Securities and Exchange Commission

 

Washington, D.C. 20549

 

Form 20-F

 

(Mark One)

o Registration Statement pursuant to Section 12(b)
or (g) of the Securities Exchange Act of 1934

 

or

 

ý Annual Report pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                  to                

 

For the fiscal year ended September 30, 2003

 

Commission file number 0-18262

 

Australia and New Zealand Banking Group Limited

(Exact name of registrant as specified in its charter)

 

Victoria, Australia

(Jurisdiction of incorporation or organization)

 

100 Queen Street, Melbourne, VICTORIA, 3000, AUSTRALIA

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

 

Title of each class

 

Name of each exchange on which registered

 

 

 

 

 

 

 

American Depositary Shares
each representing five ordinary shares

 

The New York Stock Exchange, Inc.

 

 

 

 

 

 

 

American Depositary Receipts
each representing four Preference shares

 

The New York Stock Exchange, Inc.

 

 

 

 

 

 

 

Securities registered or to be registered pursuant to Section 12 (g) of the Act.

 

None

 

 

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report.

 

US$1,000 Preference Shares

 

1,100,000

 

fully paid

 

 

 

 

 

Ordinary Shares

 

1,521,686,560

 

fully paid

 

 

 

 

 

$100 Preference Shares

 

10,000,000

 

fully paid

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

 

ý

 

No

 

o

 

Indicate by check which financial statement item the registrant has elected to follow.

 

Item 17

 

o

 

Item 18

 

ý

 

 



 

Form 20-F Cross Reference Index

 

Part I

 

 

Item 1

Identity of Directors, Senior Management and Advisors

 

Item 2

Offer Statistics and Expected Timetable

 

Item 3

Key Information

 

Item 4

Information on the Company

 

Item 5

Operating and Financial Review and Prospects

 

Item 6

Directors, Senior Management and Employees

 

Item 7

Major Shareholders and Related Party Transactions

 

Item 8

Financial Information

 

Item 9

The Offer and Listing

 

Item 10

Additional Information

 

Item 11

Quantitative and Qualitative Disclosures about Market Risk

 

Item 12

Description of Securities other than Equity Securities

 

 

 

 

Part II

 

 

Item 13

Defaults, Dividend Arrearages and Delinquencies

 

Item 14

Material Modifications to the Rights of Security Holders and use of Proceeds

 

Item 15

Controls and Procedures

 

Item 16

Reserved

 

 

 

 

Part III

 

 

Item 17

Financial Statements

 

Item 18

Financial Statements

 

Item 19

Exhibits

 

 

Australia and New Zealand Banking Group Limited Constitution

 

 

Director and Executive Employment Contracts

 

 

Subsidiaries

 

 

302 Certifications

 

 

906 Certifications

 

 

 

 

Signatures

 

 

 

2



 

Forward-Looking Statements

 

This Annual Report contains certain forward-looking statements, including statements regarding (i) economic and financial forecasts, (ii) anticipated implementation of certain control systems and programs, (iii) the expected outcomes of legal proceedings, and (iv) strategic priorities.  Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of Australia and New Zealand Banking Group Limited (the “Company”) (ABN 11 005 357 522), together with its subsidiaries (“ANZ”, “us”, “we”, “our”, or the “Group”), which may cause actual results to differ materially from those expressed in the forward-looking statements contained in this Annual Report.

 

For example, the economic and financial forecasts contained in this Annual Report will be affected by movements in exchange rates and interest rates, which may vary significantly from current levels, as well as by general economic conditions in each of ANZ’s major markets.  Such variations may materially impact ANZ’s financial condition and results of operations.  The implementation of control systems and programs will be dependent on such factors as ANZ’s ability to acquire or develop necessary technology and its ability to attract and retain qualified personnel.  The plans, strategies and objectives of management will be subject to, among other things, government regulation, which may change at any time and over which ANZ has no control.  In addition, ANZ will continue to be affected by general economic conditions in capital markets, the competitive environment in each of its markets and political and regulatory policies.  There can be no assurance that actual outcomes will not differ materially from the forward-looking statements contained in this Annual Report.  See “Summary of Material Risk Factors” on page 8.

 

3



 

Currency of Presentation, Exchange Rates and Certain Definitions

 

Currency of Presentation

 

The Company, together with its subsidiaries, publishes consolidated financial statements in Australian dollars.  In this Annual Report, unless otherwise stated or the context otherwise requires, references to “US$”, “USD” and “US dollars” are to United States dollars and references to “$”, “AUD” and “A$” are to Australian dollars.  For the convenience of the reader, this Annual Report contains translations of certain Australian dollar amounts into US dollars at specified rates.  These translations should not be construed as representations that the Australian dollar amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated.  Unless otherwise stated, the translations of Australian dollars into US dollars have been made at the rate of US$0.6797 = A$1.00, the Noon Buying Rate in New York City for cable transfers in Australian dollars as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on September 30, 2003.

 

Exchange Rates

 

For each of the periods indicated, the high, low, average and period-end Noon Buying Rates for Australian dollars were:

 

 

 

 

 

US$ per A$1.00

 

 

 

 

 

Year ended

 

High

 

Low

 

Average

 

Close

 

1999

 

September

 

0.6712

 

0.5887

 

0.6390

 

0.6528

 

2000

 

September

 

0.6687

 

0.5372

 

0.6032

 

0.5415

 

2001

 

September

 

0.5712

 

0.4828

 

0.5182

 

0.4946

 

2002

 

September

 

0.5748

 

0.4923

 

0.5329

 

0.5429

 

2003

 

September

 

0.6823

 

0.5422

 

0.6131

 

0.6797

 

Month ended

 

June

 

0.6729

 

0.6564

 

0.6652

 

0.6713

 

 

 

July

 

0.6823

 

0.6454

 

0.6607

 

0.6474

 

 

 

August

 

0.6593

 

0.6390

 

0.6518

 

0.6490

 

 

 

September

 

0.6810

 

0.6395

 

0.6635

 

0.6797

 

 

 

October

 

0.7077

 

0.6814

 

0.6948

 

0.7077

 

 

 

November

 

0.7238

 

0.6986

 

0.7158

 

0.7236

 

 

The average is calculated from the Noon Buying Rate on the last day of each month during the period.

 

On December 1, 2003, the Noon Buying Rate was US$0.7265 per A$1.00.

 

In 2003, 27% (2002: 28%) of our gross revenue was derived from overseas operations and was denominated principally in New Zealand dollars (“NZ$” or “NZD”), US dollars (“US$” or “USD”) and British pounds sterling (“£” or “GBP”).  Movements in foreign currencies against the Australian dollar can therefore affect ANZ’s earnings through the restatement of overseas profits to Australian dollars.  Based on exchange rates applied to convert overseas profits and losses from September 1999 to September 2003, the Australian dollar moved against these currencies as follows (refer also Note 55 to the Financial Report):

 

Years ended September 30

 

2003

 

2002

 

2001

 

2000

 

1999

 

NZ$

 

-7

%

-4

%

-1

%

+5

%

+4

%

US$

 

+15

%

+2

%

-14

%

-5

%

-1

%

£

 

+6

%

0

%

-7

%

0

%

0

%

 

We monitor our exposure to revenues, expenses and invested capital denominated in currencies other than Australian dollars.  These currency exposures are hedged as considered necessary.

 

Certain Definitions

 

Our fiscal year ends on September 30.  As used throughout this Annual Report, unless otherwise stated or the context otherwise requires, the fiscal year ended September 30, 2003 is referred to as 2003, and other fiscal years are referred to in a corresponding manner.  References to calendar years are identified as such.

 

4



 

FINANCIAL REVIEW

 

Item 3: Key Information

 

The summary consolidated balance sheet date as of September 30, 2003 and 2002 and income statement data for the fiscal years ended September 30, 2003, 2002 and 2001 have been derived from the Group’s 2003 audited financial statements (the “Financial Report”).  The Financial Report (as included in Item 18) has been audited by our independent auditors.  The balance sheet data as of September 30, 2001, 2000 and 1999 and income statement data for the fiscal years ended September 30, 2000 and 1999 have been derived from our audited consolidated financial statements for the fiscal years ended September 30, 2001, 2000 and 1999, which are not included in this document.

 

The financial statements referred to above have been prepared in accordance with Australian GAAP, which varies in certain respects from US GAAP.  See Note 54 to the Financial Report.

 

Prior to 2001, abnormal items were reported separately. “Abnormal items” were defined as items of revenue or expense which, although attributable to the ordinary operations of the business entity, were considered to be abnormal by reason of their size and/or effect on the results of the business entity for the period.  Since 2000, however, under Australian GAAP, abnormal items are not allowed to be disclosed separately and we have presented prior periods accordingly.  In 2000, the following abnormals were presented separately: abnormal income of $1,207 million, abnormal expenses of ($986 million) and abnormal tax expense of ($177 million).  We have re-presented prior periods in the table below accordingly.

 

Amounts reported in US dollars have been translated at the September 30, 2003 Noon Buying Rate (refer to page 4).

 

5



 

Years ended September 30 (1)

 

2003

 

2003

 

2002

 

2001

 

2000

 

1999

 

 

 

US$M

 

$M

 

$M

 

$M

 

$M

 

$M

 

Summary of Consolidated Statement of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Australian GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

6,943

 

10,215

 

9,037

 

10,251

 

10,241

 

8,684

 

Interest expense

 

(4,013

)

(5,904

)

(5,019

)

(6,418

)

(6,440

)

(5,029

)

Net interest income

 

2,930

 

4,311

 

4,018

 

3,833

 

3,801

 

3,655

 

Allowance for loan losses (2)

 

(417

)

(614

)

(860

)

(531

)

(502

)

(510

)

Net interest income after allowance for loan losses

 

2,513

 

3,697

 

3,158

 

3,302

 

3,299

 

3,145

 

Non-interest income

 

1,909

 

2,808

 

2,970

 

2,573

 

3,790

 

2,377

 

Other operating expenses

 

(2,194

)

(3,228

)

(2,905

)

(3,092

)

(4,300

)

(3,300

)

Operating profit before income tax

 

2,228

 

3,277

 

3,223

 

2,783

 

2,789

 

2,222

 

Income tax expense attributable to operating profit

 

(629

)

(926

)

(898

)

(911

)

(1,040

)

(736

)

Operating profit after income tax

 

1,599

 

2,351

 

2,325

 

1,872

 

1,749

 

1,486

 

Outside equity interests

 

(2

)

(3

)

(3

)

(2

)

(2

)

(6

)

Operating profit after income tax

 

1,597

 

2,348

 

2,322

 

1,870

 

1,747

 

1,480

 

Non-interest income as a % of operating income(3)

 

39.4

%

39.4

%

42.5

%

40.5

%

49.9

%

39.4

%

Dividends paid / provided (4)

 

436

 

641

 

1,252

 

1,062

 

941

 

814

 

Per fully paid ordinary share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit after income tax (5)

 

$

1.01

 

$

1.48

 

$

1.47

 

$

1.17

 

$

1.07

 

$

0.91

 

Dividends

 

$

0.65

 

$

0.95

 

$

0.85

 

$

0.73

 

$

0.64

 

$

0.56

 

Dividends - US$

 

 

 

US$

0.65

 

US$

0.46

 

US$

0.36

 

US$

0.35

 

US$

0.37

 

Dividends per ADR - US$

 

 

 

US$

3.23

 

US$

2.31

 

US$

1.80

 

US$

1.75

 

US$

1.85

 

Adjusted in accordance with US GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit after income tax

 

1,618

 

2,380

 

2,097

 

1,796

 

1,940

 

1,410

 

Operating profit after income tax per share (5)

 

$

1.02

 

$

1.50

 

$

1.32

 

$

1.12

 

$

1.19

 

$

0.86

 

Continuing Operations: (6)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total income

 

8,852

 

13,023

 

12,007

 

12,855

 

11,883

 

10,017

 

Operating profit after income tax

 

1,597

 

2,348

 

2,322

 

1,882

 

1,594

 

1,365

 

Operating profit after income tax per fully paid ordinary share (5)

 

$

1.01

 

$

1.48

 

$

1.47

 

$

1.18

 

$

0.97

 

$

0.83

 

 


(1)   In millions, except per share amount and ratios

(2)   The allowance for loan loss charge represents the economic loss provision charge (refer page 41)

(3)   Operating income is the sum of net interest income and non-interest income

(4)          Excludes preference share dividends and dividends taken under the bonus option plan.  The final dividend for 2003 of $777 million has not been provided for at September 30, 2003 due to a change in Australian Accounting Standards on recognition of dividends.

