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Number64RegisteredBankDisclosureStatementFortheyearended30June2017.
DisclosurestatementFortheyearended30June2017ThisDisclosureStatementhasbeenissuedbyKiwibankLimited(the"Bank"or"Kiwibank")fortheyearended30June2017inaccordancewiththeRegisteredBankDisclosureStatements(NewZealandIncorporatedRegisteredBanks)Order2014(asamended)(the"Order").
InthisDisclosureStatement,unlessthecontextrequiresotherwise:"BankingGroup"meansKiwibank'sfinancialreportinggroup,whichconsistsofKiwibank,allofitswhollyownedentitiesandallotherentitiesconsolidatedforfinancialreportingpurposes;andWordsandphrasesdefinedbytheOrderhavethesamemeaningswhenusedinthisDisclosureStatement.
ContentsGeneralmatters1Creditratings6Guarantees7Directors'statement8Historicalsummaryoffinancialstatements9FinancialstatementsIncomestatement10Statementsofcomprehensiveincome10Statementsofchangesinequity11Balancesheet12Cashflowstatement13NotestothefinancialstatementsBasisofpreparation1.
Corporateinformation152.
Basisofaccountingandgeneralaccountingpolicies15Financialperformance3.
Interestincomeandexpense194.
Netgainsonfinancialinstrumentsatfairvalue205.
Netfeeandotherincome206.
Operatingexpenses217.
Taxation22Financialassets–Lending8.
Loansandadvances249.
Impairmentreversals/(losses)onloansandadvances2410.
Assetquality2611.
Concentrationofcreditrisk29Financialassets–Other12.
Cashandcashequivalents3013.
Duefromotherfinancialinstitutions3114.
Available-for-saleassets3115.
Derivativefinancialinstruments32Financialliabilities16.
Duetootherfinancialinstitutions3517.
Depositsandotherborrowings3518.
Debtsecuritiesissued3619.
Subordinateddebt37Financialinstrumentdisclosures20.
Financialinstruments3821.
Offsettingfinancialassetsandliabilities4422.
Creditexposureconcentrations4523.
Concentrationoffunding4624.
Transfersoffinancialassets47Non-financialassetsandliabilities25.
Intangibleassets4826.
Otherassets4927.
Otherliabilities49Equity28.
Equity50Consolidationandgroupstructure29.
Relatedentities5330.
Fiduciaryactivities,securitisationandfundsundermanagement5631.
Segmentanalysis5732.
Deconsolidationofsubsidiary59Riskmanagement33.
Riskmanagement6034.
Sensitivityanalysis73Otherdisclosures35.
Auditor'sremuneration7836.
Operatingleasecommitments7937.
Capitalexpenditurecommitments7938.
Contingentliabilitiesandloancommitments7939.
Contingentassets7940.
Eventssubsequenttothereportingdate79OtherregisteredbankdisclosuresCapitaladequacy80Conditionsofregistration89Independentauditor'sreport951GeneralmattersDetailsofincorporationKiwibankisacompanydomiciledinNewZealandandwasincorporatedinNewZealandundertheCompaniesAct1993on4May2001.
On29November2001,theBankwasregisteredasabankundertheReserveBankofNewZealandAct1989andwasrequiredtocomplywiththeconditionsofregistrationaslaiddownbytheReserveBankofNewZealand("RBNZ")fromthatdateonwards.
RegisteredofficeTheregisteredofficeis:KiwibankLimited,Level8,NewZealandPostHouse,7WaterlooQuay,Wellington6011,NewZealand.
AddressforserviceTheaddressforserviceis:KiwibankLimited,GroundFloor,NewZealandPostHouse,7WaterlooQuay,Wellington6011,NewZealand.
UltimateholdingcompanyTheultimateholdingcompanyofKiwibankisNewZealandPostLimited("NZP")whoseaddressforserviceis:GroundFloor,NewZealandPostHouse,7WaterlooQuay,Wellington6011,NewZealand.
VotingsecuritiesandpowertoappointdirectorsThereare737millionvotingsharesintheBank.
KiwiGroupHoldingsLimited("KGHL")istheregisteredandbeneficialholderofallvotingshares.
KGHL,NZP,NZSFTuiInvestmentsLimited("NZSF"),AccidentCompensationCorporation("ACC")andtheNewZealandCrown(beingthoseministerswhoholdsharesinNZP,NZSFandACConbehalfoftheNewZealandCrown)aretheonlyholdersofadirectorindirectqualifyinginterestinthevotingsharesoftheBank.
KGHLhastheabilitytodirectlyappointtheBoardofDirectorsofKiwibank(the"Board").
NZP,asanimmediateparentofKGHLandtheultimateholdingcompanyoftheBank,hastheabilitytoindirectlyappointtheBoard.
NZSFandACC,asimmediateparentsofKGHL,alsohavetheabilitytoindirectlyappointtotheBoard.
Noappointmentofanydirector,chiefexecutiveofficer,orexecutive,whoreportsorisaccountabledirectlytothechiefexecutiveofficer,shallbemadeinrespectoftheBankunless:1.
theRBNZhasbeensuppliedwithacopyofthecurriculumvitaeoftheproposedappointee;and2.
theRBNZhasadvisedthatithasnoobjectiontothatappointment.
OthermaterialmattersTheBoardisoftheopinionthat,otherthanoutlinedbelow,therearenomattersrelatingtothebusinessoraffairsoftheBankortheBankingGroup,whichwould,ifdisclosedinthisDisclosureStatement,materiallyaffectthedecisionofapersontosubscribefordebtsecuritiesofwhichtheBankoranymemberoftheBankingGroupistheissuer.
GroupstructureOn31October2016,NZP,formerlythesoleshareholderofKGHL,completedthesaleofa47%shareofKGHLtoNZSF(asto25%)andACC(asto22%)(the"PartialSaleTransaction").
BothNZSFandACCareCrownentities.
ThePartialSaleTransactionreflectstheGovernment'spolicypositionthattheCrownremainsthesoleultimateshareholderofKiwibank.
DeconsolidationofKiwiCapitalFundingLimited("KCFL")On30March2017,changesweremadetotheKGHLGroupgovernancearrangementswhichresultedinKCFLbeingdeconsolidatedfromtheBankingGroupeffective30March2017andtheBankinggroupnolongerrecognisingKCFL'sassetsandliabilitiesasat31March2017.
Theeffectofthedeconsolidationisdisclosedinnote32.
RBNZ'sdecisiononKiwibank'sconvertiblecapitalinstrumentsOn29May2017,KiwibankwasinformedbytheRBNZthatKiwibank'sTier2convertiblesubordinatedbond("KiwibankBonds")andAdditionalTier1perpetualcapitalbondissuedtoKCFLdidnotcomplywithcertainrequirementsinDocumentBS2A,CapitalAdequacyFramework(StandardisedApproach).
InMarch2017KiwibankmadechangestoaddresstheRBNZ'sconcernsraised,asnotedaboveinrelationtothedeconsolidationofKCFL.
On10August2017,afterconsideringthechangesmade,theRBNZre-issuednoticesofnon-objectiontothetreatmentofthebondsissuedtoKCFLascapitalinstrumentsasatthatdate.
2GeneralmatterscontinuedTransformationstrategyreviewThechangeinKiwibank'sownershipstructurehasprovidedtheopportunityforareviewofKiwibank'sfuturegrowthandtransformationstrategy,whichaimstodeliverenhancedcustomerexperiences.
Thisstrategyisexpectedtobefinalisedbeforetheendofthenextfinancialyear.
Aspartofthisreview,Kiwibankwilllooktofurtheralignitsinformationtechnologyanddigitalstrategies.
ThisincludesreviewingtheprojectunderwaytomoderniseKiwibank'scorebankingsystemagainstthenewtransformationalobjectives.
Anumberofoptionsarebeingconsideredtodeliverthatalignment.
Whilethisreviewhasnotbeencompleted,basedontheworkdonetodate,theBoardconsidersithighlyunlikelythatthecurrentdeliverypathwillmeetkeytransformationalobjectivesoftheBankandthereforethecurrentprojectwillnotproceedwithoutsignificantchangesinthedeliverypath.
Impairmentdetailscanbefoundinintangiblesassetsnote25onpage48.
KaikouraearthquakeOn14November2016KaikouraandthesurroundingareasincludingWellingtonwerehitbyasignificantearthquakeresultingindamagetobusinesses,buildingsandhomesacrossthisarea.
TheheadofficeofKiwibankwasimpactedandemployeeshavebeenmovedtovariousnewbuildingshowevertheearthquakeisnotultimatelyexpectedtohaveamaterialfinancialimpactontheBankingGroup.
PendingproceedingsorarbitrationTheBoardareoftheopinionthattherearenopendinglegalproceedingsorarbitrationconcerningKiwibankoranymemberoftheBankingGroup,whetherinNewZealandorelsewhere,thatmayhaveamaterialadverseeffectonKiwibankortheBankingGroup.
DirectorateIndependentnon-executivedirector,chairSusanCarrelMacken(appointed28November2016)Qualifications:BSc(Maths),B.
Com,PhDinEconomicsPrimaryoccupation:CompanydirectorCountryofresidence:NewZealandFinance,AuditandDisclosuresCommitteemember:YesRisk,CreditandComplianceCommitteemember:YesRobertWilliamBentleyMorrisonresigned13April2017.
ExternalDirectorships:DirectorofeachofPanukuDevelopmentAucklandLimited,BlossomBearLimited,TamakiRegenerationLimited,THAGPLimited,TamakiRedevelopmentCompanyLimited,STGLimitedSpaElectricsPtyLimited(Aust),StationMewsApartmentsLimited,PrivateAccountingTrusteeLimited.
Independentnon-executivedirectorsMichaelCharlesJohnO'Donnell(appointed15November2016)Qualifications:BA(Hons),COPPhotography&Film,Cert.
Journalism,Dip.
BusinessAdministrationPrimaryoccupation:CompanydirectorCountryofresidence:NewZealandFinance,AuditandDisclosuresCommitteemember:NoRisk,CreditandComplianceCommitteemember:NoKevinMarkMalloy(appointed28November2016)Qualifications:DipAdvertising&MarketingPrimaryoccupation:CompanydirectorCountryofresidence:NewZealandFinance,AuditandDisclosuresCommitteemember:YesRisk,CreditandComplianceCommitteemember:NoExternalDirectorships:DirectorofeachofMODAssociatesLimited,SeratoAudioResearchLimited,TimelyLimited,NZGovernmenttoGovernmentKnowhow,TourismNewZealand,RaygunLimited,vWorkLimited,GMIWealthLimited,KiwiWealthLimited,GMIGeneralPartnerLimited,PortfolioCustodialNomineesLimited.
ExternalDirectorships:DirectorofeachofTelevisionNewZealandLimited,KM54Limited,TheSocialClubLimited.
3GeneralmatterscontinuedDirectoratecontinuedIndependentnon-executivedirectorscontinuedAlistairBruceRyan(appointed1August2017)Qualifications:MComm,CAPrimaryoccupation:CompanydirectorCountryofresidence:NewZealandFinance,AuditandDisclosuresCommitteemember:Yes(Chair)Risk,CreditandComplianceCommitteemember:NoIanCameronBlair(appointed31July2017)Primaryoccupation:ManagingdirectorCountryofresidence:NewZealandFinance,AuditandDisclosuresCommitteemember:NoRisk,CreditandComplianceCommitteemember:YesAlisonRosemaryGerryresigned31December2016.
LindsayWrightresigned31October2016.
RhodaPhilliporesigned13April2017.
ExternalDirectorships:DirectorofeachofLewisRoadCreameryLimited,LewisRoadButtersLimited,EvolveEducationGroupLimited,BarramundiLimited,MetlifecareLimited,MetlifecareLTIPTrusteeLimited,ChristchurchCasinosLimited,KingfishLimited,MarlinGlobalLimited.
ExternalDirectorships:DirectorofSapienceLimited.
Non-executivedirectorsCarolAnneCampbellQualifications:B.
Com,CAPrimaryoccupation:CompanydirectorCountryofresidence:NewZealandFinance,AuditandDisclosuresCommitteemember:YesRisk,CreditandComplianceCommitteemember:NoExternalDirectorships:DirectorofeachofNewZealandPostLimited,HickBrosHoldingsLimited,AlphaXRTLimited,WoodfordPropertiesLimited,KingfishLimited,MarlinGlobalLimited,BarramundiLimited,KeyAssetsNZLimited,FosteringFirstNewZealandLimited,MatataLimited,GalavestHoldingsLimited,MichelleAlexanderTrusteesLimited,TBAGTrusteesMeLimited,TBAGTrusteesKALimited,MH2TrusteesLimited,HodhopTrusteeCompanyLimited,MorrowTrusteesLimited,MultiplyPublishingHoldingsLimited,FarrimondTrusteesLimited,MooreNomineesLimited,MunioHoldingsLimited,HickBrosEarthmovingLimited,HickEarthmovingContractorsLimited,HickBrosEarthmovingContractorsLimited,HBILimited,HickBrosCivilConstructionLimited,HickBrosHeavyHaulageLimited,ShortlandTrustees(Mawhiti2010)Limited,ForgeFleetServicesLimited,AlilouTrusteesLimited,SpencerStreetTrusteesLimited,TBAGTrustees(Glanfield)Limited,NPTLimited,EarnslawLodgeLimited,SonomaLimited,MeridianPropertiesLimited,HickBrosInfrastructureLimited,CloudbreakTrusteesLimited,TheNationalPropertyTrustNo.
2Limited,22StodartRoadLimited,99AlbertStreetLimited,EastgateShoppingCentreLimited,NPT10Limited,NPTManagementTeamLimited,NPTCapitalLimited,SeahorseTrustCompanyLimited,NZMELimited,T&GGlobalLimited,HydraulinkInvestmentTrusteeLimited,NPT11Limited,CordbankLimited,NicaConsultingLimited,BanksideChambersLimited.
4DirectoratecontinuedNon-executivedirectorscontinuedScottJohnPickering(appointed8November2016)Qualifications:AssociateCertifiedInsuranceProfessional,CertificateofInsurance(Non-Life)Primaryoccupation:ChiefExecutive,ACCCountryofresidence:NewZealandFinance,AuditandDisclosuresCommitteemember:NoRisk,CreditandComplianceCommitteemember:YesDeborahJaneTaylor(appointed31October2016)Qualifications:LLB(Hons),LLM(FirstClassHonours),BForSc(Hons)Dip.
Acc.
CACFInstDPrimaryoccupation:CompanydirectorCountryofresidence:NewZealandFinance,AuditandDisclosuresCommitteemember:NoRisk,CreditandComplianceCommitteemember:Yes(Chair)Hon.
SirMichaelJohnCullenresignedon31October2016.
ExternalDirectorships:DirectorofeachofChubbInsuranceNewZealandLimited,ChubbInsuranceCompanyofAustraliaLtd.
ExternalDirectorships:DirectorofeachofNewZealandPostLimited,OTPPNewZealandForestInvestmentsLtd,OTPPForests(No1)Limited,OTPPForests(No2)Limited,SilverFernFarmsVenisonLimited,SilverFernFarmsBeefLimited,LandcareResearchNewZealandLimited,TassenbergLimited,RadioNewZealandLimited,PredatorFree2050Limited,SilverFernFarmsSheepmeatLimited,SilverFernFarmsCo-operativeLimited,SilverFernFarmsHoldingsLimited,SilverFernFarmsManagementLimited,SilverFernFarmsLimited,SilverFernFarmsJointVenturesLimitedAlternatedirectorsDavidJamesWalsh(appointed9August2016)Alternateto:CarolAnneCampbellandDeborahJaneTaylorQualifications:BCA,CAPrimaryoccupation:CEOCountryofresidence:NewZealandFinance,AuditandDisclosuresCommitteemember:NoRisk,CreditandComplianceCommitteemember:NoDavidJamesWalshwasappointedasanalternatedirectortoCarolAnneCampbellandDeborahJaneTayloron9August2016.
ExternalDirectorships:DirectorofeachofKiwiGroupHoldingsLimited,NewZealandPostHoldingsLimited,DatamLimited,NewZealandPostCXLimited,NewZealandPostGroupFinanceLimited,NewZealandPostAustraliaHoldingsPtyLimited,ReachMediaNewZealandLimited,KiwiFinancialServicesRetailLimited.
Finance,AuditandDisclosuresCommitteeThecharteroftheFinance,AuditandDisclosuresCommitteeprovidesthatthemembershipoftheCommitteeshallbeatleastthreemembersoftheBoardwhoarenon-executivedirectors,amajorityofwhommustalsobeindependent.
ExecutivedirectorsTherearenoexecutivedirectorsoftheBank.
CommunicationswithdirectorsCommunicationsaddressedtothedirectorsandresponsiblepersonsmaybesenttotheBank'saddressforservice.
Generalmatterscontinued5GeneralmatterscontinuedDirectoratecontinuedPolicyforavoidinganddealingwithconflictsofinterestsThepolicyandcurrentpracticeoftheBoardisthatconflictsofinterestwhichmayarisefromthepersonal,professionalorbusinessinterestsofthedirectorsoranyofthem,mustbedisclosedtotheBoard.
Directorsarenotentitledtovoteonanymatterinwhichtheyhaveaninterest.
NorcantheybecountedinthequorumforthepartoftheBoardmeetinginrespectofwhichtheyhaveaconflict,unlessKiwibank'sshareholdershaveagreedbyordinaryresolution(orwrittennoticesignedbyamajorityofshareholder)towaivethisrequirementorunlessthematterisoneinrespectofwhichthedirectorsarerequiredtoprovideacertificateundertheCompaniesAct1993.
TheCompaniesAct1993requireseachdirectortocausetobeenteredintheinterestsregisteranddisclosedtotheBoard:a)thenatureandmonetaryvalueofthedirector'sinterestinatransactionorproposedtransactionifitsmonetaryvalueisabletobequantified;orb)thenatureandextentofthedirector'sinterestinatransactionorproposedtransactionifitsmonetaryvalueisnotabletobequantified.
Directors'benefitsThereisnotransactionwhichanydirectororimmediaterelativeorclosebusinessassociateofanydirectorhaswithKiwibankwhicheitherhasbeenenteredintoontermsotherthanthosewhichwould,intheordinarycourseofbusinessofKiwibank,begiventoanyotherpersonoflikecircumstancesormeans,orcouldotherwisebereasonablylikelytoinfluencemateriallytheexerciseofthatdirector'sduties.
AuditorsTheauditorwhosereportisreferredtointhisDisclosureStatementisChrisBarberassistedbyPricewaterhouseCoopers,actingasagentonbehalfoftheOfficeoftheAuditor-General.
Hisaddressforserviceis:PricewaterhouseCoopers,113-119TheTerrace,Wellington,NewZealand.
6CreditratingsTheBankhasthefollowingcreditratingsapplicabletoitslongtermseniorunsecuredobligationspayableinNewZealanddollarsatthedatetheDirectorssignedthisDisclosureStatement.
RatingagencyCurrentcreditratingRatingoutlookStandard&Poor's(Australia)PtyLimited("S&P")AOutlookStableMoody'sInvestorsService("Moody's")A1OutlookStableFitchRatings(Fitch)AAOutlookStableOn28February2017,S&PaffirmedKiwibank'screditratingofAwithastableoutlook.
On28February2017,FitchgrantedKiwibankacreditratingofAAwithastableoutlookforseniorunsecureddebtobligationspayableinNewZealanddollarsandacreditratingofAA-withastableoutlookforunsecureddebtobligationspayableinothercurrencies.
On1March2017,Moody'sgrantedKiwibankacreditratingofA1withastableoutlookforlong-termseniorunsecuredobligationspayableinNewZealandinNewZealanddollars.
Thefollowingtabledescribesthestepsintheapplicableratingscalesforeachratingagency:S&PMoody'sInvestorsServicesFitchRatingsHighestcreditquality–abilitytorepaydebtobligationsisextremelystrongAAAAaaAAAHighquality,lowcreditrisk–abilitytorepaydebtobligationsisverystrongAAAaAAHighquality–abilitytorepayisstrongalthoughmaybesusceptibletoadversechangesincircumstancesorineconomicconditionsAAALowcreditrisk–satisfactoryabilitytorepaydebtobligationsthoughchangesincircumstancesorineconomicconditionsarelikelytoimpairthiscapacityBBBBaaBBBAbilitytorepaydebtobligationsisonlyadequateandlikelytobeaffectedbyadverseeconomicchangewhichmightaffecttimelinessofrepaymentBBBaBBRiskofdefaultduetogreatervulnerabilityBBBSignificantriskofdefault.
RepaymentofdebtobligationsrequiresfavourablefinancialconditionsCCCCaaCCCPoorprotection,highestriskofdefaultCCtoCCatoCCCtoCObligationscurrentlyindefaultD-RDtoDCreditratingsbetweenAA–CCCbyS&PandFitchRatingsmaybemodifiedbytheadditionofaplusorminussign(signallinghigherandlowerendsofthescalerespectively).
Moody'sInvestorServicesappliesnumericmodifiers1,2and3toeachgenericratingclassificationwitha1indicatingahigherratinganda3indicatingalowerratingwithinthatgenericratingcategory.
7GuaranteesAsatthedatetheBoardapprovedthisDisclosureStatement,paymentobligationsofKiwibankinrelationtocertaindebtsecuritiesissuedbyKiwibankhavethebenefitofaguaranteebyKiwiCoveredBondTrusteeLimited(the"CoveredBondGuarantee").
Also,thepaymentobligationsofKiwibankowedasat28February2017andstilloutstandinghavethebenefitofadeedpollguaranteebyNZP(the"NZPGuarantee").
On31October2016,NZPgavenoticeoftheterminationoftheNZPGuarantee(withaneffectivedateofwithdrawalof28February2017).
ThisterminationdidnotaffectanypaymentobligationsofKiwibankthatwerealreadyguaranteedatthetimetheguaranteewasterminated.
Asummaryofthedetailsofeachguaranteearesetoutbelow.
NZPGuaranteeNZPcontinuestosupportKiwibankasaregisteredbankthroughtheNZPGuaranteetotheextentofguaranteedpaymentobligationsthatexistedasat28February2017.
ThefollowingisasummaryofthemainfeaturesoftheNZPGuaranteeeffectiveforpaymentobligationsthatexistedasat28February2017:i.
TheaddressforserviceofNZPis:GroundFloor,NewZealandPostHouse,7WaterlooQuay,Wellington6011,NewZealand.
ii.
NZPisnotamemberoftheBankingGroup(asthattermisdefinedintheOrder).
iii.
TheNZPGuaranteeisanunsecuredguaranteeofallthepaymentobligations(excludinganypaymentobligations,thetermsofwhichexpresslyprovideinwritingthattheydonothavethebenefitoftheNZPGuarantee)ofKiwibankowingasat28February2017andstilloutstanding.
TheNZPGuaranteehasnoexpirydateinrelationtothepaymentobligationsthatcontinuetobeguaranteed.
iv.
TherearenomateriallegislativeorregulatoryrestrictionsinNewZealand,whichwouldhavetheeffectofsubordinatingtheclaimsundertheNZPGuaranteeofanyofthecreditorsofKiwibankontheassetsofNZP,tootherclaimsonNZP,inawindingupofNZP.
ThenettangibleassetsofNZPwere$1,042masrecordedinNZP'smostrecentAnnualReportforthefinancialyearended30June2016.
TherewerenomodificationsintheauditreportaccompanyingtheAnnualReport.
NZPhasacreditratingapplicabletoitslongtermunsecuredobligationspayableinNewZealand,inNewZealanddollars,fromS&PofA+withastableoutlook.
ForanexplanationofS&P'screditratingscaleseepage6.
CoveredBondGuaranteeCertaindebtsecurities("CoveredBonds")issuedbytheBankareguaranteedbyKiwiCoveredBondTrusteeLimited(the"CoveredBondGuarantor"),solelyinitscapacityasTrusteeofKiwiCoveredBondTrust.
TheCoveredBondGuarantorhasguaranteedthepaymentofinterestandprincipalofCoveredBonds,pursuanttoaguaranteewhichissecuredoverapoolofassets.
TheCoveredBondGuarantor'saddressforserviceisLevel9,34ShortlandStreet,Auckland,NewZealand.
TheCoveredBondGuarantorisnotamemberoftheBankingGroup.
TheCoveredBondshavebeenassignedalongtermratingofAaaandAAAbyMoody'sInvestorsServiceandFitchRatingsrespectively.
8Directors'statementThedirectorsofKiwibankstatethateachdirectorbelieves,afterdueenquiry,that:1.
AsatthedateonwhichtheDisclosureStatementissigned:i.
theDisclosureStatementcontainsalltheinformationthatisrequiredbytheRegisteredBankDisclosureStatements(NewZealandIncorporatedRegisteredBanks)Order2014(asamended);andii.
theDisclosureStatementisnotfalseormisleading.
2.
Duringtheyearended30June2017:i.
Kiwibankhascompliedwiththeconditionsofregistrationapplicableduringtheperiod;ii.
creditexposurestoconnectedpersonswerenotcontrarytotheinterestsoftheBankingGroup;andiii.
KiwibankhadsystemsinplacetomonitorandcontroladequatelytheBankingGroup'smaterialrisks,includingcreditrisk,concentrationofcreditrisk,interestraterisk,currencyrisk,equityrisk,liquidityrisk,operationalriskandotherbusinessrisks,andthatthosesystemswerebeingproperlyapplied.
Withagreementoftheshareholder,theBankhastakenadvantageoftheconcessionsavailabletoitundersection211(3)oftheCompaniesAct1993.
SignedbyAlistairBruceRyanandSusanCarrelMackenasdirectorsandresponsiblepersonsonbehalfofallthedirectorslistedintheDirectorateofthisDisclosureStatement:8September20179HistoricalsummaryoffinancialstatementsAuditedDollarsinmillionsYearended30/06/17Yearended30/06/16Yearended30/06/15Yearended30/06/14Yearended30/06/13FinancialperformanceInterestincome831898957798790Interestexpense(463)(525)(596)(505)(514)Netgainsonfinancialinstrumentsatfairvalue8353-Netfeeincome118101107104106Operatingexpenses(339)(301)(284)(265)(240)Impairmentreversals/(losses)onloansandadvances6(11)(13)4(7)Otherimpairmentlosses(90)Profitbeforetaxation71165176139135Incometaxexpense(18)(41)(49)(39)(38)Netprofitaftertaxation5312412710097Netprofitaftertaxationattributabletonon-controllinginterestsDividendspaidtonon-controllinginterest(1)Dividendspaidonordinaryshares(5)(29)(22)--Distributionstoholdersofperpetualcapital(12)(11)---Dividendspaidtoholdersofperpetualshares--(9)(9)(9)AuditedDollarsinmillionsYearended30/06/17Yearended30/06/16Yearended30/06/15Yearended30/06/14Yearended30/06/13BalancesheetTotalassets20,61619,35718,34416,67615,209Ofwhichindividuallyimpairedassets1215234454Totalliabilities19,23618,22817,31115,67314,351Equityattributabletoownersofparent1,3801,1291,033854709Non-controllinginterest---14914910FinancialstatementsIncomestatementFortheyearended30June2017DollarsinmillionsNoteYearended30/06/17Yearended30/06/16Interestincome3831898Interestexpense3(463)(525)Netinterestincome368373Netgainsonfinancialinstrumentsatfairvalue483Grossfeeandotherincome5201195Directfeeexpenses5(83)(94)Netfeeandotherincome5118101Totaloperatingincome494477Operatingexpenses6(339)(301)Profitbeforeimpairmentandtaxation155176Impairmentreversals/(losses)onloansandadvances96(11)Otherimpairmentlosses25(90)-Profitbeforetaxation71165Incometaxexpense7(18)(41)Profitaftertaxation53124StatementofcomprehensiveincomeFortheyearended30June2017DollarsinmillionsNoteYearended30/06/17Yearended30/06/16Profitaftertaxation53124OthercomprehensiveincomeNet(loss)/gainfromchangesinreservesthatmaysubsequentlybereclassifiedtoprofitorloss-Available-for-salereserve(netoftax)28(6)3-Cashflowhedgereserve(netoftax)28329Othercomprehensiveincomefortheyear2612Totalcomprehensiveincomefortheyear79136Thenotestothefinancialstatementsformanintegralpartof,andshouldbereadinconjunctionwith,thesefinancialstatements.
11FinancialstatementscontinuedStatementofchangesinequityFortheyearended30June2017DollarsinmillionsNoteFullyPaidOrdinarySharesRetainedearningsAvailable-For-SaleReserveCashFlowHedgeReservePerpetualCapitalReserveTotalEquityAttributabletoOwnersoftheParentBalanceat1July20154005328(54)1471,033Yearended30June2016Profitfortheyear-124---124OthercomprehensiveincomeAvailable-for-salefinancialassets(netoftax)--3--3Cashflowhedges(netoftax)---9-9Totalothercomprehensiveincome--39-12Totalcomprehensiveincome-12439-136TransactionswithownersDividendspaidonordinaryshares-(29)29)Distributionstoholdersofperpetualcapital-(11)11)Balanceat30June201640061611(45)1471,129Yearended30June2017Profitfortheyear-53---53OthercomprehensiveincomeAvailable-for-salefinancialassets(netoftax)--(6)--(6)Cashflowhedges(netoftax)---32-32Totalothercomprehensiveincome--(6)32-26Totalcomprehensiveincome-53(6)32-79Deconsolidationofsubsidiary32147)(147)TransactionswithownersIssueofsharecapital28337----337Dividendspaidtonon-controllinginterest28-(1)1)Dividendspaidonordinaryshares28-(5)5)Distributionstoholdersofperpetualcapital-(12)12)Balanceat30June20177376515(13)-1,380Thenotestothefinancialstatementsformanintegralpartof,andshouldbereadinconjunctionwith,thesefinancialstatements.
12FinancialstatementscontinuedBalancesheetAsat30June2017DollarsinmillionsNote30/06/1730/06/16AssetsCashandcashequivalents12464509Duefromrelatedparties298077Duefromotherfinancialinstitutions13228247Available-for-saleassets141,474955Loansandadvances817,81516,689Derivativefinancialinstruments15370658Property,plantandequipment2823Intangibleassets2597158Deferredtaxation73425Otherassets262616Totalassets20,61619,357Totalinterestearninganddiscountbearingassets20,04418,434LiabilitiesDuetootherfinancialinstitutions1659135Duetorelatedparties29124Depositsandotherborrowings1715,98314,782Derivativefinancialinstruments15416725Debtsecuritiesissued182,2582,207Currenttaxliability915Otherliabilities2794102Subordinateddebt19405258Totalliabilities19,23618,228Totalinterestanddiscountbearingliabilities16,92615,872EquityattributabletoownersoftheparentSharecapital28737400Reserves28643729Totalequityattributabletoownersoftheparent1,3801,129Totalliabilitiesandshareholders'equity20,61619,357TheBoardofDirectorsofKiwibankLimitedauthorisedthesefinancialstatementsforissueon8September2017.
AlistairBruceRyanSusanCarrelMackenThenotestothefinancialstatementsformanintegralpartof,andshouldbereadinconjunctionwith,thesefinancialstatements.
13FinancialstatementscontinuedCashflowstatementFortheyearended30June2017DollarsinmillionsNoteYearended30/06/17Yearended30/06/16CashflowsfromoperatingactivitiesInterestreceived860928Interestpaid(455)(535)Feesandotherincomereceived199195Directfeeexpensespaid(83)(94)Operatingexpensespaid(328)(255)Taxespaid(43)(45)Netcashflowsfromoperatingactivitiesbeforechangesinoperatingassetsandliabilities150194NetchangesinoperatingassetsandliabilitiesDecreaseinfinancialassetsheldfortrading-97(Increase)/decreaseinavailable-for-saleassets(519)280(Increase)inloansandadvances(1,168)(1,140)Decrease/(increase)inamountsduefromrelatedparties5(2)Decrease/(increase)inbalancesduefromotherfinancialinstitutions19(53)Increaseindepositsandotherborrowing1,1931,059(Decrease)inbalancesduetootherfinancialinstitutions(76)(190)Netcashflowsfromoperatingactivities(396)245CashflowsfrominvestingactivitiesPurchaseofproperty,plantandequipment(12)(10)Purchaseofintangibleassets(52)(65)Netcashflowsfrominvestingactivities(64)(75)CashflowsfromfinancingactivitiesIssueofsharecapital337-Increase/(decrease)indebtsecuritiesissued98(109)Dividendspaidonordinaryshares(5)(29)Distributionstoholdersofperpetualcapital(12)(11)Dividendspaidtonon-controllinginterest(1)-Netcashflowsfromfinancingactivities417(149)Increaseincashandcashequivalents(43)21Cashandcashequivalentsatbeginningoftheyear509492Effectofexchangetranslationadjustments(2)(4)Cashandcashequivalentsatendoftheyear12464509Thenotestothefinancialstatementsformanintegralpartof,andshouldbereadinconjunctionwith,thesefinancialstatements.
14FinancialstatementscontinuedCashflowstatementcontinuedFortheyearended30June2017DollarsinmillionsYearended30/06/17Yearended30/06/16ReconciliationofnetprofitaftertaxationtonetcashflowsfromoperatingactivitiesNetprofitaftertaxation53124Noncashmovementsandnon-operatingactivitiesUnrealisedfairvalueadjustments(7)4Depreciation77Amortisationofintangibles2423Netdecreaseindeferredexpenditureandaccruedincome3128(Decrease)inprovisionforcreditimpairment(13)-Lendinglosseswrittenoff711Intangibleworkinprogresswrittenoff3-Otherimpairmentlosses90-(Increase)/decreaseindeferredtaxationasset(9)3MovementsinoperatingassetsandliabilitiesDecreaseinfinancialassetsheldfortrading-96(Increase)/decreaseinavailable-for-saleassets(524)272(Increase)inloansandadvances(1,165)(1,139)Decrease/(increase)inbalancesduefromotherfinancialinstitutions19(53)Increaseindepositsandotherborrowing1,1931,059(Increase)inbalanceswithrelatedparties(5)(3)(Decrease)inbalancesduetootherfinancialinstitutions(76)(190)(Decrease)/increaseinaccruedoperatingexpenses(14)17Increase/(decrease)ininterestpayable8(10)(Increase)/decreaseininterestreceivable(3)2(Decrease)incurrenttaxation(6)(7)(Increase)/decreaseinotherassets(9)1Netcashflowsfromoperatingactivities(396)245Thenotestothefinancialstatementsformanintegralpartof,andshouldbereadinconjunctionwith,thesefinancialstatements.
15Notestothefinancialstatements1.
CorporateinformationTheseconsolidatedfinancialstatementsarepresentedforthe"BankingGroup",whichconsistsofKiwibankLimited("Kiwibank"orthe"Bank")anditssubsidiaries.
KiwiCapitalFundingLimited("KCFL")waspreviouslyconsolidatedasasubsidiaryofKiwibankbut,effective30March2017,KCFLwasdeconsolidatedduetochangesmadetotheKiwiGroupHoldingsLimited("KGHL")Groupgovernancearrangementsasnotedin'Othermaterialmatters'onpage1.
Theeffectofthedeconsolidationisdisclosedinnote32.
