Westpac Banking : Pillar 3 Report (September 2019)

Pillar 3 report

Table of contents

Structure of Pillar 3 report

	Executive summary		3
	Introduction		6
	Risk appetite and risk types		7
	Controlling and managing risk		8
	Group structure		14
	Capital overview		16
	Leverage ratio		20
	Credit risk management		22
	Credit risk exposures		32
	Credit risk mitigation		56
	Counterparty credit risk		58
	Securitisation		61
	Market risk		71
	Funding and liquidity risk management		75
	Liquidity coverage ratio		76
	Net stable funding ratio		77
	Operational risk		79
	Equity risk		81
	Interest rate risk in the banking book		83
	Remuneration		85
	Appendices
	Appendix I - Regulatory capital reconciliation		92
	Appendix II - Entities included in regulatory consolidation		98
	Appendix III - Level 3 entities' assets and liabilities		101
	Appendix IV - Regulatory expected loss		102
	Appendix V - APS330 quantitative requirements		103
	Glossary		106
	Disclosure regarding forward-looking statements		111

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

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

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

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

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

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Pillar 3 report

Executive summary

	30 September 2019	31 March 2019 30 September 2018
Level 2 Regulatory capital structure
Common equity Tier 1 (CET1) capital after deductions $m	45,752	44,680	45,239
Risk weighted assets (RWA) $m	428,794	419,819	425,384
Common equity Tier 1 capital ratio %	10.67	10.64	10.63
Additional Tier 1 capital %	2.17	2.20	2.15
Tier 1 capital ratio %	12.84	12.84	12.78
Tier 2 capital %	2.79	1.78	1.96
Total regulatory capital ratio %	15.63	14.62	14.74
APRA leverage ratio %	5.68	5.72	5.84
Level 1 Regulatory capital structure
Common equity Tier 1 (CET1) capital after deductions $m	46,380	43,850	42,988
Risk weighted assets (RWA) $m	422,475	409,231	409,240
Level 1 Common equity Tier 1 capital ratio (CET1) %	10.98	10.72	10.50

Westpac's common equity Tier 1 (CET1) capital ratio was 10.67% at 30 September 2019, up 3 basis points from 31 March 2019, as organic capital generation was largely offset by other items. This included Second Half 2019 cash earnings of $3,553 million (83 basis points). Cash earnings for Second Half 2019 were impacted by additional provisions for estimated customer refunds, payments, associated costs, and litigation ($488 million before tax), and provisions for costs associated with the restructuring of the Wealth business ($51 million before tax). These provisions for customer remediation and wealth restructuring costs are referred to as 'notable items'1(13 basis points). Excluding these notable items, organic capital growth was 51 basis points.

The 51 basis point organic capital growth included:





Second Half 2019 cash earnings, excluding notable items (92 basis point increase);

The 2019 interim dividend payment, net of dividend reinvestment plan (DRP) share issuance (48 basis point decrease);

• Ordinary RWA (before regulatory measurement changes, and excluding IRRBB) grew slightly (4 basis point decrease), mainly driven by increases in credit RWA, and mark to market CVA;
• Reduction in interest rate risk in the banking book (IRRBB) RWA (17 basis point increase), driven by an increase in the embedded gain from falling interest rates; and
• A 6 basis point reduction from other capital movements, largely driven by movements in regulatory deductions.

Other items reduced the CET1 capital ratio by 48 basis points, principally:

• Operational risk overlays comprising the Culture, Governance and Accountability (CGA)self-assessment overlay imposed by APRA (16 basis point reduction), and an increase in the overlay to better align Westpac to the standardised approach (5 basis point reduction);
• Implementation of APRA's new derivatives capital standard (14 basis point reduction)2; and
• Notable items (13 basis point reduction).

