 2,624 630 77 20,160 10 20,170 Exposure at Default 7,383 2,301 4,378 3,752 1,808 671 20,293 90 20,383 Probability of Default 0.08% 0.19% 0.64% 1.54% 4.41% 22.33% 1.61% NA 2.04% Loss Given Default 76% 75% 77% 77% 75% 75% 76% 77% 76% Regulatory Expected Loss 5 3 22 44 60 112 246 58 304 Risk Weighted Assets 313 185 964 1,607 1,586 1,271 5,926 143 6,069 Average Risk Weight 4% 8% 22% 43% 88% 189% 29% 159% 30% Outstandings 1 2,098 811 2,766 2,069 1,403 695 9,842 108 9,950 Committed Undrawn 2 11,166 2,650 2,687 2,230 687 86 19,506 12 19,518 Exposure at Default 7,324 2,198 4,384 3,282 1,911 742 19,841 108 19,949 Probability of Default 0.09% 0.19% 0.65% 1.53% 4.43% 22.72% 1.73% NA 2.26% Loss Given Default 76% 75% 76% 77% 75% 75% 76% 77% 76% Regulatory Expected Loss 5 3 22 39 64 125 258 65 323 Risk Weighted Assets 311 176 964 1,401 1,686 1,413 5,951 237 6,188 Average Risk Weight 4% 8% 22% 43% 88% 190% 30% 219% 31% Outstandings are balances that were drawn down as at the reporting date. Committed undrawn balances are committed exposures that were not drawn down as at the reporting date. Westpac Group March 2015 Pillar 3 report | 45 Pillar 3 report Credit risk exposures Other retail portfolio by PD band 31 March 2015 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 30 September 2014 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 31 March 2014 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 1 2 Outstandings 1 3 198 2,663 5,162 2,254 879 11,159 164 11,323 Outstandings 1 1 156 1,583 4,645 2,768 1,334 10,487 134 10,621 Outstandings 1 2 187 1,615 4,609 2,534 1,273 10,220 147 10,367 Committed Undrawn 2 2 700 1,807 803 733 395 4,440 8 4,448 Exposure at Default 4 684 3,585 5,749 2,915 1,274 14,211 168 14,379 Probability of Default 0.09% 0.15% 0.56% 1.67% 4.59% 24.02% 3.92% NA 5.04% Loss Given Default 76% 44% 68% 60% 74% 68% 65% 68% 65% Regulatory Expected Loss 14 59 103 227 403 94 497 Risk Weighted Assets 1 111 1,916 4,461 3,335 1,949 11,773 322 12,095 Average Risk Weight 25% 16% 53% 78% 114% 153% 83% 192% 84% Committed Undrawn 2 1 582 1,531 913 721 331 4,079 7 4,086 Exposure at Default 2 570 2,264 5,140 2,918 1,388 12,282 136 12,418 Probability of Default 0.08% 0.15% 0.54% 1.66% 5.13% 22.80% 4.60% NA 5.64% Loss Given Default 76% 44% 66% 59% 70% 67% 63% 68% 63% Regulatory Expected Loss 8 52 106 214 380 76 456 Risk Weighted Assets 92 1,153 3,885 3,220 2,070 10,420 233 10,653 Average Risk Weight 16% 51% 76% 110% 149% 85% 171% 86% Committed Undrawn 2 2 671 1,697 692 685 285 4,032 7 4,039 Exposure at Default 3 656 2,402 4,926 2,688 1,324 11,999 149 12,148 Probability of Default 0.08% 0.15% 0.54% 1.63% 5.18% 23.61% 4.55% NA 5.72% Loss Given Default 76% 44% 65% 60% 70% 67% 63% 67% 63% Regulatory Expected Loss 9 50 98 212 369 83 452 Risk Weighted Assets 1 105 1,217 3,759 2,959 1,988 10,029 236 10,265 Average Risk Weight 17% 16% 51% 76% 110% 150% 84% 158% 85% Outstandings are balances that were drawn down as at the reporting date. Committed undrawn balances are committed exposures that were not drawn down as at the reporting date. 46 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Small business portfolio by PD band 31 March 2015 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 30 September 2014 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 31 March 2014 $m 0.0 to 0.10 0.10 to 0.25 0.25 to 1.0 1.0 to 2.5 2.5 to 10.0 10.0 to 99.99 Subtotal Default Total 1 2 Outstandings 1 279 1,793 5,176 5,958 1,302 676 15,184 251 15,435 Committed Undrawn 2 561 1,042 1,400 804 108 22 3,937 8 3,945 Exposure at Default 787 2,845 6,633 6,678 1,411 701 19,055 290 19,345 Probability of Default 0.07% 0.19% 0.57% 1.44% 5.34% 25.29% 2.06% NA 3.53% Loss Given Default 37% 25% 41% 35% 27% 31% 35% 42% 35% Regulatory Expected Loss 1 15 33 21 58 128 95 223 Risk Weighted Assets 50 298 2,164 2,925 818 705 6,960 654 7,614 Average Risk Weight 6% 10% 33% 44% 58% 101% 37% 226% 39% Outstandings 1 544 818 5,394 4,921 1,214 430 13,321 213 13,534 Committed Undrawn 2 654 493 1,301 591 96 8 3,143 7 3,150 Exposure at Default 1,152 1,316 6,752 5,450 1,311 440 16,421 268 16,689 Probability of Default 0.08% 0.20% 0.60% 1.45% 5.57% 27.06% 1.92% NA 3.50% Loss Given Default 29% 26% 41% 37% 27% 34% 36% 45% 36% Regulatory Expected Loss 1 16 29 20 42 108 105 213 Risk Weighted Assets 65 149 2,208 2,472 566 344 5,804 507 6,311 Average Risk Weight 6% 11% 33% 45% 43% 78% 35% 189% 38% Outstandings 1 291 825 4,652 6,195 812 480 13,255 229 13,484 Committed Undrawn 2 555 546 1,311 781 89 8 3,290 8 3,298 Exposure at Default 796 1,376 6,025 6,911 902 491 16,501 283 16,784 Probability of Default 0.07% 0.24% 0.60% 1.50% 5.58% 28.82% 2.03% NA 3.69% Loss Given Default 33% 26% 44% 33% 30% 34% 36% 43% 36% Regulatory Expected Loss 1 15 33 16 49 114 105 219 Risk Weighted Assets 47 171 2,130 2,817 433 389 5,987 521 6,508 Average Risk Weight 6% 12% 35% 41% 48% 79% 36% 184% 39% Outstandings are balances that were drawn down as at the reporting date and include certain off-balance sheet items. Committed undrawn balances are committed exposures that were not drawn down as at the reporting date. Westpac Group March 2015 Pillar 3 report | 47 Pillar 3 report Credit risk exposures Credit Quality The improvement in quality of the portfolio seen over Full Year 2014 continued into First Half 2015, with a further reduction in stressed assets, the emergence of new problem facilities remaining low, and the additional resolution and work-out of impaired facilities. Impairment charges and actual losses are low, with provisioning levels being broadly maintained. The institutional and commercial segments continue to perform well as customers remain cautious and protective of their balance sheets. The consumer portfolios also remain sound, with low interest rates and the strong property market combining with continuing cautious consumer behaviour to offset the modest pace of economic growth and rising unemployment, to contribute to the performance of the portfolio. Actual losses 31 March 2015 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Write-offs direct 1 25 12 137 119 20 2 316 Legal and recovery costs 5 2 1 4 2 14 Write-offs from provisions 1 38 30 34 3 10 50 39 204 Recoveries (4) (7) (1) (8) (29) (7) (7) (63) Actual Losses for the 6 months ended 35 53 45 129 95 31 49 34 471 30 September 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Write-offs direct 2 64 26 303 226 50 4 4 679 Legal and recovery costs 8 4 3 6 2 23 Write-offs from provisions 1 184 176 96 30 164 56 706 Recoveries (15) (14) (1) (15) (40) (11) (10) (106) Actual Losses for the 12 months ended 171 234 121 288 190 72 174 52 1,302 31 March 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Write-offs direct 1 48 11 144 102 11 2 1 320 Legal and recovery costs 4 1 1 4 1 11 Write-offs from provisions 1 113 75 47 10 54 15 314 Recoveries (3) (8) (8) (16) (8) (5) (48) Actual Losses for the 6 months ended 111 119 58 136 87 14 60 12 597 1 Write-offs from individually assessed provisions. 48 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk exposures Regulatory loss estimates and actual losses The table below compares regulatory credit risk estimates used in the calculation of risk weighted assets to the average of actual outcomes observed since the time of Advanced IRB accreditation for each portfolio. Predicted parameters represent average internally predicted long-run probabilities of default for non-defaulted obligors at the start of each year, as well as downturn estimates of loss (or the regulatory minimum where required). They are averaged using data from the financial years beginning at the time of Advanced IRB accreditation (2008 for most portfolios) and compared to observed outcomes over the same period. 1 Predicted parameters are updated annually and utilise observed outcomes from prior periods as a key input. In order to appropriately include the most recent half-year period, its outcomes have been annualised. Default rates At the start of each year, a predicted default probability is assigned to all non-defaulted obligors. This is averaged over the portfolio and reported as the predicted default rate. This is compared to the actual default rate for the year. Both predicted and observed annual default rates are then averaged over the observation period. Loss Given Default (LGD) The LGD analysis excludes recent defaults in order to allow sufficient time for the full workout of the facility and hence an accurate LGD to be determined. The workout period varies by portfolio: a two year workout period is assumed for transaction-managed and residential mortgage lending; and a one year period for other program-managed portfolios. Exposure at Default (EAD) The EAD variance compares the observed EAD to the predicted EAD one year prior to default. For transaction-managed portfolios, predicted EAD is currently mandated to be 100% of committed exposures. The observed EAD is averaged for all obligors that defaulted over the observation period. 31 March 2015 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total 1 2 3 Regulatory Expected Loss 2 801 745 2 14 916 336 497 223 1,054 NA NA 4,588 Default rate Predicted 2.24% 2.25% 0.23% 0.60% 0.68% 1.51% 4.24% 2.52% NA NA NA Observed 1.09% 1.55% 0.24% 0.59% 1.50% 2.75% 1.68% 2.26% NA NA Loss Given Default Predicted Observed 50% 39% 34% 19% 20% 6% 76% 60% 71% 56% 33% 22% NA 23% NA NA NA NA Observed EAD variance to Predicted 3 (27%) (11%) (3%) (4%) (9%) (7%) NA NA Predicted parameters are not available for specialised lending, securitisation or standardised exposures because risk weights for these portfolios do not rely on credit estimates and are shown as NA in the tables above. Includes regulatory expected losses for defaulted and non-defaulted exposures. A negative outcome indicates observed EAD was lower than predicted EAD, which can happen because exposures were managed down prior to default or off-balance sheet items or undrawn limits were not fully drawn prior to default. Westpac Group March 2015 Pillar 3 report | 49 Pillar 3 report Credit risk exposures 30 September 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Regulatory Expected Loss 1 827 768 3 22 811 304 456 213 1,232 NA NA 4,636 Default rate Predicted 2.27% 2.25% 0.24% 0.51% 0.67% 1.51% 4.42% 2.53% NA NA NA NA 31 March 2014 $m Corporate Business lending Sovereign Bank Residential mortgages Australian credit cards Other retail Small business Specialised lending Securitisation Standardised Total Regulatory Expected Loss 1 897 875 3 15 837 323 452 219 1,343 NA NA 4,964 Default rate Predicted 2.27% 2.25% 0.24% 0.51% 0.67% 1.55% 4.74% 2.50% NA NA NA NA 1 2 Observed 1.19% 1.59% 0.59% 1.43% 2.86% 1.67% 2.51% NA NA NA Loss Given Default Predicted Observed 51% 39% 34% 21% 20% 6% 76% 57% 70% 53% 33% 21% NA 27% NA NA NA NA NA NA Observed EAD variance to Predicted 2 (28%) (12%) (4%) (4%) (9%) (7%) NA NA NA Observed 1.17% 1.61% 0.62% 1.44% 2.88% 1.67% 2.57% NA NA NA Loss Given Default Predicted Observed 50% 46% 34% 20% 20% 6% 76% 58% 71% 54% 33% 21% NA 29% NA NA NA NA NA NA Observed EAD variance to Predicted 2 (28%) (11%) (3%) (3%) (8%) (7%) NA NA NA Includes regulatory expected losses for defaulted and non-defaulted exposures A negative outcome indicates observed EAD was lower than predicted EAD, which can happen because exposures were managed down prior to default or off-balance sheet items or undrawn limits were not fully drawn prior to default. 50 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk mitigation This section describes the way in which Westpac reduces its credit risk by using financial collateral, guarantees or credit derivatives for Corporate, Sovereign and Bank asset classes. Approach Westpac recognises credit risk mitigation only when formal legal documentation is held that establishes Westpac’s direct, irrevocable and unconditional recourse to the collateral or to an unrelated credit risk mitigation provider. The minimum standards to be met so that credit risk mitigation can be recognised are embodied in Westpac’s credit rules and policies. All proposals for risk mitigation require a formal submission confirming compliance with these standards, for approval by an authorised credit officer. Authorised credit officer approval is also required for existing risk mitigation to be discontinued or withdrawn. The amount of credit risk mitigation recognised is the face value of the mitigation instrument, which is adjusted by the application of discounts for any maturity and/or currency mismatch with the underlying obligation, so that a discounted amount is recognised when calculating the residual exposure after mitigation. For regulatory capital purposes Westpac addresses credit risk mitigation as follows: exposures secured by cash, eligible financial collateral or where protection is bought via credit linked notes, provided the proceeds are invested in either cash or eligible financial collateral, are included at the gross value, with risk weighted assets for the portion thus secured calculated by applying a 5% LGD 1 ; exposures that are mitigated by way of eligible guarantees, standby letters of credit or similar instruments, where Westpac has direct recourse to an unrelated third party on default or non-payment by the customer, or credit protection bought via credit default swaps where Westpac is entitled to recover either full principal or credit losses on occurrence of defined credit events, are treated under double default rules where the protection provider is a financial firm rated A/A2 or better; and exposures that are mitigated by way of guarantees, letters of credit, credit default swaps or similar instruments, where the eligibility criteria for double default treatment are not met, are treated under the substitution approach. Structure and organisation Westpac Institutional Bank is responsible for managing the overall risk in Westpac’s corporate, sovereign and bank credit portfolios, and uses a variety of instruments, including securitisation and single name credit default swaps, to manage loan and counterparty risk. Westpac Institutional Bank has a dedicated portfolio trading desk with the specific mandate of actively monitoring the underlying exposure and the offsetting hedge book. Risk reporting Monthly reports are issued, which detail risk mitigated facilities where the mitigation instruments mature within 30 to 90 days. An independent operational unit supervises this process to ensure that the relevant business and credit risk management units’ decisions are taken and actions implemented in a timely fashion. Specific reporting is maintained and monitored on the matching of hedges with underlying facilities, with any adjustments to hedges (e.g. unwinds or extensions) managed dynamically. Netting Risk reduction by way of current account set-offs is recognised for exposures to creditworthy customers domiciled in Australia and New Zealand only. Customers are required to enter into formal agreements giving Westpac the unfettered right to set-off gross credit and debit balances in their nominated accounts to determine Westpac’s net exposure within each of these two jurisdictions. Cross-border set-offs are not permitted. Close-out netting is undertaken for off-balance sheet financial market transactions with counterparties with whom Westpac has entered into master netting agreements which allow such netting in specified jurisdictions. Close-out netting effectively aggregates pre-settlement risk exposure at time of default, thus reducing overall exposure. Collateral valuation and management Westpac revalues financial markets and associated collateral positions on a daily basis to monitor the net risk position, and has formal processes in place so that calls for collateral top-up or exposure reduction are made promptly. An independent operational unit has responsibility for monitoring these positions. The collateralisation arrangements are documented via the Credit Support Annex of the International Swaps and Derivatives Association (ISDA) master agreement for derivatives transactions and Global Master Repurchase Agreement (GMRA) for repurchase transactions. 1 Excludes collateralised derivative transactions. Westpac Group March 2015 Pillar 3 report | 51 Pillar 3 report Credit risk mitigation Types of collateral taken Westpac recognises the following as eligible collateral for credit risk mitigation by way of risk reduction: cash (primarily in Australian dollars (AUD), New Zealand dollars (NZD), US dollars (USD), Canadian dollars (CAD), British pounds (GBP), or Euro (EUR)); bonds issued by Australian Commonwealth, State and Territory governments or their Public Sector Enterprises, provided these attract a zero risk-weighting under APS112; securities issued by other specified AA-/Aa3 or better rated sovereign governments; and credit-linked notes (provided the proceeds are invested in cash or other eligible collateral described above). Guarantor/credit derivative counterparties For mitigation by risk transfer, Westpac only recognises unconditional irrevocable guarantees or standby letters of credit issued by, or eligible credit derivative protection bought from, the following entities provided they are not related to the underlying obligor: sovereign entities; public sector entities in Australia and New Zealand; authorised deposit taking institutions and overseas banks; and other entities with a minimum risk grade equivalent of A-/A3. Market and/or credit risk concentrations When Westpac uses credit risk mitigation techniques to reduce counterparty exposure, limits are applied to both gross (i.e. pre-mitigation) and net exposure. Furthermore, exposure is recorded against the provider of any credit risk mitigation and a limit framework prevents excessive concentration to such counterparties. All exposures to risk transfer counterparties are separately approved under Westpac’s usual credit approval process, with the amount and tenor of mitigation recorded against the counterparty in Westpac’s exposure management systems. The credit quality of mitigation providers is reviewed regularly in accordance with Westpac’s usual periodic review processes. Market risks arising from credit risk mitigation activities are managed similarly to market risks arising from any other trading activities. These risks are managed under either the market risk banking book or trading book frameworks as appropriate. 52 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Credit risk mitigation Total exposure covered by collateral, credit derivatives and guarantees 31 March 2015 $m Corporate Sovereign Bank Total Total before mitigation 134,631 52,961 27,791 215,383 Impact of credit mitigation 1 (77) 77 - Total after mitigation 134,554 52,961 27,868 215,383 Total exposure for which some credit risk is mitigated 4,365 241 3,087 7,693 Eligible Financial Collateral 1,892 96 1,115 3,103 Credit Risk Mitigants Covered by Guarantees 53 110 180 343 Covered by Credit Derivatives 24 44 68 30 September 2014 $m Corporate Sovereign Bank Total Total before mitigation 120,235 51,746 32,462 204,443 Impact of credit mitigation 1 (103) 103 - Total after mitigation 120,132 51,746 32,565 204,443 Total exposure for which some credit risk is mitigated 4,671 254 7,740 12,665 Eligible Financial Collateral 1,774 50 3,203 5,027 Credit Risk Mitigants Covered by Guarantees 46 175 149 370 Covered by Credit Derivatives 57 150 207 31 March 2014 $m Corporate Sovereign Bank Total Total before mitigation 114,030 40,567 32,702 187,299 Impact of credit mitigation 1 (59) 59 - Total after mitigation 113,971 40,567 32,761 187,299 Total exposure for which some credit risk is mitigated 4,044 194 3,320 7,558 Eligible Financial Collateral 1,829 25 1,000 2,854 Credit Risk Mitigants Covered by Guarantees 5 150 128 283 Covered by Credit Derivatives 54 149 203 1 Impact of credit mitigation under the substitution approach. Westpac Group March 2015 Pillar 3 report | 53 Pillar 3 report Counterparty credit risk This section describes Westpac’s exposure to credit risk arising from derivative and treasury products. Approach Westpac’s process for managing derivatives and counterparty credit risk is based on its assessment of the potential future credit risk Westpac is exposed to when dealing in derivatives products and securities financing transactions. Westpac simulates future market rates by imposing shocks on market prices and rates, and assessing the effect these shocks have on the mark-to-market value of Westpac’s positions. These simulated exposure numbers are then checked against pre-settlement risk limits that are set at the counterparty level. Structure and organisation The Financial Markets and Treasury Risk management team is charged with managing the counterparty credit exposure arising from derivatives and treasury products. Risk reporting Westpac actively reassesses and manages the counterparty credit exposure arising from derivatives business. A daily simulation of potential future counterparty credit exposure taking into account movements in market rates is conducted. This simulation quantifies credit exposure using the Derivative Risk Equivalent (DRE) methodology and exposure is loaded into a credit limit management system. Limit excesses are reported to credit managers and actioned within strict timeframes. Market related credit risk There are two components to the regulatory capital requirements for credit risk arising from derivative products: Capital to absorb losses arising from the default of derivative counterparties. This has been included as part of the “IRB Approach” credit capital requirements since Westpac’s Basel II accreditation. Capital to absorb losses arising from mark-to-market valuation movements resulting from changes in the credit quality of derivative counterparties. These valuation movements are referred to as credit valuation adjustments and this risk is sometimes labelled as credit valuation adjustment or CVA risk. Westpac refers to this requirement as mark-to-market related credit risk. Risk mitigation Mitigation is achieved in a number of ways: the limit system monitors for excesses of the pre-determined limits, with any excesses being immediately notified to credit officers; Westpac has collateral agreements with its largest counterparties. The market value of the counterparty’s portfolio is used to recalculate the credit position at each end of day, with collateral being called for when certain pre-set limits are met; and credit derivatives are used to mitigate credit exposure against certain counterparties. In addition, the following approaches are also used as appropriate to mitigate credit risk: incorporating right-to-break in Westpac’s contracts, effectively reducing the tenor of the risk; signing netting agreements, thus allowing the exposure across a portfolio of trades to be netted; regular marking to market and settling of the foreign exchange components of foreign exchange reset contracts; and downgrade triggers in documentation that, if breached, require the counterparty to provide collateral. Counterparty derivative exposures and limits The risk management methodology for counterparty derivatives exposures is similar to the credit methodology for transaction-managed loans. The main difference is in the estimation of the exposure for derivatives which is based on the DRE methodology. DRE is a credit exposure measure for derivative trades which is calibrated to a ‘loan-equivalent’ exposure. Counterparty credit limits are approved on an uncommitted and unadvised basis by authorised credit officers. This follows an evaluation of each counterparty’s credit worthiness and establishing an agreed credit risk appetite for the nature and extent of prospective business. 54 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Counterparty credit risk Wrong-way risk exposures Westpac defines wrong-way risk as exposure to a counterparty which is adversely correlated with the credit quality of that counterparty. With respect to credit derivatives, wrong-way risk refers to credit protection purchased from a counterparty highly correlated to the reference obligation. Wrong-way risk exposures using credit derivatives are controlled by only buying protection from highly rated counterparties. These transactions are assessed by an authorised credit officer who has the right to decline any transaction where they feel there is an unacceptably high correlation between the ability to perform under the trade and the performance of the underlying counterparty. Consequences of a downgrade in Westpac’s credit rating 1 Where an outright threshold and minimum transfer amount are agreed, there will not be any impact on the amount of collateral posted by Westpac in the event of a credit rating downgrade. Where the threshold and minimum transfer amount are tiered according to credit rating, the impact of Westpac being downgraded below its current credit rating would be: for a one notch downgrade, postings of $120 million; while for a two notch downgrade, postings would be $159 million. 1 Credit rating downgrade postings are cumulative. Westpac Group March 2015 Pillar 3 report | 55 Pillar 3 report Securitisation A securitisation is a financial structure where the cash flow from a pool of assets is used to service obligations to at least two different tranches or classes of creditors (typically holders of debt securities), with each class or tranche reflecting a different degree of credit risk (i.e. one class of creditors is entitled to receive payments from the pool before another class of creditors). Securitisation transactions are generally grouped into two broad categories: traditional or true sale securitisations, which involve the transfer of ownership of the underlying asset pool to a third party; and synthetic transactions, where the ownership of the pool remains with the originator and only the credit risk of the pool is transferred to a third party, using credit derivatives or guarantees. Covered bond transactions, in which bonds issued by Westpac are guaranteed by assets held in a special purpose vehicle, are not considered to be securitisation transactions. Approach Westpac’s involvement in securitisation activities ranges from a seller of its own assets to an investor in third-party transactions and includes transaction arrangement, the provision of securitisation services and funding for clients, including clients requiring access to capital markets. Securitisation of Westpac originated assets - Securitisation is a funding, liquidity and capital management tool. It allows Westpac the ability to liquefy a pool of assets and increase Westpac’s wholesale funding capacity. Westpac may provide arm’s length facilities to the securitisation vehicles. The facilities entered into typically include the provision of liquidity, funding, underwriting and derivative contracts. Westpac has entered into on balance sheet securitisation transactions whereby loans originated by Westpac are transformed into stocks of saleable mortgage backed securities and held in the originating bank’s liquid asset portfolio. These ‘self securitisations’ do not change risk weighted assets 1 . No securitisation transactions for Westpac originated assets are classified as a resecuritisation. Securitisation in the management of Westpac’s credit portfolio - Westpac uses securitisation, including portfolio credit default swaps, to manage its corporate and institutional loan and counterparty credit risk portfolios. Single name credit default swaps are not treated as securitisations but as credit risk mitigation facilities. Transactions are entered into to manage counterparty credit risk or concentration risks. Provision of securitisation services, including funding and management of conduit vehicles - Westpac provides services to clients wishing to access asset-backed financing through securitisation. Those services include access to the Asset Backed Commercial Paper Market through Waratah and Crusade conduits, the Westpac-sponsored securitisation conduits; the provision of warehouse and term funding of securitised assets on Westpac’s balance sheet; and arranging Asset-Backed Bond issues. Westpac provides facilities to Waratah and the Crusade securitisation conduit including liquidity, funding, underwriting, credit enhancement and derivative contracts. Se curitisation facilities provided by Westpac include resecuritisation exposures which are securitisation exposures in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is itself a securitisation exposure. Westpac’s role in the securitisation process Securitisation activity Role played by Westpac Securitisation of Westpac originated assets Arranger Note holder Asset originator Trust manager Bond distributor Swap provider Facility provider Servicer Securitisation in the management of Westpac’s credit portfolio Provision of securitisation services including funding and management of conduit vehicles Hedger - protection purchaser Investor - protection seller Investor - purchaser of securitisation exposures Arranger Liquidity facility provider Bond distributor Swap counterparty Credit enhancement provider Servicer Funder 1 The credit exposures of the underlying loans are measured in accordance with APS113. 56 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Securitisation Key Objectives Securitisation of Westpac originated assets - The securitisation of Westpac’s own assets provides funding diversity, and is a core tool of liquidity management. Securitisation in the management of Westpac’s credit portfolio - Westpac acts as principal in transactions and will buy and sell protection in order to meet its portfolio management objectives. Westpac also purchases securitisation exposures in order to earn income. All securitisation activity must follow Westpac’s credit approval processes. Provision of securitisation services including funding and management of conduit vehicles - Westpac receives market-based fees in return for its services as servicer, swap counterparty, arranger and facility provider and program fees, interest margins and bond distribution fees on warehouse and term funding facilities. Structure and organisation Securitisation of Westpac originated assets - Westpac’s Treasury operations are responsible for all Westpac originated securitisation activity including funding, liquidity and capital management. Securitisation in the management of Westpac’s credit portfolio - Westpac’s exposure arising from securitisation, including portfolio hedging, is managed by Westpac Institutional Bank (WIB) and integrated within Westpac’s standard risk reporting and management systems. Provision of securitisation services including funding and management of conduit vehicles - These services are provided by WIB and include the provision of liquidity, credit enhancement, funding and derivative facilities and servicer and arranger services. Risk reporting Credit exposure - Funding, liquidity, credit enhancement and redraw facilities, swap arrangements and counterparty exposures are captured and monitored in key source systems along with other facilities/derivatives entered into by Westpac. Operational risk exposure - The operational risk review process for Westpac includes the identification of risks, controls and key performance indicators in relation to all securitisation activity and services provided by Westpac or any of its subsidiaries. Market risk exposure - Exposures arising from transactions with securitisation conduits and other counterparties are captured as part of Westpac’s traded and non-traded market risk reporting and limit management framework. Liquidity risk exposure - Exposure to, and the impact of, securitisation transactions are managed under the Liquidity Risk Management Framework and are integrated into routine reporting for capital and liquidity positions, net interest margin analysis, balance sheet forecasting and funding scenario testing. The annual funding plan incorporates consideration of overall liquidity risk limits and the securitisation of Westpac originated assets. Risk mitigation Securitisation of Westpac originated assets - The interest rate and basis risks generated by Westpac’s hedging arrangements to each securitisation trust are captured and managed within Westpac’s asset and liability management framework. The liquidity risk generated by Westpac’s liquidity and redraw facilities to each securitisation trust is captured and managed in accordance with Westpac’s liquidity management policies along with all other contingent liquidity facilities. Securitisation in the management of Westpac’s credit portfolio - Transactions are approved in accordance with Westpac’s credit risk mitigation policy (see pages 51 and 52). Provision of securitisation services including funding and management of conduit vehicles - All securitisation transactions are approved within the context of a securitisation credit policy that sets detailed transaction-specific guidelines that regulate servicer counterparty risk appetite, transaction tenor, asset class, third party credit support and portfolio quality. This policy is applied in conjunction with other credit and market risk policies that govern the provision of derivative and other services that support securitisation transactions. In particular, credit hedging transactions are subject to credit risk mitigation policy (see pages 51 and 52). Any interest rate or currency hedging is subject to counterparty credit risk management (see pages 54 and 55) and market risk management (see pages 67 and 68) policies and processes. Westpac Group March 2015 Pillar 3 report | 57 Pillar 3 report Securitisation Regulatory capital approaches The regulatory capital treatment of all securitisation exposures is undertaken in accordance with APS120. Consistent with APS120 the approaches employed include the Ratings-Based Approach (RBA), where APRA provides risk-weights that are matched to external credit ratings, and the Internal Assessment Approach (IAA), which largely mirrors the RBA. The Supervisory Formula (SF), which determines a capital charge based on the attributes of the securitisation structure through an industry standard formula with pre-determined parameters, is employed under specific conditions where the RBA and IAA are deemed inappropriate. Securitisation of Westpac originated assets - The assets sold by Westpac to a securitisation trust are excluded from Westpac’s calculation of credit risk weighted assets if capital relief is sought and the requirements of APS120 are satisfied 1 . Westpac cannot rely on external rating when risk weighting its exposure to these trusts and must use the Supervisory Formula approach instead. In instances where insufficient risk transfer is achieved by the transaction for regulatory purposes, the capital calculation is performed on the underlying asset pool while the facilities provided to such securitisation vehicles do not attract regulatory capital charges. Securitisation in the management of Westpac’s credit portfolio - Unless Westpac makes an election under APS120, the underlying assets subject to synthetic securitisation are excluded from Westpac’s calculation of credit risk weighted assets. They are replaced with the credit risk weight of the applicable securitisation instrument, usually credit default swaps or underlying cash collateral. Westpac applies the RBA and the SF when determining regulatory capital treatments for securitisation exposures arising from the management of its credit portfolio. Provision of securitisation services including funding and management of conduit services - Westpac uses the RBA and the IAA methodology when determining regulatory capital requirements for the facilities associated with the provision of securitisation services to the Waratah securitisation conduit and facilities for the provision of warehouse and term funding of securitised assets on Westpac’s balance sheet. Regulatory capital for the Crusade securitisation conduit is determined in accordance with APS113. The regulatory capital treatment of derivatives for securitisation exposures is currently undertaken in accordance with APS113.The difference in regulatory capital calculations using APS120 and APS113 is immaterial. The External Credit Assessment Institutions that can be used by Westpac for resecuritisations are Standard & Poor’s, Moody’s and Fitch. Westpac’s accounting policies for securitisation activities Securitisation of Westpac originated assets - The assets sold by Westpac to a securitisation trust remain on Westpac’s balance sheet for accounting purposes. Securitisation in the management of Westpac’s credit portfolio - For risk mitigation using synthetic securitisation, the underlying assets remain on Westpac’s balance sheet for accounting purposes. The accounting treatment of the assets will depend on their nature. They could include loans and receivables, available for sale securities or derivatives. The most common form of synthetic securitisation is via a credit default swap, which is treated as a derivative and recognised in the profit and loss statement at fair value. For investment in securitisation exposures, if the instrument includes a credit default swap, the exposure will be fair valued through the profit and loss statement. Other securitisation exposures will be fair valued through the balance sheet unless Westpac makes an election at the time of purchase to fair value through the profit and loss statement. Provision of securitisation services including funding and management of conduit vehicles - Fee income from these services is recognised on an accrual basis. Liquidity and funding facilities are treated as commitments to provide finance, with fee and margin income recognised on an accrual basis. Warehouse and term funding facilities are treated as loans. 1 Including the requirements to achieve capital relief. 58 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Securitisation Banking book summary of assets securitised by Westpac This table shows outstanding Banking book securitisation assets and assets intended to be securitised 1 for Westpac originated assets by underlying asset type. It includes the amount of impaired and past due assets, along with any losses recognised by Westpac during the current period. Securitised assets are held in securitisation trusts. Trusts which meet requirements to achieve capital relief do not form part of the Level 2 consolidated group. Self securitisation trusts remain consolidated at Level 2 and the assets transferred to these trusts are risk weighted in accordance with APS113. 