Bank of China New Zealand Banking Group Disclosure Statement for the six months ended 30 June 2018
TABLE OF CONTENTS 1 GENERAL INFORMATION AND DEFINITIONS... 3 2 GUARANTEE ARRANGEMENTS... 3 3 DIRECTORATE... 3 4 AUDITOR... 3 5 CONDITIONS OF REGISTRATION... 4 6 PENDING PROCEEDINGS OR ARBITRATION... 4 7 CREDIT RATINGS... 4 8 OTHER MATERIAL MATTERS... 4 9 DISCLOSURE STATEMENT OF REGISTERED BANK AND FINANCIAL STATEMENT OF OVERSEAS BANKING GROUP.. 4 10 DIRECTORS' AND NEW ZEALAND CHIEF EXECUTIVE OFFICER S STATEMENTS... 5 FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 JUNE 2018... 6-2 -
Disclosure Statement for the six months ended 30 June 2018 1 GENERAL INFORMATION AND DEFINITIONS The Disclosure Statement is for the six months ended 30 June 2018. Certain information contained in this Disclosure Statement is required by section 81 of the Reserve Bank of New Zealand Act 1989 ( Reserve Bank Act ) and the Registered Bank Disclosure Statements (Overseas Incorporated Registered Banks) Order 2014 (as amended) (the Order ). In this Disclosure Statement: The Overseas Bank and "BoC" mean Bank of China Limited; The Overseas Banking Group means the total worldwide business of BoC including its controlled entities; The Branch means the New Zealand Branch of the Overseas Bank; "BoC NZ" means Bank of China (New Zealand) Limited, the locally incorporated subsidiary of the Overseas Bank; The "NZ Banking Group" means the New Zealand operations of the Overseas Bank comprising the Branch and BoC NZ; "Board" means the board of directors of the Overseas Bank; "RMB" means Renminbi, being the official currency of the People's Republic of China; and Reserve Bank means the Reserve Bank of New Zealand. Words and phrases not defined in this Disclosure Statement, but defined by the Order, have the meaning given by the Order when used in this Disclosure Statement. All amounts referred to in this Disclosure Statement are in New Zealand dollars unless otherwise stated. 2 GUARANTEE ARRANGEMENTS No material obligations of the Overseas Bank that relate to the Branch are guaranteed as at the date of signing this Disclosure Statement. 3 DIRECTORATE Deqi Ren resigned as director of the Overseas Bank, effective 12 June 2018. Xiangdong Zhang resigned as director of the Overseas Bank, effective 29 June 2018. Nout Wellink ceased to be a director on 29 June 2018. With the exception of the above, there have been no other changes to the composition of the Board since 31 December 2017 The Directors of the Overseas Bank (the Directors ) at the date when this Disclosure Statement was signed were: Siqing Chen (Chairman of the Board), Jucai Li, Lihong Xiao, Xiaoya Wang, Jie Zhao, Zhengfei Lu, Cheuk Yan Leung, Changyun Wang, Angela Chao. The Chief Executive Officer of Bank of China Limited, New Zealand Branch ( New Zealand Chief Executive Officer ) is Lei Wang Each of the Directors of the Board named above has authorised Mr. Lei Wang in writing to sign this Disclosure Statement on their behalf in accordance with section 82 of the Reserve Bank Act. 4 AUDITOR The name and address of the Bank's auditor whose report is referred to in this Disclosure Statement is: Ernst & Young EY Building 2 Takutai Square Britomart Auckland 1010 New Zealand. - 3 -
Disclosure Statement for the six months ended 30 June 2018 5 CONDITIONS OF REGISTRATION During the reporting period there were no changes to the Bank s conditions of registration. 6 PENDING PROCEEDINGS OR ARBITRATION the date of this Disclosure Statement, there are no pending legal proceedings or arbitration concerning any member of the NZ Banking Group, or if publicly available, the Overseas Banking Group, whether in New Zealand or elsewhere, that may have a material adverse effect on the Overseas Bank or the NZ Banking Group. 7 CREDIT RATINGS The Overseas Bank has the following credit ratings as at the date this Disclosure Statement was signed. Credit ratings Standard & Poor's Moody s Investor Service Fitch Ratings Long-term counterparty credit rating A A1 A Short-term counter party credit rating A-1 Prime-1 F1 Outlook Stable Stable Stable There have been no changes to the above credit ratings since the ratings were obtained. There are no qualifications to the rating for the Overseas Bank. A credit rating is not a recommendation to buy, sell or hold securities of the Overseas Bank. Such ratings are subject to revision, qualification, suspension or withdrawal at any time by the assigning rating agency. Investors in the Overseas Bank s securities are cautioned to evaluate each rating independently of any other rating. 8 OTHER MATERIAL MATTERS There are no matters relating to the business or affairs of the NZ Banking Group which are not contained elsewhere in the Disclosure Statement and would, if disclosed, materially affect the decision of a person to subscribe for debt securities of which the Overseas Bank or any member of the NZ Banking Group is the issuer. 9 DISCLOSURE STATEMENT OF REGISTERED BANK AND FINANCIAL STATEMENT OF OVERSEAS BANKING GROUP The Disclosure Statement of the NZ Banking Group is available for download, free of charge, on BoC NZ s website (www.bankofchina.com/nz). A printed copy will also be made available, free of charge, upon request and will be dispatched by the end of the second working day after the day on which the request has been made. The most recently published financial statement of the Overseas Banking Group is available on BoC s website www.boc.cn. - 4 -
