Bank of New Zealand. Disclosure Statement. For the year ended 30 September No. 75

Transcription

1 Bank of New Zeaand Discosure Statement For the year ended 30 September 2014 No. 75

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3 Discosure Statement For the year ended 30 September 2014 This Discosure Statement has been issued by Bank of New Zeaand for the year ended 30 September 2014 in accordance with the Registered Bank Discosure Statements (New Zeaand Incorporated Registered Banks) Order 2014 (as amended) (the Order ). In this Discosure Statement, uness the context otherwise requires: a) Banking Group means Bank of New Zeaand s financia reporting group, which consists of Bank of New Zeaand, a of its whoy owned entities and other entities consoidated for financia reporting purposes; and b) Words and phrases defined by the Order have the same meanings when used in this Discosure Statement. Contents Bank of New Zeaand Corporate Information 2 Financia Statements 6 Notes to and Forming Part of the Financia Statements 13 Auditor s Report 87 Credit Ratings 89 Conditions of Registration 90 Directors Statement 95 BNZ Discosure Statement 1

4 Bank of New Zeaand Corporate Information Address for Service The name of the Registered Bank is Bank of New Zeaand (referred to either by its fu name or as the Bank or the Company ) and its address for service is Leve 4, 80 Queen Street, Auckand 1010, New Zeaand. Nature of Business The Bank was incorporated on 29 Juy The Banking Group provides a broad range of banking and financia products to retai, business, agribusiness, corporate and institutiona cients. Voting Securities and Power to Appoint Directors Nationa Austraia Group (NZ) Limited, Nationa Austraia Bank Limited and Nationa Equities Limited are the ony hoders of a direct or indirect quaifying interest in the 2,870,997,499 voting securities of the Bank. Nationa Austraia Group (NZ) Limited is the registered and beneficia hoder of 2,870,997,499 voting securities. Neither Nationa Austraia Bank Limited (the utimate parent company) nor Nationa Equities Limited (the immediate parent company of Nationa Austraia Group (NZ) Limited) is the registered or the beneficia hoder of any of the voting securities of the Bank, but each has a reevant interest in a such securities by virtue of Nationa Austraia Group (NZ) Limited being reated to them in terms of section 5B(2) of the Securities Markets Act The utimate parent company has the power under the Bank s constitution to appoint any person as Director of the Bank or to remove any person from the office of Director, from time to time, by giving written notice to the Bank. Any appointment of a Director is subject to the Reserve Bank of New Zeaand confirming it has no objection to that appointment. Guarantees Covered bond guarantee Certain debt securities ( Covered Bonds ) issued by the Bank, or its controed entity, BNZ Internationa Funding Limited, acting through its London Branch, are guaranteed by the CBG Trustee Company Limited, soey in its capacity as trustee of the BNZ Covered Bond Trust (the Covered Bond Guarantor ). The Covered Bond Guarantor s address for service is Leve 35, Vero Centre, 48 Shortand Street, Auckand 1010, New Zeaand. The Covered Bond Guarantor is not a member of the Banking Group and has no credit ratings appicabe to any senior unsecured obigations payabe in New Zeaand doars. The Covered Bonds have been assigned a ong term rating of Aaa and AAA from Moody s Investors Service and Fitch Ratings respectivey. The Covered Bond Guarantor has guaranteed the payment of interest and principa under the Covered Bonds pursuant to a guarantee which is secured over a poo of assets (refer to note 11 for further information). There are no materia conditions appicabe to the guarantee other than nonperformance. There are no materia egisative or reguatory restrictions in New Zeaand which subordinate any caims under the guarantee of any creditors of the Bank on the assets of the Covered Bond Guarantor, to other caims on the Covered Bond Guarantor, on the winding up of the Covered Bond Guarantor. Other materia obigations of the Bank are not guaranteed. Utimate Parent Bank Utimate Parent Bank and Address for Service The utimate parent bank of Bank of New Zeaand is Nationa Austraia Bank Limited whose address for service is Leve 1, 800 Bourke Street, Dockands, Victoria 3008, Austraia. References in this document to NAB are references to the Nationa Austraia Bank Limited s financia reporting group, which consists of Nationa Austraia Bank Limited, a of its whoy owned entities and other entities consoidated for financia reporting purposes. Legay Enforceabe Restrictions that may Materiay Inhibit Nationa Austraia Bank Limited s Lega Abiity to Provide Materia Financia Support to Bank of New Zeaand Nationa Austraia Bank Limited does not guarantee the obigations of Bank of New Zeaand. Pursuant to the Banking Act 1959 (Cth), the Austraian Prudentia Reguation Authority has issued a egay enforceabe prudentia standard which restricts associations between an authorised deposit-taking institution (such as Nationa Austraia Bank Limited) and its reated entities. Any provision of materia financia support to Bank of New Zeaand by Nationa Austraia Bank Limited woud need to compy with the foowing pertinent requirements of the prudentia standard: 1. Nationa Austraia Bank Limited shoud not undertake any third-party deaings with the prime purpose of supporting the business of Bank of New Zeaand. Nationa Austraia Bank Limited must avoid giving any impression of its support uness there are forma ega arrangements in pace providing for such support. 2. Nationa Austraia Bank Limited shoud not hod unimited exposures to Bank of New Zeaand. 3. Nationa Austraia Bank Limited shoud not enter into cross-defaut causes whereby a defaut by Bank of New Zeaand on an obigation (whether financia or otherwise) is deemed to trigger a defaut of Nationa Austraia Bank Limited in its obigations. 4. In determining imits on acceptabe eves of exposure to Bank of New Zeaand, the Board of Directors of Nationa Austraia Bank Limited shoud have regard to the eve of exposures which woud be approved for unreated entities of broady equivaent credit status, and the impact on Nationa Austraia Bank Limited s stand-aone capita and iquidity positions, as we as its abiity to continue operating, in the event of a faiure of any reated entity to which Nationa Austraia Bank Limited is exposed. 5. Under Austraian Prudentia Reguation Authority Prudentia Reguation, an authorised deposit-taking institution s ( ADI ) exposure to overseas based equivaents cannot exceed 50% of the ADI s stand-aone capita base, and its aggregate exposure to a reated authorised deposit-taking institutions cannot exceed 150% of that capita base. Exposures in excess of these imits require the prior approva of the Austraian Prudentia Reguation Authority. The Austraian Prudentia Reguation Authority has broad powers under the Banking Act 1959 (Cth) to give egay enforceabe directions to Nationa Austraia Bank Limited in circumstances, for exampe, where it considers that Nationa Austraia Bank Limited has not compied with prudentia standards or that it is in the interests of Nationa Austraia Bank Limited s deposit hoders to do so. In the event that Nationa Austraia Bank Limited becomes unikey to be abe to meet its obigations or is about to suspend payments, the Austraian Prudentia Reguation Authority has the power to take contro of Nationa Austraia Bank Limited s business or appoint an administrator to Nationa Austraia Bank Limited s affairs. 2 BNZ Discosure Statement