31 March 2015 $m Residential mortgages Credit cards Auto and equipment finance Business lending Investments in ABS Other Total Total outstanding securitised by ADI Traditional Synthetic Securitisation 2 Securitisation 96,685 2,309 98,994 - Assets intended to be securitised - Impaired loans 9 10 19 Past due assets 356 3 359 Westpac recognised losses - 30 September 2014 $m Residential mortgages Credit cards Auto and equipment finance Business lending Investments in ABS Other Total Total outstanding securitised by ADI Traditional Synthetic Securitisation 2 Securitisation 88,828 1,891 90,719 - Assets intended to be securitised - Impaired loans 12 11 23 Past due assets 301 7 308 Westpac recognised losses - 31 March 2014 $m Residential mortgages Credit cards Auto and equipment finance Business lending Investments in ABS Other Total Total outstanding securitised by ADI Traditional Synthetic Securitisation 2 Securitisation 92,337 2,470 94,807 - Assets intended to be securitised - Impaired loans 12 13 25 Past due assets 297 10 307 Westpac recognised losses - Banking book summary of total Westpac sponsored third party assets securitised This table represents Banking book third party assets where Westpac acts a sponsor. $m Residential mortgages Credit cards Auto and equipment finance Business lending Investments in ABS Other Total 1 2 31 March 2015 674 145 182 1,001 30 September 2014 1,426 306 1,732 31 March 2014 1,495 332 1,827 Represents securitisation activity from the end of the reporting period to the disclosure date of this report. Includes self securitisation assets of $84,966m ($78,064m at 30 September 2014 and $81,725m at 31 March 2014). Westpac Group March 2015 Pillar 3 report | 59 Pillar 3 report Securitisation Banking book summary of securitisation activity by asset type This table shows assets transferred into securitisation schemes by underlying asset type (ADI originated) for the relevant period. For the 6 months ended 31 March 2015 $m Residential mortgages Credit cards Auto and equipment finance Business lending Investments in ABS Other Total Amount securitised 18,511 1,091 19,602 Recognised gain or loss on sale - For the 12 months ended 30 September 2014 $m Residential mortgages Credit cards Auto and equipment finance Business lending Investments in ABS Other Total Amount securitised 33,116 1,302 34,418 Recognised gain or loss on sale - For the 6 months ended 31 March 2014 $m Residential mortgages Credit cards Auto and equipment finance Business lending Investments in ABS Other Total Amount securitised 25,135 1,130 26,265 Recognised gain or loss on sale - 60 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Securitisation Banking book summary of on and off-balance sheet securitisation by exposure type 31 March 2015 $m Securities Liquidity facilities Funding facilities Underwriting facilities Lending facilities Warehouse facilities Total On balance sheet Securitisation retained Securitisation purchased 8,213 7,836 12 7,848 8,213 Off-balance sheet 1,854 5,773 69 121 7,817 Total Exposure at Default 8,213 1,854 13,609 81 121 23,878 30 September 2014 $m Securities Liquidity facilities Funding facilities Underwriting facilities Lending facilities Warehouse facilities Total On balance sheet Securitisation retained Securitisation purchased 7,036 1 7,737 13 7,751 7,036 Off-balance sheet 3,010 4,086 147 79 7,322 Total Exposure at Default 7,036 3,011 11,823 160 79 22,109 31 March 2014 $m Securities Liquidity facilities Funding facilities Underwriting facilities Lending facilities Warehouse facilities Total On balance sheet Securitisation retained Securitisation purchased 6 6,804 1 7,817 15 7,839 6,804 Off-balance sheet 3,984 3,752 157 166 8,059 Total Exposure at Default 6,810 3,985 11,569 172 166 22,702 Westpac Group March 2015 Pillar 3 report | 61 Pillar 3 report Securitisation Banking book securitisation exposure at default by risk weight band 31 March 2015 Total Exposure Exposure Risk Weighted Assets $m Less than or equal to 10% Greater than 10 - 20% Greater than 20 - 30% Greater than 30 - 50% Greater than 50 - 75% Greater than 75 - 100% Greater than 100 - 250% Greater than 250 - 425% Greater than 425 - 650% Other Deductions Total Securitisation 8,982 12,045 779 110 304 70 2 7 22,299 Resecuritisation 368 1,142 69 1,579 30 September 2014 at Default 8,982 12,045 1,147 1,252 373 70 2 7 23,878 Total Exposure Exposure Securitisation 637 1,968 296 79 304 175 13 3,472 Resecuritisation 148 742 69 959 Risk Weighted Assets $m Less than or equal to 10% Greater than 10 - 20% Greater than 20 - 30% Greater than 30 - 50% Greater than 50 - 75% Greater than 75 - 100% Greater than 100 - 250% Greater than 250 - 425% Greater than 425 - 650% Other Deductions Total Securitisation 7,746 10,446 649 293 301 70 2 5 7 19,519 Resecuritisation 559 1,883 148 2,590 31 March 2014 at Default 7,746 10,446 1,208 2,176 449 70 2 5 7 22,109 Total Exposure Exposure Securitisation 547 1,667 261 218 301 175 13 63 3,245 Resecuritisation 228 1,224 148 1,600 Risk Weighted Assets $m Less than or equal to 10% Greater than 10 - 20% Greater than 20 - 30% Greater than 30 - 50% Greater than 50 - 75% Greater than 75 - 100% Greater than 100 - 250% Greater than 250 - 425% Greater than 425 - 650% Other Deductions Total Securitisation 7,544 10,413 645 288 298 60 2 11 8 19,269 62 | Westpac Group March 2015 Pillar 3 report Resecuritisation 676 2,208 549 3,433 at Default 7,544 10,413 1,321 2,496 847 60 2 11 8 22,702 Securitisation 534 1,662 256 215 298 150 13 138 3,266 Resecuritisation 271 1,435 549 2,255 Total Risk Weighted Assets 637 1,968 444 821 373 175 13 4,431 Total Risk Weighted Assets 547 1,667 489 1,442 449 175 13 63 4,845 Total Risk Weighted Assets 534 1,662 527 1,650 847 150 13 138 5,521 Pillar 3 report Securitisation Banking book securitisation exposure deducted from capital 1 31 March 2015 $m Securities Liquidity facilities Funding facilities Underwriting facilities Credit enhancements Derivative transactions Total Exposures deducted from Common equity Tier 1 capital 7 7 30 September 2014 $m Securities Liquidity facilities Funding facilities Underwriting facilities Credit enhancements Derivative transactions Total Exposures deducted from Common equity Tier 1 capital 7 7 31 March 2014 $m Securities Liquidity facilities Funding facilities Underwriting facilities Credit enhancements Derivative transactions Total Exposures deducted from Common equity Tier 1 capital 8 8 Banking book securitisation subject to early amortisation treatment There is no securitisation exposure in the Banking book that is subject to early amortisation treatment for 31 March 2015. Banking book resecuritisation exposure subject to credit risk mitigation (CRM) As at 31 March 2015 resecuritisation exposures eligible for CRM was $1,579 million with nil CRM taken against these exposures ($2,590 million eligible for CRM and nil CRM taken as at 30 September 2014). Banking book resecuritisation exposure to guarantors Westpac has no third party guarantors providing guarantees for securitised assets, principal or interest repayments for 31 March 2015. Trading book summary of assets securitised by Westpac There are no outstanding securitisation exposures for Westpac originated assets held in the Trading book as at 31 March 2015. 1 Excludes securitisation start-up costs. Westpac Group March 2015 Pillar 3 report | 63 Pillar 3 report Securitisation Trading book summary of total Westpac sponsored third party assets securitised There are no third party assets held in the Trading book where Westpac is responsible for the establishment of the securitisation program and subsequent management as at 31 March 2015. Trading book summary of securitisation activity by asset type There is no originated securitisation activity in the trading book for the 12 months to 31 March 2015. Trading book aggregated amount of exposure securitised by Westpac and subject to APS116 Capital Adequacy: Market Risk This table shows Westpac originated outstanding securitisation exposure held in the Trading book. These exposures are risk weighted under APS116. 31 March 2015 $m Securities Liquidity facilities Funding facilities Underwriting facilities Credit enhancements Derivative transactions Total Standard Method Traditional Synthetic Securitisation Securitisation 21 21 - IMA Method Traditional Synthetic Securitisation Securitisation - 30 September 2014 $m Securities Liquidity facilities Funding facilities Underwriting facilities Credit enhancements Derivative transactions Total Standard Method Traditional Synthetic Securitisation Securitisation 21 21 - IMA Method Traditional Synthetic Securitisation Securitisation - 31 March 2014 $m Securities Liquidity facilities Funding facilities Underwriting facilities Credit enhancements Derivative transactions Total Standard Method Traditional Synthetic Securitisation Securitisation 75 75 - IMA Method Traditional Synthetic Securitisation Securitisation - 64 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Securitisation Trading book summary of on and off-balance sheet securitisation by exposure type 1 31 March 2015 $m Securities Liquidity facilities Funding facilities Underwriting facilities Lending facilities Warehouse facilities Credit enhancements Basis swaps Other derivatives Total On balance sheet Securitisation retained Securitisation purchased 21 200 21 200 Off-balance sheet 42 110 152 Total Exposure at Default 221 42 110 373 30 September 2014 $m Securities Liquidity facilities Funding facilities Underwriting facilities Lending facilities Warehouse facilities Credit enhancements Basis swaps Other derivatives Total On balance sheet Securitisation retained Securitisation purchased 22 726 22 726 Off-balance sheet 32 137 169 Total Exposure at Default 748 32 137 917 31 March 2014 $m Securities Liquidity facilities Funding facilities Underwriting facilities Lending facilities Warehouse facilities Credit enhancements Basis swaps Other derivatives Total On balance sheet Securitisation retained Securitisation purchased 75 593 75 593 Off-balance sheet 36 193 229 Total Exposure at Default 668 36 193 897 Trading book securitisation exposure subject to specific risk There is no Trading book securitisation exposure subject to specific risk for 31 March 2015. Trading book securitisation exposure subject to APS120 Securitisation specific risk by risk weight band There is no Trading book securitisation exposure subject to APS120 specific risk for 31 March 2015. Trading book capital requirements for securitisation exposures subject to internal models approach (IMA) by risk classification There is no Trading book capital requirement for securitisation subject to IMA for 31 March 2015. 1 EAD associated with Trading book securitisation is not included in the EAD by Major Type on page 26. Trading book securitisation exposure is captured and risk weighted under APS116. Westpac Group March 2015 Pillar 3 report | 65 Pillar 3 report Securitisation Trading book capital requirements for securitisation regulatory capital approaches by risk weight band There is no Trading book capital requirement for securitisation subject to regulatory capital approaches for 31 March 2015. Trading book securitisation exposure deducted from capital There is no Trading book capital deduction for 31 March 2015. Trading book securitisation subject to early amortisation treatment There is no securitisation exposure in the Trading book that is subject to early amortisation treatment for 31 March 2015. Trading book resecuritisation exposure subject to CRM Westpac has no resecuritisation exposure subject to CRM at 31 March 2015. Trading book resecuritisation by guarantor creditworthiness Westpac has no third party guarantors providing guarantees for securitised assets, principal or interest repayments for 31 March 2015. 66 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Market risk Westpac’s exposure to market risk arises out of its Financial Markets and Treasury trading activities. This is quantified for regulatory capital purposes using both the standard method and the internal model approach, details of which are provided below. Approach Trading activities are controlled by a Board-approved market risk framework that incorporates a Board-approved value at risk (VaR) limit. VaR is the primary mechanism for measuring and controlling market risk. Market risk is managed using VaR and structural risk limits (including volume limits and basis point value limits) in conjunction with scenario analysis and stress testing. Market risk limits are allocated to business management based upon business strategies and experience, in addition to the consideration of market liquidity and concentration risk. All trades are fair valued daily, using independently sourced or reviewed rates. Rates that have limited independent sources are reviewed at least on a monthly basis. Financial Markets’ trading activity represents dealings that encompass book running and distribution activity. The types of market risk arising from these activities include interest rate, foreign exchange, commodity, equity price, credit spread and volatility risk. Treasury’s trading activity represents dealings that include the management of interest rate, foreign exchange and credit spread risks associated with the wholesale funding book, liquid asset portfolios and foreign exchange repatriations. Treasury also manage banking book risk which is discussed in the Interest Rate Risk in the Banking Book section. VaR limits Market risk arising from trading book activities is primarily measured using VaR based on an historical simulation methodology. Westpac estimates VaR as the potential loss in earnings from adverse market movements and is calculated over a 1-day time horizon to a 99% confidence level using 1 year of historical data. VaR takes account of all material market variables that may cause a change in the value of the trading portfolio, including interest rates, foreign exchange rates, price changes, volatility, and the correlation between these variables. In addition to the Board approved market risk VaR limit for trading activities, RISKCO has approved separate VaR sub-limits for the trading activities of Financial Markets and Treasury. Backtesting Daily backtesting of VaR results is performed to ensure that model integrity is maintained. A review of both the potential profit and loss outcomes is also undertaken to monitor any skew created by the historical data. Stress testing Daily stress testing against pre-determined scenarios is carried out to analyse potential losses beyond the 99% confidence level. An escalation framework around selective stress tests is approved by RISKCO. Profit and loss notification framework The BRCC has approved a profit and loss notification framework. Included in this framework are levels of escalation in accordance with the size of the profit or loss. Triggers are applied to both a 1-day and a rolling 20-day cumulative total. Risk reporting Daily monitoring of current exposure and limit utilisation is conducted independently by risk managers in the Financial Markets & Treasury Risk (FMTR) team, who monitor market risk exposures against VaR and structural limits. Daily VaR position reports are produced by risk type, by product lines and by geographic region. These are supplemented by structural risk reporting, advice of profit and loss trigger levels and stress test escalation trigger points. Model accreditation has been granted by APRA for the use of an internal model for the determination of regulatory capital for the key classes of interest rate (general market), foreign exchange, commodity and equity risks (including equity specific risk). Under the model, regulatory capital is derived from both the current VaR window (market data is based upon the most recent 12 months of historical data) and a Stressed VaR window (12 months of market data that includes a period of significant financial stress), where these VaR measures are calculated as a 10-day, 99th percentile, one-tailed confidence interval. Specific risk refers to the variations in individual security prices that cannot be explained by general market movements, and event and default risk. Interest rate specific risk capital (specific issuer risk) is calculated using the Standard method and is added to the VaR regulatory capital measure. Westpac Group March 2015 Pillar 3 report | 67 Pillar 3 report Market risk Risk mitigation Market risk positions are managed by the trading desks consistent with delegated trading and product authorities. Risks are consolidated into portfolios based on product and risk type. Risk management is carried out by qualified personnel with varying levels of seniority commensurate with the nature and scale of market risks under management. The following controls allow monitoring by management: trading authorities and responsibilities are clearly delineated at all levels; a structured system of limits and reporting of exposures; all new products and significant product variations undergo a rigorous approval process to identify business risks prior to launch; models that are used to determine risk or profit and loss for Westpac’s accounts are independently reviewed; duties are segregated so that employees involved in the origination, processing and valuation of transactions operate under separate reporting lines, minimising the opportunity for collusion; and legal counsel approves documentation for compliance with relevant laws and regulations. In addition, internal audit independently review compliance with policies, procedures and limits. Market Risk regulatory capital and risk weighted assets The Internal model approach uses VaR and Stressed VaR, while the Standard approach is used for interest rate specific risk. $m Internal model approach Standard approach Total capital required Risk weighted assets 68 | Westpac Group March 2015 Pillar 3 report 31 March 2015 478 154 632 7,900 30 September 2014 541 177 718 8,975 31 March 2014 652 197 849 10,610 Pillar 3 report Market risk VaR by risk type 31 March 2015 $m Interest rate risk Foreign exchange risk Equity risk Commodity risk Other market risks Diversification benefit Net market risk 1 High 18.1 6.4 0.5 5.7 6.7 NA 22.2 For the 6 months ended Low Average 7.0 10.7 0.5 2.8 0.1 0.2 1.7 3.1 4.0 5.8 NA (7.4 ) 9.7 15.2 Period end 8.6 1.7 0.3 3.2 4.0 (7.2 ) 10.5 30 September 2014 $m Interest rate risk Foreign exchange risk Equity risk Commodity risk Other market risks Diversification benefit Net market risk 1 High 30.7 5.8 0.6 2.9 11.1 NA 40.2 For the 6 months ended Low Average 6.3 16.9 1.3 3.1 0.1 0.3 1.3 1.9 5.4 8.5 NA (7.8 ) 9.5 22.9 Period end 6.7 3.2 0.2 2.2 5.7 (7.9 ) 10.1 31 March 2014 $m Interest rate risk Foreign exchange risk Equity risk Commodity risk Other market risks Diversification benefit Net market risk 1 High 24.6 7.6 0.7 2.9 11.3 NA 35.8 For the 6 months ended Low Average 9.1 14.4 1.2 2.9 0.2 0.4 1.7 2.1 7.7 9.9 NA (8.7 ) 12.8 21.0 Period end 16.7 3.2 0.3 1.7 10.4 (8.1 ) 24.2 High 42.5 15.9 1.5 16.9 20.8 NA 55.2 For the 6 months ended Low Average 26.6 33.3 1.2 5.4 0.4 0.9 9.2 12.6 15.4 18.7 NA (31.2 ) 27.8 39.7 Period end 27.9 2.3 0.9 9.2 15.4 (26.5 ) 29.2 For the 6 months ended Average 45.8 4.9 0.5 11.4 26.8 (34.7 ) 54.7 Period end 38.9 4.7 0.6 11.4 19.7 (29.6 ) 45.7 Stressed VaR by risk type 31 March 2015 $m Interest rate risk Foreign exchange risk Equity risk Commodity risk Other market risks Diversification benefit Net market risk 1 30 September 2014 $m Interest rate risk Foreign exchange risk Equity risk Commodity risk Other market risks Diversification benefit Net market risk 1 1 High 61.2 12.5 1.0 14.2 30.7 NA 78.7 Low 33.6 1.7 0.2 8.9 19.0 NA 43.5 The Highs (Lows) by risk types will likely be determined by different days in the period. As such, the sum of these figures will not reflect the High (Low) net market risk, which reflects the highest (lowest) aggregate risk position in the period. Westpac Group March 2015 Pillar 3 report | 69 Pillar 3 report Market risk 31 March 2014 $m Interest rate risk Foreign exchange risk Equity risk Commodity risk Other market risks Diversification benefit Net market risk 1 High 53.2 17.1 2.3 11.2 33.4 NA 72.6 For the 6 months ended Low Average 30.5 41.1 1.1 4.5 0.3 0.9 5.4 8.3 26.3 30.8 NA (34.3 ) 39.2 51.2 Period end 42.5 4.9 0.3 9.5 31.0 (34.7 ) 53.5 Back-testing results The following graph gives a comparison of actual profit and loss to VaR over the 6 months ended 31 March 2015. Each point on the graph represents 1 day’s trading profit or loss. This result is placed on the graph relative to the associated VaR utilisation. The downward sloping line represents the point where a loss is equal to VaR utilisation. Any point below this line represents a back-test exception (i.e. where the loss is greater than the VaR). 1 The Highs (Lows) by risk types will likely be determined by different days in the period. As such, the sum of these figures will not reflect the High (Low) net market risk, which reflects the highest (lowest) aggregate risk position in the period. 70 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Operational risk Operational risk is defined at Westpac as 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 and reputation risk. Westpac’s operational risk definition is aligned to APS115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk. Approach Westpac has been accredited to use the AMA in accordance with APS115. 1 Westpac’s operational risk is measured and managed in accordance with the policies and processes defined in its Operational Risk Management Framework. Westpac’s Operational Risk Management Framework The Operational Risk Management Framework outlines a consistent approach to the: identification, measurement and management of operational risks that may impede Westpac’s ability to achieve its strategic objectives and vision; identification and escalation of operational risk and compliance incidents in order to minimise potential financial losses, reputational damage and shareholder, community, employee and regulatory impacts; and calculation and allocation of operational risk capital. The key components of Westpac’s operational risk management framework are listed below: Governance - The governance structure provides clearly defined roles and responsibilities for overseeing and reviewing operational risk exposure and management. The Board and BRCC are supported by committees including RISKCO that monitor operational risk profiles and the effectiveness of operational risk management practices, including operational risk capital and reporting. Risk and Control Management (RCM) - RCM is a forward-looking tool used to manage Westpac’s operational risk profile by identifying and assessing key operational risks and the adequacy of controls, with management action planning to reduce risks that are outside risk appetite. Key Indicators (KIs) - The framework defines requirements and processes for KIs, which are objective measures used by management to monitor the operational risk and control environment. Incident Management - Incident management involves identifying operational risk incidents, capturing them in the central operational risk system and escalating them to appropriate levels of management. Early identification and ownership supports the ability to minimise any immediate impacts of the incidents, address the root causes, and devise and monitor management actions required to strengthen the control environment. Data - The framework includes principles and processes to ensure the integrity of operational risk data used to support management decision-making and calculate and allocate capital. The principles apply to the governance, input and capture, reconciliation and validation, correction, reporting and storage of operational risk data. Operational risk data is subject to independent validation on a regular basis. Scenario Analysis - Scenario analysis is used to assess the impacts of extreme but plausible loss events on Westpac and is an input to the calculation of operational risk capital. Operational Risk of Change Programs - The framework defines requirements for understanding and managing the operational risk implications of projects. Reporting - Regular reporting of operational risk information to governance bodies and senior management is used to support timely and proactive management of operational risk and enable transparent and formal oversight of the risk and control environment. Control Assurance - The framework defines the process and requirements for providing assurance over the effectiveness of the operational risk control environment, including the testing and assessment of the design and operating effectiveness of controls. 1 APRA approved the AMA approach for the calculation of Lloyds operational risk RWA from December 2014. For periods prior to December 2014 Westpac applied the partial use approach, as approved by APRA, and the business acquired from Lloyds was measured under the Standardised approach as defined under APS114 Capital Adequacy: Standardised Approach to Operational Risk. Westpac Group March 2015 Pillar 3 report | 71 Pillar 3 report Operational risk AMA capital model overview Operational risk regulatory capital is calculated on a quarterly basis. The capital model is reviewed annually to re-assess the appropriateness of the model framework, methodology, assumptions and parameters in light of changes in the operational risk profile and industry developments. Westpac’s operational risk capital is based on three data sources: Internal Loss Data – operational risk losses experienced by Westpac; External Loss Data – operational risk losses experienced by other financial institutions; and Scenario Data – potential losses from extreme but plausible events relevant to Westpac. These data sources together represent the internal and external operational risk profile, across the spectrum of operational risk losses, from both historical and forward-looking perspectives. The model combines these data sources to produce a loss distribution. Expected loss offsets and risk mitigation No adjustments or deductions are currently made to Westpac’s measurement of operational risk regulatory capital for the mitigating impacts of insurance or expected operational risk losses. Operational Risk regulatory capital and risk weighted assets $m Advanced measurement approach Standardised approach Total capital required Risk weighted assets 72 | Westpac Group March 2015 Pillar 3 report 31 March 2015 2,411 2,411 30,136 30 September 2014 2,308 39 2,347 29,340 31 March 2014 2,239 39 2,278 28,474 Pillar 3 report Equity risk Equity risk is defined as the potential for financial loss arising from movements in equity values. The disclosures in this section exclude investments in equities made by Westpac subsidiaries outside the regulatory Level 2 group. Structure and organisation Any changes to the portfolio and transactional limits for Westpac’s direct equity investments are approved under delegated authority from the Westpac Board. The BRCC also approves the Equity Risk Management framework. Approach Westpac has established a comprehensive set of policies defining the management of equity risk. These policies are reviewed and approved annually. Risk mitigation Westpac does not use financial instruments to mitigate its exposure to equities in the banking book. Banking book positions Equity underwriting and warehousing risk - As a financial intermediary Westpac underwrites listed and unlisted equities. Equity warehousing activities require the acquisition of assets in anticipation of refinancing through a combination of senior, mezzanine and capital market debt and listed, unlisted and privately placed equity. Investment securities - Westpac undertakes, as part of the ordinary course of business, certain investments in strategic equity holdings and over time the nature of underlying investments will vary. Measurement of equity securities - Equity securities are generally carried at their fair value. Fair value for equities that have a quoted market price (in an active market) is determined based upon current bid prices. If a market for a financial asset is not active, fair value is determined based upon a valuation technique. This includes the use of recent arms-length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants to price similar instruments. In the event that the fair value of an unlisted security cannot be measured reliably, these investments are measured at cost. Where the investment is held for long term strategic purposes, these investments are accounted for either as available for sale, with changes in fair value being recognised in equity, or at fair value through profit and loss. Other related matters For the periods reported the book value of certain unlisted investments are measured at cost because the fair value cannot be reliably measured. These investments represent minority interests in companies for which active markets do not exist and quote prices are not available. For all other equity exposures book value equals fair value. Fair value should not differ to the listed stock price. Should a listed stock price not be available, it is estimated using the techniques referred to above. Risk reporting Westpac manages equity risk in two ways, VaR limits and investment limits: A VaR limit (in conjunction with structural limits) is used to manage equity risk in the equity trading business in Financial Markets. This limit is a sub-limit of the BRCC approved VaR limit for Financial Markets trading activities; and Investment exposures are reported quarterly. Westpac Group March 2015 Pillar 3 report | 73 Pillar 3 report Equity risk Book value of listed equity exposures by industry classification $m Business services Property Finance and insurance Construction Mining Total 31 March 2015 41 41 30 September 2014 37 37 31 March 2014 51 51 31 March 2015 221 14 235 30 September 2014 7 174 16 197 31 March 2014 12 175 31 218 31 March 2015 13 30 September 2014 13 31 March 2014 13 (11) (2) (13) (5) (2) (7) 14 32 46 Book value of unlisted equity exposures by industry classification $m Business services Property Finance and insurance Construction Mining Total Gains/losses $m Cumulative realised gains (losses) Total unrealised gains (losses) through profit & loss Total unrealised gains (losses) through equity Total latent revaluation gains (losses) Amounts included in Tier 1 / Tier 2 capital 74 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Interest rate risk in the banking book (IRRBB) Interest Rate Risk in the Banking Book (IRRBB) is the risk to interest income arising from a mismatch between the duration of assets and liabilities that arises in the normal course of banking activities. Approach The banking book activities that give rise to market risk include lending activities, balance sheet funding and capital management. Interest rate risk, currency risk and funding and liquidity risk are inherent in these activities. Treasury’s Asset & Liability Management (ALM) unit is responsible for managing market risk arising from Westpac’s banking book activity. All material regions, business lines and legal entities are included in Westpac’s IRRBB framework. Asset and liability management ALM manages the structural interest rate mismatch associated with the transfer priced balance sheet, including the investment of Westpac’s capital to its agreed benchmark duration. A key risk management objective is to achieve reasonable stability of Net Interest Income (NII) over time. These activities are performed under the oversight of RISKCO and the FMTR unit. Net Interest Income sensitivity NII sensitivity is managed in terms of the net interest income-at-risk (NaR) modelled over a three year time horizon to a 99% confidence interval for movements in wholesale market interest rates. A simulation model is used to calculate Westpac’s potential NaR. The NII simulation framework combines the underlying statement of financial position data with assumptions about runoff and new business, expected repricing behaviour and changes in wholesale market interest rates. Simulations using a range of interest rate scenarios are used to provide a series of potential future NII outcomes. The interest rate scenarios modelled include those projected using historical market interest rate volatility as well as 100 and 200 basis point shifts up and down from current market yield curves. Additional stressed interest rate scenarios are also considered and modelled. A comparison between the NII outcomes from these modelled scenarios indicates the sensitivity to interest rate changes. On and off-balance sheet instruments are then used to manage this interest rate risk. NaR limit The BRCC has approved a NaR limit. This limit is managed by the Treasurer and is expressed as a deviation from benchmark hedge levels over a one-year rolling time frame, to a 99% level of confidence. This limit is monitored by FMTR. VaR limit The BRCC has also approved a VaR limit for ALM activities. This limit is managed by the Treasurer and monitored by FMTR. Additionally, FMTR sets structural risk limits to prevent undue concentration of risk. Structural foreign exchange rate risk Structural foreign exchange rate risk results from the generation of foreign currency denominated earnings and from Westpac’s capital deployed in offshore branches and subsidiaries, where it is denominated in currencies other than Australian dollars. The Australian dollar equivalent of offshore earnings and capital is subject to change as exchange rates fluctuate, which could introduce significant variability to Westpac’s reported financial results. ALCO provides oversight of the appropriateness of foreign exchange hedges on earnings. Risk reporting Interest rate risk in the banking book risk measurement systems and personnel are located in Sydney, Auckland, Singapore and Shanghai. These include front office product systems, which capture all treasury funding and derivative transactions; the transfer pricing system, which captures all retail and other business transactions; non-traded Interest Rate Risk systems, which calculate amongst other things, ALM VaR and NaR. Daily monitoring of current exposure and limit utilisation is conducted independently by FMTR, which monitors market risk exposures against VaR, NaR and structural risk limits. Management reports detailing structural positions and VaR are produced and distributed daily for use by dealers and management across all stakeholder groups. Monthly and quarterly reports are produced for the senior management market risk forums of RISKCO and BRCC respectively to provide transparency of material market risks and issues. Westpac Group March 2015 Pillar 3 report | 75 Pillar 3 report Interest rate risk in the banking book (IRRBB) Risk mitigation Market risk arising in the banking book stems from the ordinary course of banking activities, including structural interest rate risk (the mismatch between the duration of assets and liabilities) and capital management. Hedging Westpac’s exposure to interest rate risk is undertaken using derivatives. The hedge accounting strategy adopted utilises a combination of the cash flow, fair value and net investment hedge approaches. Some derivatives held for economic hedging purposes do not meet the criteria for hedge accounting as defined under AASB 139 Financial Instruments: Recognition and Measurement and therefore are accounted for in the same way as derivatives held for trading. The same controls used to monitor traded market risk allow for continuous monitoring by management. Change in economic value of a sudden upward and downward movement in interest rates 31 March 2015 $m AUD NZD USD Total 200bp parallel increase 174.7 23.3 198.0 200bp parallel decrease (183.6 ) (24.4 ) (207.9 ) 30 September 2014 $m AUD NZD USD Total 200bp parallel increase 202.2 21.8 224.0 200bp parallel decrease (203.8 ) (23.4 ) (227.2 ) 31 March 2014 $m AUD NZD USD Total 200bp parallel increase 206.8 6.3 213.1 200bp parallel decrease (207.9 ) (7.4 ) (215.3 ) VaR results for non-traded interest rate risk $m High Low Average Period end For the 6 months ended 31 March 2015 5.9 0.8 2.7 3.8 For the 6 months ended 30 September 2014 7.2 1.2 3.8 3.1 For the 6 months ended 31 March 2014 10.7 3.4 5.6 3.7 Interest rate risk in the banking book regulatory capital and risk weighted assets $m Total capital required Risk weighted assets 76 | Westpac Group March 2015 Pillar 3 report 31 March 2015 128 1,596 30 September 2014 585 7,316 31 March 2014 677 8,459 Pillar 3 report Liquidity risk Liquidity risk is the risk that Westpac will be unable to fund assets and meet obligations as they come due. This type of risk is inherent in all banks through their role as intermediaries between depositors and borrowers. Approach Liquidity risk is measured and managed in accordance with the policies and processes defined in the BRCC approved Liquidity Risk Management Framework. Liquidity management is primarily the responsibility of the Treasurer under the oversight of the BRCC and ALCO. Liquidity Risk Management Framework Westpac’s Liquidity Risk Management Framework sets out the liquidity risk appetite, roles and responsibilities, tools for measuring and managing liquidity risk, reporting procedures and supporting policies. The key components of the Liquidity Risk Management Framework are listed below. Funding strategy Treasury undertakes an annual review of the funding profile consistent with expected market conditions and the balance sheet growth of customer deposits and loans. The funding strategy is reviewed by ALCO and approved by the BRCC annually. To further strengthen the management of Westpac’s funding, the Stable Funding Ratio (SFR) is used to focus on the composition and stability of the overall funding base. Stable funding consists of customer deposits, equity and wholesale term funding with residual maturity greater than twelve months (including securitisation). As at 31 March 2015 the SFR was 83%. See also section 2.4.2 ‘Funding and Liquidity Risk Management’ in the Westpac Group 2015 Interim Financial Results Announcement for further detail. Minimum liquid asset holdings Westpac holds a portfolio of liquid assets that are eligible to be used as collateral for repurchase agreements with the Reserve Bank of Australia. The BRCC approves minimum holdings of liquid assets annually. Liquidity Coverage Ratio (LCR) The LCR requires banks to hold sufficient high-quality liquid assets, as defined, to withstand 30 days under a regulator-defined acute stress scenario. The LCR came into effect from 1 January 2015. Given the limited amount of qualifying High Quality Liquid Assets available in Australia (due to relatively low levels of government debt outstanding), the Reserve Bank of Australia makes available to Australian institutions a Committed Liquidity Facility (CLF) that, subject to the satisfaction of qualifying conditions, can be accessed to help meet the LCR requirement. Stress testing Stress testing is carried out to assess Westpac’s ability to meet cash flow obligations under a range of market conditions, including name specific and market wide stress scenarios. These scenarios inform liquidity limits and strategic planning. Liquidity transfer pricing Westpac has a liquidity transfer pricing process which measures and allocates liquidity risk across the Group. Contingency planning Treasury maintains a contingency funding plan that outlines the steps that should be taken by Westpac in the event of an emerging ‘funding crisis’. The plan is reviewed and approved by ALCO and is aligned with the Westpac’s broader Liquidity Crisis Management Framework which is approved annually by the BRCC. Liquidity reporting Daily monitoring of the liquidity risk position is conducted by the Liquidity Risk team in Enterprise Risk, which monitors compliance with liquidity limits. The daily liquidity risk reports are circulated to, and reviewed by, local and senior staff in Treasury and the independent Liquidity Risk team. Summary liquidity reports are submitted to senior staff weekly, ALCO monthly, and to BRCC quarterly. Westpac Group March 2015 Pillar 3 report | 77 Pillar 3 report Appendix I | Regulatory capital reconciliation Balance Sheet Reconciliation 31 March 2015 $m Assets Cash and balances with central banks Receivables due from other financial institutions Due from subsidiaries Derivative financial instruments Trading securities Other financial assets designated at fair value Available-for-sale securities Loans Life insurance assets Regulatory deposits with central banks overseas Deferred tax assets Goodwill and other intangible assets Property, plant and equipment Investments in life & general insurance, funds management & securitisation entities Other assets Total assets Liabilities Payables due to other financial institutions Due to subsidiaries Deposits and other borrowings Other Financial Liabilities at fair value through income statement Derivative financial instruments Debt issues and acceptances Current tax liabilities Deferred tax liabilities Life insurance liabilities Provisions Loan Capital Other liabilities Total liabilities Equity Ordinary share capital Treasury shares and RSP treasury shares Reserves Retained Profit Non-controlling interest Total equity 78 | Westpac Group March 2015 Pillar 3 report Group Balance Sheet Adjustment Level 2 Regulatory Balance Sheet 14,738 13,637 45,702 35,041 3,288 44,296 605,064 12,348 1,306 1,368 12,592 1,539 - (230) (666) 245 95 (280) (102) (12,348) (38) (386) (3) 1,348 14,508 12,971 245 45,797 35,041 3,008 44,194 605,064 1,306 1,330 12,206 1,536 1,348 5,042 795,961 (1,076) (13,441) 3,966 782,520 15,421 466,743 (31) 2,934 (68) 15,390 2,934 466,675 12,133 50,510 168,151 347 52 10,945 1,320 11,905 8,117 745,644 (2,593) (38) (52) (10,945) (75) (1,024) (11,892) 12,133 50,510 165,558 309 1,245 11,905 7,093 733,752 27,237 (390) 1,283 21,275 912 50,317 (169) (1,286) (94) (1,549) 27,237 (390) 1,114 19,989 818 48,768 Reconciliation Table Common Disclosure Template Table a Table b Table c Table a Table d and e Row 1 Table f Table g Row 2 Table h Pillar 3 report Appendix I | Regulatory capital reconciliation $m Table a Deferred Tax Assets Total Deferred Tax Assets per level 2 Regulatory Balance Sheet Deferred tax asset adjustment before applying prescribed thresholds Less: Amounts below prescribed threshold - risk weighted Total per Common Disclosure Template - Deferred Tax Asset $m Table b Goodwill and other intangible assets Total Goodwill and Intangibles Assets per level 2 Regulatory Balance Sheet Less: Capitalised Software Disclosed Under Intangibles Total per Common Disclosure Template - Goodwill $m Table c Equity Investments Investment in significant financial entities Equity Investments in non-consolidated subsidiaries Total Investment in significant financial entities Investment in non-significant financial entities Total Investments in financial institutions Investment in commercial entities Total Equity Investments before applying prescribed threshold Less: Amounts below prescribed threshold Total per Common Disclosure Template - Equity Investments $m Table d Additional Tier 1 Capital Total Loan Capital per Level 2 Regulatory Balance Sheet Total Non-Controlling Interest per Level 2 Regulatory Balance Sheet Total Loan Capital per Level 2 Regulatory Balance Sheet Less: Non-Controlling Interest not included in Additional Tier 1 Capital Less: Tier 2 Capital Instruments Reported Below Add: Capitalised Issue Costs for Additional Tier 1 Capital Instruments 1 Total per Common Disclosure Template - Tier 1 Capital Additional Tier 1 Capital included in Regulatory Capital Westpac Capital Notes Westpac Capital Notes 2 Total Basel III complying instruments Convertible preference shares (CPS) Trust Preferred Securities 2004 (TPS 2004) Trust Preferred Securities 2006 (TPS 2006) Total Basel III non complying instruments Total per Common Disclosure Template - Additional Tier 1 Capital Instruments 31 March 2015 Common Disclosure Template Reference 1,330 1,330 (1,330) - Row 26e Row 75 Row 21 / 25 31 March 2015 Common Disclosure Template Reference 12,206 (1,932) 10,274 Row 9 Row 8 31 March 2015 Common Disclosure Template Reference 161 1,348 1,509 116 1,625 111 1,736 (1,736) - Row 18/ 19/ 23 31 March 2015 Common Disclosure Template Reference 11,905 818 12,723 (63) (7,340) 34 5,354 Row 36 1,383 1,311 2,694 1,190 715 755 2,660 5,354 Row 73 Row 72 Row 26d Row 26g Row 30 Row 33 Row 36 Westpac Group March 2015 Pillar 3 report | 79 Pillar 3 report Appendix I | Regulatory capital reconciliation 31 March 2015 Common Disclosure Template Reference 7,340 17 (56) (718) (67) 59 6,575 Row 56c Row 50 / 76 Row 51 Tier 2 Capital included in Regulatory Capital AUD1,000 million Westpac Subordinated Notes AUD925 million Westpac Subordinated Notes II CNY1,250 million Westpac Subordinated Notes AUD350 million Westpac Subordinated Notes Total Basel III complying instruments 1,000 925 264 349 2,538 Row 46 USD352 million Perpetual Floating Rate Notes USD350 million SEC registered Subordinated Notes USD400 million 144A Subordinated Notes USD75 million Subordinated Notes AUD500 million Subordinated Notes AUD1,676 million Westpac Subordinated Notes USD800 million Subordinated Notes Total Basel III non complying instruments Less: Basel III transitional adjustment Total Basel III non complying instruments after transitional adjustment Provisions Total per Common Disclosure Template - Tier 2 Capital Instruments 461 290 57 14 500 1,676 1,047 4,045 (67) 3,978 59 6,575 Row 85 Row 47 Row 50 / 76 Row 51 31 March 2015 Common Disclosure Template Reference (390) 86 (304) Row 26a 31 March 2015 Common Disclosure Template Reference 1,114 (39) 1,075 Row 3 31 March 2015 Common Disclosure Template Reference 818 (755) 63 Row 5 $m Table e Tier 2 Capital Total Tier 2 Capital per Level 2 Regulatory Balance Sheet Add: Capitalised Issue Costs for Tier 2 Capital Instruments 1 Less: Fair Value Adjustment 2 Less: Cumulative amortisation of Tier 2 Capital Instruments Less: Basel III transitional adjustment Provisions Total per Common Disclosure Template - Tier 2 $m Table f Treasury Shares and RSP Teasury Shares Total treasury shares per Level 2 Regulatory Balance Sheet Less: Treasury Shares not included for Level 2 Regulatory Capital Total per Common Disclosure Template - Treasury Shares $m Table g Accumulated Other Comprehensive Income Total reserves per Level 2 Regulatory Balance Sheet Less: Share Based Payment Reserve not included within capital Total per Common Disclosure Template - Accumulated Other Comprehensive Income $m Table h Non Controlling Interests Total non controlling interests per Level 2 Regulatory Balance Sheet Less: TPS included in Additional Tier 1 Capital (Refer to Table d) Total per Common Disclosure Template - Non Controlling Interests 1 2 Unamortised issue costs relating to capital instruments are netted off against each instrument in the Balance Sheet. For regulatory capital purposes, these capital instruments are shown gross of unamortised issue costs. The unamortised issue costs are deducted from CET1 as part of capitalised expenses in Row 26f in the common disclosure template. For regulatory capital purposes, APRA requires these instruments to be included as if they were unhedged. 