Disclosure Statement for the six months ended 30 June 2018 FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 JUNE 2018 STATEMENT OF COMPREHENSIVE INCOME... 7 STATEMENT OF FINANCIAL POSITION... 8 STATEMENT OF CHANGES IN EQUITY... 9 STATEMENT OF CASH FLOWS... 10 1 ACCOUNTING POLICIES... 11 2 OTHER OPERATING INCOME... 14 3 PROVISION FOR IMPAIRMENT LOSSESS... 14 4 CASH AND LIQUID ASSETS... 16 5 RECEIVABLES DUE FROM OTHER FINANCIAL INSTITUTIONS... 16 6 LOANS AND ADVANCES... 17 7 ASSET QUALITY... 17 8 PAYABLES DUE TO OTHER FINANCIAL INSTITUTIONS... 18 9 CUSTOMER DEPOSITS... 18 10 DEBT SECURITIES ON ISSUE... 18 11 ADDITIONAL INFORMATION ON STATEMENT OF FINANCIAL POSITION... 18 12 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES... 19 13 CONTINGENCIES AND COMMITMENTS... 21 14 RELATED PARTY TRANSACTIONS... 22 15 CONCENTRATION OF CREDIT EXPOSURES... 23 16 CONCENTRATION OF FUNDING... 25 17 INSURANCE, SECURITISATION, FUNDS MANAGEMENT, OTHER FIDUCIARY ACTIVITIES AND THE MARKETING AND DISTRIBUTION OF INSURANCE PRODUCTS... 26 18 RISK MANAGEMENT... 26 19 CAPITAL ADEQUACY... 29 20 OTHER INFORMATION ON THE OVERSEAS BANKING GROUP... 29 21 EVENTS SUBSEQUENT TO THE REPORTING DATE... 30 INDEPENDENT AUDITOR S REPORT... 31-6 -
Disclosure Statement for the six months ended 30 June 2018 STATEMENT OF COMPREHENSIVE INCOME Note Unaudited Unaudited Audited Six months Six months Year ended ended ended 30-Jun-18 30-Jun-17 31-Dec-17 Interest income 40,704 11,279 32,575 Interest expense (27,380) (5,879) (16,687) Net interest income 13,324 5,400 15,888 Other operating income 2 5,318 2,137 5,701 Net Operating Income 18,642 7,537 21,589 Operating expenses (7,641) (4,831) (12,513) Provision for impairment losses 3 (7,372) (32) (12,018) Profit/(loss) before Tax 3,629 2,674 (2,942) Income tax expense (1,040) 279 2,147 Profit/(loss) after income Tax 2,589 2,953 (795) Other comprehensive income, net of tax Items that will not be reclassified to profit or loss - - - Items that may be reclassified to profit or loss: Net change in FVOCI revaluation reserve (net of tax) 7 - - Total other comprehensive income for the period, net of tax 7 - - Total comprehensive income for the period 2,596 2,953 (795) The above statement of comprehensive income should be read in conjunction with the accompanying notes. Certain comparative numbers in the above statement of comprehensive income have been reclassified. Refer to Note 1 for further information. NZ IFRS 9 has been adopted from 1 January 2018 and has been applied in the preparation of the statement of comprehensive income. Comparative balances have not been restated. Refer to Note 1 for further information. - 7 -
Disclosure Statement for the six months ended 30 June 2018 STATEMENT OF FINANCIAL POSITION Unaudited Unaudited Audited Note 30-Jun-18 30-Jun-17 31-Dec-17 Assets Cash and liquid assets 4 60,512 44,245 238,861 Receivables due from other financial institutions 5 128,010 159,806 - Derivative assets 2,744 826 577 FVOCI securities 102,236 - - Loans and advances 6 1,838,354 416,325 1,413,797 Property and equipment 534 675 588 Deferred tax assets 7,868 1,318 4,715 Other assets 14,337 2,036 7,001 Total assets 2,154,594 625,231 1,665,641 Liabilities Payables due to other financial institutions 8 1,127,267 197,009 896,972 Derivative liabilities 674 5 490 Customer deposits 9 240,834 204,581 392,877 Debt securities on issue 10 551,484-149,656 Current tax liabilities 3,572 - - Other liabilities 15,905 5,989 11,645 Total liabilities 1,939,736 407,584 1,451,640 Head office account Branch capital - - - Retained losses (202) - (102) Total Head office account (202) - (102) Contributed equity 223,307 223,307 223,307 Reserves 7 - - Retained losses (8,254) (5,660) (9,306) Total equity 214,858 217,647 213,899 Total interest earning and discount bearing assets 2,126,808 621,236 1,665,717 Total interest and discount bearing liabilities 1,916,063 401,087 1,436,958 The above statement of financial position should be read in conjunction with the accompanying notes. NZ IFRS 9 has been adopted from 1 January 2018 and has been applied in the preparation of the statement of financial position. Comparative balances have not been restated. Refer to Note 1 for further information. - 8 -
Disclosure Statement for the six months ended 30 June 2018 STATEMENT OF CHANGES IN EQUITY For the six months ended 30 June 2018 (Unaudited) Branch capital Retained losses Banking Group Contributed equity Reserves Retained Total equity losses Balance as at 1 January 2018 - (102) 223,307 - (9,306) 213,899 Balance adjusted for adoption of NZ IFRS 9 - - - - (1,636) (1,636) Net profit attributable to shareholders - (100) - - 2,689 2,589 Total other comprehensive income for the period - - - 7-7 Balance as at 30 June 2018 - (202) 223,307 7 (8,254) 214,858 For the six months ended 30 June 2017 (Unaudited) Branch Head Office Account Branch Head Office Account Branch capital Retained losses Other members of the NZ Other members of the NZ Banking Group Contributed equity Reserves Retained Total equity losses Balance as at 1 January 2017 - - 63,307 - (8,613) 54,694 Capital injection from shareholders - - 160,000 - - 160,000 Total comprehensive income for the period - - - - 2,953 2,953 Balance as at 30 June 2017 - - 223,307 - (5,660) 217,647 Branch Head Office Account Other members of the NZ Banking Group For year ended 31 December 2017 (Audited) Contributed Retained Total equity equity Reserves losses Balance as at 1 January 2017 - - 63,307 - (8,613) 54,694 Capital injection from shareholders - - 160,000 - - 160,000 Total comprehensive income for the period - (102) - - (693) (795) Balance as at 31 December 2017 - (102) 223,307 - (9,306) 213,899 The above statement of changes in equity should be read in conjunction with the accompanying notes. NZ IFRS 9 has been adopted from 1 January 2018 and has been applied in the preparation of the statement of changes in equity. Comparative balances have not been restated. Refer to Note 1 for further information. - 9 -
