Westpac Group Pillar 3 Report March 2013 - Iguana IR Sites

PILLAR 3 REPORT
EXECUTIVE SUMMARY
Basel III transition impacts
On 1 January 2013, Australian Prudential Regulation Authority’s (APRA) new prudential standards for capital
came into effect. These standards adopt the Basel Committee on Banking Supervision (BCBS) reforms,
commonly known as Basel III, to the Australian financial system. APRA has applied national discretions under the
framework and, as such, capital ratios calculated under APRA’s standards are not directly comparable to those
calculated under BCBS standards. The table below includes pro forma 30 September 2012 ratios which have
been adjusted for the estimated impact of the Basel III changes.
Basel III
Basel III Pro Forma Basel 2.5
% 31 March 2013 30 September 2012 30 September 2012
The Westpac Group at Level 2
Common Equity Tier 1 ratio 8.7 8.2 8.4
Additional Tier 1 capital 2.1 1.6 1.9
Tier 2 capital 1.7 1.7 1.4
Total regulatory capital ratio 12.5 11.5 11.7
In transitioning to APRA’s Basel III standards the following significant changes to the calculation of capital ratios
have occurred:
Capital Deductions - Investments in wealth and insurance subsidiaries, and regulatory expected loss
adjustments 1 , both previously deducted from Tier 1 and Tier 2 capital on a 50/50 basis; and equity investments,
previously subject to thresholds, are now 100% deductions against common equity;
Dividend Payments - Expected dividend payments, previously deducted from capital on an accrual basis, are
now deducted when declared;
Risk Weighted Assets (RWA) - Two changes to the measurement of RWA were implemented: a new charge for
the risk of mark-to-market losses when the credit quality of a derivative counterparty is downgraded; and an
increased RWA factor for exposure to financial institutions reflecting a changed regulatory view on the degree of
correlation among these exposures under stressed conditions; and
Tier 1 and Tier 2 Capital - New qualifying criteria for Tier 1 and Tier 2 capital instruments have been introduced.
Instruments issued before 1 January 2013 are subject to a transitional arrangement that progressively reduces
their contribution to regulatory capital over time.
Basel III
Basel III Pro Forma Basel 2.5
Risk Weighted Assets ($m) 31 March 2013 30 September 2012 30 September 2012
Credit risk 253,734 257,014 245,099
Market risk 10,555 12,087 12,087
Operational risk 26,761 26,757 26,757
Interest rate risk in the banking book 13,744 10,234 10,234
Equity risk - - 1,263
Other 3,182 2,461 2,461
Total 307,976 308,553 297,901
Changes in risk weighted assets
Basel III pro forma adjustments added $10.7 billion to reported RWA for 30 September 2012, with a $12.0 billion
increase in credit RWA partially offset by the removal of $1.3 billion RWA for equity risk. Equity risk continues to be
incorporated when determining capital ratios although equity investments are now treated as a 100% deduction
from capital rather than represented as RWA. Allowing for this adjustment, Westpac’s RWA have remained
relatively flat between 30 September 2012 ($308.6 billion) and 31 March 2013 ($308.0 billion).
Excluding the Basel III transitional impact, movements in RWA included:
Credit risk RWA declined 1% or $3.3 billion. Lower business lending RWA mostly reflecting the benefit of
reduced stressed assets, more than offset growth in RWA in Australian mortgages;
Interest rate risk in the banking book (IRRBB) increased $3.5 billion reflecting a smaller embedded gain and
slightly increased risk exposure;
Lower market risk RWA of $1.5 billion from a reduced exposure to interest rate risk; and
1 Deferred tax assets (DTA) previously included in the deductions for regulatory expected loss are now reported within the common equity Tier 1
deductions for DTA.
3