80 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Appendix I | Regulatory capital reconciliation The common disclosure template below represents the post 1 January 2018 Basel III requirements. The Group is applying the Basel III regulatory adjustments in full as implemented by APRA. $m 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 26a 26b 26c 26d 26e 26f 26g 26h 26i 26j 27 28 29 31 March 2015 Common Equity Tier 1 capital: instruments and reserves Directly issued qualifying ordinary shares (and equivalent for mutually-owned entities) capital Retained earnings Accumulated other comprehensive income (and other reserves) Directly issued capital subject to phase out from CET1 (only applicable to mutually-owned companies) Ordinary share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) Common Equity Tier 1 capital before regulatory adjustments Common Equity Tier 1 capital : regulatory adjustments Prudential valuation adjustments Goodwill (net of related tax liability) Other intangibles other than mortgage servicing rights (net of related tax liability) Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) Cash-flow hedge reserve Shortfall of provisions to expected losses Securitisation gain on sale (as set out in paragraph 562 of Basel II framework) Gains and losses due to changes in own credit risk on fair valued liabilities Defined benefit superannuation fund net assets Investments in own shares (if not already netted off paid-in capital on reported balance sheet) Reciprocal cross-holdings in common equity Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10% of the issued share capital (amount above 10% threshold) Significant investments in the ordinary shares of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) Mortgage service rights (amount above 10% threshold) Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) Amount exceeding the 15% threshold of which: significant investments in the ordinary shares of financial entities of which: mortgage servicing rights of which: deferred tax assets arising from temporary differences National specific regulatory adjustments (sum of rows 26a, 26b, 26c, 26d, 26e, 26f, 26g, 26h, 26i and 26j) of which: treasury shares of which: offset to dividends declared under a dividend reinvestment plan (DRP), to the extent that the dividends are used to purchase new ordinary shares issued by the ADI of which: deferred fee income of which: equity investments in financial institutions not reported in rows 18, 19 and 23 of which: deferred tax assets not reported in rows 10, 21 and 25 of which: capitalised expenses of which: investments in commercial (non-financial) entities that are deducted under APRA prudential requirements of which: covered bonds in excess of asset cover in pools of which: undercapitalisation of a non-consolidated subsidiary of which: other national specific regulatory adjustments not reported in rows 26a to 26i Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions Total regulatory adjustments to Common Equity Tier 1 Common Equity Tier 1 Capital (CET1) 27,237 19,989 1,075 63 48,364 (10,274) (1,932) - Table Reference Table g Table h Table b Table b (120) (734) (127) - Table c - Table c - Table a (4,789) (304) 107 (1,625) (1,330) (1,404) (111) Table c Table a Table f Table c Table a Table c (122) - (17,976) 30,388 Westpac Group March 2015 Pillar 3 report | 81 Pillar 3 report Appendix I | Regulatory capital reconciliation $m 30 31 32 33 34 35 31 March 2015 Additional Tier 1 Capital: instruments Directly issued qualifying Additional Tier 1 instruments of which: classified as equity under applicable accounting standards of which: classified as liabilities under applicable accounting standards Directly issued capital instruments subject to phase out from Additional Tier 1 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1) of which: instruments issued by subsidiaries subject to phase out 41c Additional Tier 1 Capital before regulatory adjustments Additional Tier 1 Capital: regulatory adjustments Investments in own Additional Tier 1 instruments Reciprocal cross-holdings in Additional Tier 1 instruments Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10% of the issued share capital (amount above 10% threshold) Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) National specific regulatory adjustments (sum of rows 41a, 41b and 41c) of which: holdings of capital instruments in group members by other group members on behalf of third parties of which: investments in the capital of financial institutions that are outside the scope of regulatory consolidations not reported in rows 39 and 40 of which: other national specific regulatory adjustments not reported in rows 41a and 41b 42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions 43 44 45 Total regulatory adjustments to Additional Tier 1 capital Additional Tier 1 capital (AT1) Tier 1 Capital (T1=CET1+AT1) Tier 2 Capital: instruments and provisions Directly issued qualifying Tier 2 instruments Directly issued capital instruments subject to phase out from Tier 2 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group T2) of which: instruments issued by subsidiaries subject to phase out Provisions Tier 2 Capital before regulatory adjustments Tier 2 Capital: regulatory adjustments Investments in own Tier 2 instruments Reciprocal cross-holdings in Tier 2 instruments Investments in the Tier 2 capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the ADI does not own more than 10% of the issued share capital (amount above 10% threshold) 36 37 38 39 40 41 41a 41b 46 47 48 49 50 51 52 53 54 55 56c Significant investments in the Tier 2 capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions National specific regulatory adjustments (sum of rows 56a, 56b and 56c) of which: holdings of capital instruments in group members by other group members on behalf of third parties of which: investments in the capital of financial institutions that are outside the scope of regulatory consolidation not reported in rows 54 and 55 of which: other national specific regulatory adjustments not reported in rows 56a and 56b 57 58 59 60 Total regulatory adjustments to Tier 2 capital Tier 2 capital (T2) Total capital (TC=T1+T2) Total risk-weighted assets based on APRA standards 56 56a 56b 82 | Westpac Group March 2015 Pillar 3 report 2,694 2,694 2,660 - Table Reference Table d Table d Table d 5,354 Table d - 5,354 35,742 2,538 3,978 59 6,575 (50) - (140) (12) (12) (202) 6,373 42,115 346,823 Table d Table e Table e Table e Table e Pillar 3 report Appendix I | Regulatory capital reconciliation $m 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 31 March 2015 Capital ratios and buffers Common Equity Tier 1 (as a percentage of risk-weighted assets) Tier 1 (as a percentage of risk-weighted assets) Total capital (as a percentage of risk-weighted assets) Buffer requirement (minimum CET1 requirement of 4.5% plus capital conservation buffer of 2.5% plus any countercyclical buffer requirements expressed as a percentage of risk-weighted assets) of which: capital conservation buffer requirement of which: ADI-specific countercyclical buffer requirements of which: G-SIB buffer requirement (not applicable) Common Equity Tier 1 available to meet buffers (as a percentage of risk-weighted assets) National minima (if different from Basel III) National Common Equity Tier 1 minimum ratio (if different from Basel III minimum) National Tier 1 minimum ratio (if different from Basel III minimum) National total capital minimum ratio (if different from Basel III minimum) Amount below thresholds for deductions (not risk-weighted) Non-significant investments in the capital of other financial entities Significant investments in the ordinary shares of financial entities Mortgage servicing rights (net of related tax liability) Deferred tax assets arising from temporary differences (net of related tax liability) Applicable caps on the inclusion of provisions in Tier 2 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap) Cap on inclusion of provisions in Tier 2 under standardised approach Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap) Cap for inclusion of provisions in Tier 2 under internal ratings-based approach Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2018 and 1 Jan 2022) Current cap on CET1 instruments subject to phase out arrangements Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities Current cap on AT1 instruments subject to phase out arrangements Amount excluded from AT1 instruments due to cap (excess over cap after redemptions and maturities) Current cap on T2 instruments subject to phase out arrangements Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) Table Reference 8.76% 10.31% 12.14% N/A N/A N/A N/A N/A 4.50% 6.00% 8.00% 116 1,509 1,330 Table c Table c Table a 59 Table e 329 1,660 N/A N/A 3,901 3,980 67 Table e Westpac Group March 2015 Pillar 3 report | 83 Pillar 3 report Appendix II | Regulatory consolidation This appendix lists all subsidiaries controlled by Westpac according to their level of regulatory consolidation. Level 1 Entities The following controlled entities have been approved by APRA for inclusion in the Westpac ADI’s ‘Extended Licensed Entity’ (ELE) for the purposes of measuring capital adequacy at Level 1: Westpac Banking Corporation 1925 (Commercial) Pty Limited 1925 (Industrial) Pty Limited Belliston Pty Limited Bill Acceptance Corporation Pty Limited CBA Limited Challenge Limited Mortgage Management Pty Limited Nationwide Management Pty Limited Partnership Pacific Pty Limited Partnership Pacific Securities Pty Limited Pashley Investments Pty Limited Sallmoor Pty Limited Sixty Martin Place (Holdings) Pty Limited St.George Business Finance Pty Limited St.George Custodial Pty Limited St.George Equity Finance Limited St.George Finance Holdings Limited St.George Security Holdings Pty Limited Tavarua Funding Trust IV Teuton Pty Limited The Mortgage Company Pty Limited Value Nominees Pty Limited Westpac Administration Pty Limited Westpac Administration 2 Limited Westpac Americas Inc. Westpac Capital Holdings Inc. 84 | Westpac Group March 2015 Pillar 3 report Westpac Capital Trust IV Westpac Capital-NZ-Limited Westpac Debt Securities Pty Limited Westpac Delta LLC Westpac Direct Equity Investments Pty Limited Westpac Equipment Finance (No.1) Pty Limited Westpac Equipment Finance Limited Westpac Equity Investments NZ Limited Westpac Finance (HK) Limited Westpac Financial Holdings Pty Limited Westpac Group Investment-NZ-Limited Westpac Group Investments Australia Pty Limited Westpac Holdings-NZ-Limited Westpac Investment Capital Corporation Westpac Investment Vehicle No.2 Pty Limited Westpac Investment Vehicle Pty Limited Westpac Leasing Nominees-Vic.-Pty Limited Westpac New Zealand Group Limited Westpac Overseas Holdings No. 2 Pty Limited Westpac Overseas Holdings Pty Limited Westpac Properties Limited Westpac Securitisation Holdings Pty Limited Westpac Structured Products Limited Westpac TPS Trust Westpac Unit Trust Westpac USA Inc. Pillar 3 report Appendix II | Regulatory consolidation Level 2 Entities The following controlled entities are included in the Level 2 consolidation (along with the ELE entities) for the purposes of measuring capital adequacy: 1925 Advances Pty Limited A.G.C. (Pacific) Limited Altitude Administration Pty Limited Altitude Rewards Pty Limited Aotearoa Financial Services Limited Ascalon Funds Seed Pool Trust Australian Loan Processing Security Company Pty Limited Australian Loan Processing Security Trust Bella Trust No.2 Bella Trust BT (Queensland) Pty Limited BT Australia Pty Limited BT Financial Group (NZ) Limited BT Financial Group Pty Limited BT Securities Limited BT Short Term Income Fund Capital Corporate Finance Limited Capital Finance (NZ) Limited Capital Finance Australia Limited Capital Finance New Zealand Limited Capital Fleetlease Limited Capital Motor Finance Limited Capital Rent Group Limited Castlereagh Trust Crusade ABS Series 2012-1 Trust Crusade ABS Series 2013-1 Trust Crusade ABS Series 2015-1 Trust Crusade CP No.1 Pty Limited Crusade CP Trust No. 52 Crusade CP Trust No. 53 Crusade CP Trust No. 55 Crusade CP Trust No. 56 Crusade CP Trust No. 57 Crusade CP Trust No. 58 Crusade Management Limited Crusade Trust No.2P of 2008 Danaby Pty Limited G.C.L. Investments Pty Limited General Credits Holdings Pty Limited General Credits Pty Limited Halcyon Securities Pty Limited Hastings Management Pty Limited Hickory Trust Hitton Pty Limited Net Nominees Limited North Ryde Office Trust Number 120 Limited Oniston Pty Limited Qvalent Pty Limited RAMS Financial Group Pty Limited RMS Warehouse Trust 2007-1 Seed Pool Trust No. 2 Series 2008-1M WST Trust Series 2009-1 WST Trust Series 2011-1 WST Trust Series 2011-2 WST Trust Series 2011-3 WST Trust Series 2012-1 WST Trust Series 2013-1 WST Trust Series 2013-2 WST Trust Series 2014-1 WST Trust Series 2014-2 WST Trust SIE-LEASE (Australia) Limited SIE-LEASE (New Zealand) Pty Limited St.George Finance Limited St.George Motor Finance Limited The Home Mortgage Company Limited The Warehouse Financial Services Limited W2 Investments Pty Limited Westpac (NZ) Investments Limited Westpac Administration 3 Limited Westpac Administration 4 Pty Limited Westpac Altitude Rewards Trust Westpac Asian Lending Pty Limited Westpac Bank of Tonga Westpac Bank Samoa Limited Westpac Group March 2015 Pillar 3 report | 85 Pillar 3 report Appendix II | Regulatory consolidation Level 2 Entities (Continued) Westpac Bank-PNG-Limited Westpac Capital Markets Holding Corp. Westpac Capital Markets LLC Westpac Cash PIE Fund Westpac Covered Bond Trust Westpac Equity Holdings Pty Limited Westpac Europe Limited Westpac Financial Consultants Limited Westpac Financial Services Group Limited Westpac Financial Services Group-NZ-Limited Westpac Global Capital Markets Pty Limited Westpac Investment Vehicle No.3 Pty Limited Westpac New Zealand Limited Westpac Notice Saver PIE Fund Westpac NZ Covered Bond Holdings Limited Westpac NZ Covered Bond Limited Westpac NZ Operations Limited Westpac NZ Securitisation Holdings Limited Westpac NZ Securitisation Limited Westpac NZ Securitisation No.2 Limited Westpac Pacific Limited Partnership Westpac Securities Limited Westpac Securities NZ Limited Westpac Securitisation Management Pty Limited Westpac Singapore Limited Westpac Syndications Management Pty Limited Westpac Term PIE Fund Level 3 Entities The following controlled entities are excluded from the Level 2 consolidation but form part of the conglomerate group at Level 3: Advance Asset Management Limited Ascalon Capital Managers (Asia) Limited Ascalon Capital Managers Limited Asgard Capital Management Limited Asgard Wealth Solutions Limited BT Funds Management (NZ) Limited BT Funds Management Limited BT Funds Management No. 2 Limited BT Investment Management (Fund Services) Limited BT Investment Management (Institutional) Limited BT Investment Management Limited BT Long Term Income Fund BT Portfolio Services Limited BT Private Nominees Pty Limited BTIM UK Limited Canning Park Pte. Ltd Core Infrastructure Income Feeder 1 L.P. Core Infrastructure Income Feeder 2 L.P. Core Infrastructure Income Master L.P. Crusade CP Management Pty Limited Crusade Euro Trust 1E of 2006 Crusade Euro Trust 1E of 2007 Crusade Global Trust 1 of 2006 86 | Westpac Group March 2015 Pillar 3 report Crusade Global Trust 1 of 2007 Crusade Global Trust 2 of 2005 Crusade Global Trust 2 of 2006 Crusade Trust 1A of 2005 Data Republic Pty Limited eQR Securities Pty. Limited Europe Infrastructure Debt LP Hastings Advisers LLC Hastings Forestry Investments Limited Hastings Forests Australia Pty Limited Hastings Funds Management (UK) Limited Hastings Funds Management (USA) Inc. Hastings Funds Management Asia Pte Limited Hastings Funds Management Limited Hastings Infrastructure 1 Limited Hastings Infrastructure 2 Limited Hastings Investment Capital LP Hastings Investment Management (Europe) Limited Hastings Investment Management Pty Ltd Hastings Investments GP LLC Hastings Korea Company Limited Hastings Private Equity Fund IIA Pty Limited HLT Custodian Trust Pillar 3 report Appendix II | Regulatory consolidation Level 3 Entities (Continued) Infrastructure GP LLP Infrastructure GP 2 LLP Infrastructure Research and Advisory Services Private Limited J O Hambro Capital Management Holdings Limited J O Hambro Capital Management Limited JOHCM (Singapore) Pte Limited JOHCM (USA) Inc Magnitude Group Pty Limited MIF Custodian Trust Reinventure Fund, I.L.P. Securitor Financial Group Limited Series 2007-1G WST Trust St.George Life Limited Sydney Capital Corporation Inc. Waratah Receivables Corporation Pty Limited Waratah Securities Australia Limited Westpac Cook Cove Trust I Westpac Cook Cove Trust II Westpac Custodian Nominees Pty Limited Westpac Equity Pty Limited Westpac Financial Services Limited Westpac Funds Financing Holdco Pty Limited Westpac Funds Financing Pty Limited Westpac General Insurance Limited Westpac General Insurance Services Limited Westpac Lenders Mortgage Insurance Limited Westpac Life Insurance Services Limited Westpac Life-NZ-Limited Westpac Nominees-NZ-Limited Westpac RE Limited Westpac Securities Administration Limited Westpac Superannuation Nominees-NZ-Limited Westpac Group March 2015 Pillar 3 report | 87 Pillar 3 report Appendix III | Level 3 entities’ assets and liabilities The following legal entities excluded from the regulatory scope of consolidation. The total assets and liabilities should not be aggregated because some of the entities are holding companies for other entities in the table shown below. 31 March 2015 $m a) Securitisation Crusade CP Management Pty Limited Crusade Euro Trust 1E of 2006 Crusade Euro Trust 1E of 2007 Crusade Global Trust 1 of 2006 Crusade Global Trust 1 of 2007 Crusade Global Trust 2 of 2005 Crusade Global Trust 2 of 2006 Crusade Trust 1A of 2005 HLT Custodian Trust MIF Custodian Trust Series 2007-1G WST Trust Sydney Capital Corporation Inc. Waratah Receivables Corporation Pty Limited Waratah Securities Australia Limited b) Insurance and Funds Management Advance Asset Management Limited Ascalon Capital Managers (Asia) Limited Ascalon Capital Managers Limited Asgard Capital Management Limited Asgard Wealth Solutions Limited BT Funds Management (NZ) Limited BT Funds Management Limited BT Funds Management No.2 Limited BT Investment Management (Fund Services) Limited BT Investment Management (Institutional) Limited BT Investment Management Limited BT Long Term Income Fund BT Portfolio Services Limited BT Private Nominees Pty Limited BTIM UK Limited Canning Park Pte. Ltd Core Infrastructure Income Feeder 1 L.P. Core Infrastructure Income Feeder 2 L.P. Core Infrastructure Income Master L.P. Data Republic Pty Ltd eQR Securities Pty. Limited Europe Infrastructure Debt LP Hastings Advisers LLC Hastings Forestry Investments Limited Hastings Forests Australia Pty Limited Hastings Funds Management (UK) Limited Hastings Funds Management (USA) Inc. Hastings Funds Management Asia Pte Limited Hastings Funds Management Limited Hastings Infrastructure 1 Limited Hastings Infrastructure 2 Limited Hastings Investment Capital LP Hastings Investment Management (Europe) Limited Hastings Investment Management Pty Ltd 88 | Westpac Group March 2015 Pillar 3 report Total Assets Liabilities (excluding equity) 1 259 376 359 607 472 671 668 259 376 359 607 472 671 668 63 42 72 99 69 62 183 24 14 4 652 303 120 11 300 1 1 18 41 1 22 7 3 28 4 53 8 15 129 3 8 3 35 303 42 36 8 14 7 2 1 Pillar 3 report Appendix III | Level 3 entities’ assets and liabilities 31 March 2015 $m Hastings Investments GP LLC Hastings Korea Company Limited Hastings Private Equity Fund IIA Pty Limited Infrastructure GP 2 LLP Infrastructure GP LLP Infrastructure Research and Advisory Services Private Limited J O Hambro Capital Management Holdings Limited J O Hambro Capital Management Limited JOHCM (Singapore) Pte Limited JOHCM (USA) Inc Magnitude Group Pty Limited Reinventure Fund, I.L.P. Securitor Financial Group Limited St.George Life Limited Westpac Cook Cove Trust I Westpac Cook Cove Trust II Westpac Custodian Nominees Pty Limited Westpac Equity Pty Limited Westpac Financial Services Limited Westpac Funds Financing Holdco Pty Limited Westpac Funds Financing Pty Limited Westpac General Insurance Limited Westpac General Insurance Services Limited Westpac Lenders Mortgage Insurance Limited Westpac Life Insurance Services Limited Westpac Life-NZ-Limited Westpac Nominees-NZ-Limited Westpac RE Limited Westpac Securities Administration Limited Westpac Superannuation Nominees-NZ-Limited Total Assets 1 1 339 193 10 2 33 9 34 83 9 24 636 49 343 8,795 187 4 13 11 - Liabilities (excluding equity) 80 7 2 10 11 3 5 501 5 197 7,522 2 2 3 - Westpac Group March 2015 Pillar 3 report | 89 Pillar 3 report Appendix IV | Regulatory expected loss Capital deduction for regulatory expected loss 2 For capital adequacy purposes APRA requires the amount of regulatory expected credit losses in excess of eligible provisions to be deducted from capital. The following table shows how the deduction is calculated. $m Provisions associated with eligible portfolios Total provisions for impairment charges plus general reserve for credit losses adjustment plus provisions associated with partial write-offs less ineligible provisions 1 Total eligible provisions Regulatory expected downturn loss Shortffall in eligible provisions compared to regulatory expected downturn loss Common equity Tier 1 capital deduction for regulatory expected downturn loss in excess of eligible provisions 2 1 2 31 March 2015 30 September 2014 31 March 2014 3,505 107 406 (131) 3,887 4,588 (701) 3,481 133 504 (132) 3,986 4,636 (650) 3,791 92 528 (141) 4,270 4,964 (694) (734) (650) (694) Provisions associated with portfolios subject to the Basel standardised approach to credit risk are not eligible. Regulatory expected loss is calculated for portfolios subject to the Basel advanced capital IRB approach to credit risk. The comparison between regulatory expected loss and eligible provisions is performed separately for defaulted and non-defaulted exposures. As at 31 March 2015, there was an excess of eligible provisions compared to regulatory expected loss for defaulted exposures of $33m. This excess is not available to reduce the shortfall for non-defaulted exposures in the calculation of the common equity Tier 1 capital deduction. 90 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Appendix V | APS330 quantitative requirements The following table cross-references the quantitative disclosure requirements given by Attachments A, C, D and E of APS330 to the quantitative disclosures made in this report. The continuous reporting requirements for capital instruments under Attachment B are satisfied separately and can be found on the regulatory disclosures section on the Westpac website. 1 APS330 reference Attachment A: Table 1: Common disclosure template Attachment C: Table 3: Capital adequacy Westpac disclosure (a) to (e) (f) Page Common disclosure template 81 Capital requirements Westpac’s capital adequacy ratios Capital adequacy ratios of major subsidiary banks 16 15 15 Table 4: Credit risk (a) (b) (c) Exposure at Default by major type Impaired and past due loans by portfolio General reserve for credit losses 26 33 25 Table 5: Securitisation exposures (a) Banking book summary of securitisation activity by asset type Banking book summary of on and off-balance sheet securitisation by exposure type Trading book summary of on and off-balance sheet securitisation by exposure type 60 Capital requirements Westpac’s capital adequacy ratios Capital adequacy ratios of major subsidiary banks 16 15 15 (b) Attachment D: Table 6: Capital adequacy (b) to (f) (g) 61 65 Table 7: Credit risk - general disclosures (b) (c) (d) (e) (f) (g) (h) (h) (i) (j) Exposure at Default by major type Exposure at Default by geography Exposure at Default by industry classification Exposure at Default by residual contractual maturity Impaired and past due loans by industry classification Impaired and past due loans by geography Movement in provisions for impairment charges Loan impairment provisions Exposure at Default by measurement method General reserve for credit losses 26 31 28 32 34 35 36 25 27 25 Table 8: Credit risk - disclosures for portfolios subject to the standardised approach and supervisory risk-weights in the IRB approaches (formerly Table 5) (b) Portfolios subject to the standardised approach 37 Property finance Project finance 38 39 1 http://www.westpac.com.au/about-westpac/investor-centre/financial-information/basel-iii-risk-reports/ Westpac Group March 2015 Pillar 3 report | 91 Pillar 3 report Appendix V | APS330 quantitative requirements APS330 reference Table 9: Credit risk - disclosures for portfolios subject to IRB approaches Table 10: Credit risk mitigation disclosures (d) Westpac disclosure Corporate portfolio by external credit rating (e) (f) Business lending portfolio by external credit rating Sovereign portfolio by external credit rating Bank portfolio by external credit rating Residential mortgages portfolio by PD band Australian credit cards portfolio by PD band Other retail portfolio by PD band Small business portfolio by PD band Actual losses Comparison of regulatory expected and actual loss rates 41 42 43 44 45 46 47 48 49 Total exposure covered by collateral, credit derivatives and guarantees 53 (b) to (c) Table 12: Securitisation exposures (g) part i and (h) to (i) (g) part ii (j) (k) (l) part i (l) part ii (m) (n) part i (n) part ii (o) part i and (p) (o) part ii (q) (r) (s) (t) part i (t) part ii (u) part i (u) part ii (u) part iii (v) (w) part i (w) part ii 92 | Westpac Group March 2015 Pillar 3 report Banking Book Summary of assets securitised by Westpac Page 40 59 Summary of total Westpac sponsored third party assets securitised Summary of securitisation activity by asset type Summary of on and off-balance sheet securitisation by exposure type Securitisation exposure by risk weight band Securitisation exposures deducted from capital Securitisation subject to early amortisation treatment Resecuritisation exposure subject to credit risk mitigation Resecuritisation exposure to guarantors Trading Book Summary of assets securitised by Westpac 59 Summary of total Westpac sponsored third party assets securitised Summary of securitisation activity by asset type Aggregate amount of exposures securitised by Westpac and subject to APS116 Summary of on and off-balance sheet securitisation by exposure type Securitisation exposure retained or purchase subject to specific risk Securitisation exposure subject to APS120 for Specific risk by risk weight band Capital requirements for securitisation exposure subject to internal models approach (IMA) by risk classification Capital requirements for securitisation regulatory capital approaches by risk weight band Securitisation exposures deducted from capital Securitisation subject to early amortisation treatment Aggregate resecuritisation exposures retain or purchased subject to credit risk mitigation Resecuritisation exposure to guarantors credit worthiness 64 60 61 62 63 63 63 63 63 64 64 65 65 65 65 66 66 66 66 66 Pillar 3 report Appendix V | APS330 quantitative requirements APS330 reference Table 13: Market risk - disclosures for ADIs using the standard method (b) Westpac disclosure Market Risk regulatory capital and risk weighted assets Table 14: Market risk - disclosures for ADIs using the IMA for trading portfolios (d) VaR and Stressed VaR by risk type 69 Table 16: Equities - disclosures for banking book positions (b) to (c) Book value of listed equity exposures by industry classification / Book value of unlisted equity exposures by industry classification Gains/losses Capital requirement 1 74 (d) to (e) (f) Table 17: Interest rate risk in the banking book Attachment E 2 Table 18: Remuneration disclosure requirements 1 2 (b) Page 68 74 NA 76 (b) Change in economic value of sudden upward and downward movement in interest rates Capital requirement (g) Governance structure NA (h) (i) (j) (k) Senior manager and material risk taker payments Deferred remuneration Total value of remuneration awards Implicit and explicit adjustments NA NA NA NA 76 No Equity risk exposures. Remuneration disclosure is an annual reporting requirement under APS330. Westpac Group March 2015 Pillar 3 report | 93 Pillar 3 report Glossary Term Description Actual losses Represent direct write-offs and write-offs from provisions after adjusting for recoveries. Additional Tier 1 capital Comprises high quality components of capital that provide a permanent and unrestricted commitment of funds that are freely available to absorb losses but rank behind claims of depositors and other more senior creditors. They also provide for fully discretionary capital distributions. Advanced measurement approach (AMA) The capital requirement using the AMA is based on a bank’s internal operational risk systems, which must both measure and manage operational risk. Assets intended to be securitised Represents securitisation activity from the end of the reporting period to the disclosure date of this report. Australian Accounting Standards (AAS) A set of Australian reporting standards and interpretations issued by the Australian Accounting Standards Board. Australian and New Zealand Standard Industrial Classification (ANZSIC) A code used by the Australian Bureau of Statistics and Statistics New Zealand for classifying businesses. Authorised deposit-taking institution (ADI) ADIs are corporations that are authorised under the Banking Act 1959 to carry on banking business in Australia. Banking book The banking book includes all securities that are not actively traded by Westpac. Cash EPS Compound Annual Growth Rate (CAGR) An internal measure used to assess performance by measuring growth in cash earnings per share over a three year performance period. Common Equity Tier 1 (CET1) capital The highest form of capital. The key components of common equity are shares, retained earnings and undistributed current year earnings. Credit Valuation Adjustment (CVA) risk Refer to mark-to-market related credit risk. Default A customer default is deemed to have occurred when Westpac considers that either or both of the following events have taken place: the customer is unlikely to pay its credit obligations to its financiers in full, without recourse by any of them to actions such as realising security (where held); and the customer is past due 90 or more calendar days on any material credit obligation to its financiers. Overdrafts will be considered past due once the customer has breached an advised limit, or been advised of a limit smaller than the current outstandings. Double default rules Double default applies to exposures where a particular obligor’s exposure has been hedged by the purchase of credit protection from a counterparty and loss will only occur if both obligor and counterparty default. In this instance, capital can be reduced. Exposure at default (EAD) EAD represents an estimate of the amount of committed exposure expected to be drawn by the customer at the time of default. Extended licensed entity (ELE) An Extended Licensed Entity (ELE) comprises an ADI and any subsidiaries of the ADI that have been approved by APRA as being part of a single ‘stand-alone’ entity. External Credit Assessment Institution (ECAI) ECAI is an external institution recognised by APRA (directly or indirectly) to provide credit assessment in determining the risk-weights on financial institutions’ rated credit exposures (including securitisation exposures). 94 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Glossary Facilities 90 days or more past due date not impaired Includes facilities where: contractual payments of interest and/or principal are 90 or more calendar days overdue, including overdrafts or other revolving facilities that remain continuously outside approved limits by material amounts for 90 or more calendar days; or an order has been sought for the customer’s bankruptcy or similar legal action has been instituted, which may avoid or delay repayment of its credit obligations; and the estimated net realisable value of assets/security to which Westpac has recourse is sufficient to cover repayment of all principal and interest, or where there are otherwise reasonable grounds to expect payment in full and interest is being taken to profit on an accrual basis. These facilities, while in default, are not treated as impaired for accounting purposes. Geography Geographic segmentation of exposures is based on the location of the office in which these items were booked. Impaired assets Includes exposures that have deteriorated to the point where full collection of interest and principal is in doubt, based on an assessment of the customer’s outlook, cashflow, and the net realisation of value of assets to which recourse is held: facilities 90 days or more past due, and full recovery is in doubt: exposures where contractual payments are 90 or more days in arrears and the net realisable value of assets to which recourse is held may not be sufficient to allow full collection of interest and principal, including overdrafts or other revolving facilities that remain continuously outside approved limits by material amounts for 90 or more calendar days; non-accrual assets: exposures with individually assessed impairment provisions held against them, excluding restructured loans; restructured assets: exposures where the original contractual terms have been formally modified to provide for concessions of interest or principal for reasons related to the financial difficulties of the customer; other assets acquired through security enforcement (includes other real estate owned): includes the value of any other assets acquired as full or partial settlement of outstanding obligations through the enforcement of security arrangements; and Industry Interest rate risk in the banking book (IRRBB) any other assets where the full collection of interest and principal is in doubt. Exposures to businesses, government and other financial institutions are classified into industry clusters based upon groups of related ANZSIC codes. Companies that operate in multiple industries are classified according to their primary industry. Consumer customers as classified as “retail” and not further broken down. The risk to current and future year interest income arising from a mismatch between the duration of assets and liabilities that arises in the normal course of banking activities. Westpac Group March 2015 Pillar 3 report | 95 Pillar 3 report Glossary Internal assessment approach (IAA) Basel III provides three approaches to determine the risk-weight for a securitisation transaction, where the term securitisation includes any complex credit derivative. The internal assessment approach, a more complex approach, and subject to approval from APRA for use, may be used when there is an inability to use either the Ratings-Based Approach (no external rating available) or the supervisory formula approach. The internal assessment approach may be used to risk-weight exposures relating to residential mortgages (excluding reverse mortgages), trade receivables, equipment receivables and auto loans. Internal Ratings-Based Approach (IRB & Advanced IRB) These approaches allow banks to use internal estimates of the risks of their loans as inputs into the determination of the amount of credit risk capital needed to support the organisation. In the Advanced IRB approach, banks must supply their own estimates for all three credit parameters – Probability of Default, Loss Given Default and Exposure at Default. Liquidity Coverage Ratio (LCR) An APRA requirement to maintain an adequate level of unencumbered high quality liquid assets, to meet liquidity needs for a 30 calendar day period under an APRA-defined severe stress scenario. Absent a situation of financial stress, the value of the LCR must not be less than 100%, effective 1 January 2015. LCR is calculated as the percentage ratio of stock of HQLA and CLF over the total net cash out flows in a modelled 30 day defined stressed scenario. Loss given default (LGD) The LGD represents an estimate of the expected severity of a loss to Westpac should a customer default occur during a severe economic downturn. Westpac assigns LGD to each credit facility, assuming an event of default has occurred and taking into account a conservative estimate of the net realisable value of assets to which Westpac has recourse and over which it has security. LGDs also reflect the seniority of exposure in the customer’s capital and debt structure. Maturity The maturity date used is drawn from the contractual maturity date of the customer loans. Mark-to-market related credit risk The risk of mark-to-market losses related to deterioration in the credit quality of a derivative counterparty also referred to as credit valuation adjustment (CVA) risk. A method of random sampling to achieve numerical solutions to mathematical problems. Monte Carlo simulation Net interest income at risk (NaR) BRCC-approved limit expressed as a deviation from the benchmark hedge level over a 1-year time frame, at a 99% confidence level. Off-balance sheet exposure Credit exposures arising from facilities that are not recorded on Westpac’s balance sheet (under accounting methodology). Undrawn commitments and the expected future exposure calculated for Westpac’s derivative products are included in off-balance sheet exposure. On balance sheet exposure Credit exposures arising from facilities that are recorded on Westpac’s balance sheet (under accounting methodology). Probability of default (PD) Probability of default is a through-the-cycle assessment of the likelihood of a customer defaulting on its financial obligations within one year. Ratings-Based Approach (RBA) Basel III provides three approaches to determine the risk-weight for a securitisation transaction, where the term securitisation includes any complex credit derivative. The Ratings-Based Approach relies on the number of assets in the transaction and the external credit rating of the tranche to determining a regulatory risk-weight. 