Disclosure Statement for the six months ended 30 June 2018 STATEMENT OF CASH FLOWS For the period ended 30 June 2018 Cash flows from operating activities Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Interest received 37,808 11,347 29,578 Interest paid (19,744) (5,919) (12,522) Other operating income received 3,335 1,319 7,674 Operating expenses paid (7,510) (4,669) (14,050) Note Net cash flows from operating activities before changes in operating assets and liabilities 13,889 2,078 10,680 Net changes in operating assets and liabilities: Net change in loans and advances (433,551) (71,375) (1,080,833) Net change in securities (102,230) - - Net change in customer deposits (152,044) (9,599) 178,694 Net change in payables due to other financial institutions 228,306 (43,299) 654,620 Net change in receivables due from other financial institutions (127,942) (80,008) 79,673 Net change in current tax liabilities (1,528) - - Net change in other assets (4,516) (319) (57) Net change in other liabilities 2,989 685 442 Net cash flow from operating activities (576,627) (201,837) (156,781) Cash flow from investing activities Purchase of property and equipment (76) (23) (104) Purchase of available-for-sale assets - - - Net cash flow from investing activities (76) (23) (104) Cash flow from financing activities Issuance of ordinary shares - 160,000 160,000 Issuance of debt securities 401,829-149,656 Interest paid on debt securities (3,475) - (15) Net cash flow from financing activities 398,354 160,000 309,641 Effect of exchange rate changes on cash and cash equivalents - - - Net change in cash and cash equivalents (178,349) (41,860) 152,756 Cash and cash equivalents at beginning of the period 238,861 86,105 86,105 Cash and cash equivalents at end of the period 4 60,512 44,245 238,861 The above statement of cash flows should be read in conjunction with the accompanying notes. NZ IFRS 9 has been adopted from 1 January 2018 and has been applied in the preparation of the statement of cash flow. Comparative balances have not been restated. Refer to Note 1 for further information. - 10 -
1 ACCOUNTING POLICIES 1.1 Reporting Entity The reporting entity for the purpose of this Disclosure Statement is Bank of China Limited, Auckland Branch (the Branch ). The reporting group is the NZ Banking Group which is an aggregation of the Branch and Bank of China (New Zealand) Limited ( BoC NZ ), a locally incorporated subsidiary of the Bank of China (the Overseas Bank ), whose principal activity is the provision of a range of banking products and services to business, retail, corporate and institutional customers. The financial statements are for the period from 1 January 2018 to 30 June 2018 and have been prepared in accordance with the Registered Bank Disclosure Statements (Overseas Incorporated Registered Banks) Order 2014 (as amended) (the Order ). They were approved for issue by the Board of Directors of the Overseas Bank (the Board ) on 30 August 2018. 1.2 Basis of preparation (a) Statement of compliance The interim financial statements have been prepared in accordance with generally accepted accounting practice in New Zealand (NZ GAAP), the requirements of the Financial Markets Conduct Act 2013 and the Order and should be read in conjunction with the Disclosure Statement for the year ended 31 December 2017. For the purposes of complying with NZ GAAP the NZ Banking Group is a for-profit entity. These interim financial statements comply with the requirements of International Accounting Standard 34: Interim Financial Reporting, and New Zealand equivalent to International Accounting Standard 34: Interim Financial. (b) Basis of aggregation The NZ Banking Group is an aggregation of the individual financial statements of the Branch and BoC NZ. 30 June 2018, the head office account and reserves of the Branch showed loss of $202,000. All transactions and balances between entities within the NZ Banking Group have been fully eliminated where they exist. (c) Basis of measurement These interim financial statements have been prepared on a going concern basis in accordance with historical cost concepts, except by the application of fair value measurements required or allowed by relevant accounting standards. (d) Presentation currency and rounding Items included in the financial statements of the Bank are measured using the currency of the primary economic environment in which the Bank operates ( the functional currency ). All amounts contained in the financial statements are presented in thousands of New Zealand dollars, which is the Bank s functional and presentation currency, unless otherwise stated. (e) Comparative figures Certain comparative information has been reclassified to align with the presentation in the current period. These reclassifications have no impact on the overall financial performance or financial position for the comparative year. 1.3 Changes in accounting policies The same accounting policies and methods of computation have been followed in preparing these interim financial statements as were used in preparing the financial statements for the year ended 31 December 2017, except as disclosed below. The following new standards relevant to the NZ Banking Group have been adopted from 1 January 2018 and have been applied in the preparation of these interim financial statements. New Zealand equivalent to International Financial Reporting Standard 9: Financial Instruments ( NZ IFRS 9 ) NZ IFRS 9 was issued September 2014 and is effective for periods beginning on or after 1 January 2018. This standard sets - 11 -
out new requirements for classification and measurement, impairment and hedge accounting for financial assets and liabilities. It replaces NZ IAS 39 Financial Instruments: Recognition and Measurement ( NZ IAS 39 ). In November 2017, Prepayment Features with Negative Compensation (Amendments to NZ IFRS 9) was issued. This amendment allows financial assets with prepayment features that permit or require a party to a contract either to pay or receive reasonable compensation for the early termination of the contract to be measured at amortised cost or at fair value through other comprehensive income. The amendment is effective for annual periods beginning on or after 1 January 2019, but early application is permitted. The Bank adopted NZ IFRS 9 and its amendments from 1 January 2018. Classification and Measurement NZ IFRS 9 requires the classification of financial assets to be classified into three categories: amortised cost, fair value through other comprehensive income ( FVOCI ) and fair value through profit or loss ( FVTPL ) based on the entity s business model for managing the