Exhibit 99.1

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2018 ANNUAL REPORT

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CONTENTS
Our 2018 Reporting Suite 03
2018 Performance Snapshot 04
About Our Business 05
Chairman’s Message 06
CEO’s Message 08
Our Strategy 10
Our Performance 14
Governance 28
Our Approach to Risk Management 38
Remuneration Report 40
Directors’ Report 68
Lead Auditor’s Independence Declaration 70
Financial Report 71
Shareholder Information 172
Glossary 180
Contacts 182

OUR 2018

REPORTING

SUITE

We produce a suite of reports to meet the evolving needs and requirements of a wide range of stakeholders, including investors, customers, employees, regulators, non-government organisations and the community.

OUR CORE REPORTING SUITE

This report, our 2018 Annual Report, details our performance, governance framework and how we have remunerated our Senior Executives in light of that performance.

Our 2018 Annual Review draws on aspects of the International Integrated Reporting Framework and describes how our business model, strategy, governance and risk-management processes are addressing our most material issues and delivering value for our shareholders and other stakeholders.

Our 2018 Corporate Governance Statement discloses how we have complied with the ASX Corporate Governance Council’s ‘Corporate Governance Principles and Recommendations – 3rd edition’. We also provide our Principal Risks and Uncertainties. These documents are available at anz.com/corporategovernance.

Our Sustainability Review provides stakeholders with more detailed disclosures, including: performance against our sustainability targets; our approach to our priority areas of financial wellbeing, environmental sustainability and housing; and how we are managing social and environmental risk. This report will be available at anz.com/cs in December 2018.

ANZ’s 2018 reporting suite also includes the following documents available at shareholder.anz.com:

• News Release

• Consolidated Financial Report, Dividend Announcement & Appendix 4E

• Results Presentation and Investor Discussion Pack

• The Company Financial Report

• United Kingdom Disclosure and Transparency Rules Submission

• APS 330 Pillar III Disclosure

We will continue to evolve and improve our reporting suite over the coming years and welcome feedback on this report. Please address any questions, comments or suggestions to investor.relations@anz.com.

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The reports available for stakeholders are as follows, anti-clockwise from bottom left.

1. 2018 Annual Report anz.com/annualreport

2. 2018 Annual Review anz.com/annualreview

3. 2018 Corporate Governance Statement anz.com/corporategovernance

4. 2018 Sustainability Review anz.com/cs

Other financial disclosures are available on shareholder.anz.com

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2018 PERFORMANCE SNAPSHOT
Cash profit1
Net tangible assets per share
Common Equity Tier 1 Capital3
funded and facilitated in low carbon and sustainable solutions
people reached through our target to help enable social and economic participation4
of women in leadership5
in community investment6
Australia and New Zealand Institutional NPS7
Net Promoter Score Retail Australia8
3.71 MILLION
DIGITALLY ACTIVE CUSTOMERS9
$341
BILLION
IN HOME LENDING – INCREASE OF $10 BILLION9
$184
BILLION
IN RETAIL DEPOSITS – INCREASE OF $2 BILLION9
$95 BILLION
IN BUSINESS LENDING – INCREASE OF $1 BILLION9
#1
LEAD BANK FOR TRADE SERVICES10
1. On a cash profit (continuing operations) basis. Excludes non-core items included in statutory profit and discontinued operations included in cash profit. It is provided to assist readers in understanding the result of the ongoing business activities of the Group. For further information on adjustments between statutory and cash profit refer to page 15.
2. Equals shareholders’ equity less preference share capital, goodwill, software and other intangible assets divided by the number of ordinary shares.
3. APRA Basel 3 methodology.
4. Through our initiatives to support financial wellbeing including financial inclusion, employment and community programs, and targeted banking products and services for small businesses and retail customers. Refer to the 2018 Sustainability Review for methodology (to be released in December 2018).
5. Measures representation at the Senior Manager, Executive and Senior Executive levels. Includes all employees regardless of leave status but not contractors (who are included in FTE).
6. Figure includes foregone revenue of $107 million, being the cost of providing low or fee free accounts to a range of customers such as government benefit recipients, not for profit organisations and students.
7. Peter Lee Associates 2018 Large Corporate and Institutional Relationship Banking surveys, Australia and New Zealand 2018. In New Zealand ranked against the Top 4 competitors.
8. Roy Morgan Research Single Source, Australian population aged 14+, Main Financial Institution, six month rolling average to September 2018. Ranking based on the four major Australian banks.
9. Australia and New Zealand.
10. Peter Lee Associates Large Corporate and Institutional Transactional Banking surveys, Australia 2004–2018 and New Zealand 2005–2018.
4 ANZ 2018 ANNUAL REPORT

ABOUT OUR

BUSINESS

Founded in 1835 and headquartered in Australia, we provide banking and financial products and services to around eight million individual and business customers. We operate in and across 34 markets.

OUR CULTURE AND VALUES

Our values are the foundation of how we work and are supported by our Code of Conduct. All employees and contractors must comply with the Code, which contains guiding principles and sets the standards for the way we do business at ANZ.

We care about:

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OUR PURPOSE

Our purpose is to help shape a world in which people and communities thrive. That means striving to create a balanced, sustainable society in which everyone can take part and build a better life.

One of the ways we are bringing our purpose to life is through helping to address complex issues that matter to society and are core to our business and strategy. We are focusing our efforts on financial wellbeing, environmental sustainability and housing, contributing to these challenges by: developing innovative and responsible financial products and services; participating in relevant policy development and research; strengthening stakeholder partnerships; and harnessing the skills of our people.

OUR DIVISIONS

Our business is structured across the following divisions:

Australia: comprises the Retail and Business & Private Bank business units, providing a full range of banking services.

Institutional: services global institutional and corporate customers located in Australia, New Zealand, Asia, Europe, America, Papua New Guinea and the Middle East across three product sets: Transaction Banking, Loans & Specialised Finance and Markets.

New Zealand: comprises the Retail (including wealth management services) and Commercial business units, providing a full range of banking services.

Wealth Australia: provides investment, superannuation, insurance and financial advice services. Part of the Wealth Australia division is considered to be a discontinued operation.

Asia Retail & Pacific: comprises the Asia Retail and Pacific business units, connecting customers to specialists for their banking needs.

These divisions are supported by Group-wide functions including Technology, Services & Operations (TSO) and Group Centre.

Digital banking, which forms part of Group Centre, leads the strategic development and delivery of a superior digital experience for the bank’s customers and staff.

ABOUT OUR BUSINESS 5



				CHAIRMAN’S MESSAGE

				DAVID GONSKI, AC

						THIS SIMPLIFICATION OF OUR BUSINESS IS CRITICAL. WE KNOW A SIMPLER BANK IS MORE FOCUSED AND EASIER TO MANAGE IN AN ENVIRONMENT WHERE REGULATION AND COMPLIANCE IS INCREASING.

				This was a challenging year for both ANZ and the entire banking industry. Our statutory profit was $6,400 million, flat since 2017. Cash profit for ANZ’s continuing operations (which excludes non-core items and the discontinued Wealth businesses from the statutory profit) was $6,487 million, down 4.7%.		The final dividend of 160 cents per share fully franked was unchanged from 2017. This reflects a dividend payout ratio of 79.5% of cash profit (total Group), with $4.6 billion in dividends paid to shareholders. This is above our target fully franked payout ratio of 60-65% of cash profit (total Group), however our strong capital position has allowed us to maintain a stable dividend. While growth was subdued, particularly in Australian retail banking, the fundamentals of our business remain sound. We recognised many of the headwinds facing the sector early and the actions commenced several years ago to simplify our business are now benefiting shareholders. During the year, we announced the sale of both our Pensions and Investments businesses to IOOF and our Life Insurance businesses to Zurich, as well as the sale of our Life Insurance business in New Zealand to Cigna. We also increased our focus on Institutional banking with the announced sale of our Retail and Commercial business in Papua New Guinea to Kina Bank and the sale of our ANZ Royal Bank (Cambodia) joint venture to J Trust. We completed the sale of our minority stake in Shanghai Rural Commercial Bank and the sale of our share in the Philippines-based Metrobank Card Corporation joint venture. A highlight of the year was completing the complex separation of our six retail and wealth businesses in Asia on time and under budget. This simplification of our business is critical. We know a simpler bank is more focused and easier to manage in an environment where regulation and compliance is increasing. We have rebalanced our business, improved the returns of the Institutional division, delivered consistent outcomes in New Zealand and we are directing investment and capital to our areas of strategic focus such as Australian home owners.

6 ANZ 2018 ANNUAL REPORT

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EARNING TRUST

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been confronting for all of us at ANZ, including the Board. We are unanimous in our resolve to build a company of which we and all of our stakeholders can be proud.

We recognise this has not been the case in the last decade and that we have failed in some circumstances to do the right thing and to keep the needs of our customers as our priority.

The Board and senior management will improve transparency with customers and ensure that the balance between earnings and providing worthwhile, fair and desired services to our customers is maintained at all times.

This is why we have engaged with the Royal Commission openly and constructively and will not wait for its final recommendations before taking action to ensure our failures do not occur again.

We also support strongly the approach that our Chief Executive Officer, Shayne Elliott has stated publicly which is that where ANZ has failed, we will compensate those affected quickly and fairly and take steps to ensure that it does not happen again.

The Ethics, Environment, Social and Governance Committee of the Board is active and well informed. The Board has also made it known within ANZ that asking the question ‘is this the right thing to do?’ is critical.

As you will see in the Remuneration Report, variable remuneration at all levels of ANZ has been materially reduced.

We now have a new executive team running the bank. However, accountability for our failures is still reflected in this year’s remuneration of our most senior team including our Chief Executive Officer.

While the Board itself does not receive variable compensation, it shares some accountability for what has occurred.

As an indication of the Board’s understanding of its accountability, existing Non-Executive Directors will receive in FY19 a reduction of an amount equivalent to 20% of the FY18 base Non-Executive Director fee (and in my case, 20% of my Chairman’s fee). This is in addition to the bank’s efforts to identify and fix the causes of our failures.

CAPITAL MANAGEMENT

Despite these difficult macro conditions, the progress of our transformation means we have been able to return surplus capital to shareholders while retaining appropriate flexibility to invest in our business. This year we have maintained our unquestionably strong capital levels, reducing shares on issue by 67 million (equivalent to $1.9 billion) from an announced $3.0 billion share buyback program.

OUTLOOK

We expect the trading environment in Australia to remain challenging, particularly in retail banking, as the industry responds to increasing regulation and compliance costs, as well as implementing the recommendations of the Royal Commission.

ANZ is well placed to navigate these difficult conditions given the progress of our transformation and simplification agenda. Our focus on cost and capital management and our exposure to international trade and commercial banking also positions ANZ well for the future.

I know we have the right management team in place, led by Shayne Elliott, to deliver on a strategy that will create sustained value for our shareholders, customers and employees well into the future. I know we are taking the action required to create a company we can all be proud of.

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David Gonski, AC

CHAIRMAN

CHAIRMAN’S MESSAGE 7


CEO’S MESSAGE SHAYNE ELLIOTT
				WE ARE MAKING THE INVESTMENTS REQUIRED TO BUILD A BANK WORTHY OF THE TRUST AND RESPECT OF OUR CUSTOMERS, SHAREHOLDERS AND THE COMMUNITY.






We have delivered a credible result in 2018 for shareholders, customers and employees given the significant challenges facing ANZ and the industry. The actions commenced in 2016 to simplify our business, reduce cost and rebalance capital have us well placed to meet the challenges facing the industry. OUR PROGRESS We want to do fewer things and do them really well – while ensuring they are aligned to our purpose. At the same time, we need to focus on the areas where we can win and drive a decent return for shareholders. In Australia and New Zealand we want to be the best bank for people who want to buy and own their home and for those who want to start, run or grow a small business. In Institutional banking we want to be the best bank in the world for those companies organisations that move goods and money around the region. I am confident our strategy of focus, simplification and digital transformation is right, indeed essential, for the times. A simpler organisation is less complex to manage and hence better able to deliver sustainable earnings – and when things do go wrong, we are in a better position to fix them quickly.				Retail banking in Australia is facing strong headwinds. The combined impacts of regulatory and macro prudential requirements have seen annual housing market growth slow with a substantial reduction in the average household’s potential borrowing capacity. This year we maintained our disciplined approach to home loan growth, focusing on customers who want to buy and own their own home. We have deliberately foregone short-term revenue growth and higher margins, particularly in the investor and interest-only segments. This focus has driven better risk-adjusted returns and is in the long-term interest of shareholders. Institutional banking continued to provide diversified earnings for the Group with the transformation of our business making earnings less volatile. ANZ was again named a top-four corporate bank in Asia and our position as a leading trade bank in the Asian region will be an even more important differentiator as housing credit slows in Australia. ROYAL COMMISSION This is a critical moment for the industry, our bank and our people. We continue the urgent work required to fix the significant failures highlighted by the Royal Commission. We have accepted responsibility and we are determined to improve. We have taken action to fast-track fundamental changes involving leadership, strategy, systems, people and culture. We are also making the investments required to build a bank worthy of the trust and respect of our customers, shareholders and the community. We will also compensate customers we have failed quickly and fairly and take steps to ensure that it does not happen again.

8 ANZ 2018 ANNUAL REPORT

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DIGITAL CUSTOMERS

This year we made significant gains in using digital technology to improve the services we provide to customers, while also improving our operational capacity and reducing risk.

We rolled out the New Payments Platform to more than three million retail and commercial customers, allowing them to transfer funds to other participating banks in real-time with improved data capability. This was a complex project involving more than 150 people over three years that will provide significant benefit to our customers.

During the year, we extended our leadership in mobile payments with the addition of Fitbit Pay and Garmin Pay, while adding eftpos on Apple Pay and Android Pay. In an Australian-first we now allow cash withdrawals from ANZ ATMs using any mobile device. We also introduced a new mobile banking app that remains the top-rated banking app in the Australian Apple store with almost 150,000 reviews.

In New Zealand, we made it easier for customers to interact with the bank through the introduction of a digital assistant, ‘Jamie’, using artificial intelligence technology to help customers with the top-40 most asked banking questions.

LIVING OUR PURPOSE

A crucial evolution for our business this year has been identifying, adopting and embedding a clear sense of purpose: to shape a world where people and communities thrive.

Along with our values, this underpins everything we do and will ensure all our people can undertake their work with pride and a stronger sense of ethics and fairness.

We took action to rebalance sales incentives for front-line staff, including the removal of all sales incentives for financial planners. This included offering free advice reviews for customers concerned about their current financial position.

We invested more than $137 million in the communities in which we operate, though our employee volunteering and giving programs, our grants programs, and emergency relief measures for customers and communities impacted by natural disasters.

This year sadly has been extremely tough for many of our rural and regional customers in eastern Australia and we implemented a significant package to help our customers impacted by this once in a generation drought in NSW and Queensland.

The package included reducing rates on business loans for farmers by 1% pa in all drought declared areas and setting aside $130 million for discounted loans to help farmers re-stock and re-plant for next season. All home owners in drought declared regions were also excluded from a recent interest rate increase. In addition, we donated $1 million to rural financial counselling and community grants assisting farmers in drought-affected areas.

Our purpose also guided our decision to increase our low carbon finance commitment from $10 billion to $15 billion by 2020, and since 2015 we have funded $11.5 billion in low carbon and environmentally sustainable solutions, such as renewable energy and efficient irrigation. We are reducing our lending to the most carbon-intensive sectors but doing so in a way that supports our customers in making a manageable transition to a low carbon future.

Finally, I would like to acknowledge the over 39,000 people who turn up to work every day to do a better job for our customers, shareholders and our community. While we know we still have a significant job ahead of us, we have the right team to deliver a better bank for all our stakeholders – a bank that can truly shape a world where people and communities thrive.

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Shayne Elliott

CHIEF EXECUTIVE OFFICER

CEO’S MESSAGE 9


OUR STRATEGY We have embarked on a strategy to become a simpler, better balanced and more service oriented organisation, helping our customers and our people respond to a challenging world. Becoming a simpler bank enables us to invest our resources to build better systems and processes, to fix things that are broken and to develop products, services and programs that improve the financial wellbeing of our customers and the community.
We are repositioning the bank for the longer term – focused on fewer things and doing them really well: - creating the best bank in Australia and New Zealand for home owners and small businesses - building the best bank in the world for clients driven by trade and capital flows between Australia, New Zealand and Asia - establishing a common, digital-ready infrastructure and using data to better assist our customers to succeed in a digital world. While the environment in which we operate is changing at a rapid pace, the four priorities that underpin our strategy continue to drive our transformation. We have made significant		progress over the past two and a half years, but recognise that we still have much to do. Variable remuneration is designed to focus our CEO and Disclosed Executives on key measures supporting our business strategy, and encourage the delivery of value for shareholders. Group, division and individual performance is considered to determine their variable remuneration recommendations. In respect of Group performance, an assessment against a range of annual and longer-term strategic indicators is undertaken across the categories of Risk, Financial and Discipline, Customer, and People and Reputation. Together these inform the overall Group assessment.
FOCUSING ON AREAS WHERE WE CAN WIN
ACTIONS WE ARE TAKING	OUR PROGRESS: FULL YEAR 2015 TO FULL YEAR 2018¹

Making buying and owning a home in Australia and New Zealand easy	- established dedicated Home Owners and Home Lending teams, to make buying and owning a home easy - introduced First Home Buyer coaches: mortgage and home lending experts who assist customers through the first home buying journey from start to finish, without any cost or obligation - improved communication with home loan customers transitioning from interest only to principal and interest loans, helping them prepare for increased payment amounts - acquired technology start-up REALas, assisting prospective home buyers find out accurate sale price predictions for properties on the market - provided an additional $52 billion in home lending in Australia and New Zealand - maintained market share of owner occupier customers in Australia at 16%² - maintained number 1 housing market share position in New Zealand with 31%³ share

Making starting, running and growing a small business in Australia and New Zealand easy	- continued to invest in a dedicated Business Banking proposition - introduced innovative solutions for customers including ANZ Be Business Ready (Honcho), ANZ Be Trade Ready, Employment Hero and SmartPayroll - launched BladePay™: smaller, smarter, faster payment technology - provided $95 billion business lending in Australia and New Zealand (in 2018) - grew business deposits in Australia and New Zealand by $16 billion

Being the best bank in the world for customers driven by the movement of goods and capital in our region	- ranked number one Institutional Lead Bank in Australia and New Zealand⁴ - maintained equal 4th corporate bank in Asia and improved to #1 for Overall Quality⁵ - lead bank for trade services⁶ - increased Payments and Cash Management revenue in Institutional by 9%

Links to 2018 Group performance assessment: - Continued to improve customer experience this year, with a highlight being Institutional performance in key customer satisfaction/relationship strength surveys. A disappointing Net Promoter Score (NPS)⁷ in Australia was balanced by a record NPS in New Zealand Retail.