(5)          Amounts are based on weighted average number of ordinary shares outstanding, 2003: 1,514.2 million, 2002: 1,496.9 million, 2001: 1,492.1 million, 2000: 1,540.3 million operating profit after income tax excludes preference share dividends of 2003: $102 million, 2002: $117 million, 2001: $119 million, 2000: $102 million, 1999: $72 million

(6)   Operations that will continue to contribute to the results of the ANZ group in future periods

 

6



 

Years ended September 30

 

2003

 

2003

 

2002

 

2001

 

2000

 

1999

 

 

 

US$M

 

$M

 

$M

 

$M

 

$M

 

$M

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

Australian GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity (1)

 

9,359

 

13,770

 

11,448

 

10,538

 

9,795

 

9,403

 

Subordinated debt

 

3,827

 

5,630

 

3,445

 

3,831

 

3,687

 

3,221

 

Bonds and notes

 

11,264

 

16,572

 

14,708

 

15,340

 

9,519

 

4,456

 

Deposits and other borrowings

 

84,619

 

124,494

 

113,297

 

104,874

 

100,602

 

96,559

 

Gross loans, advances and acceptances (net of unearned income) (2)

 

111,920

 

164,661

 

147,937

 

139,867

 

133,879

 

121,223

 

Specific allowance for loan losses

 

(329

)

(484

)

(585

)

(500

)

(709

)

(907

)

General allowance for loan losses

 

(1,043

)

(1,534

)

(1,496

)

(1,386

)

(1,373

)

(1,395

)

Net loans, advances and acceptances

 

110,548

 

162,643

 

145,856

 

137,981

 

131,797

 

118,921

 

Total assets

 

132,943

 

195,591

 

183,105

 

185,493

 

172,467

 

152,801

 

Net assets

 

9,371

 

13,787

 

11,465

 

10,551

 

9,807

 

9,429

 

Risk weighted assets

 

103,426

 

152,164

 

141,390

 

139,129

 

129,688

 

118,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted in accordance with US GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity (1)

 

8,714

 

12,820

 

12,139

 

11,207

 

10,517

 

9,889

 

Total assets

 

132,698

 

195,230

 

183,035

 

185,573

 

171,858

 

152,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of Consolidated Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

Australian GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit after income tax (1) as a percentage of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Average total assets

 

 

 

1.2

%

1.3

%

1.1

%

1.1

%

1.0

%

Average shareholders’ equity(1)

 

 

 

20.6

%

23.2

%

20.2

%

19.3

%

17.6

%

Dividends (3) to ordinary shareholders as a percentage of operating profit after income tax

 

 

 

64.2

%

57.8

%

62.0

%

59.1

%

62.1

%

Average shareholders’ equity as a percentage of average total assets(4)

 

 

 

5.7

%

5.3

%

5.0

%

5.3

%

5.4

%

Capital Adequacy ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1

 

 

 

7.7

%

7.9

%

7.5

%

7.4

%

7.9

%

Tier 2

 

 

 

4.0

%

2.8

%

3.2

%

3.4

%

3.3

%

Deductions (5)

 

 

 

(0.6

)%

(1.2

)%

(0.4

)%

(0.6

)%

(0.5

)%

Total

 

 

 

11.1

%

9.5

%

10.3

%

10.2

%

10.7

%

Adjusted in accordance with US GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit after income tax (1) as a percentage of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Average total assets

 

 

 

1.2

%

1.2

%

1.0

%

1.2

%

0.9

%

Operating profit (1) after income tax as a percentage of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shareholders’ equity (1)

 

 

 

20.8

%

20.9

%

18.2

%

20.6

%

15.8

%

Dividends (6) to ordinary shareholders as a percentage of operating profit after income tax(5)

 

 

 

62.2

%

63.2

%

63.3

%

51.2

%

60.8

%

Average shareholders’ equity (1) (5) as a percentage of average total assets

 

 

 

5.6

%

5.3

%

6.0

%

5.4

%

5.6

%

 


(1)   Excludes outside equity interest

(2)          Our balance sheet shows loans and advances net of the specific and general allowances.  For ease of presentation the gross amount is shown here

(3)          Includes proposed final dividend of $777 million in 2003 not provided at September 30, 2003 following a change in Accounting Standards on recognition of dividends

(4)          Excludes preference shares

(5)          Deductions represent our investment in life insurance, funds management, securitization activities and other banks of $920 million (2002: $1,703 million, 2001: $604 million, 2000: $787 million, 1999: $584 million).  In 2003 the intangible components of investments is deducted from Tier 1 capital rather than from total capital

(6)          Excludes dividends taken under the bonus option plan.  Includes proposed final dividend of $777 million in 2003 not provided at September 30, 2003 following a change in Accounting Standards on recognition of dividend.

 

7



 

Years ended September 30

 

2003

 

2003

 

2002

 

2001

 

2000

 

1999

 

 

 

US$M

 

$M

 

$M

 

$M

 

$M

 

$M

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of credit quality data

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross non-accrual loans (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Subject to specific allowance for loan losses

 

621

 

913

 

1,072

 

940

 

1,046

 

1,288

 

Without specific allowance for loan losses

 

64

 

94

 

131

 

320

 

345

 

255

 

Total non-accrual loans

 

685

 

1,007

 

1,203

 

1,260

 

1,391

 

1,543

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific allowance (loans)

 

328

 

482

 

575

 

490

 

692

 

886

 

Specific allowance (off-balance sheet commitments)

 

1

 

2

 

10

 

10

 

17

 

21

 

General allowance

 

1,043

 

1,534

 

1,496

 

1,386

 

1,373

 

1,395

 

Total allowance

 

1,372

 

2,018

 

2,081

 

1,886

 

2,082

 

2,302

 

Gross loans, advances and acceptances (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loans and advances (2) (3)

 

102,963

 

151,483

 

134,141

 

125,543

 

118,397

 

106,365

 

Acceptances

 

8,957

 

13,178

 

13,796

 

14,324

 

15,482

 

14,858

 

Total gross loans, advances and acceptances

 

111,920

 

164,661

 

147,937

 

139,867

 

133,879

 

121,223

 

Gross non-accrual loans as a percentage of gross loans and advances

 

 

 

0.7

%

0.9

%

1.0

%

1.2

%

1.4

%

Gross non-accrual loans as a percentage of gross loans, advances and acceptances

 

 

 

0.6

%

0.8

%

0.9

%

1.0

%

1.3

%

Specific allowance for loan losses as a percentage of gross non-accrual loans (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Subject to allowance

 

 

 

52.8

%

53.6

%

52.1

%

66.2

%

68.8

%

Total non-accrual loans

 

 

 

47.9

%

47.8

%

38.9

%

49.7

%

57.4

%

Total allowance for loan losses as a percentage of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loans and advances (2)

 

 

 

1.3

%

1.6

%

1.5

%

1.8

%

2.2

%

Gross loans, advances and acceptances (2)

 

 

 

1.2

%

1.4

%

1.3

%

1.6

%

1.9

%

Risk weighted assets

 

 

 

1.3

%

1.5

%

1.4

%

1.6

%

2.0

%

 


(1)          Excludes off-balance sheet commitments that have been classified as unproductive of A$37 million (2002: A$44 million, 2001: A$31 million, 2000: A$56 million, 1999: A$70 million) net of an allowance of A$2 million (2002: A$10 million, 2001: A$10 million, 2000: A$17 million, 1999: A$21 million) and restructured loans A$ nil (2002: A$1 million, 2001: A$1 million, 2000: A$1 million, 1999: A$7 million).

(2)          Net of unearned income

(3)          The consolidated balance sheet shows loans and advances net of the specific and general allowances.  For ease of presentation the gross amount is shown here.

 

Summary of Material Risk Factors

 

The following describes some of the significant risks that could affect us.  Additionally, some risks may be unknown to us and other risks, currently believed to be immaterial, could turn out to be material.  All of these could materially adversely affect our business, profits, assets, liquidity and capital resources.  They should be considered in connection with any forward-looking statements in this annual report and the warning regarding forward-looking statements on page 3 of this annual report.

 

Risks Related to Our Business

 

Changes in general business and economic conditions may adversely impact our results

 

As we conduct the majority of our business in Australia and New Zealand, our performance is influenced by the level and cyclical nature of business activity in Australia and New Zealand, which, in turn is affected by both domestic and international economic and political events.

 

8



 

These events and conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, relative changes in foreign exchange rates and the strength of the Australian and New Zealand economies.  For example, a general economic downturn, a downturn in the housing market, a decrease in immigration, an increase in unemployment, or other events that negatively impact household and/or corporate incomes could decrease the demand for our loan and non-loan products and services and increase the number of customers who fail to pay interest or repay principal on their loans.  Australian and New Zealand economic conditions may also be affected by geo-political instability, including, among other factors, actual or potential conflict and terrorism.  Our future performance may also be affected by the economic conditions of other regions where we conduct operations.

 

As a consequence of the NBNZ acquisition described under “Recent Developments-Acquisition of The National Bank of New Zealand”, we will have a considerably larger exposure to New Zealand economic conditions than we currently have.  In particular, the NBNZ acquisition will significantly increase our exposure to the New Zealand housing market (particularly in Auckland) and the New Zealand rural sector (particularly to the dairy industry).

 

Changes in fiscal and monetary policies may adversely impact our results

 

The Reserve Bank of Australia and the Reserve Bank of New Zealand regulate the supply of money and credit in Australia and New Zealand (respectively).  Their policies determine in large part the cost of funds to us for lending and investing and the return we will earn on those loans and investments.  Both of these impact our net interest margin, and can materially affect the value of financial instruments we hold, such as debt securities.  The policies of the Reserve Bank of Australia and the Reserve Bank of New Zealand also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans.  Changes in Reserve Bank of Australia and Reserve Bank of New Zealand policies are hard to predict or anticipate.

 

Regulatory changes may adversely impact our results

 

As we consist of regulated entities which are deposit-taking institutions, we are regulated in Australia, New Zealand and in the other countries in which we have operations.  This regulation varies from country to country but generally is designed to protect depositors and the banking system as a whole, not holders of our securities.

 

The Australian Government and its agencies, including APRA and the Reserve Bank of Australia, have supervisory oversight of us and our failure to comply with laws, regulations or policies could result in sanctions by these regulatory agencies and cause damage to our reputation.

 

The New Zealand Government and its agencies, including the Reserve Bank of New Zealand, have supervisory oversight of our New Zealand business.  Our failure to comply with laws, regulations or policies could result in sanctions by these regulatory agencies and cause damage to our reputation.  The Reserve Bank of New Zealand has approved the NBNZ acquisition subject to various ongoing regulatory and consent requirements.  To the extent that these regulatory and consent requirements limit our operations or flexibility they could adversely affect our profitability and prospects.

 

In addition, these regulatory agencies frequently review banking laws, regulations and policies for possible changes.  Changes to laws, regulations or policies, including changes in interpretation or implementation of laws, regulations or policies, could affect us in substantial and unpredictable ways.  These may include changing required levels of bank liquidity and capital adequacy, limiting the types of financial services and products we may offer and/or increasing the ability of non-banks to offer competing financial services and products, as well as changes to accounting standards, taxation laws and prudential regulatory requirements.

 

For example, in August 2002 the Reserve Bank of Australia announced reforms to the Australian credit card market, which include a new interchange standard (effective from the end of October 2003) which will reduce the amount of interchange revenue received by us.  Although we estimate, based on current projections, that the negative impact of these particular reforms will not be material, in general it is difficult for us to predict the effect on our financial condition or results of operations or that of our controlled entities of any potential legislation or impending regulations.

 

There is a risk that New Zealand may introduce similar credit card market reforms, with a New Zealand Commerce Commission inquiry into the market currently under way.  Given the uncertainty attached to the outcome of this process, it is not possible to quantify the potential impact on credit card profitability in New Zealand.

 

Further, the International Monetary Fund is also about to commence an assessment of the New Zealand banking industry, specifically focusing on the supervisory framework and the role of the Reserve Bank of New Zealand.  Any regulatory response to the review could impose additional costs on us.

 

9



 

We may also be required to undertake work to meet the principles laid out by the Basel Committee on Banking Supervision in respect of the proposed new Capital Accord (widely known as Basel II).  However, at this stage it is not possible to quantify the required implications.

 

Competition may adversely impact our results

 

The financial services sector in which we operate is highly competitive and could become even more competitive, particularly in those segments that are considered to provide higher growth prospects.  Factors contributing to this include industry deregulation, mergers, changes in customers’ needs and preferences, entry of new participants, development of new distribution and service methods and increased diversification of products by competitors.