financial assets and their contractual cash flow characteristics. The contractual cash flow test is referred to as solely payment of principal and interest ( SPPI ). The business model reflects how the Bank manages the assets in order to generate cash flows. That is, whether the Bank s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. The bank classifies financial assets on the following basis: Financial assets that fail the SPPI test will be measured at FVTPL; Financial assets passing the SPPI test, a business model test assesses the objective of holding the assets: Financial assets will be measured at amortised cost if they are held within a business model where the objective is to hold financial assets in order to collect contractual cash flows; Financial assets will be measured at FVOCI if they are held within a business model where the objective is achieved by both collecting contractual cash flows and selling financial assets; Financial assets will be measured at FVTPL if they do not meet either of the criteria s above. The following table summaries the classification and measurement changes by balance sheet asset class to the Bank s financial assets on 1 January 2018, the Bank s initial application of NZ IFRS 9. There are no changes in the classification and measurement of financial liabilities of the Bank. Financial Assets Measurement category under NZ IAS 39 Measurement category under NZ IFRS 9 Original carrying amount under NZ IAS 39 New carrying amount under NZ IFRS 9 Cash and liquid assets Loans and receivables Amortised cost 238,861 238,861 Due from other financial institutions Loans and receivables Amortised cost - - Trading securities Fair value through profit or loss Fair value through profit or loss - - Derivative financial assets Fair value through profit or loss Fair value through profit or loss 577 577 FVOCI securities N/A Fair value through other comprehensive income - - Loans and advances Loans and receivables Amortised cost 1,413,797 1,411,541 Other financial assets Loans and receivables Amortised cost 4,244 4,244 Impairment Unaudited as at 1 Jan 2018 NZ IFRS 9 requires that the measurement of impairment of a financial asset be changed from incurred loss model to expected credit loss model ( ECL model ) and this approach of measurement applies to financial assets measured at amortised cost or FVOCI, loan commitments and financial guarantee contracts. The ECL is a weighted average of credit losses on financial instruments weighted at the risk of default. Credit loss is the difference between all receivable contractual cash flows according to the contract and all cash flows expected to be received by the Bank discounted to present value at the original effective interest rate, i.e. the present value of all cash shortfalls. According to the changes of credit risk of financial instruments since the initial recognition the Bank calculates the ECL by three stages: - 12 -
Stage I: The financial instruments without significant increases in credit risk after initial recognition are included in Stage I to calculate their impairment allowance at an amount equivalent to the ECL of the financial instrument for the next 12 months; Stage II: Financial instruments that have had a significant increase in credit risk since initial recognition but have no objective evidence of impairment are included in Stage II, with their impairment allowance measured at an amount equivalent to the ECL over the lifetime of the financial instruments; Stage III: Financial assets with objective evidence of impairment at the balance sheet date are included in Stage III, with their impairment allowance measured at the amount equivalent to the ECL for the financial instruments. For the previous accounting period, the impairment allowance has been measured at the amount equivalent to the ECL over the entire lifetime of the financial instrument. However, at the balance sheet date of the current period, if the financial instrument longer belongs to the situation of there being a significant increase in credit risk since initial recognition, the Bank will measure the impairment allowance of the financial instruments on the balance sheet date of the current period according to the ECL in the next 12 months. The Group shall measure ECL of a financial instrument in a way that reflects: An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes: The time value of money; and Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. Balance sheet impact of the adoption of NZ IFRS 9 The following table reconciles the balance sheet from NZ IAS 39 to NZ IFRS 9 as at 1 January 2018. Loans and advances NZ IAS 39 carrying amount as at 31 December 2017 1,413,797 Remeasurement of provision for impairment losses (2,256) NZ IFRS 9 carrying amount as at 1 January 2018 1,411,541 Deferred tax NZ IAS 39 carrying amount as at 31 December 2017 4,715 Increase in deferred tax asset arising from remeasurement of provision for impairment losses 620 NZ IFRS 9 carrying amount as at 1 January 2018 5,335 Retained losses NZ IAS 39 carrying amount as at 31 December 2017 (9,408) Transition adjustment to retained earnings in relation to adoption of NZ IFRS 9 (1,636) NZ IFRS 9 carrying amount as at 1 January 2018 (11,044) Considering the impact of NZ IFRS 9, and interpretations on the financial statements, the Bank will record an adjustment to 1 January 2018 shareholders equity at the adoption date, but will not restate comparative periods. New Zealand equivalent to International Financial Reporting Standard 15: Revenue from Contracts with Customers ( NZ IFRS 15 ) NZ IFRS 15 was issued July 2014 and is effective for periods beginning on or after 1 January 2018. Under NZ IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in NZ IFRS 15 provide a more structured approach to measuring and recognising revenue. NZ IFRS 15 does not apply to revenue associated with financial instruments, and therefore, will not impact majority of the Bank s revenue. Accordingly, NZ IFRS 15 has no significant impact on these interim financial statements. Changes to Comparatives Interest income and other operating income - 13 -