10 ANZ 2018 ANNUAL REPORT




CREATING A SIMPLER, BETTER BALANCED BANK
ACTIONS WE ARE TAKING		OUR PROGRESS: FULL YEAR 2015 TO FULL YEAR 2018¹

Exit low return and non-core businesses		- sold or exited 21 non-core businesses, including announced divestments: - Esanda asset finance business - Wealth Australia – Life Insurance, Wealth Australia – One Path Pensions and Investments/Aligned Dealer Groups - One Path Life New Zealand and New Zealand One Path Life medical insurance book - six Asia Retail and Wealth businesses across Singapore, China, Hong Kong, Taiwan, Indonesia and Vietnam - Papua New Guinea Retail, Commercial and SME business - Metrobank Card Corporation and Shanghai Rural Commercial Bank partnerships in Philippines and China respectively and ANZ Royal joint venture in Cambodia - agreement with CMC Markets to provide the ANZ Share Investing trading platform

Reduce reliance on low-return aspects of Institutional banking		- focused on strategic Institutional customers across Australia, New Zealand and the Asia Pacific region - reduced the Institutional customer base by ~6,000, exiting off-strategy, low-return customers - reduced Institutional Total Risk Weighted Assets by $44 billion - reduced capital allocated to Institutional, from ~48%⁸ of total Group capital to ~38%⁸

Reduce operating costs and risks by removing product and management complexity		- total cost base reduced from $9.4 billion to $9.2 billion - reshaped the workforce, including introduction of agile working practices (our New Ways of Working) to the Australia and Technology divisions to increase speed-to-market for key customer initiatives - reduced full time equivalent (FTE) employees by 25% - decommissioned redundant technology applications - simplified products, including decommissioning ~140 products in Australia division

Further strengthen the balance sheet by rebalancing our portfolio		- increased Common Equity Tier 1 capital from 9.6% to 11.4% - reallocated capital to Retail and Commercial in Australia and New Zealand, from ~45%⁸ to ~60%⁸ of total Group capital - freed up over ~$12 billion in capital through announced divestments and reduction in Institutional risk weighted assets

Links to 2018 Group performance assessment: While cost outcomes were below target (resulting from the large/notable items), we maintained a strong balance sheet, and divestments during the year reduced the complexity of the Group. Total shareholder returns were positive relative to peers and return on equity was on target. Organic capital generation remained strong. Capital, funding and liquidity continued to be well above regulatory minimums.

^1. Financial comparisons are on a cash profit basis. 2018 excludes discontinued operations.

^2. Source: APRA monthly banking statistics 31 August 2018.

^3. Source: RBNZ, share of all banks as of August 2018.

^4. Peter Lee Associates 2018 Large Corporate and Institutional Relationship Banking surveys, Australia and New Zealand. In New Zealand ranked against the Top 4 competitors.

^5. Greenwich Associates 2017 Asian Large Corporate Banking Study (issued in March 2018): ANZ ranked equal No. 4 in 2016 and 2017.

^6. Peter Lee Associates Large Corporate and Institutional Transactional Banking surveys, Australia 2014–2018 and New Zealand 2005–2018.

^7. NPS is a customer loyalty metric used globally to evaluate a company’s brand, products or services. Net Promoter^® and NPS^® are registered trademarks and Net Promoter Score and Net Promoter System are trademarks of Bain & Company, Satmetrix Systems and Fred Reichheld.

^8. Based on Regulatory Capital. 2015: Institutional shown under 2015 IIB Structure, including Global Institutional and Asia Retail & Pacific. 2018 adjusted for announced divestments of OnePath, P&I, NZ OnePath, Cambodia subsidiary and ANZ PNG.


		OUR STRATEGY		11



Create a stronger sense of core purpose and ethics	- renaming both the Board Environmental, Social and Governance Committee and Responsible Business Committee to include Ethics, providing management with a further vehicle to raise ethical and conduct issues
	- developed an ethical decision-making framework which captures how we apply our purpose, values and principles to inform complex decisions
	- changed the way we pay our employees, placing a greater focus on customer outcomes

	- built momentum across our key focus areas of financial wellbeing, environmental sustainability and housing:

		- surveyed 9,500 people in ANZ Adult Financial Wellbeing Survey in Australia and New Zealand and launched an insights report, the findings of which will inform future development of products and services

		- delivered Vulnerable Customer training to 6,100 frontline employees in Australia

		- arranged 18 green bonds ($1.867 billion) on behalf of customers, including debuts in New Zealand and Asia

		- introduced interest free loans to help New Zealanders insulate their homes, with nearly 560 loans approved



Links to 2018 Group performance assessment: While there were a number of highlights during the year, such as an increase in the number of women in leadership, this was offset by employee engagement scores falling below target. Our standing in the community was impacted by significant community concern as a result of our failures highlighted by the Royal Commission.

BUILDING A SUPERIOR EVERYDAY EXPERIENCE FOR CUSTOMERS AND OUR PEOPLE TO COMPETE IN THE DIGITAL AGE

ACTIONS WE HAVE TAKEN		OUR PROGRESS: FULL YEAR 2015 TO FULL YEAR 2018¹



Build more convenient, engaging banking solutions to simplify the lives of customers and our own people	- invested in ANZ’s new Digital Banking division to support growth in priority areas
	- upgraded key digital channels resulting in improved customer experience, including through:
		- a new mobile app
		- full mobile wallet (only major bank in Australia to offer this)

		- introduction of secure biometric security for ANZ app, New Zealand Contact Centre and Institutional channels

	- continued to simplify technology architecture, decommissioning 264 applications during 2018, a 35% increase on 2017

	- rolled out New Payments Platform (NPP) to small and medium businesses and Institutional clients

	- won 12 of 13 NPP mandates from local and foreign banks

	- prepared for Open Banking through a strategic partnership with Australia’s leading data company, Data Republic, allowing sharing and analysis of data with trusted third parties in a secure environment

	- introduced a digital assistant, ‘Jamie’, using Artificial Intelligence (AI) on help.anz.co.nz, to assist customers with the top-40 most asked banking questions
Links to 2018 Group performance assessment: There was strong digital engagement with customers across the Group. The ANZ app remains the top-rated banking app in the Apple store, with almost 150,000 reviews.
^1. Financial comparisons are on a cash profit basis. 2018 excludes discontinued operations.

12 ANZ 2018 ANNUAL REPORT

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OUR

PERFORMANCE

GROUP PERFORMANCE¹

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Statutory profit after tax from continuing operations for the year ended 30 September 2018 increased 12% on the prior year to $7,095 million. Statutory return on equity from continuing operations is 12.0% and statutory earnings per share from continuing operations is 245.6 cents, an increase of 13% on prior year. The table below presents our performance on a statutory and cash basis.

GROUP PROFIT RESULTS - INCLUDING DISCONTINUED OPERATIONS

2018

2017

Income Statement

Statutory
$m

Cash $m

Statutory
$m

Cash $m

Net interest income

14,514

14,875

Other operating income

5,317

4,700

4,523

4,941

Operating income

19,831

19,214

19,398

19,816

Operating expenses

(9,248)

(8,967)

Profit before credit impairment and income tax

10,583

9,966

10,431

10,849

Credit impairment charge

(688)

(1,198)

(1,199)

Profit before income tax

9,895

9,278

9,233

9,650

Income tax expense

(2,784)

(2,775)

(2,874)

(2,826)

Non-controlling interests

(16)

(15)

Profit from continuing operations

7,095

6,487

6,344

6,809

Profit/(Loss) from discontinued operations

(695)

(682)

129

Profit

6,400

5,805

6,406

6,938

As a result of the sale of our OnePath pensions and investment (OnePath P&I) and aligned dealer groups (ADG) businesses to IOOF Holdings Limited and our life insurance business to Zurich Financial Services Australia, the financial results of these businesses being divested and associated Group reclassification and consolidation impacts are treated as discontinued operations from a financial reporting perspective (refer to page 23).


14		ANZ 2018 ANNUAL REPORT

WHY WE USE CASH PROFIT FROM CONTINUING OPERATIONS TO EXPLAIN THE GROUP’S FINANCIAL PERFORMANCE

The Group uses cash profit, a non-IFRS measure, to assess the performance of its business activities. It is an industry-wide measure which enables comparison with our peer group. We calculate cash profit by adjusting statutory profit for non-core items. In general, it represents financial performance that can be controlled by management and reflects our core business activities. We use cash profit internally to set targets and incentivise our Senior Executives and leaders through our remuneration plans. In addition, we believe cash profit from continuing operations is particularly important as we continue to strategically reposition ourselves to create a simpler, better capitalised, better balanced and more agile bank.

Cash profit and cash profit from continuing operations is not subject to audit by the external auditor. Our external auditor has informed the Audit Committee that adjustments between statutory and cash profit have been determined on a consistent basis across each of the periods presented, and the adjustments for the sale impact of Shanghai Rural Commercial Bank (SRCB) in 2018 and 2017 are appropriate.

ADJUSTMENTS BETWEEN STATUTORY AND CASH PROFIT¹

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Description of adjustments between continuing operations statutory profit and cash profit:


Adjustment		Reason for the adjustment

Revaluation of policy liabilities² 2018: ($14) million 2017: $25 million		When calculating policy liabilities, the projected future cash flows on insurance contracts are discounted to reflect the present value of the obligation, with the impact of changes in the market discount rate each period being reflected in the Income Statement. ANZ includes the impact on the re-measurement of the insurance contract attributable to changes in market discount rates as an adjustment to statutory profit to remove the volatility attributable to changes in market interest rates which reverts to zero over the life of the insurance contract.

Economic and revenue and expense hedges 2018: ($257) million 2017: $110 million		The Group enters into economic hedges to manage its interest rate and foreign exchange risk which, in accordance with accounting standards, result in fair value gains and losses being recognised within the Income Statement. ANZ removes the fair value adjustments from cash profit since the profit or loss resulting from the hedge transactions will reverse over time to match with the profit or loss from the economically hedged item as part of cash profit. This includes gains and losses arising from approved classes of derivatives not designated in accounting hedge relationships but which are considered to be economic hedges, including hedges of larger foreign exchange denominated revenue and expense streams, primarily NZD and USD (and USD correlated), as well as ineffectiveness from designated accounting hedges.

Structured credit intermediation trades 2018: ($4) million 2017: ($3) million		ANZ entered into a series of structured credit intermediation trades prior to the Global Financial Crisis with eight US financial guarantors. This involved selling credit default swaps (CDSs) as protection over specific debt structures and purchasing CDS protection over the same structures. ANZ has subsequently exited its positions with six US financial guarantors and is monitoring the remaining two portfolios with a view to reducing the exposures when ANZ deems it cost effective relative to the perceived risk associated with a specific trade or counterparty.

Sale of SRCB 2018: ($333) million 2017: $333 million		The impact of SRCB was treated as an adjustment between continuing operations statutory profit and cash profit in 2017. The rationale being the loss on reclassification to held for sale was expected to be largely offset by the release of gains deferred in equity reserves. The transaction was initially expected to complete in the 2017 financial year, however completion was delayed and the Group has recognised a net loss of $86 million in continuing cash profit in the 2018 financial year.

^1.

Information has been presented on a continuing operations basis. Discontinued operations are detailed on page 23.

^2.

Relates to policy liabilities of the Wealth business in the New Zealand division which form part of continuing operations.


OUR PERFORMANCE		15

OUR PERFORMANCE (continued)

CASH PROFIT PERFORMANCE¹

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GROUP PERFORMANCE - CASH PROFIT


	Full Year
	2018	2017
	$m	$m	Movt

Net interest income	14,514	14,875	-2%

Other operating income	4,700	4,941	-5%

Operating income	19,214	19,816	-3%

Operating expenses	(9,248)	(8,967)	3%

Profit before credit impairment and income tax	9,966	10,849	-8%

Credit impairment charge	(688)	(1,199)	-43%

Profit before income tax	9,278	9,650	-4%

Income tax expense	(2,775)	(2,826)	-2%

Non-controlling interests	(16)	(15)	7%

Cash profit from continuing operations	6,487	6,809	-5%

Cash profit from continuing operations decreased $322 million (-5%) compared with the 2017 financial year.

•

Net interest income decreased $361 million (-2%) largely due to a 12 basis point decrease in the net interest margin, partially offset by 4% growth in average interest earning assets. The lower net interest margin reflects growth in lower margin liquid assets, changes in product mix, the sale of the Asia Retail and Wealth businesses, the introduction of the major bank levy from July 2017, and the impact of higher customer remediation charges ($69 million). This was partially offset by higher deposit margins and home loans re-pricing. The increase in average interest earning assets reflects growth in ANZ’s home loans and Institutional banking portfolios, partially offset by the sale of Asia Retail and Wealth businesses.

•

Other operating income decreased $241 million (-5%) largely as a result of a $318 million decrease in Markets income, a $89 million increase in customer remediation charges, a $30 million reduction in lending fee income, and the $114 million gain on the sale of Queen street recognised in the September 2017 financial year. This was partially offset by a $335 million impact from divestments.

•

Operating expenses increased $281 million (3%) primarily due to an accelerated software amortisation charge ($251 million), higher restructuring ($165 million) and customer remediation ($108 million), Royal Commission legal costs ($55 million), higher technology and consulting fees associated with investment in digital and data capabilities, and inflation. This was partially offset by lower personnel costs due to a reduction in incentives and a 9% reduction in average FTE.

•

Credit impairment charges decreased $511 million (-43%) largely due to lower individual credit impairment charges.

¹^.	Information has been presented on a continuing operations basis. Discontinued operations are detailed on page 23.


16		ANZ 2018 ANNUAL REPORT

LARGE/NOTABLE ITEMS INCLUDED IN CASH PROFIT¹

Within continuing cash profit, the Group recognised a number of large/notable items. The impact of these items on a post-tax basis is as follows:


	Full Year
	2018		2017
Gain/(Loss) on sale of divestments	$m		$m

Asia Retail and Wealth businesses		85		(270)

Shanghai Rural Commercial Bank (SRCB)		(86)		-

UDC Finance (UDC)		11		-

Metrobank Card Corporation (MCC)		247		-

OnePath Life NZ Ltd (OPL NZ)		(3)		-

ANZ Royal Bank (Cambodia) Ltd (Cambodia JV)		(42)		-

PNG Retail, Commercial and SME		(21)		-

Divested business results

Asia Retail and Wealth businesses		24		262

SRCB		-		58

MCC		10		39

Other large/notable items

Customer Remediation		(295)		(112)

Accelerated Software Amortisation		(206)		-

Royal Commission Legal Costs		(38)		-

Restructuring		(159)		(43)

Gain on Sale of 100 Queen Street, Melbourne		-		112

Description of large/notable items:


Item		Description

Gain/(Loss) on sale of divestments		The 2018 financial year included the gain on sale upon completion of the Asia Retail and Wealth businesses and MCC, and the loss on sale from SRCB. The Group recognised a loss on reclassification of assets and liabilities to held for sale for Cambodia JV, OPL NZ, and PNG Retail, Commercial and SME. In addition, a net cost recovery for UDC was recognised in respect of the terminated transaction process. The 2017 financial year included the loss on reclassification of Asia Retail and Wealth businesses to held for sale.

Divested business results		The 2018 financial year included the divested business results of the Asia Retail and Wealth businesses and a dividend received from MCC. The 2017 financial year comprised the divested business results of the Asia Retail and Wealth businesses, and equity accounted earnings for SRCB and MCC.

Customer Remediation		Customer remediation for refunds to customers and related remediation costs primarily related to product reviews in the Australia division.

Accelerated Software Amortisation		Accelerated amortisation charge of certain software assets in the 2018 financial year, predominantly relating to the Institutional division due to a reassessment of useful lives following a review of the International business.

Royal Commission Legal Costs		External legal costs associated with responding to the Royal Commission in the 2018 financial year.

Restructuring		Restructuring to re-shape our workforce and simplify our business, largely relating to the move of the Australia and Technology divisions to agile ways of working.