96 | Westpac Group March 2015 Pillar 3 report Pillar 3 report Glossary Regulatory expected loss (EL) For regulatory purposes EL is defined as: for non-defaulted exposures, the product of PD, LGD and EAD; and for defaulted exposures, the best estimate of expected loss for that exposure. It is equivalent to provisions for impaired assets and represents charges already realised through Westpac’s earnings. Regulatory EL is not calculated for standardised portfolios and is based on mandated risk-weights for specialised lending portfolios. Regulatory EL should not be interpreted as an estimate of long-run expected loss because the LGDs used in all regulatory calculations are calibrated to reflect stressed economic conditions rather than long run averages. Resecuritisation A resecuritisation exposure is a securitisation exposure in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is a securitisation exposure. In addition, an exposure to one or more resecuritisation exposures is a resecuritisation exposure; Risk weighted assets (RWA) Assets (both on and off-balance sheet) are risk weighted according to each asset’s inherent potential for default and what the likely losses would be in case of default. In the case of non asset based risks (ie market and operational risk), RWA is determined by multiplying the capital requirements for those risks by 12.5. Securitisation Purchased The purchase of third party securitisation exposure, for example residential mortgage backed securities. Securitisation Retained Securitisation exposures arising through Westpac originated assets or generated by Westpac third party securitisation activity. Sponsor An ADI would generally be considered a sponsor if it, in fact or substance, manages or advises the securitisation program, places securities into the market, or provide liquidity and/or credit enhancements. Standard model The standard model for Market risk applies supervisory risk weights to trading positions. Stressed VaR Stress VaR uses a bank’s approved VaR model but applies it to a time period of significant financial stress. Market risk capital is estimated by adding Stress VaR to actual VaR. Substitution Approach Substitutions refers to the rules governing the circumstances when capital can be reduced because an obligor’s exposure has been hedged by the purchase of credit protection from a counterparty and the counterparty’s PD is used in place of the obligors’ PD. Supervisory formula (SF) Basel III provides three approaches to determine the risk-weight for a securitisation transaction, where the term securitisation includes any complex credit derivative. The supervisory formula is used when the Ratings-Based Approach is unable to be used. Tier 2 capital Includes other capital elements, which, to varying degrees, fall short of the quality of Tier 1 capital but still contribute to the overall strength of an entity as a going concern. Westpac Group March 2015 Pillar 3 report | 97 Pillar 3 report Glossary Trading book Trading book activity represents dealings that encompass book running and distribution activity. The types of market risk arising from trading activity include interest rate risk, foreign exchange risk, commodity risk, equity price risk, credit spread risk and volatility risk. Financial Markets and Treasury are responsible for managing market risk arising from Westpac’s trading activity. Value at risk (VaR) VaR is the potential loss in earnings from adverse market movements and is calculated over a one-day time horizon at a 99% confidence level using a minimum of one year of historical rate data. VaR takes account of all material market variables that may cause a change in the value of the trading portfolio and the banking book including interest rates, foreign exchange rates, price changes, volatility, and the correlation among these variables. Exchange rates The following exchange rates were used in the Westpac Pillar 3 report, and reflect spot rates for the period end. $ USD GBP NZD EUR 31 March 2015 0.7635 0.5167 1.0202 0.7078 98 | Westpac Group March 2015 Pillar 3 report 30 September 2014 0.8768 0.5384 1.1195 0.6904 31 March 2014 0.9230 0.5549 1.0665 0.6711 Pillar 3 report Disclosures regarding forward-looking statements This Report contains statements that constitute ‘forward-looking statements’ within the meaning of Section 21E of the US 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 Wespac’s intent, belief or current expectations with respect to its business and operations, market conditions, results of operations and financial condition, including, without limitation, future loan loss provisions and financial support to certain borrowers. Words such as ‘will’, ‘may’, ‘expect’, ‘intend’, ‘seek’, ‘would’, ‘should’, ‘could’, ‘continue’, ‘plan’, ‘estimate’, ‘anticipate’, ‘believe’, ‘probability’, ‘risk’ or other similar words are used to identify forward-looking statements. These forward-looking statements reflect Westpac’s current views with respect to future events and are subject to change, certain risks, uncertainties and assumptions which are, in many instances, beyond Westpac’s control, and have been made based upon management’s expectations and beliefs concerning future developments and their potential effect upon Westpac. There can be no assurance that future developments will be in accordance with Westpac’s expectations or that the effect of future developments on Westpac will be those anticipated. Actual results could differ materially from those expected, depending on the outcome of various factors, including, but not limited to: the effect of, and changes in, laws, regulations, taxation or accounting standards or practices and government policy, particularly changes to liquidity, leverage and capital requirements; the stability of Australian and international financial systems and disruptions to financial markets and any losses or business impacts Westpac or its customers or counterparties may experience as a result; market volatility, including uncertain conditions in funding, equity and asset markets; adverse asset, credit or capital market conditions; changes to Westpac’s credit ratings; levels of inflation, interest rates, exchange rates and market and monetary fluctuations; market liquidity and investor confidence; changes in economic conditions, consumer spending, saving and borrowing habits in Australia, New Zealand and in other countries in which Westpac or its customers or counterparties conduct their operations and Westpac’s ability to maintain or to increase market share and control expenses; the effects of competition in the geographic and business areas in which Westpac conducts its operations; information security breaches, including cyberattacks; reliability and security of Westpac’s technology and risks associated with changes to technology systems; the timely development and acceptance of new products and services and the perceived overall value of these products and services by customers; the effectiveness of Westpac’s risk management policies, including internal processes, systems and employees; the incidence or severity of Westpac insured events; the occurrence of environmental change or external events in countries in which Westpac or its customers or counterparties conduct their operations; internal and external events which may adversely impact Westpac’s reputation; changes to the value of Westpac’s intangible assets; changes in political, social or economic conditions in any of the major markets in which Westpac or its customers or counterparties operate; the success of strategic decisions involving diversification or innovation, in addition to business expansion and integration of new businesses; and various other factors beyond Westpac’s control. The above list is not exhaustive. For certain other factors that may impact on forward-looking statements made by Westpac, refer to the section ‘Risk factors’ in Westpac’s 2015 Interim Financial Results Announcement. When relying on forward-looking statements to make decisions with respect to Westpac, investors and others should carefully consider the foregoing factors and other uncertainties and events. Westpac is under no obligation 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. Westpac Group March 2015 Pillar 3 report | 99 Exhibit 2 Westpac Banking Corporation ABN 33 007 457 141. | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Westpac First Half 2015 result index 2 Presentation of First Half 2015 Result 3 Investor Discussion Pack of First Half 2015 Result 33 Strategy 34 Overview Performance discipline Service revolution Digital transformation Targeted growth Workforce revolution Sustainable futures 37 38 45 47 50 51 52 Earnings drivers Net interest income Non-interest income Markets and Treasury income Expenses Impairment charges 54 55 63 64 65 68 Asset quality Funding and Liquidity Capital 69 84 88 Divisional summary Westpac RBB St.George BT Financial Group Westpac Institutional Bank Westpac New Zealand Westpac Pacific 95 97 101 105 111 117 123 Economics 124 Appendix and Disclaimer 141 Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Brian Hartzer Chief Executive Officer Comparison of 1H15 versus 2H14 cash earnings basis (unless otherwise stated) | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Operating divisions delivering, bottom line lower 4 • Solid operating performance, especially retail and business banking • Cash earnings affected by . Derivative adjustments1 . Lower Treasury earnings • Strength a hallmark of the Group • Positive economic outlook but some near-term challenges • Delivering on strategy with increased focus on service 1 In 1H15 changes were made to derivative valuation methodologies, which include the first time adoption of a FVA for derivatives. The impact of these changes resulted in a $122m (pre-tax) or $85m (post tax) charge which reduced non-interest income. | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Headline results 5 1H15 Change 1H15-1H14 Change 1H15-2H14 Cash earnings $3,778m 0% (2%) Cash EPS1 121.3c 0% (2%) Reported NPAT $3,609m 0% (8%) NIM (excl. Treasury and Markets) 2.01% 0bps 0bps Impairment charge to avg. gross loans 11bps (1bp) 0bps Return on equity2 15.8% (67bps) (54bps) Common equity Tier 1 capital ratio3 8.8% (6bps) (21bps) Fully franked interim dividend 93c 3% 1% 1 EPS is cash earnings per weighted average ordinary share. 2 Return on equity is cash earnings divided by average ordinary equity. 3 Common equity Tier 1 capital ratio on an APRA Basel III basis. | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Solid performance across operating divisions 6 Cash earnings ($m) 1H14 2H14 1H15 Operating divisions1 3,671 3,766 3,819 Cash earnings growth 4.0% 2.6% 1.4% Core earnings growth2 1.7% 3.2% 2.2% Group businesses3 101 90 44 Derivative adjustments4 0 0 (85) Total Group 3,772 3,856 3,778 1 Operating divisions (includes all divisions except Group Businesses) before derivative adjustments. 2 Core earnings is net operating income less operating expenses. 3 Group Businesses provide centralised functions, including Treasury. 4 In 1H15 changes were made to derivative valuation methodologies, which include the first time adoption of a FVA for derivatives. The impact of these changes resulted in a $122m (pre-tax) or $85m (post tax) charge which reduced non-interest income. | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Strength a hallmark 7 Common equity Tier 1 capital ratio (%) Stressed assets to TCE2 (%) Stable funding ratio1 (%) Total liquid assets3 ($bn) 2.5 1.4 1.2 1.1 FY11 1H14 2H14 1H15 . 103 127 134 137 FY11 1H14 2H14 1H15 77.0 83.4 83.2 83.2 FY11 1H14 2H14 1H15 7.4 8.8 9.0 8.8 FY11 1H14 2H14 1H15 1 Stable funding ratio is calculated as customer deposits and wholesale funding with residual maturity greater than 12 months and equity and securitisation, as a proportion of total funding. 2 TCE is total committed exposures. 3 Total liquid assets represent cash, interbank deposit and assets eligible for existing repurchase agreements with a central bank. | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Prudent capital management 8 Dividends (cps) 1 $2bn is an estimate and relates to both DRP and DRP underwrite. 2 cps is cents per share. 3 Based on 1 May 2015 price of $36.73 with 1H15 dividend annualised. Common equity Tier 1 capital ratio (%) 7.4 7.7 8.2 8.7 9.1 8.8 9.0 8.8 9.3 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Mar-15 Pro forma after DRP Preferred range 8.75% – 9.25% 80 82 84 86 88 90 92 93 10 10 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 • Strongly capitalised and moving to upper end of preferred range . 1.5% discount applied to DRP market price . Partially underwriting DRP . Adds approximately $2bn1 to capital • 1cps2 rise in dividends . Supported by solid operating performance . Pay-out ratio 75% (ex derivative adjustment) . Considers regulatory uncertainty • Dividend yield3 5.1% Special dividends | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Balancing growth, productivity and return 9 1 RBA financial aggregates, six months to March 2015. 2 APRA Banking Statistics, six months to March 2015. NIM (excl. Treasury and Markets) (%) Mortgages1 and household deposits2 system multiple (x) ROE (%) Expense growth (%) 2.01 2.01 2.01 1H14 2H14 1H15 1.0 1.3 1.0 0.9 1.0 0.9 1H14 2H14 1H15 Household deposits Mortgages 16.5 16.4 15.8 1H14 2H14 1H15 3.3 2.9 1.7 1H14 2H14 1H15 | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Consistent growth in retail and business banking cash earnings 10 432 432 441 1H14 2H14 1H15 1,253 1,330 1,350 1H14 2H14 1H15 769 806 837 1H14 2H14 1H15 1 In A$ 1H15 cash earnings $413m (up 4% on 2H14 and 5% on 1H14). Westpac RBB ($m) St.George ($m) Westpac NZ1 ($NZm) | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Steadily building customer franchise 11 1 Refer slide 145 for customer satisfaction details. 2 Refer slide 145 for wealth metrics provider. Total consumer satisfaction1 (%) Customer numbers (#m) Customers with a wealth product2 (%) 83.7 86.6 81.7 83.7 83.0 Mar-13 Mar-14 Mar-15 WRBB SGB Peers 6.1 6.2 6.4 3.2 3.6 3.7 1H13 1H14 1H15 WRBB SGB 9.3 9.8 10.1 21.8 17.1 14.6 19.5 12.3 Mar-13 Mar-14 Mar-15 WRBB SGB Peers | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack 227 235 246 734 792 827 1H14 2H14 1H15 General insurance gross written premiums Life in-force premiums BT growing franchise, although earnings down from insurance claims 12 Insurance premiums ($m) BT cash earnings ($m) Down 2% Up 2% 82 89 103 107 113 125 1H14 2H14 1H15 FUM FUA Up 17% Up 26% Up 8% Up 13% 265 274 291 150 174 131 26 11 29 441 459 451 1H14 2H14 1H15 Funds Management Insurance Capital & other FUM and FUA ($bn) | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Core earnings up 4% Lower WIB earnings impacted by derivative adjustments 13 Cash earnings components ($m) 717 (2) 67 (25) (23) (25) 709 (85) 624 2H14 Net II Non-II Expenses Impairments Tax & NCI 1H15 before derivative adjustments Derivative adjustments 1H15 Lower impairment benefit Down 13% Down 1% Westpac Banking Corporation ABN 33 007 457 141. Strategy/Outlook Brian Hartzer Chief Executive Officer | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Westpac vision 15 To be one of the world’s great service companies, helping our customers, communities and people to prosper and grow | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Our strategic priorities will deliver for all stakeholders 16 Service Revolution Digital Transformation Performance Discipline Targeted Growth Workforce Revolution One of the World’s Great Service Companies 21st Century Bank Region’s Best Performing Bank Building new Growth Highways Talent Factory Strategic Priorities Indicators ROE above 15% Customer franchise growth Lower expense to income ratio Targeted growth in Asia, wealth and SME Leading employee engagement | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Expectations for operating environment 17 Outlook for Australia remains positive Global economic conditions are mixed In Australian banking - Credit growth modest, housing growing faster than business - Asset quality expected to remain strong Competition remaining intense, particularly given low interest rates Considerable regulatory uncertainty Continuing growth in wealth and insurance markets Economy currently in transition, expect 2015 GDP growth around 2.2% Expect uneven growth across industry sectors and geographies - Lift in consumer and business confidence will be important | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Well positioned for our third century 18 Drivers of value in good shape, each division has a clear strategy and is performing well Strong balance sheet, actively responding to regulatory uncertainty Service Revolution program well underway, delivering a better experience for customers High quality management team continuing to manage the business in a balanced way Westpac is well positioned to continue building value Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Peter King Chief Financial Officer Comparison of 1H15 versus 2H14 cash earnings basis (unless otherwise stated) | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Solid performance before Treasury and derivative adjustments 20 Cash earnings ($m) Income/Expenses ($m) 3,856 59 (73) (32) (32) 3,778 2H14 Operating income Expenses Impairment charges Tax & NCI 1H15 1H14 2H14 1H15 1H151H14 (%) 1H15- 2H14 (%) Total operating income 9,859 9,961 10,020 1.6 0.6 Treasury income 303 170 123 (59.4) (27.6) Derivative adjustments 0 0 (122) n/a n/a All other income 9,556 9,791 10,019 4.8 2.3 Expenses (4,065) (4,181) (4,254) 4.6 1.7 Down 2% | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack $159m drag from infrequent and volatile items 21 2H13 1H14 2H14 1H15 Asset sales (Hastings/Visa shares) 21 30 29 6 Performance fees 43 29 17 25 Group CVA 47 2 (19) (22) Tax matters resolved 0 0 56 0 Derivative adjust. (85) Total cash earnings impact 111 61 83 (76) Cash earnings impact of infrequent/volatile items ($m) Reported profit versus cash earnings ($bn) $159m lower (4.2% cash earnings impact) 3.46 3.62 3.94 3.61 3.56 3.77 3.86 3.78 2H13 1H14 2H14 1H15 Reported profit Cash earnings | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Capital considerations Asset quality a highlight and sector deep dives Expenses tightly managed Disciplined growth/margin outcomes Investor property regulation Areas of interest in result 22 Features of Markets and Treasury income | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Markets customer income higher offset by derivative valuation adjustments1 23 380 389 420 455 84 140 72 147 67 (1) (22) (153) 531 528 470 449 2H13 1H14 2H14 1H15 2H13 1H14 2H14 1H15 2H13 1H14 2H14 1H15 2H13 1H14 2H14 1H15 Customer income Derivative valuation adjustments1 Total 1 Includes charge for methodology changes to derivative adjustments of $122m (pre tax) and CVA of $31m (pre tax) in 1H15. Markets income by component ($m) Market risk related income | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Treasury income lower, substantial rebasing from GFC highs 24 1 FY08 and FY09 based on pro forma cash earnings. Treasury income ($m) 226 306 970 756 618 720 577 473 2.2 2.1 5.8 4.5 3.6 4.0 3.1 2.4 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 0 100 200 300 400 500 600 700 800 900 1000 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Treasury income ($m) % of Group income 376 201 303 170 123 1H13 2H13 1H14 2H14 1H15 Historical view Last five halves 1 1 | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Sound new lending growth offset by higher run-off 25 1 Includes Private Bank business within BT. 2 Gross loans. 3 Includes WRBB, SGB and BT. 4 Prior period balances have been restated for Working Capital adjustments. 5 Over last 12 months. 6 Includes Australian and offshore balances. Australian mortgage lending1,2 ($bn) Managing investment property lending growth • APRA indicated potential capital requirements if investor property lending growth above 10% benchmark • Based on APRA’s definition, WBC investor property lending currently growing at ~11.5%5 • Adjusting lending criteria to actively manage investor property growth to 10% WIB lending4,6 ($bn) 64.0 66.2 3.4 0.3 0.1 0.1 70.1 1H14 2H14 Corporate & Institutional lending Securitisation & asset finance Trade finance Other 1H15 Up 6% 338.0 351.0 362.8 (23.9) (25.2) 36.9 37.0 1H14 New lending Run-off 2H14 New lending Run-off 1H15 Australian retail business lending2,3,4 ($bn) 80.7 81.9 82.4 9.1 9.1 (7.9) (8.6) 1H14 New lending Run-off 2H14 New lending Run-off 1H15 Up 1% Up 1% Up 3% Up 4% | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack NIM excluding Treasury and Markets well managed 26 Net interest margin (NIM) movement (%) NIM (%) NIM by division (%) 2.01 2.01 2.01 0.10 0.05 0.04 2.11 2.06 (6bps) 5bps 3bps (1bp) (1bp) (1bp) 2.05 1H14 2H14 Assets Customer deposits Term wholesale funding Liquidity costs Capital & other Treasury & Markets 1H15 NIM excl. Treasury & Markets Treasury & Markets impact on NIM 2.17 2.18 2.19 2.12 2.11 2.06 2.05 2.07 2.03 2.06 2.06 2.01 2.01 2.01 1H12 2H12 1H13 2H13 1H14 2H14 1H15 NIM NIM excl. Treasury and Markets 2.33 2.28 2.06 2.36 2.27 2.00 2.36 2.29 1.89 WRBB/SGB NZ WIB 1H14 2H14 1H15 NIM down 1bp NIM excl. Treasury & Markets flat | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Well controlled expenses in 1H15 27 Expense movements ($m) Composition of expense growth per half (%) 1.7 1.5 1.0 1.1 0.6 0.1 1.2 0.6 0.8 0.6 0.9 0.7 2.9 3.3 2.9 1.7 2H13 1H14 2H14 1H15 Operating expenses Amortisation FX Lloyds 4,254 4,065 4,181 144 4,212 19 4,231 23 (113) 1H14 2H14 Operating expenses Productivity benefits 1H15 pre investment Investments 1H15 pre FX FX 1H15 Up 0.6% Up 0.4% Up 0.7% | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Asset quality a highlight 28 0.88 1.30 3.09 3.20 2.48 2.17 1.60 1.37 1.24 1.12 2007 2008 2009 2010 2011 2012 2013 1H14 2H14 1H15 Watchlist & substandard 90 days past due and not impaired Impaired Stressed exposures as a % of TCE Stressed exposure by industry over last 3 halves ($bn) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Property & business services Retail lending Wholesale & retail trade Agriculture, forestry & fishing Manufacturing Transport & storage Accommodation, cafes & restaurants Construction Mining Finance & insurance Services Utilities Other 1H15 lower stressed exposure 1H15 higher stressed exposure | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Sector deep dives 29 1 Includes impaired exposures. 2 % of portfolio is to TCE. Mining portfolio Commercial property portfolio Commercial property (TCE) by borrower (%) TCE $11.7bn Lending $7.0bn % of Group TCE 1.28% % of portfolio graded as stressed1,2 3.67% % of portfolio in impaired2 0.97% 44 5 15 12 17 7 Oil and gas Iron ore Other metal ore Coal Mining services Other Mining portfolio (TCE) by sector (%) TCE $64.8bn Lending $50.5bn % of Group TCE 7.11% % of portfolio graded as stressed1,2 1.75% % of portfolio in impaired2 0.80% 43 10 25 22 Exposures <$10m Developers >$10m Investors >$10m Diversified property groups and property trusts >$10m | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Impairments up off a low base, strong provisioning cover 30 Mar-14 Sep-14 Mar-15 Impaired asset provisions to impaired assets (%) 46 45 48 Collectively assessed provisions to credit RWA1 (bps) 97 93 89 Economic overlay ($m) 398 389 387 1 RWA is risk weighted assets. Impairment charge movements ($m) 555 349 335 293 (289) (292)(247)(218) 382 331 371 330 (239) (47) (150) (64) 409 341 309 341 2H13 1H14 2H14 1H15 2H13 1H14 2H14 1H15 2H13 1H14 2H14 1H15 2H13 1H14 2H14 1H15 2H13 1H14 2H14 1H15 New IAPs Write-backs & recoveries Write-offs direct Other movements in collective provisions Total Individually assessed Provisioning cover Collectively assessed Impairment charges to average gross loans (bps) Mar-14 Sep-14 Mar-15 Impairment charges 12 11 11 Impairment charges including interest adjustment 16 15 15 | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Organic Other items Capital drivers and considerations 31 1 Other includes capital deductions. 2 Includes impact of mortgage RWA changes of 22bps and other smaller model changes. 3 Internationally comparable ratio - see slide 92 of 2015 Half Year Presentation and Investor Discussion Pack for reconciliation and explanation. 4 APRA have clarified that holding companies are to be part of the Level 2 Group for regulatory purposes. Transitional arrangements are in place for major banks. 5 BCBS is Basel Committee on Banking Supervision. Common equity Tier 1 ratio (% and bps) Other capital reviews with uncertain impact and timing 8.97 109 8.76 12.73 (72) (7) (12) (19) (14) (6) Sep-14 Cash earnings 2014 final dividend (net DRP) RWA movement Other Model changes FX translation Defined benefit pension fund Mar-15 Mar-15 Internat. Comp. • RBNZ changes to investment property loans • Changes in IRRBB calculations • Adjustment for wealth leverage4 (Westpac Group not affected) • Westpac potential sale of certain Pacific Island operations Known capital impacts • Government and APRA response to FSI report • BCBS2,5 proposals (Basel IV) announced Dec 2014. Proposed changes to standardised approach for determining Credit RWA and consults on RWA capital floors for advanced banks • BCBS review of calculation of RWA for traded risk and operational risk 1 2 3 | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Considerations for 2H15 Disciplined growth in housing, business lending, household deposits and wealth to continue Asset competition expected to continue with lower funding and deposit costs helping to offset. Aiming for flat margins excluding Treasury and Markets Productivity benefits expected to continue, largely offsetting business as usual expenses. Higher amortisation in 2H15 Strong balance sheet with leading asset quality. Impairment charges expected to remain low although write-backs likely to reduce All divisions continuing to show good momentum 32 Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Investor Discussion Pack Comparison of 1H15 versus 2H14 cash earnings basis (unless otherwise stated) Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Strategy Comparison of 1H15 versus 2H14 cash earnings basis (unless otherwise stated) | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Our strategic priorities will deliver for all stakeholders 35 Service Revolution Digital Transformation Performance Discipline Targeted Growth Workforce Revolution One of the World’s Great Service Companies 21st Century Bank Region’s Best Performing Bank Building new Growth Highways Talent Factory Strategic Priorities Indicators ROE above 15% Customer franchise growth Lower expense to income ratio Targeted growth in Asia, wealth and SME Leading employee engagement | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Westpac stands for 36 • ‘One team’ culture managing the business in a disciplined way to build long term value • CET1 capital ratio at higher end compared to international and Australian peers1 • Sector leading asset quality through last significant stress test (global financial crisis) • High quality portfolio, biased to secured consumer lending • Provisioning cover at upper end of peers • Maintained stable funding ratio with high liquidity levels • Expense to income ratio at lower end of global peers and below average of Australian major banking peers3 • Productivity culture has delivered $1.4bn of savings since FY09 • Significant further opportunities with digital transformation Service focussed Strategically well placed Focussed on core markets Leader in strength Global efficiency leader Sustainability leader • Our vision is to be one of the world’s great service companies, helping our customers, communities and people to prosper and grow • Customers at centre of everything we do • Our people are empowered at every level to deliver a better experience for our customers • No 1 or 2 position across key markets with all divisions well placed • Diverse portfolio of distinct brands across key markets appealing to a broader customer set • Enhanced strategic options through portfolio of brands across distribution, marketing and pricing • Leading Institutional franchise2 • Comparative advantages in wealth across systems and products, providing wealth/ insurance to the Group’s customers • New online and mobile platforms rolled out to customers in 2015 • Major Australian bank most focussed on Australia and New Zealand where we have proven ability to add value • 95% of exposures in Australia/NZ • Expanding in Asia, connecting customers to the region • Australia’s first bank and company, in operation for 198 years • Ranked in Global 100 list of worlds most sustainable corporations for 10 of the last 11 years, including being ranked number 1 in 2014 • Global banking leader in Dow Jones Sustainability Index since 2002. Westpac achieved sector Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Overview Comparison of 1H15 versus 2H14 cash earnings basis (unless otherwise stated) | Westpac Group First Half 2015 Presentation & Investor Discussion Pack WIB Westpac NZ WRBB Westpac Group at a glance, Australia’s First Bank 38 1 As at 31 March 2015. Source: IRESS, CapitalIQ and www.xe.com based in US Dollars. 2 Data sourced from Credit Suisse analysis of expense to income ratio of world’s largest banks March 2015. 3 Source: Standard and Poor’s, Moody’s Investors Service, Fitch Ratings. 4 Westpac Group included in 2015 Global 100 most sustainable companies, announced at World Economic Forum in January 2015. 5 APRA Banking Statistics, March 2015. 6 RBA Financial Aggregates, March 2015. 7 RBNZ, March 2015. 8 Plan for Life, December 2014, All Master Funds Admin. 9 Cash earnings basis. 10 Share price as at 31 March 2015, $39.38. Customers 13m Australian household deposit market share5 23% Australian mortgage market share6 23% Australian business market share6 19% New Zealand deposit market share7 21% New Zealand consumer lending market share7 20% Australian wealth platforms market share8 20% • Australia’s first bank and first company, opened in 1817 • Australia’s 2nd largest bank, and 12th largest bank in the world, ranked by market capitalisation1 • Strategy focused on customers, differentiated through service outcomes. Value created by growth in customer numbers and depth of relationships • Supporting customers in Australia, New Zealand and the near Pacific and customers with ties to these markets • Portfolio of brands providing consumer, business and institutional banking, wealth management and insurance services, with excellent positioning in key markets • One of the most efficient banks globally2 • Rated AA- / Aa2 / AA-, with stable outlook3 • Strong capital, funding, liquidity and credit quality • Consistent earnings profile over time • Leader in sustainability4 Reported net profit $3,609m Cash earnings $3,778m Expense to income ratio9 42.5% Common equity Tier 1 capital ratio (APRA basis) 8.8% Return on equity9 15.8% Total assets $796bn Market capitalisation10 $123bn Key statistics for 1H15 Key financial data for 1H15 (31 March 2015) Westpac Retail & Business Banking Westpac Institutional Bank Westpac New Zealand St.George Banking Group BT Financial Group SGB BT PERFORMANCE DISCIPLINE | Westpac Group First Half 2015 Presentation & Investor Discussion Pack 1H15 financial snapshot 39 1 For profitability metrics the change represents results for 1H15 versus 1H14 and 1H15 versus 2H14, the actual results for 2H14 and 1H14 are not represented here. 2 All measures on a cash earnings basis. 3 EPS is earnings per share. 4 NTA is net tangible assets. 5 2H14 liquidity coverage ratio was pro forma. 6 Total liquid assets represent cash, interbank deposits and assets eligible for existing repurchase agreements with a central bank. 1H15 Change1 1H15 – 1H14 Change1 1H15 – 2H14 Earnings2 EPS3 (cents) 121.3 0% (2%) Core earnings ($m) 5,766 0% 0% Cash earnings ($m) 3,778 0% (2%) Return on equity (%) 15.8 (67bps) (54bps) Dividend per share (cents) 93 3% 1% Expense to income ratio (%) 42.5 123bps 49bps Net interest margin (%) 2.05 (6bps) (1bp) Asset quality Impairment charges to average gross loans (bps) 11 (1bp) 0bps Impaired assets to gross loans (bps) 35 (16bps) (5bps) Impaired provisions to impaired assets (%) 48 2ppt 3ppt 1H15 Change1 1H15 – 1H14 Change1 1H15 – 2H14 Balance sheet Total assets ($bn) 796 9% 3% Common equity Tier 1 capital ratio (APRA basis) (%) 8.8 (6bps) (21bps) CET1 capital ratio internationally comparable (%) 12.73 (34bps) (36bps) Risk weighted assets ($bn) 346.8 8% 5% Loans ($bn) 605 7% 4% Customer deposits ($bn) 420 8% 3% NTA4 per share ($) 11.84 6% 2% Funding and Liquidity Customer deposit to loan ratio (%) 69.5 58bps (106bps) Stable funding ratio (%) 83 (22bps) 6bps Liquidity coverage ratio (%) 114 n/a 11ppts5 Total liquid assets6 ($bn) 137 10bn 2bn PERFORMANCE DISCIPLINE | Westpac Group First Half 2015 Presentation & Investor Discussion Pack 1H15 cash earnings summary 40 1H15 ($m) % chg1 1H15-1H14 % chg1 1H15-2H14 Net interest income 6,934 4 2 Non-interest income 3,086 (3) (2) Expenses 4,254 5 2 Core earnings 5,766 0 0 Impairment charges 341 0 10 Cash earnings 3,778 0 (2) Reported net profit 3,609 0 (8) (32) 3,856 115 3,778 (56) (73) (32) 2H14 Net interest income Non-interest income Expenses Impairment charges Tax & NCI 1H15 3,772 257 34 3,778 (96) (189) 1H14 Net interest income Non-interest income Expenses Impairment charges Tax & NCI 1H15 1 For profitability metrics the change represents results for 1H15 versus 2H14 and 1H15 versus 1H14, the actual results for 2H14 and 1H14 are not represented here. • Cash earnings down 2% with: WRBB up 2%; SGB up 4%; BTFG down 2% (impacted by higher insurance claims); WIB down 13% (impacted by derivative adjustments) and Westpac NZ up 4% (up 2% in NZ$) • Cash earnings absorbed $85m change related to derivative adjustments, and lower Treasury income (in Group Businesses) • Net interest income rose 2%, with a 3% rise in average interest-earning assets partially offset by a 1bp decline in net interest margin. Lower NIM due to Treasury, with margin excluding Treasury and Markets flat • Non-interest income down 2% impacted by derivative adjustments. Excluding this, non-interest income up 2% with an increase in markets income, following the increased volatility in FX markets • Expenses up 2% or 1% excluding FX translation impacts. $113m of productivity savings delivered this half • Impairment charges up 10%, with fewer WIB write-backs in the period • Cash earnings flat with: WRBB up 8%; SGB up 9%; BTFG up 2%; WIB down 17% (impacted by derivative adjustments and lower impairment benefit) and Westpac NZ up 5% (up 2% in NZ$) • Net interest income up 4%, driven by a 7% rise in average interest-earning assets. Net interest margin down 6bps due to Treasury and Markets. Margin excluding Treasury and Markets was flat • Non-interest income down 3% impacted by derivative adjustments. This decline more than offset growth in wealth management income and higher fees and commissions • Expense growth 5%. Expense growth of 3% excluding Lloyds acquisition and FX translation impacts. Productivity savings of $230m over last 12 months, mostly offset operating cost increases, with expense growth due | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Actively managing returns 41 1 1H15 ex derivative adjustment. 2 Return on average interest-earning assets. 3 Average ordinary equity. Return on average interest-earning assets (AIEA) (%) 2H13 1H14 2H14 1H15 Actual 1H15 ex deriv. adjust.1 Net interest income (margin) 2.12 2.11 2.06 2.05 2.05 Derivative adjustments - - (0.04) - Non-interest income 0.99 1.00 0.95 0.95 0.95 Operating expenses (1.29) (1.28) (1.26) (1.26) (1.26) Core earnings 1.82 1.83 1.75 1.70 1.74 Impairment charges (0.13) (0.11) (0.09) (0.10) (0.10) Tax & non-controlling interests (0.52) (0.53) (0.49) (0.48) (0.50) Cash Earnings (ROA2) 1.17 1.19 1.17 1.12 1.14 Leverage (AIEA/AOE3) 13.55 13.85 14.01 14.16 14.16 Return on average ordinary equity (ROE) 15.80 16.48 16.35 15.81 16.17 PERFORMANCE DISCIPLINE | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Retail and business banking engine room of growth 42 1 Refer to division definitions, slide 143. 2 Derivative adjustment. 3 Other includes Group Businesses (including Treasury) and Westpac Pacific. 4 In A$. (85) 3,856 20 31 16 3,778 (8) (8) (44) 2H14 WRBB SGB BTFG Deriv. adjust. WIB NZ Other 1H15 1H15 divisional contribution to cash earnings1 ($m) 5,780 37 34 40 29 5,766 (13) (122) (19) 2H14 WRBB SGB BTFG Deriv. adjust. WIB NZ Other 1H15 1H15 divisional contribution to core earnings1 ($m) 1H15 ($m) WRBB SGB BTFG WIB NZ4 Other3 Group Operating income 3,835 2,113 1,340 1,506 1,008 218 10,020 Expenses (1,685) (801) (668) (624) (408) (68) (4,254) Core earnings 2,150 1,312 672 882 600 150 5,766 Impairment (charges) / benefits (221) (116) 4 22 (30) 0 (341) Tax & non-controlling interests (579) (359) (225) (280) (157) (47) (1,647) Cash earnings 1,350 837 451 624 413 103 3,778 % of Group cash earnings 36 22 12 17 11 2 100 Flat Down 2% 3 3 2 WIB total (93) WIB total (82) 2 PERFORMANCE DISCIPLINE | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Continued to grow dividend 43 • Seek to consistently lift ordinary dividend cents per share each half while maintaining a strong capital position to support growth • Pay fully franked dividends, utilising franking surplus to distribute value to shareholders • Maintain payout ratio that is sustainable in the long term 6.3 6.0 5.2 5.7 5.1 8.9 8.5 7.5 8.2 7.3 1H13 2H13 1H14 2H14 1H15 WBC yield WBC fully franked yield 78 76 76 77 74 74 77 1H12 2H12 1H13 2H13 1H14 2H14 1H15 1 $2bn is an estimate and relates to both DRP and DRP underwrite. 2 1H15 ordinary dividend (annualised) using 1 May 2015 Westpac closing share price of $36.73. 3 Data using past half year dividends and share price as at 31 March and 30 September in each of the years. Includes special dividends in 1H13 and 2H13. • 1H15 ordinary dividends of 93 cents, up 1% (up 3% on 1H14) • Payout ratio of 77% (ex derivative adjustments payout ratio 75%) – Acting to increase capital ratios by issuing shares to satisfy the DRP with 1.5% discount – Partially underwriting DRP to $2bn1 • 1H15 dividend yield2 5.1% – Equivalent to a fully franked dividend yield2 of 7.3% • Franking balance of $471m after allowing for interim dividend payment 76 80 82 84 86 88 90 92 93 10 10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 Dividends per share (cents) Key dividend considerations Westpac dividend yield2,3 (%) Ordinary dividend payout ratio (%) Special dividends PERFORMANCE DISCIPLINE Payout ratio 75% ex derivative adjustments | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Cash earnings and reported net profit reconciliation 44 1H15 ($m) % change 1H151H14 % change 1H152H14 Cash earnings 3,778 0 (2) Cash EPS (cents) 121.3 0 (2) Reported net profit 3,609 0 (8) 2H14 1H15 Reported net profit 3,939 3,609 Treasury shares (6) 37 Ineffective hedges 29 (1) Fair value (gain/loss) on economic hedges (151) 26 Buyback of government guaranteed debt (12) (1) Amortisation of intangible assets 77 73 Acquisition transaction and integration expenses 26 35 Fair value amortisation of financial instruments 8 0 Bell litigation provision (54) 0 Westpac Bicentennial Foundation grant 70 0 Prior period tax provisions (70) 0 Cash earnings 3,856 3,778 • Westpac Group uses a measure of performance referred to as cash earnings to assess financial performance at both a Group and divisional level • This measure has been used in the Australian banking market for over a decade and management believes it is the most effective way to assess performance for the current period against prior periods and to compare performance across divisions and across peer companies • To calculate cash earnings, reported net profit is adjusted for – Material items that key decision makers at the Westpac Group believe do not reflect ongoing operations (both positive and negative) – Items that are not considered when dividends are recommended, such as the amortisation of intangibles, impact of Treasury shares and economic hedging impacts – Accounting reclassifications between individual line items that do not impact reported results 1 Cash earnings is not a measure of cash flow or net profit determined on a cash accounting basis, as it includes non-cash items reflected in net profit determined in accordance with AAS (Australian Accounting Standards). The specific adjustments outlined include both cash and non-cash items. Cash earnings is reported net profit adjusted for material items to ensure they appropriately reflect profits available to ordinary shareholders. All adjustments shown are after tax. For further details refer to slide 142. Cash earnings policy1 Reported net profit and cash earnings1 adjustments ($m) Reported profit and cash earnings ($bn) PERFORMANCE DISCIPLINE 3.5 3.6 3.9 3.6 3.6 3.8 3.9 3.8 2H13 1H14 2H14 1H15 Reported profit Cash earnings | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Delivering digital innovation for customers 45 Lost your wallet? • Emergency cash solution supporting 272,000 cardless cash transactions Need a loan quickly? • St.George Bank online applications for cards and loans Expanded help for small businesses? • Access to online tools and resources to help small businesses grow, complementing our expanded videoconferencing facilities In a rush? • Mobile ‘Tap and Pay’ now for American Express cards Open a new account anytime • 5-minute account opening through online electronic data validation Make logging on safer and easier? • Fingerprint and PIN logon for mobile customers Need enhanced online help? • Improved customer support through online ‘Click to chat’ Leading mobile and digital capabilities Fewer complaints! • 35% reduction in complaints1 compared to 1H14 Westpac Live won Best Innovative Online Banking Service in Money Magazine’s 2015 Best of the Best Innovation awards St.George won the Best New Innovative Product for its MoneyMeter Smartwatch app (Android) ‘St.George Fingerprint logon’ won the Security & Fraud Management Category of the Financial Insights Innovation Awards (FIIA) 2015 SERVICE REVOLUTION 1 Total complaints for WRBB/SGB/BT. | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Steadily building customer franchise 46 1 Refer slide 145 for wealth metrics provider. 