Certain comparatives have been reclassified in relation to interest income and other operating income to ensure consistency with the presentation in the current period. Lending and credit facility related fee income that are an integral part of the effective interest rate of a loan or facility has been reclassified from other operating income to interest income. The reclassification was made to better reflect the Bank s treatment of interest income and the application of the effective interest method. The following amounts have been reclassified for the six months ended 30 June 2017 and year ended 31 December 2017. These reclassifications have no impact on the overall financial performance or financial position for the comparative periods. Six months ended Year ended 30-Jun-17 31-Dec-17 Interest income (reported) 9,865 28,498 Interest income (reclassified) 11,279 32,575 Net interest income (reported) 3,986 11,811 Net interest income (reclassified) 5,400 15,888 Other operating income Lending and credit facility related fee income (reported) 1,695 5,082 Lending and credit facility related fee income (reclassified) 281 1,005 2 OTHER OPERATING INCOME Unaudited Unaudited Audited Six months Six months Year ended ended ended 30-Jun-18 30-Jun-17 31-Dec-17 Lending and credit facility related fee income 759 1,695 5,082 Fund management fee income 1,204-1,720 Other fees and commissions 1,803 1,249 1,715 Foreign currency exchange gains/(losses) 1,552 607 1,261 Total other operating income 5,318 3,551 9,778 Certain comparative numbers in the above note have been reclassified. Refer to Note 1 for further information. 3 PROVISION FOR IMPAIRMENT LOSSESS For the six months ended 30 June 2018 Unaudited Financial assets and credit commitments Residential mortgages Corporate exposures Other exposures 1 Total credit exposures Collective provision for doubtful debts measured on a 12 months ECL 745 4,186 634 5,565 Provision for doubtful debts for assets measured on a lifetime ECL - Collective provision for doubtful debts for assets not credit impaired - 750-750 Collective provision for doubtful debts for credit impaired assets - - - - Individual provision for doubt debts for credit impaired assets - 16,268-16,268 Total provision for impairment losses 745 21,204 634 22,583 1 Excludes sovereigns and central banks and includes credit commitments. - 14 -
The following table reconciles the opening balance to the closing balance of provision for impairment losses and shows the movement in opening balance where financial assets have transferred between provision stages during the reporting period. For the six months ended 30 June 2018 Unaudited Collective Provision 12 months ECL Collective provision lifetime ECL not credit impaired Collective provision lifetime ECL credit impaired Individual provision lifetime ECL credit impaired Residential mortgages Balance at beginning of period - - - - - Restated for adoption of NZ IFRS 9 388 - - - 388 Charge to income statement excluding transfer between ECL stages 357 - - - 357 Movement to the opening balance due to transfer between ECL Transferred to collective provision 12 months ECL - - - - - Transferred to collective provision lifetime ECL not credit - - - - - Transferred to collective provision lifetime ECL credit impaired - - - - - Transferred to individual provision lifetime ECL credit - - - - - Impact on period end ECL of exposures transferred between stages during the period - - - - - Total provision for residential mortgages 745 - - - 745 Corporate exposure Balance at beginning of period 3,046 - - 9,909 12,955 Restated for adoption of NZ IFRS 9 1,417 - - 1,417 Charge to income statement excluding transfer between ECL stages 98 375 6,359 6,832 Movement to the opening balance due to transfer between ECL Transferred to collective provision 12 months ECL - - - - - Transferred to collective provision lifetime ECL not credit (375) 375 - - - Transferred to collective provision lifetime ECL credit impaired - - - - - Transferred to individual provision lifetime ECL credit - - - - - Impact on period end ECL of exposures transferred between stages during the period - - - - - Total provision for corporate exposure 4,186 750-16,268 21,204 Other exposures 1 Balance at beginning of period - - - - - Restated for adoption of NZ IFRS 9 451 - - - 451 Charge to income statement excluding transfer between ECL stages 183 - - - 183 Movement to the opening balance due to transfer between ECL - Transferred to collective provision 12 months ECL - - - - - Transferred to collective provision lifetime ECL not credit - - - - - Transferred to collective provision lifetime ECL credit impaired - - - - - Transferred to individual provision lifetime ECL credit - - - - - Impact on period end ECL of exposures transferred between stages during the period - - - - - Total provision for other exposures 634 - - - 634 Total Balance at beginning of period 3,046 - - 9,909 12,955 Restated for adoption of NZ IFRS 9 2,256 - - - 2,256 Charge to income statement excluding transfer between ECL stages 638 375-6,359 7,372 Movement to the opening balance due to transfer between ECL - - - - - Transferred to collective provision 12 months ECL - - - - - Transferred to collective provision lifetime ECL not credit (375) 375 - - - Transferred to collective provision lifetime ECL credit impaired - - - - - Transferred to individual provision lifetime ECL credit - - - - - Impact on period end ECL of exposures transferred between stages during the period - - - - - Total provision for impairment losses 5,565 750-16,268 22,583 1 Excludes sovereigns and central banks and includes credit commitments. Total - 15 -