Kiwibankisafor-profitentityincorporatedanddomiciledinNewZealandundertheCompaniesAct1993andisregisteredasabankundertheReserveBankofNewZealandAct1989.
TheprincipalactivityoftheBankingGroupistheprovisionofretailandbankingproductsandservicestoindividualsandsmalltomedium-sizedbusinesses.
Kiwibank'simmediateparentcompanyisKGHL.
KGHLisownedbyNewZealandPostLimited("NZP")(53%),NZSFTuiInvestmentsLimited("NZSF")(25%)andAccidentCompensationCorporation("ACC")(22%).
TheultimateshareholderofKiwibankistheNewZealandCrown(the"Crown").
Thesefinancialstatementsfortheyearended30June2017havebeenapprovedforissuebytheBoardofDirectorson8September2017.
Theprincipalaccountingpoliciesadoptedinthepreparationofthesefinancialstatementsaresetoutbelowandintherelevantnotestothefinancialstatements.
Thesepolicieshavebeenconsistentlyappliedtoallfinancialyearspresented.
2.
Basisofpreparationandgeneralaccountingpolicies2.
1BasisofaccountingThesefinancialstatementsaregeneralpurposefinancialstatementspreparedinaccordancewithGenerallyAcceptedAccountingPracticeinNewZealand.
TheycomplywithNewZealandEquivalentstoInternationalFinancialReportingStandards("NZIFRS")andotherapplicableFinancialReportingStandards,asappropriateforfor-profitentities,theFinancialMarketsConductAct2013andtheRegisteredBankDisclosureStatements(NewZealandIncorporatedRegisteredBanks)Order2014(asamended)(the"Order").
ThesefinancialstatementsalsocomplywithInternationalFinancialReportingStandards("IFRS")asissuedbytheInternationalAccountingStandardsBoard.
MeasurementbaseThesefinancialstatementsarebasedonthegeneralprinciplesofhistoriccostaccounting,modifiedbytheapplicationoffairvaluemeasurementsforavailable-for-salefinancialassets,financialinstrumentsheldatfairvaluethroughprofitorlossandallderivativecontracts.
Thecarryingvaluesofrecognisedassetsandliabilitiesthatarehedgeditemsinfairvaluehedges,andotherwisecarriedatamortisedcost,areadjustedtorecordchangesinfairvalueattributabletotherisksthatarebeinghedged.
AccountingperiodandcomparativeamountsTheseauditedfinancialstatementsarefortheyearended30June2017.
Comparativeamountsarefromtheauditedfinancialstatementsfortheyearended30June2016.
Certainamountsinthecomparativeinformationhavebeenreclassifiedoramendedtoensureconsistencywiththecurrentyear'spresentationincludingtheloansandadvancesandrelatedentitiesnoteswhichusedifferentcategoriesfromtheprioryear(notes8and29respectively)andtheconcentrationofcreditriskandconcentrationoffundingnoteswithinwhichtherehasbeenareclassificationofcertainamountsbetweenNewZealandandoverseascategories(notes11and23respectively).
Theprioryearcomparativesforcreditexposureconcentrationsandrelatedentitieshavebeenamendedtoincludederivativeexposures(notes22and29respectively).
Whereappropriate,furtherinformationhasbeenincludedwithintherelevantnotedisclosures.
2.
2Criticalaccountingjudgements,estimatesandassumptionsThepreparationofthesefinancialstatementsinaccordancewithNZIFRSrequiresmanagementtomakejudgements,estimatesandassumptionsthataffecttheapplicationofaccountingpoliciesandreportedamountofassets,liabilities,revenuesandexpensesandthedisclosedamountofcontingentliabilities.
AlthoughKiwibankhasinternalcontrolsystemsinplacetoensurethatestimatescanbereliablymeasured,actualamountsmaydifferfromthoseestimates.
Itisnotanticipatedthatsuchdifferenceswouldbematerial.
Estimatesandunderlyingassumptionsarereviewedonanongoingbasis.
Revisionstoaccountingestimatesarerecognisedintheyearinwhichtheestimateisrevisedandanyfutureyearsaffected.
Informationaboutsignificantareasofestimationuncertaintyandcriticaljudgementsinapplyingaccountingpoliciesthathavethemostsignificanteffectontheamountsrecognisedinthefinancialstatementsaredescribedinthefollowingnotes:Note9Impairmentlosses–loansandadvancesNote20FairvalueestimationNote25IntangibleassetsNote29SecuritisationandtheconsolidationofSPVs16Notestothefinancialstatementscontinued2.
Basisofpreparationandgeneralaccountingpoliciescontinued2.
3BasisofconsolidationTheconsolidatedfinancialstatementscomprisethefinancialstatementsofKiwibankanditssubsidiariesfortheyearended30June2017.
SubsidiariesareentitiesthatarecontrolledbytheBankingGroup.
ControlisachievedwhentheBankingGroupisexposed,orhasrights,tovariablereturnsfromitsinvolvementwiththeinvesteeandhastheabilitytoaffectthosereturnsthroughitspowerovertheinvestee.
SpecificallytheBankingGroupcontrolsaninvesteeifandonlyiftheBankingGrouphas:Powerovertheinvestee(i.
e.
existingrightsthatgiveitthecurrentabilitytodirecttherelevantactivitiesoftheinvestee);Exposure,orrights,tovariablereturnsfromitsinvolvementwiththeinvestee;andTheabilitytouseitspowerovertheinvesteetoaffectitsreturns.
WhentheBankingGrouphaslessthanamajorityofthevotingorsimilarrightsofaninvestee,theBankingGroupconsidersallrelevantfactsandcircumstancesinassessingwhetherithaspoweroveraninvestee,including:Thecontractualarrangementswithothervoteholdersoftheinvestee;Rightsarisingfromothercontractualarrangements;andTheBankingGroup'svotingrightsandpotentialvotingrights.
Structuredentitiesareentitiesthataredesignedsothattheiractivitiesarenotgovernedbywayofvotingrights.
InassessingwhethertheBankingGrouphaspoweroversuchentitiesinwhichithasaninterest,theBankingGroupalsoconsidersfactorssuchas:Thepurposeanddesignoftheentity;Itspracticalabilitytodirecttherelevantactivitiesoftheentity;Thenatureoftherelationshipwiththeentity;andThesizeofitsexposuretothevariabilityofreturnsoftheentity.
TheBankingGroupreassesseswhetheritcontrolsaninvesteeiffactsandcircumstancesindicatethattherehavebeenchangestooneormoreofthethreeelementsofcontrol.
ConsolidationofasubsidiarybeginswhentheBankingGroupobtainscontroloverthesubsidiaryandceaseswhentheBankingGrouplosescontrolofthesubsidiary.
Onthedateofacquisitionofasubsidiary,identifiableassetsandliabilitiesacquiredareinitiallymeasuredatfairvalue.
TheexcessofthecostofacquisitionoverthefairvalueoftheBankingGroup'sshareoftheidentifiablenetassetsacquiredisrecordedasgoodwill.
IfthecostofacquisitionislessthanthefairvalueoftheBankingGroup'sshareofthenetassetsacquiredthedifferenceisrecogniseddirectlyintheincomestatement.
Subsequenttoinitialrecognition,goodwillismeasuredatcostlessanyaccumulatedimpairmentlosses.
Forthepurposeofimpairmenttesting,goodwillacquiredis,fromthedateofacquisition,allocatedtoeachoftheBankingGroup'scash-generatingunitsthatareexpectedtobenefitfromtheacquisition,irrespectiveofwhetherotherassetsorliabilitiesoftheacquireeareassignedtothoseunits.
Wheregoodwillhasbeenallocatedtoacash-generatingunitandpartoftheoperationwithinthatunitisdisposedof,thegoodwillassociatedwiththedisposedoperationisincludedinthecarryingamountoftheoperationwhendeterminingthegainorlossondisposal.
Goodwilldisposedinthesecircumstancesismeasuredbasedontherelativevaluesofthedisposedoperationandtheportionofthecash-generatingunitretained.
Theinterestofnon-controllingshareholdersisstatedattheirproportionofthenetprofitandnetassetsofasubsidiaryattributabletoequityintereststhatarenotowneddirectlyorindirectlybytheBankingGroup.
Lossesareattributedtothenon-controllinginterestevenifthatresultsinadeficitbalance.
Allintra-groupbalances,transactions,incomeorexpensesarefullyeliminatedonconsolidation.
Whennecessary,adjustmentsaremadetothefinancialstatementsofsubsidiariestobringtheiraccountingpoliciesintolinewiththeBankingGroup'saccountingpolicies.
2.
4AssociatesandjointarrangementsAnassociateisanentityoverwhichtheBankingGrouphasasignificantinfluence.
Significantinfluenceisthepowertoparticipateinthefinancialandoperatingpolicydecisionsoftheinvestee,butisnotcontrolorjointcontroloverthesepolices.
Ajointarrangement,wheretheBankingGroupandoneormoreotherpartieshavejointcontrol,iseitherajointoperationorajointventure.
Inajointoperation,theBankingGroupandotherpartyorpartieswithjointcontrolhaverightstotheassetsandobligationsfortheliabilitiesofthearrangementresultingineachpartyrecognisingitsrelativeshareofthejointoperation'sassets,liabilities,revenuesandexpenses.
Inajointventure,theBankingGroupandotherpartyorpartieswithjointcontrolhaverightstothenetassetsofthearrangementandeachpartyusestheequitymethod.
172.
Basisofpreparationandgeneralaccountingpoliciescontinued2.
5NewAccountingStandardsandInterpretationsStandardsandinterpretationseffectiveinthecurrentperiod:ManagementhaveconsideredamendmentstoNZIFRS'swhichbecameapplicabletotheBankingGroupforthefirsttimeduringtheyearended30June2017andhaveconcludedtheyhavenomaterialimpactonthefinancialpositionorperformanceoftheBankingGroup.
Nonewstandards,amendmentsorinterpretationstoexistingstandardsthatarenotyeteffective,havebeenearlyadoptedbytheBankingGroupinthesefinancialstatements.
Atthedateofauthorisation,thefollowingnewstandardsoramendmentstoexistingstandardswereinissuebutnotyeteffective:StandardEffectiveforannualreportingperiodsbeginningonorafter:AmendmentstoNZIAS7–StatementofCashFlows1January2017NZIFRS9–FinancialInstruments1January2018NZIFRS15–RevenuefromContractswithCustomers1January2018NZIFRS16–Leases1January2019TheDirectorsexpecttoadopttheabovestandardsandamendmentsintheperiodinwhichtheybecomemandatory.
NZIFRS9:FinancialInstrumentsNZIFRS9,issuedinSeptember2014,replacesexistingguidanceinNZIAS39FinancialInstruments:RecognitionandMeasurement.
NZIFRS9includesrevisedguidanceontheclassificationandmeasurementoffinancialinstruments,includinganewexpectedcreditlossmodelforcalculatingimpairmentsonfinancialassets,andthenewgeneralhedgeaccountingrequirements.
ItalsocarriesforwardtheguidanceonrecognitionandderecognitionoffinancialinstrumentsfromNZIAS39.
TheBankingGroupcurrentlyhasanongoingprojecttoimplementtheadoptionofNZIFRS9.
GiventhenatureoftheBankandtheBankingGroup'soperations,NZIFRS9isexpectedtohaveasignificantimpactonthefinancialstatements.
Inparticularthecalculationofimpairmentoffinancialinstrumentsonanexpectedcreditlossbasismaychangetheoveralllevelofimpairmentallowances.
However,astheimpactofadoptiondependsonthefinancialinstrumentsheldbytheBankingGroupandthecreditenvironmentatthedateofadoption,itisnotpracticaltoquantifytheimpact.
NZIFRS9willchangehedgeaccountingbyincreasingtheeligibilityofbothhedgeditemsandhedginginstrumentsandapplyingaprinciples-basedapproachtohedgeeffectiveness.
AdoptionofthenewhedgeaccountingmodelisoptionaluntiltheInternationalAccountingStandardsBoardcompletesitsAccountingforDynamicRiskManagementproject.
TheBankingGroupisyettodeterminewhethertoapplythenewhedgeaccountingmodelwhenNZIFRS9isadopted.
NZIFRS15:RevenuefromContractswithCustomersNZIFRS15establishesacomprehensiveframeworkfordeterminingwhether,howmuchandwhenrevenueisrecognised.
Itreplacesexistingrevenuerecognitionguidance,includingNZIAS18Revenue,NZIAS11ConstructionContractsandNZIFRIC13CustomerLoyaltyProgrammes.
TheBankingGroupisassessingthepotentialimpactofadoptionofNZIFRS15howeverinitialfindingsindicatethatitisnotexpectedtohaveamaterialimpactontheBankingGroup.
NZIFRS16:LeasesNZIFRS16introducesasingle,on-balancesheetaccountingmodelforlessees.
TheBankingGroupisassessingthepotentialimpactofadoptingNZIFRS16butitisanticipateditwillresultintheBankingGrouprecognisingaright-of-useassetonitsbalancesheetinrelationtothemajorityofitsleaseswithanoffsettingliabilityrecognisedforthevalueoffutureleasepayments.
NZIFRS16isalsoexpectedtoresultinashiftfromleasepaymentsbeingrecognisedasexpensesonastraight-linebasisovertheleasetermtoadepreciationexpenseontheright-of-useassetandinterestexpenseontheoutstandingbalanceoftheliability.
Thiswillresultinchangesincertainexpenseandprofitmeasureshoweveritisnotyetpracticaltoquantifytheimpactasitwillbedeterminedbytheleasesthathavebeenenteredintoasatthedateofadoption.
NZIAS7:StatementofCashFlowsamendmentAmendmentstoNZIAS7StatementofCashFlowsrequireadditionaldisclosuresregardingbothcashandnon-cashchangesinliabilitiesarisingfromfinancingactivities.
TheamendmentsarenotexpectedtohaveamaterialimpactontheBankingGroup.
Notestothefinancialstatementscontinued18Notestothefinancialstatementscontinued2.
Basisofpreparationandgeneralaccountingpoliciescontinued2.
6FinancialinstrumentsDesignationoffinancialassetsandfinancialliabilitiesintoinstrumentcategoriesisdeterminedbythebusinesspurposeofthefinancialinstruments,policiesandpracticesfortheirmanagement,theirrelationshipwithotherinstrumentsandthereportingcostsandbenefitsassociatedwitheachdesignation.
RecognitionTheBankingGroupinitiallyrecognisesloansandadvances,depositsandotherborrowings,certaindebtsecuritiesissuedandsubordinateddebtonthedateonwhichtheywereoriginated.
Allotherfinancialinstrumentsarerecognisedontrade-date–thedateonwhichtheBankingGroupbecomesapartytothecontractualprovisionsoftheinstrument.
Financialinstrumentsaremeasuredinitiallyatfairvalueplus,foranitemnotatfairvaluethroughprofitorloss,transactioncostsdirectlyattributabletoitsacquisitionorissue.
DerecognitionAfinancialasset(orwhereapplicable,apartofafinancialassetorpartofagroupofsimilarfinancialassets)isderecognisedwhere:Therightstoreceivecashflowsfromtheassethaveexpired;orTheBankingGrouphastransferreditsrightstoreceivecashflowsfromtheassetorhasassumedanobligationtopaythereceivedcashflowsinfull,withoutmaterialdelay,toathirdpartyundera'pass-through'arrangementandcannotsellorre-pledgetheassetotherthantothetransferee;orEithertheBankingGrouphastransferredsubstantiallyalltherisksandrewardsoftheasset,ortheBankingGrouphasneithertransferrednorretainedsubstantiallyalltherisksandrewardsoftheasset,buthastransferredcontroloftheasset.
AsituationmayarisewheretheBankingGrouptransfersitsrighttoreceivecashflowsfromanassetorhasenteredintoapass-througharrangement.
InsomecasestheBankingGroupwouldhaveneithertransferrednorretainedsubstantiallyalltherisksandrewardsoftheassetnortransferredcontroloftheseassets.
ShouldthisoccurtotheextentthattheBankingGrouphascontinuinginvolvementintheasset,theassetcontinuestoberecognisedonthebalancesheet.
TheBankingGroupderecognisesafinancialliabilitywhenitscontractualobligationsaredischargedorcancelledorexpire.
2.
7CurrencyFunctionalandpresentationcurrencyTheBankingGroup'sfinancialstatementsarepresentedinNewZealanddollarswhichistheBank'sfunctionalandpresentationcurrency.
AllamountsareexpressedinmillionsofNewZealanddollars,unlessotherwisestated.
ForeigncurrencytranslationTransactionsinforeigncurrenciesaretranslatedintothefunctionalcurrencyattheexchangeraterulingatthedateofthetransaction.
Foreignexchangegainsandlossesresultingfromthesettlementofsuchtransactionsarerecognisedintheincomestatement.
Atthereportingdate,foreigndenominatedmonetaryassetsandliabilitiesaretranslatedattheclosingexchangerate,withexchangevariationsarisingfromthesetranslationsbeingrecognisedintheincomestatement.
2.
8ProvisionsAprovisionisrecognisedinthebalancesheetwhentheBankingGrouphasapresentlegalorconstructiveobligationasaresultofpastevents,itisprobablethatanoutflowofresourceswillberequiredtosettletheobligationandareliableestimatecanbemadeoftheamountoftheobligation.
2.
9CashflowstatementsThefollowingaredefinitionsofthetermsusedinthecashflowstatements:i.
Cashandcashequivalentsisconsideredtobecashonhand,currentaccountsinbanks,ATM's,overnightbankdeposits,netofbankoverdraftsandinter-bankbalancesarisingfromthedailyRBNZsettlementprocess.
ii.
Investingactivitiesarethoserelatingtotheacquisition,holdinganddisposalofproperty,plantandequipment,intangibles,equityordebtinstrumentsofotherentitiesandotherlong-termassets.
iii.
FinancingactivitiesarethoseactivitieswhichresultinchangesinthesizeandcompositionofthecapitalstructureoftheBankingGroup.
Thisincludesbothequityanddebtnotfallingwithinthedefinitionofcash.
iv.
Operatingactivitiesincludealltransactionsandothereventsthatarenotinvestingorfinancingactivities.
v.
Certaincashflowshavebeennettedtoprovidemoremeaningfuldisclosure,includingchangesinloansandadvancestocustomers,depositsheldbycustomers,balanceswithotherbanks,debtsecuritiesissued,available-for-saleassets,andfinancialassetsheldfortrading.
ManyofthecashflowsarereceivedanddisbursedonbehalfofcustomersandreflecttheactivitiesofthecustomersratherthanthoseoftheBankingGroup.
19Notestothefinancialstatementscontinued2.
Basisofpreparationandgeneralaccountingpoliciescontinued2.
10OtheraccountingpoliciesSignificantandotheraccountingpolicieswhichdescribethemeasurementbasisusedandthatarerelevanttoanunderstandingoftheconsolidatedfinancialstatementsareprovidedthroughoutthenotestotheconsolidatedfinancialstatements.
3.
InterestincomeandexpenseAccountingpolicyInterestincomeandexpenserecognitionInterestincomeandexpenseforallinterestbearingfinancialassetsandliabilitiesisrecognisedusingtheeffectiveinterestmethod.
Theeffectiveinterestrateistheratethatexactlydiscountstheestimatedfuturecashreceiptsandpaymentsthroughtheexpectedlifeofthefinancialassetorliabilitytothecarryingamountofthefinancialassetorliability.
Whencalculatingtheeffectiveinterestrate,theBankingGroupestimatesfuturecashflowsconsideringallcontractualtermsofthefinancialinstrument,butnotfuturecreditlosses.
RecognitionofloanrelatedfeesandcostsCommitmentfeesaredeferredand,ifitisprobablethatthecommitmentisexercised,recognisedinincomeoverthelifeoftheloanasanadjustmentofyieldor,ifunexercised,recognisedinincomeuponexpirationofthecommitment.
Wherethelikelihoodofexerciseofthecommitmentisremote,commitmentfeesarerecognisedinincomeoverthecommitmentperiod.
Directloanoriginationcostsarerecognisedoverthelifeoftheloanasanadjustmentofyield.
Allotherloanrelatedcostsareexpensedasincurred.
DollarsinmillionsYearended30/06/17Yearended30/06/16InterestincomeLoansandadvancesatamortisedcost837882Governmentandlocalauthoritysecurities1318Othersecurities(33)(20)Cashandliquidassets710Balanceswithrelatedparties67Interestincomeonimpairedassets11Totalinterestincome831898InterestexpenseDepositsbycustomers363411Otherissues91109Balanceswithrelatedparties95Totalinterestexpense463525Interestincomefromothersecuritiesincludesthenetincomeandexpensesoninterestrateswapswhichmayresultinadebitbalance.
Thetotalinterestincomeandexpensethatrelatestofinancialassetsorliabilitiesthatarenotcarriedatfairvaluethroughprofitorlossis$830.
9m(2016:$896.
2m)and$451.
0m(2016:$509.
3m)respectively.
204.
NetgainsonfinancialinstrumentsatfairvalueAccountingpolicyAccountingpoliciesrelatingtogainsonfinancialinstrumentsatfairvaluearesetoutinnotes14,15,and18.
DollarsinmillionsYearended30/06/17Yearended30/06/16Derivativefinancialinstrumentsheldfortrading(3)(1)Financialassetsheldfortrading-1Netineffectivenessonqualifyingfairvaluehedges13-Cumulativegaintransferredfromavailable-for-salereserve68Cumulativelosstransferredfromcashflowhedgereserve(9)(5)Netforeignexchangegains1-Totalgainsonfinancialinstruments83Netineffectivenessonqualifyingcashflowhedgesis$0.
0m(2016:($0.
0m)).
Netineffectivenessonqualifyingfairvaluehedgesis$13.
5m(2016:($0.
2m)).
5.
NetfeeandotherincomeAccountingpolicyRevenuerecognitionFeeandotherincomeisrecognisedtotheextentthatitisprobablethateconomicbenefitswillflowtotheBankingGroupandthatrevenuecanbereliablymeasured.
Feeincomeisgenerallyrecognisedonanaccrualsbasiswhentheservicehasbeenprovided.
DirectfeeexpensesDirectfeeexpensesconsistofthoseexpensesdirectlyattributabletothegenerationofrevenuesuchastransactionfeesorcommissionspaid,andareexpensedastheservicesarereceived.
DollarsinmillionsYearended30/06/17Yearended30/06/16Lendingandcreditfeeincome6564Transactionandotherincome10395Agencyservicesfeeincome3336Grossfeeandotherincome201195Directfeeexpenses(83)(94)Totalfeeandotherincome118101Notestothefinancialstatementscontinued21Notestothefinancialstatementscontinued6.
OperatingexpensesAccountingpolicyOperatingexpenserecognitionOperatingexpensesarerecognisedonanaccrualbasis.
EmployeebenefitsEmployeeentitlementstosalariesandwages,bonuses,annualleave,longserviceleave,retiringleaveandothersimilarbenefitsarerecognisedintheincomestatementwhentheyaccruetoemployees.
Obligationsforcontributionstodefinedcontributionretirementplansarerecognisedasanexpenseintheincomestatementastheyfalldue.
OperatingleasesPaymentsmadeunderoperatingleases,wherethelessorsubstantiallyretainstherisksandrewardsofownership,arerecognisedintheincomestatementonastraightlinebasisoverthetermofthelease.
Leaseholdimprovementsarecapitalisedandthecostisamortisedovertheunexpiredperiodoftheleaseortheestimatedusefullifeoftheimprovements,whicheverisshorter.
Leaseincentivesreceivedarerecognisedevenlyoverthetermoftheleaseasareductioninrentalexpense.
DollarsinmillionsYearended30/06/17Yearended30/06/16Salariesandwages141122Computerandofficecosts4944Amortisationofintangibles2423Depreciation77Operatingleaseandrentalcosts1312Otherexpenses10593Totaloperatingexpenses339301DollarsinthousandsYearended30/06/17Yearended30/06/16Directors'fees74637922Notestothefinancialstatementscontinued7.
TaxationAccountingpolicyTheincometaxexpensechargedtotheincomestatementincludesbothcurrentanddeferredtax.
Incometaxisrecognisedintheincomestatementexcepttotheextentthatitrelatestoitemsrecogniseddirectlyinequity,inwhichcaseitisrecognisedinequity.
Currenttaxistheexpectedtaxpayableonthetaxableincomeforthecurrentyearusingtaxratesenactedorsubstantivelyenactedatthereportingdateaftertakingadvantageofallallowabledeductionsundercurrenttaxationlegislationandanyadjustmenttotaxpayableinpreviousyears.
Deferredtaxisprovidedinfull,usingthebalancesheetliabilitymethod,providingfortemporarydifferencesbetweenthecarryingamountofassetsandliabilitiesforfinancialreportingpurposesandtheamountsusedfortaxationpurposes.
Theamountofdeferredtaxprovidedisbasedontheexpectedmannerofrealisationorsettlementofthecarryingamountofassetsandliabilitiesusingtaxratesenactedorsubstantivelyenactedatthereportingdate.
Adeferredtaxationbenefitisrecognisedonlytotheextentthatitisprobablethatafuturetaxableprofitwillbeavailableagainstwhichthetemporarydifferencescanbeutilised.
Currentordeferredtaxrelatedtofairvaluemeasurementofavailable-for-saleassetsandcashflowhedges,whichischargedorcreditedtoothercomprehensiveincomeissubsequentlyrecognisedintheincomestatementifandwhenthedeferredgainorlossontherelatedassetorliabilityaffectsprofitorloss.
Currentanddeferredtaxassetsandliabilitiesareoffsetonlytotheextentthattheyrelatetoincometaxesimposedbythesametaxationauthorityandthereisalegalrightandintentiontosettleonanetbasisanditisallowedundertaxlaw.
IncometaxexpenseDollarsinmillionsYearended30/06/17Yearended30/06/16Profitbeforetaxation71165Taxcalculatedatarateof28%(20)(46)Taxeffectof:Deductibledistributionsrecognisedthroughequity-3Incomenotsubjecttotaxandnon-deductibleexpenses(2)-Derecognitionofdeferredtaxliabilityupondeconsolidationofsubsidiary1-TransferoftaxlossesfromotherKGHLsubsidiaries32Taxchargeaspertheincomestatement(18)(41)Representedby:Currentincometax(39)(39)Deferredincometax21(2)Taxchargeaspertheincomestatement(18)(41)Thedeferredtaxchargeintheincomestatementcomprisesthefollowingtemporarydifferences:Acceleratedtaxdepreciation-(2)Otherprovisionsandaccruals(1)-Allowancesforcreditandimpairmentlosses21-Derecognitionofdeferredtaxliabilityupondeconsolidationofsubsidiary1-Totaltemporarydifferences21(2)23Notestothefinancialstatementscontinued7.
TaxationcontinuedDeferredtaxationDollarsinmillions30/06/1730/06/16DeferredtaxBalanceatbeginningofyear2532Priorperiodadjustment2(1)Temporarydifferencesfortheyear18(2)Taxonprofitstakentoreserves(12)(4)Derecognitionofdeferredtaxliabilityupondeconsolidationofsubsidiary1-Balanceatendofyear3425DeferredincometaxassetsCashflowhedges518Otherprovisionsandaccruals23Allowanceforloanimpairment1115Impairmentofintangibleassets25-Totaldeferredincometaxassets4336DeferredincometaxliabilitiesAcceleratedtaxdepreciation(9)(9)Fairvaluelossesnotrecognisedonconsolidation-(2)Totaldeferredincometaxliabilities(9)(11)Netdeferredtaxation3425Deferredtaxassetsandliabilitiesexpectedtoberealisedwithin12months1732Deferredtaxassetsandliabilitiesexpectedtoberealisedafter12months17(7)24Notestothefinancialstatementscontinued8.
LoansandadvancesAccountingpolicyLoansandadvancesarenon-derivativefinancialassetswithfixedordeterminablepaymentsthatarenotquotedinanactivemarket.
Loansandadvancesareinitiallyrecognisedatfairvalueandsubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod.
Loansandadvancesissuedwithaninitialdurationoflessthan12monthsarerecognisedatcostlessimpairment.
Allowancesforestimatedirrecoverableamountsarerecognisedwhenthereisobjectiveevidencethattheassetisimpaired(note9).
Interestincomeandimpairmentlossesarerecognisedintheincomestatement.
Thetablebelowpresentsgrossloansandadvancesbytypeofproduct.
Totalgrossresidentialmortgageloansat30June2017were$16,646m(2016:$15,573m).
Thisincludestermloans–housingandresidentiallysecuredlendingwithinothertermlending(seenote10).
Dollarsinmillions30/06/1730/06/16Overdrafts6456Creditcardoutstandings393382Termloans-housing15,72914,702Othertermlending1,5511,511Otherlending11893Grossloansandadvances17,85516,744Collectiveallowanceforimpairmentlosses(34)(44)Allowanceforindividuallyimpairedassets(6)(9)Fairvaluehedgeadjustments-(2)Netloansandadvances17,81516,689Current1,3191,267Non-current16,49615,4229.
Impairmentreversals/(losses)onloansandadvancesAccountingpolicyAteachreportingdateanassessmentismadeastowhetherthereisobjectiveevidencethataloanoradvance(a"loan")orgroupofloansisimpaired.
Aloanoragroupofloansisimpairedandimpairmentlossesarerecognisedif,andonlyif,thereisobjectiveevidenceofimpairmentasaresultofoneormoreeventsthatoccurredaftertheinitialrecognitionoftheloan(a"lossevent")andthatlossevent(orevents)hasanimpactontheestimatedfuturecashflowsoftheloanorgroupofloansthatcanbereliablyestimated.
ObjectiveevidencethataloanorgroupofloansisimpairedincludesobservabledatathatcomestotheattentionoftheBankingGroupaboutthefollowinglossevents:significantfinancialdifficultyoftheissuerorobligator;abreachofcontract,suchasadefaultordelinquencyininterestorprincipalpayments;theBankingGroupgrantingtotheborrower,foreconomicorlegalreasonsrelatingtotheborrowersfinancialdifficulty,aconcessionthattheBankingGroupwouldnototherwiseconsider;itbecomingprobablethattheborrowerwillenterbankruptcyorotherfinancialreorganisation;thedisappearanceofanactivemarketforthatfinancialassetbecauseoffinancialdifficulties;orobservabledataindicatingthatthereisameasurabledecreaseintheestimatedfuturecashflowsfromagroupofloanssincetheinitialrecognitionofthoseloans,althoughthedecreasecannotyetbeidentifiedwiththeindividualloansintheBankingGroup,including:a)adversechangesinthepaymentstatusofborrowersintheBankingGroup;orb)nationalorlocaleconomicconditionsthatcorrelatewithdefaultsontheassetsintheBankingGroup.
Managementassesseswhetherobjectiveevidenceofimpairmentexistsindividuallyforloansthatareindividuallysignificant,andindividuallyorcollectivelyforloansthatarenotindividuallysignificant.
Ifnoobjectiveevidenceofimpairmentexistsforanindividuallyassessedloan,whethersignificantornot,theloanisincludedinagroupofloanswithsimilarcreditriskcharacteristicsandcollectivelyassessedforimpairment.
25Notestothefinancialstatementscontinued9.
Impairmentreversals/(losses)onloansandadvancescontinuedLoansthatareindividuallyassessedforimpairmentandforwhichanimpairmentlossis,orcontinuestobe,recognisedarenotincludedinacollectiveassessmentofimpairment.
Ifthereisobjectiveevidencethatanimpairmentlossonaloancarriedatamortisedcosthasbeenincurred,theamountofthelossismeasuredasthedifferencebetweentheloan'scarryingamountandthepresentvalueofestimatedfuturecashflows(excludingfuturecreditlossesthathavenotbeenincurred)discountedattheloan'soriginaleffectiveinterestrate.
Thecarryingamountoftheloanisreducedthroughtheuseofanimpairmentallowanceaccountandtheamountofthelossisrecognisedintheincomestatement.
Ifaloanhasavariableinterestrate,thediscountrateformeasuringanyimpairmentlossisthecurrenteffectiveinterestratedeterminedunderthecontract.
Forthepurposesofacollectiveevaluationofimpairment,loansaregroupedonthebasisofsimilarcreditriskcharacteristics(i.
e.
onthebasisoftheBankingGroup'sgradingprocessthatconsidersassettype,industry,collateraltype,past-duestatusandotherrelevantfactors).
Thosecharacteristicsarerelevanttotheestimationoffuturecashflowsforgroupsofloansbybeingindicativeofthedebtors'abilitytopayallamountsdueaccordingtothecontractualtermsoftheloanbeingevaluated.
InsomeinstancestheBankingGroupusesloanmortgageinsuranceonoriginationofloanswheretheloantovaluationratioisgreaterthan80%.
Futurecashflowsforagroupofloansthatarecollectivelyevaluatedforimpairmentareestimatedonthebasisofthecontractualcashflowsoftheloansandhistoricallossexperienceforloanswithsimilarcreditriskcharacteristics.
Historicallossexperienceisadjustedonthebasisofcurrentobservabledatatoreflecttheeffectsofcurrentconditionsthatdidnotaffecttheperiodonwhichthehistoricallossexperienceisbasedandtoremovetheeffectsofconditionsinthehistoricalperiodthatdonotexistcurrently.
Themethodologyandassumptionsusedforestimatingfuturecashflowsarereviewedregularlytoreduceanydifferencesbetweenlossestimatesandactuallossexperience.
If,inasubsequentperiod,theamountoftheimpairmentlossdecreasesandthedecreasecanberelatedobjectivelytoaneventoccurringaftertheimpairmentwasrecognised(suchasanimprovementinthedebtor'screditrating),thepreviouslyrecognisedimpairmentlossisreversed.
Theamountofthereversal,notexceedingwhattheamortisedcostwouldhavebeenhadtheimpairmentnotbeenrecognised,isrecognisedintheincomestatement.
Whenaloanisuncollectable,itiswrittenoffagainsttherelatedallowanceforloanimpairment.
Suchloansarewrittenoffafterallthenecessaryprocedureshavebeencompletedandtheamountofthelosshasbeendetermined.
Subsequentrecoveriesofamountspreviouslywrittenoffarerecognisedthroughtheincomestatement.
CriticalaccountingestimatesandjudgementsLoanportfoliosareassessedforimpairmentonatleastaquarterlybasis.
Indeterminingwhetheranimpairmentlossshouldberecordedintheincomestatement,judgementsaremadeastowhetherthereisanyobservabledataindicatingthatthereisameasurabledecreaseintheestimatedfuturecashflowsfromaportfolioofloansbeforethedecreasecanbeidentifiedwithanindividualloaninthatportfolio.
Thisevidencemayincludeobservabledataindicatingthattherehasbeenanadversechangeinthepaymentstatusofborrowersinagroup,ornationalorlocaleconomicconditionsthatcorrelatewithdefaultsonassetsinthegroup.
Managementusesestimatesbasedonhistoricallossexperienceforassetswithcreditriskcharacteristicsandobjectiveevidenceofimpairmentsimilartothoseintheportfoliowhenschedulingitsfuturecashflows.
Themethodologyandassumptionsusedforestimatingboththeamountandtimingoffuturecashflowsarereviewedregularlytoreduceanydifferencesbetweenlossestimatesandactuallossexperience.
Thetotalprovisioncomprisesanindividualimpairmentandcollectiveimpairmentprovision.