5 Bank of New Zeaand Corporate Information continued Utimate Parent Bank continued The priority of the creditors of Nationa Austraia Bank Limited in the event that Nationa Austraia Bank Limited is unabe to meet its obigations is governed by various Austraian aws, incuding the Banking Act 1959 (Cth). That Act provides that the assets of Nationa Austraia Bank Limited in Austraia are to be avaiabe to meet iabiities to certain governmenta agencies and deposit hoders in Austraia in priority to a other iabiities. Pending Proceedings or Arbitration The Bank s Directors are of the opinion that there are no pending proceedings or arbitrations concerning any member of the Banking Group, whether in New Zeaand or esewhere, that may have a materia adverse effect on the Registered Bank or the Banking Group. In March 2013, a potentia representative action against New Zeaand banks (incuding, potentiay, Bank of New Zeaand) was announced in reation to certain fees. Litigation Lending Services (NZ) Limited is funding the action. On 20 August 2014, representative proceedings were fied against the Bank. The potentia outcome of these proceedings cannot be determined with any certainty at this stage. Other Materia Matters Goba financia market conditions are ess voatie than in recent years but the Bank remains very aware of potentia risks. The Bank considers it has an adequate iquidity, funding and capita base to manage through a period of uncertainty. The Bank s Directors are of the opinion that there are no other matters reating to the business or affairs of the Registered Bank or the Banking Group which woud, if discosed in this Discosure Statement, materiay adversey affect the decision of a person to subscribe for debt securities of which the Registered Bank or any member of the Banking Group is the issuer. Directorate and Auditor Communications addressed to the Directors and responsibe persons, or any of them, may be sent to Leve 4, 80 Queen Street, Auckand 1010, New Zeaand. Directors Cameron Anthony Cyne retired as Group Chief Executive Officer and Managing Director of Nationa Austraia Bank Limited and as Director of the Bank, effective 15 August Andrew Gregory Thorburn was appointed Group Chief Executive Officer and Managing Director of Nationa Austraia Bank Limited, effective 16 August Mr Thorburn resigned from the Bank s Board of Directors (the Board ), effective 16 May Anthony John Heay was appointed Chief Executive Officer and Managing Director of the Bank, effective 12 May On 4 August 2014, the Bank announced that Michaea Jane Heaey was to be appointed as a Non-Executive Director of the Bank, effective 6 October Directors detais The name, occupation, technica or professiona quaifications, country of residence, and directorships of each Director of the Bank as at the date of this Discosure Statement are as foows: Non-Executive Director, Chairman John Anthony Waer Company Director B.Com., FCA New Zeaand Directorships: BNZ Investments Limited; Donaghys Limited; Fonterra Co-operative Group Limited; Haydn & Roett Limited; JAW Advisory Limited; Nationa Austraia Bank Limited; Nationa Equities Limited; Property For Industry Limited; P. F. I. Property No. 1 Limited; Sky Network Teevision Limited; Chair of the Eden Park Trust Board. Executive Director Anthony John Heay Managing Director and Chief Executive Officer Bank of New Zeaand BSc.; Grad Dip (Econ); Grad Dip (Fin) New Zeaand Directorships: Ice Funds Limited; The Icehouse Limited; JBWere (NZ) Hodings Limited. Independent Non-Executive Directors Prudence Mary Facks Company Director LL.B., LL.M. New Zeaand Directorships: BBULL Famiy Trust Limited; Chorus Limited; Mighty River Power Limited; Mighty River Power LTI Limited; Panboe Limited. BNZ Discosure Statement 3

6 Bank of New Zeaand Corporate Information continued Directorate and Auditor continued Dr Susan Carre Macken Company Director B.Sc., B.Com., Ph.D. New Zeaand Directorships: Bossom Bear Limited; ESR Limited; FA Ventures One Limited; Fertiity Associates Limited; Fertiity Associates Hodings Limited; Fertiity Associates Trustee Limited; STG Limited; Tamaki Redeveopment Company Limited; Chair of the Institute of Environmenta Science and Research Limited; nonexecutive board member of the New Zeaand Treasury. Subsequent to 30 September 2014, Ms Macken was appointed as a director of The Auckand Waterfront Deveopment Agency from 1 December Dougas Aexander McKay Company Director B.A., A.M.P. Harvard Business Schoo New Zeaand Directorships: AMI Insurance Limited; Genesis Energy Limited; IAG (NZ) Hodings Limited; IAG New Zeaand Limited; Lumey Genera Insurance (N.Z.) Limited; NZ Food Company Hodings Limited; NZ Snack Food Hodings Limited; Ryman Heathcare Limited; Wymac Consuting Limited; Eden Park Trust Board; New Zeaand Institute of Chartered Accountants. Subsequent to 30 September 2014, Mr McKay resigned from NZ Snack Food Hodings Limited and NZ Food Company Hodings Limited, effective 14 November Stephen John Moir Company Director New Zeaand Directorships: Ijap Limited; Chair of BNZ Insurance Services Limited and BNZ Life Insurance Limited; Chair of the Advisory Board to BNZ Chair of Business in Asia at Victoria University; The Board of The Guardians of the New Zeaand Superannuation Fund. Dr Andrew John Pearce Company Director B.Sc. (Hons.), M.Sc., Ph.D., FNZIM New Zeaand Directorships: Christchurch City Hodings Limited; FAUNA Limited; Seon Pearce & Associates Limited; Chair of Focus Genetics Management Limited; Chair of Hawke s Bay Regiona Investment Company Limited. Non-Executive Directors Gavin Robin Sater Group Executive, Persona Banking Nationa Austraia Bank Limited B.Com., FCPA Austraia After 30 September 2014, Michaea Jane Heaey was appointed a Non-Executive Director effective 6 October Michaea Jane Heaey Group Executive, Peope, Communications and Governance Nationa Austraia Bank Limited FCIS; LLB; Grad Dip (Natura Resources Law) Austraia Directorships: Amantec Pty Limited; Darenow Hodings Pty Limited; Darenow Nominees Pty Limited; DS SMSF Pty Limited; IWF Austraia Limited; Waterfa Venture Pty Limited. Member of the Big Issue Advisory Board. Diversity As at 30 September 2014, the proportions of femae directors on the Board and femae members as the Bank s Officers were 25% and 50%, respectivey (30 September 2013: 22% and 56%). As at 6 October 2014, the proportions of femae directors on the Board and femae members as the Bank s Officers were 33% and 33%, respectivey. For the purpose of this discosure, the BNZ Executive Team has been treated as Officers. The Bank has a Diversity Committee to ead the BNZ Diversity agenda, set strategic priorities and oversee performance reated to diversity. New Zeaand Regiona Audit Committee Members of the New Zeaand Regiona Audit Committee as at the date of this Discosure Statement were as foows: Dr Susan Carre Macken (Chair) Prudence Mary Facks Dougas Aexander McKay Stephen John Moir Dr Andrew John Pearce Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director 4 BNZ Discosure Statement

7 Bank of New Zeaand Corporate Information continued Directorate and Auditor continued Responsibe Persons Messrs. John Anthony Waer and Anthony John Heay, whose occupations, professiona quaifications, countries of residence, and directorships are discosed on page 3, have been authorised in writing to sign this Discosure Statement in accordance with section 82 of the Reserve Bank of New Zeaand Act 1989, on behaf of the other Directors, being: Prudence Mary Facks Michaea Jane Heaey* Dr Susan Carre Macken Dougas Aexander McKay Stephen John Moir Dr Andrew John Pearce Gavin Robin Sater * Director effective 6 October 2014 Poicy for Avoiding and Deaing with Conficts of Interests The poicy and current practice of the Board of Directors of the Bank for avoiding or deaing with conficts of interest which may arise from the persona, professiona or business interests of the Directors, or any of them, are that, where a Director s judgment coud potentiay be impaired because a confict of interest exists between the Director s business and persona affairs and the business affairs of the Bank, then that Director must decare that the confict of interest exists and eave the meeting for the duration of the Board s discussion and voting on the reevant matter. The Companies Act 1993 requires each Director to cause to be entered in the interests register and discose to the Board of the Bank: the nature and monetary vaue of the Director s interest in a transaction or proposed transaction if its monetary vaue is abe to be quantified; or the nature and extent of the Director s interest in a transaction or proposed transaction if its monetary vaue is not abe to be quantified. Directors Benefits There is no transaction which any Director or immediate reative or cose business associate of any Director has with the Bank or any member of the Banking Group which either has been entered into on terms other than those which woud, in the ordinary course of business of the Bank or any member of the Banking Group, be given to any other person of ike circumstances or means, or coud otherwise be reasonaby ikey to infuence materiay the exercise of that Director s duties. Information pertaining to oans to and other transactions with Directors is discosed in note 30 of this Discosure Statement. Auditor The auditor whose report is referred to in this Discosure Statement is Ernst & Young. Their address for service is Leve 9 Ernst & Young Buiding, 2 Takutai Square, Britomart, Auckand 1010, New Zeaand. BNZ Discosure Statement 5