At 30 June 2018, The NZ Banking Group has identified a loan with a carrying value of 19.22million (NZ$32.63 million), gross of provisions for impairment losses, to be impaired. The loan is impaired on the basis of objective evidence indicating the recoverable amount of the loan is less than the carrying value. The information surrounding the financial condition of the borrower and recoverability of the loan is complex in nature and limited in availability. Judgement and estimation are required in determining the amount of the provision for impairment loss. The provision for impairment loss on the loan reflects management s best estimate of loss incurred and the amount recovered may be more or less than the provision recognised at 30 June 2018. However, there is a high degree of judgement and uncertainty in the provision and the loss ultimately suffered by the bank may be significantly greater or less than the amount provided. 4 CASH AND LIQUID ASSETS Reconciliation of cash and cash equivalents Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Cash and balances with central banks 27,086 31,196 212,152 Current deposits in other institutions 3,075 4,219 - Transaction balances with other institutions 30,351 8,830 26,709 Total cash and liquid assets 60,512 44,245 238,861 Reconciliation from net profit after tax to the net cash flows from operating activities Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Net profit/(loss) for the period from operating activities 9,662 2,674 (1,650) Adjustments for non-cash items: Provision for Impairment losses 7,371 32 12,018 Net gain/loss on disposal of FVOCI securities - - - Valuation assets/liabilities on financial instruments (1,983) (819) (84) Depreciation expense 131 162 329 Total adjustments for non-cash items 5,519 (625) 12,263 Changes in assets and liabilities Net change in payables due to other financial institutions 230,192 (43,485) 656,477 Net change in receivables due from other financial institutions (128,017) (80,066) 79,740 Net change in loans and advances (433,551) (71,375) (1,080,833) Net change in FVOCI securities (102,230) - - Net change in other assets (7,336) (192) (5,157) Net change in current tax liabilities (1,528) - - Net change in customer deposits (152,044) (9,599) 178,697 Net change in other liabilities 2,706 831 3,682 Net Changes in assets and liabilities (591,806) (203,886) (167,393) Net cash flows from operating activities (576,626) (201,837) (156,781) 5 RECEIVABLES DUE FROM OTHER FINANCIAL INSTITUTIONS Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Due from other financial institutions-term 120,761 126,536 - Due from related entities-term 7,256 33,270 - Provision for impairment (7) - - Total receivables due from other financial institutions 128,010 159,806 - - 16 -
6 LOANS AND ADVANCES Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Gross loans and advances: 1,860,303 417,294 1,426,752 Housing loans 815,381 94,401 378,373 Corporate loans 1,041,891 317,983 1,044,833 Overdrafts 3,031 4,910 3,546 Provision for impairment: 21,949 969 12,955 Collective provision 5,681 969 3,046 Individually assessed provision 16,268-9,909 Net loans and advances 1,838,354 416,325 1,413,797 7 ASSET QUALITY 30 June 2018 (Unaudited) Residential mortgages Other Retail exposures Corporate exposures Total credit exposures Neither past due nor impaired 815,381-1,012,294 1,827,675 Past due but not impaired Less than 30 days past due - - - - At least 30 days but less than 60 days past due - - - - At least 60 days but less than 90 days past due - - - - At least 90 days past due - - - - Total past due assets - - - - Individually impaired assets Balance at beginning of the year - - 33,028 33,028 Additions - - - - Amounts written off - - - - Return to performing or repaid - - (400) (400) Balance at end of the period - - 32,628 32,628 Total gross loans and advances 815,381-1,044,922 1,860,303 Individually assessed provisions Balance at beginning of the period - - 9,909 9,909 Balance adjusted for adoption of NZ IFRS 9 - - - - New provision - - 6,359 6,359 Recoveries - - - - Write-back of impairment charges on loan - - - - Bad debts written off - - - - Other - - - - Balance at end of the period - - 16,268 16,268 Collectively assessed provisions Balance at beginning of the period - - 3,046 3,046 Balance adjusted for adoption of NZ IFRS 9 388 1,417 1,805 New provision 357-473 830 Recoveries - - - - Write-back of impairment charges on loan - - - - Bad debts written off - - - - Other - - - - Balance at end of the period 745-4,936 5,681 Total provision for credit impairment 745-21,204 21,949 Total net loans and advances 814,636-1,023,718 1,838,354-17 -
8 PAYABLES DUE TO OTHER FINANCIAL INSTITUTIONS Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Due to other financial institutions 406,026 15,858 302,002 Due to related entities 721,241 181,151 594,970 Total payables due to other financial institutions 1,127,267 197,009 896,972 9 CUSTOMER DEPOSITS Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Term deposits 183,694 133,102 339,586 Saving/Demand deposits 50,235 67,871 47,215 Margin deposits 6,905 3,608 6,076 Total customer deposits 240,834 204,581 392,877 The Branch held no retail deposits as at 31 December 2017 (31 December 2016: nil). 10 DEBT SECURITIES ON ISSUE Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Certificate of deposits - - - Medium-term notes 500,000-150,000 Other debt securities 52,000 - - Total debt securities issued 552,000-150,000 Debt securities issued at fair value - - - Debt securities issued at face value 552,000-150,000 Total debt securities issued 552,000-150,000 Movement in debt securities issued Balance at beginning of the year 149,656 - - Issuance during the year 428,000-150,000 Repayments during the year (26,000) - - Net effect of transaction costs and accruals (172) - (344) Balance at the end of the year 551,484-149,656 11 ADDITIONAL INFORMATION ON STATEMENT OF FINANCIAL POSITION Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Total interest earning and discount bearing assets 2,126,808 621,236 1,665,717 Total interest and discount bearing liabilities 1,916,063 401,087 1,436,958 Financial assets pledged as collateral - - - Total amount due from related entities 45,321 44,083 30,283 Total amount due to related entities 721,241 181,151 594,970 Total liabilities of the Branch, net of amounts due to related entities 1,218,495 226,432 856,670-18 -