Gain on Sale of 100 Queen Street, Melbourne		Gain on sale of our premises at 100 Queen Street, Melbourne in the 2017 financial year.

¹^.	Information has been presented on a continuing operations basis. Discontinued operations are detailed on page 23.


OUR PERFORMANCE		17

OUR PERFORMANCE (continued)

ANALYSIS OF CASH PROFIT PERFORMANCE¹

NET INTEREST INCOME - CONTINUING OPERATIONS¹


	Full Year
	2018	2017
	$m	$m	Movt
Cash net interest income^2,³	14,514	14,875	-2%
Average interest earning assets⁴	774,884	748,000	4%
Average deposits and other borrowings ^4,⁵	617,008	604,543	2%
Net interest margin (%) - cash^2,^3,4	1.87	1.99	-12 bps

Net interest income decreased $361 million (-2%) largely due to a 12 basis point decrease in the net interest margin, partially offset by 4% growth in average interest earning assets.

Net interest margin decreased reflecting growth in lower margin liquid assets, changes in product mix, the sale of the Asia Retail and Wealth businesses, the introduction of the major bank levy from July 2017, and the impact of customer remediation. This was partially offset by higher deposit margins and home loans re-pricing.

Average interest earning assets increased $26.9 billion (4%) reflecting ANZ’s strategic focus on home loans, in particular owner occupier, growth in liquid assets, partially offset by the completion of the Asia Retail and Wealth businesses sale.

Average deposits and other borrowings increased $12.5 billion (2%) driven by growth in customer deposits in Australia, Institutional and New Zealand divisions, partially offset by the sale of the Asia Retail and Wealth businesses.

LOGO

^1.

Information has been presented on a continuing operations basis. Discontinued operations are detailed on page 23.

^2.

Includes large/notable items of -$52 million (2017: $406 million). Excluding large/notable items, net interest income from continuing operations increased $97 million (1%) from 2017 to 2018.

^3.

Includes the major bank levy of -$355 million (2017: -$86 million).

^4.

Average balance sheet amounts include assets and liabilities of continuing operations reclassified as held for sale.

^5.

In 2018, certain instruments were reclassified from average non-deposit interest bearing liabilities to average deposit and other borrowings to better reflect their nature. Comparatives have been restated accordingly (2017: $4,357 million).


18		ANZ 2018 ANNUAL REPORT

OTHER OPERATING INCOME - CONTINUING OPERATIONS¹

Full Year

2018

2017

Movt

Net fee and commission income²

2,175

2,362

-8%

Net funds management and insurance income²

556

668

-17%

Markets other operating income

1,127

1,436

-22%

Share of associates’ profit²

183

300

-39%

Other²

659

175

large

Total cash other operating income from continuing operations³

4,700

4,941

-5%


	Total increase/ (decrease) $m	Movt	Explanation
Net fee and commission income²	(187)	-8%	Net fee and commission income decreased mainly as the result of the sale of the Asia Retail and Wealth businesses, lower lending fee income and higher customer remediation charges.

Net funds management and insurance income²	(112)	-17%	Net funds management and insurance income decreased mainly as the result of the sale of the Asia Retail and Wealth businesses, lower financial planning income and higher customer remediation charges.

Markets other operating income	(309)	-22%	Markets other operating income decreased across Franchise Trading, Balance Sheet Trading and Franchise Sales. This was primarily driven by challenging trading conditions, increased funding costs and large derivative valuation adjustments in the 2017 financial year.

Share of associates’ profit²	(117)	-39%	Share of associates’ profit decreased mainly driven by the cessation of equity accounting of SCRB and MCC as the result of sale announcements.

Other²	484	large	Other increased primarily by the loss on reclassification of the Asia Retail and Wealth businesses to held for sale in the 2017 financial year along with the gain on sale of MCC recognised in the 2018 financial year.
Total cash other operating income from continuing operations³	(241)	-5%

LOGO

^1.

Information has been presented on a continuing operations basis. Discontinued operations are detailed on page 23.

^2.

Excluding Markets.

^3.

Includes large/notable items of $223 million (2017: $91 million). Excluding large/notable items, other operating income from continuing operations decreased $373 million (-8%) from 2017 to 2018.


OUR PERFORMANCE		19

OUR PERFORMANCE (continued)

OPERATING EXPENSES - CONTINUING OPERATIONS¹

Full Year

2018

2017

Movt

Total cash operating expenses from continuing operations²

9,248

8,967

Full time equivalent staff (FTE) from continuing operations

37,860

43,011

-12%

Average full time equivalent staff (FTE) from continuing operations

40,016

44,038

-9%

Operating expenses increased by $281 million (3%). Key drivers:

•

Personnel expenses decreased $166 million (-3%) largely due to a reduction in incentives and a 9% reduction in average FTE, partially offset by higher customer remediation costs ($75 million) and wage inflation.

•

Premises expenses decreased $51 million (-6%) primarily driven by the consolidation of our property portfolio in Asia.

•

Technology expenses increased $297 million (19%) largely due to an accelerated amortisation charge for certain software assets ($251 million) and higher investment in digital and data capabilities.

•

Restructuring expenses increased $165 million associated with the move to agile ways of working in the Australian and Technology divisions and other transformation activities.

•

Other expenses increased $36 million (2%) largely related to Royal Commission legal costs ($55 million) and higher customer remediation costs ($34 million), partially offset by a reduction from the sale completion of the Asia Retail and Wealth businesses.

LOGO

CREDIT IMPAIRMENT CHARGE - CONTINUING OPERATIONS¹


	Full Year
	2018 $m		2017 $m		Movt
Individual credit impairment charge ($m)		773		1,341		-42%
Collective credit impairment charge/(release) ($m)		(85)		(142)		-40%
Credit impairment charge ($m)		688		1,199		-43%
Gross impaired assets ($m)		2,013		2,384		-16%
Credit risk weighted assets ($b)		337.6		336.8		0%
Total provision for credit impairment ($m)		3,443		3,798		-9%
Individual provision as % of gross impaired assets		45.7%		47.7%
Collective provision as % of credit risk weighted assets		0.75%		0.79%

The individual credit impairment charge decreased by $568 million (-42%) due to a $626 million (-30%) decrease in new and increased individual credit impairment charges primarily in the Institutional and New Zealand divisions. The Australia division experienced lower provisions on new impairments in Business & Private Bank, combined with higher recoveries and write-backs in the unsecured Retail portfolios. Asia Retail & Pacific division decreased $129 million (-78%) due to the sale of the Asia Retail and Wealth businesses.

The reduction in the collective credit impairment release of $57 million (-40%) was primarily driven by reduced risk profile releases across all divisions. The collective credit impairment releases for lending growth reduced reflecting growth in the Institutional and New Zealand divisions. The economic cycle adjustment charge was $25 million for the year, with increased economic cycle adjustments in the Australia division, partially offset by the part release of economic cycle adjustments in the New Zealand and Institutional divisions.

Gross impaired assets decreased $371 million (-16%) primarily driven by repayments and upgrades in the Institutional division (-$315 million), repayments in the New Zealand division (-$71 million) and a reduction in the Asia Retail & Pacific division (-$90 million) following the sale of the Asia Retail and Wealth businesses. This was offset by an increase in the Australia division ($105 million) primarily driven by a single name restructured loan. The Group’s individual provision coverage ratio on impaired assets was 45.7% at 30 September 2018 (Sep 17: 47.7%).

^1.

Information has been presented on a continuing operations basis. Discontinued operations are detailed on page 23.

^2.

Includes large/notable items of $769 million (2017: $362 million). Excluding large/notable items, operating expenses from continuing operations decreased $126 million (-1%) from 2017 to 2018.


20		ANZ 2018 ANNUAL REPORT

CREDIT IMPAIRMENT CHARGE - CONTINUING OPERATIONS¹

LOGO

DIVISIONAL PERFORMANCE - CONTINUING OPERATIONS¹

2018

Australia

Institutional

New
Zealand

Wealth
Australia²

Asia
Retail &
Pacific

TSO and
Group
Centre²

Group

Net interest margin

2.69%

0.90%

2.36%

n/a

4.30%

n/a

1.87%

Operating expenses to operating income

38.7%

57.4%

36.8%

77.6%

48.8%

n/a

48.1%

Cash profit from continuing operations ($m)

3,580

1,535

1,475

151

(306)

6,487

Net loans and advances ($b)

340.3

149.8

111.3

0.9

2.1

0.5

604.9

Customer deposits³($b)

202.7

205.8

79.8

n/a

3.5

(4.5)

487.3

Number of FTE

12,885

6,188

6,165

845

1,131

10,646

37,860

2017

Australia

Institutional

New
Zealand

Wealth
Australia

Asia
Retail &
Pacific

TSO and
Group
Centre

Group

Net interest margin

2.73%

1.03%

2.31%

n/a

3.20%

n/a

1.99%

Operating expenses to operating income

35.8%

50.0%

37.6%

66.7%

103.4%

n/a

45.3%

Cash profit from continuing operations ($m)

3,616

1,924

1,369

(157)

(38)

6,809

Net loans and advances ($b)

333.6

131.6

107.9

1.7

5.5

n/a

580.3

Customer deposits³($b)

201.3

189.0

75.3

n/a

7.0

(5.0)

467.6

Number of FTE

13,885

6,783

6,372

997

3,664

11,310

43,011

^1.

Information has been presented on a continuing operations basis. Discontinued operations are detailed on page 23.

^2.

Discontinued operations form part of Wealth Australia and TSO and Group Centre divisions. Amounts shown in the table above exclude discontinued operations.

³^.

TSO and Group Centre includes term deposits, other deposits and an adjustment in Group Centre to eliminate Wealth Australia investments in ANZ deposit products.


OUR PERFORMANCE		21

OUR PERFORMANCE (continued)



		DIVISIONAL PERFORMANCE - CONTINUING OPERATIONS¹

		Australia

		Lending volumes grew primarily in owner occupier and principal and interest home loans. Customer deposits grew mainly in small business banking and home loans (offset accounts). Net interest margin decreased as a result of home loan mix changes, customer remediation, and the introduction of the major bank levy from July 2017. This was partially offset by higher deposit margins due to re-pricing. Other operating income decreased as the result of customer remediation and lower lending fee income. Operating expenses increased due to higher customer remediation costs, an accelerated software amortisation charge, restructuring, and inflation. This was partially offset by a reduction in FTE related costs. Credit impairment charges decreased as a result of lower delinquency and higher write-backs and recoveries in cards and personal loans, lower new provisions in business banking, partially offset by a net increase in economic cycle adjustments.

		Institutional

		Lending volumes grew across all portfolios. Customer deposits grew in Markets and Transaction Banking. Net interest margin decreased largely due to the introduction of the major bank levy from July 2017, and growth in Markets liquid assets. Other operating income decreased due to lower Markets Franchise Trading income as a result of less favourable trading conditions in the 2018 financial year, and large positive derivative valuation adjustments recognised in the 2017 financial year. Operating expenses increased due to an accelerated software amortisation charge, restructuring, and inflation. This was partially offset by a reduction in FTE as the result of ongoing transformation activities and lower non-lending losses. Credit impairment charges decreased due to ongoing portfolio rebalancing and a benign credit environment.

		New Zealand

		Volumes grew in home loans and funds under management. Customer deposits grew across all portfolios. Net interest margin increased due to higher lending margins, partly offset by portfolio mix changes and lower deposit margins. Other operating income increased primarily due to a one-off insurance recovery in the 2018 financial year, partially offset by customer fee reductions. Net funds management and insurance income increased due to higher funds under management. Operating expenses increased due to customer remediation, increased business investment in digital capability, and inflation. This was partially offset by a reduction in FTE driven by customer migration to lower cost channels. Credit impairment charges decreased due to credit quality improvements across Retail and Commercial and Agri portfolios, and the release of the Agri economic cycle adjustment.

		Wealth Australia

		Income decreased as the result of higher customer remediation, and lower new business volumes in ANZ Financial Planning. Operating expenses decreased due to lower discretionary expenses, partially offset by higher customer remediation charges.

		Asia Retail & Pacific

		Asia Retail and Pacific divisional results were impacted by the sale completion of Retail and Wealth businesses in Singapore, Hong Kong, China, Taiwan and Indonesia to Singapore’s DBS Bank, and its Retail business in Vietnam to Shinhan Bank Vietnam. The Pacific business experienced lower operating income as the result of lending reductions due to portfolio rebalancing, and lower costs as the result of simplifying the business. Credit impairment charges benefited from improved credit quality and higher collections and recoveries.

		TSO and Group Centre

		TSO and Group Centre divisional results for the 2017 and 2018 financial year were impacted by a number of large/notable items. In the 2018 financial year, this included the gain on sale of MCC, loss on sale of SRCB, the loss on reclassification of assets and liabilities to held for sale for Cambodia JV, OPL NZ, and PNG Retail, Commercial and SME, Royal Commission legal costs, and higher restructuring. In the 2017 financial year, the Group recognised the gain on sale of 100 Queen Street, Melbourne and the divested business results for SRCB and MCC.

		^1. Information has been presented on a continuing operations basis. Discontinued operations are detailed on page 23.


22		ANZ 2018 ANNUAL REPORT

DISCONTINUED OPERATIONS

As a result of the sales outlined below, the financial results of the Wealth Australia businesses being divested and associated Group reclassification and consolidation impacts are treated as discontinued operations from a financial reporting perspective. These businesses qualify as discontinued operations, a subset of assets and liabilities held for sale, as they represent a major line of business.

The comparative Group Income Statement and Statement of Comprehensive Income have been restated to show discontinued operations separately from continuing operations in a separate line item ‘Profit/(Loss) from discontinued operations’. This impacts the current and comparative financial information for Wealth Australia and TSO and Group Centre divisions.

•

Sale to IOOF Holdings Limited (IOOF)

On 17 October 2017, the Group announced it had agreed to sell its OnePath pensions and investments (OnePath P&I) and aligned dealer groups (ADG) businesses to IOOF. The aligned dealer groups business consists of aligned advice businesses that operate under their own Australian Financial Services licences. The sale of the aligned dealer groups business completed on 1 October 2018. The completion of the remaining OnePath pensions and investment business is planned to occur after the successful completion of the successor fund transfer, which is expected to occur in the first half of the 2019 financial year.

•

Sale to Zurich Financial Services Australia (Zurich)

On 12 December 2017, ANZ announced that it had agreed to the sale of its life insurance business to Zurich and regulatory approval was obtained on 10 October 2018. The transaction is subject to closing conditions and ANZ expects it to complete in the first half of the 2019 financial year.

Included in the 2018 ‘Loss from discontinued operations’ is:

•

A $632 million loss (pre and post-tax) recognised on the reclassification of Wealth Australia businesses to held for sale; and

•

Customer remediation of $181 million ($127 million post-tax) for refunds to customers and related remediation costs. These items primarily relate to compensation to customers for receiving inappropriate advice or services not provided within the Group’s former aligned dealer groups.

Continuing operations includes the retained Wealth Australia division, which is made up of lenders mortgage insurance, share investing, financial planning and general insurance distribution.

EXPLANATION OF ADJUSTMENTS BETWEEN STATUTORY PROFIT AND CASH PROFIT - DISCONTINUED OPERATIONS

•

Treasury shares adjustment

ANZ shares held by the Group in Wealth Australia (Sep 18: 15.5 million shares; Sep 17: 15.4 million shares) are deemed to be Treasury shares for accounting purposes. Dividends and realised and unrealised gains and losses from these shares are reversed as these are not permitted to be recognised as income for statutory reporting purposes. In deriving cash profit, these earnings are included to ensure there is no asymmetrical impact on the Group’s profits because the Treasury shares are held to support policy liabilities which are revalued through the Income Statement.

•

Revaluation of policy liabilities

When calculating policy liabilities, the projected future cash flows on insurance contracts are discounted to reflect the present value of the obligation, with the impact of changes in the market discount rate in each period being reflected in the Income Statement. ANZ includes the impact on the re-measurement of the insurance contract attributable to changes in market discount rates as an adjustment to statutory profit to remove the volatility attributable to changes in market interest rates which reverts to zero over the life of the insurance contract.


	Full Year
	2018	2017
	$m	$m
Statutory profit/(loss) from discontinued operations	(695)		62
Adjustments between statutory profit and cash profit	13		67
Treasury shares adjustment	7		58
Revaluation of policy liabilities	6		9
Cash profit/(loss) from discontinued operations	(682)		129


OUR PERFORMANCE		23

OUR PERFORMANCE (continued)

FINANCIAL POSITION OF THE GROUP

CONDENSED BALANCE SHEET - INCLUDING DISCONTINUED OPERATIONS



	As at

	2018	2017

	$b	$b	Movt

Assets

Cash / Settlement balances owed to ANZ / Collateral paid¹	98.0	82.5	19%

Trading and available-for-sale assets¹	112.0	113.0	-1%

Derivative financial instruments¹	68.4	62.5	9%

Net loans and advances¹	603.9	574.3	5%

Investments backing policy liabilities¹	-	38.0	-100%

Assets held for sale	45.2	8.0	large

Other¹	15.1	19.0	-21%

Total assets	942.6	897.3	5%

Liabilities

Settlement balances owed by ANZ / Collateral received	18.3	15.8	16%

Deposits and other borrowings¹	618.2	595.6	4%

Derivative financial instruments¹	69.7	62.3	12%

Debt issuances	121.2	108.0	12%

Policy liabilities and external unit holder liabilities¹	-	41.9	-100%

Liabilities held for sale	47.2	4.7	large

Other¹	8.6	9.9	-13%

Total liabilities	883.2	838.2	5%

Total equity	59.4	59.1	1%

^1.