 

For example, mergers between banks and other types of financial services companies create entities which can offer virtually any type of banking or financial service.  Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic payment systems, mortgages and credit cards.  In addition, banks in different jurisdictions are subject to different levels of regulation and some may have lower cost structures.

 

The effect of the competitive market conditions in which we operate may have a material adverse effect on our financial performance and position.

 

Application of and changes to accounting policies may adversely impact our results

 

Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations.  Our management must exercise judgment in selecting and applying many of these accounting policies and methods so that not only do they comply with generally accepted accounting principles but that they also reflect the most appropriate manner in which to record and report our financial position and results of operations.

 

In some cases, management must select an accounting policy or method from two or more alternatives, any of which might be reasonable under the circumstances yet might result in us reporting materially different outcomes than would have been reported under a different alternative.

 

In July 2002, the Financial Reporting Council of Australia announced its formal support for Australia to adopt standards based on International Financial Reporting Standards (IFRS) for financial years beginning on or after January 1, 2005.  As a result, from January 1, 2005, the accounting standards that apply to Australian reporting companies under the Corporations Act, such as us, will be based upon IFRS issued by the International Accounting Standards Board.  It is possible that the Australian Accounting Standards Board may allow adoption of accounting standards based on IFRS before that date.

 

We expect to adopt IFRS from October 1, 2005.  It is currently expected that comparatives will be required to be restated on initial adoption of IFRS.

 

The final version of IFRS that will be applicable to us are not yet available.  In particular, the International Accounting Standards Board has yet to finalize the standard on recognition and measurement of financial instruments.  Based on exposure drafts of this standard, adoption of IFRS may result in changes to accounting for hedges, changes in the calculation of the allowance for loan losses and the status of the general allowance for loan losses, securitization, recognition of fee income and classification of hybrid equity instruments.

 

The final version of IFRS is also expected to require impairment testing for goodwill, and to require entities to cease amortization of goodwill.

 

All our financial information disclosed in this offering memorandum has been prepared in accordance with Australian GAAP.  The differences between Australian GAAP and IFRS, identified above, will potentially have a significant effect on our financial position and performance.  The differences identified above should not be taken as an exhaustive list of all the differences between Australian GAAP and IFRS.  No attempt has been made to identify all disclosure, presentation or classification differences that would affect the manner in which transactions or events are presented.

 

We have not quantified the effects of the differences expected under IFRS.  Accordingly, there can be no assurance that our consolidated financial performance or financial position (or both) would not be significantly different if determined in accordance with IFRS.

 

The potential impacts on our financial performance and financial position of the adoption of IFRS, including system upgrades and other implementation costs which may be incurred, have not been quantified, as the actual impact will depend on the final standards and the particular circumstances prevailing at the time of adoption.

 

10



 

We are subject to credit risk, which may adversely impact our results

 

As a financial institution, we are exposed to the risks associated with extending credit to other parties.  Less favorable business or economic conditions, whether generally or in a specific industry, could cause customers or counterparties to experience adverse financial consequences, thereby exposing us to the increased risk that those customers or counterparties will fail to honor the terms of their loans or agreements.

 

Credit risk arises from our lending activities and the potential for loss arising from the failure of customers or counterparties to meet their contractual obligations.  As a result, we will hold provisions to cover bad and doubtful debts.  The amount of these provisions is determined by assessing, based on current information, the extent of credit risk within the current lending portfolio.  However, if the information upon which the assessment of risk proves to be inaccurate, the provisions made for loan loss may be insufficient, which could have a material adverse effect on our results and operations.

 

In addition, in assessing whether to extend credit or enter into other transactions with customers and counterparties, we will rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information.  We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.  Our financial condition and results of operations could be negatively impacted to the extent we rely on information or financial statements that are inaccurate or materially misleading.

 

Two areas that recently emerged as credit quality problems for us were the US power industry and the global telecommunications industry.  We have been adversely affected by exposure to a small number of single name exposures in the US power industry and in the telecommunications industry.  Continued exposure to these and other industries could affect our results and operations.

 

As a consequence of the NBNZ acquisition, we will have increased exposure to the New Zealand housing market (particularly in Auckland) and to the New Zealand rural sector (particularly the dairy sector).

 

We are subject to operating risk, which may adversely impact our results

 

Operating risk relates to the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems, or from external events which impact our operating business.  Operating risk includes the risks arising from process error, fraud, systems failure, failure of security and physical protection systems, customer services, staff skills and performance and product development and maintenance.  We are highly dependent on information systems and technology and there is a risk that these might fail.  From time to time, we will undertake major projects and there are operating risks in the design and implementation of these projects.  Further, our exposure to potential systemic events or failings in the international financial services sector may also be a source of operating risk.

 

We are subject to market risk (including foreign exchange risk) and liquidity risk, which may adversely impact our results

 

Market risk relates to the risk of loss arising from changes in interest rates, foreign exchange rates, prices of commodities, debt securities and other financial contracts including derivatives.  Losses arising from these risks may have a material adverse effect on us.

 

We are also exposed to liquidity risk, which is the risk that we have insufficient funds and are unable to meet our payment obligations as they fall due, including obligations to repay deposits and maturing wholesale debt.

 

Litigation and contingent liabilities may adversely impact our results

 

There are outstanding court proceedings, claims and possible claims against us, the aggregate amount of which cannot readily be quantified.  Legal advice has been obtained and, in the light of such advice, provisions as deemed necessary have been made and are disclosed in our consolidated financial statements.  If these provisions prove inadequate, this may have a material adverse effect on our financial condition.  Known material risks relate to our exposures arising from the sale of ANZ Grindlays Bank Limited and our private banking business in the United Kingdom and Jersey, together with ANZ Grindlays (Jersey) Holdings Limited and its controlled entities, or the Grindlays’ businesses, and contingent tax liabilities.

 

As part of the sale in July 2000 of the Grindlays’ businesses to Standard Chartered Bank, we provided a number of warranties and indemnities.  Claims have been made by Standard Chartered Bank under certain of these warranties and indemnities.  A number of these claims have been resolved.  While we expect that resolution of the residual outstanding matters will occur within existing provisions, we can give no assurance that there will not be an adverse outcome.

 

11



 

In Australia, we are being audited by the Australian Taxation Office.  The Australian Taxation Office is considering several issues including the tax treatment of certain lease assignments in 1991 and 1992 and, at our request, the sale of the Grindlays’ businesses in 2000.  Based on external advice, we have assessed the likely outcome of these issues.  While we believe that we hold appropriate provisions, we can give no assurance that there will not be an adverse outcome.

 

Our due diligence inquiries in respect of NBNZ have found that there are also a number of outstanding court proceedings, claims and possible claims against NBNZ, the aggregate amount of which cannot be readily quantified and which may not be covered by warranties and indemnities from Lloyds TSB.

 

The New Zealand Inland Revenue Department is currently undertaking an audit of all major banks in New Zealand in relation to structured finance arrangements.  No assessments against us or NBNZ have been issued or suggested at this stage.  The timing and outcome of this audit is uncertain and there is a risk that this may have adverse influences for us.

 

Acquisition risk may adversely impact our results

 

We regularly examine a range of corporate opportunities with a view to determining whether those opportunities will enhance our financial performance and position.

 

Any corporate opportunity that we pursue could, for a variety of reasons, turn out to have a material adverse effect on us.  The successful implementation of our corporate strategy will depend on a range of factors including potential funding strategies and challenges associated with integrating and adding value to a business which is acquired.

 

Our operating performance or capital structure may also be affected by these corporate opportunities and there is a risk that our credit rating may be placed on credit watch or downgraded if these opportunities are pursued.

 

Integration risks resulting from our acquisition of NBNZ, including loss of revenue and customers, loss of key personnel and systems and technology risks, may adversely impact our results

 

We have undertaken detailed financial analysis of NBNZ and a detailed business analysis in order to determine the attractiveness to us of NBNZ, and the NBNZ acquisition.  To the extent that the actual results achieved by NBNZ are lower than those indicated by our analysis, there is a risk that our future results and profitability could be adversely impacted.  This may occur for a number of reasons, including for example, if the anticipated combined revenue resulting from the merger of NBNZ with our New Zealand business is lower than expected or growth occurs less quickly than expected.

 

It may not be possible to successfully integrate our New Zealand business in a timely manner with that of NBNZ or to realize the full cost savings and other economies of scale anticipated.  The proposed NBNZ acquisition involves the integration of businesses that have previously operated independently, which will involve, among other things, integrating technology platforms, integrating personnel with diverse business backgrounds and combining different corporate and workplace policies, procedures and cultures.

 

The process of integrating operations could, among other things, divert management’s attention from the activities of one or more of the businesses, as well as interrupting business momentum, and could result in the loss of key personnel, any of which could have an adverse effect on our business, results of operations or financial condition.

 

Key risks associated with the integration include loss of revenue and customers, loss of key personnel and systems/technology risks.

 

A key risk of the integration of our New Zealand business with that of NBNZ is revenue and customer loss and our resulting loss of market shares.  Some of the factors which may cause customer attrition are product change, including alignment of product features; changes to credit risk assessments; brand changes and customer perceptions; corporate and institutional customer limits on the amount of borrowing from any single financial institution; our ability to meet expected service levels; changes in our business culture, including perceived impact of change of ownership; and increased competition activities.  Revenue and customer attrition may have a material adverse effect on our financial performance and operations.

 

The business and financial performance of NBNZ is dependent upon certain key senior managers.  The loss of key senior management could have an adverse effect on our business, results of operations or financial condition.  After the completion of the NBNZ acquisition, we can provide no assurance regarding the potential loss of NBNZ senior management.

 

As part of the NBNZ acquisition, we propose to integrate different information technology platforms and back office functions.  Failure to adequately manage this integration could materially and adversely affect our financial condition and results of operations.

 

12



 

It is also possible that we may be unable to successfully communicate the rationale for the acquisition to our customers, investors, employees or suppliers.  If any of these groups fail to support the NBNZ acquisition, it could adversely affect our financial condition and results of operations.  In particular, management of the customers of NBNZ and our New Zealand business will be extremely important in preserving and enhancing the financial performance of our New Zealand business.

 

We will incur substantial additional expenses integrating NBNZ with our existing operations.  The total amount of the indirect integration costs of the acquisition are difficult to estimate and may be materially different from ANZ’s estimates.

 

See the section entitled “Recent Developments-Acquisition of The National Bank of New Zealand” for further information on the

integration of our operations with those of NBNZ.

 

13



 

COMPANY PROFILE

 

Item 4: Information on the Company

 

Overview

 

ANZ is one of the four major banking groups headquartered in Australia.  Our Australian operations began in 1835 and our New Zealand operations began in 1840.  We were incorporated in the State of Victoria, Australia, and have our principal executive office located at 100 Queen Street, Melbourne, Victoria, 3000, Australia.  Our telephone number is (61) (3) 9273 5555.

 

Based on publicly available information as at September 30, 2003, we ranked fourth among Australian banking groups in terms of total assets ($195.6 billion) and fourth in terms of shareholders’ equity ($13.8 billion) and ranked fourth in terms of market capitalization.  At December 1, 2003, following the acquisition of National Bank of New Zealand (“NBNZ”) we were ranked third among Australian banking groups in each of the above comparatives and, with a market capitalization of $30 billion, ranked as the sixth largest company listed on the Australian Stock Exchange Limited.

 

We provide a broad range of banking and financial products and services to retail, small business, corporate and institutional clients.  We conduct our operations primarily in Australia (approximately 77% of our total assets at September 30, 2003) with significant operations in New Zealand (approximately 13% of total assets at September 30, 2003).  The remainder of our operations are conducted in the United Kingdom, the United States and a number of other countries, most of which are located in the Asia Pacific region.  At September 30, 2003, we had 1,044 branches and other points of representation worldwide.  After the acquisition of NBNZ, we estimate New Zealand will account for approximately 26.5% of our total assets.

 

ANZ’s specialization strategy is executed through a management structure of 11 segments.  As at September 30, 2003 we executed our specialization strategy through a management structure of the following 11 segments:

 

Business segment

 

Principal activities

 

 

 

Personal Banking Australia

 

Personal Banking Australia provides a range of banking services to personal customers, high net worth individuals and SME rural customers in Australia.

 

 

 

Institutional Financial Services

 

Institutional Financial Services brings together the institutional customer segment with specialized wholesale product segments to provide a broad range of financial solutions for institutional customers.

 

 

 

Corporate

 

Corporate provides the principal relationship between ANZ’s corporate and SME metropolitan customers and all areas of ANZ, including working capital management, liquidity management and transaction processing.

