CFO OVERVIEW. Liquidity risk

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1 Liquidity risk Liquidity risk is the risk that the Group is unable to meet its payment obligations as they fall due, including repaying depositors or maturing wholesale debt, or that the Group has insufficient capacity to fund increases in assets. The timing mismatch of cash flows and the related liquidity risk is inherent in all banking operations and is closely monitored by the Group and managed in accordance with the risk appetite set by the Board. The Group s approach to liquidity risk management incorporates two key components: Scenario modelling of funding sources ANZ s liquidity risk appetite is defined by the ability to meet a range of regulatory and internal liquidity metrics mandated by the Board. The metrics cover a range of scenarios of varying duration and level of severity. This framework: Provides protection against shorter-term but more extreme market dislocations and stresses. Maintains structural strength in the balance sheet by ensuring an appropriate amount of longer-term assets are funded with longer-term funding. Ensures no undue timing concentrations exist in the Group s funding profile. A key component of this framework is the Liquidity Coverage Ratio (LCR) which was implemented in Australia on 1 January The LCR is a severe short term liquidity stress scenario, introduced as part of the Basel III international framework for liquidity risk measurement, standards and monitoring. As part of meeting the LCR requirements, ANZ has a Committed Liquidity Facility (CLF) with the Reserve Bank of Australia (RBA). The CLF has been established as a solution to a High Quality Liquid Asset (HQLA) shortfall in the Australian marketplace and provides an alternative form of RBA-qualifying liquid assets. The total amount of the CLF available to a qualifying ADI is set annually by APRA. Movement Liquidity Coverage Ratio 1 2 Cash outflows 3, % 12% Cash inflows % 14% Net cash outflows % 11% Total High Quality Liquid Assets 4, % 44% Liquidity Coverage Ratio (%) 119% 111% 92% All currency Group LCR. March 2014 LCR reported on a best endeavours basis. Derivative cash flows are included on a net basis. RBA open-repo arrangement netted down by exchange settlement account cash balance. Market value post discount as defined in APRA Prudential Standard APS 210 Liquidity. 37

2 Liquid assets The Group holds a portfolio of high quality unencumbered liquid assets in order to protect the Group s liquidity position in a severely stressed environment, as well as to meet regulatory requirements. High quality liquid assets comprise three categories, with the definitions consistent with Basel III LCR: Highest-quality liquid assets (HQLA1): Cash, highest credit quality government, central bank or public sector securities eligible for repurchase with central banks to provide same-day liquidity. High-quality liquid assets (HQLA2): High credit quality government, central bank or public sector securities, high quality corporate debt securities and high quality covered bonds eligible for repurchase with central banks to provide same-day liquidity. Alternative liquid assets (ALA): Assets qualifying as collateral for the CLF and eligible securities listed by the Reserve Bank of New Zealand (RBNZ). The Group monitors and manages the composition of liquid assets to ensure diversification by asset class, counterparty, currency and tenor. Minimum levels of liquid assets held are set annually based on a range of ANZ specific and general market liquidity stress scenarios such that potential cash flow obligations can be met over the short to medium term, and holdings are appropriate to existing and future business activities, regulatory requirements and in line with the approved risk appetite. 1 Market Values Post Discount Movement HQLA % 46% HQLA % n/a Internal Residential Mortgage Backed Securities (Australia) % 47% Internal Residential Mortgage Backed Securities (New Zealand) % 10% Other ALA % 16% Total Liquid Assets % 44% Discount as defined in APRA Prudential Standard APS 210 Liquidity. RBA open-repo arrangement netted down by exchange settlement account cash balance. Comprised of assets qualifying as collateral for the Committed Liquidity Facility (CLF), excluding internal RMBS, up to approved facility limit; and any liquid assets contained in the RBNZ's Liquidity Policy - Annex: Liquidity Assets - Prudential Supervision Department Document BS13A1 38