Balances exclude assets and liabilities held for sale.

•

Cash / Settlement balances owed to/by ANZ / Collateral paid/received increased $13.0 billion (19%) primarily driven by higher liquid asset holdings in Markets, increases in collateral paid, and the impact of foreign currency exchange rate movements.

•

Derivative financial assets and liabilities increased $5.9 billion (9%) and $7.4 billion (12%) respectively as foreign exchange rate and interest rate movements resulted in higher derivative fair values.

•

Net loans and advances increased $29.6 billion (5%) primarily driven by growth in home loans across the Australia and New Zealand divisions (+$10.9 billion), lending growth in the Institutional division (+$12.9 billion), UDC net loans and advances no longer being classified as held for sale (+$3.0 billion) and the impact of foreign currency exchange rate movements.

•

Assets and liabilities held for sale increased $37.2 billion and $42.5 billion respectively, primarily driven by the reclassification of Wealth Australia businesses and other smaller divestments to held for sale, partially offset by the sale completion of the Asia Retail and Wealth businesses, and UDC no longer being classified as held for sale.

•

Deposits and other borrowings increased $22.6 billion (4%) primarily driven by growth in customer deposits across Institutional, New Zealand and Australia divisions (+$9.3 billion), and a $11.4 billion increase in deposits from banks and repurchase agreements, and the impact of foreign currency exchange rate movements. This was partially offset by a reduction of $12.7 billion in certificates of deposit.

•

Debt issuances increased $13.2 billion (12%) primarily driven by senior debt issuances and the impact of foreign currency exchange rate movements.


24		ANZ 2018 ANNUAL REPORT

LIQUIDITY AND FUNDING


	2018		2017

Total liquid assets ($b)¹		191.3		180.5

Liquidity Coverage Ratio (LCR)¹		138%		135%

¹^.	Full year average, calculated as prescribed per APRA Prudential Regulatory Standard (APS 210 Liquidity) and consistent with APS 330 requirements.

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 3 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 Committed Liquidity Facility (CLF) and other eligible securities listed by the Reserve Bank of New Zealand (RBNZ).

The Group monitors and manages the size and composition of its liquid asset portfolio on an ongoing basis in line with regulatory requirements and the risk appetite set by the Board.

CAPITAL MANAGEMENT

2018

2017

Movt

Common Equity Tier 1

- APRA Basel 3

11.4%

10.6%

Credit risk weighted assets ($b)

337.6

336.8

Total risk weighted assets ($b)

390.8

391.1

APRA, under the authority of the Banking Act 1959, sets minimum regulatory requirements for banks including what is acceptable as capital and provides methods of measuring the risks incurred by the Bank.

The Group’s Common Equity Tier 1 ratio increased to 11.4% based on APRA Basel 3 standards, exceeding APRA’s minimum requirements. This increase was driven by cash earnings and divestments, outweighing the impact of dividends and share buybacks during the year.

DIVIDENDS

This performance allowed us to propose that a final dividend of 80 cents be paid on each eligible fully paid ANZ ordinary share, bringing the total dividend for the year ended 30 September 2018 to $1.60 per share. This represents a dividend payout ratio (total Group cash basis) of 79.5%.

The proposed 2018 final dividend will be fully franked for Australian taxation purposes, and New Zealand (NZ) imputation credits of NZ 10 cents per ordinary share will also be attached. It will be paid on 18 December 2018 to owners of ordinary shares at close of business on 13 November 2018 (record date).

ANZ has a Dividend Reinvestment Plan (DRP) and a Bonus Option Plan (BOP) that will operate in respect of the proposed 2018 final dividend. For the 2018 final dividend, ANZ intends to provide shares under the DRP through an on-market purchase and BOP through the issue of new shares.

Further details on dividends provided for or paid during the year ended 30 September 2018 are set out in Note 5 in the Financial Report.


OUR PERFORMANCE		25

OUR PERFORMANCE (continued)

FIVE YEAR SUMMARY


	2018¹		2017¹		2016		2015		2014

	$m		$m		$m		$m		$m

Financial performance cash²

Net interest income		14,514		14,875		15,095		14,616		13,797

Other operating income		4,700		4,941		5,499		5,921		5,781

Operating expenses		(9,248)		(8,967)		(10,439)		(9,378)		(8,760)

Profit before credit impairment and income tax		9,966		10,849		10,155		11,159		10,818

Credit impairment charge		(688)		(1,199)		(1,956)		(1,205)		(989)

Income tax expense		(2,775)		(2,826)		(2,299)		(2,724)		(2,700)

Non-controlling interests		(16)		(15)		(11)		(14)		(12)

Cash profit from continuing operations²		6,487		6,809		5,889		7,216		7,117

Cash profit/(loss) from discontinued operations		(682)		129		N/A		N/A		N/A

Cash profit		5,805		6,938		5,889		7,216		7,117

Adjustments to arrive at statutory profit²		595		(532)		(180)		277		154

Profit attributable to shareholders of the Company		6,400		6,406		5,709		7,493		7,271

Financial position

Assets		942,624		897,326		914,869		889,900		772,092

Net assets		59,383		59,075		57,927		57,353		49,284

Common Equity Tier 1		11.4%		10.6%		9.6%		9.6%		8.8%

Common Equity Tier 1 – Internationally Comparable Basel 3³		16.8%		15.8%		14.5%		13.2%		12.5%

Return on average ordinary equity (statutory)⁴		10.9%		11.0%		10.0%		14.5%		15.8%

Return on average assets (statutory)		0.7%		0.7%		0.6%		0.9%		1.0%

Cost to income ratio (cash)²		51.6%		46.1%		50.7%		45.7%		44.7%

Shareholder value – ordinary shares

Total return to shareholders (share price movement plus dividends)		0.6%		13.1%		9.2%		(7.5%)		5.9%

Market capitalisation		80,979		86,948		80,886		78,606		85,235

Dividend (cents)		160c		160c		160c		181c		178c

Franked portion – interim		100%		100%		100%		100%		100%

– final		100%		100%		100%		100%		100%

Share price – high (dollar)		$30.80		$32.95		$29.17		$37.25		$35.07

– low (dollar)		$26.08		$25.78		$21.86		$26.38		$28.84

– closing (dollar)		$28.18		$29.60		$27.63		$27.08		$30.92

Share information

(per fully paid ordinary share)

Earnings per share (cents) (statutory)		221.6		220.1		197.4		271.5		267.1

Dividend payout ratio (statutory)		72.1%		73.4%		81.9%		68.6%		67.4%

Net tangible assets per ordinary share⁵		$18.47		$17.66		$17.13		$16.86		$14.65

No. of fully paid ordinary shares issued (millions)		2,874		2,937		2,927		2,903		2,757

Dividend reinvestment plan (DRP) issue price

– interim		$27.76		$28.80		$24.82		$31.93		$33.30

– final		-		$29.02		$28.16		$27.08		$32.02

Other information

No. of employees (full time equivalents)		39,924		44,896		46,554		50,152		50,328

No. of shareholders		509,238		522,425		545,256		546,558		498,309

^1.

During 2018, part of Wealth Australia and TSO and Group Centre division was classified as a discontinued operation. 2017 comparatives have been restated accordingly. 2016 to 2014 has not been restated. All ratios are presented on a Group basis inclusive of discontinued operations across 2018 to 2014.

^2.

Cash profit excludes non-core items included in statutory profit and is provided to assist readers in understanding the result of the ongoing business activities of the Group. Cash profit is not audited; however, the external auditor has informed the Audit Committee that the adjustments have been determined on a consistent basis across each period presented, and the adjustments for the sale impact of Shanghai Rural Commercial Bank (SRCB) in 2018 and 2017 are appropriate.

^3.

Internationally Comparable Methodology applied for 2015–2018 aligns with APRA’s information paper entitled ‘International Capital Comparison Study’ (13 July 2015). Basel Internationally Comparable ratios do not include an estimate of the Basel l capital floor requirement.

^4.

Average ordinary equity excludes non-controlling interests and preference shares.

^5.

Equals shareholders’ equity less preference share capital, goodwill, software and other intangible assets divided by the number of ordinary shares.


26		ANZ 2018 ANNUAL REPORT

LOGO

From left to right: RT Hon Sir John Key, GNZM AC – Independent Non-Executive Director, John Macfarlane – Independent Non-Executive Director, Paula Dwyer – Independent Non-Executive Director, David Gonski, AC – Chairman, Independent Non-Executive Director, Graeme Liebelt – Independent Non-Executive Director, Ilana Atlas – Independent Non-Executive Director, Shayne Elliott – Chief Executive Officer, Executive Director, Jane Halton, AO PSM – Independent Non-Executive Director, Lee Hsien Yang – Independent Non-Executive Director Full biography details can be found on our website at anz.com/directors. CORPORATE GOVERNANCE FRAMEWORK CHIEF EXECUTIVE OFFICER GROUP EXECUTIVE COMMITTEE SHAREHOLDERS BOARD RESERVED POWERS AND DELEGATION OF AUTHORITY POLICY Digital Business and Technology Committee Ethics, Environment, Social and Governance Committee Human Resources Committee Audit Committee Risk Committee BOARD OF DIRECTORS GOVERNANCE BOARD OF DIRECTORS 28 ANZ 2018 ANNUAL REPORT

DIRECTORS’ MEETINGS

The number of Board meetings and meetings of Committees during the year the Director was eligible to attend, and the number of meetings attended by each Director were:


	Board		Risk Committee		Audit Committee		Human Resources Committee		Ethics, Environment, Social and Governance Committee		Digital Business and Technology Committee		Special Committee of the Board¹		Committee of the Board¹		Shares Committee¹
	A	B	A	B	A	B	A	B	A	B	A	B	A	B	A	B	A	B
Ilana Atlas	12	12			8	8	8	8	4	4			1	1	2	2	1	1
Paula Dwyer	12	12	8	8	8	8	8	8							2	2
Shayne Elliott	12	12											1	1	4	4	3	3
David Gonski, AC	12	12	8	8	8	8	8	8	4	4	4	4	1	1	4	4	3	3
Jane Halton, AO PSM	12	12					8	8	4	4	3	3	1	1	1	1
Sir John Key, GNZM AC	6	6	3	3					2	2
Lee Hsien Yang	12	12	8	8			8	8			4	4	1	1
Graeme Liebelt	12	12	8	8	8	8	8	8	1	1	1	1	1	1	2	2	1	1
John Macfarlane	12	12	8	8	8	8					4	4	1	1	1	1

Column A – Indicates the number of meetings the Director was eligible to attend as a member.

Column B – Indicates the number of meetings attended. The Chairman is an ex-officio member of the Risk, Audit, Human Resources, Ethics, Environment, Social and Governance and Digital Business and Technology Committees.

With respect to Committee meetings, the table above records attendance of Committee members. Any Director is entitled to attend these meetings and from time to time Directors attend meetings of Committees of which they are not a member.

1. The meetings of the Special Committee of the Board, Shares Committee and Committee of the Board as referred to in the table above include those conducted by written resolution.

Below from left to right: David Hisco – CEO New Zealand and Group Executive, Mark Whelan – Group Executive Institutional, Kathryn van der Merwe – Group Executive Talent and Culture, Michelle Jablko – Chief Financial Officer, Fred Ohlsson – Group Executive Australia, Shayne Elliott – Chief Executive Officer, Maile Carnegie – Group Executive Digital Banking, Kevin Corbally – Group Chief Risk Officer, Mark Hand – Group Executive, Australian Business & Private Banking, Alexis George – Deputy CEO and Group Executive Wealth Australia, Farhan Faruqui – Group Executive International, Gerard Florian – Group Executive Technology.

Full biography details can be found on our website at anz.com/exco.

LOGO


GOVERNANCE		29

LOGO

BOARD AREAS OF FOCUS This year the Board and its Committees have undertaken key strategic, governance and oversight activities, including: 32 STRATEGY AND TRANSFORMATION IMPROVING CUSTOMER OUTCOMES STRATEGY REGULATORY IMPROVING CUSTOMER OUTCOMES —Providing oversight of ANZ’s approach to customer satisfaction, including adoption of Net Promoter System and customer complaint resolution with regular discussion in relation to the key trends, themes and issues in particular divisions —Providing oversight of customer remediation activities —Discussing reports on key matters affecting customers, including in relation to the new Banking Code of Practice and ANZ’s proposed implementation of it and ANZ’s approach to: — adopting the Sedgwick recommendations; — supporting vulnerable customers; and — product suitability for customers. —Discussing ANZ’s research into financial wellbeing and the way this is informing activities across ANZ for customers, communities and employees STRATEGY —Participating in Strategy Day with CEO and Executive Committee, reviewing global trends in banking —Discussing with the CEO regular updates on ANZ’s strategic priority of creating a simpler, better balanced bank —Discussing ongoing updates and progress on business simplification, such as product, process and technology simplification —Providing oversight of the implementation of New Ways of Working (NWOW) within Australia and TSO and Group Centre divisions, including reviewing the lessons learnt at other organisations that have adopted similar methodologies; reviewing reports, including external reports, in relation to the risk assessment of the NWOW operating model and the impact of NWOW on ANZ’s Risk Management Framework —Assessing the impact of, and ANZ’s preparedness for, major technology developments such as the New Payments Platform and Open Banking —Focusing on reviewing the management of Technology Risk at ANZ 30 ANZ 2018 ANNUAL REPORT

LOGO

In addition to regular meetings of the Board in Melbourne and Sydney, the Board also met in the Australian Capital Territory and New Zealand and have participated in a number of customer and employee facing events. The Board will also have meetings in regional New South Wales and Western Australia during the remainder of the 2018 calendar year, with a focus on customer and employee engagement. CULTURAL FINANCIAL PURPOSE AND VALUES-LED TRANSFORMATION FINANCIAL $ $ PURPOSE AND VALUES-LED TRANSFORMATION — Renaming of the Environment, Sustainability and Governance Committee to the Ethics, Environment, Social and Governance Committee, providing management with a further vehicle to raise ethical and conduct issues for broader discussion with Directors —Discussing with the CEO regular updates in relation to ANZ’s strategic priority of driving a purpose and values-led transformation of the Bank to build trust and improve our employee and customer propositions —Providing oversight of the development of ANZ’s ethical decision making framework —Providing a continued focus on the oversight of ANZ’s corporate culture, including reviewing results and key themes of ANZ’s culture audits and ANZ’s staff engagement survey and following up key issues raised within those reports FINANCIAL —Reviewing and approving ANZ’s operating and funding plans —Providing oversight of capital management initiatives, including the commencement, and subsequent increase in size of ANZ’s on-market share buyback —Providing oversight of ANZ’s approach to the implementation of key accounting initiatives, including the implementation of Australian Accounting Standard AASB 9: Financial Instruments, and making key accounting judgements, including in relation to software assets amortisation, restructuring and remediation provisioning REGULATORY —Providing oversight of ANZ’s approach to preventing financial crime, including participating in an internal conference for financial crime professionals and meeting with AUSTRAC to discuss ANZ’s approach —Providing oversight of ANZ’s preparedness for the implementation of the Banking Executive Accountability Regime, including approving changes in relation to ANZ’s remuneration policy —Following the announcement of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, meeting regularly to discuss matters pertaining to it, including oversight of the approach to the remediation of matters raised at the Commission GOVERNANCE 31

GOVERNANCE (continued)

DIRECTORS’ QUALIFICATIONS, EXPERIENCE AND SPECIAL RESPONSIBILITIES

As at the date of this report, the Board comprises eight Non-Executive Directors and one Executive Director, the Chief Executive Officer. The names of the Directors, together with details of their qualifications, experience and special responsibilities are set out below. In addition, ANZ’s Board Skills Matrix (available on anz.com/CorporateGovernance) sets out the skills that ANZ considers each Director brings to the Board – notably, all Directors possess leadership and financial acumen skills, and as a group contribute many other key skills.

LOGO

DAVID GONSKI, AC

Chairman, Independent Non-Executive Director and Chair of the Ethics, Environment, Social and Governance Committee

BCom, LLB, FAICD(Life), FCPA

Chairman since 1 May 2014 and a Non-Executive Director since February 2014. Mr Gonski is an ex officio member of all Board Committees including Chair of the Ethics, Environment, Social and Governance Committee.

LOGO

SHAYNE ELLIOTT

Chief Executive Officer and Executive Director

BCom

Chief Executive Officer and Executive Director since 1 January 2016.

Chair: LOGO Member: LOGO

Career

David started his career as a lawyer at Herbert Smith Freehills, and is now one of Australia’s most respected business leaders and company directors. He has business experience in Australia and internationally, and is involved in a broad range of organisations in the government and education sectors. He is a leading philanthropist and provides strong community leadership, particularly in relation to education in Australia.

Relevant Other Directorships

•

Chairman: The University of New South Wales Foundation Limited (from 2005, Director from 1999).

•

Director: Sydney Airport Corporation Limited (from 2018), Lowy Institute for International Policy (from 2012) and Australian Philanthropic Services Limited (from 2012).

•

Member: ASIC External Advisory Panel (from 2013) and Advisory Committee for Optus Limited (from 2013).

•

Chancellor: University of New South Wales Council (from 2005).

•

President: Art Gallery of NSW Trust (from 2016).