8 Financia Statements Index Historica Summary of Financia Statements 7 Income Statement 8 Statement of Comprehensive Income 8 Statement of Changes in Equity 9 Baance Sheet 10 Cash Fow Statement 11 Notes to and Forming Part of the Financia Statements 13 1 Principa Accounting Poicies 13 Income Statement Notes 22 2 Interest 22 3 Gains Less Losses on Financia Instruments 23 4 Other Operating Income 23 5 Operating Expenses 24 6 Share Based Payments Expense 25 7 Income Tax Expense on Operating Profit 26 Asset Notes 27 8 Cash and Liquid Assets 27 9 Due from Centra Banks and Other Institutions Trading Securities Loans and Advances to Customers Aowance for Impairment Losses on Credit Exposures Asset Quaity Derivative Financia Instruments Investments in Whoy Owned Entities Consoidated Structured Entities Deferred Tax Other Assets 37 Liabiity Notes Due to Centra Banks and Other Institutions Short Term Debt Securities Deposits from Customers Bonds and Notes Other Liabiities Subordinated Debt 41 Sharehoders Equity Notes Contributed Equity Reserves Retained Profits 44 Other Notes Imputation Credit Account Interest Earning and Discount Bearing Assets and Liabiities and Ranking of Liabiities Reated Entity Transactions Categories of Financia Assets and Financia Liabiities Fair Vaue of Financia Assets and Financia Liabiities Offsetting Financia Assets and Financia Liabiities Transfers of Financia Assets Segment Anaysis Contingent Liabiities and Other Commitments Credit Exposures to Connected Persons and Non-bank Connected Persons Concentrations of Credit Exposures to Individua Counterparties and Groups of Cosey Reated Counterparties Insurance Business, Securitisation, Funds Management, Other Fiduciary Activities, and the Marketing and Distribution of Insurance Products Capita Adequacy Risk Management 72 Auditor s Report 87 6 BNZ Discosure Statement

9 Historica Summary of Financia Statements Consoidated Doars in Miions 30/9/14 30/9/13 30/9/12 30/9/11 30/9/10 Income statement Interest income 3,926 3,716 3,693 3,641 3,403 Interest expense 2,302 2,151 2,190 2,254 2,122 Net interest income 1,624 1,565 1,503 1,387 1,281 Gains ess osses on financia instruments 1 69 (94) (233) 120 (18) Other operating income Tota operating income 2,136 1,905 1,644 1,889 1,642 Operating expenses Tota operating profit before impairment osses on credit exposures and income tax expense 1,235 1, , Impairment osses on credit exposures Tota operating profit before income tax expense 1, Income tax expense on operating profit Net profit from continuing activities before New Zeaand structured finance transactions Income tax credit on New Zeaand structured finance transactions (83) Income tax credit interest costs on New Zeaand structured finance transactions (84) Net profit attributabe to sharehoders of Bank of New Zeaand Dividends Ordinary dividend Perpetua preference dividend Significant baance sheet items Tota assets 79,685 75,310 73,111 74,085 69,647 Tota iabiities 73,944 69,623 67,834 69,736 65,645 Ordinary sharehoder s equity 5,091 4,777 4,367 3,439 3,092 Contributed equity perpetua preference sharehoders Asset quaity Individuay impaired assets at amortised cost Individuay impaired assets at fair vaue through profit or oss Impairment osses on credit exposures charged to income statement at amortised cost Credit risk adjustments on financia assets charged to income statement at fair vaue through profit or oss (incuding derivatives) The information presented in the above tabe has been extracted from audited financia statements that have been prepared in accordance with New Zeaand Equivaents to Internationa Financia Reporting Standards ( NZ IFRS ). 1 In accordance with NZ IFRS 9 (2013) Financia Instruments, the Banking Group has presented the credit risk adjustments on financia iabiities designated at fair vaue through profit or oss for the year ended 30 September 2014 in other comprehensive income. Comparative baances are presented in the income statement and have not been restated. Refer to note 1 for further information. Base III and Base II reguatory capita ratios The tabe beow shows the capita adequacy ratios based on the Reserve Bank of New Zeaand s ( RBNZ s ) Capita Adequacy Framework (Interna Modes Based Approach) ( BS2B ) expressed as a percentage of tota risk-weighted exposures. Consoidated Base III Base III Base II Base II Base II Unaudited Unaudited Unaudited Unaudited Unaudited 30/9/14 30/9/13 30/9/12 30/9/11 30/9/10 Common Equity Tier One capita ratio 9.36% 8.87% N/A N/A N/A Tier One capita ratio 10.64% 10.68% 11.26% 8.99% 8.85% Tota quaifying capita ratio 12.04% 12.61% 13.29% 11.84% 11.81% Buffer ratio for Common Equity Tier One capita 4.04% 4.37% N/A N/A N/A The capita ratios as at 30 September 2014 and 30 September 2013 have been determined in accordance with the RBNZ s Base III capita adequacy framework effective from 1 January The capita ratios as at 30 September 2012, 30 September 2011 and 30 September 2010 have been determined in accordance with the RBNZ s Base II capita adequacy framework effective prior to 1 January BNZ Discosure Statement 7

10 Income Statement For the year ended 30 September 2014 Consoidated The Company Doars in Miions Note 30/9/14 30/9/13 30/9/14 30/9/13 Interest income 2 3,926 3,716 4,305 4,077 Interest expense 2 2,302 2,151 2,770 2,590 Net interest income 1,624 1,565 1,535 1,487 Gains ess osses on financia instruments (94) 69 (94) Other operating income Tota operating income 2,136 1,905 2,040 1,906 Operating expenses Tota operating profit before impairment osses on credit exposures and income tax expense 1,235 1,062 1,129 1,051 Impairment osses on credit exposures Tota operating profit before income tax expense 1, , Income tax expense on operating profit Net profit attributabe to sharehoders of Bank of New Zeaand The accounting poicies and other notes form part of, and shoud be read in conjunction with, these financia statements. Statement of Comprehensive Income For the year ended 30 September 2014 Consoidated The Company Doars in Miions Note 30/9/14 30/9/13 30/9/14 30/9/13 Net profit attributabe to sharehoders of Bank of New Zeaand Other comprehensive income/(expense): Items that wi not be recassified to profit or oss Credit risk adjustments on financia iabiities designated at fair vaue through profit or oss 1 27 (2) - (2) - Actuaria gain on defined benefit pan Tax on items transferred directy to equity Items that may be recassified subsequenty to profit or oss Change in cash fow hedge reserve 26 (18) (140) (18) (140) Change in avaiabe for sae investments revauation reserve 26 (55) 19 (56) 20 Tax on items transferred directy from equity 26 - (2) - (2) (73) (123) (74) (122) Tota other comprehensive income/(expense), net of taxation (72) (120) (73) (119) Tota comprehensive income attributabe to sharehoders of Bank of New Zeaand In accordance with NZ IFRS 9 (2013) Financia Instruments, the Banking Group has presented the credit risk adjustments on financia iabiities designated at fair vaue through profit or oss for the year ended 30 September 2014 in other comprehensive income. Comparative baances are presented in the income statement and have not been restated. Refer to note 1 for further information. The accounting poicies and other notes form part of, and shoud be read in conjunction with, these financia statements. 8 BNZ Discosure Statement