1. The impact of notable items on the CET1 ratio includes the capital deduction for the associated deferred tax assets.
2. APRA prudential standard APS180 Counterparty Credit Risk became effective on 1 July 2019 and implements the standardised approach to counterparty credit risk(SA-CCR)

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Pillar 3 report

Executive summary

$m	30 September 2019	31 March 2019 30 September 2018
Risk weighted assets at Level 2
Credit risk	367,864	362,762	362,749
Market risk	9,350	8,338	6,723
Operational risk	47,680	38,641	39,113
Interest rate risk in the banking book	530	7,076	12,989
Other	3,370	3,002	3,810
Total RWA	428,794	419,819	425,384
Total Exposure at Default	1,054,178	1,029,817	1,021,926

Risk Weighted Assets

Total RWA increased $9.0 billion or 2.1% this half:

• Credit risk RWA increased $5.1 billion over the half. This included a $5.3 billion increase from implementation of APRA's new derivatives capital standard1. The remaining movements comprised:

1. An increase inmark-to-market related credit risk of $2.0 billion, mostly due to lower interest rates;

1. Changes to credit quality and portfolio mix, which reduced RWA by $2.3 billion;

1. Foreign currency translation impacts which reduced RWA by $0.7 billion; and

• 1. Business growth which increased RWA by $0.8 billion.
• Non-creditRWA increased $3.9 billion over the half, driven by:
• 1. An increase of $9.0 billion in operational risk RWA, mainly from operational risk overlays2;

1. A decrease of $6.5 billion in interest rate risk in the banking book RWA, driven by an increase in the embedded gain from falling interest rates; and

1. An increase of $1.0 billion in market risk RWA and an increase of $0.4 billion in other assets RWA.

Supplementary capital movement for Second Half 2019

During the half, Westpac issued $4.2 billion of Tier 2 capital instruments, increasing the total regulatory capital ratio by 99 basis points. The higher new issuance was in response to APRA's increased total capital requirements to be met by 1 January 2024.

Exposure at Default

Exposure at default (EAD) increased $24 billion (or 2%), primarily due to implementation of the standardised approach to counterparty credit risk which increased EAD by $16 billion.

Leverage Ratio

The leverage ratio represents the amount of Tier 1 capital relative to exposure3. At 30 September 2019, Westpac's leverage ratio was 5.68%, down 4 basis points since 31 March 2019.

Liquidity Coverage Ratio (LCR)

Westpac's average LCR for the quarter ending 30 September 2019 was 132%4(31 March 2019: 134%).

Net Stable Funding Ratio (NSFR)

Westpac's NSFR at 30 September 2019 was 112% (31 March 2019: 113%). The reduction in the Group's NSFR over the half mainly reflects changes in the treatment of certain loans which increased the Group's required stable funding.

1APRA prudential standard APS180 Counterparty Credit Risk became effective on 1 July 2019 and implements the revised standardised approach to counterparty credit risk (SA-CCR)

1. This includes the $500 million capital overlay applied by APRA in response to Westpac's Culture, Governance and Accountability (CGA)self-assessment, which translates to a $6.25 billion increase in RWA. This also includes a $165 million increase in the operational risk capital overlay to align Westpac's operational risk capital with the standardised approach, which translates to a $2.1 billion increase in RWA.
2. As defined under Attachment D of APS110: Capital Adequacy
3. Calculated as a simple average of the daily observations over the 30 September 2019 quarter.

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Pillar 3 report

Executive summary

Implementation of APRA's new derivative capital standard1

APRA prudential standard APS180 Counterparty Credit Risk became effective on 1 July 2019 and implements the Standardised Approach to Counterparty Credit Risk (SA-CCR). The following tables detail the transition impacts of this change on key Pillar 3 metrics.

		Risk Weighted Assets
		Off-balance sheet, Market Related
$m	30 June 2019	1 July 2019		Movement
Corporate	5,125	6,420		1,295
Business lending	-	-		-
Sovereign	171	259		88
Bank	2,090	3,130		1,040
Residential mortgages	-	-		-
Australian credit cards	-	-		-
Other retail	-	-		-
Small business	-	-		-
Specialised lending	964	1,488		524
Securitisation	69	42	-	27
Standardised	53	145		92
Mark-to-market related credit risk1		8,203	10,441		2,238
Total	16,675	21,925		5,250
			Exposure at default
		Off-balance sheet, Market Related
$m	30 June 2019	1 July 2019		Movement
Corporate	11,522	16,882		5,360
Business lending	-	-		-
Sovereign	2,544	4,913		2,369
Bank	7,379	10,056		2,677
Residential mortgages	-	-		-
Australian credit cards	-	-		-
Other retail	-	-		-
Small business	-	-		-
Specialised lending	1,318	2,042		724
Securitisation	196	124	-	72
Standardised	2,655	7,886		5,231
Total	25,614	41,903		16,289

1Mark-to-market related credit risk is measured under the standardised approach. It is also known as Credit Valuation Adjustment (CVA) risk.

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