Westpac Banking : Pillar 3 Report (December 2016)

Table of contents

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

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

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

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

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

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Westpac's common equity Tier 1 (CET1) capital ratio was 9.26% at 31 December 2016, down 22 basis points from 30 September 2016. Consistent with the normal seasonal trend, capital generated for the quarter was more than offset by the determination of the 2016 Final Dividend and growth in risk weighted assets (RWA). The movement in the ratio included the impact of the 2016 Final Dividend (76 basis points decrease), the dividend reinvestment plan (DRP) (8 basis points increase) and growth in RWA (3bps decrease).

During the quarter, Westpac implemented revised models for residential mortgages which include updated data for facilities in hardship, and previously announced changes to the correlation factor used in the calculation of RWA. The net impact of these changes was a small reduction to RWA.

APRA leverage ratio 5.0 5.2 4.9

Total RWA increased $1.4 billion (0.3%) this quarter:

• Credit risk RWA declined $1.0 billion or 0.3%:

  • Reduction in mark-to-market related credit risk RWA of $1.6 billion;

  • Improved credit quality decreased RWA by $1.3 billion;

  • RWA measurement changes reduced RWA by $1.0 billion which included mortgage RWA changes and updates to Probability of Default (PD) parameters for corporate and business lending exposures.

    These were partially offset by:

  • Portfolio growth which added $1.8 billion to RWA; and

  • Foreign currency translation impacts, primarily related to NZ$ and US$ lending which increased RWA by $1.1 billion.

• Non-credit RWA increased $2.4 billion or 4.6% and included:

  • Interest rate risk in the banking book (IRRBB) RWA increased $5.2 billion. This period, the embedded gain reduced as the yield curve steepened during the quarter which increased IRRBB RWA. RWA for repricing and yield curve risk also increased;

  • Other RWA increased $0.6 billion;

  • Market risk RWA decreased $1.7 billion from lower interest rate exposure in the trading book; and

  • Operational risk RWA decreased $1.7 billion due to an update to loss scenarios.

Exposure at default (EAD) increased $23.4 billion (up 2.4%) this quarter, largely due to a $10 billion increase in sovereign exposures associated with an increase in liquid assets and from growth in residential mortgage exposures of $8.2 billion.

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During the quarter, Tier 2 capital issuances increased Tier 2 capital by $2.1 billion.

The leverage ratio represents the amount of Tier 1 capital relative to leverage exposure. At 31 December 2016, Westpac's leverage ratio1 was 5.0%, down 20 basis points since 30 September 2016.

APRA has yet to prescribe any minimum leverage ratio requirements.

1 The leverage ratio is based on the same definition of Tier 1 capital as used by APRA capital requirements and is not comparable to the Basel Committee for Banking Supervision leverage ratio calculation.

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