11 Statement of Changes in Equity For the year ended 30 September 2014 Consoidated (30/9/14) Avaiabe For Sae Tota Perpetua Asset Investments Cash Fow Share- Ordinary Preference Retained Revauation Revauation Hedge hoders Doars in Miions Capita Capita Profits Reserve Reserve Reserve Equity Baance at beginning of year 1, , (1) 5,687 Comprehensive income/(expense) Net profit attributabe to sharehoders of Bank of New Zeaand Tota other comprehensive income/(expense) (55) (18) (72) Tota comprehensive income/(expense) (55) (18) 778 Buyback of shares - (260) (260) Ordinary dividend - - (420) (420) Perpetua preference dividend - - (44) (44) Baance at end of year 1, , (19) 5,741 Consoidated (30/9/13) Baance at beginning of year 1, , ,277 Comprehensive income/(expense) Net profit attributabe to sharehoders of Bank of New Zeaand Tota other comprehensive income/(expense) (142) (120) Tota comprehensive income/(expense) (142) 575 Ordinary dividend - - (110) (110) Perpetua preference dividend - - (55) (55) Baance at end of year 1, , (1) 5,687 The Company (30/9/14) Avaiabe For Sae Tota Perpetua Investments Cash Fow Share- Ordinary Preference Retained Revauation Hedge hoders Doars in Miions Capita Capita Profits Reserve Reserve Equity Baance at beginning of year 1, , (1) 5,393 Comprehensive income/(expense) Net profit attributabe to sharehoders of Bank of New Zeaand Tota other comprehensive income/(expense) (56) (18) (73) Tota comprehensive income/(expense) (56) (18) 700 Buyback of shares - (260) (260) Ordinary dividend - - (420) - - (420) Perpetua preference dividend - - (44) - - (44) Baance at end of year 1, ,887 - (19) 5,369 The Company (30/9/13) Baance at beginning of year 1, , ,968 Comprehensive income/(expense) Net profit attributabe to sharehoders of Bank of New Zeaand Tota other comprehensive income/(expense) (142) (119) Tota comprehensive income/(expense) (142) 590 Ordinary dividend - - (110) - - (110) Perpetua preference dividend - - (55) - - (55) Baance at end of year 1, , (1) 5,393 The accounting poicies and other notes form part of, and shoud be read in conjunction with, these financia statements. BNZ Discosure Statement 9

12 Baance Sheet As at 30 September 2014 Consoidated The Company Doars in Miions Note 30/9/14 30/9/13 30/9/14 30/9/13 Assets Cash and iquid assets 8 1,779 1,725 1,779 1,725 Due from centra banks and other institutions 9 2,822 1,516 2,822 1,516 Trading securities 10 4,396 4,291 4,396 4,291 Avaiabe for sae investments Derivative financia instruments 14 4,644 4,237 4,644 4,237 Loans and advances to customers 11 64,437 62,167 64,437 62,167 Current tax assets Amounts due from reated entities ,718 10,386 Investments in whoy owned entities ,100 3,103 Other assets Deferred tax Property, pant and equipment Goodwi and other intangibe assets Tota assets 79,685 75,310 92,644 88,285 Financed by: Liabiities Due to centra banks and other institutions 19 2,147 1,304 2,147 1,304 Short term debt securities 20 4,963 5,550 1,618 1,720 Trading iabiities Derivative financia instruments 14 4,438 4,907 4,438 4,907 Deposits from customers 21 45,379 41,823 44,164 40,870 Bonds and notes 22 14,651 14,210 4,219 5,306 Current tax iabiities Amounts due to reated entities ,885 27,211 Other iabiities Subordinated debt 24, Tota iabiities 73,944 69,623 87,275 82,892 Net assets 5,741 5,687 5,369 5,393 Sharehoders equity Contributed equity ordinary sharehoder 25 1,851 1,851 1,851 1,851 Reserves 26 (17) 56 (19) 55 Retained profits 27 3,257 2,870 2,887 2,577 Ordinary sharehoder s equity 5,091 4,777 4,719 4,483 Contributed equity perpetua preference sharehoders Tota sharehoders equity 5,741 5,687 5,369 5,393 The accounting poicies and other notes form part of, and shoud be read in conjunction with, these financia statements. 10 BNZ Discosure Statement

13 Cash Fow Statement For the year ended 30 September 2014 Consoidated The Company Doars in Miions Note 30/9/14 30/9/13 30/9/14 30/9/13 Cash fows from operating activities Cash was provided from: Dividend income Interest income 3,907 3,727 4,286 4,088 Net trading income Other income Cash was appied to: Interest expense (2,255) (2,156) (2,722) (2,595) Personne expenses (449) (419) (447) (419) Other operating expenses (285) (341) (317) (378) Taxes and subvention payments (242) (213) (219) (192) Net cash fows from operating activities before changes in operating assets and iabiities 1,128 1,408 1,026 1,330 Changes in operating assets and iabiities arising from cash fow movements Net movement in due from centra banks and other institutions (term) 1 (897) (90) (897) (90) Net movement in oans and advances to customers 1 (2,427) (3,555) (2,427) (3,555) Net movement in other assets (1) 279 Net movement in trading securities and trading iabiities 1 69 (738) 69 (738) Net movement in deposits from customers 1 3,554 4,734 3,293 4,437 Net movement in due to centra banks and other institutions (term) 1 (136) - (136) - Net movement in other iabiities 187 (216) 188 (212) Net change in operating assets and iabiities Net cash fows from operating activities 1,479 1,824 1,115 1,451 Cash fows from investing activities Cash was provided from: Proceeds from sae of avaiabe for sae investments Decrease in investments in whoy owned entities Cash was appied to: Acquisition of intangibe assets (59) (57) (59) (57) Purchase of property, pant and equipment (24) (44) (9) (38) Net cash fows from investing activities (45) (90) (27) (84) Cash fows from financing activities Net movement in bonds and notes ,112 (1,071) (63) Net movement in derivative financia instruments 1 (821) (140) (821) (140) Net movement in short term debt securities 1 (584) 184 (100) (119) Net movement in reated entity funding 1 (87) (2,560) (2,032) (592) Net movement in contributed equity perpetua preference shares 1 25 (260) - (260) - Net movement in subordinated debt 1 24 (190) - (190) - Ordinary dividend 27 (420) (110) (420) (110) Perpetua preference dividend 27 (44) (55) (44) (55) Net cash fows from financing activities (1,990) (1,569) (4,938) (1,079) Net movement in cash and cash equivaents (556) 165 (3,850) 288 Cash and cash equivaents at beginning of year 1,892 1,727 1,830 1,542 Cash and cash equivaents at end of year 1,336 1,892 (2,020) 1,830 Cash and cash equivaents at end of year comprised: Cash and iquid assets 8 1,779 1,725 1,779 1,725 Due from centra banks and other institutions cassified as cash and cash equivaents 9 1, , Due to centra banks and other institutions cassified as cash and cash equivaents 19 (1,544) (565) (1,544) (565) Amounts due from reated entities cassified as cash and cash equivaents Amounts due to reated entities cassified as cash and cash equivaents 30 (104) (34) (3,457) (92) Tota cash and cash equivaents 1,336 1,892 (2,020) 1,830 1 The amounts shown represent the net cash fows for the financia year. BNZ Discosure Statement 11