Individualprovisionshavebeenraisedwhereobjectiveevidenceofimpairmentexists.
Ifnoobjectiveevidenceofimpairmentexistsexposuresareincludedinagroupofloans(personalmarketsandbusinessmarketslending)andcollectivelyassessedforimpairment.
Collectiveimpairmentcalculationshavebeendeterminedbyaprovisioningmodel,historicallossexperienceandmanagement'sexperienceofeconomicstressfactors.
Keymacro-economicassumptionsconsideredinthecollectiveprovisioningassessmentaregeographicalconcentrationrisk,personalsavingslevels,unemploymentlevels,propertypricediscountsandinsurancerecoveries.
26Notestothefinancialstatementscontinued9.
Impairmentreversals/(losses)onloansandadvancescontinuedDollarsinmillionsRetailunsecuredlendingResidentialmortgageloansBusinessexposuresTotalYearended30June2017Collectiveimpairment(reversals)(2)(6)(2)(10)Individualimpairmentlosses/(reversals)5(1)-4Totalimpairmentlosses/(reversals)perincomestatement3(7)(2)(6)Yearended30June2016Collectiveimpairmentlosses/(reversals)28(7)3Individualimpairmentlosses/(reversals)81(1)8Totalimpairmentlosses/(reversals)perincomestatement109(8)1110.
AssetqualitySummaryoflendingDollarsinmillionsRetailunsecuredlendingResidentialmortgageloansBusinessexposuresTotalAsat30June2017Neitherpastduenorimpaired45316,56971317,735Pastduebutnotimpaired35703108Impaired17412Grossloansandadvances48916,64672017,855Collectiveallowanceforimpairment(9)(19)(6)(34)Individualallowanceforimpairment-(3)(3)(6)Fairvaluehedgeadjustments----Netloansandadvances48016,62471117,815Asat30June2016Neitherpastduenorimpaired44315,49568316,621Pastduebutnotimpaired35703108Impaired28515Grossloansandadvances48015,57369116,744Collectiveallowanceforimpairment(11)(25)(8)(44)Individualallowanceforimpairment(1)(4)(4)(9)Fairvaluehedgeadjustments-(2)-(2)Netloansandadvances46815,54267916,68927Notestothefinancialstatementscontinued10.
Assetqualitycontinueda:LoansandadvancespastduebutnotimpairedDollarsinmillionsRetailunsecuredlendingResidentialmortgageloansBusinessexposuresTotalAsat30June2017Pastduelessthan30days2652381Pastdue30-59days510-15Pastdue60-89days23-5Pastdue90daysorgreater25-7Total35703108Asat30June2016Pastduelessthan30days2554382Pastdue30-59days58-13Pastdue60-89days33-6Pastdue90daysorgreater25-7Total35703108b:ImpairedassetsDollarsinmillionsRetailunsecuredlendingResidentialmortgageloansBusinessexposuresTotalYearended30June2017GrossimpairedassetsBalanceatbeginningoftheyear28515Transfersfromperforming62715Transferstoperforming--(1)(1)Assetrealisationsandloansrepaid(1)(3)(6)(10)Amountswrittenoff(6)-(1)(7)Balanceatendoftheyear17412Individualallowanceforimpairment-(3)(3)(6)Totalnetimpairedassets1416Yearended30June2016GrossimpairedassetsBalanceatbeginningoftheyear1111123Transfersfromperforming915327Transferstoperforming--(6)(6)Assetrealisationsandloansrepaid-(16)(2)(18)Amountswrittenoff(8)(2)(1)(11)Balanceatendoftheyear28515Individualallowanceforimpairment(1)(4)(4)(9)Totalnetimpairedassets141628Notestothefinancialstatementscontinued10.
Assetqualitycontinuedc:ReconciliationofcollectiveallowanceforimpairmentbyassetclassDollarsinmillionsRetailunsecuredlendingResidentialmortgageloansBusinessexposuresTotalCollectiveallowanceforimpairmentlossesYearended30June2017Balanceatbeginningoftheyear1125844Impairment(reversals)onloansnotatfairvaluethroughprofitorloss(2)(6)(2)(10)Balanceatendoftheyear919634Yearended30June2016Balanceatbeginningoftheyear9171541Impairmentlosses/(reversals)onloansnotatfairvaluethroughprofitorloss28(7)3Balanceatendoftheyear1125844d:ReconciliationoftheindividualallowanceforimpairmentDollarsinmillionsRetailunsecuredlendingResidentialmortgageloansBusinessexposuresTotalIndividualallowanceforimpairmentlossesYearended30June2017Balanceatbeginningoftheyear1449Impairmentlossesonloansnotatfairvaluethroughprofitorloss61310Amountswrittenoff(6)-(1)(7)Reversalsofpreviouslyrecognisedimpairedassets(1)(2)(3)(6)Balanceatendoftheyear-336Yearended30June2016Balanceatbeginningoftheyear15612Impairmentlossesonloansnotatfairvaluethroughprofitorloss86418Amountswrittenoff(8)(2)(1)(11)Reversalsofpreviouslyrecognisedimpairedassets-(5)(5)(10)Balanceatendoftheyear1449e:AssetqualityofloansandadvancesTherewerenorealestateorotherassetsacquiredthroughtheenforcementofsecurity/collateralheldat30June2017(30June2016:nil).
Therewerenoassetsunderadministrationasat30June2017(30June2016:nil).
Therewerenounrecognisedimpairedassetsasat30June2017(30June2016:nil).
Theaggregateamountofundrawnlimitsonlendingcommitmentstocounterpartiesforwhomdrawnbalanceswereclassifiedasindividuallyimpairedwas$1.
0mat30June2017(30June2016:$2.
9m).
29Notestothefinancialstatementscontinued10.
Assetqualitycontinuedf:CreditqualityoffinancialassetsneitherpastduenorimpairedAlargeportionofthecreditexposures,suchasresidentialmortgages,aresecured.
Thatis,thefairvalueofassociatedsecurityissufficienttoensurethattheBankingGroupwillrecovertheentireamountowingoverthelifeofthefacilityandthereisreasonableassurancethatcollectioneffortswillresultinpaymentoftheamountsdueinatimelymanner.
ThecreditqualityofloansandadvancestocustomersthatwereneitherpastduenorimpairedcanbeassessedbyreferencetotheBank'screditscoringsystems.
Attheoriginationofloansandadvancestocustomers,retailadvancesarecreditscoredbasedonacombinationofdebtservicingability,behaviouralloancharacteristicsandloan-to-valuation("LVR")ratios.
Non-retailadvancesareindividuallyriskgradedagainstsimilarcharacteristics.
Thesecreditscoringcharacteristicsarereviewedperiodicallyforadversechangesduringtheloan'slife.
Interestcontinuestobeaccruedonallloans.
Nointeresthasbeenforegone.
AllofthefinancialassetsoftheBankingGroupasat30June2017and2016,otherthanloansandadvances,areconsideredofhighcreditqualityandareneitherpastduenorimpaired.
Definitions"Impairedasset"meansanycreditexposuresagainstwhichanindividuallyassessedprovisionhasbeenrecordedinaccordancewithNZIAS39–FinancialInstruments:RecognitionandMeasurement.
A"90daypastdueasset"isanyloanwhichhasnotbeenoperatedbytheborrowerwithinitskeytermsforatleast90daysandwhichisnotanimpairedasset.
An"assetunderadministration"isanycreditexposurewhichisnotanimpairedassetorapastdueasset,butwhichistoacounterpartywhoisinreceivership,liquidation,bankruptcy,statutorymanagementoranyformofadministration.
Theseareclassifiedas"otherassetsunderadministration"andreportedseparately.
11.
ConcentrationofcreditriskConcentrationsofcreditriskarisewheretheBankingGroupisexposedtoriskinactivitiesorindustriesofasimilarnature.
Ananalysisoffinancialassetsbyindustrysectoratreportingdateisasfollows:Dollarsinmillions30/06/1730/06/16NewZealandGovernment,localauthoritiesandservices1,022966Finance,investmentandinsurance877693Households16,21615,053Transportandstorage11569Professional,scientificandtechnicalservices5639Electricity,gasandwater43Construction182220Propertyandbusinessservices936836Agriculture2724Healthandcommunityservices8092Personalandotherservices92183Retailandwholesaletrade9686Food&othermanufacturing101108OverseasFinance,investmentandinsurance66781620,47119,188Lessallowanceforimpairmentlosses(40)(53)Otherfinancialassets1810Totalfinancialassets20,44919,14530Notestothefinancialstatementscontinued11.
ConcentrationofcreditriskcontinuedMaximumexposuretocreditriskandcollateralheld30/06/1730/06/16DollarsinmillionsMaximumexposureCollateralNetexposureMaximumexposureCollateralNetexposureCreditriskrelatingtobalancesheetassetsFixedratelending13,626(13,621)512,580(12,573)7Variableratelending3,818(3,817)13,762(3,760)2Unsecuredlending411-411400-400Duefromotherfinancialinstitutions228-228247-247Balanceswithrelatedparties80-8077-77Derivativefinancialinstruments370(52)318658(78)580FinancialassetsheldfortradingAvailable-for-saleassets1,474-1,474955-955Cashandcashequivalents464-464509-509Otherfinancialassets18-1810-1020,489(17,490)2,99919,198(16,411)2,787Lessallowanceforimpairment(40)-(40)(53)-(53)Totalfinancialassets20,449(17,490)2,95919,145(16,411)2,734ThetableaboverepresentsaworstcasescenarioofcreditriskexposuretotheBankingGroupat30June2017.
Theexposuressetoutarebasedonnetcarryingamountsasreportedinthebalancesheet.
AustralianandNewZealandStandardIndustrialClassification("ANZSIC")codeshavebeenusedasthebasisfordisclosingcustomerindustrysectors.
TheexposureoftheBankingGroupderivedfromloansandadvancestoretailandcorporatecustomersis87%ofthetotalmaximumexposureat30June2017(2016:87%).
ThetableaboveprovidesaquantificationofthevalueofthefinancialchargestheBankingGroupholdsoveraborrower'sspecificasset(orassets)wheretheBankingGroupisabletoenforcethecollateralinsatisfyingthedebtintheeventoftheborrowerfailingtomeetitscontractualobligations.
Forthepurposesofthisdisclosure,wherecollateralheldisvaluedatmorethanthecorrespondingcreditexposure,coverageiscappedatthevalueofthecreditexposurelessamountsforwhichanindividualimpairmentallowancehasbeenrecognised.
Themostcommontypeofcollateralisoverrealestateincludingresidential,commercial,industrialandruralproperty.
TheBankingGroupispotentiallyexposedtocreditriskforundrawnloancommitments(note38)foranamountequaltotheundrawnbalance.
12.
CashandcashequivalentsAccountingpolicyCashandcashequivalentsisconsideredtobecashonhand,currentaccountsinbanks,ATMs,overnightbankdeposits,netofbankoverdraftsandinter-bankbalancesarisingfromthedailyRBNZsettlementprocess.
Dollarsinmillions30/06/1730/06/16Cashinhand3330Cashwithcentralbanks349400Callandovernightadvancestofinancialinstitutions8279Totalcashandcashequivalents-Current46450931Notestothefinancialstatementscontinued13.
DuefromotherfinancialinstitutionsAccountingpolicyBalancesduefromotherfinancialinstitutionsarenon-derivativefinancialassetswithfixedordeterminablepaymentsthatarenotquotedinanactivemarket.
Theyarerecognisedinitiallyatfairvalueandsubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod.
Iftheinitialdurationislessthan12monthstheyarerecognisedatcostlessimpairment.
Allowancesforestimatedirrecoverableamountsarerecognisedwhenthereisobjectiveevidencethattheassetisimpaired.
Interest,impairmentlossesandforeignexchangegainsandlossesarerecognisedintheincomestatement.
ReverserepurchaseagreementsTheBankingGrouppurchases(areverserepurchaseagreement)orborrowscollateralintheformofsecuritiesandprovidescashinexchange.
TheBankingGroupmaysellorre-pledgeanycollateralreceived,buthasanobligationtoreturnthecollateralatthematurityofthecontractandthecounterpartyretainssubstantiallyalltherisksandrewardsofownership.
ConsequentlythecollateralisnotrecognisedbytheBankingGroup,whichinsteadrecordsareceivableforthecashprovided.
Thedifferencebetweenthepurchaseandsalepriceofthecollateralrepresentsinterestincomeandisrecognisedintheincomestatementoverthetermofthereverserepurchaseagreement.
Dollarsinmillions30/06/1730/06/16Unsettledreceivables-42Shorttermadvancesduefromotherfinancialinstitutions12140Collateralisedloans107165Totalamountsduefromotherfinancialinstitutions-Current228247Includedwithintheabovebalance,is$107.
5mofcollateralpledgedbyKiwibankinrespectofitscreditsupportannexobligationstoderivativecounterparties(2016:$164.
7m).
14.
Available-for-saleassetsAccountingpolicyAvailable-for-salefinancialassetsarenon-derivativefinancialassetsthatareeitherdesignatedinthiscategoryornotclassifiedinanyoftheothercategories.
Available-for-salefinancialassetsareheldatfairvalueandgainsandlossesresultingfromchangesintheirfairvaluearerecogniseddirectlyinequityexceptforimpairmentlosses,anyinterestcalculatedusingtheeffectiveinterestmethodand,inthecaseofmonetaryitems(suchasdebtsecurities),foreignexchangegainsandlosseswhichareallrecognisedintheincomestatement.
Fornon-monetaryavailable-for-salefinancialassets(e.
g.
equityinstruments)thefairvaluemovementsrecognisedinequityincludeanyrelatedforeignexchangecomponent.
Onderecognitionthecumulativefairvaluegainorlosspreviouslyrecogniseddirectlyinequityistakentotheincomestatementinnetgainsonfinancialinstrumentsatfairvalue(note4).
ImpairmentTheBankingGroupassessesateachreportingdatewhetherthereisobjectiveevidencethatanavailable-for-saleassetisimpaired.
Anavailable-for-saleassetisimpairedandimpairmentlossesarerecognisedif,andonlyif,thereisobjectiveevidenceofimpairmentasaresultofoneormoreeventsthatoccurredaftertheinitialrecognitionoftheasset(a"lossevent")andthatlossevent(orevents)hasanimpactontheestimatedfuturecashflowsoftheavailable-for-saleassetthatcanbereliablyestimated.
Whenadeclineinfairvaluehasbeenrecogniseddirectlyinequityandthereisobjectiveevidencethattheavailable-for-saleassetisimpaired,thecumulativelossthathadbeenrecogniseddirectlyinequityisremovedfromequityandrecognisedintheincomestatement.
If,inasubsequentperiod,thefairvalueincreasesandtheincreasecanbeobjectivelyrelatedtoaneventoccurringaftertheimpairmentlosswasrecognisedintheincomestatement,theimpairmentlossisreversedthroughtheincomestatement.
Dollarsinmillions30/06/1730/06/16Governmentstockandmultilateraldevelopmentbanks866727Treasurybills-11Localauthoritysecurities1219Otherdebtsecurities487208Totalavailable-for-saleassets–Current1,47495532Notestothefinancialstatementscontinued15.
DerivativefinancialinstrumentsAccountingpolicyTheBankingGroupusesderivativesaspartofitsassetandliabilitymanagementactivitiestomanageexposurestointerestrateandforeigncurrency,includingexposuresarisingfromforecasttransactions.
Thesederivativesincludeswaps,futures,forwards,optionsandothercontingentorexchangetradedcontractsintheinterestrateandforeignexchangemarkets.
Fairvaluesareobtainedfromquotedmarketpricesinactivemarkets,includingrecentmarkettransactions,andvaluationtechniques,includingdiscountedcashflowmodelsandoptionspricingmodels,asappropriate.
Allderivativesarepresentedasassetswhenfairvalueispositiveandasliabilitieswhenfairvalueisnegative.
Themethodofrecognisingtheresultingfairvaluegainorlossdependsonthenatureoftheitembeinghedged.
TheBankingGroupdesignatescertainderivativesaseither:(1)hedgesofthefairvalueofrecognisedassetsorliabilitiesorfirmcommitments(a"fairvaluehedge");or,(2)hedgesofhighlyprobablefuturecashflowsattributabletoarecognisedassetorliability,oraforecastedtransaction(a"cashflowhedge").
Hedgeaccountingisusedforderivativesdesignatedinthiswayprovidedcertaincriteriaaremet.
TheBankingGroupdocuments,attheinceptionofthetransaction,therelationshipbetweenhedginginstrumentsandhedgeditems,aswellasitsriskmanagementobjectiveandstrategyforundertakingvarioushedgetransactions.
TheBankingGroupalsodocumentsitsassessment,bothathedgeinceptionandonanongoingbasis,ofwhetherthederivativesthatareusedinhedgingtransactionsarehighlyeffectiveinoffsettingchangesinfairvaluesorcashflowsofhedgeditems.
FairvaluehedgeChangesinthefairvalueofderivativesthataredesignatedandqualifyasfairvaluehedgesarerecordedintheincomestatement,togetherwithanychangesinthefairvalueofthehedgedassetorliabilitythatareattributabletothehedgedrisk.
Ifthehedgenolongermeetsthecriteriaforhedgeaccounting,theadjustmenttothecarryingamountofahedgeditemforwhichtheeffectiveinterestmethodisusedisamortisedtotheincomestatementovertheperiodtomaturity.
CashflowhedgeTheeffectiveportionofchangesinthefairvalueofderivativesthataredesignatedandqualifyascashflowhedgesarerecognisedinequity.
Thegainorlossrelatingtotheineffectiveportionisrecognisedimmediatelyintheincomestatement.
Amountsaccumulatedinequityarerecycledtotheincomestatementintheperiodsinwhichthehedgeditemwillaffectprofitorloss.
Whenahedginginstrumentexpiresorissold,orwhenahedgenolongermeetsthecriteriaforhedgeaccounting,anycumulativegainorlossexistinginequityatthattimeremainsinequityandisrecognisedwhentheforecasttransactionisultimatelyrecognisedintheincomestatement.
Whenaforecasttransactionisnolongerexpectedtooccur,thecumulativegainorlossthatwasreportedinequityisimmediatelytransferredtotheincomestatement.
DerivativesheldfortradingCertainderivativeinstrumentsdonotqualifyforhedgeaccounting.
TheseincludederivativestransactedaspartofthetradingactivityoftheBankingGroup,aswellasderivativestransactedaseconomichedgesbutnotqualifyingforhedgeaccounting.
Changesinthefairvalueofanyderivativeinstrumentthatdoesnotqualifyforhedgeaccountingarerecognisedimmediatelyintheincomestatement.
33Notestothefinancialstatementscontinued15.
DerivativefinancialinstrumentscontinuedTheBankingGroupusesthefollowingderivativeinstrumentsforbothhedgingandnon-hedgingpurposes:Currencyforwardsrepresentcommitmentstopurchaseforeignanddomesticcurrency,includingundeliveredspottransactions.
Foreigncurrencyandinterestratefuturesarecontractualobligationstoreceiveorpayanetamountbasedonchangesincurrencyratesorinterestrates,ortobuyorsellforeigncurrencyorafinancialinstrumentonafuturedateataspecifiedprice,establishedinanorganisedfinancialmarket.
Thecreditriskisnegligible,asfuturescontractsarecollateralisedbycashormarketablesecurities,andchangesinthefutures'contractvaluearesettleddailywiththeexchange.
Forwardrateagreementsareindividuallynegotiatedinterestratefuturesthatcallforacashsettlementatafuturedateforthedifferencebetweenacontractedrateofinterestandthecurrentmarketrate,basedonanotionalprincipalamount.
Currencyandinterestrateswapsarecommitmentstoexchangeonesetofcashflowsforanother.
Swapsresultinaneconomicexchangeofcurrenciesorinterestrates(forexample,fixedrateforfloatingrate)oracombinationofallthese(i.
e.
cross-currencyinterestrateswaps).
Noexchangeofprincipaltakesplace,exceptforcertaincurrencyswaps.
TheBankingGroup'screditriskrepresentsthepotentialcosttoreplacetheswapcontractsifcounterpartiesfailtofulfiltheirobligation.
Thisriskismonitoredonanongoingbasiswithreferencetothecurrentfairvalue.
Tocontrolthelevelofcreditrisktaken,theBankingGroupassessescounterpartiesusingthesametechniquesasforitslendingactivities.
Foreigncurrencyandinterestrateoptionsarecontractualagreementsunderwhichtheseller(writer)grantsthepurchaser(holder)theright,butnottheobligation,eithertobuy(acalloption)orsell(aputoption)atorbyasetdateorduringasetperiod,aspecificamountofaforeigncurrencyorafinancialinstrumentatapredeterminedprice.
Thesellerreceivesapremiumfromthepurchaserinconsiderationfortheassumptionofforeignexchangeorinterestraterisk.
Optionsmaybeeitherexchange-tradedornegotiatedbetweentheBankingGroupandacustomerover-the-counter.
TheBankingGroupisexposedtocreditriskonpurchasedoptionsonlyandonlytotheextentoftheircarryingamount,whichistheirfairvalue.
Thenotionalamountsofcertaintypesoffinancialinstrumentsprovideabasisforcomparisonwithinstrumentsrecognisedonthebalancesheetbutdonotnecessarilyindicatetheamountsoffuturecashflowsinvolvedorthecurrentfairvalueoftheinstrumentsand,therefore,donotindicatetheBankingGroup'sexposuretocreditorpricerisks.
Thederivativeinstrumentsbecomefavourable(assets)orunfavourable(liabilities)asaresultoffluctuationsinmarketinterestratesorforeignexchangeratesrelativetotheirterms.
Theaggregatecontractualornotionalamountofderivativefinancialinstrumentsonhand,theextenttowhichinstrumentsarefavourableorunfavourable,andthustheaggregatefairvaluesofderivativefinancialassetsandliabilities,canfluctuatesignificantlyfromtimetotime.
Thefairvalueofderivativeinstrumentsissetoutonthefollowingpage.
FairvaluehedgesGain/(loss)onfairvaluehedgesattributabletothehedgedriskDollarsinmillionsYearended30/06/17Yearended30/06/16Gain/(loss)arisingfromfairvaluehedges:Hedgeditem17(10)Hedginginstrument(4)10Netineffectivenessonqualifyingfairvaluehedges13-34Notestothefinancialstatementscontinued15.
Derivativefinancialinstrumentscontinued30/06/1730/06/16DollarsinmillionsNotionalPrincipalAmountFairvaluesNotionalPrincipalAmountFairvaluesAssetsLiabilitiesAssetsLiabilitiesDerivativesheldfortradingForeignexchangederivatives1,0845(32)1,0209(20)Interestratederivatives29,877280(291)37,006531(544)Totalderivativesheldfortrading30,961285(323)38,026540(564)DerivativesheldforhedgingDesignatedascashflowhedgesInterestratederivatives10,82824(66)9,79730(123)Exchangeratederivatives66253(23)67577(14)Totalderivativesdesignatedascashflowhedges11,49077(89)10,472107(137)DesignatedasfairvaluehedgesInterestratederivatives1,1598(4)1,55211(24)Totalderivativesdesignatedasfairvaluehedges1,1598(4)1,55211(24)Totalderivativesheldforhedging12,64985(93)12,024118(161)Totalderivativefinancialinstruments43,610370(416)50,050658(725)Current60(133)544(623)Non-current310(283)114(102)FairvaluehedgesTheBankingGroupusesinterestrateswapstohedgeinterestrateriskexposureofaportionofitsportfoliooffixedratemortgageloansandfixedratebonds.
TheBankingGrouphedgesthisriskthroughtheuseofpayfixedinterestrateswaps.
Thedesignatedhedgingrelationshipsresultinfairvaluegainsandlossesonthefixedratefinancialinstrumentsandinterestrateswaps.
Thefairvaluegainsandlossesarerecordedthroughtheincomestatementasincurred.
Whenafairvaluehedgingrelationshipisde-designated,thefairvalueadjustmentstothebalancesheetcarryingvalueareamortisedtotheincomestatementovertheremainingperiodtothematuritydateofthefixedratefinancialinstrument.
TheBankingGroupalsopartiallyhedgestheinterestrateriskarisingfromanypotentialchangeinthefairvalueoffixedratesubordinateddebtissuancesandmediumtermnotes.
TheBankingGrouphedgesthisriskthroughtheuseofreceivefixedinterestrateswaps.
Thedesignatedhedgingrelationshipsresultinfairvaluegainsandlossesonthefixedrateliabilityandinterestrateswap.
Thefairvaluegainsandlossesarerecordedthroughtheincomestatementasincurred.
Whenafairvaluehedgingrelationshipisde-designated,thefairvalueadjustmentstothebalancesheetcarryingvalueareamortisedtotheincomestatementovertheremainingperiodtothematuritydateofthefixedrateliability.
CashflowhedgesTheBankingGrouphedgestheshorttermfuturereissuanceoffixedrateloancustomersandfutureretailtermdepositsthroughtheuseofinterestrateswaps.
Gainsandlossesdeferredinthecashflowhedgereservewillbereclassifiedtotheincomestatementoverthenextonetofiveyears,asthecashflowsunderthehedgedtransactionsoccur.
DualfairvalueandcashflowhedgesTheBankingGrouphedgesfixedrateforeigncurrencydenominatedmediumtermdebtissuancesusingcrosscurrencyswaps,designatedasfairvaluehedgesofforeigninterestratesandcashflowhedgesofforeignexchangerates.
35Notestothefinancialstatementscontinued16.
DuetootherfinancialinstitutionsAccountingpolicyAmountsduetofinancialinstitutionsaredesignatedasfinancialliabilitiesatamortisedcost.
Theyarerecognisedinitiallyatfairvalueandsubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod.
Amortisationandforeignexchangegainsandlosses,arerecognisedintheincomestatementasisanygainorlosswhentheliabilityisderecognised.
RepurchaseagreementsUnderRepurchaseAgreements,collateralintheformofsecuritiesisadvancedtoathirdpartyandtheBankingGroupreceivescashinexchange.
Thecounterpartyisallowedtosellorre-pledgethecollateraladvancedunderRepurchaseAgreementsintheabsenceofdefaultbytheBankingGroup,buttheyhaveanobligationtoreturnthecollateralatthematurityofthecontract.
TheBankingGrouphasdeterminedthatitretainssubstantiallyalltherisksandrewardsofthesecuritiesadvancedandthereforetheyarenotderecognisedandareretainedwithintherelevantsecurityportfolioandaccountedforaccordingly.
Liabilityaccountsareusedtorecordtheobligationtorepurchase.
Thedifferencebetweenthesaleandrepurchasepricerepresentsinterestexpenseandisrecognisedintheincomestatementoverthetermoftherepurchaseagreement.
Dollarsinmillions30/06/1730/06/16Repurchaseagreements-53Cashcollateralreceived5278Transactionbalanceswithotherfinancialinstitutions74Totalamountsduetootherfinancialinstitutions-Current5913517.
DepositsandotherborrowingsAccountingpolicyDepositsandotherborrowingsaredesignatedasfinancialliabilitiesatamortisedcost.
Theyarerecognisedinitiallyatfairvalueandsubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod.
Amortisationandforeignexchangegainsandlossesarerecognisedintheincomestatementasisanygainorlosswhentheliabilityisderecognised.
Dollarsinmillions30/06/1730/06/16Demanddepositsnon-interestbearing1,7711,505Demanddepositsbearinginterest3,1373,135Termdeposits11,07510,142Totaldepositsfromcustomers15,98314,782Current15,61214,340Non-current371442IntheeventoftheliquidationofKiwibank,depositholderswillrankequallywithallothercreditorsbutaheadofsubordinateddebtholdersandshareholders.
Inaddition,allpaymentobligationsofKiwibankcoveredbytheNZPGuaranteethatexistedatthetimetheNZPGuaranteewasterminatedon28February2017areguaranteedundertheNZPGuaranteebutonlyinrelationtoandtotheextentofthoseobligations.
TheKiwibankPIEUnitTrust(the"Trust"),establishedinMay2008,operatesthreefunds;thePIETermDepositFund,theNoticeSaverandPIEOnlineCallFund.
KiwibankInvestmentManagementLimitedistheIssuerandManager(the"Manager"),TrusteesExecutorsLimitedistheSupervisorandKiwibankisthePromoteroftheTrust.
UnitsintheTrustdonotdirectlyrepresentdepositsorliabilitiesofKiwibank,howevertheTrustisinvestedexclusivelyintermandcalldepositswithKiwibank.
At30June2017,$3,196moftheTrust'sfundswereinvestedinKiwibankproductsorsecurities(30June2016:$3,525m).
KiwibankguaranteesthepaymentobligationsoftheManagerandanyamountsowingtoUnitholdersundertheTrustDeedinrespectoftheirUnits.
KiwibankagreestopaytoUnitholdersanyshortfallbetweentheamounttheymayreceiveonredeemingtheirUnitsorinthewindingupoftheTrustandthebalanceoftheirUnitAccounts.
36Notestothefinancialstatementscontinued18.
DebtsecuritiesissuedAccountingpolicyDebtsecuritiesissued,withtheexceptionofcommercialpaperatfairvaluethroughprofitorloss,aredesignatedasfinancialliabilitiesatamortisedcost.
Theyarerecognisedinitiallyatfairvalueandsubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod.
Amortisationandforeignexchangegainsandlosses,arerecognisedintheincomestatementasisanygainorlosswhentheliabilityisderecognised.
CommercialpaperatfairvaluethroughprofitorlossconsistsofEuropeanCommercialPaper("ECP")andismeasuredatfairvaluewithanyrealisedandunrealisedgainsorlossesrecognisedintheincomestatement.
ECPissuedhasbeendesignatedatfairvaluethroughprofitorlossastheGroupholdsrelatedderivativesatfairvaluethroughprofitorloss,anddesignationthereforeeliminatesorsignificantlyreducesanaccountingmismatchthatwouldotherwisearise.
Dollarsinmillions30/06/1730/06/16ShorttermdebtCommercialpaperatfairvaluethroughprofitorloss647290Certificatesofdeposit41227LongtermdebtMediumtermnotes1,3381,441Coveredbonds214215Fairvaluehedgeadjustment1834Totaldebtsecuritiesissued2,2582,207Current977810Non-current1,2811,397IntheeventoftheliquidationofKiwibank,holdersofthesedebtsecurities,withtheexceptionofcoveredbonds,willrankequallywithallothercreditorsbutaheadofsubordinateddebtholdersandshareholders.
Inaddition,allpaymentobligationsofKiwibankthatexistedatthetimetheNZPGuaranteewasterminatedon28February2017,excludinganypaymentobligations,thetermsofwhichexpresslyprovidethattheydonothavethebenefitoftheguarantee,areguaranteedundertheNZPGuaranteebutonlyinrelationtoandtotheextentofthoseobligations.
Theguaranteearrangementsandotherdetailsrelatingtocoveredbondsaredisclosedinnote24.
Kiwibankhasnothadanydefaultsofprincipal,interestorotherbreacheswithrespecttodebtsecuritiesissuedduringtheyear(yearended30June2016:none).
37Notestothefinancialstatementscontinued19.
SubordinateddebtAccountingpolicySubordinateddebtissuesaredesignatedasfinancialliabilitiesatamortisedcost.
Theyarerecognisedinitiallyatfairvalueandsubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod.
Amortisationandforeignexchangegainsandlosses,arerecognisedintheincomestatementasisanygainorlosswhentheliabilityisderecognised.
Dollarsinmillions30/06/1730/06/16Subordinatedbonds150150Kiwibankbonds107-Perpetualcapitalbonds148-Capitalnotes-108Totalsubordinateddebt405258Current33Non-current402255Duringtheyear,theBankingGroupdidnotissueorcallsubordinateddebt(yearended30June2016:$nilissuedand$nilcalled).
Asat30June2017,$108m(30June2016:$208m)ofsubordinateddebtqualifiedasTier2capitalforCapitalAdequacycalculationpurposes.
Theperpetualcapitalbondswerepreviouslyeliminatedonconsolidationasexplainedfurtherbelow.
Thecontractualtermsofsubordinateddebtinstrumentsonissueexpresslyprovidethattheydonothavethebenefitofadeedpollguarantee(the"NZPGuarantee")providedbyNZP.
TheNZPGuaranteewasterminatedwithaneffectivedateof28February2017.
TheBankingGrouphasnothadanydefaultsofprincipal,interestorotherbreacheswithrespecttotheseliabilitiesduringtheyear(yearended30June2016:none).
ThesubordinateddebtinstrumentsonissuearesubordinatetoallothergeneralliabilitiesoftheBankingGroupandaredenominatedinNewZealanddollars.
EffectofdeconsolidationofKiwiCapitalFundingLimited("KCFL")onsubordinateddebtKCFL,whichis100%ownedbyKGHL,wasestablishedsolelyforthepurposeofissuingdebtsecuritiestothemarketandusingtheproceedstosubscribeforcapitalinstrumentsissuedbyKiwibank.
On30March2017,changesweremadetotheKGHLGroupgovernancearrangementswhichresultedinKCFLbeingdeconsolidatedfromtheBankingGroup.
Therefore,theBankingGroupnolongerrecognisesKCFL'sassetsandliabilitiesasat30June2017.
Asaconsequenceofdeconsolidation,debtinstrumentsissuedbyKiwibanktoKCFL,previouslyeliminatedonconsolidation,arenowrecognisedaspartoftheBankingGroupandsimilarly,debtinstrumentsissuedbyKCFLarenolongerrecognisedaspartoftheBankingGroup.
ThisresultedinthederecognitionofcapitalnotesissuedbyKCFLandrecognitionofsubordinatedbondsissuedbyKiwibanktoKCFL("KiwibankBonds")thatwerefundedbyKCFL'sissuanceofthecapitalnotes.
PerpetualcapitalbondsissuedtoKCFLbyKiwibankarealsonowrecognisedbytheBankingGrouphavingbeenpreviouslyeliminatedonconsolidation.
TherecognitionoftheperpetualcapitalbondsissuedtoKCFLwasoffsetbythederecognitionofperpetualcapitalnotesthatwerepreviouslyrecognisedasequityoftheBankingGroup.
TheeffectofthedeconsolidationofKCFLisfurtherdisclosedinnote32.
TermsandconditionsofthesubordinateddebtinstrumentsonissueInstrumentIssuedateAmount($m)CouponrateCalldateMaturitydateSubordinatedbonds10December20121505.
80%p.
a.
15December201715December2022Kiwibankbonds6June20141006.
61%p.
a.
15July201915July2024Perpetualcapitalbonds27May20151507.
25%p.
a.
27May2020NoneFixedinterestratewhichwillbereseton15July2019Fixedinterestratewhichwillbereseton27May2020andat5-yearlyintervalsthereafter38Notestothefinancialstatementscontinued20.
FinancialinstrumentsAccountingpolicyTheBankingGroupmeasurescertainfinancialinstrumentsatfairvalueateachreportingdate.
Additionally,thefairvaluesofcertainfinancialinstrumentswhicharemeasuredatamortisedcostaredisclosed.
Fairvalueisthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthereportingdate.
Thefairvaluemeasurementisbasedonthepresumptionthatthetransactiontoselltheassetortransfertheliabilitytakesplaceeither:Intheprincipalmarketfortheassetorliability;orIntheabsenceofaprincipalmarket,inthemostadvantageousmarketfortheassetorliability.