2 Refer slide 145 for customer satisfaction details. Customer numbers and depth of relationship Customer satisfaction Initiatives to drive customer growth and satisfaction 6.1 6.2 6.4 3.2 3.6 3.7 1H13 1H14 1H15 WRBB SGB 9.3 9.8 10.1 21.8 17.1 14.6 19.5 12.3 Mar-13 Mar-14 Mar-15 WRBB SGB Peers 1 16 23 21 27 39 1H13 1H14 1H15 WRBB SGB Customer numbers (#m) Customers with a wealth product1 (%) Total consumer satisfaction2 (%) Total business satisfaction2 (mean) Smart ATMs as a % of ATM network Total customer complaints across WRBB, SGB and BT (#) 1H13 1H14 1H15 Down 35% SERVICE REVOLUTION 83.7 86.6 81.7 83.0 Mar-13 Mar-14 Mar-15 WRBB SGB Peers 7.5 7.5 7.1 Mar-13 Mar-14 Mar-15 WRBB SGB Peers | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Digital transformation is reshaping the company 47 62.0 60.7 60.4 59.8 56.9 53.8 45.5 44.7 44.0 42.5 42.2 US regional bank average Canadian bank average European banks UK bank average Korean bank average NAB Hong Kong bank average ANZ Singapore bank average WBC CBA Migration to digital is removing complexity in processes and is reducing manual activity • Continuing shift from manual transactions (branches, cheques, telephone service) to digital transactions (online, smart ATM, direct entry) • Greater focus on mobile capability • Increased straight through processes • Material upgrade in technology infrastructure has improved system stability and enhanced customerfacing systems • Next stage is a customer service hub that will improve efficiency and support the service focused strategy 1 Company data, Credit Suisse. Expense to income ratio average for all banks (excluding WBC/CBA) are based on their FY14 results. WBC and CBA based on 1H15 results. 43.1 42.6 52.7 33.1 42.2 41.3 50.6 36.7 41.8 40.6 49.9 41.4 WRBB/SGB NZ BTFG WIB 1H13 1H14 1H15 Global peer comparison of expense to income ratios1 (%) Divisional expense to income ratios (%) Supporting the service revolution Digital transformation Building technology architecture for the future Delivering digital solutions that improve the customer experience and help customers to bank when and where they want • New online platform in WRBB and New Zealand • New services to improve convenience (i.e. get cash, online applications) • Increased ability for customers to self-serve DIGITAL TRANSFORMATIO N | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Digital transformation continues 48 >200% increase in digital gross productivity save1 95% increase in mobile sales2 2.5% increase in active digital customers in 1H15 >13% digital sales as a % of retail sales 2.6m active mobile customers 3.1m consumers migrated to Westpac Live 300K business customers migrated to Westpac Live $84m new sales revenue from digital in 1H15 35% reduction in complaints2 >58% of customers bank with us on a mobile device 1 Productivity benefits associated with shifting service activity out of high-cost channels such as branches and contact centres to lower-cost channels such as digital. 2 Total for WRBB/SGB/BT and 1H15 compared to 1H14. DIGITAL TRANSFORMATIO N 1H13 2H13 1H14 2H14 1H15 Active digital customers (m) 3.52 3.65 3.77 3.97 4.07 % of digital sessions via mobile 43.5 46.1 51.3 53.8 59.6 Australian digital banking logins (m) 288 320 338 359 389 Digital sales as a % of total retail sales 10.2 9.1 10.6 10.5 13.3 Increasing use of digital by customers 52.8 44.0 35.3 -1.6 -15.0 -26.4 -34.6 Digital EFTPOS Direct Entry Branch ATM Cheques Telephone Shift in payment transactions FY11 – 1H15 (%) | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Our customer focused technology strategy continues to deliver 49 Channel Systems • 502k additional accounts have switched to e-statements in 1H15 Customer Service Hub • Progressing the next step in our transformation to put the customer at the centre of our technology systems Product Systems • Second release of Panorama Wealth platform introducing ‘BT Managed Portfolios’ for sale through financial advisors • Work underway to upgrade Hogan in St.George Analytics Systems • Systems in place to deliver information on next best offer and notifications to help customers manage their finances (i.e. due payments) • Further development underway to deliver improved customer insights and more personalised offers Infrastructure Platforms • Upgrade to data centres has enabled the further closure of 2 data centres (East Chatswood and Kent Street) • Upgrades have materially enhanced stability – Severity 1 incidents down 50% in 1H15 Customer Service Hub Channel Systems Analytics Systems Customer Data Product System A Product System B Product System C Product System D Infrastructure Platforms We are building a world-class technology leadership team focused on developing our target architecture and transforming our infrastructure. The team continues to drive efficiencies to create the headroom for additional investment in strategic programs DIGITAL TRANSFORMATION | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Building new growth highways 50 Targeted Growth Building new Growth Highways Wealth Asia SME • Helping to deepen customer relationships while providing high quality earnings and low capital intensive growth • Proven track record of delivering wealth/insurance products to customers1 • Technology providing better customer access and a comparative advantage for Westpac – Panorama2 (integrated wealth system to transform how customers manage, build and protect their wealth) progressively being rolled out – In FY14 the BT Cash Hub was launched (balances now over $1bn) – 1H15 BT Managed Portfolio released and continuing to attract more advisers onto platform (over 1,300 advisors currently registered) • New technology and simplification of systems/processes is allowing Westpac to deliver a high quality, low cost to serve model to better support SME customers – 49% of WRBB/SGB sites3 have business connect which gives customers immediate face-to-face access to over 120 experts via videoconference – Driving product simplicity including SGB Digital BizPack (5 essential products, 15 minute sign-up). WRBB equivalent My Business Solutions launched in April 2015 – New online lending application tool (LOLA) for local business bankers providing them with more customer information, conditionally approved limits and maturing facility information • Building capabilities and capacity in Asia to seamlessly connect our customers to the increasing flows of global trade, capital and people between Australia/NZ and Asia. Increased our team in Asia by 17% to 506 FTE • Completed technology foundations including global trade platform and core banking systems. Now offering faster end-to-end processing • Sub-branch in the Shanghai Free Trade Zone is now operational • Became a foundational bank for the Sydney RMB Hub announced in November and continue to be a lead market maker in AUD/CNY and NZD/CNY • 1H15 welcomed our 500th new corporate customer 1 Refer slide 145 for wealth metrics provider details. 2 Refer slide 109 for more information on Panorama. 3 Sites is branches and standalone business banking centres excluding instores. TARGETED GROWTH | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Workforce revolution 51 • ‘Building a high performance culture through improved management and performance systems, and by enhancing the Group’s leadership capabilities, through training and education • Developing a workforce that better meets the company’s needs with a mix that is more reflective of society, including increased flexibility; gender equality in leadership roles; and delivering on our reconciliation action plan • Creating physical workspaces that deliver more for our teams. New sites are already operational including the new Melbourne head office. Future sites including a new corporate office at Barangaroo are in development • Simplifying employee arrangements and processes including the development of a new enterprise agreement to increase workforce flexibility and simplify our industrial terms • Key indicators of success include employee engagement (biannual survey) and employee metrics shown LTI2 frequency rate (rolling 12 months) (#) Women in leadership positions1 (%) New starter retention (rolling 12 months) (%) High performer retention (rolling 12 months) (%) 1 Spot number as at balance date. 2 LTI is lost time injury. 41 43 44 Mar-13 Mar-14 Mar-15 1.8 1.4 0.9 Mar-13 Mar-14 Mar-15 96.0 95.6 95.7 Mar-13 Mar-14 Mar-15 85.7 86.7 87.6 Mar-13 Mar-14 Mar-15 WORKFORCE REVOLUTION ‘Workforce revolution’ is a program to further transform Westpac’s workforce to encourage and retain the best talent | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Continued sustainability leadership 52 1H15 progress Priority Objectives 1H15 progress • Ensure our workforce is representative of community • Women in leadership steady at 44%, and up from 43% one year ago • Recruited an additional 67 Indigenous Australians • Participation of mature aged workers (50+) has remained steady at 20.9% • Extend length and quality of working lives • Mean employee retirement age 61.5 years, down from 61.6 (but up from 61.4 one year ago) • Anticipate the future product and service needs of aging and culturally diverse customers • Launched BTFG changing the face of financial planning. Five initiatives now launched since 2013 • Provide products/services to help customers adapt to environmental challenges • Work continues to build on the four products already launched, ahead of target • Increase lending and investment in CleanTech and environmental services • Group exposures (TCE) to the CleanTech and environmental services sector have grown by $50m, taking total exposures to over $8.0bn • Continue to reduce our environmental footprint • On track to maintain carbon neutrality for FY15 and achieve electricity and paper reduction targets • Ensure customers have access to the right advice to achieve a secure retirement • The proportion of customer facing employees with wealth accreditation remains steady at 12% • Help customers meet their financial goals in retirement • Commenced a new retention program with a range of activities planned to meet the 2017 target • Increase access to financial services in Pacific Island nations • Provided over 32,000 new basic banking accounts • More than doubled number of mobile activations to over 40,000 • Help people gain access to social and affordable housing • $1bn lent to the social and affordable housing sector as at 31 March 2015, up from $0.82bn Sustainability strategic priorities • Global banking leader in the Dow Jones Sustainability Index since 2002. Westpac was the sector leader from 2002-2007, in 2011 and in 2014 • Ranked as one of the Global 100 Most Sustainable Corporations in the World by Corporate Knights for 10 of the last 11 years, including being ranked number 1 in 2014 Leading track record • Westpac supported the Westpac Bicentennial Foundation which awarded the first 22 scholarships from the Westpac Bicentennial Foundation, Australia’s largest ever private education scholarship fund • Launched a Social Impact Framework to ensure our activities deliver the greatest social and business benefit • | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Helping communities prosper and grow 53 1 All figures for the six months to 31 March 2015 unless otherwise stated. 2 New mortgage and new business lending in Australian retail and business banking operations. 3 Includes NZ and Pacific. 4 Is a FY14 number. Supporting communities1 One of Australia’s largest taxpayers, with an effective tax rate 29.7% Employ approximately 36,500 fulltime equivalent employees $46bn new lending2 of $524bn total Aust. loans Provide loans to help millions of Australians own their home or grow their business Funding economic activity $2.9bn in dividends Supporting working or retired Australians either individually (595K shareholders) or via their super funds Wealth of many Australians >$1.6bn in tax expense The bottom line $2.4bn in employee expenses The workforce 2%4 community contributions to pre-tax profit Invested $217m3,4 via community contributions The nation Income tax expense on a cash earnings basis ($m) 1H14 2H14 1H15 Notional income tax based on the Australian company tax rate of 30% 1,636 1,641 1,628 Net amounts not deductible/(not assessable) 7 (54) (15) Total income tax expense in the income statement 1,643 1,587 1,613 Effective tax rate (%) 30.1 29.0 29.7 Other tax/government payments ($m) 1H14 2H14 1H15 Net GST, Payroll tax, FBT 218 208 228 Westpac also makes a number of other government and regulatory payments including fees for Government guarantees, APRA fees and stamp duties which are not included in the above. Similarly, Westpac also collects tax on behalf of others, such as withholding tax, PAYG and GST. These have been excluded from this analysis SUSTAINABLE FUTURES Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Earnings Drivers Comparison of 1H15 versus 2H14 cash earnings basis (unless otherwise stated) | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Net operating income up 1% 55 1 AIEA is average interest-earning assets. 2 Other includes Group Businesses and Westpac Pacific. 3 DA is derivative adjustments. • Net operating income up 1% • Net interest income up 2% – AIEA1 growth of 3% mostly from rise in Australian mortgages – Customer deposit growth of 3%, with focus on growing LCR efficient deposits – Net interest margin down 1bp due to lower Treasury revenue. Margins excluding Treasury and Markets flat • Non-interest income down 2% – Fees and commissions up 1% to $1,478m – Wealth and insurance down 1% to $1,134m – Trading income, down 10% to $425m (up 16% excluding derivative adjustments) – Other income down 17% to $49m 9,859 9,961 10,020 (86) 245 10 34 201 10 (103) (77) (7) (11) (45) (10) 1H14 AIEA growth Margins Fees & commissions Wealth Trading Other 2H14 AIEA growth Margins Fees & commissions Wealth Trading Other 1H15 9,859 9,961 10,020 1H14 2H14 1H15 Net operating income movement half on half ($m) Operating income ($m) and divisional % contribution to 1H15 9,859 144 134 13 31 9,961 66 23 2 65 46 10,020 (2) (218) (122) (21) 1H14 WRBB SGB BTFG WIB NZ Other 2H14 WRBB SGB BTFG DA WIB NZ Other 1H15 Divisional contribution to net operating income ($m) 38% 21% 13% 15% 10% 3% WRBB SGB BTFG WIB NZ Other Up 1% Up 1% Net interest up 2% Non-interest down 1% Net interest up 2% Non-interest down 2% 2 2 2 3 WIB total (57) REVENUE | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Loan growth predominantly from Australian mortgages and institutional 56 338.0 351.0 362.8 20.6 21.4 22.1 133.2 136.9 139.7 2.0 2.0 1.9 Mar-14 Sep-14 Mar-15 Margin lending Business Personal (loans + cards) and other Housing 338.0 351.0 20.5 16.5 362.8 (25.2) Mar-14 Sep-14 WRBB new lending SGB new lending Net run-off Mar-15 Up 3% 133.2 136.9 0.4 0 2.2 0.2 139.7 Mar-14 Sep-14 WRBB SGB WIB Other Mar-15 Up 2% 1 Other includes other offshore lending. 2 Includes Private Bank within BT. • Westpac Group loans up 4% (up 3% excluding foreign exchange translation impacts) • Australian mortgage lending up 3% – Small rise in new lending although run-off increased 6% reflecting accelerated customer repayments and lower interest rates • Australian business lending up 2% – Growth weighted towards corporate in property and natural resources – Continued run-off in stressed assets, though at a slower rate • Australian personal lending up 3% – Growth in auto finance portfolio and credit card balances • New Zealand lending up 3% (in NZ$ terms) with similar growth across mortgages and business. Lending up 13% in A$ terms due to exchange rate movements • Other overseas lending up 13% with majority of growth due to foreign exchange impacts of $1.8bn. Trade finance volumes impacted by lower commodity prices 564.6 580.3 605.1 11.8 2.8 0.6 7.7 1.9 Mar-14 Sep-14 Australian housing Australian business Australian other New Zealand Other Mar-15 Net loans ($bn) Australian gross loans ($bn) Australian mortgage flow (gross loans) ($bn) Australian business (gross loans) ($bn) 1 REVENUE 2 2 Up 4% | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian mortgages driver of lending growth 57 0.9 1.0 0.9 1H14 2H14 1H15 18.4 19.7 19.8 14.7 17.2 17.2 1H14 2H14 1H15 Proprietary 3rd party 1 RBA Financial Aggregates, March 2015. 2 Includes Private Bank business within BT. 3 Gross loans. 4 Westpac data, APRA ADI property exposure statistics, December 2014. 5 Other ADIs consist of authorised deposit taking institutions that are not banks, building societies or credit unions. • Australian mortgage market share1 of 23.1% – Grew at 0.9x system1 • 3% lift in balances – Higher new lending volumes – Partly offset by run-off of $25.2bn, up 6% • Average dynamic LVRs slightly lower • % of loans written over 80% largely steady and significantly lower than industry • Mortgage complaints down 6% Australian mortgage lending volumes2,3 ($bn) Mortgage growth multiple of system1 (x) Australian new mortgage lending2 ($bn) Loans approved above 80% LVR4 (%) 5 338.0 351.0 362.8 ( 23.9) ( 25.2) 36.9 37.0 1H14 New lending Run-off 2H14 New lending Run-off 1H15 0 10 20 30 40 WBC ADIs (excluding other non-bank ADIs) REVENUE Up 4% Up 3% | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Business remains subdued, with high repayment levels continuing 58 1 Sites is branches and stand alone business banking centres excluding instores. 2 Includes WRBB, SGB and BT. 3 Prior period balances have been restated for Working Capital adjustments. 4 Gross loans. 5 Business banking customers of WRBB and St.George. 6 Net loans. 7 Includes Australian and offshore balances. • Westpac Group business lending up 4%, primarily driven by institutional customers • WIB business balances up 6% – Majority of growth in corporate and institutional lending (up 7%), predominantly commercial property and natural resources • WRBB/SGB business balances up 1% – Business customers up 4% – Conditions remain subdued with customers choosing to use surplus cash flow to pay down existing debt – New lending of $9.1bn was largely offset by higher run-off ($8.6bn) – WRBB Connect Now in 46% of sites1 and SGB Business Connect in 55% of sites1 delivering low cost-to-serve model to more customers – Business and merchant complaints down 13% Australian business banking customers5 (#000) WIB lending6,7 ($bn) Australian retail business lending2,3,4 ($bn) 949 969 985 1,007 1,038 1,132 1,174 1H12 2H12 1H13 2H13 1H14 2H14 1H15 Lloyds 70 77.4 80.7 81.9 82.4 8.1 3.7 9.1 9.1 (8.5) (7.9) (8.6) 2H13 New lending Run-off Lloyds 1H14 New lending Run-off 2H14 New lending Run-off 1H15 Up 4% Up 1% Up 1% 64.0 66.2 3.4 0.3 0.1 0.1 70.1 1H14 2H14 Corporate & Institutional lending Securitisation & Asset Finance Trade Finance Other 1H15 Up 6% REVENUE 1,108 | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Consumer finance supported by growth in auto finance 59 1 APRA monthly banking statistics, March, 2015. 2 Rfi data, March 2015, excludes auto finance. 3 NPS among credit card customers refer slide 144 for metric provider details. 4 Includes Private Bank within BT. 5 Net loans. • Total Australian consumer finance up 3% to $21.1bn • Growth across both personal lending and credit cards modest – Applications for credit cards down 4% – Credit card growth of 1.6% below system1 growth of 3.2% – Personal lending growth at 2.6% in line with system2 • Auto finance up 6% with new business volumes and margins improving. Growth supported by 2014 Lloyds acquisition • Simplification and service enhancements improving customer experience – 33% reduction in credit card complaints – 27% reduction in personal loan complaints – SGB continued to lead majors in NPS among credit card customers and WBC rated 2nd of the majors3 Australian credit card and personal loan applications4 (#’000) Australian consumer finance lending4,5 ($bn) Australian credit cards growth relative to system1 Australian personal lending growth relative to system2 21.1 0.4 0.2 19.9 0.2 0.4 20.5 1H14 Auto finance Other consumer finance 2H14 Auto finance Other consumer finance 1H15 Up 3% Up 3% 204 179 257 240 230 145 148 160 149 150 1H13 2H13 1H14 2H14 1H15 Credit cards Personal lending REVENUE 1H13 2H13 1H14 2H14 1H15 Westpac Group (%) 1.1 (2.4) 4.3 1.2 1.6 Market (%) 1.8 (1.8) 2.2 (0.8) 3.2 Growth multiple against market (x) 0.6 n/a 1.9 n/a 0.5 1H13 2H13 1H14 2H14 1H15 Westpac Group (%) 6.5 2.9 6.7 2.8 2.6 Market (%) 6.2 3.0 4.5 1.6 2.6 Growth multiple against market (x) 1.0 1.0 1.5 1.8 1.0 | Westpac Group First Half 2015 Presentation & Investor Discussion Pack High quality deposit focus, liquidity coverage ratio higher at 114% 60 169 180 188 92 97 95 73 78 75 55 54 62 1H14 2H14 1H15 Other WIB Australian retail business Australian retail household 162 171 166 60 65 68 69 69 74 98 104 112 389 409 420 1H14 2H14 1H15 Term deposits Savings Online Transaction 1 Refer slide 145 for liquidity coverage ratio definition. 2 APRA Banking Statistics, March 2015. 3 Australian retail includes Private Bank within BT. 4 Other is predominately comprised of NZ and Westpac Pacific. 5 Pro forma. 6 Refer slide 145 for HQLA definition. 7 Refer slide 145 for CLF definition. 8 Other flows includes credit and liquidity facilities, collateral outflows and inflows from customers. 9 Calculated on a spot basis. 10 Mortgage offset accounts are included in transaction accounts. • Liquidity coverage ratio1 higher at 114% • Customer deposit LCR outflow favourable movements reflects quality improvements within the deposit book including – Shift in mix of deposits away from lower quality to higher quality retail and non-financial institution deposits – Customers migrating to new term deposit structures • Customer deposits up $11bn or 3% – Excluding FX translation, customer deposits increased $5.2bn – Focus on growing LCR efficient deposits (strong relationship characteristics) and with LCR costs now incorporated in pricing – Household deposit growth at 1.0x system2 • Growth across all categories except term deposits – Transactional deposits up 8%, including good growth in mortgage offset accounts – Term deposits down 3% due to lower financial institution deposits (have low LCR value) as the Group priced to improve portfolio quality Liquidity coverage ratio Australian household deposits2 market share (%), system multiple (x) Customer deposit composition3 ($bn) Customer deposit composition3 ($bn) 40% 27% 17% 16% 10 Sep-145 Mar-15 High Quality Liquid Assets6 (HQLA) 59 57 Committed Liquidity Facility7 (CLF) 66 66 Total LCR liquid assets 125 123 Cash outflows in a modelled 30 day defined stress scenario Customer deposits 75 66 Wholesale funding 20 17 Other flows8 26 25 Total cash outflows 121 108 Liquidity coverage ratio9 103% 114% 1.1 1.1 1.2 1.3 1.0 1.3 1.0 22.3 22.5 22.7 22.9 23.0 23.3 23.3 20.00 20.20 20.40 20.60 20.80 21.00 21.20 21.40 21.60 21.80 22.00 22.20 22.40 22.60 22.80 23.00 23.20 23.40 23.60 23.80 | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Delivered good growth across the New Zealand portfolio 61 24.3 24.9 24.5 25.2 25.1 20.7 21.7 23.9 24.2 26.4 45.0 46.6 48.4 49.4 51.5 1H13 2H13 1H14 2H14 1H15 Term deposits Other deposits • Mortgage growth of 3% – Good growth in a competitive market – Proportion of fixed rate mortgages now 73% of the portfolio – 83% of the portfolio in <80% LVR lending • Business lending up 4% – Good growth in food processing and agriculture lending • Deposit growth of 4% – Deposit growth fully funded loan growth in 1H15 – Growth driven by at call and transaction accounts, primarily in online deposits – Customer deposit to loan ratio now 77.3% 1H14 2H14 1H15 Change 1H15-2H14 (%) Net loans 63.2 64.6 66.6 . 3 Mortgage 38.6 39.6 40.7 . 3 Business & institutional 22.8 23.1 24.0 . 4 Other 1.8 1.9 1.9 - 0 Total deposits 48.4 49.4 51.5 . 4 Term deposits 24.5 25.2 25.1 - 0 Other 23.9 24.2 26.4 . 9 TCE 90.1 92.7 94.9 . 2 Balance sheet (NZ$bn) Customer deposits (NZ$bn) >80% LVR mortgages as a % of the portfolio Balance sheet growth compared to system1 growth (%) Mortgages System 5.7 5.2 Business Westpac NZ Deposits 10.8 11.9 21.3 20.5 18.4 17.5 16.6 1H13 2H13 1H14 2H14 1H15 REVENUE 1 RBNZ March 2015. 7.5 6.7 | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Flat net interest margin (NIM) excluding Treasury and Markets 62 • NIM down 1bp to 2.05% due to lower Treasury income • NIM up across WRBB (1bp), New Zealand (2bps), and slightly down in St.George (2bps). Most margin pressure in WIB (down 11bps) • NIM excluding Treasury and Markets flat at 2.01% – 6bps decrease in asset spreads primarily from impact of competitive pricing in mortgages. Business and institutional spreads also lower – 5bps increase from improved customer deposit spreads on term deposits, online accounts and savings deposits, partially offset by 1bps impact of lower hedging benefit on low-rate deposits – 3bps benefit from term wholesale funding as pricing for new term senior issuances was lower than maturing deals – 1bp decrease from increased holdings of high quality liquid assets and cost of CLF – 1bp decline in capital and other due to lower hedging rates • Treasury and Markets down 1bp, reflecting lower Treasury earnings 2.26 2.05 2.09 2.01 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 NIM NIM excl. Treasury and Markets Net interest margin (%) Net interest margin by division (%) 2.01 2.01 2.01 0.10 0.05 0.04 2.11 2.06 (6bps) 5bps 3bps (1bp) (1bp) (1bp) 2.05 1H14 2H14 Assets Customer deposits Term wholesale funding Liquidity costs Capital & Other Treasury & Markets 1H15 NIM excl. Treasury & Markets flat NIM down 1bp Net interest margin movement (%) 2.37 2.27 2.06 2.28 2.40 2.30 2.00 2.27 2.41 2.28 1.89 2.29 WRBB SGB WIB NZ 1H14 2H14 1H15 REVENUE | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Non-interest income impacted by derivative adjustments 63 Non-interest income ($m) Non-interest income contributors (% of total) Fees and commissions Wealth and insurance Trading income • Non-interest income down 2% – Fees and commissions up 1% to $1,478m, mostly from seasonally higher points redemption income associated with credit cards – Wealth and insurance down 1% to $1,134m with business growth (9% increase in FUM revenue; 4% increase in FUA; BTIM performance fees up $31m; general insurance net earned premiums up 6%; life net earned premiums up 1%) being offset by an increase in insurance claims (severe weather events resulted in insurance claims costs of $51m, and higher life insurance claims reflecting growth in book and rise in loss ratios to 34% from 30%) – Trading income down $45m to $425m. $122m derivative adjustment more than offset increased markets income – Other income down $10m to $49m with lower gains from asset sales compared to 2H14, partly offset by lower cost of hedging New Zealand earnings 46 46 47 48 34 35 36 37 18 17 15 14 2 2 2 1 2H13 1H14 2H14 1H15 Fees and commissions Wealth and insurance Trading income Other 1,393 1,458 1,468 1,478 2H13 1H14 2H14 1H15 1,024 1,111 1,145 1,134 2H13 1H14 2H14 1H15 550 547 470 425 2H13 1H14 2H14 1H15 REVENUE | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Markets and Treasury income: lift in customer business, treasury and derivative valuation adjustments lower1 64 • Markets income down 4% (down 15% 1H15/1H14) . Market volatility saw a lift in customer flow, with customer income up 8%, while derivative valuation adjustments1 of $153m offset an increase in market risk related income • Customer income up 8% (up 17% 1H15/1H14) . Fixed income and FX sales both increased, maintaining the strong performance delivered in the last three halves . Fixed income sales, mainly interest rate hedging products, benefited from improved deal flow through the year, including WIB’s involvement in a number of infrastructure deals. FX saw increased demand to manage currency risk from corporate and institutional customers . The successful partnership between WIB and the Australian retail and business banking divisions has also supported growth in Fixed Income and FX sales Group risk related income ($m) Markets income by activity ($m) • Group risk related income, down $103m (down $325m 1H15/1H14) . Derivative valuation adjustments1 in 1H15 reduced Group risk related income by $153m . Market risk related income was up $75m from improved trading performance in Fixed Income and FX – Treasury income $47m lower ($180m lower compared to 1H14) . Returns on the liquids portfolio have been impacted by the introduction of the LCR, which requires a significant portion of the Group’s liquid assets to be held in low-yielding, High Quality Liquid Assets, which are largely long-term holdings and not actively traded . Returns from balance sheet risk management activities also lower • WIB 1H15 average daily VaR $7.9m ($8.5m 2H14; $10.0m 1H14) • Treasury 1H15 average daily VaR $10.4m ($17.6m 2H14; $15.5m 1H14) 1 Includes charge for methodology changes to derivative adjustments of $122m (pre-tax) and CVA of $31m (pre-tax) in 1H15. 380389 420 455 84 140 72 147 67 (1) (22) (153) 531 528 470 449 2H13 1H14 2H14 1H15 2H13 1H14 2H14 1H15 2H13 1H14 2H14 1H15 2H13 1H14 2H14 1H15 Customer | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Expense growth well controlled, expense to income ratio at lower end of global peers 65 1 Company data, Credit Suisse. Expense to income ratio average for all banks (excluding WBC/CBA) are based on their FY14 results. WBC and CBA based on 1H15 results. Components of expense growth (%) Expense movement ($m) Divisional expense to income (%) Global peer comparison of expense to income ratios1 (%) 1.4 1.3 2.1 1.7 1.5 1.0 1.1 0.7 0.1 0.6 0.1 1.2 (0.1) (0.2) 0.6 0.8 0.9 0.7 0.6 1.4 1.9 2.0 2.9 3.3 2.9 1.7 1H12 2H12 1H13 2H13 1H14 2H14 1H15 Operating expenses Amortisation FX translation Lloyds 4,254 23 4,065 4,181 144 4,212 63 4,231 (113) (13) (31) 1H14 2H14 Operating expenses Productivity benefits 1H15 pre investment Growth and productivity Regulatory change Other technology 1H15 pre FX translation FX translation 1H15 Up 0.4% Up 0.7% 43.1 42.6 52.7 33.1 42.2 41.3 50.6 36.7 41.8 40.6 49.9 41.4 WRBB/SGB NZ BTFG WIB 1H13 1H14 1H15 62.0 60.7 60.4 59.8 56.9 53.8 45.5 44.7 44.0 42.5 42.2 US regional bank average Canadian bank average European banks UK bank average Korean bank average NAB Hong Kong bank average ANZ Singapore bank average WBC CBA Up 0.6% Ex deriv. adjust. 38.3% EXPENSES | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Disciplined investment spend, focused on growth and productivity 66 1 Investment spend capitalised also includes technology hardware equipment. 2 Includes positive FX revaluation of $15m and write-offs of $3m in 1H15. 3 Data for Westpac and Peer 2 from 1H15 results, and data for Peer 1 and Peer 3 from 2H14 results. Investment spend capitalised ($m) 1H14 2H14 1H15 Growth and productivity 169 166 148 Regulatory change and compliance 81 103 57 Other technology 95 97 86 Total1 345 366 291 Investment spend expensed ($m) 1H14 2H14 1H15 Growth and productivity 80 55 85 Regulatory change and compliance 74 82 51 Other technology 32 34 31 Total 186 171 167 Investment spend capitalised ($m) 1H14 2H14 1H15 Capitalised software Opening balance 1,897 2,023 2,070 Additions 332 332 274 Amortisation (209) (256) (254) Write-offs, impairments and other2 3 (29) 12 Closing balance 2,023 2,070 2,102 Other deferred expenses Deferred acquisition costs 118 129 126 Other deferred expenses 28 11 14 2.5 2.0 2.1 2.1 Peer 1 Peer 2 Peer 3 WBC Average amortisation period (excluding write-offs)3 (years) Capitalised software balance3 ($bn) 5.1 6.5 6.7 4.1 Peer 1 Peer 2 Peer 3 WBC Investment spend ($m) and mix (%) 29 35 24 47 41 51 24 24 25 1H14 2H14 1H15 Other technology Growth & productivity Regulatory change 458 537 531 Investment spend ($m) EXPENSES | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Productivity savings of $113m 67 • Bank Now/FreshStart branches now 30% of Australian branches1 • Smart ATMs process 23% of deposits in WRBB and 33% of deposits in Westpac NZ • Complaints for retailing and business banking and wealth down 21% on 2H14 and 35% on 1H14 • WIB implemented new automated payment system across Asia reducing inward FX payments from numerous manual steps to 1 automatic step • WRBB 5 minute account opening through online electronic validation • WRBB 60 minute mortgage approval introduced in 2H14 represented 18% of total applications • SGB online applications introduced for card and loan applications • New business loan origination platform reduced settlement of funds time from 19 days to 3 days $1.4bn saved from efficiency programs since FY09 ($m) 1H15 metrics 1 Branches excluding instores. 2 Cumulative numbers. 3 Total branch sales FTE including business FTE / Total FTE. 4 Percentage change is based on prior corresponding period. 1,439 143 212 289 238 225 102 117 113 FY09 FY10 FY11 FY12 FY13 1H14 2H14 1H15 FY09-1H15 cumulative Initiative 1H13 1H14 1H15 % of Bank Now / FreshStart Australian branches1,2 7% 16% 30% Australian % of smart ATMs of ATM network2 8% 20% 29% WRBB branch sales FTE/branch FTE2,3 51% 55% 59% WRBB/SGB active digital customers2 (m) 3.5 3.8 4.1 % sales growth per average customer contact centre FTE4 n/a 14% 8% Retail and business banking and wealth complaint reduction4 11% 35% Number of IT applications closed2 8 35 96 EXPENSES | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Improvements in asset quality leading to low impairment charges 68 1 Pre-2008 does not include St.George. 2008 and 2009 are pro forma including St.George for the entire period with 1H09 ASX Profit Announcement providing details of pro forma adjustments. 2 Does not include interest carrying adjustment. 3 Other includes Westpac Pacific, BT and centrally held provisions in Group Businesses. Impairment charges to average gross loans1 (bps) Impairment charge movements ($m) New IAPs, write-backs and recoveries ($m) Net change in CAPs ($m) 976 983 480 613 506 511 412 458 291 266 57 88 75 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 635 698 399 (36) (43) 19 196 146 147 143 284 221 266 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 221 266 88 11 (12) 23 9 1 75 2H14 WRBB SGB WIB NZ Other 1H15 New IAP’s $42m lower (13%) as fewer stressed assets deteriorated. Write-backs $34m lower, recoveries $5m higher New CAPs raised in 1H15 were $45m higher. Other changes in CAPs were positive however the benefit was less than that recorded in 2H14. Write-offs were little changed Up 10% 309 341 Net change in CAPs2 New IAPs, write-backs and recoveries Net change in CAPs2 New IAPs, write-backs and recoveries 3 11 15 0 20 40 60 80 100 2005 2006 2007 2008 2009 2010 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 Impairment charge Impairment charge inc. interest adjustment IMPAIRMENT CHARGES Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Asset Quality Comparison of 1H15 versus 2H14 cash earnings basis (unless otherwise stated) | Westpac Group First Half 2015 Presentation & Investor Discussion Pack High quality portfolio with bias to secured consumer lending 70 1 Exposure by booking office. Asset composition as at 31 March 2015 (%) Standard and Poor’s risk grade Australia NZ / Pacific Asia Americas Europe Group % of Total AAA to AA- 88,897 7,684 1,099 5,744 1,314 104,738 12% A+ to A- 32,259 5,271 6,350 3,539 3,071 50,490 5% BBB+ to BBB- 59,200 8,713 8,679 1,437 2,153 80,182 9% BB+ to BB 66,095 11,029 1,743 225 7 79,099 9% BB- to B+ 59,480 9,876 - 15 31 69,402 8% <B+ 6,025 1,786 - 105 3 7,919 1% Secured consumer 418,134 48,121 532 - - 466,787 51% Unsecured consumer 46,586 5,069 279 - - 51,934 5% Total committed exposures 776,676 97,549 18,682 11,065 6,579 910,551 Exposure by region1 (%) 85% 11% 2% 1% <1% 100% 2 2 10 6 76 1 2 1 Cash and balances with central banks Receivables due from other financial institutions Trading securities, financial assets at fair value and available-for-sale securities Derivative financial instruments Loans Life insurance assets Goodwill Other assets On balance sheet lending Total assets 67 18 11 4 Housing Business Institutional Other consumer Exposure by risk grade as at 31 March 2015 ($m) ASSET QUALITY | Westpac Group First Half 2015 Presentation & Investor Discussion Pack A well diversified portfolio across industries and large exposures 71 2.0 1.9 1.4 1.3 1.1 1.2 1.3 1.1 1.1 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 1H15 Largest corporation/NBFI single name exposure represents less than 0.2% of TCE Top 10 exposures to corporations & NBFIs6 as at 31 March 2015 ($m) 0 300 600 900 1,200 1,500 AAAABBBA A A ABBB AA+ S&P rating or equivalent Top 10 exposures to corporations and NBFIs6 as a % of total committed exposures7 (%) Exposures at default1 by sector2 ($m) 0 20 40 60 80 100 120 Other Mining Accommodation, cafes & restaurants Construction Utilities Transport & storage Agriculture, forestry & fishing Services Property & business services Government admin. & defence Manufacturing Wholesale & Retail Trade Property Finance & insurance 1H14 2H14 1H15 ASSET QUALITY 3 4 5 1 Exposures at default represents an estimate of the amount of committed exposure expected to be drawn by the customer at the time of default. Chart excludes retail lending. 2 All residential mortgage exposures are now reported under the retail lending classification to align with our treatment of other consumer portfolios. Comparatives have been restated to reflect this change. 3 Finance and insurance includes banks, non-banks, insurance companies and other firms providing services to the finance and insurance sectors. 4 Property includes both residential and non-residential property investors and developers, and excludes real estate agents. 5 Construction includes building and nonbuilding construction, and industries serving the construction sector. 6 Non-Bank Financial Institutions. 