 

 

 

New Zealand Banking

 

New Zealand Banking provides a broad range of personal banking services, including wealth management, for personal, small business, rural and corporate clients in New Zealand and is only one part of ANZ’s New Zealand business on a geographical basis.  The New Zealand Banking segment does not include NBNZ, the operations of the Mortgages, Consumer Finance, Asset Finance, Institutional Financial Services, ING New Zealand Treasury segments in New Zealand.

 

 

 

Mortgages

 

Mortgages provides mortgage finance secured by residential real estate in Australia and New Zealand.

 

 

 

Consumer Finance

 

Consumer Finance provides consumer and commercial credit cards, ePayment products, personal loans and merchant payment facilities.

 

 

 

Asset Finance

 

Asset Finance provides finance and operating leases for vehicles and business equipment.  Segment identified as Esanda and UDC in Attachment 1.

 

 

 

ING Australia

 

ING Australia is a joint venture between ANZ and ING that provides integrated manufacture and distribution of wealth creation, management and protection products and services.  This business operates in New Zealand as ING New Zealand.

 

 

 

Asia Pacific

 

Asia Pacific provides primarily retail banking services in the Asia and Pacific region and includes ANZ’s share of PT Panin Bank in Indonesia.

 

14



 

Treasury

 

Treasury is the banker to all ANZ businesses charged with providing cash flow support, ensuring liquidity, managing interest rate risk and providing capital to the businesses.

 

 

 

Group Center

 

Group Center provides support to the ANZ Group and includes technology, payments, finance, legal, risk, tax and audit functions.

 

ANZ’s agenda for the next five years is to be:

 

      the leading bank in Australia

•     the sustainable leader in New Zealand and the Pacific

      the leading Australian bank in Asia

      the most respected major Australasian company

 

Core elements to achieving this agenda:

 

      bold and different

•     easy to do business with

      the best managed, most efficient, and most successful Australian bank

      growing, investing, partnering, making bold moves

      a unique climate of inspiration, leadership, values and opportunities

      trusted by the community, with a sustainable contribution to society

 

Our Strategic Direction

 

Gaining Momentum with the ANZ Agenda

 

At ANZ, we are currently on a journey to create an organization that is both different and sustainable.  This is not something that can be achieved overnight or with a simple statement of intent.  It requires sustained commitment, persistence and investment over a number of years.

 

We took the first major step on this through our innovative strategy that created a portfolio of specialist businesses, and embarked on a journey to transform the culture of the whole organization.  Specialization has not only brought a sharper financial focus through greater accountability, it has also contributed to a greater sense of ownership and commitment from our people.  This has already contributed to improved customer satisfaction across many business units, and in turn, improved results.

 

13,000 staff have been through our Breakout cultural change programme.  We see this as fundamental to the creation of a different organization, with motivated people, satisfied customers and superior returns.

 

The next step on this journey is to determine how we build an institution that is capable of sustained performance over the long term.  It means serving our customers well, with innovative and good value services, and delivering sound profitable growth for shareholders.  It means our being committed to creating more jobs, and building a challenging, exciting and caring environment for our people.  It means earning and retaining the trust of the communities in which we operate and extends to making an overall contribution to society.  It means being bold and different, investing for growth and partnering with world-class organizations where joint capability creates a competitive advantage that we could not achieve on our own.  This is the ANZ Agenda, with the overall aim of making ANZ the most respected major company in Australia and New Zealand in the eyes of our stakeholders:

 

      Customers: A bank that is easy to do business with, a human face, and one that values and builds enduring relationships.

      People: A great company, with great people, great values and great opportunities.

•     Shareholders: One of the most efficient, best managed. and most successful banks in the world.

•     Community: A company that is trusted by the community, and makes a sustainable contribution to society.

 

15



 

Progress on the ANZ Agenda in 2003

 

People make great companies.  At ANZ, we are committed to helping our people continuously to improve their skills and capabilities, and support them in obtaining tertiary and post-graduate qualifications.  This year saw the first of our MBA graduates from our online MBA with Charles Sturt University.  We now have 100 people on the programme.  We continue to be one of the largest private sector recruiters of graduates with a new intake of 240 in Australia and New Zealand alone.

 

In July, we conducted our annual staff satisfaction survey which reported that satisfaction levels have again risen and are now at 82%.  With capable, satisfied and motivated people, we have a strong foundation for the future.

 

In our retail banking businesses, trained and committed staff acting as advocates for ANZ, are essential to the health of our relationships with customers and the broader community.  Over the last two years, staff satisfaction in our network has risen from under 50% to over 80%.  We have also maintained high levels of investment to improve customer service, quality and efficiency.  In Australia we have invested over $100 million in a new industry-leading technology for our branch network, and the new telling project, “MyTell”, is now in a number of pilot branches, with full roll out to occur during this financial year.

 

We are particularly excited about the growth in our rural Australia franchise, through the commitment of our people in the more remote communities.

 

In our Small and Medium Enterprises business, special focus and investment in specialist relationship managers is yielding above average levels of growth.

 

Many people in Australia find difficulty in understanding financial information, and this is putting the most vulnerable at considerable potential risk.  This year we were proud to launch Australia’s first financial literacy survey, and are continuing to take a lead in alleviating this problem.  We see this study as a first step towards empowering people with the appropriate financial skills to make informed basic financial decisions.

 

Our specialized business portfolio provides a strong platform for growth

 

At ANZ we have an attractive portfolio of businesses.  Our specialization strategy is based on the premise that specialists will outperform generalists, and that a portfolio of specialized businesses provides synergistic benefits and also a diversified risk profile.

 

ANZ’s traditional strength is in Institutional Financial Services and Corporate Banking.  These businesses, by function of their size and market position should be key drivers of ANZ’s future success, as should our developing franchise in Small to Medium Business.  We believe the economic outlook now favors an overweight position in these areas as activity shifts from the consumercentric growth of recent years.

 

We have a strong portfolio of specialized product businesses.  Our credit card franchise remains a major strength of ANZ notwithstanding issues in the first half together with the reduced interchange levels from the Reserve Bank of Australia’s reforms.  The Mortgage business has become a major force in the third-party market and is employing innovative new distribution channels.  Esanda in Australia, and UDC in New Zealand, are also leading brands in auto and equipment finance.

 

We currently are the largest bank in all segments in New Zealand, the leading Australian bank in Asia, and the market leader in key domestic niche markets such as auto-and equipment financing (source: Australian Bureau of Statistics).

 

Personal Banking and Wealth Management are less traditional areas for ANZ, making it difficult to transform quickly our market position against larger entrenched competitors.  Nevertheless we are finding new ways to build these businesses so that we can transform our position over the medium to long term.

 

Building a future

 

Specialization creates a demonstrably more agile operation, able to respond rapidly to the opportunities presented within each business segment.  Our efficiency levels enable us to provide highly competitive customer value, such as in personal transaction accounts.  We are targeting further productivity gains through technology-based process improvements.

 

We will consider enhancing our capabilities, growth opportunities, scale benefits and other synergies through selective acquisitions.  In order to proceed, any proposed acquisitions must demonstrate a capacity to add value for shareholders and pass a rigorous investment review.

 

16



 

We will also enter commercial arrangements and partnerships where these provide a strategic fit with our existing businesses.  Our recently announced agreement with Diners Club Australia is an example of this approach.  In response to the regulatory regime for credit cards, we have provided a different solution that enhances our prospective performance whilst continuing to service our customers’ needs.

 

Our regional international strategy is focused on consumer banking.  Our preference is to work with local partners with domestic customer franchises where we can add our own distinct capabilities to theirs.  A good example is our credit card joint venture with Metrobank in the Philippines.  Over time we would like to pursue further initiatives, while continuing to reflect the need to maintain a lower risk profile.

 

Our institutional business across Australasia, Asia, Europe and North America, are focused on Trade and Project finance, and financial markets.

 

Finally, our regional international strategy is disciplined and long-term.  We have no pressing sense of urgency and if a proposed investment does not meet our requirements, we will not proceed.

 

Subsidiaries, Associates and Joint Venture

 

We have many subsidiaries and associates.  More detailed information regarding material subsidiaries and associates is contained in Exhibit 8 and Notes 43, 44 and 45 of the Financial Report.

 

Organization Structure Changes

 

The Group from time to time modifies the organization of its businesses to enhance the focus on delivery of specialized products or services to customers.  Prior period numbers are adjusted for such organizational changes to allow comparability.  The significant changes for the current period were:

 

      The re-organization within Personal Banking Australia, effective from April 1, 2003.  This segment consists of:

 

                  Personal Distribution which provides a full range of banking services, including the distribution of Wealth Management products, to personal customers and small to medium rural customers in Australia through branches, call centers, ATMs and on-line banking.

 

                  Banking Products manufactures deposit, transaction accounts and Margin Lending products.  In addition, the businesses manage ANZ’s direct channels covering Phone Banking, ATMs and Internet Banking.

 

      In addition, there have been a number of function transfers including the transfer of the Contact Center to Personal Banking Australia, further customer segmentation between Institutional Banking, Structured Finance International and Corporate, and a number of relatively minor methodology changes to revenue and cost allocations.

 

      ANZ has increased the allocation of economic capital to business units carrying goodwill on investments.  Business units carrying goodwill will show increased earnings on capital in the equity standardized statement of financial performance.

 

Property

 

We have a sizeable holding of freehold and leasehold land and buildings (largely within Australia) for our business purposes.  These premises, which include branches, administration centers and residential accommodation for employees, had a carrying value at September 30, 2003 of $426 million (market value of $464 million as at June 30, 2002). (2002 carrying value: $455 million).

 

The Group last valued this class of assets, based on independent valuations, as at June 30, 2002.  There were no material movements in property values in the period to September 30, 2003.

 

Whilst the overall number of properties has decreased as a result of the Group’s continued divestment strategy through sales and sale and leasebacks of non core property assets, the increase in individual property carrying values from September 30, 2002 to September 30, 2003 is a reflection of the substantial upgrade works undertaken on the primary and secondary data centers (to improve their redundancy capacity), together with numerous branch refurbishments works completed as part of the “Restoring Customer Faith Program”.

 

17



 

Recent Developments

 

Acquisition of National Bank of New Zealand

 

On October 24, 2003, ANZ announced it had reached agreement with Lloyds TSB to acquire The National Bank of New Zealand for £2,043.8 million, approximately $4.915 billion at exchange rates on October 23, 2003.

 

This transaction, which closed on December 1, 2003, was funded by the process of a Rights offer (A$3,570 million net of the proceeds of transaction costs) and the proceeds of a Hybrid tier 1 offering (A$1,618 million equivalent as at September 30, 2003 noon buying rate) with the balance raised via a subordinated debt offering.

 

The National Bank of New Zealand is one of New Zealand’s leading banks with net loans and advances of NZ$35 billion (as at June 30, 2003) representing around 23% of industry lending.  It has strong market share in personal, rural, and small business banking including a national network of 160 retail branches and 260 ATMs.

 

The National Bank of New Zealand also enjoys consistently high customer and staff satisfaction levels.  In the year to September 2003, The National Bank of New Zealand maintained its top position in the AC Nielsen Consumer Finance Monitor with 71% of personal customers rating its service as excellent or very good.  This is coupled with leading levels of staff satisfaction (85%).

 

The National Bank of New Zealand’s track record of value creation is based on an efficient operating model, strong revenue growth with sound credit quality and high levels of staff and customer satisfaction driven by a strong and experienced management team.

 

ANZ had a strong existing business in New Zealand that dates back to 1840.  Prior to the NBNZ acquisition, ANZ was among the top five banks in New Zealand with over one million personal customers and a leading position in corporate banking.

 

We have taken a number of steps to invigorate this existing business in New Zealand including more autonomy for New Zealand management and a series of initiatives to improve customer satisfaction, including introducing new products, opening branches and re-organizing our approach to personal banking.

 

The NBNZ acquisition is a significant strategic milestone for ANZ.  It is part of ANZ’s strategy to develop leading positions in growth businesses in its home markets and clearly establishes ANZ as New Zealand’s largest bank.  It also reflects our long-term confidence in New Zealand’s economic prospects.

 

Following completion of the acquisition of NBNZ in December 2003, our combined business in New Zealand will contribute as much as 30% of earnings in future years.  Naturally, the significance of our business and of our presence in New Zealand will necessitate a very different approach to thinking about our business in New Zealand, our customers, staff and our role in New Zealand as the largest provider of banking services.