TheBankingGroupmusthaveaccesstotheprincipalorthemostadvantageousmarket.
Thefairvalueofanassetorliabilityismeasuredusingtheassumptionsthatmarketparticipantswouldusewhenpricingtheassetorliability,assumingthatmarketparticipantsactintheirowneconomicbestinterest.
TheBankingGroupusesvaluationtechniquesthatareappropriateinthecircumstancesandforwhichsufficientdataisavailabletomeasurefairvalue,maximisingtheuseofrelevantobservableinputsandminimisingtheuseofunobservableinputs.
Allassetsandliabilitiesforwhichfairvalueismeasuredordisclosedinthefinancialstatementsarecategorisedwithinthefairvaluehierarchybasedonthelowestlevelinputthatissignificanttothefairvaluemeasurementasawhole.
Forassetsandliabilitiesthatarerecognisedinthefinancialstatementsatfairvalueonarecurringbasis,theBankingGroupdetermineswhetheranytransfersbetweenlevelsinthehierarchyhasoccurredbyre-assessingcategorisationattheendofeachreportingperiod.
Forthepurposesoffairvaluedisclosures,theBankingGrouphasdeterminedclassesofassetsandliabilitiesonthebasisofthenature,characteristicsandrisksoftheassetorliabilityandthelevelofthefairvaluehierarchyasexplainedabove.
CriticalaccountingestimatesandjudgementsThefairvalueoffinancialinstrumentsthatarenotquotedinanactivemarketisdeterminedbyusingvaluationtechniques.
Managementuseavarietyofmethodsandmakesassumptionsthatarebasedonmarketconditionsexistingateachreportingdate.
Theterm"financialinstruments"includesbothfinancialassetsandfinancialliabilities.
Thefairvalueofafinancialinstrumentisthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipants,atthereportingdate,intheprincipal,orinitsabsence,themostadvantageousmarkettowhichtheBankingGrouphasaccess(atthatdate).
a:MeasurementbasisoffinancialassetsandliabilitiesTheaccountingpoliciesdescribehowdifferentclassesoffinancialinstrumentsaremeasured,andhowincomeandexpenses,includingfairvaluegainsandlosses,arerecognised.
Thefollowingtablesanalysethecarryingamountsofthefinancialassetsandliabilitiesbycategoryandbybalancesheetheading.
39Notestothefinancialstatementscontinued20.
FinancialinstrumentscontinuedCarryingamountsoffinancialassetsandliabilitiesbycategory30June2017LoansandreceivablesAvailable-for-saleAssetsatfairvaluethroughprofitorlossDerivativesusedforhedgingTotalDollarsinmillionsHeldfortradingDesignatedatFVTPLCashandcashequivalents464----464Duefromotherfinancialinstitutions228----228Available-for-saleassets-1,474---1,474Loansandadvances17,815----17,815Derivativefinancialinstruments--285-85370Duefromrelatedparties80----80Otherfinancialassets18----18Totalfinancialassets18,6051,474285-8520,449DollarsinmillionsLiabilitiesatfairvaluethroughprofitorlossDerivativesusedforhedgingOtherfinancialliabilitiesatamortisedcostTotalHeldfortradingDesignatedatFVTPLDuetootherfinancialinstitutions---5959Depositsandotherborrowings---15,98315,983Derivativefinancialinstruments323-93-416Debtsecuritiesissued-647-1,6112,258Subordinateddebt---405405Duetorelatedparties---1212Otherfinancialliabilities---6767Totalfinancialliabilities3236479318,13719,20040Notestothefinancialstatementscontinued20.
FinancialinstrumentscontinuedCarryingamountsoffinancialassetsandliabilitiesbycategorycontinued30June2016LoansandreceivablesAvailable-for-saleAssetsatfairvaluethroughprofitorlossDerivativesusedforhedgingTotalDollarsinmillionsHeldfortradingDesignatedatFVTPLCashandcashequivalents509----509Duefromotherfinancialinstitutions247----247FinancialassetsheldfortradingAvailable-for-saleassets-955---955Loansandadvances16,689----16,689Derivativefinancialinstruments--540-118658Duefromrelatedparties77----77Otherfinancialassets10----10Totalfinancialassets17,532955540-11819,145DollarsinmillionsLiabilitiesatfairvaluethroughprofitorlossDerivativesusedforhedgingOtherfinancialliabilitiesatamortisedcostTotalHeldfortradingDesignatedatFVTPLDuetootherfinancialinstitutions---135135Depositsandotherborrowings---14,78214,782Derivativefinancialinstruments564-161-725Debtsecuritiesissued-290-1,9172,207Subordinateddebt---258258Duetorelatedparties---44Otherfinancialliabilities---7777Totalfinancialliabilities56429016117,17318,18841Notestothefinancialstatementscontinued20.
Financialinstrumentscontinuedb:FairvaluesoffinancialassetsandliabilitiesThefollowingtablessummarisethecarryingvaluesoffinancialassetsandliabilitiespresentedontheBankingGroup'sbalancesheet.
Thefairvaluespresentedinthetablesareataspecificdateandmaybesignificantlydifferentfromtheamountswhichwillactuallybepaidorreceivedonthematurityorsettlementdate.
Dollarsinmillions30/06/1730/06/16CarryingamountEstimatedfairvalueCarryingamountEstimatedfairvalueFinancialassetsAvailable-for-saleassets1,4741,474955955Loansandadvances17,81517,84416,68916,804Derivativefinancialinstruments370370658658Duefromrelatedparties80807777FinancialliabilitiesDepositsandotherborrowings(15,983)(15,996)(14,782)(14,796)Derivativefinancialinstruments(416)(416)(725)(725)Debtsecuritiesissued(2,258)(2,271)(2,207)(2,213)Subordinateddebt(405)(411)(258)(261)Duetorelatedparties(12)(12)(4)(4)Thecarryingvaluesofthefollowingfinancialinstrumentsareareasonableapproximationoffairvaluebecause,forexample,theyareshort-terminnatureorrepricetocurrentmarketratesfrequently:cashandcashequivalents,duefromotherfinancialinstitutions,otherfinancialassets,duetootherfinancialinstitutionsandotherfinancialliabilities.
c:FairvaluemeasurementAssetsandliabilitiescarriedatfairvalueorforwhichfairvaluesaredisclosedhavebeenclassifiedintothreelevelsaccordingtothequalityandreliabilityofinformationusedtodeterminethefairvalues.
Thethreelevelsofthefairvaluehierarchyaredefinedasfollows:Level1–Fairvaluemeasurementsarethosederivedfromunadjustedquotedpricesinactivemarketsforidenticalassetsorliabilities.
Level2–Fairvaluemeasurementsarethosewherequotedmarketpricesarenotavailable,forexamplewheretheinstrumentistradedinamarketthatisnotconsideredtobeactiveorvaluationtechniquesareusedtodeterminefairvalueandwherethesetechniquesuseinputsthatarebasedsignificantlyonobservablemarketdata.
Level3–Fairvaluemeasurementswhereatleastoneinputwhichcouldhaveasignificanteffectontheinstrument'svaluationisnotbasedonobservablemarketdataUnlessotherwisenotedthefollowingdisclosuresareprovidedseparatelyforassetsandliabilitiesatfairvalueandthosecarriedatamortisedcost.
Therehavebeennotransfersbetweenlevels1and2duringtheyear(yearended30June2016:notransfers).
Therewerealsonotransfersinto/outoflevel3duringtheyear(yearended30June2016:notransfers).
d:FinancialassetsandliabilitiescarriedatfairvalueValuationmethodologyThefairvaluesofassetsandliabilitiescarriedatfairvalueweredeterminedbyapplicationofthefollowingmethodsandassumptions.
Heldfortradingandavailable-for-salesecuritiesEstimatesoffairvalueforbothheldfortradingandavailable-for-salesecuritiesarebasedonquotedmarketpricesordeterminedusingmarketacceptedvaluationmodelsasappropriate(includingdiscountedcashflowmodels)withinputsincludinganinterestrateyieldcurvedevelopedfromquotedratesandmarketobservablecreditspreads.
42Notestothefinancialstatementscontinued20.
FinancialinstrumentscontinuedDebtsecuritiesissuedDebtsecuritiesissuedthatareclassifiedatfairvaluethroughprofitorlossareshortterminnature.
Fortheseliabilitiesfairvaluehasbeendeterminedusingadiscountedcashflowmodelwithinputsincludinganinterestrateyieldcurvedevelopedfromquotedratesandmarketobservablecreditspreads.
DerivativefinancialinstrumentsWheretheBankingGroup'sderivativefinancialassetsandliabilitiesarenottradedonanexchange,theyarevaluedusingvaluationtechniques,includingdiscountedcashflowandoptionpricingmodels,asappropriate.
Thetypesofderivativesclassifiedaslevel2andthevaluationtechniquesusedinclude:Interestrateswapswhicharevaluedusingdiscountedcashflowmodels;themostsignificantinputsintothosemodelsareinterestrateyieldcurveswhicharedevelopedfromquotedrates.
Foreignexchangederivativesthatdonotcontainoptionswhicharepricedusingratesavailablefrompubliclyquotedsources.
Dollarsinmillions30/06/1730/06/16Level1Level2Level3TotalLevel1Level2Level3TotalFinancialassetsatfairvalueDerivativefinancialassets-370-370-658-658Available-for-salefinancialassets530944-1,474462493-955FinancialliabilitiesatfairvalueDerivativefinancialliabilities-416-416-725-725Debtsecuritiesissued-647-647-290-290e.
FinancialassetsandliabilitiescarriedatamortisedcostValuationmethodologyThefairvaluesofassetsandliabilitiescarriedatamortisedcostweredeterminedbyapplicationofthefollowingmethodsandassumptions.
LoansandadvancesTheBankingGroupprovidesloansandadvancestocorporateandretailcustomersatbothfixedandvariablerates.
Thecarryingvalueofthevariablerateloansandadvancesisassumedtobetheirfairvalue.
Forfixedratelending,severaltechniquesareusedtoestimatefairvaluetakingintoaccountexpectedcreditlosses,prevailingmarketinterestratesandexpectedfuturecashflows.
Forretailexposures,fairvalueisprincipallyestimatedbydiscountinganticipatedcashflows(includinginterestatcontractualrates)atmarketratesforsimilarloansofferedbytheBankingGroupandotherfinancialinstitutions.
Certainloanssecuredonresidentialpropertiesaremadeatafixedrateforalimitedperiod,typicallysixmonthstofiveyears,afterwhichloansreverttotherelevantvariablerate.
Thefairvalueofsuchloansisestimatedbyreferencetothemarketratesforsimilarloansofmaturityequaltotheremainingfixedinterestrateperiod.
Thefairvalueofcorporateandretailloansareestimatedbydiscountinganticipatedcashflowsataratewhichreflectstheeffectsofinterestratechanges,adjustedforchangesincreditrisk.
ImpairedandpastdueloansandadvancesForimpairedloansaswellaspastdueloans,fairvalueisestimatedbydiscountingtheexpectedfuturecashflowsusingcurrentmarketinterestratesincorporatinganappropriateriskfactoror,wheresuchloansarecollateralisedandhavebeenwrittendowntothecurrentmarketvalueofthecollateral,theestimatedfairvalueisbasedonthewrittendowncarryingvalue.
DepositsbycustomersForfixedtermdepositsbycustomers,fairvalueshavebeenestimatedusingadiscountedcashflowmodelwithreferencetomarketinterestrates.
Forotherdepositsbycustomers,thecarryingamountisareasonableestimateoffairvalue.
43Notestothefinancialstatementscontinued20.
FinancialinstrumentscontinuedDebtsecuritiesissuedandsubordinateddebtThefairvaluesoftheseinstrumentsarecalculatedbasedonquotedmarketprices,whereavailable.
Forthoseinstrumentswherequotedmarketpricesarenotavailable,adiscountedcashflowmodelisusedbasedoninputsincludinganinterestrateyieldcurvedevelopedfromquotedratesandmarketobservablecreditspreads.
Dollarsinmillions30/06/1730/06/16Level1Level2Level3TotalLevel1Level2Level3TotalFinancialassetsatamortisedcostLoansandadvances--17,84417,844--16,80416,804Duefromrelatedparties--8080--7777FinancialliabilitiesatamortisedcostDepositsandotherborrowings--15,99615,996--14,79614,796Debtsecuritiesissued-1,624-1,624-1,923-1,923Subordinateddebt-411-411-261-261Duetorelatedparties--1212--4444Notestothefinancialstatementscontinued21.
OffsettingfinancialassetsandliabilitiesAccountingpolicyFinancialassetsandliabilitiesareoffsetandthenetamountreportedinthebalancesheetwhenthereisalegallyenforceablerighttooffsettherecognisedamountsandthereisanintentiontosettleonanetbasis,orrealisetheassetandsettletheliabilitysimultaneously.
ThefollowingtablessetouttheeffectorpotentialeffectofnettingarrangementsontheBankingGroup'sfinancialposition.
Thisincludestheeffectorpotentialeffectofrightsofset-offassociatedwiththeBankingGroup'srecognisedfinancialassetsandrecognisedfinancialliabilitiesthataresubjecttoanenforceablemasternettingarrangement,irrespectiveofwhethertheyaresetoffinaccordancewiththeaboveaccountingpolicy.
Thefollowingfinancialinstrumentsaresubjecttooffsetting,enforceablemasternettingarrangements.
30June2017DollarsinmillionsNoteGrossamountsofrecognisedfinancialassetsGrossamountsofrecognisedfinancialliabilitiessetoffinthebalancesheetNetamountsoffinancialassetspresentedinthebalancesheetRelatedamountsnotsetoffinthebalancesheetNetamountFinancialinstrumentsCashcollateralreceivedDerivativefinancialassets15370-370(303)(52)15Total370-370(303)(52)15NoteGrossamountsofrecognisedfinancialliabilitiesGrossamountsofrecognisedfinancialassetssetoffinthebalancesheetNetamountsoffinancialliabilitiespresentedinthebalancesheetsheetRelatedamountsnotsetoffinthebalancesheetNetamountFinancialinstrumentsCashcollateralpledgedDerivativefinancialliabilities15416-416(303)(107)6Total416-416(303)(107)630June2016DollarsinmillionsNoteGrossamountsofrecognisedfinancialassetsGrossamountsofrecognisedfinancialliabilitiessetoffinthebalancesheetNetamountsoffinancialassetspresentedinthebalancesheetRelatedamountsnotsetoffinthebalancesheetNetamountFinancialinstrumentsCashcollateralreceivedDerivativefinancialassets15658-658(551)(78)29Total658-658(551)(78)29GrossamountsofrecognisedfinancialliabilitiesGrossamountsofrecognisedfinancialassetssetoffinthebalancesheetNetamountsoffinancialliabilitiespresentedinthebalancesheetRelatedamountsnotsetoffinthebalancesheetNetamountNoteFinancialinstrumentsCashcollateralpledgedDerivativefinancialliabilities15725-725(551)(165)9Repurchaseagreements1653-53(53)--Total778-778(604)(165)9The'Financialinstruments'columnidentifiesfinancialassetsandliabilitiesthataresubjecttosetoffundernettingarrangementssuchasISDAMasteragreements.
ThearrangementbetweentheBankingGroupandthecounterpartyallowsfornetsettlementoftherelevantfinancialassetsorfinancialliabilitieswhenbothelecttosettleonanetbasis.
Intheabsenceofsuchanelection,financialassetsandfinancialliabilitieswillbesettledonagrossbasis.
However,eachpartytothemasteragreementwillhavetheoptiontosettleallsuchamountsonanetbasisintheeventofdefaultoftheotherparty.
45Notestothefinancialstatementscontinued22.
CreditexposureconcentrationsCreditexposuretoindividualcounterpartiesCreditexposureconcentrationsaredisclosedonthebasisofactualexposuresandgrossofset-offs.
Peakend-of-dayaggregatecreditexposureshavebeencalculatedusingtheBankingGroup'sTier1capitalattheendoftheyear.
Therewerenoindividualcounterparties,excludingconnectedpersons,bankcounterpartiesandthecentralgovernmentofanycountrywithalong-termcreditratingofA-orA3above,oritsequivalent,wheretheyearendandpeakend-of-dayaggregateactualcreditexposures,netofindividualcreditimpairmentallowances(whichwerenil),equalledorexceeded10%oftheBankingGroup'sshareholder'sequityasatthereportingdate.
Asat30June2017andinthe3monthsended30June2017,therehavebeennocreditexposureconcentrationswithnon-bankcounterpartieswhereactualcreditexposuresequalledorexceeded10%oftheBankingGroup'sshareholder'sequityasatthereportingdate(3monthsended30June2016:nil).
CreditexposurestoconnectedpersonsCreditexposureconcentrationsaredisclosedonthebasisofactualcreditexposuresandcalculatedonagrossbasis(netofindividualcreditimpairmentallowanceandexcludingadvancesofacapitalnature).
TheinformationoncreditexposuretoconnectedpersonshasbeenderivedinaccordancewiththeBankingGroup'sConditionsofRegistrationandtheRBNZConnectedExposuresPolicyBS8.
TheBankingGroupdoesnothavecreditexposurestoconnectedpersonsotherthannon-bankconnectedpersons.
Peakend-of-daycreditexposurestonon-bankconnectedpersonshavebeencalculatedusingtheBankingGroup'sTier1capitalattheendoftheyear.
Therating-contingentlimit,whichisapplicabletotheBankingGroupasatthereportingdate,is60%.
Therehavebeennorating-contingentlimitchangesduringthelastyear.
Withintherating-contingentlimitthereisasub-limitof15%oftheBankingGroup'sTierIcapital,whichappliestonon-bankconnectedpersons.
Alllimitsonaggregatecreditexposuretoallconnectedpersonsandnon-bankconnectedpersonsintheBankingGroup'sConditionsofRegistrationhavebeencompliedwithatalltimesoverthelastyear.
Thelimitis125%oftheBankingGroup'sTier1capitalinrespectofthegrossamountofaggregatecreditexposuretoconnectedpersonsthatcanbenettedoffindeterminingthenetexposure.
Therearenoindividualimpairmentcreditallowancesagainstcreditexposurestonon-bankconnectedpersonsnorarethereanycontingentexposuresarisingfromrisklay-offarrangementstoconnectedpersonsasat30June2017(30June2016:nil).
DollarsinmillionsYearended30/06/17Yearended30/06/16Creditexposurestonon-bankconnectedpersonsatyearend8582Creditexposurestonon-bankconnectedpersonsatyearendexpressedasapercentageofTier1capital6.
7%8.
1%Peakcreditexposurestonon-bankconnectedpersonsduringtheyear9985Peakcreditexposurestonon-bankconnectedpersonsduringtheyearexpressedasapercentageofTier1capital7.
9%8.
4%46Notestothefinancialstatementscontinued23.
ConcentrationoffundingConcentrationsoffundingarisewheretheBankingGroupisfundedbyindustriesofasimilarnatureorinparticulargeographies.
ANZSICcodeshavebeenusedasthebasisfordisclosingindustrysectors.
Ananalysisoffinancialliabilitiesbyindustrysectorandgeographyatthereportingdateisasfollows:Dollarsinmillions30/06/1730/06/16NewZealandTransportandstorage136131Finance,investmentandinsurance3,1863,674Electricity,gasandwater1511Food&othermanufacturing7765Construction12291Communications3024Government,localauthoritiesandservices632393Agriculture3826Healthandcommunityservices204157Personalandotherservices315235Propertyandbusinessservices400415Education252182Retailandwholesaletrade7055Households11,73210,877OverseasFinance,investmentandinsurance-Australia199268Finance,investmentandinsurance-restofworld1,4491,237Households-Australia3835Households-restofworld23823119,13318,107Otherfinancialliabilities6781Totalfinancialliabilities19,20018,18847Notestothefinancialstatementscontinued24.
TransfersoffinancialassetsThefollowingfinancialassetshavebeentransferredbuthavenotbeenderecognised.
KiwibankRMBSTrustSeries2009-1(the"RMBSTrust")InMay2008theRBNZexpandedtherangeofacceptablecollateralthatthebankscanpledgeandborrowagainstaspartofchangestoitsliquiditymanagementprogramme,designedtoensureadequateliquidityforNewZealandfinancialinstitutions.
Theexpandedcollateralcriteriaincludestheuseofapoolofindividualresidentiallysecuredmortgages(loansandadvances)thatareaggregatedtogethertoformaresidentialmortgagebackedsecurity("RMBS").
AnRMBScanbetransferredtoaseparateTrustallowingtheBankingGrouptoenterintoarepurchaseagreementontheseloanswiththeRBNZ.
TheBankingGroupcanborrowfromtheRBNZusingtheRMBSascollateraluntilrepurchasedatalaterdate,inordertomanageitsliquidityrequirements.
On26June2009theBankingGroupestablishedanin-houseRMBSfacilityinordertoissuesecuritiesthatmeettheRBNZcriteria.
TheseassetsandliabilitiesdonotqualifyforderecognitionastheBankingGroupretainsacontinuinginvolvementandretainssubstantiallyalltherisksandrewardsofownershipofthetransferredassets(funding,liquidityandcreditriskremainswiththeBankingGroup).
ThecarryingvalueandfairvalueoftheRMBSpoolat30June2017is$1,100m(30June2016:$1,100m).
ThesesecuritiesareringfencedtoensuretheyarenotusedascollateraloutsideofagreementsestablishedwiththeRMBSTrust.
KiwiCoveredBondTrust(the"CoveredBondTrust")On23January2013,theCoveredBondTrustwasestablishedtoholdKiwibankhousingloansandtoprovideguaranteestocertaindebtsecuritiesissuedbytheBankingGroup.
GuaranteesprovidedbytheCoveredBondTrusthaveapriorclaimovertheassetsoftheCoveredBondTrust.
On19February2013,selectedKiwibankhousingloansweretransferredtotheCoveredBondTrustinordertoestablishandfacilitatetheBankingGroup'scoveredbondprogramme.
TheseassetsandliabilitiesdonotqualifyforderecognitionastheBankingGroupretainsacontinuinginvolvementandretainssubstantiallyalltherisksandrewardsofownershipofthetransferredassets.
TheCoveredBondTrustisconsolidatedwithintheBankingGroup.
SubstantiallyalloftheassetsoftheCoveredBondTrustcomprisehousingloansoriginatedbyKiwibankandhighlyratedshort-datedsecurities,togetherwhicharesecurityfortheguaranteeofissuancesofcoveredbondsbytheBankingGroup,providedbyKiwiCoveredBondTrusteeLimitedasTrusteeoftheCoveredBondTrust.
TheassetsoftheCoveredBondTrustarenotavailabletocreditorsofKiwibank,althoughtheBankingGroup(oritsliquidatororstatutorymanager)mayhaveaclaimagainsttheresidualassetsoftheCoveredBondTrust(ifany)afterallpriorrankingcreditorsoftheCoveredBondTrusthavebeensatisfied.
ThecarryingvalueandapproximatefairvalueoftheCoveredBondTrustpoolat30June2017is$316m(30June2016:$316m).
ThesesecuritiesareringfencedtoensuretheyarenotusedascollateraloutsideofagreementsestablishedwiththeCoveredBondTrust.
TheconsolidatedfinancialstatementsoftheBankingGroupdonotchangeasaresultofestablishingtheRMBSTrustandtheCoveredBondTrust.
RepurchaseagreementsTheBankingGroupentersintosaleandrepurchaseagreementswiththewidermarketinordertomanageshorttermliquidity.
Undertherepurchaseagreements,collateralintheformofsecuritiesisadvancedtoathirdpartyandtheBankingGroupreceivescashinexchange.
ThecounterpartyisallowedtosellorrepledgethecollateraladvancedunderrepurchaseagreementsintheabsenceofdefaultbytheBankingGroup,buthasanobligationtoreturnthecollateralatthematurityofthecontract.
TheBankingGrouphasdeterminedthatitretainssubstantiallyalltherisksandrewardsofthesesecuritiesandthereforehasnotderecognisedthem(funding,liquidityandcreditriskremainswiththeBankingGroup).
Inaddition,itrecognisesafinancialliabilityforcashreceivedwhichisincludedinduetootherfinancialinstitutions.
TheBankingGrouphasrecognisedliabilitiesforoutstandingrepurchaseagreementsof$0.
0masat30June2017(30June2016:$53.
0m).
TransferredfinancialassetsthatarederecognisedintheirentiretybutwheretheBankingGrouphasacontinuinginvolvementAsat30June2017,theBankingGrouphasnotderecognisedanyfinancialassetswheretheyhaveacontinuinginvolvement(30June2016:nil).
48Notestothefinancialstatementscontinued25.
IntangibleassetsAccountingpolicyAcquiredcomputersoftwarelicencesarecapitalisedonthebasisofthecostsincurredtoacquireandbringtheassetstouse.
Thesecostsareamortisedonastraightlinebasisovertheestimatedusefullivesofthelicences(being3to5years).
Developedsoftwareassetsexpectedtogenerateneteconomicbenefitsbeyond12monthsarerecognisedasintangibleassets.
Thecostofdevelopedsoftwareassetsincludesthecostofallmaterialsusedinconstruction,directlabourontheproject,andanappropriateproportionofvariableandfixedoverheads.
Developedsoftwareintangibleassetsareamortisedovertheirestimatedusefullives(being3to15years).
CriticalaccountingestimatesandjudgementsIntangibleassetsthatarenotyetavailableforuseareassessedforimpairmentonatleastanannualbasisandwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofintangibleassetsmayexceedtheirrecoverableamount.
Anyimpairmentlossisrecognisedintheincomestatementasanexpense.
AspartofareviewofthetransformationstrategyoftheBank,theBoardisintheprocessofreviewingtheexistingcorebankingsystemproject.
Whilethisreviewhasnotbeencompleted,basedontheworkdonetodate,theBoardconsidersithighlyunlikelythatthecurrentdeliverypathofthecorebankingsystemprojectwillmeetkeytransformationalobjectivesoftheBankandthereforethecurrentprojectwillnotproceedwithoutsignificantchangesinthedeliverypath.
Asaresult,thecarryingamountoftheassetmaynotrepresentthefutureeconomicbenefitsexpectedfromitsuse.
Basedonanassessmentoftheremainingassets'value-in-use,animpairmentchargeof$90mhasbeenrecognisedfortheyearended30June2017(30June2016:nil)toreflecttheestimatedimpactofthis.
Anamountof$97m(30June2016:$158m)remainscapitalisedonthebalancesheetinrelationtototalsoftwareandlicencesoftheBankingGroup.
30/06/1730/06/16DollarsinmillionsComputersoftwareComputersoftwareworkinprogressTotalComputersoftwareComputersoftwareworkinprogressTotalCostatbeginningofyear2048128515466220Accumulatedamortisationatbeginningofyear(127)-(127)(104)-(104)Carryingvalueatbeginningofyear77811585066116Additions4525656065Transfersfromcomputersoftwareworkinprogress13(13)-45(45)-Amortisation(24)-(24)(23)-(23)Writtenoff-(3)(3)---Otherimpairment-(90)(90)---Carryingvalueatendofyear7027977781158Costatendofyear22111733820481285Accumulatedamortisationatendofyear(151)-(151)(127)-(127)Accumulatedimpairmentatendofyear-(90)(90)---Carryingvalueatendofyear702797778115849Notestothefinancialstatementscontinued26.
OtherassetsAccountingpolicyPrepaymentsandtradeandotherreceivablesaredesignatedasloansandreceivables.
Prepaymentsincludecostspaidrelatingtosubsequentfinancialyearsandaremeasuredatcost.
Tradeandotherreceivablesarenon-derivativefinancialassetswithfixedordeterminablepaymentsthatarenotquotedinanactivemarket.
Theyarerecognisedinitiallyatfairvalueandsubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod.
Iftheinitialdurationislessthan12monthstheyarerecognisedatcostlessimpairment.
Allowancesforestimatedirrecoverableamountsarerecognisedwhenthereisobjectiveevidencethattheassetisimpaired.
Interest,impairmentlossesandforeignexchangegainsandlossesarerecognisedintheincomestatement.
Dollarsinmillions30/06/1730/06/16Prepayments86Tradeandotherreceivables1810Totalotherassets-Current261627.
OtherliabilitiesAccountingpolicyOtherliabilitiesdesignatedasfinancialliabilitiesaremeasuredatamortisedcost.
Theyarerecognisedinitiallyatfairvalueandsubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod.
Amortisationandforeignexchangegainsandlosses,arerecognisedintheincomestatementasisanygainorlosswhentheliabilityisderecognised.
DeferredsettlementliabilitiesDeferredsettlementliabilitiesarerecognisedinthebalancesheetatfairvalueandaredeterminedbydiscountingtheexpectedfuturecashflowsataratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyand,whereappropriate,therisksspecifictotheliability.
Dollarsinmillions30/06/1730/06/16Tradeandotherpayables3947Employeeentitlements2019Deferredsettlementobligationtonon-controllinginterest-4Otherliabilities3532Totalotherliabilities94102Current94100Non-current-2Intheeventofliquidation,theabovecreditorsrankinprioritytosubordinateddebtholdersandshareholdersandwillrankequallywithdepositholdersandothercreditors.
Kiwibankdisposedofa30%shareholdinginKiwiAssetFinanceLimited("KAFL");20%inOctober2011,and10%inOctober2012.
Kiwibankrepurchasedthisnon-controllingshareholdinginAugust2016.
Adeferredsettlementliabilitywaspreviouslyrecognisedforthisobligationasat30June2016.
Thevalueoftheliabilityisnilat30June2017(2016:$3.
7m)andwaspreviouslycalculatedbyapplyingdiscountedcashflowsanalysis.
50Notestothefinancialstatementscontinued28.
EquityAccountingpolicySharecapitali)OrdinarysharesOrdinarysharesarerecognisedattheamountpaidupperordinaryshare,netofdirectlyattributableissuecosts.
ii)PerpetualpreferencesharesPerpetualpreferencesharesarerecognisedattheamountpaidupperperpetualpreferenceshare,netofdirectlyattributableissuecosts.
iii)DistributionsDividendsdistributedinrespectofsharesarerecognisedasaliabilityinthefinancialstatementsinthereportingperiodinwhichthedividenddistributionisapproved.
Perpetualcapitalreservei)PerpetualcapitalnotesAmountsreceivedontheissueofperpetualcapitalnotesarerecognisedinequity,netofdirectlyattributableissuecosts.
ii)DiscretionarydistributionsDiscretionarydistributionsmadeinrespectofperpetualcapitalnotesarerecognisedasaliabilityinthefinancialstatementsinthereportingperiodinwhichthedistributionisapprovedandarerecognisedasdeductionsfromequity.
Otherreservesi)Available-for-salereserveTheavailable-for-salereserveincludeschangesinthefairvalueofavailable-for-salefinancialassets,netoftax.
Whentheassetisderecognisedthesechangesinfairvaluearetransferredtotheincomestatement.
Ifanavailable-for-salefinancialassetisimpairedtheassociatedimpairmentchargeisrecognisedintheincomestatement.
ii)CashflowhedgereserveThecashflowhedgereserveincludesthefairvaluegainsorlossesassociatedwiththeeffectiveportionofdesignatedcashflowhedginginstruments.
OrdinarysharesThetotalauthorisednumberofordinarysharesinKiwibankatthereportingdatewas737million(30June2016:400million).
Allissuedordinarysharesarefullypaid.
Allordinaryshareshaveequalvotingrightsandshareequallyindividendsandsurplusesonwindingup.
Ordinarysharesdonothaveaparvalue.
ThewholeoftheissuedordinarysharecapitalisownedbyKGHL,whichisincorporatedinNewZealand.
Dollarsinmillions30/06/1730/06/16Balanceatbeginningoftheyear(2017:400mshares;2016:400mshares)400400Issuedinyear(2017:337mshares;2016:nilshares)337-Balanceatendoftheyear(2017:737m;2016:400mshares)73740051Notestothefinancialstatementscontinued28.
EquitycontinuedReservesDollarsinmillions30/06/1730/06/16Balanceatbeginningoftheyear729633Netprofitfortheyear53124Dividendspaidonordinaryshares(5)(29)Dividendspaidtonon-controllinginterest(1)-Distributionstoholdersofperpetualcapital(12)(11)Netmovementinavailableforsalereserve(6)3Netmovementincashflowhedgereserve329Netmovementinperpetualcapitalreserve(147)-Balanceatendoftheyear643729PerpetualcapitalreserveOn27May2015KCFLissued150,000,000perpetual,non-cumulative,unsecured,subordinated,lossabsorbingdebtsecurities("PCN")forcashat$1perPCNandutilisedtheproceedstopurchaseall150,000,000PerpetualCapitalBonds("PB")issuedbyKiwibank,forcashat$1perPerpetualCapitalBond.
ThePCNsareperpetualinnatureanddonothaveamaturitydate,however,someorallofthePCNsmayberepaidonaresetdate(resetdatesoccurat5-yearlyintervals,commencing27May2020).
KCFL'sobligationtopayinterestonthePCNsisdependentonthereceiptofapaymentofinterestfromKiwibankonthePerpetualCapitalBondsonanequivalentpaymentdate.
Therefore,KCFLhasnocontractualobligationinrespectofthePCNsandtheyareclassifiedasequity.
Thecostsassociatedwiththeissuearenettedagainsttheperpetualcapitalreserveinthebalancesheet.
AsaresultofthedeconsolidationofKCFL,thePCN'sandperpetualcapitalreservearenolongerrecognisedaspartoftheBankingGroup'sbalancesheet(2016:$147m).
TheBankingGroupnowrecognisesthePBassubordinateddebthavingbeenpreviouslyeliminatedonconsolidation.
ThedeconsolidationofKCFLisfurtherdisclosedinnote32.
NiloftheperpetualcapitalbondsqualifiedasAdditionalTier1capitalasat30June2017(2016:$147m).
Dollarsinmillions30/06/1730/06/16Balanceatbeginningoftheyear147147Deconsolidationofsubsidiary(147)-Balanceatendoftheyear-147CashflowhedgingreserveThecashflowhedgingreservecomprisestheeffectiveportionofthecumulativechangeinthefairvalueofforeignexchangeandinterestratederivativecontractsrelatedtohedgedforecastedtransactionsthathavenotyetoccurred.
Dollarsinmillions30/06/1730/06/16Balanceatbeginningoftheyear(45)(54)Grosschangesinfairvalue367Taxonchangesinfairvalue(10)(2)Cumulativelosstransferredtotheincomestatement95Taxeffectofitemstransferredtoincomestatement(3)(1)Balanceatendoftheyear(13)(45)52Notestothefinancialstatementscontinued28.
EquitycontinuedAvailable-for-salereserveTheavailable-for-salereserveincludesthecumulativenetchangeinthefairvalueofavailable-for-salesecuritiesuntiltheinvestmentisderecognisedorimpaired.
Dollarsinmillions30/06/1730/06/16Balanceatbeginningoftheyear118Grosschangesinfairvalue(3)12Taxonchangesinfairvalue1(3)Cumulativegaintransferredtotheincomestatementondisposaloffinancialassets(6)(8)Taxeffectofitemstransferredtoincomestatement22Balanceatendoftheyear511CapitalTheBankingGroup'sregulatorycapitalisanalysedintwotiers:Tier1capital,whichincludesordinaryshares,retainedearningsincludingcurrentyearprofit,andtheavailable-for-salereserve.