14 Cash Fow Statement continued For the year ended 30 September 2014 Consoidated The Company Doars in Miions 30/9/14 30/9/13 30/9/14 30/9/13 Reconciiation of net profit attributabe to sharehoders of Bank of New Zeaand to net cash fows from operating activities Net profit attributabe to sharehoders of Bank of New Zeaand (Increase)/decrease in accrued interest receivabe (19) 11 (19) 11 Depreciation and amortisation expense Impairment osses on credit exposures Impairment osses on non-financia assets Increase in provision for tax Unreaised gains ess osses on financia instruments Increase/(decrease) in accrued interest payabe 47 (5) 47 (5) Decrease in accrued subvention payments - - (6) (7) Increase/(decrease) in other iabiities 41 (3) 42 (4) Gain on sae of avaiabe for sae investments (67) (19) (67) (19) Decrease in provision for impairment of whoy owned entities (63) Deduct operating cash fows not incuded in net profit: Net change in operating assets and iabiities Net cash fows from operating activities 1,479 1,824 1,115 1,451 Netting of cash fows Certain cash fows (as indicated by 1 ) are shown net as these cash fows are either received and disbursed on behaf of customers and counterparties and therefore refect the activities of these parties rather than those of the Bank, or are received and disbursed in transactions where the turnover is quick, the amounts arge and the maturities short. The accounting poicies and other notes form part of, and shoud be read in conjunction with, these financia statements. 12 BNZ Discosure Statement

15 Notes to and Forming Part of the Financia Statements For the year ended 30 September 2014 Note 1 Principa Accounting Poicies In these financia statements Bank of New Zeaand is referred to as the Bank or the Company. The Banking Group means Bank of New Zeaand, a of its whoy owned entities isted in note 15 and entities consoidated for financia reporting purposes isted in note 16. The financia statements are genera purpose financia reports prepared in accordance with the requirements of the Financia Reporting Act 1993 and the Registered Bank Discosure Statements (New Zeaand Incorporated Registered Banks) Order 2014 (as amended). Assumptions and estimates The preparation of the financia statements requires the use of certain critica accounting estimates and assumptions that affect the reported amount of assets, iabiities, revenues and expenses and the discosed amount of contingent iabiities. It aso requires management to exercise judgement in the process of appying accounting poicies. The notes to the financia statements set out areas invoving a higher degree of judgement or compexity, or areas where assumptions are significant to the Banking Group. Refer to notes 6, 12, 31 and 32 for further information. Assumptions made as at each reporting date (e.g. the cacuation of the aowance for impairment osses on credit exposures and fair vaue adjustments) are based on best estimates at that date. Athough the Banking Group has interna contro systems in pace to ensure that estimates can be reiaby measured, actua amounts may differ from those estimates. Estimates and underying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Statement of compiance The financia statements have been prepared in accordance with Generay Accepted Accounting Practice in New Zeaand ( NZ GAAP ). They compy with New Zeaand equivaents to Internationa Financia Reporting Standards ( NZ IFRS ) and other appicabe Financia Reporting Standards as appropriate for profit-oriented entities. The financia statements compy with Internationa Financia Reporting Standards ( IFRS ). New and amended accounting standards and interpretations Changes in accounting poicy and discosure The foowing new and amended standards reevant to the Banking Group have been adopted from 1 October 2013 and have been appied in the preparation of these financia statements: NZ IFRS 7 Financia Instruments: Discosures Offsetting Financia Assets and Financia Liabiities (amended in November 2012) is effective for periods beginning on or after 1 January The amendment requires enhanced discosures about financia instruments that are offset or subject to netting. Refer to note 33 for further information. NZ IFRS 10 Consoidated Financia Statements was issued in November 2012 and is effective for periods beginning on or after 1 January This standard introduced a singe contro mode to determine which investees shoud be consoidated. It defines contro as consisting of three eements: power, exposure to variabe returns, and an investor s abiity to use power to affect its amount of variabe returns. Adoption of the standard has not resuted in any significant impact on the Banking Group s reported resuts or financia position. NZ IFRS 12 Discosure of Interests in Other Entities was issued in November 2012 and is effective for periods beginning on or after 1 January It requires discosures about the significant judgements and assumptions made by management in determining whether contro exists. It aso enhances discosure reating to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. NZ IFRS 12 discosures are provided in note 39. NZ IFRS 13 Fair Vaue Measurement was issued in November 2012 and is effective for periods beginning on or after 1 January It estabishes a singe source of guidance for fair vaue measurements. It appies to both financia instrument items and non-financia instrument items for which other accounting standards require or permit fair vaue measurements and discosures about fair vaue measurements. NZ IFRS 13 defines fair vaue as the price that woud be received to se an asset or paid to transfer a iabiity in an ordery transaction between market participants at the measurement date under current market conditions. Fair vaue under NZ IFRS 13 is an exit price regardess of whether that price is directy observabe or estimated using another vauation technique. Aso, NZ IFRS 13 incudes extensive discosure requirements. Adoption of these amendments has not resuted in any significant impact on the Banking Group s reported resuts or financia position; however additiona discosures have been incorporated in note 32. In accordance with the transitiona provisions, comparatives have not been presented. NZ IAS 19 Empoyee Benefits (amended in August 2011) is effective for periods beginning on or after 1 January It requires the return on pan assets for defined benefit pans recognised in profit or oss to be cacuated based on the rate used to discount the defined benefit, and aso revises the definition of short term empoyee benefits. Adoption of these amendments has not resuted in any significant impact on the Banking Group s reported resuts or financia position. NZ IAS 27 Separate Financia Statements (amended in June 2011) is effective for periods beginning on or after 1 January It removes the accounting and the discosure requirements for consoidated financia statements, which are now incuded in NZ IFRS 10 and NZ IFRS 12. Adoption of these amendments has not resuted in any significant impact on the Banking Group s reported resuts or financia position. NZ IAS 28 Investments in Associates and Joint Ventures (amended in June 2011) is effective for periods beginning on or after 1 January It repaces NZ IAS 28 (2004), as a resut of the issue of NZ IFRS 11 Joint Arrangements and NZ IFRS 12, effectivey shifting the discosure requirements to those standards. Adoption of these amendments has not resuted in any significant impact on the Banking Group s reported resuts or financia position. NZ IAS 32 Financia Instruments: Presentation (amended in November 2012) is effective for periods beginning on or after 1 January It has been amended to carify the treatment of income tax reating to distributions and transaction costs. Adoption of these amendments has not resuted in any significant impact on the Banking Group s reported resuts or financia position. Eary adoption NZ IFRS 9 own credit provisions The Banking Group eected to eary adopt the own credit provisions in NZ IFRS 9 from 1 October These provisions require the Banking Group to present in other comprehensive income the fair vaue gains and osses attributabe to changes in the Banking Group s own credit risk for financia iabiities designated and measured at fair vaue through profit or oss. Comparatives have not been restated in accordance with the transition requirements of these provisions. The credit risk adjustment presented in other comprehensive income for the year ended 30 September 2014 was a $1 miion oss (after tax). BNZ Discosure Statement 13