 

ANZ intends that both the ANZ and The National Bank of New Zealand brands, names and branch networks will be retained for the foreseeable future.  By working together with The National Bank of New Zealand and focusing on the interests of our customers, staff and the community we can create a better organization in the future for New Zealand and for shareholders.

 

ANZ Stapled Exchange Preference Securities

 

On August 14, 2003 ANZ announced an offer of up to $750 million of ANZ Stapled Exchangeable Preferred Securities (ANZ StEPS), with the ability to accept over subscriptions of up to $250 million.

 

The $1 billion raised through the offer strengthened our balance sheet and increased our financial flexibility.

 

Key features of the offer included:

 

      a quarterly floating distribution rate, calculated as the 90 day bank bill rate plus a margin;

 

      distributions are payable in preference to any dividends on ANZ’s ordinary shares;

 

      the ability for ANZ to change certain terms on reset dates, the first reset date is September 15, 2008;

 

•     the ability for ANZ or investors to exchange ANZ StEPS for cash or ordinary shares in certain circumstances; and

 

      quotation on the Australian Stock Exchange.

 

18



 

ANZ’s US$1.1 billion hybrid capital raising

 

On November 26, 2003, the company issued 1.1 million fully paid preference shares with a liquidation preference of US$1,000.  The preference shares were issued as part of a two tranche, structured hybrid raising under two offering memorandums dated November 19, 2003.  The two tranches involve US$350 million with an initial call date of January 15, 2010 at US Treasuries plus 100 basis points (equivalent to 4.484%) and US$750 million with an initial call date of December 15, 2013 at US Treasuries plus 118 basis points (equivalent to 5.36%).

 

Assets and Gross Revenue by Line of Business

 

Years ended September 30 (1)

 

2003

 

 

 

2002

 

 

 

2001

 

 

 

 

 

$M

 

 

 

$M

 

 

 

$M

 

 

 

Line Of Business (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

External Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Banking Australia

 

6,696

 

3

%

5,832

 

3

%

n/a

 

n/a

 

Institutional Financial Services

 

56,529

 

29

%

59,155

 

32

%

n/a

 

n/a

 

Corporate

 

16,085

 

8

%

13,538

 

7

%

n/a

 

n/a

 

New Zealand Banking

 

4,225

 

2

%

3,797

 

2

%

n/a

 

n/a

 

Mortgages

 

77,586

 

40

%

64,826

 

35

%

n/a

 

n/a

 

Consumer Finance

 

6,135

 

3

%

5,551

 

3

%

n/a

 

n/a

 

Asset Finance

 

13,460

 

7

%

12,410

 

7

%

n/a

 

n/a

 

ING Australia

 

1,736

 

1

%

1,638

 

1

%

n/a

 

n/a

 

Asia Pacific

 

1,949

 

1

%

1,932

 

1

%

n/a

 

n/a

 

Treasury

 

9,085

 

5

%

11,692

 

6

%

n/a

 

n/a

 

Group Center

 

2,105

 

1

%

2,734

 

1

%

n/a

 

n/a

 

Total Assets

 

195,591

 

100

%

183,105

 

100

%

n/a

 

n/a

 

 

Line Of Business (2)

 

As published in the September 2002 Company Profile

 

 

 

2002

 

 

 

2001

 

 

 

 

 

$M

 

 

 

$M

 

 

 

External Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Banking and Wealth

 

 

 

 

 

 

 

 

 

Management

 

10,635

 

6

%

13,597

 

7

%

Corporate Businesses

 

42,822

 

23

%

44,245

 

24

%

Investment Banking

 

25,669

 

14

%

29,851

 

16

%

Consumer Finance

 

5,551

 

3

%

4,881

 

3

%

Mortgages

 

64,826

 

35

%

55,901

 

30

%

Asset Finance

 

12,410

 

7

%

12,013

 

7

%

Small to Medium Business

 

6,764

 

4

%

6,013

 

3

%

Other

 

14,428

 

8

%

18,992

 

10

%

 

 

183,105

 

100

%

185,493

 

100

%

 


(1)   Comparative Line of Business information for 2001 cannot be provided without unreasonable effort or expense, refer table below for line of business in 2002 and 2001 under previous business structure.  Refer 2002 20-F for discussion of these businesses

(2)   For discussion of operating results by Line of Business see “Operating and Financial Review and Prospects - Results by Line of Business”

 

19



 

Years ended September 30 (1)

 

2003

 

 

 

2002

 

 

 

2001

 

 

 

 

 

$M

 

 

 

$M

 

 

 

$M

 

 

 

Gross Revenue (2) (equity standardized)(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Banking Australia

 

737

 

6

%

728

 

6

%

n/a

 

n/a

 

Institutional Financial Services

 

3,342

 

26

%

3,147

 

26

%

n/a

 

n/a

 

Corporate

 

932

 

7

%

827

 

7

%

n/a

 

n/a

 

New Zealand Banking

 

480

 

4

%

417

 

3

%

n/a

 

n/a

 

Mortgages

 

4,487

 

34

%

3,760

 

31

%

n/a

 

n/a

 

Consumer Finance

 

1,052

 

8

%

992

 

8

%

n/a

 

n/a

 

Asset Finance

 

1,091

 

8

%

1,036

 

9

%

n/a

 

n/a

 

ING Australia

 

46

 

0

%

142

 

1

%

n/a

 

n/a

 

Asia Pacific

 

326

 

3

%

281

 

2

%

n/a

 

n/a

 

Treasury

 

455

 

3

%

473

 

4

%

n/a

 

n/a

 

Group Center

 

75

 

1

%

204

 

2

%

n/a

 

n/a

 

Total Income

 

13,023

 

100

%

12,007

 

100

%

n/a

 

n/a

 

 

As published in the September 2002 Company Profile.

 

Gross Revenue (2) (equity standardized) (3)

 

 

 

 

 

 

 

 

 

Personal Banking and Wealth

 

 

 

 

 

 

 

 

 

Management

 

1,376

 

11

%

1,440

 

11

%

Corporate Businesses

 

2,141

 

18

%

2,467

 

19

%

Investment Banking

 

1,527

 

13

%

2,309

 

18

%

Consumer Finance

 

986

 

8

%

896

 

7

%

Mortgages

 

3,760

 

31

%

3,846

 

30

%

Asset Finance

 

1,036

 

9

%

1,071

 

8

%

Small to Medium Business

 

503

 

4

%

473

 

4

%

Other

 

678

 

6

%

322

 

3

%

Total Income

 

12,007

 

100

%

12,824

 

100

%

 


(1)   Comparative Line of Business information for 2001 cannot be provided without unreasonable effort or expense, refer table below for line of business for 2002 and 2001 under previous business structure

(2)   Gross revenue comprises interest income, non-interest income and share of equity accounted investments (refer Note 41 of the Financial Report)

(3)   Economic Value Added EVA(TM) principles are in use throughout the Group, whereby risk adjusted capital is allocated and charged against business units.  Equity standardized profit is determined by eliminating the impact of earnings on each business unit’s book capital and attributing earnings on the business units risk adjusted capital.  This enhances comparability of business unit performance.  Geographic results are not equity standardized

 

20



 

Assets and Gross Revenue by Region

 

Years ended September 30

 

2003

 

 

 

2002

 

 

 

2001

 

 

 

 

 

$M

 

 

 

$M

 

 

 

$M

 

 

 

Region (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Australia

 

151,538

 

77

%

135,050

 

74

%

133,057

 

72

%

New Zealand

 

25,696

 

14

%

23,799

 

13

%

22,337

 

12

%

Overseas Markets

 

18,357

 

9

%

24,256

 

13

%

30,099

 

16

%

 

 

195,591

 

100

%

183,105

 

100

%

185,493

 

100

%

Gross Revenue (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Australia

 

9,508

 

73

%

8,697

 

72

%

9,012

 

70

%

New Zealand

 

2,149

 

17

%

1,917

 

16

%

2,011

 

16

%

Overseas Markets

 

1,366

 

10

%

1,393

 

12

%

1,801

 

14

%

 

 

13,023

 

100

%

12,007

 

100

%

12,824

 

100

%

Net profit before tax

 

 

 

 

 

 

 

 

 

 

 

 

 

Australia

 

2,371

 

72

%

2,391

 

74

%

2,160

 

78

%

New Zealand

 

495

 

15

%

456

 

14

%

395

 

14

%

Overseas Markets

 

411

 

13

%

376

 

12

%

228

 

8

%

 

 

3,277

 

100

%

3,223

 

100

%

2,783

 

100

%

 


(1)   For discussion of operating results by region see “Operating and Financial Review and Prospects - Results by Region”

(2)   Gross revenue comprises interest income and non-interest income

 

Supervision and Regulation

 

Australia

 

Our operations are regulated in each country in which we operate.  The supervisory framework in Australia covering Australian banks is largely compliant with the Basel core principles for effective banking supervision.  The Australian Prudential Regulation Authority (“APRA”) has responsibility for the prudential and regulatory supervision of Australian banks, Credit Unions, Building Societies, other Authorized Deposit-Taking Institutions (“ADI’s”), Insurance Companies and Superannuation Funds.  The Reserve Bank of Australia (“RBA”) has the responsibility for the supervision of the payments system in Australia.  The RBA has the power to inject liquidity into the financial system, in the event of financial disruption, whatever the cause.  On advice from APRA, the RBA can provide a lender of last resort facility to a solvent bank that has encountered liquidity constraints.

 

APRA discharges its responsibilities by requiring banks subject to its supervision to conform to a set of prudential standards and to regularly provide it with reports which set forth a broad range of information, including financial and statistical data relating to their financial position and information in respect of prudential and other matters.

 

In its supervision of banks, APRA gives special attention to capital adequacy, liquidity, earnings, loan loss experience, concentration of risks, the maturity structure of assets and liabilities, large exposures, potential exposures through equity investments, funds management and securitization activities and international banking operations.  APRA may also exercise certain investigative powers if a bank fails to provide information about its financial condition or becomes unable to meet its obligations or suspends payment.

 

In carrying out its supervisory role, APRA supplements its analysis of statistical data collected from banks with selective “on site” visits and formal meetings with banks’ senior management and external auditors.  APRA has also formalized a consultative relationship with each bank’s external auditors.  The external auditors provide additional assurance that prudential standards set by APRA are being observed, and that statutory and other banking requirements are being met.  External auditors also undertake targeted reviews of specific risk management areas as selected at the annual meeting between the bank, its external auditors and APRA.  In addition, each bank’s Chief Executive Officer attests to the adequacy and operating effectiveness of the bank’s management systems to control exposures and limit risks to prudent levels.

 

21



 

A bank may not enter into any agreement or arrangement for the sale or disposal of its business or carry on business in partnership with another bank without the consent of the Treasurer of the Commonwealth of Australia (“the Treasurer”).

 

Although the Reserve Bank of Australia (RBA) has the authority, with the approval of the Treasurer, to set interest rates paid or charged by banks, this authority is not currently being exercised.

 

Bank Liquidity

 

Liquidity is regulated by APRA through individual agreements with each bank which take into consideration the specific operations of each organization.  APRA requires that banks have a comprehensive liquidity policy statement which defines the guidelines and systems for managing domestic and foreign currency liquidity.  This statement must be approved by the Board of Directors.  A bank’s liquidity management policy should cater for a range of potential conditions and APRA requires each bank’s liquidity risk to be assessed under two specific scenarios.  The first scenario is known as the “going-concern” and refers to the normal behavior of cash flows in the ordinary course of business and forms the day-to-day focus of a bank’s liquidity management.  The second scenario, known as the “short term crisis”, covers the behavior of cash flows where there is a problem (real or perceived) which may include operational problems, doubts about the solvency of a bank or adverse rating changes.  APRA expects a bank to have sufficient liquidity to keep operating for at least 5 business days.

 

Banks must supply APRA with a monthly return which details the projected future cash flows under both the “going concern” and “short term crisis” scenarios.  The latter must include maturity profiles out to 5 business days based on assumptions agreed with APRA.  Banks are required to consult with APRA before making any significant changes to the assumptions underlying these reports.

 

Where APRA is not satisfied with the adequacy of an ADI’s liquidity management strategy, or where it has particular concerns about an ADI’s liquidity, it can direct the ADI to hold specified amounts of liquid assets such as cash and certificates of deposit.

 

Banks operate Exchange Settlement Accounts with the RBA.  These accounts are used primarily for liquidity management purposes by banks.  Prior to October 1, 1997 the RBA paid an interest rate on balances in Exchange Settlement Accounts of 10 basis points under the cash rate.  Effective from that date, the RBA reduced the interest payable on these balances to 25 basis points below the cash rate.