Tier2capital,whichincludessubordinateddebt.
TheBankingGroupmaintainsanactivelymanagedcapitalbasetocoverrisksinherentinthebusinessandmeetthecapitaladequacyrequirementsoftheRBNZ.
TheadequacyoftheBankingGroup'scapitalismonitoredusing,amongothermeasures,therulesandratiosestablishedbytheBaselCommitteeonBankingSupervisionandadoptedbytheRBNZinsupervisingtheBankingGroup.
FurtherdetailscanbefoundintheCapitalAdequacysectionofthisDisclosureStatement.
Duringtheyearended30June2017,Kiwibankwasincompliancewithallofitsexternallyimposedconditionsofregistration.
CapitalmanagementTheprimaryobjectivesoftheBankingGroup'scapitalmanagementpolicyaretoensurethattheBankingGroupcomplieswithexternallyimposedcapitalrequirementsandmaintainsstrongcreditratingsandhealthycapitalratiosinordertosupportitsbusiness.
TheBankingGroupmanagesitscapitalstructureandmakesadjustmentstoitaccordingtochangesineconomicconditionsandtheriskcharacteristicsofitsactivities.
Inordertomaintainoradjustthecapitalstructure,theBankingGroupmayadjusttheamountofdividendpaymenttoshareholders,returncapitaltoshareholdersorissuecapitalsecurities.
Nochangeshavebeenmadetotheobjectives,policiesandprocessesfromthepreviousyear.
However,theyareunderconstantreviewbytheBoard.
DividendsDollarsinmillions30/06/1730/06/16Declaredandpaidduringtheyeartonon-controllinginterestsinasubsidiary:91centsperordinaryshareinKiwiAssetFinanceLimited1-Declaredandpaidduringtheyearonordinaryshares:1.
25centspershare(2016:7.
25centspershare)529Totaldividendspaid629IfforanyreasonaninterestpaymentonthePBshasnotbeenpaidinfullonanInterestPaymentDate,Kiwibankmustnot,withoutapprovalofanextraordinaryresolutionoftheholdersofthePBs:a)resolvetopayorpayanydividendonitsOrdinaryShares;b)undertakeanycapitalreduction;orc)makeanypaymentsonothercapitalinstrumentsthatrankequallywithorjuniortothePBs(unlessthepaymentismadeinrespectofcapitalinstrumentsthatrankequallywiththePBsandaproratapaymentismadeinrespectofthePBsatthesametime).
Theserestrictionswillapplyuntil:a)KiwibankpaystheinterestpaymentsinfullontwosubsequentconsecutiveInterestPaymentDates;andb)either:i)theinterestpaymentsonPCNsarepaidinfullonthosedates;orii)therearenoPCNsoutstanding.
53Notestothefinancialstatementscontinued29.
RelatedentitiesTheBankingGroupCriticalaccountingestimatesandjudgementsTheBankingGroupsponsorstheformationofSPVsintheordinarycourseofbusiness,primarilytoprovidefunding.
SPVsaretypicallysetupforasingle,pre-definedpurpose,havealimitedlifeandgenerallyarenotoperatingentitiesnordotheyhaveemployees.
ThemostcommonformofSPVstructureinvolvestheacquisitionoffinancialassetsbytheSPVthatarefundedbytheissuanceofsecuritiestoexternalinvestors(securitisation).
RepaymentoftheissuedsecuritiesisdeterminedbytheperformanceofthefinancialassetsacquiredbytheSPV.
ASPVisconsolidatedandreportedaspartoftheBankingGroupifitiscontrolledbytheBank.
Thedefinitionofcontrolisoutlinedinnote2.
3.
AsitcansometimesbedifficulttodeterminewhethertheBankingGroupcontrolsanSPV,managementmakesjudgementsabouttheBankingGroup'spoweroveranSPV,itsexposuretovariablereturnsanditsabilitytoaffectthosereturnsbyexercisingitspower.
TheBankingGroupconsistsofKiwibankandallofitscontrolledentities.
Atthereportingdate,Kiwibankhadthefollowingcontrolledentities:InterestheldbyKiwibankLimitedNameofentityPrincipalactivity30/06/1730/06/16NewZealandHomeLendingLimitedAgencyservicesformortgagelendingthroughtheNewZealandHomeLoansCompanyLimited100%100%AMPHomeLoansLimitedAgencyservicesformortgagelendingthroughtheAMPAdvisornetwork100%100%KiwibankInvestmentManagementLimitedProvisionofinvestmentmanagementservices100%100%KBCustodialServicesLimitedFundsmanagement100%100%KiwiAssetFinanceLimitedAssetfinancecompany100%70%KiwibankPIEUnitTrust("PIEUnitTrust")Provisionofinvestmentmanagementservices--KiwibankRMBSTrustSeries2009-1Securitisationfinanceentity--KiwiCoveredBondTrustSecuritisationfinanceentity--TheBankingGroupconsolidatesthePIEUnitTrust,theKiwibankRMBSTrustSeries2009-1,KiwiCoveredBondTrustonthebasisthatKiwibankisdeemedtocontroltheseentities(KiwiCapitalFundingLimitedwasalsoconsolidatedaspartoftheBankingGroupasat30June2016butwasdeconsolidatedon30March2017asdisclosedfurtherinnote32).
AllBankingGroupentitieshaveareportingdateof30Juneandareincorporatedand/ordomiciledinNewZealand.
InOctober2011,Kiwibankdisposedofa20%shareholdinginKAFLandinOctober2012,Kiwibankdisposedofafurther10%ofitsshareholdingtothesamenon-controllingshareholder.
InAugust2016,Kiwibankrepurchasedtheshareholdingfromthenon-controllingshareholder.
AdeferredsettlementliabilitywaspreviouslyrecordedasKiwibankwasobligedtorepurchasethe30%holdingbetween2016and2018(note27).
TransactionswiththeNZPGroupandKGHLGroupThe"NZPGroup"comprisesNZPanditssubsidiaries.
The"KGHLGroup"comprisesKGHLanditssubsidiaries.
AlltransactionswiththeNZPGroupandKGHLGroupwereconductedonnormalcommercialtermsandwithintheBankingGroup'sapprovedpolicies.
Refertonote28fordetailsofdividendspaidtoshareholders.
KiwiFinancialServicesRetailLimited("KFSRL"),asubsidiaryofKGHL,wassetupduringthecurrentyeartoemployretailnetworkstaffforwhichKiwibankandNZPwillreimburseKFSRL.
AllpaymentobligationsofKiwibankthatexistedatthetimetheNZPGuaranteewasterminatedon28February2017,excludinganypaymentobligationsthetermsofwhichexpresslyprovidethattheydonothavethebenefitoftheguarantee,areguaranteedundertheNZPGuarantee.
NoconsiderationispaidtoNZPfortheNZPGuarantee.
TransactionsconductedwithentitieswithintheNZPGroupandKGHLGroupinclude:CertainsharedserviceactivitieshavebeenprovidedtotheBankingGroupincommonwithotherNZPGroupcompanies.
Thefeepaidforthisserviceisbaseduponactivityandamutuallyagreedfee.
TheBankingGrouputilisesNZP'sretailnetworkinitsprovisionofretailbankingservicestocustomers.
Thefeepaidforthisserviceisbaseduponactivityandamutuallyagreedfee.
KFSRLtransferredretailnetworkstaffcontractsfromNZPeffectivefrom13November2016.
TheBankingGroupreimbursedKFSRLforpersonnelcostsof$16.
9mfortheyearended30June2017(2016:nil).
Duringtheyear,NZPheldanumberofpropertyleasesonbehalfoftheBankingGroup.
TheBankingGroupreimbursedNZPfortheleasecharges.
At30June2017,theBankingGroupholdspropertyleaseswithNZPthatareincludedinthosedisclosedinnote36.
54Notestothefinancialstatementscontinued29.
RelatedentitiescontinuedKiwibankwaspreviouslyamemberoftheNZPconsolidatedtaxgroup,andpurchasedtaxlossesfrommembersofthatgroup.
On31October2016,KiwibankexitedtheNZPconsolidatedtaxgroupandjoinedanewtaxgroupwithotherKGHLgroupcompanies.
Consequently,KiwibanknowpurchasestaxlossesfrommembersoftheKGHLtaxgroup.
AgencyServicesfeerevenueandexpenditureareincludedintheBankingGroupunderamanagementagreementwherebytheBankingGroupmanagestheAgencyServicesactivityofNZP.
AgencyServicesactivityconsistsofagencycollectionandidentityverificationservices.
TheCrownpreviouslyenteredintoa$300muncalledcapitalfacilitywithNZPwhereNZPcoulddrawdowncapitalforcontingenteventsaroundKiwibank'sconditionsofregistration.
ThisfacilitywasreplacedbyonemadewithKGHL.
TheannualisedcostofthisfacilityonchargedtotheBankingGroupbyKGHLis$3.
0m(2016:$3.
6monchargedtotheBankingGroupbyNZP).
NZPhasacreditfacilitywiththeBankingGroup,allowingNZPtodrawdowntotheextentthattheBankingGroupdoesnotexceedcreditexposuretoconnectedpersonsof15%ofTier1capital,asrequiredinKiwibank'sbankingconditionsofregistration.
Whenloansaredrawndownthetransactionisundertakenatmarketinterestrates.
Asat30June2017thebalanceofthefacilityowedbyNZPtotheBankingGroupwas$75.
8m(30June2016:$76.
0m).
ThereisarevolvingcreditagreementbetweentheBankingGroupandNewZealandHomeLoansLimited("NZHL"),afellowsubsidiaryofKGHL,thebalanceofwhichwas$3.
5mat30June2017(30June2016:$3.
3m).
DuringtheyearNZHLreceivedcommissionsfromtheBankingGrouptotalling$14.
1m(yearended30June2016:$13.
5m).
DuringtheyeartheBankingGroupreceivedcommissionsfromKiwiInsuranceLimited,afellowsubsidiaryofKGHL,totalling$1.
8m(yearended30June2016:$1.
6m).
ThetablebelowshowsbalancesoutstandingatthereportingdatewithNZP,andothersubsidiarieswithintheKGHLGroup.
Noprovisionforcreditimpairmenthasbeenrecognisedforloansmadetorelatedparties.
ThetablebelowshowsbalancesoutstandingatthereportingdatewithNZP,andothersubsidiarieswithintheKGHLGroup.
Noprovisionforcreditimpairmenthasbeenrecognisedforloansmadetorelatedparties.
Dollarsinmillions30/06/1730/06/16OutstandingbalancesNZP104OthersubsidiariesofKGHL2-Totalduetorelatedpartiesperbalancesheet124NZP(Deposits)41-NZPSuperannuationPlan(Deposits)1313KGHL(Deposits)1910KiwiInsurance(Deposits)214OthersubsidiariesofKGHL(Deposits)42Totalduetorelatedpartiesincludedindeposits7939NZP(derivativefinancialinstruments-liabilities)35Totalduetorelatedpartiesincludedinderivativefinancialinstruments-liabilities35KCFL(subordinateddebt)255-Totalduetorelatedpartiesincludedinsubordinateddebt255-Totaloutstandingbalancesduetorelatedparties34948ReceivablesNZP7976OthersubsidiariesofKGHL11Totalduefromrelatedpartiesperbalancesheet8077TheNewZealandHomeLoanCompanyLimited(Loansandadvances)43Totalduefromrelatedpartiesincludedinloansandadvances43NZP(derivativefinancialinstruments-assets)12Totalduefromrelatedpartiesincludedinderivativefinancialinstruments-assets12Totalreceivablefromrelatedparties8582Balanceswithdueto/fromrelatedpartiesperbalancesheetPayables-Current124Payables-Non-current--Receivables-Current531Receivables-Non-current7546At30June2016KCFLwasconsolidated–seenote3255Notestothefinancialstatementscontinued29.
RelatedentitiescontinuedThetablebelowshowsrevenueandexpenditureduringtheyearwithNZP,andothersubsidiarieswithintheKGHLGroup.
Therevenueandexpensesamountsbelowincludeinterestincomeandinterestexpenseonbalanceswithrelatedpartiesasdisclosedinnote3.
DollarsinmillionsYearended30/06/17Yearended30/06/16RevenueNZP4854OthersubsidiariesofKGHL22ExpenditureNZP7284OthersubsidiariesofKGHL3715Inaddition,KiwibankundertakessometransactionswithotherState-OwnedEnterprisesandGovernmentdepartments.
TransactionswithkeymanagementpersonnelLoansmadetoanddepositsheldbykeymanagementpersonnel(includingpersonallyrelatedparties)aremadeintheordinarycourseofbusinessonnormalcommercialtermsandconditions,nomorefavourablethanthosegiventootheremployeesorcustomers.
Loansareontermsofrepaymentthatrangebetweenfixedandvariable,allofwhichhavebeenmadeinaccordancewiththeBankingGroup'slendingpolicies.
Noprovisionforcreditimpairmenthasbeenrecognisedforloansmadetokeymanagementpersonnel(30June2016:$nil).
Keymanagementpersonnelaredefinedasthosepersonshavingauthorityandresponsibilityforplanning,directingandcontrollingtheactivitiesoftheentity,directlyorindirectly.
ThisincludestheBoardandmembersoftheseniorexecutiveteam.
ThetablebelowshowstheamountofbenefitspaidtokeymanagementpersonnelwithintheBankingGroup.
Italsoshowsloanstoanddepositsfromkeymanagementpersonnel.
Dollarsinmillions30/06/1730/06/16KeymanagementpersonnelYearended30JuneSalariesandshorttermbenefits65Asat30JuneLoanstokeymanagementpersonnel1-Depositsfromkeymanagementpersonnel-456Notestothefinancialstatementscontinued30.
Fiduciaryactivities,securitisationandfundsundermanagementAccountingpolicyAsubsidiaryoftheBankingGroupactsasmanagerforanumberofunittrustsandinvestmentfunds.
TheassetsandliabilitiesofthesetrustsandfundsarenotincludedintheconsolidatedfinancialstatementswhentheBankingGroupdoesnothavecontrolofthetrustsandfunds.
FeesearnedinrespectoftheseactivitiesareincludedinOtherIncome.
SecuritisedassetsarederecognisedwhentherighttoreceivecashflowshaveexpiredortheBankingGrouphastransferredsubstantiallyalltherisksandrewardsofownership(seenote24).
InsurancebusinessTheBankingGroupdoesnotmarketordistributeitsowninsuranceproducts.
SecuritisedassetsTheBankingGrouphasaninhouseRMBSfacilityandcoveredbondprogramme,whicharediscussedfurtherinnote24.
FundsmanagementTheKiwibankKiwiSaverSchemecommencedacceptingmembersandsubscriptionsonthe1stofJuly2010andclosedtonewmemberson5December2012.
Duringtheyearended30June2015,theBankingGrouptransferredthemembersandassetsoftheKiwibankKiwiSaverSchemetotheKiwiWealthKiwiSaverScheme,operatedbyKiwiWealthLimited.
AsubsidiaryofKiwibankalso:actsasthemanagerfortheKiwibankPIEUnitTrust.
ThesefundsareinvestedinproductsofKiwibankandarerecordedasliabilitiesinthebalancesheet(note17).
At30June2017,$3,196moffundsundermanagementwereinvestedinKiwibank'sownproductsorsecurities(30June2016:$3,525m).
isadistributoroftheKiwibankInvestmentPortfolio.
TheBankingGroupisnottheIssuer,ManagerorPromoteroftheseFunds.
Norisitresponsibleforanydeclineinperformanceoftheunderlyingassetsoftheinvestorsduetomarketforces.
ProvisionoffinancialservicesFinancialservicesprovidedbyKiwibanktoentitieswhichareinvolvedintrust,custodial,fundsmanagementandotherfiduciaryactivities,areatfairvalue,exceptthatKiwibankdoesnotchargeKiwibankInvestmentManagementLimited,theManageroftheKiwibankPIEUnitTrust,anybankfees.
Further,theKiwibankPIEUnitTrustbankaccountusedfortaxpaymentsdoesnotearninterest.
TheBankingGrouphasnotprovidedanyfundingtoentitieswhichconductthefollowingactivitiesduringtheyearsended30June2017and30June2016:trust,custodial,fundsmanagementorotherfiduciaryactivitiesestablished,marketedand/orsponsoredbyamemberoftheBankingGroup;marketinganddistributionofinsuranceproducts.
RiskmanagementWithregardstotheactivitiesidentifiedabove,theBankingGrouphasinplacepoliciesandprocedurestoensurethatthoseactivitiesareconductedinanappropriatemanner.
Shouldadverseconditionsarise,itisconsideredthatthesepoliciesandprocedureswillminimisethepossibilitythattheseconditionswilladverselyimpacttheBankingGroup.
Thepoliciesandproceduresincludecomprehensiveandprominentdisclosureofinformationregardingproducts,andformalandregularreviewofoperationsandpoliciesbymanagementandauditors.
57Notestothefinancialstatementscontinued31.
SegmentanalysisAccountingpolicyOperatingsegmentsarereportedinamannerconsistentwiththeinternalreportingprovidedtothechiefoperatingdecision-maker.
Thechiefoperatingdecision-maker,whoisresponsibleforallocatingresourcesandassessingperformanceoftheoperatingsegmentshasbeenidentifiedastheKiwibankLeadershipTeam("KBLT"),whichconsistsoftheChiefExecutiveandhisdirectreports.
Areportablebusinesssegmentisagroupofassetsandoperationsengagedinprovidingproductsorservicesthataresubjecttorisksandreturnsthataredifferentfromthoseofotherbusinesssegments.
Forthepurposesofthisnote,thechiefoperatingdecision-makerhasbeenidentifiedastheKiwibankLeadershipTeam("KBLT"),whichconsistsoftheChiefExecutiveandhisdirectreports.
TheKBLTreviewstheBankingGroup'sinternalreportingpackonaregularbasistoassessperformanceandtoallocateresources.
Withinthepack,operatingsegmentshaveprimarilybeendeterminedwithreferencetodifferencesinproductsandservices.
Operatingsegmentshavebeenaggregatedforreportingpurposeswherethefollowingcriteriahavebeenmet:a)AggregationisconsistentwiththecoreprincipleofNZIFRS8OperatingSegments;b)Segmentshavesimilareconomiccharacteristics;andc)Segmentsaresimilarineachofthefollowingrespects:–natureoftheproductandservices;–natureofproductionprocess;–typeorclassofcustomerfortheirproductsandservices;–methodsusedtodistributetheirproductsorprovidetheirservices;and–natureoftheregulatoryenvironment.
Forthepurposesofthisnote,anoperatingsegmentisadistinguishablepartoftheBankingGroup,engagedinprovidingproductsandserviceswhicharesubjecttorisksandreturnsthataredifferentfromthoseofotherbusinesssegments.
Thebusinesssegmentsaredefinedbythecustomersthattheyserviceandtheservicestheyprovide.
TheKBLTassessestheperformanceoftheoperatingsegmentsbasedonameasureofprofitbeforetax.
Thismeasurementbasisincludesareallocationofinternaloverheadexpensesfromnon-incomegeneratingcostcentresofthebusiness.
NetinterestincomeatasegmentallevelincludesanallocationforinternaltransferpricingwhicheliminatestozeroataBankingGrouplevel.
Transferpricingisallocatedonabasiswhichreflectsintersegmentfundingarrangements.
Asummariseddescriptionofeachbusinessunitisshownbelow:Personal–Providesbankingproductsandservicestothepersonalbankingsegment.
Business–Providesbankingproductsandservicestothebusinesssector.
IncludedwithinthesegmentareBusinessandTreasuryservices.
Norevenuefromtransactionswithasingleexternalcustomerorcounterpartyamountedto10%ormoreoftheBankingGroup'stotalrevenue(2016:nil).
TheBankingGroupoperatespredominantlywithinNewZealandwithnosignificantportionofassetsoroperationslocatedoutsideNewZealand.
58Notestothefinancialstatementscontinued31.
Segmentanalysiscontinued30/06/1730/06/16DollarsinmillionsPersonalMarketsBusinessMarketsTotalPersonalMarketsBusinessMarketsTotalExternalnetinterestincome434(66)368442(69)373Netintersegmentinterest(199)199-(212)212-Netinterestincome235133368230143373Otherexternaloperatingincome94321268024104Segmentalrevenue329165494310167477Profitbeforeimpairmentandtaxation84711559581176Profitbeforetaxation1655717689165Totalassets16,2764,34020,61615,1564,20119,357Totalliabilities12,7476,48919,23611,7086,52018,228Acquisitionofintangibleassets421052521365Acquisitionofproperty,plantandequipment102128210Amortisationexpense1772416723Depreciationexpense617527Otherimpairmentlosses721890---Impairment(reversals)/lossesonloansandadvances(4)(2)(6)19(8)1159Notestothefinancialstatementscontinued32.
DeconsolidationofsubsidiaryOn30March2017,changesweremadetotheKGHLGroupgovernancearrangementswhichresultedinKCFLbeingdeconsolidatedfromtheBankingGroupeffective30March2017andtheBankinggroupnolongerrecognisingKCFL'sassetsandliabilities.
NoconsiderationwasreceivedinrelationtothechangesthatledtothedeconsolidationofKCFL.
KCFL,whichis100%ownedbyKGHL,wasestablishedsolelyforthepurposeofissuingdebtsecuritiestothemarketandusingtheproceedstosubscribeforcapitalinstrumentsissuedbyKiwibank.
ThedebtissuedbyKCFLhassubstantiallythesametermsasthedebtissuedbyKiwibanktoKCFLandtheimpactofdeconsolidationislimitedtodifferencesinaccountingtreatmentofthedebtissuancesbeforeandafterdeconsolidation.
PerpetualcapitalnotesissuedbyKCFLwerepreviouslytreatedasequityoftheBankingGroupanddeconsolidationresultedinareductionof$147mintheBankingGroup'sperpetualcapitalreserve.
ThisdecreaseinequitywasoffsetbyanincreaseinsubordinateddebtliabilitiesduetotherecognitionoftheperpetualcapitalbondsissuedbyKiwibanktoKCFLthatwerepreviouslyeliminateduponconsolidation.
Theperpetualcapitalbondswerecarriedatamortisedcostwithavalueatthedateofdeconsolidationof$148mincludingunamortisedissuancecostsof$2m.
ThesubordinateddebtissuedhadthesameaccountingtreatmentbeforeandafterdeconsolidationthereforetherewasnoeffectontheBankingGroupinrelationtothesubordinateddebt.
Dollarsinmillions30/06/1730/06/16EffectofdeconsolidationofsubsidiaryLiabilitiesPerpetualcapitalbonds(148)-EquityPerpetualcapitalreserve(perpetualcapitalnotes)147-Netassetsdeconsolidated(1)-LossondeconsolidationofsubsidiaryNetassetsdeconsolidated(1)-Fairvalueofinterestretained--Considerationreceivedupondeconsolidation--Lossondeconsolidationofsubsidiary(1)-Thelossondeconsolidationof$1.
1marisesduetotherecognitionoftheperpetualcapitalbondissuancecostsamortisedtodatebyKiwibankhavingbeenpreviouslyeliminateduponconsolidation.
Thelossondeconsolidationisreflectedwithinoperatingexpenses.
Asaconsequenceofthedeconsolidation,theBankingGroupalsoderecognisedadeferredtaxliabilityonfairvaluelossesof$1.
4masdisclosedinnote7.
60Notestothefinancialstatementscontinued33.
RiskmanagementRiskmanagementTheBankingGroup'sexposuretoriskarisesprimarilyfromitsbusinessactivitiesasafinancialintermediaryandfinancialmarketsparticipant.
TheBankingGrouprecognisestheimportanceofeffectiveriskmanagementtoitsbusinesssuccessandtoitscustomers.
RiskmanagementenablestheBankingGrouptobothincreaseitsfinancialandorganisationalgrowthopportunitiesandmitigatepotentiallossordamage.
OrganisationalperspectiveTheBankingGroupapproachesthemanagementofriskusinganorganisationalframeworkthatischaracterisedby:TheBoardprovidingoversightonriskappetites,strategies,andmonitoringprogress;BusinessunitlevelaccountabilityforthemanagementofrisksinaccordancewithagreedstrategiesandtheBankingGroup'sriskmanagementframework;TheRiskManagementfunctionisresponsibleforimplementingariskmanagementframeworkandprovidingassurancearoundthemanagementofvariouselementsofrisk;andIndependentoversightofbusinessunitriskmanagementbybothinternalandexternalauditfunctionstoi)provideregularriskevaluationandreporting;andii)assesstheadequacyandeffectivenessofmanagement'scontrolofrisk.
ThedirectorsofKiwibankareresponsibleforthestewardshipoftheBankingGroup.
Tohelpdischargethisobligation,theBoardhasestablishedtheFinance,AuditandDisclosuresCommittee,(whichincludesmemberswhohaveappropriatefinancialexperienceandunderstandingofthebankingindustryinwhichtheBankingGroupoperates)andtheRisk,CreditandComplianceCommittee,whichcollectivelyareresponsiblefor:ReviewandapprovaloftheBankingGroup'sframeworksandpoliciesformanagingbusiness,credit,marketandoperationalriskandmaintaininganeffectiveriskmanagementframework.
MonitoringtheBankingGroup'skeyrisks,performance,exposuresagainstlimits,capitallevelsandmanagementoftheBankingGroup'srisks.
MonitoringanticipatedchangesintheeconomicandbusinessenvironmentandotherfactorsrelevanttotheBankingGroup'sriskprofile.
Reviewandapprovaloflimitsandconditionsthatapplytorisktaking.
Reviewofinternalauditactivitiesandsignificantauditissues.
Reviewoffinancialanddisclosurestatements.
ThefollowingspecialisedprincipalmanagementcommitteeshavebeenformedtotranslateBoardriskappetiteintoappropriatestrategies,policies,controls,processesandproceduresforidentifying,measuringandmanagingrisk:i)theAsset-LiabilityCommittee("ALCO"),whichisconcernedwithbalancesheetstructure,capital,fundingandmarketrisk;ii)theExecutiveRiskCommittee,whichisfocusedonbusiness,creditandoperationalrisk;iii)theDisclosureCommittee,whichisfocusedoncontinuousdisclosurerequirements;andiv)theEnterprisePortfolioManagementGroup,whichconsiderscertainrisksassociatedwiththeBankingGroup'skeystrategicprojectsandinvestmentportfolio.
IndependentCreditandMarketrisk-controlunitsoperatealongsidetheBankingGroup'slendingbusinessunitsandTreasuryunit.
Theserisk-controlfunctionsareaccountableforidentifyingandquantifyingcreditandmarketrisks,respectively,andforworkingwiththelendingandTreasurybusinessunitstoimplementappropriatepolicies,proceduresandcontrolstomanagethoserisks.
TheBankingGroup'sRiskManagementUnithasbeenassignedtheroleofinternalmonitor.
TheRiskManagementUnitistaskedwithensuringthatriskbasedreportingoffinancialandnon-financialthreatstotheBankingGroupisundertakenonaregularbasis.
Theunitprovidesanindependentappraisalofbusinessunits'riskpositionsandtheoverallcontrolenvironment,reportingontheBankingGroup'skeyrisksthroughtheExecutiveRiskCommittee,andontotheBoardRisk,CreditandComplianceCommitteeandtheBoardFinance,AuditandDisclosuresCommitteeasappropriate.
NoformalreviewsoftheBankingGroup'sriskmanagementsystemwereundertakenbyexternalpartiesduringtheyearended30June2017.
61Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedInternalauditTheBankingGrouphasanindependentinternalauditfunction,whichappraisestheadequacyandeffectivenessoftheinternalcontrolenvironment,andreportsresultstoManagementandtheBoardFinance,AuditandDisclosuresCommittee.
TheinternalauditfunctionreportsdirectlytotheChairoftheBoardFinance,AuditandDisclosuresCommitteewithmatrixreportingtotheChiefExecutiveOfficer.
Inplanningauditactivities,internalauditadoptsarisk-basedapproachthatdirectsandconcentratesresourcestothoseareasofgreatestsignificance,strategicconcernandrisktothebusiness.
Thisencompassesreviewsofmajorcredit,market,technology,programmes,projectsandoperatingriskswithintheBankingGroup.
SignificantfindingsarereportedquarterlytotheBoardFinance,AuditandDisclosuresCommittee.
TheauditplanisapprovedbytheBoardFinance,AuditandDisclosuresCommittee.
Allissuesandrecommendationsreportedtomanagementaretrackedandmonitoredinternallytoensurecompletionandagreedactionsareundertakenwhereappropriate.
RiskmanagementframeworkTheBankingGroup'sriskmanagementframeworkrevolvesaroundfourkeyfunctions.
Namely:Strategicriskmanagement–AframeworkandsetofprocessesthattheBankingGroupusestoplan,organise,leadandcontrolriskmanagementactivitiesinanefforttominimisetheeffectsandimpactsofriskeventsontheBankingGroup'scapitalandearnings.
ThisreflectstheBaselIIIaccordrequirementsforaproperlyframedstructurefromwhichriskmanagementstrategiesandpolicycanbedevolved.
Thisframeworkprovides:i)Ahighlevel"riskstructure"fortheclassificationandcategorisationofallrisksdeemedmaterialtotheBankingGroup,whichformsthebasisofreportingtheBankingGroup'sriskprofile.
ii)Riskappetite–theBankingGroup'swillingnesstotakeonfinancialrisksandabasicoperationalpre-requisitefortheestablishmentofconsistentrisklimits.
iii)Riskpolicystatements–theseexplicitlyarticulatetheBankingGroup'sfundamentalattitudetowardsriskandriskmanagement.
TheriskpolicystatementsareintendedtoensureemployeesunderstandtheBankingGroup'sriskmanagementgoalsthroughouttheorganisation.
iv)Riskprinciples–thesearecentralrulesforriskmanagementdecision-makingandformthebasisformaximumuniformityinriskmanagementdecision-making.
Capitalmanagementandcapitaladequacy–theBankingGroup'scapitalmanagementstrategyseekstoensuretheBankingGroupisadequatelycapitalisedwhilerecognisingcapitalisoftenanexpensiveformoffundingorinsurance.
TheBankingGroupseekstomaintainandacquirecapitalinaneconomicallyeffectivemannersoasto:i)supportfuturedevelopmentandgrowthaspirations;ii)complywithregulatorycapitalrequirements;iii)maintainastronginternalcapitalbasetocoverallmaterialinherentrisks;andiv)maintainaninvestmentgradecreditrating.
TheBankingGroupundertakesaprogrammeofactivitiesdesignedtoensurethatithassufficientfinancialresourcestocontinueasagoingconcernevenifitsuffersamaterialunforeseenorunexpectedriskevent(s).
Thisprogramme,calledtheInternalCapitalAdequacyAssessmentProgramme("ICAAP"),dealsprimarilywithassessingtheBankingGroup'scapacitytoabsorbriskbasedon:i)identificationandquantificationofitsimmediaterisks;andii)comparisonofthoseriskswithitsfinancialcapital(thatmayhavetobesacrificediftheserisksmaterialise).
TheBoardofDirectorshasultimateresponsibilityforcapitaladequacyandapprovescapitalpolicyandminimuminternalcapitallevelsandlimits.
InensuringthattheBankingGrouphasadequateoverallcapitalinrelationtoitsriskprofile,amixtureofriskcapitalestimatesandjudgementbasedestimateshavebeenmaderelatingtoallmaterialrisks,evenwheretheyarehardtoquantify.
Includedintheseestimatesisalsoatrade-offbetweentheimportanceofallocatingcapitaltosuchrisksandtherobustnessoftheBankingGroup'sapproachtomitigatingandmanagingtheserisks.
TheBankingGroupmonitorsitskeyrisksandinternalandregulatorycapitaladequacy,andreportsonthesetotheBoardRisk,CreditandComplianceCommittee,andtheBoardFinance,AuditandDisclosuresCommittee.
Intheeventoflarge,unexpectedlosses,theBankingGroupiscommittedtorestoringitscapitalposition.
Managementhavedevelopedplansaccordingly.
62Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedRiskassessmentandriskprioritisation–ThisfunctionadministeredbytheRiskManagementUnitisdesignedtoidentifyandassesstherealrisksfacingtheBankingGroup.
Theprioritisationprocessisintendedtoensurethatmanagementfocusandappropriateresourcesaredirectedatisolating,reducingorcontrollingexpected(probable)riskevents.
Theriskprioritisationprocessinvolvesassessingtheprobabilityandseverityoflossesusing(wherepossible)quantitativeriskandcontroldata.
Enterpriseriskmanagement–Irrespectiveoftheirrelativesignificance,themajorityofrisksituationsfacingtheBankingGroupoccurintheday-to-dayoperationsofthebusiness.
Theserisks(referredtoasenterpriserisks-astheyarisefromoperatingthebusiness)arenotconfinedtoformalriskdomains(i.
e.
credit,market,oroperationalrisk)orbusinesslines.
AsitisconsidereddesirabletomanageriskinaconsistentandcomprehensivemanneracrossthewholeoftheBankingGroup,adecisionsupportmodelexistsforanymanagerneedingtomakeariskmanagementdecisionaboutaspecificriskmatterarisingintheircurrentorproposedoperations(i.
e.
day-to-daybusinessactivities).
TheBankingGroup'shighlevel"riskstructure"recognisesfivemaintypesofrisk(orriskdomains).
Specifically:Creditrisk–theriskoffinanciallossarisingfromthefailureofacustomerorcounterpartytohonouranyfinancialorcontractualobligation.
Marketrisk–thepotentialforlossesarisingfromadversemovementsinthelevelandvolatilityofmarketfactors,suchasinterestratesandforeignexchangerates.
ThisriskdomainalsoincludestheriskthattheBankingGroupwillnothavesufficientfundsavailabletomeetfinancialandtransactionalcash-flowobligations.
Operationalrisk–theriskofdirectorindirectlossesresultingfrominadequateorfailedinternalprocesses,people,andsystems,orfromexternalevents.
Thisriskdomainincludeslegalandregulatoryrisk,whichincludes,butisnotlimitedto,exposuretofines,penalties,orpunitivedamagesresultingfromregulatoryactions,aswellasprivatesettlements.
Businessandstrategicrisk–macroormicroenvironmentaleventsthatcouldimpedeorpreventtheBankachievingitsstatedbusinessgoalsorstrategies,includingmissedopportunitiesandpotentiallosses/damagearisingfrompoorstrategicbusinessdecisions.
Systemicrisk–therisktheglobalanddomesticeconomicenvironmentchangesmateriallysotheBankingGroupisunabletoachieveitsbusinessgoalsandstrategies.
Thisincludeschangesinfinancialmarketsimpactingcreditandliquidityflows.
CreditriskTheBankingGroup'screditrisksarisefromlendingtocustomersandfrominter-bank,treasury,internationalandcapitalmarketactivities.
TheBankingGrouphasclearlydefinedcreditpoliciesandframeworksfortheapprovalandmanagementofcreditrisk.
KeyelementsoftheCreditriskmanagementframeworkare:Creditriskmanagement–theBoardrequiressoundlendinggrowthforappropriatereturns.
