Westpac Banking : Pillar 3 Report (March 2016)

Microsoft Word - Pillar 3 Report Mar 2016 v35 dlk BACKI NG AUSTR ALIA PILLAR 3 REPORT MARCH 2016

INCORPORATING THE REQUIREMENTS

OF APS330

,11estpac GROUP

WESTPAC BANKING CORPORATION

ABN 33 007 457141

-- EST. 1817 -

Table of contents

Structure of Pillar 3 report

Executive summary	3
Introduction	6
Risk appetite and risk types	7
Controlling and managing risk	8
Group structure	13
Capital overview	15
Leverage ratio disclosure	19
Credit risk management	21
Credit risk exposures	29
Credit risk mitigation	54
Counterparty credit risk	57
Securitisation	59
Market risk	70
Liquidity risk management	74
Liquidity coverage ratio disclosure	75
Operational risk	76
Equity risk	78
Interest Rate Risk in the Banking Book	80
Appendices
Appendix I - Regulatory capital reconciliation	82
Appendix II - Entities included in regulatory consolidation	88
Appendix III - Level 3 entities' asset and liabilities	92
Appendix IV - Regulatory expected loss	94
Appendix V - APS330 quantitative requirements	95
Glossary	98
Disclosure regarding forward-looking statements	103

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.

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

2 | Westpac Group March 2016 Pillar 3 report

Westpac's common equity Tier 1 (CET1) capital ratio was 10.5% at 31 March 2016, up 97 basis points from 30 September 2015. The increase was principally due to the Group's $3.5 billion share entitlement offer completed in November 2015 which added 96 basis points to the CET1 capital ratio. Capital generated through First Half 2016 earnings (107 basis points) was largely offset by payment of the 2015 final dividend, net of the dividend reinvestment plan (DRP), growth in risk weighted assets and other movements.

The CET1 capital ratio of 10.5% is above Westpac's preferred range as the Group has raised capital ahead of increased capital requirements for Australian residential mortgages1 effective 1 July 2016. If these capital requirements had been in force as at 31 March 2016, the CET1 capital ratio would be approximately 110 basis points lower.

31 March 2016	30 September 2015	31 March 2015
The Westpac Group at Level 2 Common equity Tier 1 (CET1) capital after deductions $m	38,041	34,069	30,388
Risk w eighted assets (RWA) $m	363,248	358,580	346,823
Common equity Tier 1 capital ratio %	10.5	9.5	8.8
Additional Tier 1 capital %	1.6	1.9	1.5
Tier 1 capital ratio %	12.1	11.4	10.3
Tier 2 capital %	1.9	1.9	1.8
Total regulatory capital ratio %	14.0	13.3	12.1
APRA leverage ratio %	5.0	4.8	NA

Common equity Tier 1 capital ratio movement First Half 2016 - Second Half 2015

107bps

96bps

4bps

4bps

(6bps)

(4bps)

10.47%

9.50%

(71bps)

(22bps)

(11bps)

Net FX translation impact

-2bps

Organic (+3 bps)

Other items (+94 bps)

30

September 2015

Cash earnings

Dividend (Net of DRP)

Ordinary RWA

growth

Other movements

Entitlement Offer

Modelling Changes

FX - Credit RWA

FCTR

Defined benefit impact

31 March

2016

Organic capital generation of 3 basis points included:

• First Half 2016 cash earnings of $3.9 billion (107 basis point increase);

• The 2015 final dividend payment net of DRP share issuance (71 basis point decrease);

• Increases in RWA (excluding modelling changes and foreign currency translation) (22 basis point decrease); and

• Other movements included higher capitalised expenses (5 basis point decrease) and cash earnings adjustments mostly related to volatility of hedge transactions (6 basis point decrease).

  Other items increased the CET1 capital ratio by 94 basis points:

• The Group's entitlement offer completed in November 2015, raised $3.5 billion of CET1 capital (96 basis point increase);

• RWA modelling changes (discussed further below) reduced RWA by $1.7 billion (4 basis point increase);

1 Refer APRA media release entitled "APRA increases capital adequacy requirements for residential mortgage exposures under the internal ratings-based approach", 20 July 2015.

Westpac Group March 2016 Pillar 3 report | 3

• Foreign currency translation impacts had a modest impact on the ratio. Exchange rate movements reduced credit RWA by $1.7 billion (4 basis point increase), while the foreign currency translation reserve decreased

  $0.2 billion (6 basis point decrease); and

• An increase in the accounting obligation for the defined benefit pension plan primarily reflecting the impact of lower discount rates used to value defined benefit liabilities (4 basis point decrease).

  Risk Weighted Assets Risk w eighted assets
  $m	31 March 2016	30 September 2015	31 March 2015
  Credit risk	313,048	310,342	303,026
  Market risk	9,024	10,074	7,900
  Operational risk	32,329	31,010	30,136
  Interest rate risk in the banking book	4,678	2,951	1,596
  Other	4,169	4,203	4,165
  Total	363,248	358,580	346,823
  Movements in RWA for First Half 2016 were as follows:

  • Credit risk RWA increased $2.7 billion or 0.9% due to:

  • Growth in the portfolio added $5.6 billion to credit RWA over the half;

  • Modelling changes reduced credit RWA by $1.7 billion. These included:

    • Moving from standardised to advanced modelling for the Lloyds asset finance portfolio ($2.1 billion net decrease1);

    • Reclassification of exposures to the small business category ($1.3 billion net decrease); and

    • Updates to probability of default parameters for unsecured exposures ($0.8 billion decrease);

    • Partially offset by updates to Loss Given Default (LGD) parameters for corporate exposures ($2.5 billion increase).

  • Changes in credit quality increased RWA by $1.5 billion;

  • Currency movements decreased RWA by $1.7 billion mainly due to the A$ appreciating against US$; and

  • Reduction in mark-to-market related credit risk of $1.0 billion, related to derivative counterparty exposure.

• Non-credit RWA increased $2.0 billion or 4.1% primarily due to:

  • Interest rate risk in the banking book (IRRBB) RWA increased $1.7 billion reflecting hedging on a higher level of capital and a lower embedded gain as market interest rates increased;

  • Market risk RWA decreased $1.0 billion from a reduction in the level of interest rate and credit spread risk exposure in the trading book; and

  • Operational risk RWA increased $1.3 billion.

Exposure at Default

Over the half, exposure at default (EAD) increased $15.7 billion (up 1.7%), the majority of which was due to growth in residential mortgage exposures of $13.5 billion.

Leverage Ratio

The leverage ratio represents the amount of Tier 1 capital relative to leverage exposure. At 31 March 2016, Westpac's APRA leverage ratio2 was 5.0%, up 25 basis points since 30 September 2015. The increase is primarily due to the capital raised through the Group's share entitlement offer completed in November 2015, partly offset by the redemption of an additional Tier 1 capital instrument.

APRA has yet to prescribe any minimum leverage ratio requirements.

1 Standardised RWA reduced $7 billion. Corporate RWA increased $0.6 billion, business lending $0.3 billion, other retail $1.9 billion and small business $2.2 billion.

2 Refer to Glossary. The APRA 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.

4 | Westpac Group March 2016 Pillar 3 report