3 Funding ANZ targets a diversified funding base, avoiding undue concentrations by investor type, maturity, market source and currency. $10.9 billion of term wholesale debt (with a remaining term greater than one year as at 31 March 2015) was issued during the March 2015 half. Furthermore, $5 billion of Additional Tier 1 Capital was also issued during the March 2015 Half. The weighted average tenor of new term debt was 4.6 years (2014: 4.9 years). The following tables show the Group s total funding composition: Movement Customer deposits and other liabilities 1 Australia 162, , ,080 1% 4% International and Institutional Banking 201, , ,252 10% 17% New Zealand 60,293 51,360 51,749 17% 17% Global Wealth 17,357 13,844 12,699 25% 37% GTSO and Group Centre (5,214) (5,294) (4,758) -2% 10% Customer deposits 436, , ,022 8% 12% Other funding liabilities 2 12,315 14,502 10,895-15% 13% Total customer liabilities (funding) 448, , ,917 7% 12% Wholesale funding 3 Debt issuances 4 84,859 79,291 72,747 7% 17% Subordinated debt 16,463 13,607 13,226 21% 24% Certificates of deposit 59,646 52,754 57,707 13% 3% Commercial paper 22,729 15,152 16,041 50% 42% Other wholesale borrowings 5,6 53,625 42,460 43,871 26% 22% Total wholesale funding 237, , ,592 17% 17% Shareholders' Equity (excl. preference shares) 52,051 48,413 46,167 8% 13% Total Funding 737, , ,676 10% 14% Movement Funded Assets Other short term assets & trade finance assets 7 87,755 74,925 79,118 17% 11% Liquids 6 123, ,951 85,655 23% 45% Short term funded assets 211, , ,773 20% 28% Lending & fixed assets 8 526, , ,903 7% 9% Total Funded Assets 737, , ,676 10% 14% Funding Liabilities 3,4,6 Other short term liabilities 30,858 22,676 25,023 36% 23% Short term funding 60,394 46,466 55,294 30% 9% Term funding < 12 months 31,860 23,888 18,637 33% 71% Other customer deposits 1,9 101,223 89,825 84,940 13% 19% Total short term funding liabilities 224, , ,894 23% 22% Stable customer deposits 1,10 370, , ,488 7% 12% Term funding > 12 months 83,665 84,519 79,805-1% 5% Shareholders' equity and hybrid debt 59,504 55,287 53,489 8% 11% Total Stable Funding 513, , ,782 5% 10% Total Funding 737, , ,676 10% 14% Includes term deposits, other deposits and an adjustment recognised in Group Centre to eliminate Global Wealth investments in ANZ deposit products. Includes interest accruals, payables and other liabilities, provisions and net tax provisions, excluding other liabilities in Global Wealth. Excludes liability for acceptances as they do not provide net funding. Excludes term debt issued externally by Global Wealth. Includes borrowings from banks, net derivative balances, special purpose vehicles, other borrowings and Euro Trust securities (preference shares). The Euro Trust Securities were bought back by ANZ for cash at face value and cancelled on 15 December RBA open-repo arrangement netted down by the exchange settlement account cash balance. Includes short-dated assets such as trading securities, available-for-sale securities, trade dated assets and trade finance loans. Excludes trade finance loans. Total customer liabilities (funding) plus Central Bank deposits less Stable customer deposits. Stable customer deposits represent operational type deposits or those sourced from retail / business / corporate customers and the stable component of Other funding liabilities. 39