TheBankingGrouppursuesthisobjectiveinastructuredmanner,managingcreditriskthroughapplicationofsectorspecificcreditunderwritingstandardsincludingscorecards,arobustcontrolenvironment,monitoringoftheportfolios,reviewofallmajorcreditrisksandriskconcentrationsandthroughatieredstructureofdelegatedlendingauthoritiesdesignedtocontrolthemultiplefacetsofcreditriskmanagement.
Anindependentcreditmanagementfunctionstaffedbycreditriskspecialistsexiststo;i)provideindependentcreditdecisions;ii)supportfront-linelendingstaffintheapplicationofsoundcreditpractices;iii)providecentralisedremedialmanagementoftroublesomeandimpairedaccounts;andiv)reviewportfoliomonitoringandloanassetqualityanalysisandreporting.
TheintegrityandeffectivenessoftheBankingGroup'screditriskmanagementpractices,assetqualityandcompliancewithpolicyissupportedbyindependentassessmentsbytheQualityAssuranceandInternalAuditfunctions.
Creditriskmitigation–TheBankingGroup'sBoardapprovedwholesalecreditmanagementpolicysetsouttheparametersforwhichitcanenterintocreditexposuresarisingfromonandoff-balancesheettransactions.
TheBankingGroupalsohaslegalarrangementswithitsmajorinstitutionalcounterpartiestoallownettingofoff-balancesheetexposuresalongwithcollateralmanagementarrangements.
63Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedPortfoliostructureandmonitoring–TheBankingGroup'screditportfolioisdividedintotwoAssetClasses,RetailandCorporate.
TheRetailAssetClassiscomprisedofhousingloan,creditcardandpersonalloanfacilitiesandsmalltomediumenterprisebusinesslending.
Thissegmentismanagedonadelinquencybandapproachandonabehaviouralbasis.
TheCorporateAssetClassconsistsoflendingtomiddlemarketandCorporatebusinesses.
Eachexposureisassignedaninternalriskratingthatisbasedonanindepthassessmentoftheriskofdefault.
Theseexposuresarerequiredtobereviewedonanannualbasis.
Theoverallcompositionandqualityofthecreditportfoliosismonitoredtakingintoaccountthepotentialchangesineconomicconditions.
Creditapprovalstandards–TheBankingGrouphasclearlydefinedcreditunderwritingpoliciesandstandardsforalllending,whichincorporateincomeandrepaymentcapacity,acceptableterms,security,andloandocumentationcriteria.
Inthefirstinstance,theBankingGroupreliesontheassessedintegrityandcharacterofthecustomerorcounterpartyandtheircapacitytohonourtheirfinancialobligationsforrepayment.
LongertermConsumerlendingisgenerallysecuredagainstrealestate,whileshorttermrevolvingconsumercredit(personallending)isgenerallyunsecured.
TheBankingGrouprequiresadequateandsustainabledebtservicingcapacity,andmayalsorequiresecuritycoverwithinloantosecurityratiosassetoutintheBankingGroup'screditpolicy.
Collateralsecurityintheformofrealpropertyand/orgeneralsecurityinterestoverbusinessassetsisgenerallytakenforbusinesscreditexceptforgovernment,bankandcorporatecounterpartiesofstrongfinancialstanding.
TheBankingGroupusesISDAagreementstodocumentderivativeactivitiesandlimitexposurestocreditlosses.
UnderISDAprotocols,intheeventofdefault,allcontractswiththecounterpartyareterminatedandsettledonanetbasis.
Problemcreditfacilitymanagement–Creditexposuresaremonitoredregularlythroughtheexaminationofirregularanddelinquentaccounts.
Thisenablesdoubtfuldebtstobeimmediatelyidentifiedsothatspecificprovisionsforpotentiallossescanbeestablishedasearlyaspossible.
Problemcreditfacilitiesaremonitoredtoensureworkoutandcollectionandrecoverystrategiesareestablishedandenactedpromptlytominimiseriskofpotentiallosses.
Creditriskportfoliosareregularlyassessedforobjectiveevidenceofimpairment.
TheBankingGroupmaintainsacollectiveimpairmentallowancewherethereisobjectiveevidencethattheportfoliocontainsprobablelossesthatwillbeidentifiedinfutureperiods.
TheBankingGroupalsocreatesanindividualallowanceforimpairmentagainstspecificcreditexposureswhenthereisobjectiveevidencethatitwillnotbeabletocollectallamountsdue.
Operationscontrolenvironment–Operationally,creditriskiscontrolledthroughacombinationofapprovals,limits,monitoringandreviewprocedureswhicharecarriedoutonaregularbasis.
Functionsaresegregatedsothatnoonepersonisabletocontrolallsignificantstagesofthecreditprocess,therebyreducingthechanceoferrorordefalcationescapingdetection.
Preparationofformallendingdocumentationonlyoccursafteranindependentofficerintheoperationsareahasverifiedthatthecreditfacilityhasbeenproperlyapprovedandthefacilitydocumentationmatchesthetermsofthecreditapproval.
MarketriskMarketriskarisesfromthemismatchbetweenassetsandliabilitiesinthebankingbusiness.
Inordertomanageitsownexposuretomarketrisk,theBankingGrouptransactsinderivativeinstrumentssuchasswaps,options,futuresandforwardrateagreements.
Theseactivitiesaremanagedusingstructurallimits(includingvolumeandbasispointvaluelimits)inconjunctionwithscenarioanalysis.
Marketrisklimitsareallocatedbasedonbusinessstrategies,modellingandexperience,inadditiontomarketliquidityandriskconcentrationanalysis.
KeyelementsoftheBankingGroup'smarketriskmanagementframeworkare:InterestrateriskmanagementTheBoardexpectsreasonablestabilityintheBankingGroup'snetinterestincomeovertime.
TheBankingGroup'sTreasuryfunctionhasbeentaskedwithmanagingthesensitivityofnetincometochangesinwholesalemarketinterestrates.
Thissensitivity(knownasstructuralinterestraterisk)arisesfromtheBankingGroup'slendinganddeposittakingactivitiesandinvestmentofcapitalandotherliabilities.
TheprovisionofloansandacceptingdepositsatbothfixedandvariableratesgivesrisetotheriskthattheBankingGroupcouldhaveunmatchedpositionsleadingtomaterialexposuresinashiftinginterestrateenvironment.
Otheractivitiessuchascurrentaccountfacilitiesandtradingfinancialinstrumentssuchasswaps,optionsandforwardrateagreementsalsoincurinterestraterisks.
64Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedThemainobjectiveofthemanagementofinterestrateriskistoachieveabalancebetweenreducingrisktoearningsfromtheadverseeffectofinterestratemovementsandenhancingnetinterestincomethroughthecorrectanticipationofthedirectionandextentofinterestratechanges.
ALCO(comprisingofexecutivemanagement)isresponsibleforimplementingandmonitoringinterestrateriskmanagementpolicieswithinBoarddefinedpolicyguidelinesandlimits.
InterestrateriskismanagedbytheTreasuryunitwithinpre-approvedlimits.
InterestrateriskismeasuredintermsoftheBankingGroup'snotionalexposuretopotentialshiftsinfutureinterestratesrelativetothetimescalewithinwhichassetsandliabilitiescanbere-priced.
AseparateindependentMarketRiskManagementUnitisresponsibleforthedailymeasurementandmonitoringofmarketriskexposures.
TheBankingGroupreducesinterestrateriskbyseekingtomatchthere-pricingofassetsandliabilities.
Asubstantialportionofcustomerdepositsandlendingisatvariablerates,whichareperiodicallyadjustedtoreflectmarketmovements.
Wherenaturalhedgingstillleavesaresultantinterestratemismatch,theresidualrisksarehedgedwithinpredefinedlimitsthroughtheuseofphysicalfinancialinstruments,interestrateswapsandotherderivativefinancialinstruments.
ThetablesbelowsummarisetheBankingGroup'sexposuretointerestraterisk.
Theyincludethefinancialinstrumentsatcarryingamounts,categorisedbytheearlierofcontractualrepricingormaturitydates.
Interestraterepricingschedule30/06/17DollarsinmillionsTotalNon-interestbearingUpto3months3to6months6monthsto1yearBetween1&2yearsOver2yearsFinancialassetsCashandcashequivalents46433431----Duefromotherfinancialinstitutions228-20820---Available-for-saleassets1,474-374209122460309Loansandadvances17,815(21)5,5701,6483,9894,6571,972Derivativefinancialinstruments370370Duefromrelatedparties80545--30-Otherfinancialassets1818Totalfinancialassets20,4494056,6281,8774,1115,1472,281FinancialliabilitiesDuetootherfinancialinstitutions(59)(7)(52)Depositsandotherborrowings(15,983)(1,772)(8,551)(2,958)(2,331)(192)(179)Derivativefinancialinstruments(416)(416)Debtsecuritiesissued(2,258)-(1,404)(61)-(271)(522)Subordinateddebt(405)--(150)--(255)Duetorelatedparties(12)(12)Otherfinancialliabilities(67)(67)Totalfinancialliabilities(19,200)(2,274)(10,007)(3,169)(2,331)(463)(956)On-balancesheetgap1,249(1,869)(3,379)(1,292)1,7804,6841,325Netderivativenotionalprincipals(9)-4,2331,132(1,565)(3,791)(18)Neteffectiveinterestrategap1,240(1,869)854(160)2158931,30765Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedInterestraterepricingschedulecontinuedDollarsinmillions30/06/16TotalNon-interestbearingUpto3months3to6months6monthsto1yearBetween1&2yearsOver2yearsFinancialassetsCashandcashequivalents50931478----Duefromotherfinancialinstitutions24742205----Available-for-saleassets955-89-26294546Loansandadvances16,689(31)5,3131,5593,1855,3041,359Derivativefinancialinstruments658658Duefromrelatedparties77145-31--Otherfinancialassets1010Totalfinancialassets19,1457116,1301,5593,2425,5981,905FinancialliabilitiesDuetootherfinancialinstitutions(135)(4)(131)Depositsandotherborrowings(14,782)(1,506)(9,463)(1,809)(1,563)(245)(196)Derivativefinancialinstruments(725)(725)Debtsecuritiesissued(2,207)-(977)(159)(160)(98)(813)Subordinateddebt(258)150)(108)Duetorelatedparties(4)(4)Otherfinancialliabilities(77)(77)Totalfinancialliabilities(18,188)(2,316)(10,571)(1,968)(1,723)(493)(1,117)On-balancesheetgap957(1,605)(4,441)(409)1,5195,105788Netderivativenotionalprincipals20-4,706(170)(981)(4,026)491Neteffectiveinterestrategap977(1,605)265(579)5381,0791,27966Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedCurrencyriskmanagementCurrencyriskresultsfromthemismatchofforeigncurrencyassetsandliabilities.
Thesemismatchescanarisefromtheday-to-daypurchaseandsaleofforeigncurrencyandfromdepositandlendingactivityinforeigncurrencies.
TheBankingGrouphasapolicyofhedgingallforeigncurrencyborrowingintoNewZealanddollars.
Residualcurrencyrisksaremonitoreddailyintermsofopenpositionsineachcurrencyandaremanagedwithinpre-approvedlimits.
TheBankingGrouptakesonexposuretotheeffectsoffluctuationsintheprevailingforeigncurrencyexchangeratesonitsfinancialpositionandcashflows.
TheBoardsetslimitsonthelevelofexposurebycurrencyandinaggregateforovernightpositions,whicharemonitoreddaily.
ThetablebelowsummarisestheBankingGroup'sexposuretoforeigncurrencyexchangerateriskasatthereportingdate.
IncludedinthetablearefinancialinstrumentsatNZDcarryingamounts,categorisedbycurrency.
Dollarsinmillions30/06/17NZDCHFAUDUSDGBPEUROtherTotalAssetsCashandcashequivalents385-93719122464Duefromotherfinancialinstitutions228228Available-for-saleassets1,4741,474Loansandadvances17,810-13-1-17,815Derivativefinancialinstruments(54)487(25)(60)-(1)23370Duefromrelatedparties8080Otherfinancialassets1818Totalfinancialassets19,941487(15)(20)19122520,449LiabilitiesDuetootherfinancialinstitutions(33)--(26)59)Depositsandotherborrowings(15,879)-(20)(49)(21)(11)(3)(15,983)Derivativefinancialinstruments(1,382)-2806063(2)79(416)Debtsecuritiesissued(944)(478)(239)(495)--(102)(2,258)Subordinateddebt(405)405)Duetorelatedparties(12)12)Otherfinancialliabilities(67)67)Totalfinancialliabilities(18,722)(478)2136(18)(13)(26)(19,200)Neton-balancesheetfinancialpositon1,21996161(1)(1)1,24967Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedCurrencyriskmanagementcontinuedDollarsinmillions30/06/16NZDCHFAUDUSDGBPEUROtherTotalAssetsCashandcashequivalents433-10431193509Duefromotherfinancialinstitutions205--42---247Available-for-saleassets955955Loansandadvances16,687--1-1-16,689Derivativefinancialinstruments248512(27)(101)(3)(3)32658Duefromrelatedparties7777Otherfinancialassets1010Totalfinancialassets18,615512(17)(15)873519,145LiabilitiesDuetootherfinancialinstitutions(92)--(43)135)Depositsandotherborrowings(14,689)-(18)(47)(13)(12)(3)(14,782)Derivativefinancialinstruments(1,339)-17730545123(725)Debtsecuritiesissued(1,231)(495)(136)(190)--(155)(2,207)Subordinateddebt(258)258)Duetorelatedparties(4)4)Otherfinancialliabilities(77)77)Totalfinancialliabilities(17,690)(495)2325(9)(7)(35)(18,188)Neton-balancesheetfinancialpositon92517610(1)--957LiquidityandfundingriskmanagementLiquidityriskistheriskthattheBankingGroupwillnothavesufficientfundsavailabletomeetitsfinancialandtransactionalcashflowobligations.
ManagementofliquidityriskisdesignedtoensurethattheBankingGrouphastheabilitytogenerateorobtainsufficientcashinatimelymannerandatareasonablepricetomeetitsfinancialcommitmentsonadailybasis.
TheTreasuryfunctionhasresponsibilityforliquiditymanagement,underoversightoftheALCO.
TheBankingGroupmonitorsthisriskdaily,primarilybyforecastingfuturecashrequirements,bothundernormalconditionsandduringcrisissituations.
TheBankingGroupmanagesthisby;i)holdingreadilytradable,investmentassets,thatareeligiblefortheRBNZ'srepurchasefacilities,andshortterminvestmentswithhighcreditqualitycounterpartiestoprovideforanyunexpectedpatternsincashmovements;andii)byseekingastablefundingbase.
TheBankingGroupmaintainsliquiditycrisiscontingencyplansdefininganapproachforrespondingtoliquiditythreateningevents.
Fundingriskisalliedtoliquidityrisk,butisconcernedwiththeBankingGroup'scapacitytofundincreasesinassetswhilemeetingitspaymentobligations,includingrepayingdepositorsandmaturingwholesaledebt.
TheBankingGroupemploysassetandliabilitycashflowmodellingtodetermineappropriateliquidityandfundingstrategies.
ThismodellinghelpsensurethatanappropriateportionoftheBankingGroup'sassetsarefundedbycustomerliabilities,bankborrowing,andequity.
Thisapproachalsorecognisesthefavourableliquiditycharacteristicsoflongtermcustomerliabilitiesandwholesaledebtfunding,inreducingtheimpactorvolatilityofshorttermfunding.
Undernormalbusinessconditions,theBankingGroupseekstosatisfythemajorityofitsfundingneedsfromretailliabilities.
TheBankingGroup'sborrowingcapacityisanestimateoftheamountoffundingthatcanberaisedinthewholesalemarkets.
TheBankingGroup'sfundingstrategyisdesignedtodeliverasustainableportfolioofwholesalefunds.
Treasury(underoversightoftheALCO)isresponsibleformonitoringtheBankingGroup'sfundingbaseandensuringthatthisbaseisprudentlymaintainedandadequatelydiversified.
68Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedLiquidityriskmanagementprocessTheBankingGroup'sliquiditymanagementresponsibilitiesinclude:Day-to-dayliquidityrequirements.
RBNZliquidityratiosarecalculatedandmonitoreddailytoensurethattheGroup:–iscompliantwithpart11oftheConditionsofRegistrationandtheRBNZ"Liquiditypolicy"(BS13);–maintainsaprudentlevelofcashandhighlyliquidassets("primaryliquidassets")andmarketableassetsoflimitedcreditrisk("secondaryliquidassets")tomeetbothexpectedandprojectedoutflowsunderseverefundingstressfromthewholesaleandretailbalancesheetoveraoneweekandonemonthperiod;and–maintainsadiversifiedstablefundingbase.
Securinganappropriatelymatchedprofileoffuturecashflowsfrommaturingassetsandliabilities.
ImplementingtheBankingGroup'sfundingplanwhichincludesthedevelopmentofsustainablewholesalefundingcapacity.
StresstestingtheBankingGroup'sfundingandliquiditypositionwitharangeofadverseeventscovering:–aKiwibanknamecrisis–aninternationalcreditcrisis–aKiwibankNameeventcombinedwithdomesticfundingstressNon-derivativecashflowsThetablesbelowsummarisethecashflowspayablebytheBankingGroupundernon-derivativefinancialliabilitiesbyremainingcontractualmaturitiesatthereportingdate.
Theamountsdisclosedinthetablearethecontractualundiscountedcashflows.
TheBankingGroupdoesnotmanageliquidityriskonthebasisoftheinformationprovidedbelow.
Derivativecashflowsa)DerivativessettledonanetbasisThetablesonthefollowingpagesanalysetheBankingGroup'sderivativefinancialliabilitiesthatwillbesettledonanetbasisintorelevantmaturitygroupingsbasedontheremainingperiodatthereportingdatetothecontractualmaturitydate.
Theamountsdisclosedinthetablearethecontractualundiscountedcashflowsusingforwardrates.
b)DerivativessettledonagrossbasisThetablesonthefollowingpagesanalysetheBankingGroup'sderivativefinancialinstrumentsthatwillbesettledonagrossbasisintorelevantmaturitygroupingsbasedontheremainingperiodatthereportingdatetothecontractualmaturitydate.
Theamountsdisclosedinthetablearethecontractualundiscountedcashflowsusingforwardrates.
69Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedNon-derivativecashflowsbycontractualmaturityDollarsinmillions30/06/17OndemandUpto3months3to12monthsBetween1&5yearsMorethan5yearsGrossnominalinflow/outflowCarryingamountNon-derivativecashflowsLiabilitiesDuetootherfinancialinstitutions(59)59)(59)Depositsandotherborrowings(5,756)(4,563)(5,391)(414)-(16,124)(15,983)Debtsecuritiesissued(199)(528)(290)(1,329)(33)(2,379)(2,258)Subordinateddebt(3)-(12)(61)(421)(497)(405)Duetorelatedparties(12)12)(12)Otherfinancialliabilities(67)67)(67)Totalfinancialliabilities(6,096)(5,091)(5,693)(1,804)(454)(19,138)(18,784)AssetsCashandcashequivalents464----464464Duefromotherfinancialinstitutions1486020--228228Available-for-saleassets65224379857-1,5251,474Loansandadvances1953691,1193,99029,95335,62617,815Duefromrelatedparties51178-8580Otherfinancialassets18----1818Totalfinancialassets8956541,5194,92529,95337,94620,079Netnon-derivativecashflows(5,201)(4,437)(4,174)3,12129,49918,808Derivativecashflows-netInterestratederivatives(8)(9)(26)(8)-(51)Total(8)(9)(26)(8)-(51)Derivativecashflows-grossForeignexchangederivativesInflow266619250657331,825Outflow(276)(651)(253)(602)(39)(1,821)Total(10)(32)(3)55(6)4Off-balancesheetcashflowsCapitalcommitments-(8)(1)--(9)Undrawnloancommitments(2,857)2,857)Leasecommitments-(2)(6)(27)(47)(82)Total(2,857)(10)(7)(27)(47)(2,948)Netcashflows(8,076)(4,488)(4,210)3,14129,44615,813Cumulativenetcashflows(8,076)(12,564)(16,774)(13,633)15,81315,813Includedwithinsubordinateddebtareperpetualcapitalbondswhichhavenofixedmaturitydate.
Therepaymentoftheprincipalamountoftheperpetualcapitalbondshasbeenincludedinthe"morethan5years"column.
70Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedNon-derivativecashflowsbycontractualmaturitycontinuedDollarsinmillions30/06/16OndemandUpto3months3to12monthsBetween1&5yearsMorethan5yearsGrossnominalinflow/outflowCarryingamountNon-derivativecashflowsLiabilitiesDuetootherfinancialinstitutions(135)135)(135)Depositsandotherborrowings(5,605)(5,398)(3,411)(489)-(14,903)(14,782)Debtsecuritiesissued(147)(249)(459)(1,467)(35)(2,357)(2,207)Subordinateddebt(3)-(12)(61)(286)(362)(258)Duetorelatedparties(4)4)(4)Otherfinancialliabilities(77)77)(77)Totalfinancialliabilities(5,971)(5,647)(3,882)(2,017)(321)(17,838)(17,463)AssetsCashandcashequivalents509----509509Duefromotherfinancialinstitutions247----247247Available-for-saleassets81172925-1,016955Loansandadvances1743571,0883,82328,62634,06816,689Duefromrelatedparties-23145-7877Otherfinancialassets10----1010Totalfinancialassets9483701,1914,79328,62635,92818,487Netnon-derivativecashflows(5,023)(5,277)(2,691)2,77628,30518,090Derivativecashflows-netInterestratederivatives(18)(11)(55)(34)(2)(120)Total(18)(11)(55)(34)(2)(120)Derivativecashflows-grossForeignexchangederivativesInflow437170377747351,766Outflow(443)(174)(390)(678)(40)(1,725)Total(6)(4)(13)69(5)41Off-balancesheetcashflowsCapitalcommitments-(5)(1)--(6)Undrawnloancommitments(2,650)2,650)Leasecommitments-(1)(4)(13)-(18)Total(2,650)(6)(5)(13)-(2,674)Netcashflows(7,697)(5,298)(2,764)2,79828,29815,337Cumulativenetcashflows(7,697)(12,995)(15,759)(12,961)15,33715,337EquityriskEquityriskresultsfromthere-pricingofequityinvestments.
TheBankingGroupdoesnotundertakeequitytradingandtherearenosignificantexposurestoequityinstruments.
71Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedOperationalandcomplianceriskOperationalriskistheriskoflossresultingfrominadequateorfailedinternalprocesses,peopleandsystemsorfromexternalevents.
Thisdefinitionincludeslegalrisk,butexcludesstrategicandreputationalrisk.
Operationalriskismitigatedbyimplementingthenecessaryprocess,systemsandtrainingregimes.
Compliancerisk,asubsetofoperationalrisk,istheriskoflegalorregulatorysanctions,materialfinancialloss,orlosstoreputationabankmaysufferasaresultofitsfailuretocomplywithlaws,regulations,rules,relatedself-regulatorystandardsandcodesofconductapplicabletoitsbankingactivities.
OperationalriskisinherentintheBankingGroup'sactivitiesandinadequatepracticestoidentifyandassessoperationalriskcanleadtonon-compliance,sanctionsfines/penaltiesandlossesduetoerrors,compensationandinternalfraud.
Failureofprocesses/systemsorhumanerrorcouldresultinpoorcustomerserviceorexperience.
Operationalriskcoversabroadspectrumofactivities,andiscategorisedintosevenspecific"eventtypes":InternalfraudExternalfraudEmploymentpractices&workplacesafetyClients,products&businesspractices(NB:ThiscategoryincludesalargeproportionofKiwibank'scompliancerisks.
)DamagetophysicalassetsBusinessdisruptionandsystemfailuresExecution,deliveryandprocessmanagementOperationalriskmanagementwithintheBankingGroupisbasedonthefollowingcoreelements:OperationalriskmanagementreliesonthesupportandparticipationofallBankingGroupstaff.
SeniormanagementareaccountabletotheBoardformaintaininganadequateandeffectivecontrolenvironmentthatiscommensuratewiththeBankingGroup'sriskappetiteandbusinessobjectives.
Businessunitsareresponsibleforthemanagementoftheiroperationalrisks.
Eachbusinessareaisresponsiblefortheidentification,measurement,monitoringandmitigationofoperationalriskintheirareasofresponsibility.
AcentralRiskManagementUnitownsandmanagestheoperationalriskandcomplianceframeworkandprovidesguidance,assurance,reviewandchallengeandbankwideriskreportingtorelevantgovernancecommittees.
GeneralManagersprovideattestationsregardingtheiroperationalriskandcompliancesystemsandanyweaknesses.
AsummaryoftheresponsesandanyissuesidentifiedisreportedtotheexecutiveDisclosuresCommitteeandtotheBoardRisk,CreditandComplianceCommittee.
BusinessandstrategicriskTherearenumerousexternalandinternaluncertaintiesthatmayderailthebusinessstrategiesorgoalsoftheBankingGroup.
Successinmanagingbusinessriskisintrinsicallymoredifficultthanmanagingfinancialrisks(i.
e.
credit,marketandoperationalrisks).
ItisonlythroughsoundbusinessstrategiesandskilfulexecutionofthesebusinessstrategiesthattheBankingGroup'sbusinessgoals/objectiveswillbeachieved.
Riskmanagementstrategiesarenotasubstituteforgoodbusinessstrategiesbutaidintheselectionofappropriatestrategiesandintheirsuccessfulexecution.
TheBankingGrouphasthreecorebusinessriskmanagementstrategiesaimedatsupportingitsbusinessstrategies.
Specifically:Establishmentandmaintenanceofaninternalorganisationalenvironmentinwhichbusinessandstrategicriskcanmeaningfullybemanaged.
Establishmentandmaintenanceofstructures,measurementbasisandriskmanagementprocessesfortheevaluationandmanagementofbusinessandstrategicrisks.
BuildingcapabilitywithintheBankingGrouptoenableboththepursuitofopportunitiesandmitigationofvulnerabilities.
72Notestothefinancialstatementscontinued33.
RiskmanagementcontinuedRiskGovernanceRiskGovernanceencompassesrolesandresponsibilitiesoftheBoard,CROandtheriskmanagementfunction,andindependentassessmentoftheRiskGovernanceFramework.
SupportisprovidedintheRiskDivisionbyCROandtheEnterpriseRiskManagementteamwhichprovidesframeworksthatquantifyandcommunicatethelevelofrisktheBankingGroupiswillingtoaccepttomanagement.
KeyelementsoftheRiskGovernancefunctionare:RiskAppetite&supportingpolicyframeworks–TheRiskappetiteandcultureframeworkincludesadefinitionofriskculture,aneffectiveriskappetitestatement,andclearlydefinedrisklimits.
ItalsodefinesrolesandresponsibilitiesfortheBoardofDirectorsandseniormanagementinestablishingtheapprovedriskappetitestatement.
Thisrequiresclearlydefinedframeworks,includingspecificpolicy,forthedevelopmentandmaintenanceofCreditOrigination,PortfolioManagementandPolicies/SectorPoliciesandDelegatedLendingAuthorities.
TheseframeworksareregularlyreviewedandrefinedforcontinuousimprovementandtosupportBusinessneeds.
TheBankingGroup'sExecutiveRiskCommittee(comprisingofexecutivemanagement)istaskedwithproducingrobustcreditpolicies,creditmanagementprocessesandassetwritingstrategies;examiningportfoliostandards,concentrationsoflending,assetimpairment;andmonitoringcompliancewithpolicy.
QualityAssuranceofcreditactivities–ThisprovidesassurancethatCreditPolicy,processesandsystemsarebeingusedasdesigned,bybothindividualstaffandsystematicallyacrosstheBankingGroup.
TheRiskgovernancefunctionincludesreviewingmaterialcreditchangeinitiativesensuringtheyareworkingasdesignedandproducingintendedoutcomes.
ModelAssurance–toprovideassurancethatmodelsarefitforpurposeandworkingasintended,thefunctionistaskedwithdevelopingmodelvalidationstandardswiththeprimaryfocusonmodelsusedforratingcreditexposure.
73Notestothefinancialstatementscontinued34.
SensitivityanalysisThetablesbelowsummarisethepre-taxsensitivityoffinancialassetsandfinancialliabilitiestochangesintworiskvariables,interestrateandcurrencyrisks.
Thesensitivitytointerestratemovementsmodelstheimpactofa1%parallelmovement,bothupanddown,intheyieldcurveonfairvaluesandearnings.
Fairvaluesensitivityassesseswhetherchangesinthefairvalueimpactthenetprofit(forexample,financialassetsheldfortrading)orequity(forexample,availableforsaleassetsandcashflowhedges)only;marketvaluesareusedasthebasisforthiscalculation.
Earningssensitivitycalculatestheimpactonnetprofitforthepreviousyearofa1%movementininterestratebaseduponfinancialassetsandliabilitiesthathavere-pricedoverthepreviousyearthatwereheldatthereportingdate.
Thesensitivitytocurrencymovementsmodelstheimpactonnetprofitofa10%movement,bothupanddown,intheNewZealandDollarrelativetoallcurrencieswhereKiwibankheldamaterialexposureatthereportingdate.
Anychangesinthevalueoffinancialassetsandfinancialliabilitiesduetocurrencymovementsareconsideredtoimpactthenetprofitand,therefore,equityequally.
Interestraterisk–Fairvalue30June2017DollarsinmillionsCarryingamounts-1%+1%-1%+1%NetprofitNetprofitEquityEquityFinancialassetsCashandcashequivalents464----Duefromotherfinancialinstitutions228----Available-for-saleassets1,474--18(18)Loansandadvances17,8155(5)5(5)Derivativefinancialinstruments370205(196)204(195)Duefromrelatedparties80----Otherfinancialassets18----Totalfinancialassets20,449210(201)227(218)FinancialliabilitiesDuetootherfinancialinstitutions(59)Depositsandotherborrowings(15,983)Derivativefinancialinstruments(416)(186)177(258)248Debtsecuritiesissued(2,258)(19)18(19)18Subordinateddebt(405)(2)2(2)2Duetorelatedparties(12)Otherfinancialliabilities(67)Totalfinancialliabilities(19,200)(207)197(279)26874Notestothefinancialstatementscontinued34.
SensitivityanalysiscontinuedInterestraterisk–Fairvalue30June2016DollarsinmillionsCarryingamounts-1%+1%-1%+1%NetprofitNetprofitEquityEquityFinancialassetsCashandcashequivalents509----Duefromotherfinancialinstitutions247----Available-for-saleassets955--23(22)Loansandadvances16,6898(8)8(8)Derivativefinancialinstruments658348(332)365(348)Duefromrelatedparties77----Otherfinancialassets10----Totalfinancialassets19,145356(340)396(378)FinancialliabilitiesDuetootherfinancialinstitutions(135)Depositsandotherborrowings(14,782)Derivativefinancialinstruments(725)(325)309(403)386Debtsecuritiesissued(2,207)(26)25(26)25Subordinateddebt(258)(2)2(2)2Duetorelatedparties(4)Otherfinancialliabilities(77)Totalfinancialliabilities(18,188)(353)336(431)41375Notestothefinancialstatementscontinued34.
SensitivityanalysiscontinuedInterestraterisk–Earnings30June2017DollarsinmillionsCarryingamounts-1%+1%-1%+1%NetprofitNetprofitEquityEquityFinancialassetsCashandcashequivalents464(4)4(4)4Duefromotherfinancialinstitutions228(2)2(2)2Available-for-saleassets1,474(10)10(10)10Loansandadvances17,815(122)122(122)122Derivativefinancialinstruments370117(117)117(117)Duefromrelatedparties80(1)1(1)1Otherfinancialassets18----Totalfinancialassets20,449(22)22(22)22FinancialliabilitiesDuetootherfinancialinstitutions(59)1(1)1(1)Depositsandotherborrowings(15,983)138(138)138(138)Derivativefinancialinstruments(416)(151)151(151)151Debtsecuritiesissued(2,258)14(14)14(14)Subordinateddebt(405)Duetorelatedparties(12)Otherfinancialliabilities(67)Totalfinancialliabilities(19,200)2(2)2(2)76Notestothefinancialstatementscontinued34.
SensitivityanalysiscontinuedInterestraterisk–Earnings30June2016DollarsinmillionsCarryingamounts-1%+1%-1%+1%NetprofitNetprofitEquityEquityFinancialassetsCashandcashequivalents509(5)5(5)5Duefromotherfinancialinstitutions247(2)2(2)2Available-for-saleassets955(5)5(5)5Loansandadvances16,689(113)113(113)113Derivativefinancialinstruments658128(128)128(128)Duefromrelatedparties77----Otherfinancialassets10----Totalfinancialassets19,1453(3)3(3)FinancialliabilitiesDuetootherfinancialinstitutions(135)1(1)1(1)Depositsandotherborrowings(14,782)130(130)130(130)Derivativefinancialinstruments(725)(177)177(177)177Debtsecuritiesissued(2,207)12(12)12(12)Subordinateddebt(258)Duetorelatedparties(4)Otherfinancialliabilities(77)Totalfinancialliabilities(18,188)(34)34(34)3477Notestothefinancialstatementscontinued34.
SensitivityanalysiscontinuedCurrencyrisk30June2017DollarsinmillionsCarryingamounts-10%+10%-10%+10%NetprofitNetprofitEquityEquityFinancialassetsCashandcashequivalents4648(7)8(7)Duefromotherfinancialinstitutions228----Available-for-saleassets1,474----Loansandadvances17,815----Derivativefinancialinstruments37043(38)43(38)Duefromrelatedparties80----Otherfinancialassets18----Totalfinancialassets20,44951(45)51(45)FinancialliabilitiesDuetootherfinancialinstitutions(59)(3)2(3)2Depositsandotherborrowings(15,983)(12)11(12)11Derivativefinancialinstruments(416)96(88)96(88)Debtsecuritiesissued(2,258)(132)120(132)120Subordinateddebt(405)Duetorelatedparties(12)Otherfinancialliabilities(67)Totalfinancialliabilities(19,200)(51)45(51)4578Notestothefinancialstatementscontinued34.
SensitivityanalysiscontinuedCurrencyrisk30June2016DollarsinmillionsCarryingamounts-10%+10%-10%+10%NetprofitNetprofitEquityEquityFinancialassetsCashandcashequivalents5098(7)8(7)Duefromotherfinancialinstitutions247----Available-for-saleassets955----Loansandadvances16,689----Derivativefinancialinstruments65841(37)41(37)Duefromrelatedparties77----Otherfinancialassets10----Totalfinancialassets19,14549(44)49(44)FinancialliabilitiesDuetootherfinancialinstitutions(135)(4)4(4)4Depositsandotherborrowings(14,782)(11)9(11)9Derivativefinancialinstruments(725)61(56)61(56)Debtsecuritiesissued(2,207)(93)85(93)84Subordinateddebt(258)Duetorelatedparties(4)Otherfinancialliabilities(77)Totalfinancialliabilities(18,188)(47)42(47)4135.
Auditor'sremunerationDollarsinthousandsYearended30/06/17Yearended30/06/16Auditor'sremunerationAuditandreviewoffinancialstatements763744OtherServices:Otherassuranceservices5713Taxcomplianceservices19825Otherservices27729Otherassuranceservicesrelatetoaregistryaudit,trusteereportingandacontrolsassurancereport(2016:registryauditsandtrusteereporting).