12 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the NZ Banking Group is the current bid price. Derivative contracts classified as held for trading are fair valued by comparing the contracted rate to the current market rate for a contract with the same remaining period to maturity. The fair value of currency swaps and forwards are calculated using an interpolation method which is a method of constructing new data points within the range of a discrete set of known data points determined by using forward exchange market rates at the reporting date. Fair value hierarchy of financial instruments measured at fair value All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: (a) Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) (b) Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable (level 2), and (c) Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable (level 3). The NZ Banking Group considers transfers between levels of the fair value hierarchy, if any, to have occurred at the beginning of the respective reporting period. There were no transfers between any of the levels in the six months ended 30 June 2018 (six month ended 30 June 2017: nil; year ended 31 December 2017: nil) The following table summarisies the attribution of financial instruments carried at fair value to the fair value hierarchy: 30 June 2018 (Unaudited) Financial assets Level 1 Level 2 Level 3 Total Trading securities - - - - Derivative financial assets - 2,744-2,744 FVOCI securities - 102,236-102,236 Total financial assets carried at fair value - 104,980-104,980 Financial liabilities Trading liabilities - - - - Derivative financial liabilities - 674-674 Debt securities issued at fair value - - - - Total financial liabilities carried at fair value - 674-674 30 June 2017 (Unaudited) Financial assets Level 1 Level 2 Level 3 Total Trading securities - - - - Derivative financial assets - 826-826 Available-for-sale securities - - - - Total financial assets carried at fair value - 826-826 Financial liabilities Trading liabilities - - - - Derivative financial liabilities - 5-5 Debt securities issued at fair value - - - - Total financial liabilities carried at fair value - 5-5 - 19 -
31 December 2017 (Audited) Financial assets Level 1 Level 2 Level 3 Total Trading securities - - - - Derivative financial assets - 577-577 Available-for-sale securities - - - - Total financial assets carried at fair value - 577-577 Financial liabilities Trading liabilities - - - - Derivative financial liabilities - 490-490 Debt securities issued at fair value - - - - Total financial liabilities carried at fair value - 490-490 Fair value of financial instrument not measured at fair value Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. New Zealand Equivalent to International Financial Reporting Standard 7 Financial Instruments: Disclosure (NZ IFRS 7) requires the disclosure of fair value of those financial instruments not carried at fair value in balance sheet. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value disclosure does not cover those assets and liabilities that are not considered to be financial instruments, such as fixed assets. The following table summarises the carrying amounts and the estimated fair values of those financial instruments not measured at fair value: Unaudited Unaudited 30 June 2018 30 June 2017 Fair Value Carrying Carrying Fair Value Amount Amount Audited 31 December 2017 Carrying Fair Value Amount Financial Assets Cash and liquid assets 60,512 60,512 44,245 44,245 238,861 238,861 Receivables due from other financial institutions 128,010 128,010 159,806 159,806 - - Loans and advances 1,829,014 1,838,354 413,713 416,325 1,400,073 1,413,797 Other financial assets 7,065 7,065 1,053 1,053 4,244 4,244 Total financial assets 2,024,601 2,033,941 618,817 621,429 1,643,178 1,656,902 Financial liabilities Payables due to other financial institutions 1,127,267 1,127,267 197,009 197,009 896,972 896,972 Customer deposits 240,844 240,834 204,584 204,581 392,876 392,877 Debt securities on issue 556,487 551,484 - - 151,803 149,656 Other financial liabilities 5,203 5,203 884 884 3,031 3,031 Total financial liabilities 1,929,801 1,924,788 402,476 402,473 1,444,682 1,442,536 The following methods and assumptions were used to estimate the fair values: Cash and liquid assets, Due from central banks and other institution, Due to central banks and other institution These assets and liabilities are primarily short term in nature or are receivable or payable on demand. In such cases the carrying amounts approximate their fair value or have been determined using discounting cash flow models based on observable market prices as appropriate. Trading securities, Available for sale investments and Trading liabilities. Trading securities include treasury bills, bank bills and bonds, promissory notes, and government and other securities. Trading liabilities include short sales of securities. Available for sale investments include listed equity securities and other securities. These assets and liabilities are recorded at fair value based on quoted closing market prices as at the reporting date. Where quoted market prices are not available, the NZ Banking Group obtains the - 20 -