Relevant Former Directorships held

in last three years, include

•

Former Chairman: Review to Achieve Education Excellence in Australian Schools for the Commonwealth of Australia (2017-2018), Coca-Cola Amatil Limited (2001-2017, Director from 1997) and Sydney Theatre Company Ltd (2010-2016).

•

Former Director: Singapore Telecommunications Limited (2013-2015).

Age 65 years | Residence Sydney, Australia

Career

Shayne has over 30 years’ experience in banking in Australia and overseas, in all aspects of the industry. Shayne joined ANZ as CEO Institutional in June 2009, and was appointed Chief Financial Officer in 2012.

Prior to joining ANZ, Shayne held senior executive roles at EFG Hermes, the largest investment bank in the Middle East, which included Chief Operating Officer. He started his career with Citibank New Zealand and worked with Citibank/Citigroup for 20 years, holding various senior positions across the UK, USA, Egypt, Australia and Hong Kong.

As a Director of the Financial Markets Foundation for Children, Shayne contributes to the promotion of health and welfare of Australian children. He actively engages in the promotion of Australian economic growth, social progress and public policy development through membership of the Australian Bankers’ Association (which he also Chairs) and the Business Council of Australia.

Relevant Other Directorships

•

Chairman: Australian Bankers’ Association (from 2017, Member from 2016).

•

Director: ANZ Bank New Zealand Limited (from 2009) and the Financial Markets Foundation for Children (from 2016).

•

Member: Business Council of Australia (from 2016).

Age 54 years | Residence Melbourne, Australia

32 ANZ 2018 ANNUAL REPORT

LOGO

ILANA ATLAS

Independent Non-Executive Director

and Chair of the Human Resources Committee

BJuris (Hons), LLB (Hons), LLM

Non-Executive Director since September 2014. Ilana is a member of the Audit Committee and Ethics, Environment, Social and Governance Committee.

Chair: LOGO Member: LOGO

LOGO

PAULA DWYER

Independent Non-Executive Director and

Chair of the Audit Committee

BCom, FCA, SF Fin, FAICD

Non-Executive Director since April 2012. Paula is a member of the Risk Committee and Human Resources Committee.

Chair: LOGO Member: LOGO

Career

Ilana brings a strong financial services background and legal experience to the Board. Ilana was a partner at law firm Mallesons Stephen Jaques (now King & Wood Mallesons), where in addition to her practice in corporate law, she held a number of management roles in the firm including Executive Partner, People and Information, and Managing Partner. She also worked at Westpac for 10 years, where her roles included Group Secretary and General Counsel and Group Executive, People, where she was responsible for human resources, corporate affairs and sustainability. Ilana has a strong commitment to the community, in particular the arts and education.

Relevant Other Directorships

•

Chairman: Coca-Cola Amatil Limited (from 2017, Director from 2011) and Jawun (from 2017, Director from 2014).

•

Director: OneMarket Limited (from 2018) and Paul Ramsay Foundation (from 2017).

•

Member: Panel of Adara Partners (from 2015).

•

Fellow: Senate of the University of Sydney (from 2015).

Relevant Former Directorships held

in last three years, include

•

Former Chairman: The Bell Shakespeare Company Limited (2010-2016, Director 2004-2016).

•

Former Director: Westfield Corporation Limited (2014-2018), Human Rights Law Centre Ltd (2012-2017) and Treasury Corporation of New South Wales (2013-2017).

Age 64 years | Residence Sydney, Australia

Career

Paula has extensive experience in financial markets, corporate finance, risk management and investments, having held senior executive roles at Calibre Asset Management, Ord Minnett (now J P Morgan) and at Price Waterhouse (now PricewaterhouseCoopers). Her career as a company director spans financial services, investment, insurance, healthcare, gambling and entertainment, fast moving consumer goods, property and construction and retailing sectors. Paula has a strong interest in education and medical research, having served as a member of the Geelong Grammar School Council and the Business and Economics Faculty at the University of Melbourne and as Deputy Chairman of Baker IDI.

Relevant Other Directorships

•

Chairman: Tabcorp Holdings Limited (from 2011, Director from 2005), Healthscope Limited (from 2014) and Kin Group Advisory Board (from 2014).

•

Director: Lion Pty Ltd (from 2012).

•

Member: Kirin International Advisory Board (from 2012) and Australian Government Takeovers Panel (from 2017).

Relevant Former Directorships held

in last three years, include

•

ASIC External Advisory Panel (2012-2015).

Age 58 years | Residence Melbourne, Australia

GOVERNANCE 33

GOVERNANCE (continued)

DIRECTORS’ QUALIFICATIONS, EXPERIENCE AND SPECIAL RESPONSIBILITIES (continued)

LOGO

JANE HALTON, AO PSM

Independent Non-Executive Director

BA (Hons) Psychology, FIML, FIPAA, NAM, Hon. FAAHMS, Hon. FACHSE, Hon. DLitt (UNSW)

Non-Executive Director since October 2016. Jane is a member of the Human Resources Committee, Ethics, Environment, Social and Governance Committee and Digital Business and Technology Committee.

Member: LOGO

LOGO

RT HON SIR JOHN KEY, GNZM AC

Independent Non-Executive Director

BCOM, DCOM (HONORIS CAUSA)

Non-Executive Director since February 2018. Sir John is a member of the Ethics, Environment, Social and Governance Committee and Risk Committee.

Member: LOGO

Career

Jane’s 33 year career in the public service includes the positions of Secretary of the Australian Department of Finance, Secretary of the Australian Department of Health, Secretary for the Department of Health and Ageing, and Executive Co-ordinator (Deputy Secretary) of the Department of the Prime Minister and Cabinet. She brings to the Board extensive experience in finance, insurance, risk management, information technology, human resources, health and ageing and public policy. She also has significant international experience.

Jane has contributed extensively to community health through local and international organisations including the World Health Organisation and National Aboriginal and Torres Strait Islander Health Council.

Relevant Other Directorships

•

Chairman: Vault Systems (from 2017), Coalition for Epidemic

•

Preparedness Innovations (Norway) (from 2018, Member from 2016) and Council on the Ageing Australia (from 2017).

•

Director: Clayton Utz (from 2017) and Crown Resorts Limited (from 2018).

•

Member: Executive Board of the Institute of Health Metrics and Evaluation at the University of Washington (from 2007).

•

Adjunct Professor: University of Sydney and University of Canberra.

•

Council Member: Australian Strategic Policy Institute (from 2016).

Relevant Former Directorships held

in last three years, include

•

Former Chairman: OECD Asian Senior Budget Officials Network (2014–2016) and World Health Organisation Executive Board (2013–2014, Member 2012-2015).

•

Former Member: Melbourne Institute Advisory Board (2007–2015).

•

Former Public Policy Fellow: ANU Crawford School of Public Policy (2012-2016).

Age 58 years | Residence Canberra, Australia

Career

Sir John was Prime Minister of New Zealand from 2008 to 2016, having commenced his political career in 2002. Sir John had a long career in international finance, primarily for Bankers Trust in New Zealand and Merrill Lynch in Singapore, London and Sydney. He was previously a member of the Foreign Exchange Committee of the Federal Reserve Bank of New York (from 1999 – 2001).

Sir John was made a Knight Grand Companion of the New Zealand Order of Merit in the 2017 Queen’s Birthday Honours. In 2017 Sir John became a Companion of the Order of Australia for advancing the Australia-New Zealand bilateral relationship.

Relevant Other Directorships

•

Chairman: ANZ Bank New Zealand Limited (from 2018, Director from 2017).

•

Director: Air New Zealand Limited (from 2017).

Relevant Former Directorships held

in last three years, include

•

Former Chairman: The International Democratic Union (2014-2018).

Age 57 years | Residence Auckland, New Zealand.

34 ANZ 2018 ANNUAL REPORT

LOGO

LEE HSIEN YANG

Independent Non-Executive Director and Chair

of the Digital Business and Technology Committee

MSc, BA

Non-Executive Director since February 2009. Hsien Yang is a member of the Risk Committee and Human Resources Committee.

Chair: LOGO Member: LOGO

LOGO

GRAEME LIEBELT

Independent Non-Executive Director

and Chair of the Risk Committee

BEc (Hons), FAICD, FTSE, FIML

Non-Executive Director since July 2013. Graeme is a member of the Audit Committee and Human Resources Committee.

Chair: LOGO Member: LOGO

Career

Hsien Yang is an experienced business executive with considerable knowledge of and operating experience in Asia. He has a background in engineering and brings to the Board his international business and management experience across a wide range of sectors including telecommunications, food and beverages, property, publishing and printing, financial services, education, civil aviation and land transport. His contribution to community education activities includes former membership of the Governing Board of Lee Kuan Yew School of Public Policy.

Relevant Other Directorships

•

Chairman: The Islamic Bank of Asia Limited (from 2012, Director from 2007).

•

Director: Rolls-Royce Holdings plc (from 2014), Cluny Lodge Pte Ltd (from 1979) and Caldecott Inc. (from 2013).

•

Special Adviser: General Atlantic (from 2013).

•

President: INSEAD South East Asia Council (from 2013).

Relevant Former Directorships held

in last three years, include

•

Former Chairman: Civil Aviation Authority of Singapore (2009-2018) and General Atlantic Singapore Fund Pte Ltd (2013-2018).

•

Former Director: Singapore Exchange Limited (2004-2016) and General Atlantic Singapore Fund FII Pte Ltd (2014-2018).

•

Former Consultant: Capital International Inc Advisory Board (2007-2016).

•

Former Member: Governing Board of Lee Kuan Yew School of Public Policy (2005-2017).

Age 61 years | Residence Singapore

Career

Graeme brings to the Board his experience of a 23 year executive career with Orica Limited (including a period as Chief Executive Officer), a global mining services company with operations in more than 50 countries. He has extensive international experience and a strong record of achievement as a senior executive including in strategy development and implementation.

Graeme is committed to global trade and co-operation, as well as community education.

Relevant Other Directorships

•

Chairman: Amcor Limited (from 2013, Director from 2012) and DuluxGroup Limited (from 2018, Director from 2016).

•

Director: Australian Foundation Investment Company Limited (from 2012) and Carey Baptist Grammar School (from 2012).

Age 64 years | Residence Melbourne, Australia

GOVERNANCE 35

36 ANZ 2018 ANNUAL REPORT

LOGO


OUR APPROACH TO RISK MANAGEMENT

The success of the Group’s strategy is underpinned by our sound management of the Group’s risks. All of the Group’s activities involve — to varying degrees — the analysis, evaluation, acceptance and management of risks or combinations of risks.

	The Board is responsible for establishing and overseeing the Group’s Risk Management Framework. The Board has delegated authority to the Board Risk Committee (BRC) to develop and monitor compliance with the Group’s risk management policies. The Committee reports regularly to the Board on its activities. The key pillars of the Group’s Risk Management Framework include: • the Risk Appetite Statement (RAS), which clearly and concisely sets out the Board’s expectations regarding the degree of risk that the Group is prepared to accept in pursuing its strategic objectives and its business plan; and • the Risk Management Statement (RMS), which describes the Group’s strategy for managing risks and a summary of the key elements of the Risk Management Framework (RMF) that give effect to that strategy. The RMS includes: a description of each material risk; and an overview of how the RMF addresses each risk, with reference to the relevant policies, standards and procedures. It also includes information on how the Group identifies, measures, evaluates, monitors, reports and then either controls or mitigates material risks.

The material risks facing the group per the Group’s RMS, and how these risks are managed are summarised below:

Key Material Risks
Risk Type	Description	Managing the Risk
Capital Adequacy Risk	The risk of loss arising from the Group failing to maintain the level of capital required by prudential regulators and other key stakeholders (shareholders, debt investors, depositors, rating agencies, etc.) to support ANZ’s consolidated operations and risk appetite.	We pursue an active approach to Capital Management through ongoing review, and Board approval, of the level and composition of our capital base against key policy objectives.
Compliance Risk	The risk of failure to act in accordance with laws, regulations, industry standards and codes, internal policies and procedures and principles of good governance as applicable to ANZ’s businesses.	Key features of how we manage Compliance Risk as part of our Operational Risk framework include: • centralised management of key obligations, and emphasis on identifying changes in regulations and the business environment, so as to enable us to proactively assess emerging compliance risks and implement robust reporting and certification processes. • recognition of incident management as a separate element to enhance ANZ’s ability to identify, manage and report on incidents/breaches in a timely manner. • the Whistleblower Protection Policy allowing employees and contractors to make confidential, anonymous submissions regarding concerns relating to accounting, internal control, compliance, audit and other matters.
Credit Risk	The risk of financial loss resulting from: • a counterparty failing to fulfil its obligations; or • a decrease in credit quality of a counterparty resulting in a financial loss. Credit Risk incorporates the risks associated with us lending to customers who could be impacted by climate change or by changes to laws, regulations, or other policies adopted by governments or regulatory authorities, including carbon pricing and climate change adaptation or mitigation policies.	Our Credit Risk framework is top down, being defined by credit principles and policies. Credit policies, requirements and procedures cover all aspects of the credit life cycle — for example: transaction structuring, risk grading, initial approval, ongoing management and problem debt management, as well as specialist policy topics.


38		ANZ 2018 ANNUAL REPORT


Risk Type	Description	Managing the Risk

Insurance Risk	The risk of unexpected losses resulting from worse than expected claims experience, including any of the following that expose an insurer to financial loss: inadequate or inappropriate underwriting, claims management, reserving, insurance concentrations, reinsurance management, product design and pricing.	We manage Insurance Risk primarily by: • product design to price all applicable risks into contracts; • reinsurance to reduce liability for large individual risks; • underwriting to price, or reserve, for the level of risk associated with an individual contract; • claims management to admit and pay genuine claims; • insurance experience reviews to update assumptions; and • portfolio management to maintain a diversity of individual risks.
Liquidity and Funding Risk	The risk that the Group is unable to meet its payment obligations as they fall due, including: • repaying depositors or maturing wholesale debt; or • the Group having insufficient capacity to fund increases in assets.	Key principles in managing our Liquidity and Funding Risk include: • maintaining our ability to meet liquidity ‘survival horizons’ under a range of stress scenarios to meet cash flow obligations over a short to medium term horizon; • maintaining a strong structural funding profile; and • maintaining a portfolio of high-quality liquid assets to act as a source of liquidity in times of stress.
Market Risk	The risk to the Group’s earnings arising from: • changes in any interest rates, foreign exchange rates, credit spreads, volatility, and correlations; or • from fluctuations in bond, commodity or equity prices.	Our risk management and control framework for Market Risk involves us quantifying the magnitude of market risk within the trading and balance sheet portfolios through independent risk measurement. First, we identify the range of possible outcomes, the likely timeframe, and the likelihood of the outcome occurring. Then we allocate an appropriate amount of capital to support these activities.
Operational Risk	The risk of loss and/or non-compliance with laws resulting from inadequate or failed internal processes, people and/or systems, or from external events. This definition includes legal risk, and the risk of reputation loss, or damage arising from inadequate or failed internal processes, people and/or systems, but excludes Strategic Risk.	We operate a three-lines-of-defence model to manage Operational Risk, with each Line of Defence having defined roles, responsibilities and escalation paths to support effective communication and effective management of our Operational Risk. Also, we have ongoing review mechanisms to ensure our Operational Risk framework continues to meet organisational needs and regulatory requirements.
Reinsurance Risk	The risk that a reinsurer fails to meet its contractual obligations, that is, to pay us reinsurance claims when due, which in turn creates a counterparty credit risk.	We manage Reinsurance Risk by: • measuring our counterparties’ probability of default; and • then restricting our counterparty exposures on the basis of financial strength and concentration.
Reputation Risk	The risk of loss that directly or indirectly impacts earnings, capital adequacy or value, that is caused by: • adverse perceptions of the Group held by any of customers, the community, shareholders, investors, regulators, or rating agencies; • conduct risk associated with the Group’s employees or contractors (or both); or • the social or environmental (or both) impacts of our lending decisions.	We manage Reputation Risk by maintaining a positive and dynamic culture that: • ensures we act with integrity; and • enables us to build strong and trusted relationships with customers and clients, with colleagues, and with the broader society. We have well established decision-making frameworks and policies to ensure our business decisions are guided by sound social and environmental standards that take into account Reputation Risk.
Strategic Risk	The risk that the Group’s business strategy and strategic objectives may lead to an increase in other key Material Risks — for example: Credit Risk, Market Risk and Operational Risk.	We consider and manage Strategic Risks through our annual strategic planning process, managed by the Executive Committee and approved by the Board. Any increase to our key Material Risks is managed in accordance with the risk management practices specified above.
Technology Risk	The risk of loss and/or non-compliance with laws resulting from inadequate or failed internal processes, people and/or systems or from external events impacting on IT assets, including the compromise of an IT asset’s confidentiality, integrity or availability.	Consistent with the management of Operational Risk, we operate a three-lines-of-defence model to manage Technology Risk, with each Line of Defence having defined roles, responsibilities and escalation paths to support effective communication and effective management of our Technology Risk. We also have ongoing review mechanisms to ensure our Operational Risk framework, which is also used to manage Technology Risk, continues to meet organisational needs and regulatory requirements.