 

Associations with Related Entities

 

APRA requires that ADI’s are to take account of risks associated with the related parties in the group of which they are a member and are not exposed to excessive risk as a result of their associations with related entities.

 

Associations and dealings by an ADI with their related entities may give rise to contagion risk, or the possibility that problems arising in other group members may compromise the financial and operational position of the ADI.  To this end, an ADI is required to manage and monitor the level of contagion risk so that this is kept at a modest level.  Various rules are imposed by APRA to ensure contagion risk is controlled including:

 

                  comprehensive policies and procedures for managing and monitoring risk are in place (this must also be advised to APRA, with the ADI’s Chief Executive attesting to the identification, adequacy and operating effectiveness of risk management policies, systems and procedures);

 

                  dealings with related entities are transparent and controlled with prudent exposure limits in place (APRA has set specific prudential limits on intra-group exposures).  Unlimited exposures and cross default clauses triggering a possible default of the ADI in its obligations are not to be held.  Effectively the ADI’s dealings with the related entities should not be for the prime purpose of supporting the related entities business;

 

                  separation and disclosure rules covering badging and product distribution arrangements to ensure the ADI is not linked to the fortunes of other entities in the group; and

 

                  participation by the ADI and related entities in common group operations.

 

22



 

The APRA prescribed specific prudential limits on intra-group exposures are set on the exposures of an ADI to related parties or, where applicable, of an Extended Licensed Entity (ELE) to related parties which do not form part of the ELE. An ELE is defined as consisting of the ADI and all APRA approved ADI subsidiaries which are effectively operated as a division of the ADI, though the subsidiaries are separate legal entities. The limits are as follows:

 

                  Exposures of an ADI or ELE to related ADI’s (including overseas based equivalents) being limited to:

 

                  50% of the ADI’s Level 1 capital base on an individual related ADI exposures basis; and

 

                  150% of the ADI’s Level 1 capital base on an aggregate exposure basis to all related ADI’s.

 

                  Exposures of an ADI or ELE to other related parties (ie non-related ADI’s captured above) being limited to:

 

                  25% of the ADI’s Level 1 capital base where the exposure is to any other regulated related entity (ie any related entity other than an ADI or overseas based equivalent directly regulated by APRA or by a foreign equivalent) not captured above;

 

                  15% of the ADI’s Level 1 capital base where the exposure is to an unregulated related entity; and

 

                  35% of the ADI’s Level 1 capital base on an aggregate exposure basis to all other related parties.

 

Any proposed exposures in excess of the APRA prescribed prudential limits on intra-group exposures, are subject to APRA approval. ADI’s are subject to reporting requirements covering intra-group exposures.

 

ANZ reports on an ELE basis and manages and complies with all requirements above.

 

Capital Adequacy

 

APRA imposes guidelines for the capital adequacy of banks as an essential part of its prudential supervision of ADI’s.

 

APRA assesses an ADI’s financial strength by measuring its capital adequacy on both a stand-alone and a group basis. The stand-alone, or Level 1, basis only includes the ADI. The group, or Level 2, basis includes the ADI and all its consolidated subsidiaries. Level 1 and 2 assessments are applicable to all ADI’s and the capital adequacy measurement is based on the Basel Capital Accord. APRA also requires a capital adequacy measurement at a third level if an ADI is part of a “conglomerate group.” APRA has defined a conglomerate group as a group of companies containing one or more locally incorporated ADI’s and may include non-financial as well as financial entities. Level 3 assessments apply only to ADI’s prescribed by APRA and the capital adequacy measurement is based on a methodology agreed with APRA.

 

APRA has prescribed that ANZ is not required to measure its capital adequacy at Level 3.

 

Under the existing APRA guidelines, balance sheet assets and off-balance sheet exposures are assessed according to broad categories of relative credit risk, based largely on the nature of the asset or counterparty.

 

There are four categories of risk weights (0%, 20%, 50%, 100%) applied to the different types of assets or counterparties. Mortgage lending over residential property to individual borrowers is risk weighted at 50%, including mortgage lending with a loan to valuation ratio over 80% which is insured through an acceptable lenders mortgage insurer.

 

Off-balance sheet exposures are taken into account by applying different categories of credit conversion factors to arrive at credit equivalent amounts, which are then weighted in the same manner as balance sheet assets according to the counterparty.

 

Effective January 1, 1998, APRA required banks to measure and apply capital charges in respect of their market risks arising from their trading and commodity positions, in a manner which is broadly consistent with the January 1996 Basel Committee amendment to its Capital Accord. In measuring their market risks, banks have a choice of two methods. The first alternative is to measure risks in a standardized manner defined by APRA. The second alternative allows banks to utilize their internal risk measurement systems subject to APRA approval. ANZ applies the second approach.

 

Capital, for APRA supervisory purposes, is classified into two tiers, referred to as Tier 1 and Tier 2. APRA requires all ADI’s to maintain a minimum ratio of capital to risk-weighted assets of 8 per cent, at least half of which must be maintained in the form of Tier 1 capital. APRA has not indicated that it has any plans to allow Australian ADI’s to employ a third tier of capital, which would consist of short term subordinated notes, to meet a proportion of the market risk capital requirements. APRA will consider other risk factors that have not been incorporated or accounted for quantitatively in the framework when assessing the overall capital adequacy of an ADI. Where it is judged appropriate, APRA may require individual ADI’s to maintain a minimum capital ratio above 8 per cent.

 

23



 

Tier 1 or “core” capital, consists of paid up ordinary share capital, general reserves, retained earnings, current year’s earnings net of expected dividends and tax expenses, non-cumulative preference shares not redeemable at the holders’ option (as approved by APRA) together with minority interests but excludes retained earnings and reserves of subsidiaries and associates that are not consolidated for capital adequacy purposes. Tier 1 must constitute at least 50% of the capital base requirements. In June 1999, APRA expanded the definition of Tier 1 capital to include innovative equity instruments (as approved by APRA). Innovative equity instruments include capital instruments which are a permanent and unrestricted commitment of funds, are available to absorb losses, have no fixed servicing obligations and are subordinated to the interests of depositors and other creditors. The maximum innovative equity instruments allowed to be included in Tier 1 capital is 25% of the sum of paid up capital, general reserves, retained earnings, current year’s earnings net of expected dividends and tax expenses and minority interests. Any excess amount is eligible as Upper Tier 2 capital. Provision has also been made so that capital instruments issued via special purpose vehicles may be eligible for inclusion in Tier 1 capital.

 

ANZ also reports Adjusted Common Equity as a percentage of risk weighted assets. Adjusted Common Equity is defined as Tier 1 capital less preference shares translated at current rates and deductions from total capital (see below).

 

Tier 2 capital consists of general allowance for loan losses, asset revaluation reserves, certain cumulative irredeemable preference shares, mandatory convertible notes and similar capital instruments, and subordinated and perpetual debt. The contribution made to the overall capital adequacy ratio by Tier 2 capital cannot exceed that made by Tier 1 capital. Certain categories of Tier 2 capital, including term (as distinct from perpetual) subordinated debt, are not counted towards qualifying capital to the extent that they exceed 50% of Tier 1 capital.

 

In order for subordinated debt securities issued by ANZ to qualify as Tier 2 for capital adequacy purposes, further approvals from APRA may be required, and APRA may require other terms and conditions to the issue of such subordinated debt securities to be satisfied.

 

Deductions from Capital (as required by APRA)

 

Deductions (as required by APRA) from Tier 1 Capital comprise:

 

                  Future income tax benefits (other than those associated with general allowance for loan losses), net of any provision for deferred income tax;

 

                  Unamortized goodwill and any other intangible assets, including the intangible component of investments;

 

                  Investments in and any other forms of credit support provided to associated lenders mortgage insurers;

 

                  Retained earnings and reserves of subsidiaries and associates that are not consolidated for capital adequacy purposes (ie funds management and insurance entities).

 

Deductions from total capital comprise:

 

                  ADI’s tangible investments in non-consolidated financial entities, and tangible investments in entities involved in funds management, insurance and securitization activities;

 

                  Strategic cross-ADI shareholdings (including those strategic shareholdings in equivalent deposit taking institutions in overseas countries);

 

                  Any non repayable loans advanced by an ADI under APRA’s certified industry support arrangements; and

 

                  Any undertakings by an ADI to absorb designated first level of losses on claims supported by it (eg; first loss facilities associated with funds management and the securitization of assets).

 

ANZ’s capital adequacy ratio was 11.1% (including 7.7% of Tier 1 Capital) at September 30, 2003, compared with 9.5% at September 30, 2002, and 10.3% at September 30, 2001.

 

APRA may from time to time vary the capital adequacy ratios, which it sets for individual banks subject to its supervision. For further information on our capital adequacy, see “Operating and Financial Review and Prospects-Capital”.

 

24



 

Equity Holdings

 

Individual equity investments by ADI’s are subject to the following requirements:

 

(i) ADI’s must consult with APRA prior to:

 

                  Committing to any proposal to acquire more than 10% equity interest in an entity that operates in the field of finance:

 

                  Establishing or acquiring a subsidiary (other than an entity which is purely used as a special purpose financing vehicle for the ADI):

 

                  Taking up an equity interest in an entity arising from the work-out of a problem exposure which:

 

                  Exceeds 0.25% of the consolidated ADI’s Tier 1 capital; or

 

                  Results in the ADI acquiring more than 10% equity interest in the entity; or

 

                  Results in the ADI’s aggregate investment in non-subsidiary entities which are not operating in the field of finance to exceed more than 5% of the consolidated ADI’s Tier 1 capital.

 

(ii) ADI’s must report all other equity investments to APRA not subject to (i) retrospectively.

 

(iii) For equity investments by an ADI in non-subsidiary entities that are not operating in the field of finance exceeding

 

                  0.25% the consolidated ADI’s Tier 1 capital for an individual investment or

 

                  5% of the consolidated ADI’s Tier 1 capital in aggregate the excess above these limits must be deducted from the ADI and consolidated ADI’s Tier 1 capital for capital adequacy calculation purposes.

 

These restrictions do not apply to equity holdings held within a trading portfolio.

 

Large Credit Exposures

 

APRA requires banks to report large credit exposures in terms of the consolidated group (ie the bank and its subsidiaries). Banks must consult with APRA before committing to any exposure (includes claims and commitments recorded on and off balance sheet) to any individual counterparty or group of related counterparties which will exceed 10% (subject to exceptions) of the capital base of the consolidated group. Banks are required to report quarterly to APRA the largest 10 exposures and all those exceeding or equal to 10% of the consolidated capital base. ANZ reported largest 10 exposures to 3 Government bodies, 5 Corporates, and 2 Bank counterparties as at September 30, 2003. Their respective ratings are as follows:

 

                  One Bank - S&P rating A+, Moody’s rating A1

 

                  One Bank - S&P rating AA-, Moody’s rating Aa3

 

                  Three Government bodies - S&P rating Aaa, Moody’s rating AAA

 

                  One Corporate - S&P rating AAA, Moody’s rating Aaa

 

                  One Corporate - S&P rating AA-, Moody’s rating Aa3

 

                  One Corporate - S&P rating AAA, Moody’s rating Aa1

 

                  One Corporate - S&P rating A+, Moody’s rating A2

 

                  One Corporate - Not externally rated

 

25



 

Possible Future Developments

 

APRA issued a policy discussion paper in June 2003 on the deduction of intangible assets, specifically capitalized expenses, from Tier 1 Capital. APRA has proposed that the following capitalized expenses will be deducted from Tier 1 capital from July 1 2004:

 

1. Loan / lease origination fees and commissions paid to originators and brokers;

 

2. Securitization establishment costs;

 

3. Costs associated with debt / capital raisings; and

 

4. Other generic capitalized expenses, such as those in the nature of:

 

a. transformation costs; and

 

b. business development initiatives.

 

The impact on ANZ’s capital adequacy ratios as at September 30, 2003 would have resulted in a minor reduction to the Tier 1 and Total Capital ratios to approximately 7.5% and 10.9% respectively.

 

Basel

 

In January 2001, the Basel Committee on Banking Supervision issued a set of consultative papers detailing a new capital adequacy framework. The papers set out proposals to update the 1988 Accord, and establish the risk management and regulatory capital calculation framework for bank regulators around the world. When adopted, the proposals will amplify the influence of credit opinions from agencies such as Standard & Poor’s and Moody’s Investors Services and, for banks with more advanced internal risk grading and risk management practices and processes, provide the opportunity to use internal credit ratings. Once adopted, these developments will mean regulatory capital holdings are a more accurate reflection of the risk profile of a bank’s loan portfolio, market related and operational activities.