16 Notes to and Forming Part of the Financia Statements continued Note 1 Principa Accounting Poicies continued New and amended accounting standards and interpretations issued but not yet effective The foowing new standards and amendments to standards reevant to the Banking Group are not yet effective and have not yet been appied in preparing these financia statements: Amendments to NZ IAS 32 Offsetting Financia Assets and Financia Liabiities effective 1 January 2014 has been amended to carify the conditions for offsetting financia assets and iabiities. The impact of this standard is sti being assessed. Amendments to NZ IFRS arising from the Annua Improvements Project ( ) effective 1 Juy 2014 that carified that an entity providing key management personne services to the reporting entity or to the parent of the reporting entity is a reated party of the reporting entity. NZ IFRS 15 Revenue from Contracts with Customers estabishes principes for reporting information about the nature, timing and uncertainty of revenue and cash fows arising from an entity s contracts with customers. The standard provides a singe, principes based five step mode to be appied to a contracts with customers. The impact of this standard is sti being assessed, and is not appicabe unti 1 October NZ IFRS 9 Financia Instruments (2014) was issued in September 2014 and is appicabe for accounting periods beginning on or after 1 January This standard sets out new requirements for cassification and measurement, impairment and hedge accounting for financia assets and iabiities. It repaces New Zeaand Internationa Accounting Standard ( NZ IAS ) 39 Financia Instruments: Recognition and Measurement and a previous versions of NZ IFRS 9. The standard is effective for the Banking Group in the year commencing 1 October Eary adoption is permitted. It is expected that the Austraian Accounting Standard Board ( AASB ) wi issue the Austraian equivaent accounting standard AASB 9 Financia Instruments ( AASB 9 ) in the next quarter ending December 2014, with eary appication provisions equivaent to NZ IFRS 9. If AASB 9 is issued as expected and it permits NAB to eary adopt the standard with an appication date of 1 October 2014, and NAB does eect to eary adopt, the Banking Group intends to eary adopt NZ IFRS 9 with the same appication date. The areas of most significant impact and the known estimabe transitiona differences from appication of NZ IFRS 9 are summarised beow. Cassification and measurement The cassification and measurement of financia assets is determined on the basis of the contractua cash fow characteristics and the objective of the business mode associated with hoding the asset. Key changes incude: the Hed to Maturity ( HTM ) and Avaiabe for sae asset categories wi be removed. BNZ does not have any HTM assets at transition date; a new asset category measured at Fair Vaue through Other Comprehensive Income ( FVOCI ) is introduced; upon transition, the Banking Group wi eect to revoke previous fair vaue option designations that currenty measure specific ending portfoios at Fair Vaue through Profit or Loss. These portfoios wi be subsequenty accounted at Amortised Cost; and cassification of financia iabiities wi remain argey unchanged for the Banking Group. The Banking Group has aready eary adopted the own credit risk provisions of NZ IFRS 9 pertaining to financia iabiities from 1 October Impairment The NZ IFRS 9 impairment requirements are based on an expected credit oss mode ( ECL ) that repaces the incurred oss mode under the current accounting standard. The Banking Group wi be generay required to recognise either a 12-months or ifetime ECL, depending on whether there has been a significant increase in credit risk since initia recognition. The ECL mode wi appy to debt instruments accounted for at amortised cost or at FVOCI. NZ IFRS 9 wi change the Banking Group s current methodoogy for cacuating the provision for doubtfu debts, in particuar for coective provisioning. Hedge accounting The requirements for genera hedge accounting has been simpified for hedge effectiveness testing and may resut in more designations of groups of items as the eigibiity criteria for hedge accounting have been broadened. The Banking Group wi eect an accounting poicy choice under NZ IFRS 9 to continue to appy the hedge accounting requirements under NZ IAS 39. Transition impact The overa impact of transitioning to NZ IFRS 9 on the Banking Group s financia statements is expected to be a decrease in net assets of approximatey $55 miion. This is comprised of a decrease of approximatey $36 miion arising from the re-measurement of financia asset cassification changes described above, a decrease in credit risk adjustments for financia assets designated at fair vaue through profit or oss, aso reating to these recassifications of approximatey $40 miion, an increase in aowance of impairment osses on credit exposures of approximatey $81 miion, and an increase in net tax assets of approximatey $22 miion. Any adjustments that arise as a resut of the transition process wi be recognised in either retained earnings or an appropriate equity reserve at the date of transition. Opening retained earnings is expected to decrease by approximatey $55 miion (post tax). The transitiona impact is based on best estimates as at the reporting date. The information provided in this note is focused upon materia items; it does not represent a compete ist of expected adjustments. Basis for preparation The financia statements have been prepared under the historica cost convention, modified by the appication of fair vaue measurements required or aowed by reevant accounting standards. Currency of presentation A amounts are expressed in New Zeaand doars uness otherwise stated. Rounding of amounts A amounts have been rounded to the nearest miion doars except where indicated. Recassification of financia information Certain comparative baances have been recassified to aign with the presentation used in the current financia year. These recassifications have no impact on the overa financia performance or financia position for the comparative year. 14 BNZ Discosure Statement

17 Notes to and Forming Part of the Financia Statements continued Note 1 Principa Accounting Poicies continued Principes of consoidation NZ IFRS 10 Consoidated Financia Statements considers whether an entity has contro of another entity for the purpose of consoidation where the entity is exposed, or has rights to, that other entity s (incuding Structured Entities) variabe returns from its invovement with that entity and whether the entity has the abiity to affect those returns through its power over the other entity. Entities are fuy consoidated from the date on which contro is transferred to the Bank. They are deconsoidated from the date that contro ceases. In assessing whether the Banking Group contros and shoud consoidate a structured entity, management uses their judgment when considering the requirements of NZ IFRS 10 and NZ IFRS 12. In appying their judgment management wi make assessments whether the entity has contro of another entity as foows: the power the Banking Group has from existing rights to direct the reevant activities of the entity; the exposure or rights the Banking Group has to variabe returns from the entity; and the abiity of the Banking Group to affect the amount of their returns from the entity. The Bank records investments in whoy owned entities at cost ess any provision for impairment. Inter-company baances and transactions, incuding income, expenses and dividends, are eiminated in fu. The financia resuts of the Bank s consoidated entities have been prepared in accordance with the Bank s accounting poicies, which have been consistenty appied throughout the Banking Group. Foreign currency transation i) Functiona and presentation currency Items incuded in the financia statements of each of the Banking Group s foreign operations are measured using the currency of the primary economic environment in which the entity operates (the functiona currency ). The Discosure Statement is presented in New Zeaand doars, which is the Bank s functiona and presentation currency. ii) Transactions and baances Foreign currency transactions are transated into the functiona currency using the exchange rates prevaiing at the dates of the transactions. Foreign exchange gains and osses resuting from the settement of such transactions and from the transation at the year-end exchange rates of monetary assets and iabiities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as quaifying cash fow hedges. Transation differences on non-monetary items cassified as avaiabe for sae financia assets are incuded in other comprehensive income. iii) Foreign operations The resuts and financia position of a of the Banking Group s operations that have a functiona currency different from the presentation currency are transated into the presentation currency as foows: assets and iabiities for each baance sheet presented are transated at the cosing rate as at the reporting date; income and expenses for each income statement are transated at average exchange rates (uness this average is not a reasonabe approximation of the cumuative effect of the rates prevaiing on the transaction dates, in which case income and expenses are transated at the dates of the transactions); and a resuting exchange differences are recognised in other comprehensive income, in the foreign currency transation reserve. On consoidation, exchange differences arising from the transation of the net investment in foreign entities, and from borrowings and other foreign currency instruments designated as hedges of such investments, are recognised in other comprehensive income. To the extent that the hedge is ineffective, such differences are recognised in the income statement. When a foreign operation is sod, such exchange differences are transferred out of reserves and recassified to the income statement as part of the gain or oss on sae. Goodwi and fair vaue adjustments arising on the acquisition of a foreign entity are treated as assets and iabiities of the foreign entity and transated at the cosing rate. Fair vaue measurement Fair vaue is defined as the price that woud be received to se an asset or paid to transfer a iabiity in an ordery transaction between market participants at the measurement date. The best evidence of the fair vaue of a financia instrument at initia recognition is the transaction price (i.e. the fair vaue of the consideration given or received) uness the fair vaue of that instrument is evidenced by comparison with other observabe current market transactions in the same instrument (i.e. without modification or repackaging) or based on a vauation technique whose variabes incude ony data from observabe markets. When such evidence exists, the Banking Group recognises the profit on initia recognition (i.e. on day one). Where a financia asset or iabiity is subsequenty measured at fair vaue, the best evidence is independenty quoted market prices in an active market. Where such prices are unavaiabe, then depending on the circumstances, aternative evidence may be used, incuding the price of recent transactions, prices for simiar instruments or prices obtained utiising component parts (which when aggregated form the price of the whoe instrument). Where no active market exists for a particuar asset or iabiity, the Banking Group uses standard market vauation techniques to arrive at the estimated fair vaue, utiising observabe market sourced inputs wherever possibe. Depending on the circumstances, the same aternative evidence (as described above) may be used in the vauation techniques. The vauation techniques address factors such as interest rates, iquidity and credit risk. Fair vaue asset or iabiity prices defined above generay represent the present vaue of a future cash fows incuding those reating to interest, dividends or other cash fows as appropriate. BNZ Discosure Statement 15