OUR APPROACH TO RISK MANAGEMENT			39


REMUNERATION REPORT

Dear Shareholder, 2018 Remuneration Report – audited This has been a difficult year for ANZ and our industry. While we recorded a solid financial result, particularly in our Institutional and New Zealand businesses, the Board acknowledges the significant community concern as a result of our failures highlighted in the Royal Commission. Given this has impacted our corporate reputation and economic profit, variable remuneration at all levels of ANZ has been materially reduced from the prior year. It is important that accountability for these failures is reflected in the remuneration of our most senior team even though most are new to their roles and many are new to ANZ: • All Disclosed Executives (including our Chief Executive Officer (CEO)) achieved outcomes below their target. • Variable remuneration outcomes for our CEO and current Disclosed Executives averaged 78% of target overall (53% of maximum opportunity), with substantial differentiation at an individual level ranging from 60% to 91%. • We have re-set the salaries with each new appointment to the Executive team. The total statutory remuneration of the CEO and Disclosed Executives in 2018 is down almost 40% when compared to 2015. The ANZ Incentive Plan (ANZIP), which is the variable remuneration plan for the majority of our people, including the CEO and all Disclosed Executives, has been reduced by $124 million from last year. The performance rights awarded in November 2014 were tested in November 2017, but as the relative Total Shareholder Return performance hurdles were not met these performance rights lapsed and executives received no value from this award.		While the Non-Executive Directors do not receive variable remuneration, the Board accepts that it is appropriate that they too share some accountability for these failures. As a consequence, the Non-Executive Directors, who have served on the Board in financial year (FY) 18, have agreed to a 20% reduction of their fee for FY19 (20% reduction to the Chairman fee from $825,000 to $660,000, and 20% reduction to the NED member fee from $240,000 to $192,000). Given that many of the issues, that led to the large/notable items that have impacted performance this year, pre-date many of the members of the existing management team, the Board has exercised its discretion to apply downwards adjustment to the unvested deferred remuneration held by previous members of the management team. Moving forward Commissioner Hayne has rightly raised questions about how the industry rewards its people and we await his final recommendations. Remuneration at ANZ has evolved significantly over recent years in accordance with our reward principles as set out in this report. However we also know we have more to do. We are currently undertaking a company-wide review of how we reward our workforce with the objective to reward people in a way that supports our strategy, purpose and culture, improves the services we provide our customers, supports employee engagement and delivers value to shareholders. On behalf of the Board, I invite you to consider our Remuneration Report which will be presented to shareholders for adoption at the 2018 Annual General Meeting in Perth. Ilana Atlas Chair — Human Resources Committee


CONTENTS
1. Who is Covered by this Report	41	5. 2018 Outcomes	48

2. Remuneration at a Glance	42	6. Non-Executive Director Remuneration	58

3. Our Reward Principles	43	7. Remuneration Governance	59

4. Composition of Executive Remuneration	43	8. Other Information	61


40		ANZ 2018 ANNUAL REPORT

1. WHO IS COVERED BY THIS REPORT

The Key Management Personnel (KMP) whose remuneration is disclosed in this year’s report are:

Non-Executive Directors (NEDs) – Current



D Gonski		Chairman

I Atlas		Director

P Dwyer		Director

J Halton		Director

J Key		Director – appointed 28 February 2018

H Lee		Director

G Liebelt		Director

J Macfarlane		Director

Chief Executive Officer (CEO) and Disclosed Executives – Current

S Elliott		Chief Executive Officer and Executive Director

M Carnegie		Group Executive, Digital Banking

K Corbally		Chief Risk Officer (CRO) – appointed 19 March 2018

A George		Deputy Chief Executive Officer and Group Executive, Wealth Australia – appointed Deputy Chief Executive Officer 14 May 2018

D Hisco		Group Executive and Chief Executive Officer, New Zealand

M Jablko		Chief Financial Officer (CFO)

F Ohlsson		Group Executive, Australia

M Whelan		Group Executive, Institutional

Disclosed Executives – Former

G Hodges		Former Deputy Chief Executive Officer – concluded in role 13 May 2018, ceased employment 30 September 2018

N Williams		Former Chief Risk Officer – concluded in role 30 March 2018, ceasing employment 2 November 2018

The Remuneration Report for the Group outlines our remuneration strategy and framework and the remuneration practices that apply to KMP.

This report has been prepared, and audited, as required by the Corporations Act 2001. It forms part of the Directors’ Report.


REMUNERATION REPORT			41

REMUNERATION REPORT (continued)

2. REMUNERATION AT A GLANCE

ANZ’S PURPOSE AND STRATEGY¹

IS UNDERPINNED BY:

OUR REMUNERATION
POLICY/REWARD
PRINCIPLES:

Attract, motivate and
keep great people

Reward our people for doing
the right thing having regard to
our customers and shareholders

Focus on how things
are achieved as much
as what is achieved

Are fair and
simple to
understand

WITH REMUNERATION DELIVERED TO OUR CEO AND DISCLOSED EXECUTIVES THROUGH:


OUR CORE REMUNERATION COMPONENTS²:	Fixed remuneration	Variable remuneration delivered as
		Cash Deferred shares Performance rights

REINFORCED BY:

ALIGNING
REMUNERATION
AND RISK:

Assessing
behaviours based
on ANZ’s Values and
risk/compliance
standards

Risk is a key input in determining
variable remuneration including
as a multiplier in determining
the ANZIP variable
remuneration pool

Applying Board
discretion on
performance and
remuneration
outcomes

Being able to
downward
adjust deferred
remuneration

(including to zero)

Prohibiting
the hedging of
unvested equity

WHILE SUPPORTING THE ALIGNMENT OF EXECUTIVES AND SHAREHOLDERS THROUGH:

SHAREHOLDER
ALIGNMENT:

Substantial
shareholding
requirements

Significant incentive
deferral (up to four
years) in ANZ equity

Use of relative and absolute
Total Shareholder Return
(TSR) hurdles

Use of Economic Profit as a
key input in determining the
variable remuneration pool

DRIVING PERFORMANCE THROUGH OBJECTIVES WITHIN THE

GROUP PERFORMANCE FRAMEWORK TO DETERMINE THE VARIABLE REMUNERATION POOL:


GROUP PERFORMANCE CATEGORIES:	Risk	Financial and Discipline	Customer	People and Reputation
		(50% weighting)	(25% weighting)	(25% weighting)


	(overall adjustment)	Combined weighting 100% including both annual and longer term strategic measures

ANZ’S 2018
PERFORMANCE
OVERALL:
(see sections 5.1 and 5.2)

Despite solid performance against the majority of metrics in the 2018 Group Performance Framework,

the ANZIP variable remuneration pool for 2018 is significantly down on prior year, in recognition of the

failures highlighted in the Royal Commission and their reputational impact.

2018 FIXED
REMUNERATION
CHANGES:

No change to the CEO’s fixed remuneration for 2018.

Fixed remuneration for new appointments has been set lower than prior incumbent.

No change to NED fees for 2018 (reduction of 20% to the Chairman fee and NED member fee (for current NEDs) in 2019).

INDIVIDUAL OUTCOMES REFLECT THE PERFORMANCE OF THE GROUP, DIVISION AND INDIVIDUAL:

2018 VARIABLE REMUNERATION OUTCOMES³: (see sections 5.4 and 5.5)

CEO Variable Remuneration

75% of target which comprises:

Annual Variable Remuneration:

83% of target (56% of max); and

Long Term Variable Remuneration:

67% of target

(subject to shareholder approval).

Current Disclosed Executives

Nov 2014 performance
rights fully lapsed.
Executives received no
value from this award.

Variable Remuneration outcomes:

% of target

% of max

Average:

Range:

60 - 91

40 - 60

^1.	See the ‘About our Business’ and ‘Our Strategy’ sections of the Annual Report.

^2.	The structure of our remuneration framework is aligned with our reward principles and has been designed to support ANZ’s purpose and strategy.

^3.	Variable remuneration outcomes appropriately reflect the Group’s performance against the indicators in the Group performance framework, and also the individual’s performance against their own targets, which are appropriately stretching.

42 ANZ 2018 ANNUAL REPORT

3. OUR REWARD PRINCIPLES

Our remuneration policy and reward principles are a key consideration when making decisions pertaining to our remuneration frameworks and were updated in 2018 to better reflect ANZ’s strategic direction and culture.


ANZ Reward Principles		This means we focus on…

Attract, motivate and keep great people	✓	Providing a market competitive reward offering, and supporting the movement/mobility of talent internally
	✓	Using financial and non-financial rewards to support being a ‘great place to work and grow’, and to motivate discretionary effort

Reward our people for doing the right thing having regard to our	✓	Ensuring our financial services are provided efficiently, ethically and fairly
customers and shareholders	✓	Rewarding for performance against both short and longer term objectives in line with ANZ’s strategy, and aligning executive and shareholder interests

Focus on how things are achieved (values, culture and risk) as much as what is achieved (performance)	✓	Assessing performance and differentiating rewards based on a balanced scorecard of measures
	✓	Providing flexibility to recognise team and individual performance to support collaboration and innovation, and ensuring the reward framework provides employees with confidence to pursue multi-year initiatives

Are fair and simple to understand	✓	Simplicity in design, process, communication and the employee experience, whilst being flexible enough to meet business needs
	✓	Fairness in both the internal and external market context, and supporting gender pay equity
	✓	Providing greater transparency around remuneration to improve employee understanding

4. COMPOSITION OF EXECUTIVE REMUNERATION

4.1 REMUNERATION STRUCTURE

There are two core components of remuneration at ANZ – fixed remuneration and at risk variable remuneration. In structuring remuneration, the Board aims to find the right balance between:

•

fixed remuneration and at risk variable remuneration;

•

cash and deferred equity; and

•

short, medium, and long-term rewards.

The CEO’s variable remuneration framework is slightly different to that of the Disclosed Executives, as follows:

•

CEO We reward the CEO Variable Remuneration (VR) comprising Annual Variable Remuneration (AVR) and Long Term Variable Remuneration (LTVR). This is in accordance with his employment contract (as disclosed to the market at the time of his appointment) and is consistent with external market practice. LTVR reinforces the CEO’s focus on achieving longer term strategic objectives and creating long-term value for all stakeholders.

The Human Resources (HR) Committee and the Board determine the CEO’s VR outcome (AVR and LTVR) and the LTVR outcome is also subject to shareholder approval at the Annual General Meeting.

•

AVR outcome: half of this is delivered as ANZ shares (deferred evenly over one to four years); and

•

LTVR outcome: all of this is delivered as performance rights and the 2018 award will be effectively deferred for four years (three year deferral plus a further one year restriction period).

•

Disclosed Executives We reward the Disclosed Executives under a single VR framework. This approach enables us to:

•

provide the appropriate mix of short and long-term rewards (including performance hurdles) to drive performance, and attract and retain talent;

•

tie the full VR award to the performance of ANZ; and

•

defer VR over the short, medium and longer term (with shares deferred evenly over four years and the performance rights tested against their hurdles after three years).

The HR Committee and the Board determines the VR outcome for each Disclosed Executive. The delivery of VR to Disclosed Executives in relation to the deferral periods and performance hurdles is aligned to that of the CEO.

The Board can, on the basis of each executive’s performance, adjust the executive’s variable remuneration down, potentially to zero.

We structure the CEO and Disclosed Executives’ remuneration based on the following target remuneration mix. The CEO and Disclosed Executives may be awarded amounts above or below the target for variable remuneration.

REMUNERATION REPORT 43

REMUNERATION REPORT (continued)

4. COMPOSITION OF EXECUTIVE REMUNERATION (continued)

LOGO

^1.	Face value at threshold vesting (50% vesting).

^2.	One year restriction introduced to enable equity to remain subject to downward adjustment for a further period.

^3.

The CRO’s remuneration arrangements are structured differently to preserve the independence of this role and to minimise any conflicts of interest in carrying out the risk control function across ANZ. The CRO’s target remuneration has a slightly different mix: fixed remuneration (37%) and VR (63%). VR is delivered as 33% cash, 33% deferred shares and 34% deferred share rights (instead of performance rights). The CRO has a VR target of 170% of fixed remuneration and a maximum opportunity of 150% of target.

By deferring a significant portion of an executive’s remuneration, we ensure that their variable remuneration:

•

is linked to performance;

•

has significant retention elements;

•

aligns their interests with shareholders to deliver on ANZ’s strategic objectives; and

•

can be adjusted downwards, including to zero (if appropriate), allowing the Board to hold executives accountable.

4.2 FIXED REMUNERATION

We express fixed remuneration as a total dollar amount which is delivered as cash salary and superannuation contributions. The Board sets (and reviews annually) the CEO’s and Disclosed Executives’ fixed remuneration based on financial services market relativities reflecting their responsibilities, performance, qualifications, experience and location. In addition, for new appointments we continue to set fixed remuneration lower than that of the prior incumbent (following the trend established with the CEO appointment).

4.3 VARIABLE REMUNERATION

The ANZ Incentive Plan (ANZIP) is our main variable remuneration plan covering the majority of employees, including the CEO and Disclosed Executives.

ANZIP variable remuneration pool sizing and allocation process

LOGO

4.3.1 HOW DO WE DETERMINE THE VARIABLE REMUNERATION POOL AT A GROUP LEVEL?

ANZIP variable remuneration pool based on performance

Managing risk appropriately is fundamental to the way ANZ operates and is therefore a key element of how we measure and assess performance at a Group, Division and individual level.

When determining the size of the ANZIP variable remuneration pool the Board considers:

1.	our economic profit performance – a risk adjusted financial measure;

2.	our performance against the Group Performance Framework (Risk, Financial and Discipline, Customer, and People and Reputation performance indicators) that were agreed by the Board at the start of the financial year; and

3.	other factors such as the overall operating environment, affordability and the quality of our results.

The Board exercise their judgement to determine the appropriate size of the variable remuneration pool each year – it is not a formulaic outcome.

44 ANZ 2018 ANNUAL REPORT

4. COMPOSITION OF EXECUTIVE REMUNERATION (continued)



				The ANZ Group Performance Framework is designed around three key inputs:
				•		Creating a safe bank with sound risk practices;
				•		Achieving our agreed annual and longer term goals; and
				•		Realising our strategic vision.
				Performance indicators are set by the Board at the start of each year under the categories of:
				•		Risk – separate measure which can adjust the overall performance assessment;
				•		Financial and Discipline, 50% weighting;
				•		Customer, 25% weighting; and
				•		People and Reputation, 25% weighting.
				The indicators within each category encourage our people to focus on both annual priorities and on broader long-term strategies to deliver great outcomes for our customers and shareholder value.
				The performance indicators are designed to be stretching, yet achievable. They are approved by the Board at the start of each year and are set considering prior year performance, industry standards and ANZ’s strategic objectives. They may reflect targets set for the current year and also longer term strategic goals. As the specific targets and features relating to many of these indicators are commercially sensitive, we have not provided them in detail.

4.3.2 HOW DO WE DETERMINE VARIABLE REMUNERATION AT AN INDIVIDUAL LEVEL?

Variable remuneration is designed to focus our CEO and Disclosed Executives on key performance measures supporting our business strategy, and encourage the delivery of long term value for shareholders.

Performance objectives set

• Individual objectives are agreed for the CEO and Disclosed Executives, using a balanced scorecard approach under the four categories of (i) Risk, (ii) Financial and Discipline, (iii) Customer, and (iv) People and Reputation.

• The weighting of measures varies to reflect the responsibilities of each individual’s role.

• Many of these measures relate to the contribution towards medium to longer term performance outcomes aligned to ANZ’s strategic objectives.

• This methodology is replicated across ANZ for all employees reflecting the individual’s responsibilities.

Performance assessed against objectives

• The performance of the CEO and each Disclosed Executive is assessed against their objectives, ANZ’s Values (behaviours) and ANZ’s risk and compliance standards.

• The HR Committee seeks input from the CEO, CRO (on risk management), CFO (on financial performance), Group Executive, Talent and Culture (GE T&C) (on talent and culture matters) and Group General Manager Internal Audit (on internal audit matters).

• The HR Committee reviews (and the Board reviews and approves) the performance outcomes for the CEO and each Disclosed Executive.

Determination of remuneration outcomes

• The HR Committee (with input from the Risk and Audit Committees) considers the performance of the Group, Division and individual to determine remuneration recommendations for the CEO and Disclosed Executives.

• Where the CEO and Disclosed Executives deliver on target performance at a Group, business and individual level (taking into consideration ANZ Values (behaviours) and risk/compliance standards), then variable remuneration recommendations are likely to be around the target opportunity. Recommendations will be adjusted up or down in line with performance.

• The HR Committee’s recommendations are then reviewed and ultimately approved by the Board.

REMUNERATION REPORT 45

REMUNERATION REPORT (continued)

4. COMPOSITION OF EXECUTION REMUNERATION (continued)

4.3.3 HOW IS VARIABLE REMUNERATION DELIVERED?

As the table below shows, variable remuneration is delivered partly in cash, partly in shares deferred evenly over four years, and partly in performance rights. The performance rights are subject to performance hurdles which determine whether they vest in three years’ time. The CEO’s 2018 performance rights are also subject to a 12 month restriction period post vesting.

LOGO

Cash

The cash component is paid to executives at the end of the annual Performance and Remuneration Review (usually in late November).

Deferred shares

Deferred shares are ordinary shares and are deferred evenly over one to four years. By deferring part of an executives’ remuneration over time (and it remaining subject to downward adjustment), we enable a substantial amount of their remuneration to be directly linked to delivering long-term shareholder value. We grant deferred shares in respect of the 1 October to 30 September performance period in late November each year.