 

Since January 2001, the Basel Committee have progressively released a number of working papers, refining the content of the original documents. A final version of the consultative papers is now expected by June 2004, with implementation of the new proposals expected by the end of 2006.

 

Payment System Reforms In Australia

 

The first two stages of a package of credit card reforms introduced by the Reserve Bank of Australia (RBA) are in place. From January 1, 2003, merchants have been able to charge an additional fee for credit card transactions. From October 31, 2003 a cost-based approach to calculating interchange fees has applied. Interchange fees are wholesale fees that banks pay one another. This has significantly reduced interchange fees. Changes to credit card product offerings already in place will to some extent mitigate the impact on the Group. ANZ estimates that the impact of interchange reductions on earnings after tax will be no greater than $40 million in 2004.

 

The final stage of credit card reforms will allow non-banks to issue credit cards and acquire credit card transactions. APRA released its standards for public comment in July 2003 and a date for commencement of the regime has yet to be announced.

 

Australian Deposit Taking Institutions have applied to the Australian Competition and Consumer Commission (ACCC) to authorize EFTPOS interchange fees to be set to zero. In its draft decision, the ACCC denied the application; a final decision is expected before the end of 2003.

 

CLERP 9

 

The CLERP 9 Bill will be introduced into the Australian parliament by the end of 2003.

 

The government aims to improve the operation of the market by promoting transparency, accountability and shareholder activism and the Bill proposes a range of measures designed to enhance audit regulation and the general corporate disclosure framework.

 

The reforms particularly target the areas of auditing standards, fundraising, directors’ duties, takeovers and financial services by including measures that target auditor independence, enforcement arrangements, disclosures to shareholders and enforcement arrangements to support continuous disclosure, including the introduction of civil penalties.

 

The Parliament is likely to debate the Bill in the first half of 2004 and the government hopes for passage in time for a July 1, 2004 implementation date.

 

26



 

ANZ does not expect the CLERP 9 reforms to have a material affect on our business.

 

New Zealand

 

The supervision of registered banks in New Zealand is carried out by the Reserve Bank of New Zealand pursuant to the Reserve Bank of New Zealand Act 1989. The Reserve Bank of New Zealand’s principal statutory purpose in exercising its supervisory powers is to promote the maintenance of a sound and efficient financial system and to avoid significant damage to the financial system that could result from the failure of a registered bank.

 

The Reserve Bank of New Zealand generally imposes uniform conditions of registration to ensure a level playing field among registered banks. A key element of this uniformity is the ongoing minimum capital adequacy ratio requirements imposed on registered banks by the Reserve Bank of New Zealand. The Reserve Bank of New Zealand requires each registered bank to have a capital ratio of at least 8% of the group’s credit exposures, on a risk-weighted basis. Within this 8% requirement, a banking group’s Tier 1 capital (which is equity or its equivalent) must be at least 4% of the group’s risk-weighted exposures.

 

The Reserve Bank of New Zealand, its system of supervision places emphasis on a financial disclosure regime. Every quarter, each registered bank must publish what is known as a general disclosure statement, which outlines its financial position and performance so that customers and depositors can make an informed decision about the level of risk attaching to an individual bank.

 

Neither the New Zealand Government nor the Reserve Bank of New Zealand guarantees banks or bank deposits and there is no deposit insurance in New Zealand.

 

As a result of changes made in August 2003 to the Reserve Bank of New Zealand Act 1989, a person must obtain the written consent of the Reserve Bank of New Zealand before giving effect to a transaction resulting in that person acquiring a “significant influence” over a registered bank.

 

“Significant influence” means the ability to appoint 25% or more of the board of directors of a registered bank or a qualifying interest (e.g. legal ownership) in 10% or more of its voting securities.

 

In assessing applications for consent to acquire a significant influence over a registered bank, the Reserve Bank of New Zealand will have regard to the same matters as are relevant in assessing an application for registration as a registered bank. In giving its consent, the Reserve Bank of New Zealand may impose such terms and conditions as it thinks fit.

 

The Reserve Bank of New Zealand has stated that a systematically important bank in New Zealand (which includes both ANZ Banking Group (New Zealand) Limited and NBNZ) must be able to operate as a going concern if one of its service providers, including its parent company, fails. The Reserve Bank of New Zealand’s approach is directed at ensuring that each bank operating in New Zealand has effective control of its core procedures, systems and senior staff, so that each bank may continue operating as a going concern.

 

The Reserve Bank of New Zealand has indicated that this going concern requirement will not necessarily preclude the adoption and use by NBNZ of ANZ’s policies, procedures and systems. However, the amalgamation of NBNZ with ANZ Banking Group (New Zealand) Limited is likely only to be able to proceed if the Reserve Bank of New Zealand is satisfied that the amalgamated entity can continue to operate on a stand alone basis. It is likely that over time the Reserve Bank of New Zealand’s requirement for local banks to be self sufficient in this regard will apply to all registered banks in New Zealand and, accordingly, would apply to both ANZ Banking Group (New Zealand) Limited and NBNZ were they not to amalgamate or otherwise combine operations.

 

United States

 

On October 26, 2001, the President signed into law H.R. 3162, the USA PATRIOT Act (the “Act”), which contains strong measures to prevent, detect, and prosecute terrorism and international money laundering. Title III of the Act is the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. It includes numerous provisions for fighting international money laundering and blocking terrorist access to the U.S. financial system. The Act is far-reaching in scope, covering a broad range of financial activities and institutions.

 

The provisions affecting banking organizations are generally set forth as amendments to the Bank Secrecy Act (“BSA”). These provisions relate principally to U.S. banking organizations’ relationships with foreign banks and with persons who are resident outside the United States. The BSA, which generally applies to insured depository institutions as well as to the U.S. branches and agencies of foreign banks, does not immediately impose any new filing or reporting obligations for banking organizations, but requires certain additional due diligence and recordkeeping practices. Some requirements take effect without the issuance of regulations. Other provisions have been implemented through regulations promulgated by the U.S. Department of the Treasury, in consultation with the Federal Reserve Board and the other federal financial institutions’ regulators.

 

27



 

Following the passage in March 2000 of the Gramm-Leach-Bliley Act of 1999 (“GLB”, also known as the Financial Modernization Act), ANZ successfully applied to the Federal Reserve Bank and became a Financial Holding Company (“FHC”). As a FHC, ANZ is allowed to engage in financial activities that are financial in nature or incidental, or complementary to financial activities, as determined by the Federal Reserve Bank and the Secretary of the Treasury Department. This legislation provides a clearer method for future integration of banks with other financial businesses and allows the Bank to enter into other new business lines for the first time.

 

Under this legislation, the FHC is subject to restrictions if it were determined that the FHC is not “well managed” or “well capitalized”. In addition, under the GLB, the Federal Reserve Bank is the “umbrella” supervisor with jurisdiction over the FHCs.

 

Under the GLB’s new requirements, the Office of the Comptroller of the Currency (“Comptroller”) will continue to oversee, as “primary regulator,” foreign banks having a federal branch in the United States. Therefore, the ANZ New York Branch will continue to be subject to supervision, examination and extensive regulation by the Comptroller and the International Banking Act of 1978 (the “IBA”), along with the regulations adopted pursuant to the IBA. The IBA provides, among other things, that a federal branch of a foreign bank can exercise the same rights and privileges that are available to national banks. In addition, the exercise of any such right or privilege must be subject to the same duties, restrictions, penalties, liabilities, conditions and limitations that apply to national banks at the same location. The Comptroller also imposes a required “capital equivalency” deposit to a federal branch, which must be maintained on deposit with a Federal Reserve member bank (or invest in qualifying securities as authorized by the Comptroller). The amount of this deposit should be not less than 5% of the total liabilities (excluding, among other things, liabilities to affiliates) of the federal branch. In addition, a federal branch is subject to the record-keeping and reporting requirements that apply to national banks. The branch must maintain its accounts and records separate from those of the foreign bank and must comply with such additional requirements as may be prescribed by the Comptroller. In addition to the above deposit requirement, Regulation D of the Federal Reserve Bank imposes uniform reserve requirements to all institutions (including a federal branch) with transaction accounts or non-personal time deposits. The Regulation defines such deposits and requires reports of deposits to the Federal Reserve.

 

Under the IBA, a federal branch of a foreign bank is subject to the receivership provisions to the same extent as a national bank. The Comptroller may take possession of the business and property of a federal branch. Accordingly, the Comptroller has at its disposal a wide range of supervisory and enforcement tools addressing violations of laws and regulations and breaches of safety and soundness, which can be used against federal branches. The Comptroller may remove federal branch management and assess civil money penalties. In certain circumstances, the Comptroller may also terminate a federal branch license at its own initiative or at the recommendation of the Federal Reserve Board.

 

Also under the IBA, the branch is subject to certain restrictions with respect to opening new domestic deposit-taking branches and establishing or acquiring subsidiary banks in states outside of our “home-state” of New York.

 

Other Countries

 

Local banking operations in all of ANZ’s offshore branches and banking subsidiaries are subject to host country supervision by their respective regulators.

 

Competition

 

The Australian banking system is highly competitive. In September 2003, the four major banking groups in Australia (being ANZ, Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation, together with their respective banking subsidiaries), held approximately 70% of the total Australian assets of banks that carry on business in Australia. Each of these four banking groups operates a nationwide branch network and, at September 30 2003, they collectively operated approximately 70% of the total number of bank branches in Australia. The operations of the smaller regional banks are typically limited to servicing customers in a particular State or region with particular emphasis on residential mortgage lending.

 

The deregulation of the Australian financial system during the early 1980s led to a proliferation of financial institutions that compete in selected markets with the four major banks. Non-bank financial intermediaries such as building societies and credit unions compete principally in the areas of accepting deposits and residential mortgage lending, mainly for owner-occupied housing. Some large building societies were granted banking authorizations under the Banking Act 1959. Specialist non-bank residential mortgage lenders and direct (non-branch) banking operations have become more prominent in recent years.

 

28



 

Competition is particularly intense in the housing lending market, which has been largely driven in recent times by the rise of mortgage originators, and more recently, growth of the mortgage broker industry. Broker originated loans now account for between 30%-40% of all transactions in the Australian marketplace. Most banks have embraced broker-originated business whilst continuing efforts to grow market share in the traditional network channel.

 

Our Consumer Finance business offers credit card products and personal loans in Australia. In a highly competitive market ANZ holds a strong position, accounting for around 26%-28% of all credit card spending in Australia. Reforms recently introduced by the RBA, which allow merchants to recover the costs of accepting credit cards, determine objective cost-based benchmarks for setting interchange fees and liberalize access to the schemes, are designed to increase competition further in this market.

 

ANZ’s Esanda and UDC businesses offer a range of personal finance products in Australia and New Zealand. The businesses hold leading market positions in motor vehicle and equipment finance. The highly competitive nature of this business in both countries has seen a period of rationalization in recent years that has resulted in a number of our peers divesting their personal finance operations to non-banking institutions.

 

Institutional Financial Services (“IFS”) offers a wide range of financial market services to our large corporate and institutional customer base including: foreign exchange, derivative and fixed interest activities, project and structured finance, corporate finance (mergers and acquisitions, and other advisory), primary markets origination and syndication and leasing finance. Competitors gain recognition through the quality of their client base, perceived skill sets, reputation and brands. In domestic markets, IFS’s competitors are generally either international investment banks operating in niche markets, the boutique operations of large multi-national banking conglomerates or domestic investment banks with a focus on niche areas. IFS’ key competitive strength is its focused geographic and sector experience, league table rankings and its established client base.

 

ANZ’s Corporate segment offers traditional relationship management to both its Corporate (A$10m to A$100m turnover) and Small to Medium Enterprise (A$50k Funds Under Management to A$5m turnover) businesses as well as sophisticated financial solutions to it larger clients. ANZ has a strong market share in the Corporate market that is dominated by the major Australian banks. Recent growth in the SME market has seen competition intensify amongst the major and regional banks in an attempt to increase market share. ANZ’s share of this market has increased in recent periods.

 

The funds management industry is an area of strong competition among the four major banks and Australia’s insurance companies. Competition has increased as the Australian Government has encouraged long-term saving through superannuation by means of taxation concessions and the imposition of a mandatory superannuation guarantee levy on employers. In May 2002, ANZ commenced operations of the joint venture with the ING Australia Group to create a larger and more competitive organization in wealth management.