18 Notes to and Forming Part of the Financia Statements continued Note 1 Principa Accounting Poicies continued Assets Cash and cash equivaents Cash and cash equivaents consist of cash and short-term, highy iquid investments that are readiy convertibe to known amounts of cash within three months and are subject to insignificant risk of changes in vaue and are hed for the purpose of meeting short-term cash commitments. For the purpose of the cash fow statement, cash and cash equivaents incudes cash and iquid assets, transactions with reated parties, and amounts due from centra banks and other institutions (incuding securities hed under agreements to rese), net of amounts due to centra banks and other institutions. Financia assets Financia assets comprise items such as Due from centra banks and other institutions, Trading securities, Avaiabe for sae investments, Derivative financia instruments, Loans and advances to customers and Amounts due from reated entities. Cassification of financia assets Under NZ IAS 39 financia assets are required to be cassified as: at fair vaue through profit or oss; avaiabe for sae; hed to maturity; or oans and receivabes. Items cassified at fair vaue through profit or oss In accordance with NZ IAS 39, certain financia instruments have been cassified at fair vaue through profit or oss. Items cassified at fair vaue through profit or oss incude financia assets hed for trading, financia assets designated at fair vaue through profit or oss and derivative financia instruments. Purchases and saes of financia assets cassified at fair vaue through profit or oss are recognised on trade date, being the date that the Banking Group is committed to purchase or se an asset. Financia assets cassified as fair vaue through profit or oss are initiay recognised at fair vaue, with transaction costs being recognised in the income statement immediatey. Subsequenty, they are measured at fair vaue with gains and osses recognised in the income statement as they arise. Where a financia asset is hed at fair vaue, the movement in fair vaue attributabe to interest rate market movements is either an observabe market vaue or cacuated based on changes in observabe market interest rates for swaps. The movement in fair vaue attributabe to changes in credit risk is estabished through a statistica-based cacuation to estimate expected osses attributabe to adverse movements in credit risk. i) Financia assets hed for trading A financia asset is cassified as hed for trading if it is acquired principay for the purpose of seing or repurchasing in the near term, or forms part of a portfoio of financia instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a quaifying hedge reationship). The Banking Group has cassified certain pubic and other debt securities as hed for trading. ii) Financia assets designated at fair vaue through profit or oss Upon initia recognition, financia assets may be designated at fair vaue through profit or oss. This cassification can ony be used in the foowing circumstances: where designation eiminates or significanty reduces a measurement or recognition inconsistency that woud otherwise arise from measuring assets and iabiities (not ony financia assets and iabiities) or recognising the gains or osses on them on different bases. Where derivative financia instruments have been transacted to hedge these amounts, an accounting inconsistency woud arise if such amounts were accounted for on an amortised cost basis, as the derivatives are measured at fair vaue with movements in fair vaue recognised in the income statement. By designating these amounts at fair vaue through profit or oss, any fair vaue movements on the instrument wi offset the fair vaue movements on hedging derivatives in the income statement; or those that are part of a group of financia assets, financia iabiities or both, that are managed and their performance is evauated by management on a fair vaue basis in accordance with the documented risk management or investment strategy; or those that contain one or more embedded derivatives, except if the embedded derivative does not modify significanty the associated cash fows or it is cear with itte or no anaysis that separation is prohibited. Once a financia instrument has been designated at fair vaue through profit or oss upon initia recognition, the Banking Group cannot subsequenty change the designation. Avaiabe for sae investments Avaiabe for sae investments comprise non-derivative financia assets that are designated as avaiabe for sae or are not categorised into any of the categories of: (i) fair vaue through profit or oss; (ii) hed to maturity; or (iii) oans and receivabes. Avaiabe for sae investments are initiay recognised at fair vaue incuding direct and incrementa transaction costs. They are subsequenty hed at fair vaue. Gains and osses arising from changes in fair vaue are incuded in other comprehensive income unti sae when the cumuative gain or oss is transferred to the income statement. 16 BNZ Discosure Statement