We calculate the number of deferred shares to be granted based on the Volume Weighted Average Price (VWAP) of the shares traded on the ASX in the week leading up to and including the date of grant. For disclosure and expensing purposes, we use the one day VWAP to determine the fair value.

In some cases (generally due to regulatory or tax reasons), we may grant deferred share rights to executives instead of deferred shares. Each deferred share right entitles the holder to one ordinary share.


Performance rights – CEO (LTVR) and Disclosed Executives (VR) excluding the CRO
What is a performance right?		A performance right is a right to acquire one ordinary ANZ share at nil cost – as long as time and performance hurdles are met. The future value of performance rights may range from zero to an indeterminate value. The value depends on our performance against the hurdles and on the share price at the time of exercise.
What is the performance period?		Performance rights have a three year performance period. For the 2018 grant (to be granted in November/ December 2018), the performance period is from 22 November 2018 to 21 November 2021. We use a three year performance period as it: aligns to our business planning cycle, provides sufficient time for longer term performance to be reflected, while balancing a reasonable timeframe for executives to find the award meaningful and motivating.
What is the restriction period that applies to the CEO?		The performance rights granted to the CEO in December 2018 will also be subject to a 12 month restriction period. This means they are effectively deferred for four years (three year deferral period and one year restriction period). The CEO’s performance rights which meet the performance hurdle will be converted to shares at the third anniversary of grant. They are then restricted for 12 months (to the fourth anniversary of grant) and remain subject to downward adjustment. The CEO is unable to trade the shares during this period. Dividends on any vested shares will be payable to the CEO during the restriction period.

46 ANZ 2018 ANNUAL REPORT

4. COMPOSITION OF EXECUTIVE REMUNERATION (continued)


Performance rights — CEO (LTVR) and Disclosed Executives (VR) excluding the CRO
What are the performance hurdles and why?	The Total Shareholder Return (TSR) performance hurdles reflect the importance of focusing on achieving longer term strategic objectives and aligning executives’ and shareholders’ interests.

	We will apply two TSR performance hurdles for the 2018 grants of performance rights (as we did in 2017):

	· 75% will be measured against a relative TSR hurdle, tranche 1;
	· 25% will be measured against an absolute TSR hurdle, tranche 2.

	TSR represents the change in value of a share plus the value of reinvested dividends paid. We regard it as the most appropriate long-term measure – it focuses on the delivery of shareholder value and is a well understood and tested mechanism to measure performance.

	The combination of relative and absolute TSR hurdles provides balance to the plan by:

	· Relative: rewarding executives for performance that exceeds that of peer companies; and
	· Absolute: ensuring there is a continued focus on providing positive growth – even when the market is declining.

	The two hurdles measure separate aspects of performance:

	· the relative TSR hurdle measures our TSR compared to that of the Select Financial Services comparator group, made up of core local and global competitors. This comparator group is chosen to broadly reflect the geographies and business segments in which ANZ competes for revenue; and
	· the absolute Compound Annual Growth Rate (CAGR) TSR hurdle provides executives with a more direct line of sight to the level of shareholder return to be achieved. It also provides a tighter correlation between the executives’ rewards and the shareholders’ financial outcomes.

	We will measure ANZ’s TSR against each hurdle at the end of the three year performance period to determine whether each tranche of performance rights become exercisable. We measure each tranche independently from the other – that is: one tranche may vest fully or partially but the other tranche may not vest.
What is the relative TSR performance hurdle for the 2018 grant?	Relative TSR is an external hurdle that measures our TSR against that of the Select Financial Services comparator group over three years.
(Also see ANZ TSR performance in section 5.2 and hurdle outcomes in section 5.5)	The Select Financial Services comparator group is made up of: Bank of Queensland Limited; Bendigo and Adelaide Bank Limited; Commonwealth Bank of Australia Limited; DBS Bank Limited; Macquarie Group Limited; National Australia Bank Limited; Standard Chartered PLC; Suncorp Group Limited; and Westpac Banking Corporation.
	If our TSR when compared to the TSR of the comparator group	then the percentage of performance rights that vest
	is less than the 50th percentile	is nil
	reaches at least the 50th percentile, but is less than the 75th percentile	is 50% plus 2% for every one percentile increase above the 50th percentile
	reaches or exceeds the 75th percentile	is 100%
What is the absolute TSR performance hurdle for the 2018 grant?	Absolute CAGR TSR is an internal hurdle as to whether ANZ achieves or exceeds a threshold level of growth the Board sets at the start of the performance period.
	The HR Committee recommends the absolute TSR targets for that year’s award to the Board for approval. When recommending the targets, the Committee considers factors including: the risk free bond rate; historical volatility of ANZ’s share price relative to the market; and the market risk premium.
	If the absolute CAGR of our TSR	then the percentage of performance rights that vest
	is less than 10%	is nil
	is 10%	is 50%
	reaches at least 10%, but is less than 15%	is progressively increased on a pro-rata, straight-line, basis from 50% to 100%
	reaches or exceeds 15%	is 100%

REMUNERATION REPORT 47

REMUNERATION REPORT (continued)

4. COMPOSITION OF EXECUTIVE REMUNERATION (continued)


Performance rights — CEO (LTVR) and Disclosed Executives (VR) excluding the CRO

How do we calculate		When calculating performance against TSR, we:
TSR performance?		· reduce the impact of share price volatility – by using an averaging calculation over a 90 day period for start and end values;

		· ensure an independent measurement – by engaging the services of an external organisation, Mercer Consulting (Australia) Pty Ltd, to calculate ANZ’s performance against the TSR hurdles; and

		· test the performance against the relevant hurdle once only at the end of the three year performance period – the rights lapse if the performance hurdle is not met.


How do we calculate the number of performance rights?		The number of performance rights we grant is calculated using a face value basis – i.e. the full share price. Face value at full (100%) vesting is split into two tranches. Each tranche value is then divided by the market price (five trading day VWAP of ANZ shares at the start of the performance period) to determine the number of performance rights we award in each tranche.
		Performance rights are allocated in November for Disclosed Executives and December for the CEO (subject to shareholder approval).


How do we expense performance rights?		ANZ engages an external expert to independently determine the fair value of performance rights, which is only used for expensing purposes.

		They consider factors including: the performance conditions; share price volatility; life of the instrument; dividend yield; and share price at grant date.

Deferred share rights for the CRO

The CRO receives deferred share rights instead of performance rights to preserve the independence of the role and to minimise any conflicts of interest in carrying out the risk control function across the organisation.

The CRO’s deferred share rights are subject to a time-based vesting hurdle of three years. The value the Board uses to determine the number of deferred share rights to be allocated to the CRO is the face value of the Company’s shares traded on the ASX at the time of grant adjusted for the loss of dividends over the three year deferral period.

4.3.4 DOWNWARD ADJUSTMENT OF DEFERRED REMUNERATION – BOARD DISCRETION

Any deferred remuneration we award is subject to the Board’s on-going discretion to reduce (including to zero) deferred/retained remuneration. This discretion may be exercised, for example, where the Board considers this is necessary to protect the financial soundness of ANZ, to meet unexpected or unknown regulatory requirements or if the Board subsequently considers that the grant was not justified.

Further, if the CEO and/or Disclosed Executives have failed to comply with their accountability obligations under the Banking Executive Accountability Regime (BEAR), their deferred remuneration will be reduced by an amount that is proportionate to the failure, as required by BEAR.

Accordingly, before any scheduled release of deferred remuneration, the Board considers whether any downward adjustment (or deferral of vesting for a further period or periods) should be made.

No downward adjustment was applied to the deferred remuneration of the CEO and Disclosed Executives during 2018.

However, given that many of the issues, that led to the large/notable items that have impacted performance this year, pre-date many of the members of the existing management team, the Board has exercised its discretion to apply downwards adjustment to the unvested deferred remuneration held by previous members of the management team.

5. 2018 OUTCOMES

5.1 ANZIP VARIABLE REMUNERATION POOL

At the end of each financial year the HR Committee (with input from the Risk and Audit Committees) determines the size of the ANZIP variable remuneration pool for that year and makes a recommendation to the Board for their approval.

When determining the size of the 2018 variable remuneration pool the HR Committee:

considered the pool size generated based on a percentage of the economic profit for the year (which was down on prior year reflecting large/notable items including announced divestments, customer remediation, accelerated software amortisation, Royal Commission legal costs and restructuring charges);

reviewed outcomes achieved against the Group Performance Framework, which was set at the start of the year. This was assessed overall as below target (as detailed in section 5.2); and

considered all other relevant factors (such as operating environment, affordability, and quality of the result).

48 ANZ 2018 ANNUAL REPORT

5. 2018 OUTCOMES (continued)

The matters raised in ANZ’s submission to the Royal Commission, including their significant reputational impact, were specifically taken into account in the overall assessment of Group performance and when determining the size of the 2018 variable remuneration pool.

Taking all of this into account the Board decided that the 2018 ANZIP variable remuneration pool would be materially reduced. The pool is down by $124 million from the prior year and accordingly the variable remuneration outcomes for all executives (and employees) have been materially reduced.

5.2 ASSESSMENT AGAINST THE GROUP PERFORMANCE FRAMEWORK FOR THE 2018 FINANCIAL YEAR

LOGO

Performance framework: Overview of indicative measures informing our assessment of performance

This performance framework reflects both annual (Run the Bank Well) and longer term (Strategic) performance indicators across Risk, Financial and Discipline, Customer, and People and Reputation categories. Risk outcomes form an integral part of the assessment and the focus on creating a safe bank with sound risk practices is reinforced by having the Risk assessment directly impact the overall assessment of the Group’s performance (i.e. a multiplier effect).

The table below provides an overview of some of the indicative measures used to inform the overall assessment for each of the key performance categories. For strategic measures ‘+’ refers to delivered, ‘=’ on track, and ‘–’ more work to do.


Indicative Measure		Performance against Indicative Measures


Risk

Overall assessment: On Target

Key risk, control, governance and compliance metrics were met despite a challenging external and regulatory environment. This includes strong risk foundations being put in place in line with our objectives to:

a. Manage the bank well and ensure our risk appetite, balance sheet, systems, processes and culture are strong, coherent and aligned appropriately;

b. Operate safely within all regulatory limits at all times; and

c. Ensure ANZ’s products, services and processes are responsible and fair for customers.

There is strong leadership on the importance of Risk and Compliance and setting the right culture, as well as a heavy emphasis on maintaining high ethical standards, acting fairly and with integrity. ANZ is focused on making it easier, safer and important for our people to raise issues and concerns. 2018 saw the lowest credit provisions in more than 20 years with a loss rate of 0.12%. While a benign credit environment played a role, it must be recognised that management decisions, often at the expense of revenue, as well as a significant reshaping of the portfolio, contributed to this outcome.

Run the bank well


• No material anti-money laundering, know your customer or sanctions breaches		• = There were no material breaches in 2018

• Fixing repeat adverse audit trends in a timely and sustainable manner		• = Management accountability for fixing issues in a timely and sustainable manner saw the number of adverse audits fall by 16%. There was a very low number of repeat adverse rated audits during FY18, representing less than 1% of all audits. None of these indicated broader risk management awareness issues

• No unplanned material breaches of primary metrics in Group Risk Appetite Statement		• = No material breaches recorded

• Leaders demonstrate accountability for managing risk		• – My Voice engagement survey result on ‘leaders demonstrate accountability for managing risk’ although 81% positive, was slightly below target

Strategic


• Build out enabling technology per roadmap		• = Successful delivery of projects relating to Retail Credit Infrastructure, as well as progress on rationalising multiple mortgage models into one

REMUNERATION REPORT 49

REMUNERATION REPORT (continued)

5. 2018 OUTCOMES (continued)

Performance framework: Overview of indicative measures informing our assessment of performance (continued)

Indicative Measure

Performance against Indicative Measures

Financial and Discipline

Overall assessment: On Target

The assessment of financial measures such as return on equity, considers the outcomes both with and without the impact of the large/notable items¹. While cost outcomes were below target (resulting from the large/notable items), we maintained a strong balance sheet, and divestments during the year reduced the complexity of the Group. Total shareholder returns were positive relative to peers and return on equity was on target. Organic capital generation remained strong. Capital, funding and liquidity continued to be well above regulatory minimums.


Run the bank well
Profitability

• Reduction in operating expenses	• –	3.1% higher than 2017 as a result of large/notable items¹or 1.5% lower excluding large/notable items¹

Returns

• Total shareholder returns (TSR) relative to peers	• =	TSR for 2018 is 0.6% – above the median of the financial services comparator group and domestic majors

• Return on equity (ROE)	• =	ROE on target. ROE (continuing) was 11.0% or 11.8% excluding large/notable items¹

Sound Balance Sheet Indicators

• Common Equity Tier 1 (CET1) and Net Stable Funding Ratio	• +	Funding and liquidity have been well managed, with CET1 of 11.4%, comfortably ahead of regulatory requirements. ANZ generated 182 bps of capital which compares favourably to the historical average of 154 bps. Net Stable Funding Ratio of 115%
Strategic
• Simplification and standardisation of our technology landscape	• =	ANZ has been simplifying its technology architecture and progress has been in-line with expectations

• Transactions to simplify and create a better balanced bank	• +	Significant asset divestments announced in 2018 include Wealth Australia – Life Insurance (to Zurich), Wealth Australia – One Path Pensions & Investments/Aligned Dealer Group (to IOOF), ANZ Royal joint venture, One Path Life New Zealand and PNG Retail, Commercial and SME. Completed sales include Asia Retail in 6 countries and Metrobank Card Corporation investment in Philippines and Shanghai Rural Commercial Bank investment in China

50 ANZ 2018 ANNUAL REPORT

5. 2018 OUTCOMES (continued)

Performance framework: Overview of indicative measures informing our assessment of performance (continued)

Indicative Measure

Performance against Indicative Measures

Customer

Overall assessment: On Target

ANZ continued to improve customer experience this year, with a highlight being Institutional performance in key customer satisfaction/ relationship strength surveys. A disappointing Net Promoter Score (NPS)²in Australia was balanced by a record NPS in New Zealand Retail and strong digital engagement with customers across the Group. The ANZ app remains the top-rated banking app in the Apple store with almost 150,000 reviews. The Royal Commission has had a significant impact on the Group this year and ANZ is fast-tracking changes to build a bank worthy of the trust of all stakeholders.


Run the bank well
Customers as Advocates

· Improve Net Promoter Score (NPS)²	•	+	A record NPS in New Zealand, and a slightly improved Australia Retail score

	•	–	A disappointing result in Business and Private Banking

· Maintain or improve position in respect of relevant corporate and institutional customer satisfaction/relationship strength indices	•	+	Strong performance as evidenced by results on Peter Lee Associates³: #1 lead bank penetration in Australia (biggest gap on competition since 2003) and New Zealand; #1 for Relationship Strength Index in Australia (highest score ever recorded by any bank) and New Zealand. Greenwich Associates⁴: #4 top Corporate Bank in Asia for the 6th successive year


Improving Digital Offering

· Increase the proportion of customers choosing digital for services or purchases, by delivering digital solutions that improve the customer experience	•	–	Customers use of digital solutions increased year-on-year, but were slightly below set targets
Strategic
Building for the future

· Build and deliver new customer ecosystems to engage and increase customer retention · Improve our data assets to strengthen relationships and improve risk management · Build a payments platform that delivers continuous innovation and improves the customer experience	•	=	The business is on track with major initiatives/projects to create the best bank and experiences for our customers. Rolled out New Payments Platform to three million small, medium and Institutional customers; improved digital channels with the launch of 39 digital branches; introduced cash withdrawals from ANZ ATMs using any mobile device – an Australian first; maintained mobile payment leadership

REMUNERATION REPORT 51

REMUNERATION REPORT (continued)

5. 2018 OUTCOMES (continued)

Performance framework: Overview of indicative measures informing our assessment of performance (continued)


Indicative Measure	Performance against Indicative Measures

People and Reputation

Overall assessment: Below Target

Strong progress to build new digital capabilities as well as an increase in the number of women in leadership. This was offset by employee engagement scores falling below target and our standing in the community was impacted by significant community concern as a result of our failures highlighted by the Royal Commission.
Run the bank well

Diversifying our workforce
• Improving women in leadership	• =	0.9% increase year-on-year to 32% (0.1% below the desired target of 32.1%)

• Environment open and accepting of individual differences	• =	Maintained high score of >90% in employee My Voice survey

Engaging our People

• Significantly improve staff engagement	• –	2018 engagement score of 73% was 1% higher than the 2017 ‘pulse’ survey (for a small sample of our population) and 1% lower than 74% in 2016 (full survey). Solid result given the current operating environment and the significant transformation underway

Sustainability

• Glassdoor⁵employer of choice ratings	• =	Improved score on 2017 and achieved the target of 3.7

• Maintain strong performance on Dow Jones Sustainability Indices (DJSI)	• =	DJSI assessment is down to a score of 83, however ANZ is the leading Australian bank

• Corporate Confidence Index (CCI)	• =	Outcomes of the CCI are provided to ANZ on a confidential basis, however ANZ has assessed its score as on-target
Strategic

People and Reputation

• Building and attracting talent in core digital capability areas	• =	We have attracted and retained talent in areas such as digital and technology, and work has commenced to build new skills more broadly across the organisation

• Introducing and embedding new ways of working to more rapidly deliver valuable new features and services to our customers	• =	Good progress in rolling out new ways of working to Australia and Technology divisions

• Rebuild reputation	• –	ANZ’s standing in the community was impacted by significant community concern resulting from failures highlighted by the Royal Commission. ANZ has taken action to fast-track changes to build a bank worthy of the trust and respect of all stakeholders

1.	Large/notable items include announced divestments, customer remediation, accelerated amortisation of software assets, Royal Commission legal costs and restructuring charges.