fair value by means of discounted cash flows and other valuation techniques based on observable market prices. Loans and advances to customers The carrying value of loans and advances is net of allowance for impairment losses, credit risk adjustment, unearned and deferred income. Floating rate loans to customers generally reprice within six months, therefore, their fair value is assumed to equate their carrying value. For fixed rate loans, the fair value is estimated by discounting the expected future cash flows based on maturity of the loans and advances, using current market interest rates of similar types of loans and advances or interest rate swap rates. Derivative financial instruments The fair value of trading and hedging derivative, including foreign exchange contracts, interest rate swap, interest rate and currency option contracts, and currency swaps, are obtained from observable market prices as at the reporting date, discounted cash flow models or option pricing models as appropriate. Deposits from customers With respect to Deposits from customers, the fair value of non-interest-bearing, call and variable rate deposits and fixed rate deposits repricing within six months is approximated as the carrying value as at the reporting date. For other fixed rate term deposits, the fair value is estimated by discounting the cash flow based on the maturity of the deposit, using current market rates. Debt Securities Debt Securities are recorded at fair value based on a discounted cash flow model using a yield curve appropriate to the remaining maturity of the instruments. This is based on observable market prices as at the reporting date where available, otherwise alternative observable market source data is used. Other financial assets and liabilities For these balances, such as receivable and payable accrued interest, the carrying amount is considered to approximate the fair value, as they are short term in nature or are receivable / payable on demand. 13 CONTINGENCIES AND COMMITMENTS Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Lease commitments: One year or less 255 221 312 Between one and five years 890 823 890 Over five years 278 463 390 Total lease commitments 1,423 1,507 1,592 Capital commitments: Due within one year - - - Due within two year or more - - - Total capital commitments - - - Credit related commitments and contingent liabilities: Commitments to extend credit 447,569 181,738 392,687 Trade letters of credit - - - Standby letters of credit 38,467 8,582 37,431 Total credit related commitments and contingent liabilities 486,036 190,320 430,118 Other contingent liabilities - - - Total commitments and contingent liabilities 487,459 191,827 431,710-21 -
14 RELATED PARTY TRANSACTIONS The NZ Banking Group undertakes transactions with BoC and it s controlled entities (the Overseas Banking Group ). 30 June 2018, the NZ Banking Group had no controlled entities. Transactions with related parties Unaudited Unaudited Audited Six months Six months Year ended ended ended 30-Jun-18 30-Jun-17 31-Dec-17 Interest income Received from related parties 37 127 224 Interest expense Paid to related parties 11,739 3,553 8,520 Non-interest income Received from related parties 952 109 725 Operating expenses Paid to related parties 149 (1) 32 Balances with related parties Unaudited Unaudited Audited 30-Jun-18 30-Jun-17 31-Dec-17 Due from the Overseas Bank 42,699 32,509 29,106 Due fromothr controlled entities of the Overseas Banking Group 6,973 11,574 1,177 Total related party assets 49,672 44,083 30,283 Due to the Overseas Bank 711,177 180,051 585,374 Due to other controlled entities of the Overseas Banking Group 10,064 1,100 9,596 Total related party liabilities 721,241 181,151 594,970-22 -
15 CONCENTRATION OF CREDIT EXPOSURES 15.1 Concentration of credit exposures The NZ Banking Group s concentrations of credit exposures arise where the NZ Banking Group is exposed to risk in activities or industries of a similar nature, and in particular geographies. Australia and New Zealand Standard Industrial Classification (ANZSIC) 2006 codes have been used as the basis for disclosing customer and industry sectors. The credit concentration is monitored as part of the NZ Banking Group s credit risk management framework on a regular basis. The analysis by industry and by geographical location is as follows: 30 June 2018 (Unaudited) Industry sector Cash and liquid assets Due from other financial institutions Loan and advances with Interest receivable FVOCI securities Other financial assets Credit Total (on Commitments balance and sheet) contingent liabilities Agriculture - - 42,077 - - 42,077 12,350 Forestry and Fishing - - 69,592 - - 69,592 806 Manufacturing - - 190,893 - - 190,893 125,746 Electricity, gas, water and waste services - - 46,446 - - 46,446 7,900 Construction - - 114,285 - - 114,285 98,773 Wholesale trade - - 31,288 - - 31,288 21,106 Retail trade - - 4,181 - - 4,181 - Accommodation and food services - - 17,026 - - 17,026 - Transport, postal and warehousing - - 49,094 - - 49,094 - Information media and telecommunications - - 14,068 - - 14,068 1,641 Financial and insurance services 60,512 128,017 64,443 - - 252,972 29,562 Rental, hiring and real estate services - - 378,839 - - 378,839 42,992 Professional, scientific and technical services - - - - - - 50,000 Administrative and support services - - 17,074 - - 17,074 - Public administration and safety - - - 102,236-102,236 90,000 Arts and recreation services - - 3,870 - - 3,870 1,040 Personal lending - - 816,715 - - 816,715 4,086 Other Services - - 5,831-12,396 18,227 34 Subtotal 60,512 128,017 1,865,722 102,236 12,396 2,168,883 486,036 Provisions for impairment losses on loans and advances - 7 21,949 - - 21,956 627 Total credit exposures 60,512 128,010 1,843,773 102,236 12,396 2,146,927 485,409 Geographic area New Zealand 60,512 128,010 1,379,073 102,236 12,396 1,682,227 448,453 Overseas - - 464,700 - - 464,700 36,956 Total credit exposures 60,512 128,010 1,843,773 102,236 12,396 2,146,927 485,409 15.2 Concentration of credit exposure to individual counterparties Credit exposure is calculated on the basis of actual exposures net of individual credit impairment provision. In addition, credit exposures to individual counterparties (not being members of a group of closely related counterparties) and to groups of closely related counterparties exclude exposures to the central government of any country with a long-term credit rating of A- or A3 or above, or its equivalent, or to any bank with a long-term credit rating of A- or A3 or above, or its equivalent. Credit exposures to individual counterparties relate only to exposures held in the financial records of the NZ Banking Group and exclude exposures booked outside of New Zealand. - 23 -