7 Includes St.George from 2009 onwards. | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Commercial property portfolio well diversified 72 1 Includes impaired exposures. ASSET QUALITY 54 19 18 9 Commercial offices & diversified groups Residential Retail Industrial Commercial property by borrower type (%) Commercial property by sector (%) Commercial property by region (%) 16 11 8 6 5 9 45 NSW & ACT VIC QLD SA & NT WA NZ & Pacific Institutional (diversified) 43 10 25 22 Exposures <$10m Developers >$10m Investors >$10m Diversified Property Groups and Property Trusts >$10m Total committed exposure (TCE) $64.8bn Lending $50.5bn Commercial property as a % of Group TCE 7.11% Average risk grade1 BBequivalent % of portfolio graded as ‘stressed’1 1.75% % of portfolio in impaired 0.80% Commercial property portfolio | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Mining portfolio relatively underweight 73 1 Includes impaired exposures. TCE $11.7bn Lending $7.0bn Mining as a % of Group TCE 1.28% Average risk grade1 BBB equivalent % of portfolio graded as ‘stressed’1 3.67% % of portfolio in impaired 0.97% 44 5 15 12 17 7 Oil and gas Iron ore Other metal ore Coal Mining services Other • Westpac’s direct exposure to mining (category includes energy and resources sector) 1.3% of Group TCE at 31 March 2015 • A high quality portfolio . Diversified by commodity, customers and region . Focused on quality operators with efficient, lower cost operating models . Well rated, with <1% of exposures in impaired • Underwriting includes customer sensitivity to movements in commodity prices • Provisioning levels remain sound, with specific provisions to impaired assets at 58%. Additional management overlay provision exists (within economic overlays) given potential for volatility in energy and resource prices • Trade finance portfolio supports customers primarily through export letters of credit . High quality counterparties and short tenors . Less than 20% of the trade portfolio has iron ore as the underlying commodity and less than 5% for coal Mining portfolio Mining portfolio (total committed exposure) by sector (%) ASSET QUALITY Mining portfolio | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Stressed exposures as a % of TCE and provisions1 ($bn) Portfolio stress continues to reduce 74 0.13 0.24 0.57 0.67 0.62 0.60 0.58 0.56 0.44 0.34 0.27 0.24 0.13 0.15 0.29 0.46 0.41 0.40 0.35 0.35 0.31 0.28 0.26 0.26 0.62 0.91 2.23 2.07 1.45 1.26 1.24 1.03 0.85 0.75 0.71 0.62 0.88 1.30 3.09 3.20 2.48 2.26 2.17 1.94 1.60 1.37 1.24 1.12 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 0.0 1.0 2.0 3.0 4.0 FY07 FY08 FY09 FY10 FY11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 Impaired (lhs) 90+ days past due and not impaired (lhs) Watchlist & substandard (lhs) IAP (rhs) 1H14 2H14 1H15 Collectively assessed provisions to credit RWA 97bps 93bps 89bps Collectively assessed provisions to performing nonhousing loans 134bps 129bps 128bps Impairment provisions to impaired assets 46% 45% 48% Total provisions to gross loans 67bps 60bps 58bps 10.9 (0.06) (0.39) (0.04) (0.34) 0.16 (0.02) 10.2 2H14 WRBB SGB BT WIB NZ Pacific & other 1H15 1 FY07 and FY08 do not include St.George. Provisioning coverage ratios Movement in stressed exposures ($bn) % $bn ASSET QUALITY | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Improvement in portfolio quality across most sectors 75 1,798 2,149 1,218 1,748 1,519 1,343 1,060 1,194 997 958 708 609 607 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 162 531 568 872 925 745 792 738 886 1,232 1,179 731 736 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 New and increased gross impaired assets ($m) Gross impaired assets returned to performing or repaid ($m) Stressed exposures by industry ($bn) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Property & business services Retail lending Wholesale & Retail Trade Agriculture, forestry & fishing Manufacturing Transport & storage Accommodation, cafes & restaurants Construction Mining Finance & insurance Services Utilities Other 1H14 2H14 1H15 ASSET QUALITY | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Provision cover by portfolio category 76 Exposures as a % of TCE 0.44 0.34 0.27 0.24 0.31 0.28 0.26 0.26 0.85 0.75 0.71 0.62 98.76 2H13 1H14 2H14 1H15 Fully performing portfolio Watchlist & substandard 90+ days past due and not impaired Impaired 98.40 98.63 98.88 Fully performing portfolio • Small cover as low probability of default (PD) • Includes economic overlay 0.23 0.23 0.22 0.22 Provisioning to TCE (%) 2H13 1H14 2H14 1H15 Watchlist & substandard • Still performing but higher cover reflects elevated PD 6.36 6.73 6.76 6.55 90+ days past due and not impaired • In default but strong security 5.36 5.23 5.06 5.36 Impaired assets • In default. High provision cover reflects expected recovery 43.16 46.43 44.77 47.82 Collective provisions Impaired asset provisions ASSET QUALITY | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian unsecured lending portfolio continues to perform well 77 • Total Australian consumer unsecured 90+ day delinquencies increased 18bps to 120bps (up 5bps 1H14/1H15) • Changes in delinquencies reflect some seasonality, with the Christmas and holiday season typically seeing higher delinquencies, as well as weakening employment conditions in some areas • Australian credit card 90+ days delinquencies were up 26bps to 108bps (up 9bps 1H14/1H15) although part of the rise in March was due to timing differences associated with debt sales • The average credit card payments to balance ratio remained high, increasing to 49.3%, with customers remaining disciplined • Australian personal loan portfolio 90+ day delinquencies were up 26bps to 168bps (up 13bps 1H14/1H15) • Australian auto loan 90+ day delinquencies were flat at 82bps (down 11bps 1H14/1H15) • Review of treatment of hardship will likely see a rise in reported delinquencies in future periods 1 Cards average payments to balance ratio is calculated using the average payment received compared to the average statement balance at the end of the reporting month. Australian credit card average payments to balance ratio1 (%) Australian unsecured lending portfolio as at 31 March 2015 ($bn and %) Australian unsecured lending 90+ days delinquencies (%) 1.08 1.68 1.20 0.82 - 0.50 1.00 1.50 2.00 2.50 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Credit cards Personal loans (excl Auto loans) Total unsecured lending Auto loans 44 22 34 Credit cards Personal loans Auto loans 10.0 5.0 7.9 1H15 39.7 39.8 41.4 45.6 45.2 42.7 43.8 43.7 44.6 44.7 45.3 45.4 46.6 47.7 48.7 48.4 49.3 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 22.9 % ASSET QUALITY | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian housing loan-to-value ratios (LVRs) 2 (%) High levels of borrower equity support Australian mortgage portfolio 78 1 Flow is all new mortgage originations settled during the 6 month period ended 31 March 2015 and includes RAMS. 2 Excludes RAMS. 3 Dynamic LVR represents the loan-to-value ratio taking into account the current outstanding loan balance, changes in security value and other loan adjustments. 4 Property valuation source Australian Property Monitors. 5 Average LVR of new loans is based on rolling 6 month window. 6 Customer loans ahead on payments exclude equity/line of credit products as there are no scheduled payments. 7 Mortgage insurance claims 1H15 $1m (2H14 $6m, 1H14 $3m). 0 20 40 60 80 0<=60 60<=70 70<=80 80<=90 90<=95 95+ 1H15 drawdowns LVR at origination Portfolio LVR at origination Portfolio dynamic LVR Australian mortgage portfolio 1H14 balance 2H14 balance 1H15 balance 1H15 flow1 Total portfolio ($bn) 338.0 351.0 362.8 37.0 Owner-occupied (%) 47.6 47.1 46.6 46.3 Investment property loans (%) 44.0 45.2 46.3 51.6 Portfolio loan/line of credit (%) 8.4 7.7 7.1 2.1 Variable rate / Fixed rate (%) 81 / 19 78 / 22 78 / 22 82 / 18 Low Doc (%) 4.2 3.8 3.4 1.1 Proprietary channel (%) 57.5 56.6 55.8 53.2 First Home Buyer (%) 10.9 10.3 9.7 6.0 Mortgage insured (%) 22.2 21.3 20.3 11.6 1H14 2H14 1H15 Average LVR at origination2 (%) 69 70 70 Average dynamic2,3,4 LVR (%) 47 44 43 Average LVR of new loans2,5 (%) 72 71 71 Average loan size ($’000) 223 229 235 Customers ahead on repayments, including offset accounts2,6 (%) 73 73 73 Actual mortgage losses (net of insurance)7 ($m) 45 55 38 Actual mortgage loss rate annualised (bps) 2 3 2 94% of portfolio with dynamic LVR <80% 2 2 1 11 1H15 total portfolio 1H15 IPL portfolio 1H15 Owner Occ. portfolio 1992 total portfolio (last recession) • Portfolio losses of $38m in 1H15 represent an annualised loss rate of 2bps (net of insurance claims7) • Loss rates remain very low by international standards due to supportive economic | Westpac Group First Half 2015 Presentation & Investor Discussion Pack 0 5 10 15 20 25 30 Behind On Time < 1 Month < 1 Year < 2 Years > 2 Years Mar-14 Sep-14 Mar-15 Mortgage customers continuing to repay ahead of schedule 79 Borrower repayments • Australian mortgage customers continue to display a cautious approach to debt levels, taking advantage of historically low mortgage rates to pay down debt and build buffers – Including mortgage offset account balances, 73% of customers are ahead of scheduled payments, with 23% of these being more than 2 years ahead – Mortgage offset account balances up $3.3bn or 14% (up 29% 1H15/1H14) to $27bn • Credit decisions across all brands are made by the Westpac Group, regardless of the origination channel Serviceability assessment • Loan serviceability assessments include an interest rate buffer, adequate surplus test and discounts to certain forms of income (e.g. dividends, rental income) • Westpac has a minimum assessment rate, often referred to as a floor rate, now set at 7.10% p.a. • The minimum assessment rate is at least 210bps higher than the lending rate and is applied to all mortgage debt, not just the loan being applied for • The minimum assessment rate and buffer has increased from 6.80% p.a. and 180bps respectively 1 Excludes RAMS. 2 Customer loans ahead on payments exclude equity loans/line of credit products as there are no scheduled principal payments. Includes mortgage offset account balances. ‘Behind’ is more than 30 days past due. ‘On time’ includes up to 30 days past due. Australian home loan customers ahead on repayments1,2 (%) Australian mortgage offset account balances ($bn) 73% ahead on repayments 8.0 10.1 11.9 13.0 14.6 16.2 18.4 20.8 23.5 26.8 FY09 FY10 FY11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 ASSET QUALITY | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian investment property portfolio sound origination profile 80 1 Excludes RAMS. 2 Dynamic LVR represents the loan-to-value ratio taking into account the current outstanding loan balance, changes in security value and other loan adjustments. 3 Property valuation source Australian Property Monitors. 4 Average LVR of new loans is based on rolling 6 month window. 5 Self-managed Super Fund (SMSF) IPLs are limited recourse however do require member guarantees. Strong origination standards High levels of equity in the portfolio Loan-to-value ratio at origination1 (%) Applicants by gross income band1(%) 0 5 10 15 20 25 <=50 50<=75 75<=100 100<=125 125<=150 150<=200 200<=500 500<=1m 1m+ Owner Occupied IPL 0 10 20 30 40 50 0-60 60-70 70-75 75-80 80-85 85-90 90-95 95-97 97+ Owner Occupied IPL • Investment property loans (IPLs) are 46.3% of Westpac’s Australian mortgage portfolio • Compared to owner-occupied applicants, IPL applicants are on average older (75% over 35 years), have higher incomes and higher credit scores • 87% of IPLs originated at or below 80% LVR • Majority of IPLs are interest-only, however the repayment profile closely tracks the profile of the principal and interest portfolio . 62% of interest-only IPL customers are ahead on repayments • IPL 90+ days delinquencies 36bps continue to outperform the total portfolio average • IPL portfolio losses represent an annualised loss rate of 2bps (net of insurance claims) – in line with total portfolio losses of 2bps • Self-managed Superannuation Fund balances are a very small part of the portfolio, at 1% of Australian mortgage balances • All IPLs5 are full recourse • Loan serviceability assessments include an interest rate buffer, minimum assessment rate, adequate surplus test and discounts to certain forms of income (e.g. dividends, rental income) • All IPLs, including interest-only loans, are assessed on a principal & interest basis • Specific credit policies apply to IPLs to assist risk mitigation, including . | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian mortgage delinquencies at low levels 81 1 Source ABA Cannex February 2015. - 0.5 1.0 1.5 2.0 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 90+ Past Due Total 90+ First Home Buyer 90+ Investor 30+ Past Due Australian mortgage portfolio 1H14 2H14 1H15 30+ days delinquencies (bps) 128 108 124 90+ days delinquencies (bps) 50 47 47 90+ days delinquencies – investment property loans (bps) 39 37 36 Properties in possession (#) 189 194 263 • Australian mortgage delinquencies have declined given improved serviceability in low interest rate environment • Properties in possession remain <2bps of the portfolio, however have increased, mainly in Qld, where natural disasters and a decline in mining investment have seen weaker conditions • Review of treatment of hardship will likely see a rise in reported delinquencies in future periods Australian mortgages delinquencies (%) 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 ALL NSW/ACT VIC/TAS QLD WA SA/NT Australian mortgages delinquencies by state (%) Westpac Australian mortgage portfolio and system by State (%) 34 27 19 13 7 40 26 17 10 7 44 28 14 9 6 NSW & ACT VIC & TAS QLD WA SA & NT Australian banking system Total Westpac portfolio (all brands) 1H15 Westpac drawdowns (all brands) 1 ASSET QUALITY | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Lenders mortgage insurance 82 Insurance statistics 1H14 2H14 1H15 Insurance claims ($m) 3 6 1 WLMI loss ratio4 (%) 10 27 5 Gross written premiums ($m) 24 28 24 LVR Band • LVR =80% • Low Doc LVR =60% • LVR >80% to = 90% • Low Doc LVR >60% to = 80% • LVR >90% Insurance Not required Generally insured through captive insurer, WLMI. LMI not required for certain approved borrower groups. LMI required for all Low Doc borrowers where LVR >60% to = 80% Reinsurance arrangements: • 40% risk retained by WLMI • 60% risk transferred through quota share arrangements2 with Arch Capital Group Limited, Tokio Millennium Re, Everest Re, Endurance Re, Trans Re and AWAC Insured externally through Arch Capital Group Limited for all new business effective from 18 May 2015 Prior to 18 May 2015, external insurance provided by QBE (Westpac brand) and Genworth (St George and RAMS brands). Existing LMI policies remain in force 1 Prudential Capital Requirement (PCR) determined by APRA. 2 For all new business effective from 1 October 2014. 3 Insured coverage is net of quota share. 4 Loss ratio is claims over the total of earned premium plus reinsurance plus exchange commission. 79.8 10.2 10.0 Not insured Insured by third parties Insured by WLMI • Lenders mortgage insurance (LMI) provides benefits to the Westpac Group – Risk transfer / loss mitigation – Improvement in the quality of risk acceptance via the additional layer of independent review provided by the mortgage insurers • Mortgages are insured through Westpac’s captive mortgage insurer, Westpac Lenders Mortgage Insurance (WLMI), and through external LMI providers, based on risk profile • WLMI provides the Westpac Group with an increased return on the mortgages it insures through the capture of underwriting profit • WLMI is strongly capitalised (separate from bank capital) | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Mortgage portfolio stress testing outcomes 83 • Westpac regularly conducts a range of portfolio stress tests as part of its regulatory and risk management activities • The Australian mortgage portfolio stress testing scenario presented represents a severe recession and assumes that significant reductions in consumer spending and business investment lead to six consecutive quarters of negative GDP growth. This results in a material increase in unemployment and nationwide falls in property and other asset prices • Estimated Australian mortgage portfolio losses under these stressed conditions are manageable and within the Group’s risk appetite and capital base – Cumulative total losses of $2.3bn over three years for the uninsured portfolio (2H14: $2.2bn) – Cumulative claims on LMI, both WLMI and external insurers, of $879m over the three years (2H14: $793m) • WLMI separately conducts stress testing so that it is sufficiently capitalised to cover mortgage claims arising from a stressed mortgage environment • Preferred capital ranges incorporate buffers at the Westpac Group level that also consider the combined impact on the mortgage portfolio and WLMI of severe stress scenarios 1 Assumes 30% of LMI claims will be rejected in a stressed scenario. 2 Represents 1H15 actual losses of $38m annualised. 3 Stressed loss rates are calculated as a percentage of mortgage exposure at default. Key assumptions Stressed scenario Current Year 1 Year 2 Year 3 Portfolio size ($bn) 363 350 343 341 Unemployment rate (%) 6.1 11.6 10.6 9.4 Interest rates (cash rate, %) 2.25 0.50 0.50 0.50 House prices (% change cumulative) 0.0 (13.0) (22.4) (26.2) Annual GDP growth (%) 2.5 (3.9) (0.2) 1.7 Stressed loss outcomes (net of LMI recoveries)1 $m 762 1,065 1,272 273 bps3 2 26 32 7 Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Funding and Liquidity Comparison of 1H15 versus 2H14 cash earnings basis (unless otherwise stated) | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Strong liquidity position 85 • Westpac’s Liquidity Coverage Ratio (LCR) 114% • The LCR requires banks to hold 100% of their net cash outflows over a modelled 30-day stressed scenario in qualifying liquid assets – Westpac held $57bn of eligible High Quality Liquid Assets (HQLA) at 31 March 2015 – In addition, APRA has approved access to the Committed Liquidity Facility (CLF) for $66bn for calendar year 2015 • $136.7bn in unencumbered liquid assets held at 31 March 2015 – Securities are eligible for repo with a central bank – Sufficient to cover all short term debt outstanding (including long term debt with a residual maturity less than or equal to one year) – Sufficient to cover all outstanding debt for 19 months – Differs from LCR qualifying liquid assets due to applicable haircuts and eligibility criteria Liquidity Coverage Ratio ($m) Pro forma as at 2H14 as at 1H15 % Mov’t 1H15 – pro forma 2H14 High Quality Liquid Assets1 (HQLA) 59 57 (3) Committed Liquidity Facility2 (CLF) 66 66 - Total LCR liquid assets 125 123 (1) Customer deposits 75 66 (11) Wholesale funding 20 17 (15) Other flows3 26 25 (7) Total cash outflows 121 108 (11) LCR4 103% 114% 11 1 Includes HQLA as defined in APS 210, BS-13 qualifying liquids, less RBA open repos funding end of day ESA balances with the RBA. 2 The RBA makes available to Australian Authorised Deposit-taking Institutions a CLF that, subject to qualifying conditions, can be accessed to meet LCR requirements under APS210 – Liquidity. 3 Other flows include credit and liquidity facilities, collateral outflows and inflows from customers. 4 LCR is calculated as the percentage ratio of stock of HQLA and CLF over the total net cash outflows in a modelled 30 day defined stressed scenario. Calculated on a spot basis. September 2014 LCR is on a pro forma basis. 5 Private securities include Bank paper, RMBS, and Supra-nationals. 6 Includes long term wholesale funding with a residual maturity less than or equal to 1 year. Unencumbered liquid assets ($bn) 43.0 54.6 57.0 118.2 26.0 21.7 19.2 58.0 58.1 60.5 1H14 2H14 1H15 Total short term debt outstanding at 1H15 Self securitisation Private securities Cash, government and semi-government bonds 6 126.5 134.4 136.7 5 FUNDING & LIQUIDITY | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Sound funding profile, stable sources providing 83% of all funding 86 1 Source APRA Banking Statistics March 2015. 2 Excluding securitisation. 3 FY08 does not include St.George. 4 Equity excludes FX translation, Available-for-Sale Securities and Cash Flow Hedging Reserves. • Stable Funding Ratio maintained at 83.2% as the Group continues to focus on funding growth through stable funding sources • Focus on deposit quality – household deposits grew at system in 1H151 • $15.9bn of term wholesale funding raised in 1H15, with a weighted average term to maturity of 4.6 years2, providing a stable source of funds for the Group • Short term funding maintained at 16.8% of total funding . Weighted average maturity of short term funding portfolio 130 days 43.8 57.7 60.6 60.2 59.7 4.7 7.3 7.4 7.1 7.0 1.3 1.7 1.6 1.7 1.8 10.2 10.7 9.3 9.3 9.7 3.8 5.4 5.0 4.9 5.0 19.7 9.8 9.3 9.7 10.6 16.5 7.4 6.8 7.1 6.2 FY08 FY12 FY13 FY14 1H15 Wholesale Onshore <1yr Wholesale Offshore <1yr Wholesale Onshore >1yr Wholesale Offshore >1yr Securitisation Equity Customer deposits Funding composition by residual maturity (%) Stable Funding Ratio 3 4 63.8% 83.9% 83.2% 82.8% 83.2% Maintaining a stable funding profile FUNDING & LIQUIDITY | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Wholesale term issuance well diversified, benefit from broad product capabilities 87 53 23 16 4 4 By type Senior Unsecured Covered Bonds RMBS ABS Subordinated Debt 1 Based on residual maturity and FX spot currency translation. Includes all debt issuance with contractual maturity greater than 370 days excluding US Commercial Paper and Yankee Certificates of Deposit. 2 Contractual maturity date for hybrids and callable subordinated instruments is the first scheduled conversion date or call date for the purposes of this disclosure. 3 Tenor excludes RMBS and ABS. 4 Perpetual subdebt has been included in >FY20 maturity bucket. Maturities exclude securitisation amortisation. 5 Sources: Westpac, APRA Banking Statistics March 2015. 1H15 new term issuance composition1 (%) Australian covered bond issuance5 Term debt issuance and maturity profile1,2,4 ($bn) 2 1 35 1 41 20 By tenor 1 Year 2 Years 3 Years 4 Years 5 Years >5 years 41 30 11 10 8 By currency AUD USD EUR GBP Other 45 43 25 33 22 33 16 15 24 28 22 17 13 9 FY09 FY10 FY11 FY12 FY13 FY14 1H15 2H15 FY16 FY17 FY18 FY19 FY20 >FY20 Covered Bond Hybrid Senior Govt Guaranteed Sub Debt Issuance Maturities 2,3 16 23 18 25 19 27 24 27 Peer 1 Peer 2 Peer 3 Westpac Remaining capacity (8% cap & over-collateralisation) ($bn) Issued ($bn) FUNDING & LIQUIDITY Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Capital Comparison of 1H15 versus 2H14 cash earnings basis (unless otherwise stated) | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Current capital considerations 89 1 Domestic systemically important banks. 2 Basel Committee on Banking Supervision. 3 FSB is Financial Stability Board. 4 QIS is quantitative impact study. 5 TLAC is total loss absorbing capital. 6 GSIB is globally systemically important banks. Common equity Tier 1 capital ratio (%) Regulatory considerations • Westpac’s preferred common equity Tier 1 (CET1) capital range is 8.75% - 9.25%. The management buffer above regulatory minimums takes into consideration – The capital conservation buffer (CCB) requirement from January 2016 – Stress testing to maintain an appropriate buffer in a downturn – Quarterly volatility of capital ratios associated with dividend payments • Given current regulatory uncertainties the Group has decided it is appropriate to move capital ratios to the upper end of the preferred range Issuing shares to satisfy the DRP at a 1.5% discount - Partial underwrite of the DRP Westpac preferred capital range 8.8 8.8 Revised APRA minimum (from 2016) Westpac Mar 15 CET1 Westpac Mar 15 Pro-forma CET1 Reported CET1 capital ratio DRP and DRP underwrite D-SIB1 + capital conservation buffer 3.5 Regulatory minimum 4.5 8.0 Quartile 1 Quartile 2 Quartile 3 Quartile 4 Westpac’s preferred CET1 capital ratio range 9.3 • RBNZ changes to risk weighting of investor property loans • BCBS2 initial consultation on standardised approach for determining Credit RWA and consults on RWA capital floors for advanced banks. Proposals announced December 2014 with first consultation due mid- 2015. BCBS work plan target date for completion end 2015. Implementation date and transition arrangements to be advised • Awaiting Government and APRA response to provide more information on implementation of FSI recommendations • Leverage ratio disclosure expected during 2015 and applicable (Pillar 1) from 2018 • FSB3 undertaking a QIS4 on TLAC5 during 2015 with rules for G-SIBs6 expected to be finalised at G20 summit in 2015. D-SIB impacts unknown • Risk model enhancements and recalibrations – IRRBB CAPITAL | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Capital strength maintained while supporting growth 90 1 Based on PwC report, refer slide 92 for definition of internationally comparable. 2 Reflects APRA clarification that holding companies are now part of the Level 2 Group for regulatory purposes. Transitional arrangements are in place. 3 Includes the impact of change to mortgage PDs of 22bps and other smaller model changes. 4 Peer 1,2 and 3 are as at 31 December 2014. Common equity Tier 1 (CET1) capital ratio (% and bps) WBC CET1 capital ratio not impacted by wealth leverage2,3 (%) 1H14 2H14 1H15 Common equity Tier 1 capital ratio 8.8 9.0 8.8 Additional Tier 1 capital 1.5 1.6 1.5 Tier 1 capital ratio 10.3 10.6 10.3 Tier 2 capital 1.8 1.7 1.8 Total regulatory capital ratio 12.1 12.3 12.1 Risk weighted assets (RWA) ($bn) 322 331 347 Internationally comparable1 common equity Tier 1 ratio 13.1 13.1 12.7 • Organic movements were – Cash earnings net of ordinary dividends paid (+109bps) – 2014 final dividend (-72bps) – Higher RWA from supporting growth in the business (-7bps) – Other including higher capitalised expenditure (-6bps), higher regulatory expected loss (-2bps) and other items (-4bps) • Other items impacting capital in 1H15 included – Risk model changes including mortgage risk weights (-19bps) – FX translation impact (-14bps) – Defined benefit plan revaluation (-6bps) • 17bps increase in Tier 2 from issue of CNY1.25bn and AUD0.35bn • Internationally comparable CET1 capital ratio 12.7%. On a total regulatory capital basis the ratio is 16.9% 8.82 8.97 109 8.76 12.73 (72) (7) (12) (19) (14) (6) 31 Mar 14 Basel III 30 Sep 14 Basel III Cash Earnings Final ordinary dividend RWA movement Other Model changes FX translation DB plan changes 31 Mar 15 Basel III 31 Mar 15 Int'l Comp1 Organic (+18bps) Other items (-39bps) 3 Key movements in capital Key capital ratios (%) 8.76 8.14 8.60 8.28 0.2 0.6 0.5 Westpac Peer 1 Peer 2 Peer 3 CAPITAL | Westpac Group Half Year 2015 Presentation & Investor Discussion Pack Internationally comparable CET1 capital ratio in top quartile of global peers 91 Source: Company reports and investor presentations. 1 Based on internationally comparable, refer slide 92 for definition. 2 As at 31 March 2015. 3 As at 31 October 2014. 4 As at 31 December 2014. 5 As at 30 September 2014. Global peer comparison of Basel III pro forma CET1 capital ratios1 (%) 12.7 Handelsbanken SEB Nordea Danske Bank DnB UBS CBA Intesa Sanpaolo Lloyds WBC ANZ United Overseas Bank Deutsche Bank DBS Rabobank Natixis NAB HSBC RBS Sumitomo Mitsui Goldman Sachs Standard Chartered Scotiabank Macquarie Mitsubishi UFG Morgan Stanley Barclays BNP Paribas OCBC Credit Agricole SA Citigroup Wells Fargo Societe Generale BBVA Banco Popular CIBC Bank of Montreal JPMorgan Chase Unicredit Royal Bank of Canada Santander Bank of America TD Bank Commerzbank Miziho FG 3 4 5 5 4 3 4 4444444344344 4444444444444 444534444244 CAPITAL | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Internationally comparable capital ratio 92 • APRA has a conservative stance in setting capital standards, resulting in a significant variance between capital measured under APRA and the Basel III Framework • In August 2014 the ABA1 released a report prepared by PwC titled “International comparability of capital ratios of Australia’s major banks”. This report sets out the basis for an internationally comparable CET1 capital ratio for the major Australian banks, using the findings from the BCBS March 2014 report on its assessment of Basel III regulations in Australia, and other items identified by PwC as areas where APRA’s implementation is different to other jurisdictions • This table reconciles Westpac’s APRA CET1 capital ratio with the internationally comparable CET1 capital ratio 2H14 1H15 Westpac’s CET1 capital ratio (APRA basis) 8.97% 8.76% Capital deductions APRA requires 100% deductions from capital for DTA, intangibles relating to capitalised expenses and all investments (e.g. financial institutions, funds management and insurance subsidiaries). The Basel Framework allows a concessional threshold before these deductions apply. Assets below the threshold can be risk weighted 112bps 115bps Mortgage loss given default (LGD) 20% floor The Basel Framework imposes a 10% floor in downturn loss given default (LGD) models used for residential mortgages, whereas APRA imposes a 20% floor. A 15% flat LGD is has been assumed as a reasonable proxy 47bps 52bps Specialised lending APRA rules for “specialised lending” (corporate lending to project finance, certain real estate exposures, commodity finance, etc) are more conservative than those contained in the Basel Framework and / or which are applied by most other prominent jurisdictions 64bps 61bps Interest rate risk in the banking book (IRRBB) APRA’s rules require the inclusion of IRRBB within Pillar 1 RWA for banks using Advanced Internal Ratings Based (AIRB) approaches. IRRBB is not required to be assessed under Pillar 1 in the Basel Framework. It is highlighted as a risk that may be taken into account in assessing Pillar 2 capital ratios 20bps 4bps Undrawn corporate lending EAD2 APRA’s rules typically require AIRB | Westpac Group First Half 2015 Presentation & Investor Discussion Pack RWA movements 93 1 Credit RWA movements impacted by rounding. RWA movements RWA movements ($bn) Credit RWA movements ($bn)1 Credit RWA movements ($bn)1 272.0 281.5 303.0 7.4 5.4 9.0 1.9 (2.2) 1H14 2H14 Methodology changes Translation impacts Net growth Credit quality Mark-to-market related credit risk 1H15 Up 7.7% 272.0 281.5 303.0 7.3 10.3 1.3 1.4 0.8 1.9 (0.8) (0.7) 1H14 2H14 Corporate Business lending Residential mortgages Small business Other retail Standardised Mark-to-market Other 1H15 Up 7.7% 322.5 331.4 346.8 21.6 0.8 (1.1) (5.7) (0.2) 1H14 2H14 Credit risk Market risk Operational risk IRRBB Other 1H15 Up 4.7% • Total RWA increased 4.7% • Credit RWA increased 7.7% or $21.6bn $7.4bn from methodology changes including $8.5bn from changes in probability of default (PD) estimates for mortgages - $5.4bn from translation impacts of the lower A$ - $9.0bn supporting business growth • Lower interest rate risk in the banking book (IRRBB) due to a reduction in exposure to interest rate movements and a higher embedded gain from lower market interest rates • Market risk RWA down $1.1bn primarily due to lower market volatility • Operational risk RWA up $0.8bn (3%) CAPITAL | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Actively managing capital across Group and business units to optimise returns 94 8.7 9.1 8.8 9.0 8.8 16.1 15.8 16.5 16.4 15.8 1H13 2H13 1H14 2H14 1H15 CET1 ROE 1 1H15 adjusted for the impact of methodology changes to derivative adjustments. 2. ROA is return on average interest-earning assets. 3 AOE is average ordinary equity. 4 Capital for the Group is average ordinary tangible equity. 5 Other includes Group Businesses including Treasury and Westpac Pacific. 6 Operational risk financial requirements (ORFR) imposed by APRA on funds management businesses. Actively managing returns ROE and CET1 capital ratios (%) Return on average interest-earning assets (AIEA) (%) Allocated capital and ROTE 1H14 2H14 1H15 1H151 Net interest margin 2.11 2.06 2.05 2.05 Non-interest income 1.00 0.95 0.91 0.95 Operating income 3.11 3.01 2.96 3.00 Operating expenses (1.28) (1.26) (1.26) (1.26) Cash earnings (ROA2) 1.19 1.17 1.12 1.14 Leverage (AIEA/AOE3) 13.85 14.01 14.16 14.16 ROE 16.5 16.4 15.8 16.2 • Returns impacted by methodology change for derivative adjustments in 1H15. Before derivative adjustments ROE 16.2% • Continue to refine capital allocation model with more capital allocated to divisions in 1H15 • Capital held centrally includes: surplus capital, capital for Treasury, and capital for next dividend payment • ROTE declined as cash earnings was lower and there was a 3% increase in the value of average tangible equity Division 2H14 1H15 Capital ($m) ROTE (%) Capital ($m) ROTE (%) Comments on movements in allocated capital Group4 36,441 21.1 37,399 20.3 Westpac RBB 9,905 26.8 10,983 24.7 Increased mortgage from model review and business lending growth St.George 7,630 21.1 7,973 21.1 Increase in mortgage, offset by reduction in business stressed exposures BTFG 2,850 32.1 3,090 29.3 Increased capital in funds management (ORFR6) and growth WIB 8,119 17.6 8,367 15.0 Uplift in lending Westpac NZ ($A) 3,778 21.0 3,619 22.9 Lower capital due to review of regulatory capital loadings Other5 4,159 7.0 3,367 6.1 Capital for dividend & Treasury. More allocated to divisions in 1H15 CAPITAL Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results DIVISIONAL SUMMARY Comparison of 1H15 versus 2H14 cash earnings basis (unless otherwise stated) | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Differentiated by our strong portfolio of brands Westpac Group 96 1 Other includes Group Businesses (including Treasury) and Westpac Pacific. Key statistics for 1H15 Contribution to 1H15 cash earnings (%) WIB Westpac NZ Westpac New Zealand Banking and wealth services to consumers, businesses and institutions in New Zealand Westpac Institutional Bank Leading Australasian institutional bank, with branches and representative offices in Australia, US, UK and Asia 36 22 12 17 11 2 Westpac RBB St.George Banking Group BT Financial Group Westpac Institutional Bank Westpac NZ Other1 WRBB BTFG SGB Division Cash earnings 1H15 ($m) Cash earnings 1H15-2H14 % change Core earnings 1H15-2H14 % change Westpac RBB 1,350 2% 2% St.George 837 4% 3% BT Financial Group 451 (2%) (2%) Westpac Institutional Bank 624 (13%) (9%) Westpac NZ (in A$) 413 4 5 Other1 103 (30) (11) Westpac Retail & Business Banking Australian national brand for consumer and business banking, SMEs and commercial customers under the Westpac brand St.George Banking Group Australian local brand for consumer, business and commercial banking customers under the St.George, BankSA, Bank of Melbourne and RAMS brands BT Financial Group Australian Wealth and Insurance division with $103bn funds under management and $118bn funds under administration at 31 March 2015 DIVISIONAL SUMMARY | Westpac Group First Half 2015 Presentation & Investor Discussion Pack WRBB delivers another disciplined 1H15 result 97 1 ROTE down in 1H15 with more capital allocated to the division, including more capital being applied to mortgages. 2 APRA Banking Statistics, March 2015. Key financial metrics 1H15 - 2H14 Key financial metrics 1H14 2H14 1H15 Change on 2H14 Revenue ($m) 3,625 3,769 3,835 . 2% Net interest margin (%) 2.37 2.40 2.41 . 1bp Expense to income (%) 44.4 43.9 43.9 - 0bp Customer deposit to loan ratio (%) 58.4 60.0 60.5 . 49bps ROTE (%) 26.6 26.8 24.7 . (213bps)1 Cash earnings . 2% • Up $20m to $1,350m Core earnings . 2% • Up $37m to $2,150m with 2% revenue growth Net interest income . 2% • Up $61m to $3,100m • 3% asset growth: mortgages up 3% and business lending up 1% • 3% deposits growth with system growth in household deposits2, delivering a 49bps uplift in deposit to loan ratio to 60.5% Net interest margin . 1bp • Asset spread compression of 7bps due to competitive pricing for new business • Deposit spreads up 6bps due to market pricing of at call and term deposits • Lower wholesale funding costs of 2bps Noninterest income . 1% • 7% growth in FX revenue through leveraging WIB partnership • Uplift in merchant and trade activity revenue Expenses . 2% • Salary, lease and investment cost increases • Partly offset by productivity benefits from improved processes, Bank Now and Connect Now transformation, and more customers using self-service through Westpac Live and Smart ATMs Impairment charges . 5% • Up $11m to $221m • Higher consumer impairments in line with seasonal trends, offset by improved quality in business lending portfolio Cash earnings movement 1H15 1H14 ($m) 1,253 1,330 1,350 125 19 16 61 5 (46) (37) (29) (11) (6) 1H14 Net II Non-II Expenses Impairment charges Tax & NCI 2H14 Net II Non-II Expenses Impairment charges Tax & NCI 1H15 Up 6% Up 2% WRBB | Westpac Group First Half 2015 Presentation & Investor Discussion Pack WRBB consistently delivering high quality results 98 45.5 44.5 44.4 43.9 43.9 1H13 2H13 1H14 2H14 1H15 341 359 361 369 379 1H13 2H13 1H14 2H14 1H15 252 256 262 271 278 56.3 58.2 58.4 60.0 60.5 1H13 2H13 1H14 2H14 1H15 1,143 1,217 1,253 1,330 1,350 1H13 2H13 1H14 2H14 1H15 1,873 1,982 2,015 2,113 2,150 1H13 2H13 1H14 2H14 1H15 3,438 3,570 3,625 3,769 3,835 1H13 2H13 1H14 2H14 1H15 Revenue ($m) Expense to income ratio (%) Revenue per FTE ($’000) Core earnings ($m) Cash earnings ($m) Loans ($bn) and customer deposit to loan ratio (%) WRBB | Westpac Group First Half 2015 Presentation & Investor Discussion Pack A leading customer franchise driving growth 99 1 Refer slide 145 for customer satisfaction details. 2 Refer slide 145 for wealth metrics provider details. 3 Branches excluding instores. 4 Refer slide 145 for business satisfaction details. 5 Refer slide 144 for business NPS. 6 Sites includes branches and standalone business banking centres and excludes instores. 7 Refer slide 145 for average products per customer metrics. 8 Refer slide 144 for consumer NPS. 9 Complaints 1H14/2H14 restated with BT complaints historically captured and reported within WRBB channel now reported in BT channel. 10 Spot number as at balance date. Key performance metrics Business banking highlights • Equal #1 in business customer satisfaction of the majors4, #1 NPS overall business and SME5 • Continuing to enhance our business bank offering with 0.3m customers migrated to Westpac Live platform; Connect Now our video conferencing facility is in 332 sites (up 240) representing 46% of sites6 (enhancing the Westpac Local model, with more access to business banking specialists via video conference) • Small Business Banking unit delivered 17% of WRBB’s total revenue in 1H15, with revenue growth of 3% • Successful partnership model with WIB providing increased access to FX, foreign accounts and debt markets products. FX revenue up 20% • Winner: Business banking excellence recognised through awards - AB+F Best Business Bank; AB+F Best Service Business Bank; AB+F Best Business Banking at Branch; Roy Morgan Major Business Bank of the Year (2014 calendar year) for fourth year in a row • Leading customer franchise maintained with equal #1 in customer satisfaction1 of the majors, record customer growth, maintained market leading wealth penetration2 position, and delivered a 34% reduction in customer complaints • Continuing to meet customer needs 24/7 and enabling: more self-service with 80 Bank Now branches | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Transformation of network delivering gains 100 1 Size calculations and rent savings excludes new branches, kiosks and instore conversions. 2 Transaction redirection to self-service device – Before (3months average pre opening), After (all months average post opening, excludes month in which it opens). 3 Percentage of deposits at branches with Smart ATMs. Bank Now improvements delivered Active digital customers (#m) Sales FTE / Total FTE (%) Digital sales (#’000) Deposits through Smart ATMs3 (%) Branch transactions (#m) WRBB % change post opening Branch size reduction1 (m2) . 27 Rent savings1 . 12 Counter deposit transactions (#) . 29 Counter withdrawal transactions (#) . 19 Transactions redirected to Smart ATM’s2 (#) . 519 21.5 20.4 19.9 18.4 2H13 1H14 2H14 1H15 2.45 2.53 2.63 2.70 2H13 1H14 2H14 1H15 107 135 145 152 2H13 1H14 2H14 1H15 10 16 23 1H14 2H14 1H15 52 55 57 59 2H13 1H14 2H14 1H15 | Westpac Group First Half 2015 Presentation & Investor Discussion Pack 1H15 delivered 4% cash earnings growth 101 1 RBA Financial Aggregates, March 2015. Key financial metrics 1H15 – 2H14 Key financial metrics 1H14 2H14 1H15 Change on 2H14 Revenue ($m) 1,956 2,090 2,113 . 1% Net interest margin (%) 2.27 2.30 2.28 . 2bps Expense to income (%) 38.2 38.9 37.9 . 94bps Customer deposit to loan ratio (%) 54.7 55.6 54.4 . 116bps ROTE (%) 22.0 21.1 21.1 . (2bps) Cash earnings . 4% • Up $31m to $837m Core earnings . 3% • Up $34m to $1,312m with 1% revenue growth Net interest income . 1% • Up $14m to $1,840m • Lending up 3% primarily mortgages (above system1) and auto finance growth. Business lending flat with 7% increase in new lending offset by portfolio run-off • Deposits up 1%, with most of the rise in consumer savings and transaction accounts Net interest margin . 2bps • Margins down 2bps to 2.28% • Asset spreads declined by 5bps from strong competition for new lending • Cost of liquidity and capital higher by 3bps • Partly offset by 6bps deposit spread improvement Non-interest income . 3% • Repricing business line fees including for undrawn commitments. Auto finance fees also higher Expenses . 1% • Expenses down 1% • Productivity initiatives including benefits from branch optimisation and Lloyds synergies • Offset increases from FreshStart branch rollout • Some benefit from timing of investment spend Impairment charges . 9% • Impairment charges down $12m to $116m • Business impairment charges were $41m lower • Offset slightly higher consumer impairments reflecting seasonality in unsecured delinquencies Cash earnings movement 1H15 – 1H14 ($m) 769 121 13 806 14 9 11 12 837 (65) (20) (12) (15) 1H14 Net II Non-II Expenses Impairment charges Tax & NCI 2H14 Net II Non-II Expenses Impairment charges Tax & NCI 1H15 Up 5% Up 4% | Westpac Group First Half 2015 Presentation & Investor Discussion Pack St.George building strong track record for delivering 102 Cash earnings contribution (%) Cash earnings ($m) Core earnings ($m) Expense to income ratio (%) Revenue per FTE ($’000) Loans ($bn) and customer deposit to loan ratio (%) 688 699 769 806 837 1H13 2H13 1H14 2H14 1H15 38.5 37.8 38.2 38.9 37.9 1H13 2H13 1H14 2H14 1H15 149 153 162 168 174 56.4 58.1 54.7 55.6 54.4 1H13 2H13 1H14 2H14 1H15 358 370 367 377 378 1H13 2H13 1H14 2H14 1H15 1,108 1,167 1,209 1,278 1,312 1H13 2H13 1H14 2H14 1H15 67 8 14 5 6 STG BoM BankSA RAMS Lloyds | Westpac Group First Half 2015 Presentation & Investor Discussion Pack St.George delivering across key metrics 103 1 Refer slide 145 for consumer satisfaction details. 