TaxcomplianceservicesrelatetothereviewoftaxreturnsandGSTapportionmentmethodology(2016:reviewoftaxreturns).
Otherservicesincludeoff-quarterdisclosurestatementsandotheragreeduponprocedures,accountingopinionsrelatingtothetreatmentoftheBankingGroup'scapitalinstruments,ITsupportservicesandworkshopfacilitationservices(2016:off-quarterDisclosureStatementsandotheragreeduponprocedures).
79Notestothefinancialstatementscontinued36.
OperatingleasecommitmentsAccountingpolicyPaymentsmadeunderoperatingleases,wherethelessorsubstantiallyretainstherisksandrewardsofownership,arerecognisedintheincomestatementinasystematicmanneroverthetermofthelease.
Leaseholdimprovementsarecapitalisedandthecostisamortisedovertheunexpiredperiodoftheleaseortheestimatedusefullifeoftheimprovements,whicheverisshorter.
Leaseincentivesreceivedarerecognisedevenlyoverthetermoftheleaseasareductioninrentalexpense.
Asatthereportingdatecommitmentsundernon-cancellablepropertyandvehicleoperatingleasesinrespectofpaymentsduetobemadewere:Dollarsinmillions30/06/1730/06/16Lessthanoneyear85Betweenoneandtwoyears75Betweentwoandfiveyears208Greaterthanfiveyears47-Totalleasecommitments821837.
CapitalexpenditurecommitmentsCapitalexpenditurecommitmentscontractedforasat30June2017,butnotprovidedforinthesefinancialstatements,total$9.
1m;(30June2016:$6.
3m)andareanalysedinnote33.
38.
ContingentliabilitiesandloancommitmentsAccountingpolicyContingentliabilitiesarepossibleobligationswhoseexistencewillbeconfirmedonlybyuncertainfutureeventsorpresentobligationswherethetransferofeconomicbenefitsisnotprobableorcannotbereliablymeasured.
Contingentliabilitiesarenotrecognisedinthebalancesheet,butaredisclosedunlessthelikelihoodofpaymentisremote.
Therearenomaterialcontingentliabilitiesasat30June2017(30June2016:nil).
Undrawnloancommitmentsasatthereportingdateareasfollows:Dollarsinmillions30/06/1730/06/16Loancommitments2,8572,65039.
ContingentassetsTheBankingGroupheldinsurancepoliciesatthedateoftheKaikouraearthquakethatprovidedcoverforMaterialDamageandBusinessInterruption.
ItisprobablethatthepolicieswillenabletheBankingGrouptoobtainareimbursementforvariouscostsincurredasaresultoftheearthquakehoweverthereisinsufficientinformationtoformareliableestimateofthefinancialeffect.
40.
EventssubsequenttothereportingdateOn10August2017,theRBNZre-issuednoticesofnon-objectiontothetreatmentofKiwibank'sTier2convertiblesubordinatedbond("KiwibankBonds")andAdditionalTier1perpetualcapitalbondissuedtoKCFLascapitalinstrumentsasatthatdate.
There-recognitionofthesecapitalinstrumentsincreasestheBankingGroup'sregulatorycapitalby$247mbuthasnoimpactontheBankingGroup'sbalancesheet.
Therewerenoothermaterialeventsthatoccurredsubsequenttothereportingdatethatrequirerecognitionoradditionaldisclosureinthesefinancialstatements.
80CapitaladequacyKiwibankLimited("Kiwibank"orthe"Bank")issubjecttothecapitaladequacyrequirementsforregisteredbanksasspecifiedbytheReserveBankofNewZealand("RBNZ").
Followinganinternationallyagreedframework(commonlyknownasBaselIII)developedbytheBaselCommitteeonBankingSupervision,theRBNZhassetminimumacceptableregulatorycapitalrequirementsandprovidedmethodsforestimatingormeasuringtherisksincurredbytheBank.
AsabankadoptingaStandardisedapproachundertheBaselIIIregime,KiwibankappliestheRBNZ'sBS12-GuidelinesonaBank'sInternalCapitalAdequacyAssessmentProcess("ICAAP")asabasisforestimatingadequateprudentialcapitalandBS2A-CapitalAdequacyFramework(StandardisedApproach)forcalculatingregulatorycapitalrequirements.
InaccordancewithKiwibank'sbankingconditionsofregistration,KiwibankappliestheRBNZ'sBaselIIIframework.
Regulatorycapitaladequacyratiosarecalculatedbyexpressingcapitalasapercentageofriskweightedexposures.
Asaconditionofregistration,theBankingGroupmustcomplywiththefollowingminimumcapitalrequirementssetbytheRBNZ:Totalcapitalratiomustnotbelessthan8.
0%ofriskweightedexposures.
Tier1capitalratiomustnotbelessthan6.
0%ofriskweightedexposures.
TheCommonEquityTier1capitalratioisnotlessthan4.
5%.
CapitaloftheBankingGroupmustnotbelessthanNZ$30m.
RegulatorycapitalTheBaselIIIstandardsforbankcapitaldistinguishbetweenTier1andTier2capital.
Tier1capitalispermanentlyandfreelyavailabletoabsorblosseswithoutthebankbeingobligedtoceasetrading,whileTier2capitalgenerallyonlyabsorbslossesinawindingup.
WithinTier1capital,CommonEquityTier1capital("CET1")hasgreaterlossabsorbingcapabilitythantheotherTier1instrumentsreferredtoasAdditionalTier1capital("AT1").
Capitalratiosareusedtodefineminimumcapitalrequirementsforeachof:CommonEquity,Tier1capital(CET1plusAT1),andTotalcapital(Tier1plusTier2),asapercentageofrisk-weightedassets.
Thereareincreasingconstraintsoncapitaldistributionswhereabank'scapitallevelfallswithinthebufferrange.
Thefollowingtableshowsthecurrentcapitalratiorequirementsandconservationbuffers(asapercentageofriskweightedassets).
CapitalratiosTheBankingGroup30/06/1730/06/16CapitaladequacyratiosCommonEquityTier1capitalratio12.
3%9.
1%Tier1capitalratio12.
3%10.
7%Totalcapitalratio13.
4%12.
9%RBNZminimumratiosCommonEquityTier1capitalratio4.
5%4.
5%Tier1capitalratio6.
0%6.
0%Totalcapitalratio8.
0%8.
0%BufferratiosBufferratio5.
4%4.
6%Bufferratiorequirement2.
5%2.
5%KiwibankLimited30/06/1730/06/16CapitaladequacyratiosCommonEquityTier1capitalratio11.
9%8.
6%Tier1capitalratio11.
9%10.
1%Totalcapitalratio12.
9%12.
3%81CapitaladequacycontinuedOrdinarysharesTheordinarysharesissuedbytheBank,whicharefullypaid,areincludedwithinCET1capital.
Thematerialtermsandconditionsoftheordinarysharesare:a)eachsharecontainsasinglerighttovote;b)therearenoredemption,conversionorcapitalrepaymentoptions/facilities;c)thereisnopredetermineddividendrate;d)thereisnomaturitydate;ande)therearenooptionstobegrantedpursuanttoanyagreement.
PerpetualcapitalbondsFollowingtheRBNZ'sdeterminationthattheydidnotcomplywithcertainrequirementsinDocumentBS2A,CapitalAdequacyFramework(StandardisedApproach),thePerpetualCapitalBondsissuedbytheBanktoKCFLceasedtobeincludedwithinAT1capitalfrom29May2017.
ThePerpetualcapitalbondissue,issuedbytheBankon27May2015,andwhichisfullypaid,issubordinatetoothertermsubordinateddebtissuesandallothergeneralliabilitiesoftheBankingGroupandisdenominatedinNewZealanddollars.
Thematerialtermsandconditionsare:a)thePerpetualcapitalbondsconstitutedirect,perpetual,convertible,non-cumulative,unsecured,subordinateddebtsecuritiesissuedbyKiwibank;b)interestonthePerpetualcapitalbondsispayablequarterlyataninitialrateof7.
25%p.
a.
subjecttotheabsolutediscretionofKiwibank;c)interestisnon-cumulative;d)thePerpetualcapitalbondsmayberequiredtobeconvertedintoordinarysharesofKiwibankLimited(orwrittenoffifconversionintoordinarysharesisnotpossible)ifcertaineventsoccur;e)thePerpetualcapitalbondsdonothaveamaturitydate,however,Kiwibankmayelecttomakeearlyrepaymenton27May2020oranyresetdatethereafter(resetdatesoccurat5-yearlyintervals,commencingon27May2020);andf)thePerpetualcapitalbondsarenotguaranteedbyanymemberoftheBankingGroup,Kiwibank'sparentcompanies(includingNewZealandPost),theCrownorbyanyotherperson.
SubordinatedbondsThesubordinateddebtissue,issuedbytheBankon10December2012andwhichisfullypaid,isincludedwithinTier2capital.
TheissueissubordinatetoallothergeneralliabilitiesoftheBankingGroupandisdenominatedinNewZealanddollars.
Thematerialtermsandconditionsare:Subordinateddebtissued10December2012:a)theSubordinatedBondsconstitutedirect,unsecured,subordinateddebtobligationsofKiwibank;b)theSubordinatedBondspayinterestattheCouponRateof5.
8%pa;c)interestwillbepaidinarrearsinequalsemi-annualinstalments.
PaymentsofinterestaresubjecttoKiwibankandtheBankingGroupbeingabletosatisfytheSolvencyTestimmediatelyfollowingpayment;d)thematuritydateoftheSubordinatedBondsis15December2022.
KiwibankmayredeemtheSubordinatedBondsontheFirstCallDate(15December2017)andonanyInterestPaymentDatethereaftersubjecttoKiwibankandtheBankingGroupbeingabletosatisfytheSolvencyTestimmediatelyfollowingthepayment;KiwibankmayalsoredeemtheSubordinatedBondsatanytime(includingbeforetheFirstCallDate)ifaRegulatoryEventoraTaxEventoccurs;ande)theSubordinatedBondsarenotguaranteedbyanymemberoftheBankingGroup,Kiwibank'sparentcompanies(includingNewZealandPost),theCrownorbyanyotherperson.
UndertheRBNZ'sBaselIIIrulesthe$150msubordinateddebtissubjecttoalossabsorbencyhaircut.
82CapitaladequacycontinuedConvertiblesubordinatedbonds("KiwibankBonds")FollowingtheRBNZ'sdeterminationthattheydidnotcomplywithcertainrequirementsinDocumentBS2A,CapitalAdequacyFramework(StandardisedApproach),theconvertiblesubordinatedbondsissuedbytheBanktoKCFLceasedtobeincludedwithinTier2capitalfrom29May2017.
Theconvertiblesubordinatedbondissue,issuedbytheBankon6June2014andwhichisfullypaid,issubordinatetoallothergeneralliabilitiesoftheBankingGroupandisdenominatedinNewZealanddollars.
Thematerialtermsandconditionsare:a)theconvertiblesubordinatedbondsconstitutedirect,unsecured,subordinateddebtobligationsofKiwibank;b)interestontheconvertiblesubordinatedbondsispayablesemi-annuallyataninitialrateof6.
61%p.
a.
subjecttotheconditionthatKiwibankandtheBankingGroupissolventaftereachpayment;c)theconvertiblesubordinatedbondsmayberequiredtobeconvertedintoordinarysharesofKiwibankLimited(orwrittenoffifconversionintoordinarysharesisnotpossible)ifcertaineventsoccur;d)theconvertiblesubordinatedbondshaveamaturitydateof15July2024,however,Kiwibankmayelecttomakeearlyrepaymenton15July2019oranysemi-annualinterestpaymentdatethereafter;ande)theconvertiblesubordinatedbondsarenotguaranteedbyanymemberoftheBankingGroup,Kiwibank'sparentcompanies(includingNewZealandPost),theCrownorbyanyotherperson.
RiskexposuresRiskweightedexposuresarederivedbyassigningriskweightpercentagestocertainmaterialriskcategoriesofexposures.
Theseexposuresaremeasuredorestimatedfrom:i)selectedbalancesheetassets;ii)offbalance-sheetexposuresandmarketcontracts;andiii)businessunitnetincome.
TheBank'scurrentprudentialcapitalrequirementsbasedonassessmentsofitsmaterialriskclasses(commonlyreferredtoas"PillarI"riskclassesunderBaselIII)canbesummarisedasfollows:Creditrisk-ThevulnerabilityoftheBankingGroup'slendingandinvestmentportfoliostosystemiccounterpartydefault.
TheriskbasedcapitalallocationiscomputedbasedonRBNZStandardisedApproachCreditRiskmethodology(BS2A).
Marketrisk-Thevulnerabilityofearningstomovementsininterestratesandcurrencyvolatility.
TheriskbasedcapitalallocationiscomputedbasedonRBNZStandardisedApproachtoInterestRateRisk(BS2A).
Operationalrisk-Theriskofloss,resultingfrominadequateorfailedinternalprocesses(includinglegalrisks),peopleandsystemsandfromexternalevents.
TheriskbasedcapitalallocationiscomputedbasedonRBNZStandardisedApproachtoOperationalRiskmethodology(BS2A).
Kiwibank'sBoardisultimatelyresponsibleforcapitaladequacyandapprovescapitalplansandestablishesminimuminternalcapitallevelsandlimits.
Thesearetypicallyhigherthantheregulatoryminimum.
Thecapitaladequacytablessetoutonpages83to88summarisethecompositionofregulatorycapitalandcapitaladequacyratiosfortheyearended30June2017.
ThroughouttheperiodKiwibankandtheBankingGroupcompliedwithbothregulatoryandinternalcapitaladequacyrequirements.
83CapitaladequacycontinuedRegulatorycapitalThefollowingtableshowsthequalifyingcapitalfortheBankingGroup.
TheBankingGroupDollarsinmillions30/06/1730/06/16CommonEquityTier1capitalIssuedandfullypaidupsharecapital737400Retainedearnings(netofappropriations)651616Accumulatedothercomprehensiveincomeandotherdisclosedreserves(8)(34)LessdeductionsfromCommonEquityTier1capitalIntangibleassets(97)(158)Cashflowhedgereserve1345Deferredtaxassets(34)(8)Receivablesfromaffiliatedinsurancegroup(1)-TotalCommonEquityTier1capital1,261861AdditionalTier1capitalPerpetualcapitalbonds-147TotalAdditionalTier1capital-147TotalTier1capital1,2611,008Tier2capitalSubordinatedbondsandcapitalnotes108208TotalTier2capital108208Totalcapital1,3691,216IncludesAvailableforSaleReserveof$5m.
Theavailable-for-salereserveincludesthecumulativenetchangeinthefairvalueofavailable-for-salesecuritiesuntiltheinvestmentisderecognisedorimpaired.
Includescashflowhedgereserveof($13m).
Thecashflowhedgingreservecomprisestheeffectiveportionofthecumulativenetchangeinthefairvalueofforeignexchangeandinterestratederivativecontractsrelatedtohedgedforecastedtransactionsthathavenotyetoccurred.
ThecashflowhedgereserveisnoteligibleforinclusionincapitalunderBS2A7(3)(c).
PerpetualcapitalbondsareclassifiedasdebtoftheBankingGroupforfinancialreportingpurposes.
84CapitaladequacycontinuedOn-balancesheetexposuresTheBankingGroupDollarsinmillions30/06/17TotalexposureRiskweightingRiskweightedexposureMinimumPillarIcapitalrequirementOn-balancesheetexposuresCashandgoldbullion330%--Sovereignsandcentralbanks8790%--Multilateraldevelopmentbanksandotherinternationalorganisations3350%--Publicsectorentities12120%2424100%4-Banks65520%1311012750%645Corporate9250%464705100%70556Residentialmortgagesnotpastdue10,17535%3,5612855,00140%2,00016078250%3913121070%147125375%4034990%444251100%25120Impairedassets7100%71Pastdueresidentialmortgages>90days135%--3100%3-Otherpastdueassets1150%2-Nonriskweightedassets5010%--Otherassets631100%63150Totalon-balancesheetexposures20,6168,05164385CapitaladequacycontinuedOff-balancesheetexposuresandmarketrelatedcontractsTheBankingGroup30/06/17DollarsinmillionsTotalexposureCreditconversionfactorCreditequivalentamountAverageriskweightingRiskweightedexposureMinimumPillarIcapitalrequirementDirectcreditsubstitute7100%7100%71Assetsalewithrecourse-100%Forwardassetpurchase-100%Commitmentwithcertaindrawdown106100%106100%1068Noteissuancefacility-50%Revolvingunderwritingfacility35650%17840%716Revolvingunderwritingfacility1,15420%23138%887Revolvingunderwritingfacility1230%Performance-relatedcontingency650%3100%3-Othercommitmentswhereoriginalmaturityisgreaterthanoneyear28950%14552%756Othercommitmentswhereoriginalmaturityislessthanorequaltooneyear520%1100%1-Othercommitmentswhereoriginalmaturityislessthanorequaltooneyear-20%-20%--Othercommitmentsthatcancelautomaticallywhenthecreditworthinessofthecounterpartydeterioratesorthatcanbecancelledunconditionallyatanytimewithoutpriornotice8180%-0%--Marketrelatedcontracts:(a)Foreignexchangecontracts1,726n/a10150%514(b)Interestratecontracts41,864n/a43236%15612(c)CVA1099Totaloff-balancesheetexposures46,4541,20466753Thecreditequivalentamountformarketrelatedcontractswascalculatedusingthecurrentexposuremethod.
Residentialmortgagesbyloan-to-valueratioTheBankingGroupDollarsinmillions30/06/17On-balancesheetOff-balancesheetTotalLVR0%-80%14,74747415,221LVR>80%-90%1,345401,385LVR90%+43924463Total16,53153817,069TheLVRclassificationaboveiscalculatedincompliancewiththeOrder.
At30June2017,oftheloanswithanLVRgreaterthan80%,$419mrelatesto"WelcomeHome"loans,whosecreditriskismitigatedbytheNewZealandCrown.
86CapitaladequacycontinuedResidentialmortgagesbyloan-to-valueratiocontinuedTheBankhasrestatedtheratiosasat30June2016belowasithasidentifiedthatinpreviousperiodstheLVRdisclosurehadbeenincorrectlycalculatedasexposureswithmissingLVRswerenotincludedintheLVR90%+categorybutdistributedacrosstherespectiveLVRbandsinlinewiththeaverageportfolioLVRdistribution.
Furtheradjustmentshavebeenmadetoreflectoff-balancesheetmortgageexposuresandcalculationswithoutthebenefitofanycreditriskmitigation.
TheBankingGroupDollarsinmillionsReported30/06/16On-balancesheetOff-balancesheetTotalLVR0%-80%13,88734514,232LVR>80%-90%1,322141,336LVR90%+24511256Total15,45437015,824TheBankingGroupDollarsinmillionsRestated30/06/16On-balancesheetOff-balancesheetTotalLVR0%-80%13,23846513,703LVR>80%-90%1,638421,680LVR90%+57837615Total15,45454415,998Reconciliationofmortgage-relatedamountsTheBankingGroupDollarsinmillions30/06/17Residentialmortgagestotalon-balancesheetexposures16,531Collectiveallowanceforimpairment19Deferredarrangementfees96Grossresidentialmortgageloansperassetquality(note10)16,646Othertermlendingresidentiallysecured(917)Grosstermloans-housingperloansandadvances(note8)15,729CreditriskmitigationTheBankingGroup30/06/17DollarsinmillionsTotalvalueofon-andoff-balancesheetexposurescoveredbyeligiblecollateral(afterhaircutting)Totalvalueofon-andoff-balancesheetexposurescoveredbyguaranteesorcreditderivativesRiskweightedexposureMinimumPillarIcapitalrequirementSovereignorcentralbank----Multilateraldevelopmentbank----Publicsectorentities----Bank(42,509)-(240)(19)Corporate----Residentialmortgage----Other----(42,509)-(240)(19)87CapitaladequacycontinuedOperationalriskTheBankingGroupDollarsinmillions30/06/17ImpliedriskweightedexposureTotaloperationalriskcapitalrequirementOperationalrisk1,21597MarketRiskTheBankingGroupDollarsinmillions30/06/17ImpliedriskweightedexposureAggregatecapitalchargeEndofperiodPeakend-of-dayEndofperiodPeakend-of-dayInterestraterisk5136254150-ofwhichrelatestotradingbook404734Foreigncurrencyrisk161811Equityrisk----TheaggregatemarketriskexposureaboveisderivedinaccordancewithBS2A.
Thepeakend-of-dayaggregatecapitalchargeisthemaximumoverthehalfyearaccountingperiodatthecloseofeachbusinessday.
TotalcapitalrequirementsTheBankingGroupDollarsinmillions30/06/17TotalexposureaftercreditriskmitigationRiskweightedexposureorimpliedriskweightedexposureTotalcapitalrequirementTotalcreditriskplusequity24,5618,478677Operationalriskn/a1,21597Marketriskn/a52942TotalPillarIrisk24,56110,222816Othermaterialrisk(PillarII)TheBaselIIIcapitaladequacyregimeintendstoensurethatbankshaveadequatecapitaltosupportallmaterialriskinherentintheirbusinessactivities.
Consequently,banksarerequiredtomaintainanICAAPforassessingoverallcapitaladequacyinrelationtotheirriskprofile.
Kiwibank'sICAAPmethodologyrequiresittoholdcapitalagainstthefollowing"othermaterialrisks"(PillarIIrisks),including:Earningsrisk–Thecurrentorprospectiverisktoearningsandgrowthtargetsarisingfromchangesinthebusinessenvironmentandfromadversebusinessdecisions,improperimplementationofdecisionsorlackofresponsivenesstochangesinthebusinessenvironment.
Otherrisks–Includingchangestoexternalratings,delaystothecorebankingsystemreplacement,andcyberrisks.
TheBankhasmadeaninternalcapitalallocationof$47m(30June2016:$44m).
88CapitaladequacycontinuedSubsequenteventsOn10August2017,theRBNZre-issuednoticesofnon-objectiontothetreatmentofKiwibank'sTier2convertiblesubordinatedbond("KiwibankBonds")andAdditionalTier1perpetualcapitalbondissuedtoKCFLascapitalinstrumentsasatthatdate.
Asaresult,ManagementwillundertakeafurtherreviewoffuturecapitalrequirementsgiventhecapitalinstrumentshadbeenexcludedfromtheBankingGroup's30June2017capitalpositionaftertheRBNZ'sinitialrevocationofthelettersofnon-objection.
Theimpactofthere-recognitionofthesecapitalinstrumentsontheBankingGroup'scapitalpositionisshownbelow:TheBankingGroupRegulatoryminimaAsat30/06/17Restatedasat30/06/17includingcapitalinstrumentsCapitaladequacyratiosCommonEquityTier1capitalratio4.
50%12.
3%12.
3%Tier1capitalratio6.
00%12.
3%13.
8%Totalcapitalratio8.
00%13.
4%15.
8%BufferratiosBufferratio2.
50%5.
4%7.
8%89ConditionsofregistrationTheconditionsofregistrationimposedonKiwibankLimitedbytheReserveBankofNewZealandpursuanttosection74oftheReserveBankofNewZealandAct1989,whichwereapplicableasat30June2017,areasfollows:Conditionsofregistrationasfrom1October2016–KiwibankLimitedTheregistrationofKiwibankLimited(the"Bank")asaregisteredbankissubjecttothefollowingconditions:1.
That-a)theTotalcapitalratiooftheBankingGroupisnotlessthan8%;b)theTier1capitalratiooftheBankingGroupisnotlessthan6%;c)theCommonEquityTier1capitalratiooftheBankingGroupisnotlessthan4.
5%;d)theTotalcapitaloftheBankingGroupisnotlessthan$30million;e)thebankmustnotincludetheamountofanAdditionalTier1capitalinstrumentorTier2capitalinstrumentissuedafter1January2013inthecalculationofitscapitalratiosunlessithasreceivedanoticeofnon-objectiontotheinstrumentfromtheReserveBank;andf)theBankmeetstherequirementsofPart3oftheReserveBankofNewZealanddocument"Applicationrequirementsforcapitalrecognitionorrepaymentandnotificationrequirementsinrespectofcapital"(BS16)datedNovember2015inrespectofregulatorycapitalinstruments.
Forthepurposesofthisconditionofregistration,-theTotalcapitalratio,theTier1capitalratio,theCommonEquityTier1capitalratioandTotalcapitalmustbecalculatedinaccordancewiththeReserveBankofNewZealanddocument:"CapitalAdequacyFramework(StandardisedApproach)"(BS2A)datedNovember2015;anAdditionalTier1capitalinstrumentisaninstrumentthatmeetstherequirementsofsubsection8(2)(a)or(c)oftheReserveBankofNewZealanddocument"CapitalAdequacyFramework(StandardisedApproach)"(BS2A)datedNovember2015;aTier2capitalinstrumentisaninstrumentthatmeetstherequirementsofsubsection9(2)(a)or(c)oftheReserveBankofNewZealanddocument"CapitalAdequacyFramework(StandardisedApproach)"(BS2A)datedNovember2015.
1A.
That-a)theBankhasaninternalcapitaladequacyassessmentprocess("ICAAP")thataccordswiththerequirementssetoutinthedocument"Guidelinesonabank'sinternalcapitaladequacyassessmentprocess('ICAAP')"(BS12)datedDecember2007;b)underitsICAAP,theBankidentifiesandmeasuresits"othermaterialrisks"definedasallmaterialrisksoftheBankingGroupthatarenotexplicitlycapturedinthecalculationoftheCommonEquityTier1capitalratio,theTier1capitalratioandtheTotalcapitalratioundertherequirementssetoutinthedocument"CapitalAdequacyFramework(StandardisedApproach)"(BS2A)datedNovember2015;andc)theBankdeterminesaninternalcapitalallocationforeachidentifiedandmeasured"othermaterialrisk".
1B.
That,ifthebufferratiooftheBankingGroupis2.
5%orless,theBankmust:a)accordingtothefollowingtable,limittheaggregatedistributionsoftheBank'searningstothepercentagelimittodistributionsthatcorrespondstotheBankingGroup'sbufferratio:BankingGroup'sbufferratioPercentagelimittodistributionsoftheBank'searnings0%-0.
625%0%>0.
625%–1.
25%20%>1.
25%–1.
875%40%>1.
875%–2.
5%60%b)prepareacapitalplantorestoretheBankingGroup'sbufferratiotoabove2.
5%withinanytimeframedeterminedbytheReserveBankforrestoringthebufferratio;andc)havethecapitalplanapprovedbytheReserveBankForthepurposeofthisconditionofregistration,-"bufferratio","distributions",and"earnings"havethesamemeaningasinPart3oftheReserveBankofNewZealanddocument:"CapitalAdequacyFramework(StandardisedApproach)"(BS2A)datedNovember2015.
90Conditionsofregistrationcontinued2.
ThattheBankingGroupdoesnotconductanynon-financialactivitiesthatinaggregatearematerialrelativetoitstotalactivities.
Inthisconditionofregistration,themeaningof"material"isbasedongenerallyacceptedaccountingpractice.
3.
ThattheBankingGroup'sinsurancebusinessisnotgreaterthan1%ofitstotalconsolidatedassets.
Forthepurposesofthisconditionofregistration,theBankingGroup'sinsurancebusinessisthesumofthefollowingamountsforentitiesintheBankingGroup:a)ifthebusinessofanentitypredominantlyconsistsofinsurancebusinessandtheentityisnotasubsidiaryofanotherentityintheBankingGroupwhosebusinesspredominantlyconsistsofinsurancebusiness,theamountoftheinsurancebusinesstosumisthetotalconsolidatedassetsofthegroupheadedbytheentity;andb)iftheentityconductsinsurancebusinessanditsbusinessdoesnotpredominantlyconsistofinsurancebusinessandtheentityisnotasubsidiaryofanotherentityintheBankingGroupwhosebusinesspredominantlyconsistsofinsurancebusiness,theamountoftheinsurancebusinesstosumisthetotalliabilitiesrelatingtotheentity'sinsurancebusinessplustheequityretainedbytheentitytomeetthesolvencyorfinancialsoundnessneedsofitsinsurancebusiness.
IndeterminingthetotalamountoftheBankingGroup'sinsurancebusiness-a)allamountsmustrelatetoonbalancesheetitemsonly,andmustcomplywithgenerallyacceptedaccountingpractice;andb)ifproductsorassetsofwhichaninsurancebusinessiscomprisedalsocontainanon-insurancecomponent,thewholeofsuchproductsorassetsmustbeconsideredpartoftheinsurancebusiness.
Forthepurposesofthisconditionofregistration,-"insurancebusiness"meanstheundertakingorassumptionofliabilityasaninsurerunderacontractofinsurance:"insurer"and"contractofinsurance"havethesamemeaningasprovidedinsections6and7oftheInsurance(PrudentialSupervision)Act2010.
4.
Thataggregatecreditexposures(ofanon-capitalnatureandnetofanyallowancesforimpairment)oftheBankingGrouptoallconnectedpersonsdonotexceedtherating-contingentlimitoutlinedinthefollowingmatrix:CreditRatingoftheBankConnectedexposurelimit(%oftheBankingGroup'sTier1capital)AA/Aa2andabove75AA-/Aa370A+/A160A/A240A-/A330BBB+/Baa1andbelow15ThistableusestheratingscalesofS&P,FitchandMoody's(Fitch'sscaleisidenticaltoStandard&Poor's.
)Withintherating-contingentlimit,creditexposures(ofanon-capitalnatureandnetofanyallowancesforimpairment)tonon-Bankconnectedpersonsshallnotexceed15%oftheBankingGroup'sTier1capital.
Forthepurposesofthisconditionofregistration,compliancewiththerating-contingentconnectedexposurelimitisdeterminedinaccordancewiththeReserveBankofNewZealanddocumententitled"Connectedexposurepolicy"(BS8)datedNovember2015.
5.
Thatexposurestoconnectedpersonsarenotonmorefavourableterms(e.
g.
asrelatestosuchmattersascreditassessment,tenor,interestrates,amortisationschedulesandrequirementforcollateral)thancorrespondingexposurestonon-connectedpersons.
91Conditionsofregistrationcontinued6.
ThattheBankcomplieswiththefollowingcorporategovernancerequirements:a)theboardoftheBankmusthaveatleastfivedirectors;b)themajorityoftheboardmembersmustbenon-executivedirectors;c)atleasthalfoftheboardmembersmustbeindependentdirectors;d)analternatedirector,-(i)foranon-executivedirectormustbenon-executive;and(ii)foranindependentdirectormustbeindependent;e)atleasthalfoftheindependentdirectorsoftheBankmustbeordinarilyresidentinNewZealand;f)thechairpersonoftheboardoftheBankmustbeindependent;andg)theBank'sconstitutionmustnotincludeanyprovisionpermittingadirector,whenexercisingpowersorperformingdutiesasadirector,toactotherthaninwhatheorshebelievesisthebestinterestsofthecompany(i.
e.
theBank).
Forthepurposesofthisconditionofregistration,"non-executive"and"independent"havethesamemeaningasintheReserveBankofNewZealanddocumententitled"CorporateGovernance"(BS14)datedJuly2014.
7.
Thatnoappointmentofanydirector,chiefexecutiveofficer,orexecutivewhoreportsorisaccountabledirectlytothechiefexecutiveofficer,ismadeinrespectoftheBankunless:a)theReserveBankhasbeensuppliedwithacopyofthecurriculumvitaeoftheproposedappointee;andb)theReserveBankhasadvisedthatithasnoobjectiontothatappointment.
8.
ThatapersonmustnotbeappointedaschairpersonoftheboardoftheBankunless:a)theReserveBankhasbeensuppliedwithacopyofthecurriculumvitaeoftheproposedappointee;andb)theReserveBankhasadvisedthatithasnoobjectiontothatappointment.
9.
ThattheBankhasaboardauditcommittee,orotherseparateboardcommitteecoveringauditmatters,thatmeetsthefollowingrequirements:a)themandateofthecommitteemustinclude:ensuringtheintegrityoftheBank'sfinancialcontrols,reportingsystemsandinternalauditstandards;b)thecommitteemusthaveatleastthreemembers;c)everymemberofthecommitteemustbeanon-executivedirectoroftheBank;d)themajorityofthemembersofthecommitteemustbeindependent;ande)thechairpersonofthecommitteemustbeindependentandmustnotbethechairpersonoftheBank.
Forthepurposesofthisconditionofregistration,"non-executive"and"independent"havethesamemeaningasintheReserveBankofNewZealanddocumententitled"CorporateGovernance"(BS14)datedJuly2014.
10.
ThatasubstantialproportionoftheBank'sbusinessisconductedinandfromNewZealand.
11.
ThattheBankhaslegalandpracticalabilitytocontrolandexecuteanybusiness,andanyfunctionsrelatingtoanybusiness,oftheBankthatarecarriedonbyapersonotherthantheBank,sufficienttoachieve,undernormalbusinessconditionsandintheeventofstressorfailureoftheBankorofaserviceprovidertotheBank,thefollowingoutcomes:a)thattheBank'sclearingandsettlementobligationsdueonadaycanbemetonthatday;b)thattheBank'sfinancialriskpositionsonadaycanbeidentifiedonthatday;c)thattheBank'sfinancialriskpositionscanbemonitoredandmanagedonthedayfollowinganyfailureandonsubsequentdays;andd)thattheBank'sexistingcustomerscanbegivenaccesstopaymentsfacilitiesonthedayfollowinganyfailureandonsubsequentdays.
Forthepurposesofthisconditionofregistration,theterm"legalandpracticalabilitytocontrolandexecute"isexplainedintheReserveBankofNewZealanddocumententitled"OutsourcingPolicy"(BS11)datedJanuary2006.
12.
That:a)thebusinessandaffairsoftheBankaremanagedby,orunderthedirectionorsupervisionof,theboardoftheBank;b)theemploymentcontractofthechiefexecutiveofficeroftheBankorpersoninanequivalentposition(together"CEO")iswiththeBank,andthetermsandconditionsoftheCEO'semploymentagreementaredeterminedby,andanydecisionsrelatingtotheemploymentorterminationofemploymentoftheCEOaremadeby,theboardoftheBank;andc)allstaffemployedbytheBankshallhavetheirremunerationdeterminedby(orunderthedelegatedauthorityof)theboardortheCEOoftheBankandbeaccountable(directlyorindirectly)totheCEOoftheBank.
92Conditionsofregistrationcontinued13.
ThattheBankingGroupcomplieswiththefollowingquantitativerequirementsforliquidity-riskmanagement:a)theone-weekmismatchratiooftheBankingGroupisnotlessthanzeropercentattheendofeachbusinessday;b)theone-monthmismatchratiooftheBankingGroupisnotlessthanzeropercentattheendofeachbusinessday;andc)theone-yearcorefundingratiooftheBankingGroupisnotlessthan75percentattheendofeachbusinessday.
Forthepurposesofthisconditionofregistration,theratiosidentifiedmustbecalculatedinaccordancewiththeReserveBankofNewZealanddocumentsentitled"LiquidityPolicy"(BS13)datedJuly2014and"LiquidityPolicyAnnex:LiquidAssets"(BS13A)datedDecember2011.
14.