 

On October 24, 2003, ANZ announced that it had purchased The National Bank of New Zealand from Lloyds TSB Group plc. Combined with ANZ’s existing New Zealand operations the amalgamated entity will hold an approximate 40% market share, and will be the leading player in all market segments of the New Zealand banking market. We compete in New Zealand with the Bank of New Zealand (a wholly-owned subsidiary of National Australia Bank Limited), Westpac Trust Corporation (a wholly owned subsidiary of Westpac Banking Corporation), ASB Bank Limited (a subsidiary of Commonwealth Bank of Australia) and others.

 

29



 

Item 5: Operating and Financial Review and Prospects

 

Results for 2003, 2002 and 2001

 

The following discussion is based on the Financial Statements and accompanying notes as prepared under Australian GAAP and set out in the Financial Report. Note 54 to the Financial Report discusses the differences between Australian GAAP and US GAAP, and their impact on our net profit, shareholders’ equity and total assets.

 

The analysis that follows discusses results after income tax unless otherwise stated. In prior periods, abnormal items were reported separately, and the analysis discusses results after income tax and abnormal items. Since 2000, under Australian GAAP, abnormal items are not allowed to be disclosed separately. In past years abnormal items were defined as items of revenue or expense which, although attributable to the ordinary operations of the business entity, were considered to be abnormal by reason of their size and/or effect on the results of the business entity for the period.

 

Overview

 

We consider that many factors may affect our financial condition and results of operations. The following factors are of particular importance.

 

The state of the economies in the countries in which we operate, in particular Australia and New Zealand, influences our profitability. Such factors as the level of economic growth, unemployment levels and the state of consumer confidence all have a bearing upon our profitability.

 

Our profitability is influenced by the level of interest rates and by fluctuations in rates. Net interest income is a function of the earning rate on lending and investing and the cost of borrowed funds. The extent to which lending and funding are not matched, particularly with regard to repricing profiles, can also impact our interest earnings.

 

In 2003, 27% (2002: 28%) of our gross revenue was derived from countries outside Australia. Movements in foreign currencies against the Australian dollar will therefore affect our earnings through the translation of overseas profits to Australian dollars.

 

We face substantial competition in all our markets, particularly Australia and New Zealand. Competition affects our profitability in terms of reduced interest rate spreads and the volume of new lending. See “Information on the Company - Competition”.

 

Our operations are impacted by government actions such as exchange controls, and changes to taxation and government regulations in the countries in which we operate. Our operations in most countries depend on the continuing availability of banking licenses issued by applicable governments. In Australia, in addition to the competition rules overseen by the Australian Competition and Consumer Commission (“ACCC”), there is a prohibition of merger between any of the four major banks in Australia by the Commonwealth Government of Australia. There is no change anticipated to this prohibition in the near term.

 

Finally, our operations are also constrained by community pressures, most notably in Australia, in keeping fee income, interest rate increases and branch rationalization to acceptable levels.

 

Changes in Accounting Policy

 

AASB 1044, Provisions, Contingent Liabilities and Contingent Assets became effective for the Group from October 1, 2002. Under the new Standard, provision for dividends cannot be booked unless dividends are declared, determined or publicly recommended on or before balance date. Accordingly the dividend applicable to the current reporting period has not been booked in this report. However, dividends declared after balance date still need to be disclosed in the notes. The adoption of AASB 1044 results in an increase in Shareholders’ Equity of $777 million at September 30, 2003. The Group will continue its current practice of making a public announcement of the dividend after balance date. Dividend information for the current period is provided in Note 7, Dividends.

 

AASB 1012, Foreign Currency Translation became effective for the Group from October 1, 2002. Under this revised Standard foreign denominated equity must be reported using the spot rate applicable at the date of issue and not be retranslated using the spot rate at the end of each reporting period. The Group has retranslated its USD preference share capital to the historical spot rates. As the translation adjustment is reported in the foreign currency translation reserve the impact of these changes are neutral on equity.

 

30



 

Operating Results

 

Our results for the past three years are summarized below and are discussed under the headings of “Analysis of Major Income and Expense Items”, “Results by Line of Business”, and “Results by Region”, which follow.

 

Years ended September 30

 

2003

 

2002

 

2001

 

 

 

$M

 

$M

 

$M

 

 

 

 

 

 

 

 

 

Australian GAAP

 

 

 

 

 

 

 

Net interest income

 

4,311

 

4,018

 

3,833

 

Allowance for loan losses charge

 

(614

)

(860

)

(531

)

Net interest income after allowance for loan losses charge

 

3,697

 

3,158

 

3,302

 

Non-interest income

 

2,808

 

2,970

 

2,573

 

Net operating income tax

 

6,505

 

6,128

 

5,875

 

Other operating expenses

 

(3,228

)

(2,905

)

(3,092

)

Operating profit before income tax

 

3,277

 

3,223

 

2,783

 

Income tax expense

 

(926

)

(898

)

(911

)

Operating profit after income tax

 

2,351

 

2,325

 

1,872

 

Outside equity interest

 

(3

)

(3

)

(2

)

Net profit attributable to shareholders of the company

 

2,348

 

2,322

 

1,870

 

US GAAP

 

 

 

 

 

 

 

Operating profit attributable to ANZ shareholders

 

2,380

 

2,097

 

1,796

 

 

Analysis of Significant Items

 

ANZ believes that the exclusion of significant transactions provides investors with a measure of the performance of the operating business without the distortion of one-off gains and losses. The table below shows the impact of the significant items on our Operating Results for the past three years. Significant items are shown individually and also shown geographically for Australia and New Zealand.

 

 

 

2003

 

2002

 

2001

 

 

 

$M

 

$M

 

$M

 

Profit excluding profit after tax from sale of businesses to joint venture, NHB recovery and additional allowance for loan losses charge

 

 

2,168

 

 

Additional allowance for loan losses charge after tax

 

 

(175

)

 

 

 

 

 

 

 

 

 

Recovery from NHB litigation after tax

 

 

159

 

 

 

 

 

 

 

 

 

 

Profit from sale of Australian businesses to ING Australia joint venture after tax

 

 

138

 

 

Australian significant transactions

 

 

122

 

 

Profit from sale of New Zealand businesses to ING Australia joint venture after tax

 

 

32

 

 

Net profit attributable to shareholders of the company

 

 

2,322

 

 

 

31



 

Australia and New Zealand Banking Group Limited recorded a profit after tax of $2,348 million for the year ended September 30, 2003, an increase of 1% over the September 2002 year. Earnings per ordinary share were 1% higher at 148.3 cents, and return on ordinary shareholders’ equity was down from 23.2% to 20.6%.

 

Net profit and loss

 

Profit after tax for the 2003 year was $2,348 million, an increase of 1% over the September 2002 year. Excluding one-off significant transactions in 2002, there was an 8% increase over the September 2002 year. Key influences on the operating result for the year were:

 

                  Growth of 7% in net interest income. Average net lending assets grew by $13.6 billion (10%) overall, with growth of $10.8 billion (18%) in Mortgages, $1.6 billion in Corporate and $0.8 billion in Asset Finance. Net lending asset volumes reduced 15% in overseas markets as a result of the strategy to reduce higher risk exposures in the UK and US and the exchange rate impact of a strengthening Australian dollar. Average deposits and other borrowings grew $13.5 billion, in Treasury ($3.2 billion), Personal Banking Australia ($4.2 billion), Institutional Financial Services ($2.7 billion), New Zealand Banking (NZ $0.8 billion), Asset Finance ($0.8 billion) and Corporate ($1.6 billion). The deposit growth was encouraged by uncertainty in global equity markets.

 

Net interest margin contracted by 10 basis points:

 

                  The funding cost associated with unrealized trading gains increased as a result of the appreciation of the AUD. Whilst resulting in a 3 basis point decline in net interest margin, it is offset by an equivalent gain in trading income.

 

                  Net interest income in Treasury fell by $45 million with maturing high yielding assets not able to be replaced due to the sustained period of low and stable interest rates (3 basis points).

 

                  The interest benefit from low interest savings accounts and non-interest bearing balances reduced as the rate at which they were invested reduced (3 basis points).

 

                  The proportion of the balance sheet funded by low interest savings accounts and non-interest balances reduced during the year, offset by an increase in term deposits and wholesale funding. This change in funding mix reduced the net interest margin by 5 basis points.

 

                  Partially offsetting these declines was an increase in foreign currency hedge revenue as a result of the strengthening AUD (3 basis points) and a reduction in the funding cost on impaired assets (1 basis point).

 

                  Non interest income reduced 5%. After adjusting to remove the impact of selling the ANZ Funds Management business to ING Australia non interest income increased 5% :

 

                  Lending fees increased $57 million on strong volume growth in Corporate, Asset Finance and Institutional Banking in Australasia.

 

                  Non-lending fees reduced by 3% ($35 million) principally from a $38 million under-accrual of loyalty points on co-branded credit cards in prior years, higher cost of loyalty points and reduced fee revenue from the US and UK structured finance operations.

 

                  Non-fee other income increased by 17% ($102 million), including increased equity accounted income in PT Panin, development property sales in Institutional and higher profit on trading instruments. The latter is principally due to a change in the split of Capital Markets earnings between trading and net interest income.

 

                  Operating expenses increased $323m, 11% compared to 2002. Excluding the 2002 NHB recovery ($248 million) operating expenses increased by $75 million, 2% higher than the full year 2002. After also adjusting for the impact of selling the Funds Management businesses to ING Australia operating expenses increased 4%.

 

                  The Allowance for Loan Loss charge increased by 1%. A 12% growth in net advances was offset by an improvement in overall average credit quality, with an increased proportion of mortgage loans.

 

32



 

Credit Risk

 

The total group allowance for loan loss charge totalled $614 million as compared to a charge of $860 million in 2002. The 2002 charge included an additional allowance for loan losses of $250 million to restore the general allowance for loan losses to an appropriate level.

 

The allowance for loan loss charge to operating segments was lower at $514 million in the year to September 2003 (2002: $538 million). An additional charge of $100 million (7 basis points) was taken to recognize continued uncertainty and expected levels of default in the offshore lending portfolios. Excluding the $250 million additional provision in 2002, the average allowance for loan loss rate decreased over the year to 39 basis points compared to 43 basis points for the September 2002 year.

 

Net specific allowance for loan losses were $527 million, down from $728 million in the September 2002 year. The reduction was mainly due to the absence of large single name losses in the September 2003 year, compared to the September 2002 year where 43% of losses were due to two large amounts in the offshore portfolios. While the Australian and New Zealand portfolio losses remained relatively stable over the year, the international portfolio losses reduced by 52%. Settlement of the Grindlays credit warranties ($27 million) was included in the net specific allowance for loan losses for the 2003 year.

 

Net non-accrual loans were $525 million at September 2003 compared with $628 million at September 2002. New non-accruals of $988 million in the September 2003 year represent a reduction of $297 million compared to the September 2002 year where large single names boosted the level of non-accruals. The Allowance for Loan Loss balance at 30 September 2003 was $1,534 million (1.01% of risk weighted assets), compared with $1,496 million (1.06% of risk weighted assets) at September 30, 2002.

 

33



 

Analysis of Major Income and Expense Items

 

Net interest income

 

The following table analyzes net interest income, interest spread and net interest average margin for Australia, New Zealand and overseas markets. Interest income figures included as part of spread and margin calculations are presented on a tax-equivalent basis.

 

Years ended September 30

 

2003

 

2002

 

2001

 

 

 

$M

 

$M

 

$M

 

Interest income

 

10,215

 

9,037

 

10,251

 

Interest expense

 

(5,904

)

(5,019

)

(6,418

)

Net interest income

 

4,311

 

4,018

 

3,833

 

Average interest earning assets

 

162,154

 

145,920

 

139,301

 

 

 

 

 

 

 

 

 

Australia

 

 

 

 

 

 

 

Gross interest spread adjusted to include interest forgone

 

2.31

 

2.44

 

2.35

 

Interest forgone on impaired assets (1)

 

(0.02

)

(0.04

)

(0.03

)

Net interest spread (2)

 

2.29

 

2.40

 

2.32

 

Interest attributable to net non-interest bearing items

 

0.41

 

0.51

 

0.64

 

Net interest average margin (3)- Australia

 

2.70

 

2.91

 

2.96

 

 

 

 

 

 

 

 

 

New Zealand

 

 

 

 

 

 

 

Gross interest spread adjusted to include interest forgone

 

2.30

 

2.34

 

2.13

 

Interest forgone on impaired assets (1)

 

 

 

(0.03

)

Net interest spread (2)

 

2.30

 

2.34

 

2.10

 

Interest attributable to net non-interest bearing items

 

0.62

 

0.48

 

0.54

 

Net interest average margin (3)- New Zealand

 

2.92

 

2.82

 

2.64

 

 

 

 

 

 

 

 

 

Overseas markets