Westpac Banking : Pillar 3 Report (September 2016)

 2016 Pillar 3 Report

Incorporating the requirements of APS330

WESTPAC BANKING CORPORAT ION ABN 33 007 457 141

200 I ,11estpac GROUP

200 years proudly supporting Australia

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	60
Market risk	71
Liquidity risk management	75
Liquidity coverage ratio disclosure	76
Operational risk	77
Equity risk	79
Interest Rate Risk in the Banking Book	81
Remuneration disclosures	83
Appendices
Appendix I - Regulatory capital reconciliation	89
Appendix II - Entities included in regulatory consolidation	95
Appendix III - Level 3 entities' asset and liabilities	98
Appendix IV - Regulatory expected loss	100
Appendix V - APS330 quantitative requirements	101
Glossary	104
Disclosure regarding forward-looking statements	109

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

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

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

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

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

2 | Westpac Group September 2016 Pillar 3 report

30 September 2016	31 March 2016	30 September 2015
The Westpac Group at Level 2 Common equity Tier 1 (CET1) capital after deductions $m	38,875	38,041	34,069
Risk w eighted assets (RWA) $m	410,053	363,248	358,580
Common equity Tier 1 capital ratio %	9.5	10.5	9.5
Additional Tier 1 capital %	1.7	1.6	1.9
Tier 1 capital ratio %	11.2	12.1	11.4
Tier 2 capital %	1.9	1.9	1.9
Total regulatory capital ratio %	13.1	14.0	13.3
APRA leverage ratio %	5.2	5.0	4.8

Following APRA's announcement that mortgage RWA methodology would change in 2016, WBC raised $3.5 billion of capital in First Half 2016. This saw the CET1 capital ratio increase from 9.5% to 10.5% at 31 March 2016. Following APRA's revision to mortgage RWA calculations on 1 July 2016, the CET1 capital ratio reduced 110 basis points. This change combined with other movements saw the CET1 capital ratio reduce by 99 basis points to 9.5% in Second Half 2016.

Capital raised via entitlement offer offset by APRA's revision to mortgage RWA calculations

9.50% 1bps

96bps

10.47%

(110bps)

96bps

(69bps)

(6bps)

(6bps)

14bps

(12bps)

(6bps)

9.48%

Organic (+15 bps)

Other items (-4bps)

30 Other

Entitlement

31 March

Mortgage

Cash

Interim

Ordinary

Other

RWA

Regulatory FX - Credit 30

September movements 2015

Offer

2016

RWA

Change

Earnings

Dividend (net of DRP)

RWA

growth

movements efficiency

initiatives

Modelling changes

RWA

September 2016

Organic capital generation of 15 basis points included:

• Second Half 2016 cash earnings of $3.9 billion (96 basis point increase);

• The 2016 interim dividend payment net of shares issued to satisfy the DRP (69 basis point decrease);

• An increase in RWA (excluding foreign currency translation impacts, RWA efficiency initiatives and regulatory modelling changes) (6 basis point decrease); and

• Other movements reduced the CET1 capital ratio by 6 basis points and included higher capitalised expenditure (3 basis points decrease), higher capitalised software (2 basis points decrease), increased capital retained in non-consolidated subsidiaries (5 basis points decrease) and other movements (4 basis points increase).

  Other items impacted the CET1 capital ratio by 4 basis points including:

• RWA efficiency initiatives decreased RWA by $5.7 billion (14 basis points increase) (discussed further below);

• Regulatory modelling changes increased RWA by $4.6 billion (12 basis points decrease), including a new requirement to hold capital for credit spread risk for liquid assets in the banking book which came into effect on 1 July 2016 (9 basis points decrease), and other minor changes to credit RWA (3 basis points decrease); and

• The impact of foreign currency translation, mostly related to NZ$ lending, increased credit RWA by $2.3 billion (6 basis points decrease).

Westpac Group September 2016 Pillar 3 report | 3

Risk w eighted assets $m	30 September 2016	31 March 2016	30 September 2015
Credit risk	358,812	313,048	310,342
Market risk	7,861	9,024	10,074
Operational risk	33,363	32,329	31,010
Interest rate risk in the banking book	5,373	4,678	2,951
Other	4,644	4,169	4,203
Total	410,053	363,248	358,580

Second Half 2016 - First Half 2016

Movements in RWA for the Second Half 2016 were as follows:

• Credit risk RWA increased $45.8 billion or 14.6% which included:

  • APRA's revision to the calculation of RWA for Australian residential mortgages, which came into effect on 1 July 2016 ($43 billion increase);

  • Growth in the portfolio added $7.0 billion to credit RWA;

  • RWA efficiency initiatives decreased RWA by $5.7 billion and included:

    • Management of unutilised limits and derivative exposures ($3.0 billion decrease); and

    • Data improvements and refinements to parameters for certain derivative, corporate and mortgage exposures ($2.7 billion decrease).

  • Foreign currency translation impacts, mostly related to NZ$ lending, increased RWA by $2.3 billion;

  • Improved credit quality decreased RWA by $1.2 billion;

  • RWA measurement changes increased RWA by $1.0 billion and included:

    • Reclassification of exposures to the small business and business lending categories ($0.6 billion increase); and

    • Updates to Loss Given Default (LGD) parameters for corporate exposures ($0.4 billion increase); and

  • Reduction in mark-to-market related credit risk of $0.6 billion.

• Non-credit RWA increased $1.0 billion primarily due to:

  • Interest rate risk in the banking book (IRRBB) RWA increased $0.7 billion. The requirement to hold capital for credit spread risk for liquid assets in the banking book, which came into effect on 1 July 2016, increased RWA by $3.6 billion. This was partially offset by a higher embedded gain in the portfolio from falling market interest rates over the period and lower RWA for repricing and yield curve risk ($2.9 billion decrease);

  • Market risk RWA decreased $1.2 billion mainly from a reduction in the level of interest rate risk exposure in the trading book;

  • Operational risk RWA increased $1.0 billion; and

  • Other increased $0.5 billion.

Exposure at Default

Over the half, exposure at default (EAD) increased $18.1 billion (up 1.9%), mainly reflecting growth in residential mortgage exposures of $20.4 billion.

Leverage Ratio

The leverage ratio represents the amount of Tier 1 capital relative to exposure. At 30 September 2016, Westpac's leverage ratio1 was 5.2%, up 19 basis points since 31 March 2016. The increase is primarily due to higher retained earnings and a net increase in Additional Tier 1 capital, partly offset by growth in exposures.

APRA has yet to prescribe any minimum leverage ratio requirements.

1 Refer to Glossary. 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.

4 | Westpac Group September 2016 Pillar 3 report