ThattheBankhasaninternalframeworkforliquidityriskmanagementthatisadequateintheBank'sviewformanagingtheBank'sliquidityriskataprudentlevel,andthat,inparticular:a)isclearlydocumentedandcommunicatedtoallthoseintheorganisationwithresponsibilityformanagingliquidityandliquidityrisk;b)identifiesresponsibilityforapproval,oversightandimplementationoftheframeworkandpoliciesforliquidityriskmanagement;c)identifiestheprincipalmethodsthattheBankwilluseformeasuring,monitoringandcontrollingliquidityrisk;andd)considersthematerialsourcesofstressthattheBankmightface,andpreparestheBanktomanagestressthroughacontingencyfundingplan.
15.
Thatnomorethan10%oftotalassetsmaybebeneficiallyownedbyaSPV.
Forthepurposesofthiscondition,-"totalassets"meansallassetsoftheBankingGroupplusanyassetsheldbyanySPVthatarenotincludedintheBankingGroup'sassets:"SPV"meansaperson-a)towhomanymemberoftheBankingGrouphassold,assigned,orotherwisetransferredanyasset;b)whohasgranted,ormaygrant,asecurityinterestinitsassetsforthebenefitofanyholderofanycoveredbond;andc)whocarriesonnootherbusinessexceptforthatnecessaryorincidentaltoguaranteetheobligationsofanymemberoftheBankingGroupunderacoveredbond.
"coveredbond"meansadebtsecurityissuedbyanymemberoftheBankingGroup,forwhichrepaymenttoholdersisguaranteedbyaSPV,andinvestorsretainanunsecuredclaimontheissuer.
16.
That:a)nomemberoftheBankingGroupmaygiveeffecttoaqualifyingacquisitionorbusinesscombinationthatmeetsthenotificationthreshold,anddoesnotmeetthenon-objectionthreshold,unless;(i)theBankhasnotifiedtheReserveBankinwritingoftheintendedacquisitionorbusinesscombinationandatleast10workingdayshavepassed;and(ii)atthetimeofnotifyingtheReserveBankoftheintendedacquisitionorbusinesscombination,theBankprovidedtheReserveBankwiththeinformationrequiredundertheReserveBankofNewZealandBankingSupervisionHandbookdocument"SignificantAcquisitionsPolicy"(BS15)datedDecember2011;andb)nomemberoftheBankingGroupmaygiveeffecttoaqualifyingacquisitionorbusinesscombinationthatmeetsthenon-objectionthresholdunless:(i)theBankhasnotifiedtheReserveBankinwritingoftheintendedacquisitionorbusinesscombination;(ii)atthetimeofnotifyingtheReserveBankoftheintendedacquisitionorbusinesscombination,theBankprovidedtheReserveBankwiththeinformationrequiredundertheReserveBankofNewZealandBankingSupervisionHandbookdocument"SignificantAcquisitionsPolicy"(BS15)datedDecember2011;and(iii)theReserveBankhasgiventheBankanoticeofnon-objectiontothesignificantacquisitionorbusinesscombination.
Forthepurposesofthisconditionofregistration,"qualifyingacquisitionorbusinesscombination","notificationthreshold"and"non-objectionthreshold"havethesamemeaningasintheReserveBankofNewZealandBankingSupervisionHandbookdocument"SignificantAcquisitionsPolicy"(BS15)datedDecember2011.
93Conditionsofregistrationcontinued17.
ThattheBankispre-positionedforOpenBankResolutionandinaccordancewithadirectionfromtheReserveBank,theBankcan-a)closepromptlyatanytimeofthedayandonanydayoftheweekandthateffectiveupontheappointmentofthestatutorymanager;(i)allliabilitiesarefrozeninfull;and(ii)nofurtheraccessbycustomersandcounterpartiestotheiraccounts(deposits,liabilitiesorotherobligations)ispossible;b)applyademinimistorelevantcustomeraccounts;c)applyapartialfreezetothecustomerliabilityaccountbalances;d)reopenbynolaterthan9amthenextbusinessdayfollowingtheappointmentofastatutorymanagerandprovidecustomersaccesstotheirunfrozenfunds;e)maintainafullfreezeonliabilitiesnotpre-positionedforopenbankresolution;andf)reinstatecustomers'accesstosomeoralloftheirresidualfrozenfunds.
Forthepurposesofthisconditionofregistration,"deminimis","partialfreeze","customerliabilityaccount"and"frozenandunfrozenfunds"havethesamemeaningasintheReserveBankofNewZealanddocumententitled"OpenBankResolution(OBR)Pre-positioningRequirementsPolicy"(BS17)datedSeptember2013.
18.
ThattheBankhasanImplementationPlanthat-a)isup-to-date;andb)demonstratesthattheBank'spre-positioningforOpenBankResolutionmeetstherequirementssetoutintheReserveBankdocument:"OpenBankResolutionPre-positioningRequirementsPolicy"(BS17)datedSeptember2013.
Forthepurposesofthisconditionofregistration,"ImplementationPlan"hasthesamemeaningasintheReserveBankofNewZealanddocumententitled"OpenBankResolution(OBR)Pre-positioningRequirementsPolicy"(BS17)datedSeptember2013.
19.
ThattheBankhasacompendiumofliabilitiesthat-a)attheproduct-classlevellistsallliabilities,indicatingwhichare–(i)pre-positionedforOpenBankResolution;and(ii)notpre-positionedforOpenBankResolution;b)isagreedbytheReserveBank;andc)iftheReserveBank'sagreementisconditional,meetstheReserveBank'sconditions.
Forthepurposesofthisconditionofregistration,"compendiumofliabilities",and"pre-positionedandnonpre-positionedliabilities"havethesamemeaningasintheReserveBankofNewZealanddocumententitled"OpenBankResolution(OBR)Pre-positioningRequirementsPolicy"(BS17)datedSeptember2013.
20.
ThatonanannualbasistheBanktestsallthecomponentpartsofitsOpenBankResolutionsolutionthatdemonstratestheBank'sprepositioningforOpenBankResolutionasspecifiedintheBank'sImplementationPlan.
Forthepurposesofthisconditionofregistration,"ImplementationPlan",hasthesamemeaningasintheReserveBankofNewZealanddocumententitled"OpenBankResolution(OBR)Pre-positioningRequirementsPolicy"(BS17)datedSeptember2013.
21.
That,foraloan-to-valuationmeasurementperiod,thetotaloftheBank'squalifyingnewmortgagelendingamountinrespectofproperty-investmentresidentialmortgageloanswithaloan-to-valuationratioofmorethan60%,mustnotexceed5%ofthetotalofthequalifyingnewmortgagelendingamountsinrespectofproperty-investmentresidentialmortgageloansarisingintheloan-to-valuationmeasurementperiod.
22.
That,foraloan-to-valuationmeasurementperiod,thetotaloftheBank'squalifyingnewmortgagelendingamountinrespectofnonproperty-investmentresidentialmortgageloanswithaloan-to-valuationratioofmorethan80%,mustnotexceed10%ofthetotalofthequalifyingnewmortgagelendingamountinrespectofnonproperty-investmentresidentialmortgageloansarisingintheloan-to-valuationmeasurementperiod.
23.
ThattheBankmustnotmakearesidentialmortgageloanunlessthetermsandconditionsoftheloancontractorthetermsandconditionsforanassociatedmortgagerequirethataborrowerobtaintheregisteredbank'sagreementbeforetheborrowercangranttoanotherpersonachargeovertheresidentialpropertyusedassecurityfortheloan.
Intheseconditionsofregistration,-"BankingGroup"meansKiwibankLimited(asareportingentity)andallotherentitiesincludedinthegroupasdefinedinsection6(1)oftheFinancialMarketsConductAct2013forthepurposesofPart7ofthatAct.
"generallyacceptedaccountingpractice"hasthesamemeaningasinsection8oftheFinancialReportingAct2013.
94ConditionsofregistrationcontinuedInconditionsofregistration21to23,—"loan-to-valuationratio","nonproperty-investmentresidentialmortgageloan","property-investmentresidentialmortgageloan","qualifyingnewmortgagelendingamountinrespectofproperty-investmentresidentialmortgageloans","qualifyingnewmortgagelendingamountinrespectofnonproperty-investmentresidentialmortgageloans",and"residentialmortgageloan"havethesamemeaningasintheReserveBankofNewZealanddocumententitled"FrameworkforRestrictionsonHigh-LVRResidentialMortgageLending"(BS19)datedOctober2016:"loan-to-valuationmeasurementperiod"means—a)thethreecalendarmonthperiodendingonthelastdayofDecember2016;andb)thereafteraperiodofthreecalendarmonthsendingonthelastdayofthethirdcalendarmonth,thefirstofwhichendsonthelastdayofJanuary2017.
AmendmentstoconditionsofregistrationTheRBNZissuedrevisedConditionsofRegistrationeffective1October2016.
Thesereflectchangestotheloan-to-valueratiosapplicabletopropertyandnon-propertyinvestmentresidentialmortgagelending.
ThesealsorefertotherevisedversionofFrameworkforRestrictionsofHigh-LVRResidentialMortgageLending(BS19).
Asat30June2017,therehavebeennootherchangestotheConditionsofRegistration.
95PricewaterhouseCoopers,113-119TheTerrace,POBox243,Wellington6140,NewZealandT:+64(4)4627000,F:+64(4)4627001,www.
pwc.
com/nzIndependentauditor'sreportTothereadersofKiwibankLimitedandBankingGroup'sDisclosureStatementThisreportincludes:ourauditopinionontheconsolidatedfinancialstatementsonpages10to79oftheDisclosureStatementpreparedinaccordancewithclause24oftheRegisteredBankDisclosureStatements(NewZealandIncorporatedRegisteredBanks)Order2014(asamended)(the'Order'),NewZealandEquivalentstoInternationalFinancialReportingStandards('NZIFRS')andInternationalFinancialReportingStandards('IFRS').
Theconsolidatedfinancialstatementscomprise:-thebalancesheetasat30June2017;-theincomestatementfortheyearthenended;-thestatementofcomprehensiveincomefortheyearthenended;-thestatementofchangesinequityfortheyearthenended;-thecashflowstatementfortheyearthenended;and-thenotestothefinancialstatements,whichincludethebasisofpreparationandgeneralaccountingpolicies.
ourauditopiniononthesupplementaryinformation(excludingcapitaladequacy)fortheyearended30June2017preparedinaccordancewithSchedules4,7,13,14,15,and17oftheOrder;ourauditopiniononotherlegalandregulatoryrequirementsinaccordancewithclauses2(1)(d)and2(1)(e)ofSchedule1oftheOrder;andourreviewopiniononthesupplementaryinformationrelatingtoCapitalAdequacyfortheyearended30June2017onpages80to88thatisrequiredtobepreparedinaccordancewiththeBank'sconditionsofregistrationanddisclosedinaccordancewithSchedule9oftheOrder.
TheAuditor-GeneralistheauditorofKiwibankLimited(the'Bank')andtheBankingGroup(the'BankingGroup')comprisingtheBankanditsNewZealanddomiciledsubsidiariesandothercontrolledentities.
TheAuditor-Generalhasappointedme,ChrisBarber,usingthestaffandresourcesofPricewaterhouseCoopers,tocarryouttheauditoftheconsolidatedfinancialstatementsoftheBankingGrouponhisbehalf.
96Reportontheauditoftheconsolidatedfinancialstatementsandsupplementaryinformation(excludingsupplementaryinformationrelatingtocapitaladequacy)OurauditopinionInouropinion:theconsolidatedfinancialstatementsoftheBankingGroup,onpages10to79(excludingthesupplementaryinformationincludedinthebalancesheetandnotes10,11,22,30,33and34):(i)giveatrueandfairview,inallmaterialrespectsof:-itsfinancialpositionasat30June2017;and-itsfinancialperformanceandcashflowsfortheyearthenended;and(ii)complywithgenerallyacceptedaccountingpracticeinNewZealandinaccordancewithNZIFRSandIFRS.
thesupplementaryinformationincludedinthebalancesheetandnotes10,11,22,30,33and34prescribedbySchedules4,7,13,14,15,and17oftheOrder:(i)hasbeenprepared,inallmaterialrespects,inaccordancewiththeguidelinesissuedundersection78(3)oftheReserveBankofNewZealandAct1989oranyconditionsofregistration;(ii)isinaccordancewiththebooksandrecordsoftheBankingGroup;and(iii)fairlystates,inallmaterialrespects,thematterstowhichitrelatesinaccordancewiththoseSchedules.
BasisforourauditopinionWeconductedourauditinaccordancewiththeAuditor-General'sAuditingStandards,whichincorporatetheInternationalStandardsonAuditing(NewZealand).
OurresponsibilitiesunderthosestandardsarefurtherdescribedintheAuditor'sresponsibilitiesfortheauditoftheconsolidatedfinancialstatementsandsupplementaryinformation(excludingthesupplementaryinformationrelatingtocapitaladequacy)sectionofourreport.
WehavefulfilledourresponsibilitiesinaccordancewiththeAuditor-General'sAuditingStandards.
WeareindependentoftheBankingGroupinaccordancewiththeAuditor-General'sAuditingStandards,whichincorporateProfessionalandEthicalStandard1(Revised)CodeofEthicsforAssurancePractitionersissuedbytheNewZealandAuditingandAssuranceStandardsBoard,andwehavefulfilledourotherethicalresponsibilitiesinaccordancewiththeserequirements.
Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouropinion.
97OurfirmcarriesoutassignmentsfortheBankingGroupintheareasofotherassurance,non-assuranceservices,taxcomplianceandotherservices.
ITrelatedsupportserviceshavealsobeenprovidedbyabusinessacquiredbyPricewaterhouseCoopersduringtheyearended30June2017.
Appropriatesafeguardswereputinplacetomitigatethethreatstoauditindependencefollowingtheacquisition.
Inaddition,certainpartnersandemployeesofourfirmmaydealwiththeBankingGrouponnormaltermswithintheordinarycourseoftradingactivitiesoftheBankingGroup.
ThesemattershavenotimpairedourindependenceasauditoroftheBankingGroup.
WehavenootherinterestsintheBankingGroup.
OurauditapproachOverviewAnauditisdesignedtoobtainreasonableassuranceastowhethertheconsolidatedfinancialstatementsarefreefromquantitativeandqualitativematerialmisstatement.
OverallquantitativeBankingGroupmaterialitywas$8.
05million,whichrepresents5%ofprofitbeforetaxationandotherimpairmentlosses.
Wechoseprofitbeforetaxationandotherimpairmentlossesasthebenchmarkbecause,inourview,itisthebenchmarkagainstwhichtheperformanceoftheBankingGroupismeasuredbyreaders,andisagenerallyacceptedbenchmark.
Wechose5%basedonourprofessionaljudgement,notingthatitisalsowithintherangeofcommonlyacceptedprofit-relatedthresholds.
ThefollowinghavebeendeterminedasKeyAuditMatters:CorebankingsystemreplacementDeconsolidationofKiwiCapitalFundingLimitedfromtheBankingGroupAllowanceforimpairmentlossesonloansandadvancesOperationofInformationTechnology(IT)systemsandcontrols98MaterialityThescopeofourauditwasinfluencedbyourapplicationofmateriality.
Basedonourprofessionaljudgement,wedeterminedcertainquantitativethresholdsformateriality,includingtheoverallBankingGroupmaterialityfortheconsolidatedfinancialstatementsasawholeassetoutabove.
Wealsoassessqualitativemateriality,whichincludesothermattersthat,inourjudgement,andinthecontextofouraudit,mightinfluencetheeconomicdecisionsofthereadersoftheconsolidatedfinancialstatements.
Quantitativematerialityandqualitativeconsiderationshelpedustodeterminethescopeofouraudit,thenature,timingandextentofourauditproceduresandtoevaluatetheeffectofmisstatements,bothindividuallyandinaggregateontheconsolidatedfinancialstatementsasawhole.
AuditscopeWedesignedourauditbyassessingtherisksofmaterialmisstatementintheconsolidatedfinancialstatementsandourapplicationofmateriality.
Asinallofouraudits,wealsoaddressedtheriskofmanagementoverrideofinternalcontrolsincludingamongothermatters,considerationofwhethertherewasevidenceofbiasthatrepresentedariskofmaterialmisstatementduetofraud.
Wetailoredthescopeofourauditinordertoperformsufficientworktoenableustoprovideanopinionontheconsolidatedfinancialstatementsasawhole,takingintoaccountthestructureoftheBankingGroup,theaccountingprocessesandcontrols,andtheindustryinwhichtheBankingGroupoperates.
KeyAuditMattersKeyauditmattersarethosemattersthat,inourprofessionaljudgment,wereofmostsignificanceinourauditoftheconsolidatedfinancialstatementsofthecurrentyear.
WehavecommunicatedtheKeyAuditMatterstotheDirectorsoftheBank(the'Directors'),buttheyarenotacomprehensivereflectionofallthemattersthatwereidentifiedbyourauditandthatwerediscussedwiththeDirectors.
InthetablebelowwehavedescribedtheKeyAuditMattersandhaveincludedasummaryoftheprincipalauditproceduresweperformedtoaddressthosematters.
Thesematterswereaddressedinthecontextofourauditoftheconsolidatedfinancialstatementsasawhole,andinformingouropinionthereon,andwedonotprovideaseparateopiniononthesematters.
KeyAuditMatterHowourauditaddressedtheKeyAuditMatterCorebankingsystemreplacementAsdetailedinnote25intangibleassets,theBankisreviewingitstransformationstrategy.
Aspartofthis,theBankisreviewingthecurrentprojecttoreplaceitscorebankingsystem(the'Project').
InaccordancewithAccountingStandards,theBankhasperformedanassessmentofwhethertheProject'sworkinprogresscostsWediscussedwithmanagementandtheDirectorsthestatusoftheProjectandthetransformationstrategyreview.
Givenmanagement'sandtheDirectors'viewthatitishighlyunlikelythattheProjectwillproceedwithoutsignificantchanges,wereviewedmanagement'sassessmentoftherecoverableamountoftheProject'sworkinprogresscosts.
Thisincludedconsideringandchallengingtheassumptionsunderpinningthe99KeyAuditMatterHowourauditaddressedtheKeyAuditMatterarerecoverableandhasdeterminedthatanimpairmentof$90millionisnecessaryasaresultoftheDirectors'judgementthatitisconsideredhighlyunlikelythattheProjectwillcontinueinitscurrentform.
ThemagnitudeoftheProject'sworkinprogressbalanceandthemanagementjudgmentsinvolvedincreasestheriskofmaterialmisstatementwithrespecttothecarryingvalueoftheProject'sworkinprogress.
assessment,reviewingtheadviceofmanagement'sexpert,testingthecalculationoftheimpairmentchargeandthedisclosuresmadeinthefinancialstatements.
Wehavenomaterialmatterstoreport.
DeconsolidationofKiwiCapitalFundingLimitedfromtheBankingGroupKiwiCapitalFundingLimited(KCFL)wasdeconsolidatedfromtheBankingGroupduringtheyear(refertonote32totheconsolidatedfinancialstatements).
Thedeconsolidationwasasaresultofmanagement'sproposaltoinstitutegovernancechangesinKCFLfollowingadifferingregulatorycapitalinterpretationforcapitalinstrumentsissuedtoKCFL.
ThebasisofKCFL'sdeconsolidationinvolvedahighlevelofcomplexityandjudgementandincreasedtheriskofmanagementbias.
WediscussedwithmanagementthegovernancechangesmadesupportingthedeconsolidationofKCFLandreviewedtherelevantlegalagreementstoevaluateandassesstheimpactontheBankingGroup'sconsolidatedfinancialstatements.
WeutilisedouraccountingtechnicalspecialiststomakeourownassessmentofthefactorsresultinginthedeconsolidationofKCFLfromtheBankingGroupforfinancialreportingpurposes.
Weusedthisasabasistochallengethekeyjudgementsmadebymanagement,includingtheassessmentofanypotentialmanagementbias.
Weassessedwhethertheextentofthedisclosuresmade,inrelationtothedeconsolidationwereappropriate.
Wehavenomaterialmatterstoreport.
AllowanceforimpairmentlossesonloansandadvancesThedeterminationofimpairmentallowancesisahighlysubjectiveandjudgementalarea.
Asdetailedinnote8,theBankingGrouphasloansandadvancestotalling$17,815million.
Thesearenetofimpairmentallowancesof$40millionwhichincludesbothallowancesforindividuallyimpairedassetsandcollectiveallowancesforimpairmentlosses.
Weunderstoodandtestedthedesignandoperatingeffectivenessofkeycontrolsaroundidentificationofimpairmenttriggersandcategorisationofloans.
Forasampleofallowancesforindividuallyimpairedassets,we:-Understoodthelatestdevelopmentsoftheborrowersandthebasisofmeasuringtheimpairmentallowancesandconsideredwhetherkeyjudgementswereappropriategiventheborrowers'circumstances.
-Considered,inrelationtotestingofcollateralvaluations,whethervaluationswereuptodateand100KeyAuditMatterHowourauditaddressedtheKeyAuditMatterTheauditwasfocusedonimpairmentduetothematerialityoftheloanandadvancesbalanceandassociatedimpairmentallowancesandthesubjectivenatureoftheimpairmentcalculation.
Impairmentallowancesrepresentmanagement'sbestestimateofthelossesincurredwithinloansandadvancesatthebalancesheetdate.
Theyarecalculatedonacollectivebasisforportfoliosofloansandadvancesofasimilarnatureandonanindividualbasisforsignificantloansandadvances.
Thecalculationofbothindividualandcollectiveallowancesforimpairmentisinherentlyjudgemental.
Forallowancesforindividuallyimpairedassets,judgementisrequiredtodeterminewhenanimpairmenteventhasoccurredandthevalueofcollateralheldrelativetoeachloan.
Collectiveallowancesforimpairmentarecalculatedusingmodelswhichapproximatetheimpactofcurrenteconomicandcreditconditionsonportfoliosofloans.
Theinputstothesemodelsarebasedonhistoricallossexperiencewithjudgementappliedtodeterminetheassumptionsusedtocalculateimpairment.
Managementalsoappliesadjustments,oroverlays,wheretheybelievethedatadrivenparametersandcalculationsarenotappropriate,eitherduetoemergingtrendsormodelsnotfullycapturingtherisksintheloanportfolio.
Theseoverlaysrequiresignificantjudgement.
Seenote9totheconsolidatedfinancialstatementswhichexplainsthecriticalaccountingestimatesandassumptionsindeterminingtheimpairmentofloansandadvances.
consistentwiththestrategybeingfollowedinrespectoftheparticularborrower.
Forthecollectiveallowancesforimpairment,whichreflectlossesincurredbutnotyetidentifiedandwhicharecalculatedusingmodels,ourworkinvolvedthefollowingprocedures:-Weunderstoodthegovernanceovercollectiveallowancesforimpairmentandthemodelsreviewprocess.
-Weunderstoodthevariousmodelsusedincludingcriticallyexaminingmanagement'smodelmonitoringprocessand,onasamplebasis,conductingin-depthreviewsofthemodelsusedtocalculatetheimpairmentallowances.
-Forkeyinputsandassumptionsinthemodels,weobtainedandtestedtheobjectiveevidencethatsupportedtheirappropriateness.
-Wherechangeshadbeenmadeinmodelparametersandassumptions,weunderstoodthereasonswhychangeshadtakenplaceandusedourindustryknowledgeandexperiencetoevaluatetheappropriatenessofsuchchanges.
-WetestedthecompletenessandaccuracyoftheunderlyingloaninformationusedintheimpairmentmodelsbyagreeingdetailstotheBankingGroup'ssourcesystemsaswellasre-performingthecalculationofthemodelledprovision.
-Foroverlaystothemodelledoutput,wechallengedmanagementtoprovideevidencethattheoverlayswereappropriate.
-Weperformedapeerbankcomparisonandconsideredwhether,withtheinclusionoftheoverlays,theoverallcollectiveallowancesforimpairmentsitwithinarangeofacceptableoutcomes.
Wehavenomaterialmatterstoreport.
101KeyAuditMatterHowourauditaddressedtheKeyAuditMatterOperationofInformationTechnology(IT)systemsandcontrolsTheBankingGroupisheavilyreliantonautomatedprocessesandcontrolsperformedbyITsystemsfortheprocessingandrecordingofsignificantvolumesoftransactionsincludingforitsfinancialreportingprocesses.
InconsideringthecomplexityoftheBankingGroup'sprocessesandthedesignoftheinternalcontrolenvironment,therearesomeareasoftheauditwhereweseektoplacerelianceonautomatedcontrolsorreports.
TheeffectiveoperationoftheseareasisdependentontheBankingGroup'sITGeneralControl(ITGC)environment.
Forexample:changemanagementinternalcontrolsareimportantbecausetheyhelpensurethatchangestoapplicationsanddataareauthorisedandmadeappropriately;IToperationsareimportantastheyhelpensureerrorsinprocessingareresolvedinatimelymanner;anduseraccesscontrolsareimportanttohelpensurestaffhaveappropriateaccesstoITsystemsandthataccessismonitored.
Forsignificantfinancialstatementbalances,wegainedanunderstandingofthebusinessprocesses,keycontrolsandITsystemsusedtogenerateandsupportthosebalances.
Whererelevanttoourplannedauditapproach,wevalidatedthedesignandoperatingeffectivenessofthekeycontrolsthatsupportthecontinuedintegrityofthein-scopeITsystemsforthefullfinancialreportingperiod.
Whereweidentifieddesignoroperatingeffectivenessmatters,weperformedadditionalsubstantiveauditprocedures.
Informationotherthantheconsolidatedfinancialstatements,supplementaryinformationandtheauditor'sreportTheDirectorsareresponsible,onbehalfoftheBank,fortheotherinformationintheDisclosureStatement.
TheotherinformationcomprisestheinformationrequiredtobeincludedintheDisclosureStatementinaccordancewithSchedule2oftheOrderandisincludedonpages1to9and89to94.
OuropinionontheconsolidatedfinancialstatementsdoesnotcovertheotherinformationincludedintheDisclosureStatementandwedonotexpressanyformofassuranceconclusionthereon.
102Inconnectionwithourauditoftheconsolidatedfinancialstatements,ourresponsibilityistoreadtheotherinformationaboveand,indoingso,considerwhethertheotherinformationismateriallyinconsistentwiththeconsolidatedfinancialstatementsorourknowledgeobtainedintheaudit,orotherwiseappearstobemateriallymisstated.
If,basedontheworkwehaveperformedontheotherinformationthatweobtainedpriortothedateofthisauditor'sreport,weconcludethatthereisamaterialmisstatementofthisotherinformation,wearerequiredtoreportthatfact.
Wehavenothingtoreportinthisregard.
ResponsibilitiesoftheDirectorsfortheconsolidatedfinancialstatementsandsupplementaryinformationTheDirectorsareresponsible,onbehalfoftheBank,forthepreparationandfairpresentationoftheconsolidatedfinancialstatementsinaccordancewithclause24oftheOrder,NZIFRSandIFRS,thatgiveatrueandfairviewofthematterstowhichtheyrelate.
TheDirectorsarealsoresponsibleforsuchinternalcontrolastheDirectorsdetermineisnecessarytoenablethepreparationofconsolidatedfinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.
Inaddition,theDirectorsarealsoresponsibleforthepreparationandfairpresentationofsupplementaryinformationintheDisclosureStatementwhichcomplieswithSchedules2,4,7,13,14,15,and17oftheOrder.
Inpreparingtheconsolidatedfinancialstatements,theDirectorsareresponsibleforassessingtheBankingGroup'sabilitytocontinueasagoingconcern,disclosing,asapplicable,mattersrelatedtogoingconcernandusingthegoingconcernbasisofaccountingunlesstheDirectorseitherintendtoliquidatetheBankingGrouportoceaseoperations,orhavenorealisticalternativebuttodoso.
Auditor'sresponsibilitiesfortheauditoftheconsolidatedfinancialstatementsandsupplementaryinformation(excludingthesupplementaryinformationrelatingtocapitaladequacy)Ourobjectivesaretoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatements,asawhole,andthesupplementaryinformation(excludingthesupplementaryinformationrelatingtocapitaladequacydisclosedonpages80to88),arefreefrommaterialmisstatement,whetherduetofraudorerror,andtoissueanauditor'sreportthatincludesouropinion.
Reasonableassuranceisahighlevelofassurance,butisnotaguaranteethatanauditcarriedoutinaccordancewiththeAuditor-GeneralAuditingStandardswillalwaysdetectamaterialmisstatementwhenitexists.
Misstatementscanarisefromfraudorerrorandareconsideredmaterialif,individuallyorintheaggregate,theycouldreasonablybeexpectedtoinfluencetheeconomicdecisionsofreaderstakenonthebasisoftheseconsolidatedfinancialstatements.
103AspartofanauditinaccordancewiththeAuditor-General'sAuditingStandards,weexerciseprofessionaljudgementandmaintainprofessionalscepticismthroughouttheaudit.
Wealso:Identifyandassessestherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetofraudorerror,designandperformauditproceduresresponsivetothoserisks,andobtainauditevidencethatissufficientandappropriatetoprovideabasisforouropinion.
Theriskofnotdetectingamaterialmisstatementresultingfromfraudishigherthanforoneresultingfromerror,asfraudmayinvolvecollusion,forgery,intentionalomissions,misrepresentations,ortheoverrideofinternalcontrol.
Obtainanunderstandingofinternalcontrolrelevanttotheauditinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheBankingGroup'sinternalcontrol.
EvaluatetheappropriatenessofaccountingpoliciesusedandthereasonablenessofaccountingestimatesandrelateddisclosuresmadebytheDirectors.
ConcludeontheappropriatenessoftheuseofthegoingconcernbasisofaccountingbytheDirectorsand,basedontheauditevidenceobtained,whetheramaterialuncertaintyexistsrelatedtoeventsorconditionsthatmaycastsignificantdoubtontheBankingGroup'sabilitytocontinueasagoingconcern.
Ifweconcludethatamaterialuncertaintyexists,wearerequiredtodrawattentioninourauditor'sreporttotherelateddisclosuresintheconsolidatedfinancialstatementsor,ifsuchdisclosuresareinadequate,tomodifyouropinion.
Ourconclusionsarebasedontheauditevidenceobtaineduptothedateofourauditor'sreport.
However,futureeventsorconditionsmaycausetheBankingGrouptoceasetocontinueasagoingconcern.
Evaluatetheoverallpresentation,structureandcontentoftheconsolidatedfinancialstatements,includingthedisclosures,andwhethertheconsolidatedfinancialstatementsrepresenttheunderlyingtransactionsandeventsinamannerthatachievesfairpresentation.
ObtainsufficientappropriateauditevidenceregardingthefinancialinformationoftheentitiesorbusinessactivitieswithintheBankingGrouptoexpressanopinionontheconsolidatedfinancialstatements.
Weareresponsibleforthedirection,supervisionandperformanceoftheBankingGroupaudit.
Weremainsolelyresponsibleforouropinion.
CommunicatewiththeDirectorsregarding,amongothermatters,theplannedscopeandtimingoftheauditandsignificantauditfindings,includinganysignificantdeficienciesininternalcontrolthatweidentifyduringtheaudit.
ProvidetheDirectorswithastatementthatwehavecompliedwithrelevantethicalrequirementsregardingindependence,andtocommunicatewiththemallrelationshipsandothermattersthatmayreasonablybethoughttobearonourindependence,andwhereapplicable,relatedsafeguards.
DeterminefromthematterscommunicatedwiththeDirectors,thosemattersthatwereofmostsignificanceintheauditoftheconsolidatedfinancialstatementsofthecurrentperiodandarethereforethekeyauditmatters.
Wedescribethesemattersinourauditor'sreportunlesslaworregulationprecludespublicdisclosureaboutthematterorwhen,inextremelyrarecircumstances,wedeterminethatamattershouldnotbecommunicatedinourauditor'sreportbecausetheadverseconsequencesofdoingsowouldreasonablybeexpectedtooutweighthepublicinterestbenefitsofsuchcommunication.
OurresponsibilitiesarisefromthePublicAuditAct2001.
104Reportonotherlegalandregulatoryrequirements(excludingsupplementaryinformationrelatingtocapitaladequacy)Wealsoreportinaccordancewithclauses2(1)(d)and2(1)(e)ofSchedule1oftheOrder.
Inrelationtoourauditoftheconsolidatedfinancialstatements(excludingthesupplementaryinformationrelatingtocapitaladequacydisclosedonpages80to88)fortheyearended30June2017:(i)wehaveobtainedalltheinformationandexplanationsthatwehaverequired;and(ii)inouropinion,properaccountingrecordshavebeenkeptbytheBankingGroupasfarasappearsfromanexaminationofthoserecords.
ReportonthereviewofthesupplementaryinformationrelatingtocapitaladequacyOurreviewopinionBasedonourreviewprocedures,whicharenotanaudit,nothinghascometoourattentionthatcausesustobelievethatthesupplementaryinformationrelatingtoCapitalAdequacydisclosedonpages80to88isnot,inallmaterialrespects,preparedinaccordancewiththeBank'sconditionsofregistrationanddisclosedinaccordancewithSchedule9oftheOrderfortheyearended30June2017.
BasisforourreviewopinionWeconductedourreviewinaccordancewiththeNewZealandStandardonReviewEngagements2410ReviewofFinancialStatementsperformedbytheIndependentAuditoroftheEntity(NZSRE2410).
ResponsibilitiesoftheDirectorsforthesupplementaryinformationrelatingtocapitaladequacyTheDirectorsareresponsible,onbehalfoftheBank,forthepreparationofsupplementaryinformationrelatingtocapitaladequacythatispreparedinaccordancewiththeBank'sconditionsofregistrationanddisclosedinaccordancewithSchedule9oftheOrder.
TheDirectorsarealsoresponsibleforsuchinternalcontrolastheDirectorsdetermineisnecessarytoenablethepreparationofsupplementaryinformationrelatingtocapitaladequacythatisfreefrommaterialmisstatement,whetherduetofraudorerror.
Auditor'sresponsibilitiesforreviewofthesupplementaryinformationrelatingtocapitaladequacyWeareresponsibleforreviewingthesupplementaryinformationrelatingtocapitaladequacydisclosedonpages80to88,toconcludewhetheranythinghascometoourattentionthatwouldcauseustobelievethatthesupplementaryinformationrelatingtocapitaladequacydisclosedonpages80to88,isnot,inallmaterialrespects:(i)preparedinaccordancewiththeBank'sconditionsofregistration;and(ii)disclosedinaccordancewithSchedule9oftheOrder.
105AreviewinaccordancewithNZSRE2410isalimitedassuranceengagement.
Theauditorperformsprocedures,primarilyconsistingofmakingenquiries,primarilyofpersonsresponsibleforfinancialandaccountingmatters,andapplyinganalyticalandotherreviewprocedures.
TheproceduresperformedinareviewaresubstantiallylessthanthoseperformedinanauditconductedinaccordancewiththeAuditor-General'sAuditingStandards,whichincorporatetheInternationalStandardsonAuditing(NewZealand).
Accordingly,wedonotexpressanauditopiniononthesupplementaryinformationrelatingtocapitaladequacydisclosedonpages80to88.
ChrisBarberPricewaterhouseCoopersOnbehalfoftheAuditor-GeneralWellington,NewZealand8September2017