2 Refer slide 144 for consumer NPS details. 3 Branches excludes instores 4 Sites includes branches and standalone business banking centres but excludes instores. BoM included in analysis for the first time. 5 Includes Lloyds customers. 6 Refer to slide 145 for average products per customer metrics details. 7 Refer to slide 145 for wealth metrics provider details. 8 Refer to slide 144 for business NPS details. 9 Spot number as at balance date. Key performance metrics • Customer service revolution and continued innovation is delivering a better customer experience. Customer satisfaction1 and NPS2 equal to or ahead of all the majors, delivered strong customer growth, and reduced complaints by 6% • Continuing to meet customer needs with 30 more FreshStart branches3 (60% of branches) and enabling more self-service. Smart ATMs now represent 39% of ATM network • Continued to focus on simplification of processes including ‘Time to First Yes’ (65% now approved in branch within one hour); and deliver innovative digital mobility solutions that support customer needs including: biometric authentication on mobiles, Smartwatch capability and piloting iBeacon technology • Winner: Asian Banker best mobile Phone banking initiative for 2015; AIMIA best smartphone or table application in financial services 2015; Money Magazine best app 2015 Consumer banking highlights 1H14 2H14 1H15 Change on 2H14 Total customers (#m) 3.55 3.61 3.71 . 3% Business customers5 (#’000) 366 381 398 . 4% Active digital customers (#m) 1.28 1.33 1.37 . 2% Total branches (#) 446 452 431 (5%) FreshStart % of branches3 33 51 60 . 9ppts Smart ATMs % of ATM network 27 33 39 . 6ppts Business Connect % of sites4 44 52 55 . 3ppts Avg. products per customer6 (#) 2.61 2.64 2.63 x (0.3%) Customers with a wealth product7 (%) 16.1 17.1 17.1 - 0bps Overall consumer NPS2 1st 1st =1st . Steady Overall business NPS8 1st 1st | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Investment, innovation and customer focus delivering sustainable growth across brands 104 • Development of ‘Our Service Promise’ program which included – Establishment of key service behaviours and staff empowerment model – Successful national roll-out with all staff attending immersion sessions around Australia • Reinvigoration of branch network model through FreshStart now rolled out to 253 branches3 (60% of branches) • Business Connect, providing SME customers access to expert bankers now rolled out to 243 sites4 (55% of sites) 1 First in Australia. 2 First bank in the world. 3 Branches excludes instores. 4 Sites is branches and business banking centres and excludes instores. We have included BoM sites in analysis for first time. Strong customer growth (#m) Bank of Melbourne continuing to grow market share Lloyds acquisition a solid performer Stressed assets as % of TCE (%) Maintaining an innovation edge Customer-faced transformational agenda continuing • Leverage strong heritage of digital capability – First internet banking1 (1995) – Real time banking1 (1996) – First to send SMS alerts1 (2003) – First savings/transaction accounts opened via mobile devices1 (2010) – First to deliver biometric authentication via mobile devices2 (2014) • Providing innovative customer solutions – Credit and debit card application and activation via mobile (2012) – Personal loans on mobile (2013) – Ability to view e-statements via mobile (2013) – Piloting iBeacon identification of customers in branches (2015) • Positive cash earnings growth supporting expansion • Branches/instores (up 7) • Strong household deposits up 12% to $6.2bn, mortgages up 10% to $19.7bn and total lending up 8% to $25.8bn • 7% lift in customer numbers • Strong engagement with the Victorian community including: a partnership with Melbourne City Mission; Bank of Melbourne Neighbourhood Fund and Local Project; presenting partner of Melbourne Food and Wine Festival • Acquired capital finance business from Lloyds in FY14 • Integration program is progressing well – Auto finance dealers now migrated to single St.George origination platform – Integrated collections, customer service and risk functions • Customer growth of 2.4% with new business volumes and margins remaining strong • Product innovation to enhance customer experience – iPad app that allows dealers to navigate quickly through settlement processes – Customers can self-serve payout details 3.22 3.26 3.55 3.61 3.71 1H13 2H13 1H14 2H14 1H15 Includes Lloyds 2.8 2.3 1.8 1.6 1.3 1H13 2H13 1H14 2H14 1H15 | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Consistent wealth results up 2% (up 7% before performance fees) 105 1 Plan for Life as at 31 December 2014. Movement 1H15 - 1H14 Key financial metrics Cash earnings movement ($m) 86 27 28 2 441 451 (77) (49) (7) 1H14 Funds income Performance fees Insurance income GI claims Capital & other income Expenses Impairment charges Tax and NCI 1H15 Revenue up $15 (1%) 0 Up 2% 1H13 1H14 1H15 Change on 1H14 Revenue ($m) 1,133 1,325 1,340 . 1% Expense to income (%) 52.7 50.6 49.9 . (72bps) ROTE (%) 25.4 31.2 29.3 . (194bps) FUM ($bn) 65.7 82.1 103.3 . 26% FUA ($bn) 95.5 106.8 125.0 . 17% BTFG cash earnings tend to be seasonal, given insurance claims and fund activity, and are best compared to prior corresponding period (1H14) Funds management income . 1% • Funds management income up 1%, and up 9% when adjusted for BTIM performance fees • Maintained lead FUA position with all platforms market share1 ranked #1 at 19.9% • Strong FUM/FUA supported by positive net flows, impact of FX and a rise in asset markets • Private wealth up 13% driven by growth in mortgage lending • Partly offset by significant BTIM performance fee income from JOHCM in 1H14 not matched in 1H15 Insurance income . 9% • Insurance income down $22m • Higher claims mostly from Brisbane hail storm and Cyclone Marcia ($51m) • Life in-force premium and General Insurance gross written premiums up 13% and 8% respectively Capital & other income . 90% • Higher income driven by returns on invested capital and a rise in retained earnings Expenses - 0% • Investment costs up $3m driven by investment in Panorama and increase in planner numbers • Other expenses down $5m, driven by a reduction in performance fees, partly offset by higher volumes | Westpac Group First Half 2015 Presentation & Investor Discussion Pack 106 Movement 1H15 - 2H14 Key financial metrics Cash earnings movement ($m) 9 31 5 24 6 459 451 (67) (15) (1) 2H14 Funds income Performance fees Insurance income GI claims Capital & other income Expenses Impairment charges Tax and NCI 1H15 Revenue up $2 (flat) Down 2% 1H14 2H14 1H15 Change on 2H14 Revenue ($m) 1,325 1,338 1,340 0% Expense to income (%) 50.6 48.8 49.9 . 105bps ROTE (%) 31.2 32.1 29.3 . (285bps) FUM ($bn) 82.1 89.0 103.3 . 16% FUA ($bn) 106.8 112.7 125.0 . 11% Funds management income . 4% • Funds management income up 4%, up 1% when adjusted for BTIM performance fees • Asset markets stronger positively impacting FUM/FUA related income across platforms, superannuation and asset management • Private wealth up 5% driven by 5% growth in mortgage lending • In BTIM, 100% of JOHCM funds returning above benchmark in 3 and 5 year periods resulting in higher performance fee income Insurance income . 21% • Insurance income down $62m • Higher seasonal claims experience including Brisbane hail storms and Cyclone Marcia • Life in-force premiums and General Insurance gross written premiums up 4% and 5% respectively Capital & other income . 69% • Higher income driven by higher returns on invested capital and a rise in retained earnings Expenses . 2% • Expenses up $15m reflecting higher volumes and BTIM performance fees partly offset by productivity benefits Franchise growth continues | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Growth across funds management business 107 FUM and FUA drivers FUA ($bn) FUM ($bn) FUA by asset class (%) 77.0 82.8 86.6 91.7 101.5 14.7 15.9 17.2 18.1 20.1 3.8 4.0 3.0 2.9 3.4 1H13 2H13 1H14 2H14 1H15 BT Wrap/Asgard Corporate Super Other Up 17% 95.5 125 • FUM related revenue increased 9% on 2H14 supported by – Positive foreign exchange translation impacts for funds held outside Australia by JOHCM and revaluation of Ascalon seed pool – Above benchmark for 5 year performance: 90% Advance, 97% BTIM and 100% JOHCM – BT Super for Life retail FUM up 16% to $5.7bn • FUA related revenue increased 4% on 2H14 – Asgard Infinity up 22% to $8.7bn supported by positive flows – BT Wrap/Asgard platforms FUA increased 11% – Improved markets contributed $10bn to FUA balances – Asset class investment allocation held consistent 17.1 17.4 17.0 18.1 19.9 14.4 20.5 24.1 27.7 35.1 18.3 20.8 23.0 25.2 28.8 15.9 17.5 18.0 18.0 19.5 65.7 76.2 82.1 89.0 103.3 1H13 2H13 1H14 2H14 1H15 BTIM (exc. JOHCM) JOHCM Advance Retail super/other Up 26% 38 40 40 39 39 17 18 18 19 19 5 5 5 5 4 19 19 19 19 18 13 13 12 12 12 8 5 6 6 8 1H13 2H13 1H14 2H14 1H15 Equities Aust Equities Intl. Property Cash Fixed interest Other inc. diversified 102.7 106.8 112.7 | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Insurance portfolio continues to expand 108 1 Plan for Life December 2014. Premiums ($m) Insurance loss rates (%) Life insurance individual new sales market share1 (%) Life insurance lapse rates1 (%) 218 227 235 246 685 734 792 827 2H13 1H14 2H14 1H15 General insurance gross written premiums Life in-force premiums 31 45 32 62 32 29 30 34 2H13 1H14 2H14 1H15 General insurance loss rate Life insurance loss rates 5% 10% 15% 20% Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 WBC Peer 1 Peer 2 Avg of next Top 4 10% 15% 20% Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 WBC Peer 1 Peer 2 Peer 3 Up 13% Up 8% | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Strategy driving long term growth 109 Panorama – a 360 degree view Advice – lifting professional standards • Helping customers across the banking network • Strong focus on innovation, enhancing customer experience and increasing digital – SMS alert to customers before a major storm reminding them of what to do if they need us • Expanding General Insurance reach and consolidating Motor, Travel and Business Insurance products through new Allianz partnership – Offering customers wider product range and greater digital access – Westpac General Insurance will continue to offer its own Home & Contents cover • Restructured Lenders Mortgage Insurance arrangements to improve customer service with no change to risk appetite Insurance – continued targeted growth • Delivering new initiatives to improve the client experience, adviser professionalism and transparency – Launched Adviser View, an online adviser register giving customers the power to search, share and compare financial advisers, provide comments and rate their financial adviser. Average rating for advisers is 4.86 out of 5, over 1,000 pieces of customer feedback to date – Rolled out Advice Commitment (customer charter) providing an upfront overview on what clients can expect from us – Raising the bar on minimum education and professional standards. By the end of 2019 all advisers will be required to hold a Certified Financial Planner, Fellow Chartered Financial Planner Practitioners or Masters of Financial Planning – Continued focus on strengthening our risk and control framework • Panorama, BT's new investment platform, will provide advisers and clients with a 360-degree view of their wealth across investments, superannuation, insurance and banking, allowing them to actively manage, access and report their wealth • Cash Hub launched a year ago. FUM now exceeds $1 billion and 1,363 advisers registered to date • Supports SMSF investors by connecting accountants and other SMSF professionals and facilitating compliance, tax and consolidated reporting • Ongoing investment in Panorama will provide sustainable productivity in future years • The latest addition to Panorama, BT Managed Portfolios, offers a simple way to access shares, managed funds and cash investments through a range of professionally managed portfolios, and removes the need to individually research, | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Solid performance across key metrics 110 1 Refer slide 145 for wealth metrics provider. 2 Plan for Life, All Master Funds Admin as at December 2014 (for 1H15), as at June 2014 (for 2H14) and as at December 2013 (for 1H14) and represents the BT Wealth business market share at these times. 3 Plan for Life (Individual Risk) rolling 12 month average. New sales includes sales, premium re-rates, age and CPI indexation December 2014. 4 Internally calculated from APRA quarterly general insurance performance statistics, February 2015. 5 Spot number as at balance date. Key performance metrics FUM / FUA • Life Insurance claims team consistently rated Claims Management Analysis Programme A+ since 2011. CMAP is an independently conducted assessment of our claims department providing transparent analysis of operations and measuring the client claims ‘experience’ • Home & Contents Fast Track Program expanded to include additional products reducing average claims processing time from 64 to 30 days • Online Investing One Click launched, delivering pre-population of data, signature free account applications and straight through processing • Continued roll out of digital video statements for BT Super for Life providing members with a personalised video, addressing the member by name and confirming their superannuation balance. Initiative won Money Magazine’s Best Innovative Investing Product Delivering on the service revolution 1H14 2H14 1H15 Change on 2H14 Wealth penetration1 (WBC Group) 19.7 20.0 20.0 - 0% Planners (salaried & aligned) (# spot) 1,195 1,220 1,222 . 0% BT Super for Life (retail) customers (#’000) 432 466 478 . 3% Platform market share2 (including Corporate Super) (%) 19.7 19.7 19.9 . 1% Retail market share2 (exc. cash) (%) 18.4 18.4 18.8 . 2% Life Insurance market share3 (%) 10.8 11.4 11.6 . 19bps Home & contents market share4 (%) 5.2 5.5 5.6 . 10bps Women in leadership5 (%) 41 44 43 × (1ppt) Average Period end $bn 1H15 – 2H14 % mov't $bn 1H15 – 1H14 % mov't | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Lower WIB earnings impacted by derivative adjustments 111 Movement 1H15 – 2H14 Cash earnings . 13% • Lower cash earnings mainly due to the impact of methodology changes to derivative adjustments that reduced cash earnings by $85m • Excluding this impact, WIB’s cash earnings were down 1% Core earnings . 9% • Excluding the impact of derivative adjustments, core earnings were up 4% Net interest income flat • Average interest-earning assets up 6%. Growth was supported by a lift in lending, with net loans up 6% • Deposits down 4%, as the business did not pursue lower LCR value deposits • Growth was offset by margin compression as competitive industry pressures remain Net interest margin . 11bps • Lower net interest margin reflects continued competition, in particular for lending assets Non-interest income . 8% • Excluding the impact of derivative adjustments, non-interest income was up 9%, supported by a lift in WIB markets income from a strong performance in fixed income and FX sales Expenses . 4% • Increased expenses reflects investments in the business, including the continued build of capabilities in Asia and meeting regulatory requirements Impairment benefit . 51% • Impairment benefit $22m (2H14: $45m) as writebacks continued to exceed new IAPs Cash earnings movement ($m) 717 (2) 67 (25) (23) (25) 709 (85) 624 2H14 Net II Non-II Expenses Impairments Tax & NCI 1H15 (adjusted) 1H15 Down 1% Down 13% Derivative adjustments Core earnings movement ($m) 964 882 (2) 67 (25) 1,004 (122) 2H14 Net II Non-II Expenses 1H15 (adjusted) 1H15 Up 4% Down 9% Derivative adjustments | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Customer revenue supported by lift in customer activity across the business 112 1,227 1,296 1 (7) 16 1,306 1H14 2H14 Lending Deposits Sales and fees 1H15 • Customer revenue1 up 1% supported by . Strong customer flow in FX and Fixed Income businesses . Increased market volatility in core currencies contributed to a rise in customer hedging activity . Maintained No. 1 position in core AUD and NZD FX markets2 . Fixed income sales, mainly interest rate hedging products, benefited from a number of large transactions, including infrastructure deals . Lower fixed rates also supported a lift in customer interest rate hedging . Lending revenue in line with 2H14 . Net loans up 6%, mainly in infrastructure and natural resources . Successful integration of Lloyds business, with asset finance revenue up 10% . Lower trade finance revenue as contract values declined in line with the fall in commodity prices . Net interest margin pressure offsetting growth as competition for assets remains strong . Deposit revenue lower reflecting lower deposit balances and margin pressure 176 95 184 104 203 114 FX Fixed Income 1H14 2H14 1H15 Lift in customer revenue Lift in Financial Markets customer sales Up 1% Up 6% Financial Markets customer sales revenue ($m) 1 WIB customer revenue is lending revenue, deposit revenue, sales and fee income. Excludes trading, derivative adjustments and Hastings. 2 Source: Euromoney FX Poll 2014, Number 1 Australian Bank for FX, Globally. Measure of market share from 14,050 FX industry votes. 3 Other includes overdrafts and provisions. Customer revenue1 ($m) 66 80 131 1H14 2H14 1H15 Operating lease avg balances ($m) 2.8 2.9 3.3 1H14 2H14 1H15 Financing lease avg balances ($bn) Leveraging new capabilities in asset finance Lift in customer lending 64.0 66.2 3.4 0.3 0.1 0.1 70.1 1H14 2H14 Corporate & Institutional lending Securitisation & Asset Finance Trade Finance Other 1H15 WIB net loans ($bn) 3 Up 6% Up 10% Up 10% | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Infrastructure • Revenue up 40% • 3 major transactions successfully closed in 1H15, with a total enterprise value of approximately $7.7bn and a strong pipeline of opportunity • Hastings continues to deliver positive results with revenue up 20%. Hastings is one of the longest running dedicated infrastructure specialists globally, with a strong track record Delivering for customers in key growth sectors 113 Superannuation • Revenue in line with 2H14 • More than 41,000 employers in Australia now using Westpac’s clearing house and gateway – up 39% in 1H15 • More than 50% of prudentially-regulated funds use Westpac’s solution, including key industry funds WIB/Australian retail and business banking partnership • Partnership revenue up 2% • WIB’s financial market activity with retail and business banking customers has continued to grow . Active customers up 27% . Revenue up 9% for FX products to retail and business banking customers • Lift in customer activity due to market volatility, resulting in hedging of the lower Australian dollar and customers locking in fixed interest rates at current lows • Investment in digital capability delivering . Over 80% of financial markets transactions with retail and business banking customers executed online • Revenue from global currency card more than doubled on 1H14 • Westpac customers can now apply for a global currency card online in just 30 seconds China and broader Asian Region • Increasing levels of customer activity . Welcomed 500th new corporate & institutional customer in February 2015 . Connecting Asian Corporates into Australia across multiple products – Financing, Bond Issuance, Remittance, FX & Interest Rate Swaps . Continued focus on Greater China with 57% of new financing drawdowns originating from China • Revenue lower, mainly due to lower trade finance revenue as contract values decline in line with commodity prices • Building capabilities . Opened Shanghai Free Trade Zone Sub-Branch – completed first customer transaction on the day of opening . Implemented newly automated payment system across Singapore, Hong Kong and India offering significantly faster end-to-end processing for customers | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Innovative solutions and new capabilities to support WIB customers 114 1 WIB customer revenue is lending revenue, deposit revenue, sales and fee income. Excludes trading, derivative adjustments and Hastings. 2 Peter Lee Associates Large Corporate and Institutional Transactional Banking Survey Australia. Quantitative measure from 576 votes in 2014. Westpac ranks No.1 for citations as a ‘lead’ domestic transactional bank 2004-2014. 3 Excludes a charge for $122m from methodology changes to derivative valuations. Reinventing the customer experience Solutions and capabilities for customers – 1H15 highlights 80 7 3 10 Customer Market risk Hastings Other 1H15 revenue composition3 (%) Maintained focus on delivering for customers • 80% of WIB revenue from customer business1 • Supported by 11 years as No.1 lead domestic transactional bank2 and strength of customer relationships • Continue to focus on partnering with customers and delivering innovative solutions Corporate Mobile & Corporate Online • Customers are accessing Corporate Online features from their smart devices. To date, 13,500 customers have downloaded the Corporate Mobile app, an increase of 35% • Delivered single sign-on for Quickservice Foundation bank for Sydney RMB Hub • A foundation bank for Australasia’s first RMB Hub in Sydney supporting the internationalisation of the Chinese currency Launched QuickRec to key customers • Provides additional payables and receivables information to enhance customer bank statements, including aggregating data from multiple accounts into a single report • Information provided via a secure online portal or direct customer connection, and tailored to customer needs Mobile PayWay • Growing between 30-50 new customers per month • Rolled out to over 150 public schools in S.A. • Improvements to customer onboarding – up to 80% reduction in time to onboard new customers in key sectors • Customer collaboration and co-design to develop big data solutions • Implemented bulk customer onboarding for merchant acquiring significantly reducing time to establish new multiple merchant terminals for customers • Tailoring solutions to automate end-of-day reconciliations for merchants for key multinational customer • Improving customer experience by delivering automated solution for exception and escalation processes • Introduced paperless statements providing customers with greater flexibility and increasing efficiency | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Risk management continues to be a competitive advantage 115 • WIB continues to benefit from its strong risk management disciplines, recording impairment benefits in the last five halves • Impairment benefit of $22m was lower compared to 2H14 ($45m). Writebacks and recoveries have reduced as the volume of stressed assets has declined, however they continue to offset new IAPs • The level of stress in the portfolio remains very low, down a further 21bps to 68bps • The current level of stress remains well below the long term average of approximately 2% • Impaired assets to TCE down 11bps to 12bps Stressed exposures as a % of TCE Impairments: (charges) / benefits ($m) (186) (100) (69) (15) (37) 104 98 93 58 54 125 48 66 2 5 43 46 90 45 22 1H13 2H13 1H14 2H14 1H15 1H13 2H13 1H14 2H14 1H15 1H13 2H13 1H14 2H14 1H15 1H13 2H13 1H14 2H14 1H15 0.1 0.2 0.7 0.9 0.7 0.7 0.6 0.6 0.4 0.3 0.2 0.1 0.7 0.8 3.6 3.5 1.8 1.5 1.4 1.0 0.7 0.7 0.7 0.6 0.8 1.0 4.3 4.6 2.6 2.3 2.1 1.6 1.2 1.0 0.9 0.7 FY07 FY08 FY09 FY10 FY11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 Impaired 90+ days past due not impaired Watchlist & substandard New IAPs Write-backs and recoveries Change in CAP Total impairment benefit | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Institutional market leadership 11 years as Number 1 Lead Domestic Transactional Bank1 116 No.1 Relationship Strength Index (All domestic relationships)2 1 Peter Lee Associates Large Corporate and Institutional Transactional Banking Survey Australia. Quantitative measure from 576 votes in 2014. Westpac ranks No.1 for citations as a ‘lead’ domestic transactional bank 2004-2014. 2 Peter Lee Associates Large Corporate and Institutional Transactional Banking Survey Australia. Rank vs. Top 4. Quantitative measure from 576 votes in 2014. 3 Euromoney FX Poll 2014. Measure of market share from 14,050 FX industry votes. 4 Euromoney FX Poll 2014. Quantitative measure of market share vs. global competitors from 308 FX industry votes. 5 Euromoney FX Poll 2014, Asian Timezone. Measure of client service from 5,405 FX service user votes. 6 Peter Lee Associates Foreign Exchange Survey Australia 2014. Quantitative measure from 307 corporate and financial institution respondents. Rank vs. Top 4. 7 Euromoney Awards for Excellence 2014. 8 Peter Lee Associates Debt Securities Investors Australia Survey 2014. Rank vs. top 4 major domestic banks. Based upon the most active investors in each type of security. Based upon Westpac achieving a no.1 ranking amongst the four major domestic banks for estimated market share across Corporate Bonds, Asset Backed Securities, CPI Linked Securities and CPI Linked Derivatives, a No.1 ranking for Relationship Strength amongst the four major domestic banks across Commonwealth Treasury and Semi Government Bonds and Asset Backed Securities. 9 KangaNews fixed income research poll 2014. Votes by more than 60 Australian-based institutional fixed income investors only. 10 Peter Lee Associates Large Corporate and Institutional Banking Survey Australia 2014. Rank vs Top 4 from 570 respondents. 11 Peter Lee Associates Interest Rate Derivatives Survey, Australia 2014. Quantitative measure from 188 corporate respondents. Rank vs. Top 4. Global Transactional Services. No.1 Overall Satisfaction (All domestic relationships)2 No.1 Lead Transactional Bank in Australia 20142 Financial Markets. No.1 Australian Bank for FX, Globally3 No.1 Australian Bank for FX Quantitative Research in Australasia4 No.1 Australian FX Bank for Client Service in the | Westpac Group First Half 2015 Presentation & Investor Discussion Pack NZ delivers a solid performance across return, growth, productivity and strength 117 1 RBNZ March 2015. Cash earnings movement (NZ$m) Flat Up 2% Key financial metrics 1H15 - 2H14 (NZ$m) Cash earnings . 2% • Cash earnings of $441m up $9m Core earnings . 3% • Up $18m to $640m driven by 3% increase in revenue Net interest income . 3% • Up $23m to $832m • Lending up 3% with mortgages up 3% and business lending up 4%, including agriculture lending above system1 • Deposits up 4% fully funding lending growth Net interest margin . 2bps • Deposit spreads improved driven by active rate management and portfolio optimisation • A reduction in wholesale funding costs • Asset spreads declined mainly reflecting continued intense competition, particularly in fixed housing Non-interest income . 2% • Increased revenue driven by wealth income and higher institutional income • Insurance performance maintained with premium growth offset by higher claims coming off a low level of claims in 2H14 Expenses . 2% • Increase driven by annual salary increases • Partially offset by investment in strategic initiatives delivering productivity savings Impairment charges . 41% • Impairments up $9m to $31m with a rise in stressed assets off a low base • Asset quality maintained with 90+ days mortgage delinquencies a low 25bps Key financial metrics 1H14 2H14 1H15 Change on 2H14 Revenue (NZ$m) 1,022 1,049 1,077 . 3% Margins (%) 2.28 2.27 2.29 . 2bps Expense to income (%) 41.3 40.7 40.6 . 13bps Customer deposit to loan ratio (%) 76.6 76.5 77.3 . 86bps ROTE (%) 21.2 20.9 22.8 . 190bps 432 26 1 432 23 5 441 (5) (18) (4) (10) (9) 1H14 Net II Non-II Expenses Impairment charges Tax & NCI 2H14 Net II Non-II Expenses Impairment charges Tax & NCI 1H15 0 New Zealand | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Investment delivering improvement in key operating metrics and enhancing the customer experience 118 1 Refer slide 144 for NPS definition. 2 Refer slide 145 for metric definition. Key performance metrics Everyday banking, changing how customers bank New Zealand 1H14 2H14 1H15 Change on 2H14 Customers (#m) 1.32 1.31 1.32 . 1% Active digital customers (#’000) 647 661 679 . 3% Digital applications ($m) 282 284 297 . 5% Digital log-ins (#m) 53 59 64 . 8% Total branches 197 193 190 (2%) Smart ATMs % of ATM network 19 21 23 . 2ppts Deposits through Smart ATMs (#’000) 880 946 1,066 . 13% Customers with a wealth product2 (%) 26.4 27.3 28.0 . 69bps FUM (NZ$bn) 4.9 5.5 6.0 . 9% FUA (NZ$bn) 1.5 1.7 1.9 . 12% Women in leadership (%) 43 44 45 . 1ppt 880 946 1,066 1H14 2H14 1H15 Up 13% Number of deposits via Smart ATM’s • Providing enhanced flexibility with 24/7 capability for customers’ everyday banking needs • Further expanded the fleet of Smart ATM’s (up 8%) to 143 • Deposits via Smart ATM’s up 13% 33% of all physical deposits now processed via this channel - Over 1 in 3 Smart ATM deposits are conducted outside normal business hours • Branch deposits have fallen 11% Digital capability enhancing customer experience 2,646 2,402 2,135 1H14 2H14 1H15 Down 11% Number of deposits via branches 284 280 297 1H14 2H14 1H15 Up 5% Digital applications ($m) • Enhanced digital application capabilities is supporting an improved customer experience with online banking NPS1 up 5ppt to 46% • Number of digital applications rose 19%. Value now $297m (up 5%) • Broker originated applications have been streamlined with a new app that digitally captures customer information and completes the application 38% | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Delivering on digital leadership and leveraging partnerships 119 1 Global Finance World's Best Banks in Developed Markets Award 2015 March 2015. 2 The Asian Banker Excellence in Retail Financial Services Awards 2015 March 2015. 3 Canstar Online Banking NZ Awards April 2015. • Continuing to deliver digital innovation in partnership with Mastercard with the launch of Pay Tag (a mobile sticker). Converting a phone into a contactless payment device enabling customers to make fast, secure payments of up to $80 by holding their device up to contactless terminals New internet banking platform Partnerships providing value for customers Recognition for digital leadership continues Innovation via partnerships • Launched Westpac One, a new internet and mobile banking platform providing customers more functionality and a consistent experience across all devices • Over 500,000 customers migrated to date. As a result of the new platform digital applications are - Up 52% on average across cards, personal loans and home lending - 40% of total applications are now made online - 88% are being conditionally approved instantly online • 11.8 million log-ins per month, up 17% in the first month after launch • Best Bank in New Zealand (Global Finance)1 • Best Retail Bank of the Year (New Zealand) (Asian Banker awards)2 • Best Online Bank in New Zealand (Canstar)3 • Announced a partnership with Air New Zealand to offer Airpoints rewards, New Zealand’s most popular loyalty rewards programme with over 1.4m New Zealanders participating. Will provide customers greater choice and more value on their credit card and mortgage products • Over 25,000 applications received to date via an online portal which has delivered straight-through approval of over 70% of all applications • New Airpoints cards sent to customers from 1 May 2015. Capability to select PIN numbers online has been launched New Zealand | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Delivering returns through growth and productivity whilst optimising the balance sheet 120 42.6 40.7 41.3 40.7 40.6 1H13 2H13 1H14 2H14 1H15 2.34 2.32 2.28 2.27 2.29 1H13 2H13 1H14 2H14 1H15 75.2 75.7 76.6 76.5 77.3 1H13 2H13 1H14 2H14 1H15 368 400 432 432 441 1H13 2H13 1H14 2H14 1H15 580 602 600 622 640 1H13 2H13 1H14 2H14 1H15 1.3 1.4 1.5 1.7 1.9 4.1 4.4 4.9 5.5 6.0 1H13 2H13 1H14 2H14 1H15 FUA FUM Cash earnings (NZ$m) Core earnings (NZ$m) Net interest margin (%) Expense to Income ratio (%) FUM and FUA (NZ$bn) Deposit to loan ratio (%) New Zealand | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Mortgage portfolio quality remains strong 121 43% 17% 23% 12% 3% 2% 0<=60 60<=70 70<=80 80<=90 90<=95 95+ 83% of mortgage portfolio less than 80% LVR 0.25 0.0 0.5 1.0 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 • Mortgage portfolio NZ$40.7bn, up 3% • The proportion of fixed rate mortgages remains at 73%, as the outlook for cash rate rises has been delayed to late 2016 • Loan origination through proprietary channels remained steady at 74% • Well secured portfolio, with 83% of the portfolio having LVR of 80% or less • Mortgage 90+ days delinquencies remains low at 25bps up 4bps from low 21 bps in 2H14, reflecting seasonal increases • Westpac New Zealand uses a servicing assessment approach to assess capacity to repay mortgages. This includes an adequate surplus test and discounts to certain forms of non-salary income. Also included is an interest rate buffer which in the current interest rate environment is in the range of 2% higher than the standard lending rate 0.05 0.00 0.05 0.10 0.15 0.20 0.25 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 1 LVR based on current loan balance and current assessment of property value. Portfolio highlights New Zealand mortgage portfolio by region (%) New Zealand mortgage portfolio LVR1 (%) of portfolio Mortgage 90+ days delinquencies (%) Mortgage loss rates each half (%) New Zealand 43 9 8 40 Auckland Wellington Christchurch Rest of New Zealand | Westpac Group First Half 2015 Presentation & Investor Discussion Pack 24.2 23.1 16.2 11.2 6.8 18.4 Property Manufacturing Agriculture, forestry & fishing Wholesale trade Mining Other Stable asset quality with a small increase in business stressed assets 122 0.3 0.5 1.4 2.6 3.4 2.2 1.9 1.5 0.8 0.9 1.1 0.0 0.1 0.4 0.2 0.3 0.2 0.1 0.2 0.1 0.0 0.2 4.7 7.1 14.4 12.8 9.6 4.4 4.1 3.2 2.9 2.3 2.3 5.0 7.7 16.2 15.6 13.2 6.8 6.1 4.9 3.8 3.3 3.6 FY07 FY08 FY09 FY10 FY11 FY12 1H13 2H13 1H14 2H14 1H15 Impaired 90+ days past due not impaired Watchlist & substandard 1 Large reduction in stressed exposures from FY11 to FY12 due primarily to transfer of WIB assets during 1H12. Business stressed exposures as a % of New Zealand business TCE Movement in impairment charges (NZ$m) • Total business stressed exposures as a % of business TCE is at 3.56%, up 30bps (down 20bps on 1H14) • Business impaired exposures increased to 1.07% of business TCE, up 14bps mostly due to the movement of one single name exposure • Watchlist and substandard exposures were relatively stable at 2.32%, up 2bps • Impairment charges increased NZ$9m. The higher CAP charge reflects seasonal delinquency patterns, and is offset by lower IAP charges • Overall, asset quality remains stable with credit quality metrics remaining relatively low New Zealand 1 4 22 33 15 31 (37) (2) 1H14 2H14 CAP changes & other Writeback + recoveries New IAPS Write- Offs 1H15 Up $9m | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Westpac Pacific solid earnings contribution, up 4% 123 Cash earnings movement ($m) Movement 1H15 – 2H14 Cash earnings . 4% • Strong net interest income performance, partly offset by the impact of FX controls introduced in PNG in July 2014 • Translation impacts from movements between the A$ and local currencies increased cash earnings by $4m Net interest income . 19% • Good growth in both assets and liabilities, in particular in Fiji. Higher yields on government securities portfolio. Benefit of currency translation. Net interest margin up 18bps Non-interest income . 14% • Mainly due to lower FX sales income from the impact of foreign exchange controls in PNG Expenses . 11% • Increase reflects annual salary reviews and government mandated superannuation increases in Fiji Impairment charges . $4m • Impairments provided a $1m benefit 65 5 3 6 57 13 4 59 (22) (9) (5) (1) 1H14 Net II Non-II Expenses Impairment charges Tax & NCI 2H14 Net II Non-II Expenses Impairment charges Tax & NCI 1H15 Down 12% Up 4% 1. Full year impact in FY14 flat Sale of operations in five Pacific Island Nations • In January 2015, Westpac entered into an agreement to sell its banking operations in Samoa, Cook Islands, Solomon Islands, Vanuatu and Tonga to the Bank of South Pacific Limited (BSP) for A$125m • Westpac will retain its operations in Fiji and PNG • Completion of the sale is expected to occur in Second Half 2015 and is subject to the parties obtaining necessary statutory, regulatory and third party approvals • Decision reflects desire to increase focus on growth plans in the larger markets of PNG and Fiji. These markets are closely tied to Asia, Australia and New Zealand with strong flows of capital, trade, and migration between these regions Contribution of Pacific businesses to be sold Cash earnings1 A$8m Assets A$0.7b Liabilities A$0.6b Pacific Highlights • Papua New Guinea (PNG) and Fiji grew their customer base by 71,000 (18%) on prior year through expansion of the ‘Everywhere Banking’ program. The program saw over 7,100 people Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Economics | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian and New Zealand economic forecasts 125 Key economic indicators1 (%) as at April 2015 Calendar year 2013 2014f 2015f 2016f World GDP 3.3 3.2 3.5 4.1 Australia GDP 2.1 2.7 2.2 3.0 Private consumption 2.0 2.8 2.4 3.2 Business investment2,3 -8.0 -4.3 -7.4 -1.2 Unemployment – end period 5.8 6.2 6.7 6.3 CPI headline – year end 2.7 1.7 2.3 2.5 Interest rates – cash rate 2.5 2.5 2.0 2.0 Credit growth, Total – year end 3.8 5.9 5.3 6.0 Credit growth, Housing – year end 5.4 7.1 7.4 6.6 Credit growth, Business – year end 1.6 4.8 2.3 5.6 New Zealand GDP 2.3 3.3 3.0 3.4 Unemployment – end period 6.1 5.7 5.2 4.9 Consumer prices 1.6 0.8 0.3 1.7 Interest rates – official cash rate 2.5 3.5 3.5 4.0 Credit growth – Total 4.2 4.5 5.1 5.5 Credit growth – Housing 5.2 5.1 5.2 5.9 Credit growth – Business 2.2 3.8 4.3 4.4 1 Source: Westpac Economics. 2 GDP and component forecasts updated following the release of quarterly national accounts. 3 Business investment adjusted to exclude the effect of private sector purchases of public assets. ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australia remains well-placed relative to developed economies 126 Australia’s economy: diversified and flexible Real GDP growth (%) 8.4 8.6 11.5 2.6 8.4 10.3 12.7 11.1 3.2 5.6 11.9 5.7 Manufacturing Construction Mining Rural Utilities & transport Wholesale & retail Property, business services Finance Communications Household services Education & health Government -8 -6 -4 -2 0 2 4 6 8 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14 Australia UK Canada US Euro Net public debt levels as a % of GDP 2013 Sources: OECD, Westpac Economics. Sources: IMF, Westpac Economics. Sources: ABS, Westpac Economics. 1 Excludes ownership of dwellings and taxes less subsidies. Sector contribution to GDP (%)1 % growth, year-ended Australian economic growth and external shocks -2 0 2 4 6 8 -2 0 2 4 6 8 Dec-86 Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14 GDP %yr GDP %yr Global recession, but home grown property bust Asian Crisis, ~ 60% of export markets in recession Tech Wreck, ~ 90% of export markets in recession GFC, ~ 70% of export markets in recession € shock Sources: ABS, Westpac Economics. 