Table of contents

Structure of Pillar 3 report

Executive summary

3

Introduction

5

Risk appetite and risk types

6

Controlling and managing risk

7

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

70

Liquidity risk management

74

Liquidity coverage ratio disclosure

75

Operational risk

76

Equity risk

78

Interest Rate Risk in the Banking Book

80

Remuneration Disclosures

82

Appendices

Appendix I - Regulatory capital reconciliation

88

Appendix II - Entities included in regulatory consolidation

94

Appendix III - Level 3 entities' asset and liabilities

97

Appendix IV - Regulatory expected loss

99

Appendix V - APS330 quantitative requirements

100

Glossary

103

Disclosure regarding forward-looking statements

108

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 2017 Pillar 3 report

30 September 2017

31 March 2017

30 September 2016

The Westpac Group at Level 2

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

42,670

40,335

38,875

Risk w eighted assets (RWA) $m

404,235

404,382

410,053

Common equity Tier 1 capital ratio %

10.56

9.97

9.48

Additional Tier 1 capital %

2.10

1.71

1.69

Tier 1 capital ratio %

12.66

11.68

11.17

Tier 2 capital %

2.16

2.32

1.94

Total regulatory capital ratio %

14.82

14.00

13.11

APRA leverage ratio %

5.66

5.30

5.20

Westpac's common equity Tier 1 (CET1) capital ratio was 10.56% at 30 September 2017, up 59 basis points from 31 March 2017. Organic capital generation over the half added 39 basis points, including a larger contribution from the Dividend Reinvestment Plan (DRP) on the interim dividend. Participation in the 1H17 DRP was higher due to the 1.5% discount applied to the DRP market price. RWAs were little changed over the half with an increase in non-credit RWAs offsetting a reduction in credit risk RWAs. Other items contributing to the increase in the CET1 capital ratio were the partial sale of Westpac's investment in BTIM and consolidation of the life insurance statutory funds.

100bps

(50bps)

(4bps)

(7bps)

10bps

6bps

4bps

(2bps)

2bps

10.56% 9.97%

Organic

(+39bps)

Other items (+20bps)

31 March 2017

Cash

earnings

Interim dividend (net of DRP)

Ordinary

RWA

growth

Other

movements

BTIM

sale

Life insurance statutory fund consolidation

Regulatory modelling change

FX

translation

impact

Defined benefit impact

30 September 2017

Organic capital generation of 39 basis points included:

  • Second Half 2017 cash earnings of $4.0 billion (100 basis point increase);

  • The 2017 interim dividend payment, net of DRP share issuance (50 basis point decrease);

  • Ordinary RWAs before the impact of FX movements and RWA modelling changes increased mainly driven by non-credit RWA (4 basis point decrease); and

  • Other movements reduced the CET1 capital ratio by 7 basis points, mainly from an increase in capitalised costs and a small increase in other equity investments including fintech businesses.

    Other items increased the CET1 capital ratio by 20 basis points mainly from:

  • Sale of shares in BT Investment Management Limited (10 basis point increase);

  • Consolidation of statutory funds in the life insurance business (6 basis point increase); and

  • Regulatory modelling changes which reduced RWA by $1.8 billion (4 basis point increase).

Westpac Group September 2017 Pillar 3 report | 3

$m

30 September 2017

31 March 2017

30 September 2016

Risk w eighted assets

Credit risk

349,258

352,713

358,812

Market risk

8,094

7,471

7,861

Operational risk

31,229

31,653

33,363

Interest rate risk in the banking book

11,101

8,143

5,373

Other

4,553

4,402

4,644

Total RWA

404,235

404,382

410,053

Total Exposure at Default

990,853

970,367

967,577

Risk Weighted Assets

Total RWA decreased $0.2 billion this half:

  • Credit risk RWA decreased $3.4 billion or 1.0%:

    ̵ Improved asset quality reduced RWA by $4.6 billion;

    ̵ RWA modelling changes as part of ongoing model refinement reduced RWA by $1.8 billion; and

    ̵ Reduction in mark-to-market related credit risk RWA of $0.9 billion.

    These items were partially offset by portfolio growth which added $3.9 billion to RWA, reflecting ongoing discipline in RWA management.

  • Non-credit RWA increased $3.2 billion or 6.4%:

̵ Interest rate risk in the banking book (IRRBB) RWA increased $3.0 billion. Repricing and yield curve risk increased, including credit spread risk from holdings of liquid assets. The embedded gain declined which also added to IRRBB RWA;

̵ Market risk RWA increased $0.6 billion from higher interest rate risk exposure in the trading book; and

̵ Operational risk decreased $0.4 billion.

Exposure at Default

Over the half, exposure at default (EAD) increased $20.5 billion (up 2.1%), primarily due to growth in residential mortgage exposures of $14.4 billion and sovereign exposures associated with liquid assets of $2.3 billion.

Leverage Ratio

The leverage ratio represents the amount of Tier 1 capital relative to exposure1. At 30 September 2017, Westpac's leverage ratio was 5.7%, up 36 basis points since 31 March 2017. The increase is primarily due to increased capital highlighted earlier.

APRA has yet to prescribe any minimum leverage ratio requirements.

Liquidity Coverage Ratio (LCR)

The LCR requires banks to hold sufficient high-quality liquid assets (HQLA), as defined in APS210 Liquidity, to withstand 30 days under a regulatory-defined acute stress scenario.

Westpac's LCR as at 30 September 2017 was 124% (30 September 2016: 134%) and the average LCR for the

quarter ending 30 September 2017 was 124%2.

1 As defined under Attachment D of APS110: Capital Adequacy

2 Calculated as a simple average of the daily observations over the 30 September 2017 quarter.

4 | Westpac Group September 2017 Pillar 3 report

Westpac Banking Corporation published this content on 08 November 2017 and is solely responsible for the information contained herein.
Distributed by Public, unedited and unaltered, on 08 November 2017 00:21:03 UTC.

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