4 Capital Management APRA Basel 3 Mar M 14 Internationally Comparable Basel 3 1 Sep S 14 Capital Ratios Common Equity Tier 1 8.7% 8.8% 8.3% 14% 17% 12% Tierr % 10.7% 10.3% 14.7% 15.0% 14.7% Total capital 16% 17% 11% 17.1% 17.5% 16.8% Risk weighted assetss () Internationally Comparable methodology as per the Australian Bankers Association: International comparability of capital ratios of Australia s major banks (August 2014) report prepared by PwC Australia. APRA Basel 3 Common Equity Tier 1 (CET1) March 2015 v September 2014 Capital Deductions represents the movement in retained earnings in deconsolidated entities, capitalised software and other intangibles in the period. 9.3 million ordinary shares were issued under the Dividend Reinvestment R Plan and Bonus Option Plan for the 2014 final dividend. d March 2015 v September 2014 ANZ s CET1 ratio decreased 7 bps to 8.7% in the March 2015 half. Key drivers for f the CET1 ratioo movement during the half were: Capital generation from cash earnings which more than offset capital usage from RWA growth and other business capital deductions. d Net organic capital generation is 59 bps or $1 billion; Paymentt of the September 2014 Final Dividend (net of shares issued under the DRP) reduced CET1 ratio by 64 bps; Other impacts of -2 bps mainly due to nett impacts of non-cash earnings, net deferred tax asset a balance movements and RWA measurement changes. 40

5 APRA to Internationally Comparable 1 Common Equity Tier 1 (CET1) as at 31 March 2015 ANZ s interpretation of the regulations documented in the Basel B Committee publications; Basel 3: A global regulatory framework for more resilient banks and banking systems (June 2011) and International Convergencee of Capital Measurement and Capital Standards (June 2006) ). Also includes differences identified in PwC s report on International Comparability of Capital Ratios of Australia s Major Banks (August 2014), commissioned by the Australian Bankers Association. The above provides a reconciliation of the CET11 ratio under APRA s Basel 3 prudential capital standards to Internationally Comparable Basel 3 standards. APRA views the Basel 3 reforms as a minimum requirement and hence has not incorporated some of f the concessionss proposed in the Basel 3 rules and has also set higher requirements in other areas. As a result, Australian banks Basel 3 reportedd capital ratios will not be directly comparable with international peers. The International Comparable Basel 3 CET1 ratio incorporates differences between APRA and a both the Basel Committee Basel 3 framework (including differences identified inn the March 2014 Basel Committees Regulatory Consistency Assessment Programme (RCAP) on Basel 3 implementation in Australia) andd its application in major offshore jurisdictions. The material differences in APRA s Basel 3 and Internationally Comparable Basel 3 ratios include: Deductions Investment in insurance and banking associates APRA requires full deduction against CET On an Internationally Comparable basis, these investments are subject to a concessional threshold before a deduction is required. Deferred tax assets A full deductionn is required fromm CET1 for deferred tax assets (DTA) relating to temporary differences. On an Internationally Comparable basis, thiss is first subject to a concessional threshold before the deduction is required. Capitalised expensess net of deferred fee income Adjustments to CET1 for capitalised expenses andd deferred fee income are not required under an Internationally Comparable basis. Risk Weighted Assets (RWA) IRRBB RWA APRAA requires inclusion of Interest Rate Risk in the Banking Book (IRRBB) within the RWA base for the CET1 ratio calculation. This is not required under an Internationally Comparable basis. Mortgages RWA APRA imposes a floor of 20% on the downturn Loss Given Defaultt (LGD) used in credit RWA calculations for residential mortgages. The Internationally Comparable Basel 3 framework only requires downturn LGDD floor of 10%. Specialised Lending - APRA requiress the supervisoryy slotting approach be used in determining credit RWA for specialised lending exposures. The Internationally Comparable basis allows for the advanced internal ratings based approach to be used when calculating RWA for these exposures. Unsecured Corporate Lending LGD Adjustment to align ANZ s unsecured corporate lending LGD to 45% to be consistent with banks in other jurisdictions. The 45% LGD ratee is also used in the Foundation Internal Ratings-based approachh (FIRB). Undrawn Corporate Lending Exposure at Default (EAD) To adjust ANZ s credit conversion factors (CCF) for undrawn corporate loan commitments to 75% (used in FIRB approach) a to align with banks in other jurisdictions. 41