13.5 26.0 38.5 55.7 60.4 81.3 83.1 87.6 110.7 Aus NZ Canada Germany Spain US UK France Italy ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australia’s economic transition from mining to non-mining Sources: ABS, Westpac Economics. Investment: share of Australian economy (% of GDP) Iron ore cash cost curve (total supply free-on-board) 0 5 10 15 Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14 mining, CAPEX housing investment business investment (ex mining) Sources: AME, Westpac Economics F’casts end 2015 Sources: ABS, Westpac Economics. % of GDP Australian growth mix: contributions to GDP growth (%) -2 -1 0 1 2 3 4 -2 -1 0 1 2 3 4 consumer housing inv. mining inv. business inv. govt demand net exports GDP ppts 2012 2013 2014e 2015f 2016f ann% avg 10yrs to 2007 0 50 100 0 50 100 0 450 900 1350 1800 USD/t USD/t Brazil Australia China others current MB $48/t cfr Cumulative export supply, mt ECONOMICS 127 | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian state economies shift in growth with NSW the pace setter 128 Business investment by state ($bn) Domestic demand (% ann) Gross State Product 2013/14 (%) Population (# m) • Domestic demand growth is shifting from the mining states of WA and Qld, to NSW and, to a lesser extent, Victoria – 1 in 3 Australians live in NSW, with a similar number spread across WA and Qld, some 25% are in Victoria, and 12% reside in the smaller states and territories • The downturn in mining investment and in global commodity prices is being particularly hard felt in WA and Qld, with per capita consumer spending growth now quite weak • In Victoria, structural change associated with the recent high level of the Australian dollar has been a significant headwind, with a number of large manufacturers announcing their intended exit from the Australian market • In contrast, the NSW economy, held back by the high interest rates prevailing during the mining boom, has responded strongly to record low rates. Home building is in a catch-up phase and consumer spending growth is above trend, supported by strong gains in population, house prices and wage incomes • The exchange rate plays a key role in adjusting to swings in global commodity prices and in facilitating a rebalancing of growth between the mining and non-mining sectors of the economy 0.9 -3.7 0.7 0.3 0.5 1.4 1.8 -3.4 -1.7 1.2 1.5 1.7 2.8 3.8 Qld WA Aus Tas SA Vic NSW Dec-13 yr Dec-14 yr Sources: ABS, Westpac Economics 0 5 10 15 20 25 Dec-00 Dec-08 NSW + Vic WA + Qld Construction 0 5 10 15 20 25 Dec-00 Dec-08 NSW + Vic WA + Qld Equipment ’03/04 to ’07/08 Sources: ABS, Westpac Economics 7.5 5.8 4.7 2.6 1.7 0.5 0.4 0.2 NSW Vic Qld WA SA Tas ACT NT Australia: 23.5 million Jun 2014 31 22 19 16 6 2 0 10 20 30 40 NSW Vic Qld WA SA Tas % of Australian GDP Sources: ABS, Westpac Economics Sources: ABS, Westpac Economics | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian labour market 129 Australia: employment by sector (annual change, ’000) Sources: ABS, Westpac Economics. 1 The group of industries collectively called the household services sector includes those industries that provide services primarily to households, including health, education, hospitality, accommodation, food services and art and recreation. Sources: OECD, Westpac Economics. 0 2 4 6 8 10 12 14 Feb-99 Feb-03 Feb-07 Feb-11 Feb-15 Australia Canada UK US Euro % Personal bankruptcies vs company insolvencies (%) Unemployment rates (%) Sources: ASIC, ITSA, ABS, Westpac Economics. 0.0 1.0 2.0 3.0 4.0 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 0.0 0.4 0.8 1.2 1.6 % % Company insolvencies (rhs) Personal bankruptcies (lhs) *seasonally adjusted by Westpac; bankruptcies shown as per 1000 people, insolvencies shown as per employing businesses -120 -80 -40 0 40 80 120 160 200 Mining Manufacturing Utilities Government Health & education Agriculture Wholesale & transp. Retail Finance & real estate Construction Leisure & hospitality Business services change in employment 4Q13 1Q14 4Q14 - 1Q15 ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australia’s population growth 130 Population growth (%) -0.5 0.0 0.5 1.0 1.5 2.0 -0.5 0.0 0.5 1.0 1.5 2.0 Germany Hungary Poland Greece Japan Netherlands China France Italy UK Sweden US Canada New Zealand Spain India Indonesia Australia % % *average 2005-10 world • Australia’s population is just over 23 million and growing at a comparatively rapid pace . Population growth was 1.8% in 2013, a touch above Australia’s long run average pace of 1.4% and well above world population growth of 1.2% . Much stronger than that seen in most advanced economies, many of which are seeing static or even declining populations . Also strong compared to population growth seen in many emerging economies • The growth of Australia's population has two main components – natural increase (the number of births minus the number of deaths) and net overseas migration . Natural increase and net overseas migration contributed 40% and 60% respectively to total population growth in the 12 months to March 2013 • Australia is very much a migrant country . Approximately one-third of the population born overseas . Overall, the proportion of overseas-born residents from European countries of birth is declining, while the proportion of migrants coming from Asia is increasing Sources: UN, Westpac ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Interest rates to remain low AUD high relative to fundamentals 131 Sources: RBA, OECD, Westpac Economics. 0 1 2 3 4 5 6 7 8 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Australia UK Canada US Euro Major countries’ policy rates (%) 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12 Mar-16 Fair value band AUD/USD actual & forecast Australian dollar (AUD/USD) • We see scope for the Reserve Bank to lower interest rates further, expecting rates to decline from 2.25% to 2.00% in 2Q15 • The economy has been hit by a negative income shock since mid 2014, with commodity prices falling sharply, particularly iron ore as global supply expands and China navigates a soft spot • Price pressures are expected to remain benign with core CPI inflation forecast to be 2.3% in 2015 and wages growth subdued. Labour markets are only expected to improve slowly • The Australian dollar has not fully adjusted to the sharp fall in commodity prices since mid 2014. The currency remains above ‘fair value’ based on long run fundamentals • Commodity prices have fallen by around 32% since mid 2014, while the AUD has depreciated by 18% against the USD and by only 12% on a TWI basis over the same period • The AUD is expected to decline further to US72¢ by the end of 2015, holding around that level through much of 2016 Sources: RBA, Westpac Economics. latest: 78 F’casts USD USD Includes WCFI+BI commodities index, 2 year swap spread, and NFD to GDP. % ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Credit growth picking up at a modest pace 132 Sources: Westpac MI, NAB, Westpac Economics. -40 -30 -20 -10 0 10 20 30 60 70 80 90 100 110 120 130 Mar-03 Mar-07 Mar-11 Mar-15 Consumer (lhs) Business * (rhs) monthly * rebased to avg 0 Business confidence and consumer confidence (net balance) -10 -5 0 5 10 15 20 25 (10) (5) 5 10 15 20 25 Mar-95 Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 Housing Total credit Business Forecasts end 2015 Australian private sector credit growth (% ann) • Confidence remains relatively subdued • After a weak 2014, consumer sentiment responded positively to the RBA’s February rate cut but has since drifted lower again and remains in pessimistic territory • Job loss fears and concerns around a Budget tightening by the Federal Government have been the main factors weighing on sentiment • Business confidence was more resilient for a time but has slipped back in recent months • Credit growth increased to over 5.5% during 2014, as both housing and business responded to declining interest rates • A potential loss of momentum in business credit, following the recent dip in confidence, could see the 2015 year be one of consolidation ahead of an improvement in 2016, supported by record low interest rates, investors continuing to move in to the housing market, and an improved international environment Sources: RBA, Westpac Economics. % annual % annual ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian commercial property market 133 0 5 10 15 20 25 30 35 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 Brisbane CBD Perth CBD Sydney CBD Melbourne CBD Source: PCA OMR 1/2015 Total vacancy rates in capital cities (%) Australian commercial investment sales over $5 million ($’000) 0 5 10 15 20 25 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 NSW Vic Qld SA WA ACT Recent sector activity largely in NSW and Vic Source: CBRE research Source: CBRE, RBA, Westpac Economics -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Prime Office Prime Industrial Prime Retail Average premium since 2000 Prime Office = 2.52%; Prime Industrial = 3.31%; Prime Retail = 2.01% Premium property prime yields over 10 year bond rate (%) -2.5% -1.5% -0.5% 0.5% 1.5% 2.5% Sydney CBD Melbourne CBD Canberra Adelaide CBD Brisbane CBD Gold Coast Sunshine Coast Perth CBD West Perth Change in occupied space Net supply Net changes over second half 2014 Factors driving vacancy change (%) Source: PCA OMR 2/2015 ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack China growth remains a positive for Australia 134 • As a $US7 trillion economy, China grew at 10%. As a $US10 trillion economy, Westpac expects China to grow at 7.1% • Represents an equivalent incremental contribution to global growth, at higher levels of energy, protein, metal and consumer goods demand per head • Were China to slow immediately to a 5% pace (a big downside shock that we do not envisage), it would still double its 2012 size by 2025 • Chinese authorities have shown a clear commitment to maintaining growth above 7% but will be less tolerant of strong credit driven expansions – the double digit growth rates that have featured regularly over the past 20 years are now unlikely to occur • Australia will continue to benefit as Chinese households progressively expand their living standards and their consumption basket Source: Westpac Economics. Real GDP % ann 2012 2013 2014f 2015f 2016f China 7.7 7.7 7.4 7.1 7.3 Chinese real GDP increments: 4 scenarios (% of 2012 GDP) 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35 1993 1998 2003 2008 2013 2018 2023 2028 % of 2012 GDP % of 2012 GDP 8% CAGR History & 7% CAGR 6% CAGR 5% CAGR 0 50 100 150 200 250 300 350 400 450 1 6 11 16 21 26 31 36 41 46 51 index years Korea China Japan Taiwan Malaysia Hong Kong Thailand Sources: GGDC, Westpac Economics. Middle income is defined as 20% of contemporaneous US per capita GDP in PPP terms Per capita growth from middle income stage ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian housing market sound fundamentals 135 Sources: REIA, Westpac Economics. 210 226 187 236 196 300 365 77 98 114 125 136 125 125 1950s 1960s 1970s 1980s 1990s 2000s last 4 years population dwelling stock* * net of demolitions – implied by Census data; Westpac estimates 2.6 1.7 2.9 01234567 Dec-84 Dec-89 Dec-94 Dec-99 Dec-04 Dec-09 Dec-14 Australia Sydney Melbourne investor housing boom • Australian housing market continues to face a significant structural undersupply • Persistently low level of new building over the last decade has combined with a strong migration-led burst in population growth over the last 15yrs • Australia’s annual population increase has lifted from around 200,000 a year in recent decades to over 350,000 in the last 4 years. Construction has been adding about 125,000 new dwellings net of demolitions over the same time • More recently, new construction has increased to a relatively high level and is expected to remain elevated in 2015 with net additions tracking around 160,000 dwellings a year • While this may result in pockets of excess dwelling stock, it will only begin to address shortages across the broader market Population versus dwelling stock (annual average change ‘000) Australia’s housing stock deficiency Residential rental vacancy rates (%) Sources: ABS, Westpac Economics. 0 50 100 150 200 250 300 0 50 100 150 200 250 300 Feb-93 Feb-95 Feb-97 Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 '000 '000 indicative accumulated deficiency Aus dwelling approvals (SA annualised) underlying f'casts Sources: ABS, Westpac Economics. % ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Price growth and activity some moderation, wide range of conditions 136 Sources: RP Data-Rismark, ABS, Westpac Economics. Australia: dwelling prices vs labour incomes Sources: ABS, RP Data-Rismark, APM, Residex, Westpac Economics. Sources: ABS, Westpac Economics. • Price growth and activity have moderated somewhat since the start of 2015 but remains robust at around 8% yr nationally • Growth rates continue to vary significantly between capital cities – Sydney up 13.9%yr; average since 2007: 6.0% – Melbourne up 5.6%yr; average since 2007: 4.6% – Brisbane up 3.0%yr, average since 2007: 0.2% – Perth flat over the year, average since 2007: 0.9% • Housing credit growth is currently tracking at 7.4%yr, however new growth is stronger with total credit tempered by high levels of repayment • Repayment-based measures of affordability remain around their long run average levels only partly reflecting low interest rates -20 -10 0 10 20 30 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 % Sydney Melbourne Brisbane Perth * 6mth annualised growth rates, all dwellings, composite of all measures, seasonally adjusted index 40 70 100 130 160 190 220 250 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13 dwelling prices labour income per household labour income per capita Capital city dwelling prices Sources: RBA, Westpac Economics. Housing credit momentum 7.5 6.0 10.3 0 4 8 12 16 20 24 28 32 36 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Total Owner-occupier Investor 6mth %change, annualised ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Investment property lending remains buoyant 137 Sources: ABS, Westpac Economics. 0 2 4 6 8 10 12 14 Feb-95 Feb-00 Feb-05 Feb-10 Feb-15 'upgraders', ex-refinancing investor finance first home buyers Investor housing yields vs shares, deposits Housing finance approvals: value of housing finance ($bn/mth) Dwelling turnover Sources: RP Data-Rismark, ABS, FIRB, Westpac Economics Sources: REIA, RBA, Westpac Economics. Sources: ABS, Westpac Economics. 0 20 40 60 80 100 120 140 160 180 200 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14 thousands estimated investor purchases all dwellings units FIRB approvals *quarterly $bn/mth 0 1 2 3 4 5 6 7 8 9 10 Mar-95 Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 %pa rental yield* ASX 200 dividend yield 1yr term deposit *gross yield, median rent on 2bdrm unit as % of median unit price investor boom improved access to finance and CGT changes • Investor housing activity is buoyant, responding to low vacancy rates, solid rental yields, and low interest rates, including low fixed rates that also offer the opportunity to hedge interest rate risk • Gross rental yields are attractive compared to returns on other asset classes, many of which exhibit much greater volatility • New investor loans currently account for almost 40% of the value of total housing loan approvals – while that is high, activity is coming from a relatively low starting point and evidence suggests borrowing and lending decisions are conservative • Total market turnover remains below recent peaks and well below the levels seen in 2002-03, when activity was clearly overheating (high levels of turnover are often associated with increased speculative activity) ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Australian households a cautious approach to household finances 138 Sources: ABS, RBA, Westpac Economics. Australian households: debt to income ratio (%) Household savings rate (% income) -20 30 80 130 180 Dec-77 Dec-82 Dec-87 Dec-92 Dec-97 Dec-02 Dec-07 Dec-12 total (gross) debt total debt net of offset accounts total debt net of deposits* trend since Jun-07 * Westpac estimates prior to 1988 Consumer survey: ‘Wisest place for savings’ Sources: ABS, Westpac Economics. Sources: Melbourne Institute, Westpac Economics. 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09 Mar-12 Mar-15 % % shares real estate deposits pay down debt 9.0 -3 0 3 6 9 12 15 Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14 % income includes funds held in mortgage offset accounts –24pts since peak % Sources: RP Data-Rismark, Residex, Westpac Economics. Housing affordability: all dwellings 10 15 20 25 30 35 40 Mar-79 Mar-84 Mar-89 Mar-94 Mar-99 Mar-04 Mar-09 Mar-14 estimates based on capital cities prior to 1993 % income required to service mortgage of 75% median dwelling, all regions long run avg deteriorate improve 10yr avg if mortgage rate was 1% higher % ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack -3 -2 -1 0 1 2 3 4 5 6 7 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 New Zealand domestic demand to underpin growth 139 New Zealand GDP growth and forecast (%) Earthquake-related construction activity in Christchurch ($bn) Source: Westpac Economics. Source: Statistics NZ, Westpac Economics. 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 2011 2013 2015 2017 2019 2021 2023 Residential Commercial Infrastructure Estimate Forecasts • The economy grew by 3.3% over 2014 - its fastest pace in seven years. Growth is expected to remain strong over 2015 and 2016 • Growth is being support by robust domestic demand. Construction activity is ramping up in Canterbury (associated with the Christchurch earthquake) and more generally. At the same time, household and business spending has been increasing supported by gains in employment, strong population growth, and low borrowing costs • Strength in domestic demand is helping to offset the effects of softness in the prices for some exports and the high exchange rate • Inflation will fall close to zero over 2015 as a result of earlier oil price declines and lingering strength in the NZD • With domestic demand looking robust, the RBNZ is not expected to cut rates, however, weak inflation means the OCR is likely to remain on hold for an extended period • OCR increases are not expected until September 2016 at the earliest Source: ANZ, Westpac Economics. Selected NZ export commodity prices 0 50 100 150 200 250 300 350 400 450 0 50 100 150 200 250 300 350 400 450 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 index index Meat and wool Dairy Forestry F’cast $bn % Forecasts ECONOMICS | Westpac Group First Half 2015 Presentation & Investor Discussion Pack -10 0 10 20 30 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Annual % New Zealand housing market remains firm 140 New Zealand house price inflation (annual %) New Zealand Official Cash Rate (%) Source: RBNZ, Westpac Economics. Source: QV, Westpac Economics. Westpac forecast 0 1 2 3 4 5 6 7 8 9 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 • Housing market activity slowed in 2014 following the introduction of restrictions on high loan-to-value lending. It picked up again in late 2014 as the impact of lending restrictions waned, and volatility associated with the general election passed • Housing demand is being supported by the low fixed mortgage rates • Strong population growth is also boosting housing demand • We expect a 7.5% increase in nationwide house prices this year, up from 4.9% in 2014. Auckland will probably exceed that figure, while the rest of New Zealand (including Christchurch) will be a little more subdued • The RBNZ has been consulting on requirements for banks to set aside more capital if they lend to property investors • This may have only a modest impact on interest rates for investor property, however, it could open the door to further policy changes in the future 0 2 4 6 8 10 12 14 16 18 20 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Ann % change Westpac forecast Westpac forecast Source: RBNZ, Westpac Economics. Annual growth in system housing lending (% annual change) % ECONOMICS Westpac Banking Corporation ABN 33 007 457 141. 2015 Interim Financial Results Appendix & Disclaimer | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Appendix 1: Cash earnings adjustments 142 Cash earnings adjustment 1H14 2H14 1H15 Description Reported net profit 3,622 3,939 3,609 Reported net profit after tax attributable to owners of Westpac Group Treasury shares 13 (6) 37 Earnings on certain Westpac Banking Corporation shares held by Westpac in the wealth business are not recognised under AAS. These are added back as these shares support policyholder liabilities and equity derivative transactions, which are re-valued in deriving income Ineffective hedges 17 29 (1) The gain/(loss) on qualified hedge ineffectiveness is reversed as the gain/(loss) from fair value movements reverses over time Fair value gain/(loss) on economic hedges 46 (151) 26 Unrealised profit/losses on economic hedges: FX hedges on future NZ earnings, FX hedges on fees payable on Governmentguaranteed debt, accrual accounted term funding transactions and credit spread movements on certain long term debt issuances are reversed as they may create a material timing difference on reported earnings in the current period, which does not affect cash earnings over the life of the hedge Buyback of government guaranteed debt (30) (12) (1) The Group has bought back portions of its government guaranteed debt, which reduced the government fees on that debt, currently 70bps. The charge is being amortised over the original term of the debt that was bought back. This has been treated as a cash earnings adjustment as the economic benefit of ceasing to pay the government guarantee fee cannot be recognised Amortisation of intangible assets 70 77 73 The merger with St.George and the acquisitions of J O Hambro Capital Management and Lloyds resulted in the recognition of identifiable intangible assets. These assets include intangibles related to core deposits, customer relationships, management contracts and distribution relationships. These intangible items are amortised over their useful lives, ranging between 4 and 20 years. The amortisation of intangible assets (excluding capitalised software) is a cash earnings adjustment because it is a noncash flow item and does not reflect cash distribution available to shareholders Acquisition transaction and integration expenses 25 26 35 Transaction and integration costs associated with the acquisition of Capital Finance Australia Ltd and BOS International Australia Ltd incurred have been treated as a cash earnings adjustment as they do not impact the earnings expected from the acquired businesses following the integration period Fair value amortisation of financial instruments 9 8 0 The unwind of the merger accounting adjustments associated with the fair valuing of St.George retail bank loans, deposits, wholesale funding and associated hedges. Given these are not considered in determining dividends they are treated as cash earnings adjustments Bell litigation provision 0 (54) 0 During 2012, the Group recognised additional provisions in respect of the long running Bell litigation. This was treated as a | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Appendix 2: Definitions 143 Westpac RBB or WRBB Westpac Retail & Business Banking is responsible for sales and service to consumer, SME, commercial and agribusiness customers (with turnover of up to $100 million) in Australia under the Westpac brand St.George Banking Group or St.George or SGB St.George Banking Group provides sales and service to consumer, SME and corporate customers (businesses with facilities typically up to $150 million) in Australia under the St.George, BankSA, Bank of Melbourne and RAMS brands BTFG BT Financial Group (Australia) is the Group’s wealth management business, including operations under the Advance Asset Management, Ascalon, Asgard, BT Investment Management, Licensee Select, and Securitor brands. Also included are the advice, private banking, and insurance operations of Bank of Melbourne, BankSA, St.George and Westpac. BTFG designs, manufactures and distributes financial products that are designed to help customers achieve their financial goals by administering, managing and protecting their assets WIB Westpac Institutional Bank provides a broad range of financial services to commercial, corporate, institutional and government customers with connections to Australia and New Zealand. Operates in Australia, New Zealand, UK, US and Asia Westpac NZ Westpac New Zealand provides a full range of retail and commercial banking and wealth management and insurance products and services to consumer, business, and institutional customers throughout New Zealand. New Zealand operates under the Westpac New Zealand, Westpac Institutional Bank, Westpac Life and BT brands in NZ Westpac Pacific Westpac Pacific provides banking services for retail and business in Fiji, Papua New Guinea, Vanuatu, Cook Islands, Tonga, Solomon Islands and Samoa Group Businesses or GBU Group Businesses provides centralised Group functions, including Treasury and Finance Westpac’s divisions Cash earnings Is a measure of the level of profit that is generated by ongoing operation and is therefore available for distribution to shareholders. Three categories of adjustments are made to reported results to determine cash earnings: material items that key decision makers at Westpac believe do not reflect ongoing operations; items that are not considered when dividends are recommended; and accounting reclassifications that do not impact reported results. For details of these adjustments refer to slide 142 Core earnings Net operating income less operating expenses AIEA Average interest-earning assets Net interest margin Net interest income divided by average interest-earning assets ROTE Return on average tangible equity and is cash earnings divided by average ordinary equity less average goodwill and other intangible assets (excluding capitalised software) Full-time equivalent employees (FTE) A calculation based on the number of hours worked by full and part-time employees as part of their normal duties. For example, the full-time equivalent of one FTE is 76 hours paid work per fortnight Risk Weighted Assets or RWA Assets (both on and off-balance sheet) are risk weighted according to each asset's inherent potential for default and what the likely losses would be in case of default. In the case of non asset based risks (ie market and operational risk), RWA is determined by multiplying the capital requirements for those risks by 12.5 NCI Non-controlling interests Capital ratios As defined by APRA (unless stated otherwise) Internationally comparable Internationally comparable regulatory capital ratios are Westpac’s estimated ratios after adjusting the capital ratios determined under APRA Basel III regulations for various items as identified in the August 2014 Australian Bankers Association’s report titled “International comparability of capital ratios of Australia’s major banks” prepared by Pricewaterhouse Coopers. This report is available at “bankers.asn.au/FSI/Papers-and-Reports/PapersandReports” Financial performance Capital | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Appendix 2: Definitions (continued) 144 TCE Total committed exposures Stressed loans Stressed loans are the total of watchlist and substandard, 90 days past due and not impaired and impaired assets Impaired assets Impaired assets can be classified as 1. Non-accrual assets: Exposures with individually assessed impairment provisions held against them, excluding restructured loans 2. Restructured assets: exposures where the original contractual terms have been formally modified to provide concessions of interest or principal for reasons related to the financial difficulties of the customer 3. 90 days past due and not impaired: exposures where contractual payments are 90 days or more in arrears and not well secured 4. other assets acquired through security enforcement 5. any other assets where the full collection of interest and principal is in doubt 90 days past due and not impaired A loan facility where payments of interest and/or principal are 90 or more calendar days past due and the value of the security is sufficient to cover the repayment of all principal and interest amounts due, and interest is being taken to profit on an accrual basis Watchlist and substandard Loan facilities where customers are experiencing operating weakness and financial difficulty but are not expected to incur loss of interest or principal Individually assessed provisions or IAPs Provisions raised for losses that have already been incurred on loans that are known to be impaired and are individually significant. The estimated losses on these impaired loans is based on expected future cash flows discounted to their present value and as this discount unwinds, interest will be recognised in the statement of financial performance Collectively assessed provisions or CAPs Loans not found to be individually impaired or significant will be collectively assessed in pools of similar assets with similar risk characteristics. The size of the provision is an estimate of the losses already incurred and will be estimated on the basis of historical loss experience of assets with credit characteristics similar to those in the collective pool. The historical loss experience will be adjusted based on current observable data Key metrics Asset quality Net Promoter Score or NPS Net Promoter Score measures the net likelihood of recommendation to others of the customer’s main financial institution for retail or business | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Appendix 2: Definitions (continued) 145 Key metrics (continued) Leading employer in workplace diversity We were recognised as the leading bank in the 2014 Australian Workforce Equality Index for creating an inclusive workplace culture for lesbian, gay, bisexual, transsexual and intersex employees; as a leading employer of people with disability in the Australian Government’s National Disability Awards; as a leading employer of mature employees by US-based AARP; and we retained our status as an Employer of Choice for Women by the Workplace Gender Equality Agency Liquidity coverage ratio (LCR) LCR is calculated as the percentage ratio of stock of HLQA and CLF over the total net cash outflows in a modelled 30 day defined stressed scenario High quality liquid assets (HQLA) As defined by APRA in Australian Prudential Standard APS210: Liquidity, including RBNZ BS-13 qualifying liquid assets, less RBA open repos funding and end of day exchange settlement accounts Committed liquidity facility (CLF) The RBA makes available to Australian Authorised Deposit-taking Institutions a CLF that, subject to qualifying conditions, can be accessed to meet LCR requirements under APS210 – Liquidity Credit value adjustment (CVA) CVA adjusts the fair value of over-the-counter derivatives and credit risk. CVA is employed on the majority of derivative positions and reflects the market view of the counterparty credit risk. A debit valuation adjustment (DVA) is employed to adjust for our own credit risk Funding valuation adjustment (FVA) FVA reflects the estimated present value of the future market funding cost or benefit associated with funding uncollateralised derivatives Derivative adjustments In First Half 2015 changes were made to derivative valuation methodologies, which include the first time adoption of the FVA for uncollateralised derivatives. The impact of these changes resulted in a $122 million (pre-tax) charge which reduced non-interest income Key metrics (continued) Customer satisfaction – overall business Source: DBM Consultants Business Financial Services Monitor, March 2013- 2015, 6MMA. MFI customers, all businesses. The Customer Satisfaction score is an average of customer satisfaction ratings of the customer’s main financial institution for business banking on a scale of 0 to 10 (0 means ‘extremely dissatisfied’ and 10 means ‘extremely satisfied’) Customer satisfaction – overall consumer Source: Roy Morgan Research, March 2013-2015, 6MMA. Main Financial Institution (as defined by the customer). Satisfaction ratings are based on the relationship with the financial institution. Customers must have at least a Deposit/Transaction account relationship with the institution and are aged 14 or | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Investor Relations Team 146 Andrew Bowden Head of Investor Relations +61 2 8253 4008 [email protected] Leigh Short Senior Manager +61 2 8253 1667 [email protected] Equity Investor Relations www.westpac.com.au/investorcentre click on ‘Analysts’ Centre’ • Annual reports • Presentations and webcasts • 5 year financial summary • Prior financial results For further information on Westpac Jacqueline Boddy Director +61 2 8253 3133 [email protected] Louise Coughlan Director (Rating Agencies) +61 2 8254 0549 [email protected] Debt Investor Relations Retail Shareholder Investor Relations Rebecca Plackett Manager +61 2 8253 6556 [email protected] or email: [email protected] | Westpac Group First Half 2015 Presentation & Investor Discussion Pack Disclaimer 147 The material contained in this presentation is intended to be general background information on Westpac Banking Corporation (Westpac) and its activities. The information is supplied in summary form and is therefore not necessarily complete. It is not intended that it be relied upon as advice to investors or potential investors, who should consider seeking independent professional advice depending upon their specific investment objectives, financial situation or particular needs. The material contained in this presentation may include information derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness or reliability of the information. All amounts are in Australian dollars unless otherwise indicated. Unless otherwise noted, financial information in this presentation is presented on a cash earnings basis. Cash earnings is a non-GAAP measure. Refer to Westpac’s 2015 Interim Financial Results (incorporating the requirements of Appendix 4D) for the half year ended 31 March 2015 available at www.westpac.com.au for details of the basis of preparation of cash earnings. Refer to slides 44 for an explanation of cash earnings and Appendix 1 slide 142 for a reconciliation of reported net profit to cash earnings. This presentation contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the US 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 presentation 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, including, without limitation, future loan loss provisions, financial support to certain borrowers, indicative drivers, forecasted economic indicators and performance metric outcomes. We use words such as ‘will’, ‘may’, ‘expect’, 'indicative', ‘intend’, ‘seek’, ‘would’, ‘should’, ‘could’, ‘continue’, ‘plan’, ‘probability’, ‘risk’, ‘forecast’, ‘likely’, ‘estimate’, ‘anticipate’, ‘believe’, or 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. Actual results could differ Exhibit 3 Appendix 3A.1 - Notification of dividend / distribution Appendix 3A.1 - Notification of dividend / distribution 1 / 4 Important Information Information and documents given to ASX become ASX's property and may be made public. Please note that two corporate actions on the same security may not run with different record dates if the timetables result in overlapping (but not identical) ex-periods. It is permissible to run different corporate actions with the same record date except in the case of reorganisations - consolidations/splits which cannot run at the same time as any other corporate action for that entity Denotes minimum information required for first lodgement of this form. * Denotes information that must be provided before or on +business day 0 of the relevant ** Appendix 6A or Appendix 7A timetable. The balance of the information, where applicable, must be provided as soon as reasonably practicable by the entity. Part 1 Entity and announcement details 1.1 Name of +Entity WESTPAC BANKING CORPORATION 1.2 Registered Number Type ABN Registration Number 33007457141 1.3 ASX issuer code WBC 1.4 The announcement is New announcement 1.5 Date of this announcement Monday May 4, 2015 1.6 ASX +Security Code WBC ASX +Security Description ORDINARY FULLY PAID Part 2A - All dividends/distributions basic details Each form (announcement) can only relate to one +record date and payment date but may have multiple types of dividend/distributions applicable for those dates, for example an ordinary and a special dividend/distribution. If more than one type is applicable tick each relevant box in Q2A.1. Further Parts to the form will be presented for each type of dividend/distribution selected. All other questions in Part 2A are to be answered on the basis of the total of all the dividend/distribution types indicated in Q2A.1 (i.e. gross) as well as any supplementary dividend/distribution if applicable. Appendix 3A.1 - Notification of dividend / distribution Appendix 3A.1 - Notification of dividend / distribution Appendix 3A.1 - Notification of dividend / distribution 2 / 4 2A.1 Type of dividend/distribution Ordinary 2A.2 Dividend/distribution period (frequency) Six Monthly 2A.3 Dividend/distribution relates to period ending Tuesday March 31, 2015 2A.4 +Record Date Friday May 15, 2015 2A.5 Ex Date Wednesday May 13, 2015 2A.6 Payment Date Thursday July 2, 2015 2A.7 Is the payment of dividend/distribution conditional? No 2A.8 Currency in which the dividend/distribution is made ("primary currency") AUD Australian Dollar 2A.9 Total dividend/distribution amount per +security (in primary currency) AUD 0.93000000 2A.10 Whether mandatory or via an optional plan or facility, will or can the dividend/distribution be paid in a currency other than the primary currency? Yes 2A.11 Does the +entity have a Dividend/Distribution Reinvestment Plan (DRP) 2A.11a If the +entity has a DRP, is the DRP applicable to this dividend/distribution? Yes 2A.11a(i) DRP Status in respect of this dividend/distribution Full DRP 2A.12 Does the +entity have tax component information apart from franking? Yes Part 2B - Currency Information 2B.1 Does the +entity pay in certain currencies dependent upon the registered address of the +security holder (for example NZD to residents of New Zealand and/or USD to residents of the U.S.A.)? No Appendix 3A.1 - Notification of dividend / distribution Appendix 3A.1 - Notification of dividend / distribution 3 / 4 2B.2 Does the entity offer all +security holders a documented plan under which they may apply to receive their payment in a foreign currency? Yes 2B.2a Please provide or indicate where +security holders may obtain the foreign currency plan documentation inclusive of the application form and further information about the foreign currency plan. Details of dividend payment options for Westpac Ordinary Fully Paid Shares are available in Westpac's Investor Centre at . www.westpac.com.au/investorcentre 2B.2b Date and time by which share registry must receive application documentation Friday May 15, 2015 17:00:00 Part 3A - Ordinary dividend/distribution 3A.1 Is the ordinary dividend/distribution estimated at this time? No 3A.1a Ordinary dividend/distribution estimated amount per +security AUD 3A.1b Ordinary Dividend/distribution amount per security AUD 0.93000000 3A.2 Is the ordinary dividend/distribution franked? Yes 3A.2a Is the ordinary dividend/distribution fully franked? Yes 3A.3 Percentage of ordinary dividend/distribution that is franked 100.0000 % 3A.3a Applicable corporate tax rate for franking credit (%) 30.0000 % 3A.4 Ordinary dividend/distribution franked amount per security AUD 0.93000000 3A.5 Percentage amount of dividend which is unfranked 0.0000 % 3A.6 Ordinary dividend unfranked amount per security AUD 0.00000000 3A.7 Ordinary dividend/distribution conduit foreign income amount per security AUD 0.00000000 Part 3E Other - distribution components / tax 3E.1 Please indicate where and when information about tax components can be obtained (you may enter a url). A New Zealand imputation credit of NZD 0.06 per Westpac Ordinary Fully Paid Share will attach to the dividend. Further details are available in Westpac's investor centre at . www.westpac.com.au/investorcentre Appendix 3A.1 - Notification of dividend / distribution Appendix 3A.1 - Notification of dividend / distribution 4 / 4 Part 4A +Dividend reinvestment plan (DRP) 4A.1 What is the default option if +security holders do not indicate whether they want to participate in the DRP? Do not participate in DRP (i.e. cash payment) 4A.2 Last date and time for lodgement of election notices to share registry under DRP Monday May 18, 2015 17:00:00 4A.3 DRP discount rate 1.5000 % 4A.4 Period of calculation of reinvestment price Start Date Wednesday May 20, 2015 End Date Thursday June 18, 2015 4A.5 DRP price calculation methodology The average of the daily volume weighted average market price per Westpac Ordinary Fully Paid Share sold on the ASX and Chi-X during the 21 trading days commencing Wednesday May 20, 2015, less a 1.50 percent discount. 4A.6 DRP Price (including any discount): AUD 4A.7 DRP +securities +issue date Thursday July 2, 2015 4A.8 Will DRP +securities be a new issue? Yes 4A.8a Do DRP +securities rank pari passu from +issue date? Yes 4A.9 Is there a minimum dollar amount or number of +securities required for DRP participation? No 4A.10 Is there a maximum dollar amount or number of +securities required for DRP participation? No 4A.11 Are there any other conditions applying to DRP participation? Yes 4A.11a Conditions for DRP participation Participation in the DRP is restricted to shareholders who are resident in, and whose address on the register of shareholders is in, Australia or New Zealand. 4A.12 Link to a copy of the DRP plan rules http://www.westpac.com.au/about-westpac/investor-centre/shareholder-information/dividend-rein vestment-plan/ Part 5 - Further information 5.1 Please provide any further information applicable to this dividend/distribution