19 Notes to and Forming Part of the Financia Statements continued Note 1 Principa Accounting Poicies continued Interest income is determined using the effective interest method. Dividends earned whist hoding avaiabe for sae investments are recognised in the income statement as Other operating income. Impairment osses, and transation differences on monetary items, are recognised in the income statement. Avaiabe for sae investments are derecognised when the rights to receive cash fows have expired or the Banking Group has transferred substantiay a the risks and rewards of ownership. Loans and receivabes Loans and receivabes represent the fourth cassification of financia assets under NZ IAS 39. Loans and receivabes are non-derivative financia assets with fixed or determinabe payments, that are not quoted in an active market and which are not cassified as avaiabe for sae or at fair vaue through profit or oss. They arise when the Banking Group provides money or services directy to a customer and has no intention of trading the oan. Loans and receivabes are initiay recognised at fair vaue incuding direct and incrementa transaction costs. They are subsequenty recorded at amortised cost, using the effective interest method, adjusted for impairment osses, deferred income and unearned future income on ease finance. Under the effective interest method, fee income and costs directy reated to the origination of the oan are deferred over the expected ife of the assets or, where appropriate, a shorter period. When cacuating effective interest rate, the Banking Group estimates cash fows considering a contractua terms of the financia instrument and excuding future credit osses. Unearned future income on ease finance represents interest not yet earned on the Banking Group s ease finance assets and is cacuated on an amortised cost basis. Loans and receivabes are derecognised when the rights to receive cash fows have expired or the Banking Group has transferred substantiay a of the risks and rewards of ownership. Repurchase and reverse repurchase agreements Securities sod under agreements to repurchase are cassified in the investment or trading portfoios and accounted for accordingy. They are not derecognised from the baance sheet as the Bank retains substantiay a the risks and rewards of ownership. The Bank s obigation to repurchase is cassified under Due to centra banks and other institutions. The difference between the sae and repurchase prices represents interest expense and is recognised in the income statement over the term of the repurchase agreements. Securities purchased under agreements to rese are recorded as Due from centra banks and other institutions. The difference between the purchase and the resae prices are treated as interest and accrued over the ife of the agreements using the effective interest method. Where the Banking Group has accepted coatera arising from secured pacements and reverse repurchase agreements, the Banking Group is obiged to return equivaent securities. Securities repedged by the Banking Group are stricty for the purposes of providing coatera for the counterparty. These transactions are conducted under terms that are usua for customary standard ending, and securities borrowing and ending activities. Securities ent to counterparties are aso discosed in the financia statements. Impairment of financia assets The Banking Group assesses at each reporting date whether there is objective evidence that a financia asset or a portfoio of financia assets is impaired. A financia asset or portfoio of financia assets hed at amortised cost is impaired and impairment osses are incurred if, and ony if: there is objective evidence of impairment as a resut of one or more oss events that occurred after the initia recognition of the asset and prior to the reporting date (a oss event ); and that oss event has had an impact on the estimated future cash fows of the financia asset or the portfoio that can be reiaby estimated. Financia assets at fair vaue through profit or oss are not assessed for impairment as their fair vaue refects the credit quaity of the instrument and changes in fair vaue are recognised in the income statement. The Banking Group assesses whether objective evidence of impairment exists individuay for financia assets that are individuay significant, and individuay or coectivey for financia assets that are not individuay significant. If the Banking Group determines that no objective evidence of impairment exists for an individuay assessed financia asset (whether significant or not), it incudes the asset in a group of financia assets with simiar credit risk characteristics and coectivey assesses them for impairment. Assets that are individuay assessed for impairment and for which an impairment oss is, or continues to be, recognised are not incuded in a coective assessment of impairment. For Loans and advances to customers the amount of impairment oss is measured as the difference between the asset s carrying amount and the present vaue of estimated future cash fows discounted at either the asset s origina effective interest rate or, where the origina effective interest rate is not avaiabe, at the asset s contractua interest rate. Cash fows reating to short-term receivabes are not discounted if the effect of discounting is immateria. The amount of the oss is recognised using an aowance account and the amount of the oss is incuded in the income statement. The cacuation of the present vaue of the estimated future cash fows of a coateraised financia asset refects the cash fows that may resut from forecosure ess costs for obtaining and seing the coatera, whether or not forecosure is probabe. For the purposes of a coective evauation of impairment, financia assets are grouped on the basis of simiar risk characteristics, taking into account asset type, industry, geographica ocation, coatera type, past due status and other reevant factors. These characteristics are reevant to the estimation of future cash fows for groups of such assets by being indicative of the counterparty s abiity to pay a amounts due according to the contractua terms of the assets being evauated. Future cash fows in a group of financia assets that are coectivey evauated for impairment are estimated on the basis of the contractua cash fows of the assets in the group and historica oss experience for assets with credit risk characteristics simiar to those in the group. Historica oss experience is adjusted on the basis of current observabe data to refect the effects of current conditions that did not affect the period on which the historica oss experience is based, and to remove the effects of conditions in the historica period that do not currenty exist. In addition, the Banking Group uses its experienced judgment to estimate the amount of an impairment oss. This incorporates amounts cacuated to overcome mode imitations and systemic risks where appropriate and supported by historica oss experience data. The use of such judgments and reasonabe estimates is considered by management to be an essentia part of the process and does not impact reiabiity. The methodoogy and assumptions used for estimating future cash fows are reviewed reguary to reduce any differences between oss estimates and actua oss experience. BNZ Discosure Statement 17

20 Notes to and Forming Part of the Financia Statements continued Note 1 Principa Accounting Poicies continued Foowing impairment, interest income is recognised using the origina effective rate of interest, which was aso used to discount the future cash fows for the purpose of measuring the impairment oss. If, in a subsequent period, the amount of the impairment oss decreases and the decrease can be reated objectivey to an event occurring after the impairment was recognised, the previousy recognised impairment oss is reversed by adjusting the aowance account. The amount of the reversa is recognised in the income statement. When a oan is uncoectibe, it is written off against the reated aowance for oan impairment. Such oans are written off after a the necessary procedures have been competed and the amount of the oss has been determined. Subsequent recoveries of amounts previousy written off are recognised through the income statement. In the case of equity instruments cassified as avaiabe for sae, a significant or proonged decine in the fair vaue of the security beow its cost is considered in determining whether impairment exists. Where such evidence exists, the cumuative net oss that has been previousy recognised in other comprehensive income is removed from other comprehensive income and recognised in the income statement. In the case of debt instruments cassified as avaiabe for sae, impairment is assessed based on the same criteria as a other financia assets. Reversas of impairment of debt securities cassified as avaiabe for sae are recognised in the income statement. Reversas of impairment of equity shares cassified as avaiabe for sae are not recognised in the income statement. Increases in the fair vaue of equity shares cassified as avaiabe for sae after impairment are recognised directy in other comprehensive income. Asset quaity The Banking Group has discosed, in note 13, certain components of its oan portfoio as impaired assets according to the cassifications discussed beow: Impaired assets means any credit exposure for which an impairment oss is required in accordance with NZ IAS 39 paragraphs 58 to 62. The foowing categories are aso discosed in note 13, but are not considered to be impaired assets: Other assets under administration are those oans which are not impaired or past due, where the customer is in receivership, iquidation, statutory management or any other form of administration in New Zeaand, or is in an equivaent form of vountary or invountary administration overseas. Past due assets are those oans which are not impaired and for which payments of principa or interest are contractuay past due and adequate security is hed. Derivative financia instruments and hedge accounting A derivatives are recognised in the baance sheet at fair vaue on trade date and are cassified as trading except where they are used as part of an effective hedge reationship. The carrying vaue of a derivative is remeasured at fair vaue throughout the ife of the contract. Derivatives are carried as assets when the fair vaue is positive and iabiities when the fair vaue is negative. The method of recognising the resuting fair vaue gain or oss on a derivative depends on whether the derivative is used as a hedging instrument and, if so, the nature of the item being hedged. The Banking Group designates certain derivatives as either hedges of movements in the fair vaue of recognised assets and iabiities or firm commitments (fair vaue hedge) or hedges of highy probabe future cash fows attributabe to a recognised asset or iabiity, or a forecast transaction (cash fow hedge). Hedge accounting is generay used for derivatives designated in this way, provided certain criteria are met. The Banking Group documents, at inception of the transaction, the reationship between hedging instruments and hedged items, as we as the Banking Group s risk management objective and strategy for undertaking these hedge transactions. In addition, the documents outine how effectiveness wi be measured throughout the ife of the hedge reationship and its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highy effective in offsetting changes in fair vaue or cash fows of hedged items. Any derivative that is de-designated as a hedging derivative wi be accounted for as trading from the time that it is de-designated, with a subsequent movements in fair vaue recognised in the income statement. i) Fair vaue hedge accounting Subsequent to initia designation, changes in the fair vaue of derivatives that are designated and quaify for fair vaue hedge accounting are recorded in the income statement, together with any changes in the fair vaue of the hedged asset or iabiity that are attributabe to the hedged risk. When a hedging instrument expires or is sod, or when a hedge no onger meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the income statement on an effective yied basis over the remaining period to maturity of the hedged item. ii) Cash fow hedge accounting The effective portion of changes in fair vaue of derivatives that are designated and quaify for cash fow hedge accounting are recognised in other comprehensive income, whie the gain or oss reating to any ineffective portion is recognised immediatey in the income statement. The carrying vaue of the hedged item is not adjusted. Amounts accumuated in reserves are transferred to the income statement in the period in which the hedged item wi affect profit or oss. When a hedging instrument expires or is sod, or when a hedge no onger meets the criteria for hedge accounting, any cumuative gain or oss existing in reserves at that time remains in reserves and is recognised in the income statement when the forecast transaction utimatey affects profit or oss. When a forecast transaction is no onger expected to occur, the cumuative gain or oss that was reported in reserves is immediatey transferred to the income statement. 18 BNZ Discosure Statement