2.	NPS is a customer loyalty metric used globally to evaluate a company’s brand, products or services. Net Promoter^® and NPS^® are registered trademarks and Net Promoter Score and Net Promoter System are trademarks of Bain & Company, Satmetrix Systems and Fred Reichheld.

3.	Peter Lee Associates 2018 Large Corporate and Institutional Relationship Banking surveys, Australia and New Zealand.

4.	Greenwich Associates 2017 Asian Large Corporate Banking study; ANZ ranked = No.4 in 2016 and 2017.

5.	Glassdoor is a website where employees and former employees anonymously review companies and their management.

52 ANZ 2018 ANNUAL REPORT

5. 2018 OUTCOMES (continued)

5.3 ANZ PERFORMANCE OUTCOMES

ANZ’s Financial Performance 2014 – 2018


	2014		2015		2016		2017		2018
Statutory profit ($m)		7,271		7,493		5,709		6,406		6,400

Cash profit ($m, unaudited)		7,117		7,216		5,889		6,938		5,805

Cash profit – Continuing operations ($m, unaudited)¹		7,117		7,216		5,889		6,809		6,487

Cash return on equity (ROE) (%) – Continuing operations (unaudited)¹		15.4		14.0		10.3		11.7		11.0

Cash earnings per share (EPS) – Continuing operations (unaudited)¹		260.3		260.3		202.6		232.7		223.4

Share price at 30 September ($)		30.92		27.08		27.63		29.60		28.18
(On 1 October 2013, opening share price was $30.75)

Total dividend (cents per share)		178		181		160		160		160

Total shareholder return (12 month %)		5.9		(7.5)		9.2		13.1		0.6

1. Cash profit from continuing operations has been presented for FY17 and FY18, prior periods are not restated.

The Group uses cash profit as a measure of performance for the Group’s ongoing business activities, as this provides a basis to assess Group and Divisional performance against earlier periods and against peer institutions.

We calculate cash profit by adjusting statutory profit for non-core items. Although cash profit is not audited, the external auditor has informed the Audit Committee that recurring adjustments have been determined on a consistent basis across each period presented.

The sizing of the ANZIP variable remuneration pool takes account of both cash profit and economic profit. Importantly, economic profit takes into consideration credit losses across an economic cycle.

Cash profit from continuing operations represents the Group’s cash profit excluding the impact of our discontinued businesses which consists of OnePath pensions and investments and aligned dealer groups and the Group’s life insurance business in Australia. The businesses were reclassified to discontinuing in 2018, and only the 2017 result was restated in the table above.

ANZ TSR performance (1 to 10 years)

The table below compares ANZ’s TSR performance against the median TSR, and upper quartile TSR, of the performance rights Select Financial Services (SFS) comparator group over one to ten years. ANZ’s TSR performance was above the median TSR of the SFS Comparator Group when comparing over one, three and ten years, and below the median over five years to 30 September 2018.


	Years to 30 September 2018

		1		3	5	10
ANZ (%)		0.6		22.4	21.6	161.6
Median TSR SFS (%)		(1.5	)	16.0	42.5	121.3
Upper Quartile TSR SFS (%)		17.2		38.6	51.4	177.0

5.4 CEO’S AND DISCLOSED EXECUTIVES’ REMUNERATION OUTCOMES

At the start of each year, the Board sets stretching – yet achievable – performance objectives for the CEO and for each Disclosed Executive. When executives deliver on target performance at a Group and individual level (taking into consideration ANZ Values (behaviours) and risk/ compliance standards), then their variable remuneration awards are likely to be around the target.

At year end, each executive’s performance is assessed against their objectives for the year and in light of their risk/compliance standards and their demonstration of ANZ Values (behaviours). The CEO assesses the performance of the Disclosed Executives and makes recommendations to the HR Committee. The HR Committee assesses the performance of the CEO. It then makes recommendations to the Board on both the CEO and the Disclosed Executives’ performance and remuneration outcomes.

In 2018, the Board reviewed the CEO and Disclosed Executives’ fixed remuneration. The only change made in 2018 was an adjustment for Alexis George on commencement in the expanded role of Deputy CEO and Group Executive, Wealth Australia.

The Board approved the CEO’s and the Disclosed Executives’ 2018 VR outcomes. In doing so, it considered the performance of the individual, the business and overall Group performance, and the shareholder experience.

REMUNERATION REPORT 53

REMUNERATION REPORT (continued)

5. 2018 OUTCOMES (continued)

5.4 CEO’S AND DISCLOSED EXECUTIVES’ REMUNERATION OUTCOMES (continued)

CEO: The CEO’s VR for 2018 has been awarded at 75% of target, noting that this comprises both AVR and LTVR.

The 2018 AVR awarded to the CEO is 83% of target (56% of maximum), which reflects his performance against his objectives and the overall performance of the Group. The proposed 2018 LTVR is 67% of target, and this reduction, in addition to the AVR reduction, further acknowledges the conduct issues and reputational damage of the matters raised in the Royal Commission.

The proposed LTVR of $1.4 million/$2.8 million (performance rights face value at threshold/full vesting) is subject to shareholder approval at the 2018 Annual General Meeting.

Disclosed Executives: The average 2018 VR for current Disclosed Executives is 78% of target (53% of maximum). This is significantly below target and in line with the material reduction in the ANZIP variable remuneration pool. Every executive is below target and there is significant differentiation at an individual level ranging between 60% to 91% of target. The different VR outcomes reflect the relative performance of the different areas/individuals, demonstrate the ‘at risk’ nature of VR, and demonstrate a clear link between performance and reward at both an ANZ and individual level for the 2018 financial year.

The VR awards will be paid/granted in November/December 2018. The majority of the VR award is deferred and remains subject to the Board’s discretion to adjust this downwards at any time prior to vesting. In addition, whether the portion of 2018 VR delivered as performance rights actually vests will be subject to ANZ’s TSR performance over a three year performance period, which is in line with our business planning cycle.

Year-on-year Remuneration awarded

This table shows a year-on-year comparison of remuneration awarded to the CEO and current Disclosed Executives for the 2017 and 2018 performance periods.

The year-on-year difference for Alexis George reflects her time as a KMP in 2017 and her adjustment in fixed remuneration in 2018. For David Hisco, the year-on-year difference reflects differences in exchange rate when converting NZD to AUD.

Financial
Year

Fixed
remuneration
$

Variable remuneration
awarded¹

Total remuneration
awarded¹

CEO and Current Disclosed Executives

S Elliott

2018

2,100,000

3,150,000

5,250,000

2017

2,100,000

4,100,000

6,200,000

M Carnegie

2018

1,000,000

1,600,000

2,600,000

2017

1,000,000

1,700,000

2,700,000

K Corbally

2018

(6.5 months in role)

486,000

499,500

985,500

A George

2018

(12 months/4.5 months as Deputy CEO)

876,000

1,075,000

1,951,000

2017

(10 months in role)

664,000

913,000

1,577,000

D Hisco

2018

1,170,713

1,952,719

3,123,432

2017

1,195,013

2,200,550

3,395,563

M Jablko

2018

1,000,000

1,750,000

2,750,000

2017

1,000,000

2,240,000

3,240,000

F Ohlsson

2018

1,000,000

1,200,000

2,200,000

2017

1,000,000

1,620,000

2,620,000

M Whelan

2018

1,200,000

2,175,000

3,375,000

2017

1,200,000

3,275,000

4,475,000

¹^.	Performance rights face value at threshold vesting.

This table supplements, and is different to, the Statutory Remuneration table which presents the accounting expense for both vested and unvested awards in accordance with the Australian Accounting Standards.

A further breakdown of the variable remuneration awarded for 2018 is provided on the next page.

54 ANZ 2018 ANNUAL REPORT

5. 2018 OUTCOMES (continued)

2018 Variable Remuneration awarded

This table shows the VR awarded to the CEO and current Disclosed Executives for the year ending 30 September 2018, and what this represents as a % of their target opportunity and maximum opportunity.

The average variable remuneration awarded to the CEO and current Disclosed Executives is 78% of target (53% of maximum), which appropriately reflects ANZ’s overall performance and the impact to the overall ANZIP variable remuneration pool.

Only the cash component will be received this year. The deferred shares will vest evenly over four years. The performance rights may or may not vest when tested against the performance hurdles in three years’ time.

LOGO

¹^.	VR for the CEO = AVR + LTVR (LTVR subject to shareholder approval at the 2018 Annual General Meeting).

²^.	% of max for the CEO = 150% of AVR target plus LTVR target (face value at threshold vesting). The maximum opportunity arrow for the CEO is not to scale, given there is no max for LTVR.

³^.	Remuneration disclosed from commencement in Disclosed Executive role, CRO receives deferred share rights instead of performance rights.

⁴^.	Multiply by two to convert to face value at full vesting for performance rights.

2018 Actual Remuneration received

This table shows the remuneration the CEO and current Disclosed Executives actually received in relation to the 2018 performance year as cash; or in the case of prior equity awards, the value which vested in 2018. The final column also shows the value of prior equity awards which lapsed in 2018 (these awards reflect the 2014 performance rights which failed to meet the performance hurdles when tested in November 2017).

Only the cash component of the 2018 VR award appears in this table, as the other components are deferred and may/may not vest in future years.


	Fixed remuneration $		Cash variable remuneration $		Total cash $		Deferred variable remuneration which vested during the year¹ $		Other deferred remuneration which vested during the year¹ $		Actual remuneration received $		Deferred variable remuneration which lapsed/forfeited during the year¹ $
CEO and Current Disclosed Executives
S Elliott		2,100,000		875,000		2,975,000		874,666		-		3,849,666		(1,582,649)

M Carnegie²		1,000,000		528,000		1,528,000		34,610		1,481,009		3,043,619		-

K Corbally³		486,000		164,835		650,835		-		-		650,835		-

A George⁴		876,000		354,750		1,230,750		334,044		250,000		1,814,794		(153,292)

D Hisco⁵		1,170,713		644,397		1,815,110		864,274		-		2,679,384		(1,383,354)

M Jablko⁶		1,000,000		577,500		1,577,500		34,610		428,084		2,040,194		-

F Ohlsson		1,000,000		396,000		1,396,000		597,403		-		1,993,403		(404,809)

M Whelan		1,200,000		717,750		1,917,750		856,454		-		2,774,204		(395,655)

¹^.

The point in time value of previously deferred remuneration granted as shares/share rights and/or performance rights is based on the one day VWAP of the Company’s shares traded on the ASX on the date of vesting or lapsing/forfeiture multiplied by the number of shares/share rights and/or performance rights. The amount paid as deferred cash is the value disclosed. The lapsed/forfeited values relate to the performance rights we awarded in November 2014 which lapsed due to the performance hurdles not being met.

²^.	Other deferred remuneration for M Carnegie relates to previously disclosed compensation for bonus opportunity foregone and deferred remuneration forfeited.

³^.	Remuneration disclosed from commencement in Disclosed Executive role (19 March 2018).

⁴^.

A George’s fixed remuneration was adjusted in May 2018 when she commenced in the expanded role of Deputy CEO and Group Executive, Wealth Australia. As disclosed in 2017, in relation to A George’s role before her appointment to the Group Executive Committee, in July 2016 the Board approved a cash retention award of $500,000 with partial vesting in June 2017 ($250,000) and December 2017 ($250,000).

⁵^.	Paid in NZD and converted to AUD.

⁶^.	Other deferred remuneration for M Jablko relates to previously disclosed compensation for bonus opportunity foregone and deferred remuneration forfeited.

REMUNERATION REPORT 55

REMUNERATION REPORT (continued)

5. 2018 OUTCOMES (continued)

2018 Statutory Remuneration – CEO and Disclosed Executives

The following table outlines the statutory remuneration disclosed in accordance with the Australian Accounting Standards. While it shows the fixed remuneration awarded (cash and superannuation contributions) and also the cash component of the 2018 VR award, it does not show the actual VR awarded or received in 2018 (which are shown on the previous pages), but instead shows the amortised accounting value for this financial year of deferred remuneration (including prior year awards).


			Short-Term Employee Benefits								Post-Employment

													Retirement
					Non monetary		Total cash				Super		benefit accrued
	Financial		Cash salary¹		benefits²		incentive³		Other cash⁴		contributions⁵		during year⁶
	Year		$		$		$		$		$		$

CEO and Current Disclosed Executives

S Elliott		2018		2,079,831		17,321		875,000		-		20,169		-

		2017		2,080,276		16,995		1,000,000		-		19,724		-

M Carnegie⁹		2018		979,831		29,254		528,000		-		20,669		-

		2017		980,776		29,920		561,000		100,000		19,724		-

K Corbally¹⁰		2018		472,582		6,383		164,835		-		10,145		-



A George¹¹		2018		843,584		40,254		354,750		250,000		20,669		-

		2017		657,308		22,468		301,290		250,000		15,320		-

D Hisco^12,¹³		2018		1,168,324		464,599		644,397		-		2,389		2,305

		2017		1,195,013		465,103		726,181		-		-		7,636

M Jablko¹⁴		2018		979,831		15,341		577,500		-		20,669		-

		2017		980,276		15,515		739,200		268,082		20,224		-

F Ohlsson¹³		2018		979,831		31,668		396,000		-		20,169		-

		2017		980,276		46,848		534,600		-		19,724		-

M Whelan		2018		1,179,831		11,821		717,750		-		20,169		-

		2017		1,180,276		11,995		1,080,750		-		19,724		-

Former Disclosed Executives

G Hodges¹⁵		2018		1,029,831		20,861		264,000		-		20,169		-

		2017		1,030,276		17,753		732,600		-		19,724		4,565

N Williams¹⁶		2018		1,449,515		52,472		-		-		21,985		-

		2017		1,330,276		19,359		627,000		-		19,724		5,870

^1.	Cash salary includes any adjustments required to reflect the use of ANZ’s Lifestyle Leave Policy.

^2.	Non monetary benefits generally consist of company-funded benefits (and the associated Fringe Benefits Tax) such as car parking, taxation services, costs met by the company in relation to relocation, outplacement services and gifts received on leaving ANZ for former Disclosed Executives.

^3.

The total cash incentive relates to the cash component only. The relevant amortisation of the AVR/VR deferred components is included in share-based payments and has been amortised over the vesting period. The total AVR/VR was approved by the Board on 24 October 2018. 100% of the cash component of the AVR/VR awarded for the 2017 and 2018 years vested to the executive in the applicable financial year.

^4.

Other cash and other equity allocations relate to employment arrangements such as compensation for bonus opportunity foregone and deferred remuneration forfeited, retention awards, and shares received in relation to the Employee Share Offer. For further details, see the individual footnotes for each relevant executive.

^5.

For all Australian based executives, the 2018 and 2017 superannuation contributions reflect the Superannuation Guarantee Contribution based on the Maximum Contribution Base. In the 2017 Remuneration Report, superannuation contributions reflected the Superannuation Guarantee Contribution of 9.5% of cash salary – individuals may have elected to take this contribution as superannuation or a combination of superannuation and cash salary. From 31 August 2018 D Hisco commenced superannuation contributions to KiwiSaver where ANZ provides an employer contribution matching member contributions up to 4% of total gross pay (less employer superannuation contribution tax).

^6.

Accrual relates to Retirement Allowance. As a result of being employed with ANZ before November 1992, D Hisco, G Hodges and N Williams were eligible to receive a Retirement Allowance on retirement, retrenchment, death, or resignation for illness, incapacity or domestic reasons. The Retirement Allowance is calculated as three months of preserved notional salary (which is 65% of fixed remuneration) plus an additional 3% of notional salary for each year of full-time service above 10 years less the total accrual value of long service leave (including taken and untaken).

^7.

As required by AASB 2 Share-based payments, the amortisation value includes a proportion of the fair value (taking into account market-related vesting conditions) of all equity that had not yet fully vested as at the commencement of the financial year. The fair value is determined at grant date and is allocated on a straight-line basis over the relevant vesting period. The amount included as remuneration neither relates to, nor indicates, the benefit (if any) that the executive may ultimately realise if the equity become exercisable.

^8.	Termination benefits reflect payment for accrued annual leave, long service leave and the retirement allowance, payable on termination.

56 ANZ 2018 ANNUAL REPORT



Long-Term Employee Benefits		Share-Based Payments⁷

		Total amortisation value of
								Other equity
		Variable remuneration						allocations⁴
Long service leave accrued during the year		Shares		Share rights		Performance rights		Shares		Termination benefits⁸		Grand total remuneration
$		$		$		$		$		$		$


	31,819		1,023,295		-		1,597,860		-		-	5,645,295

	31,819		1,105,401		-		1,380,645		-		-	5,634,860

	15,152		366,123		-		282,708		353,951		-	2,575,688

	15,152		225,446		-		177,089		2,794,880		-	4,903,987

	24,255		172,709		40,943		33,129		118,316		-	1,043,297



	26,767		308,376		-		194,781		-		-	2,039,181

	15,405		262,448		-		120,594		-		-	1,644,833

	3,782		-		589,413		651,112		475		-	3,526,796

	21,319		-		669,039		757,389		533		-	3,842,213

	15,152		436,228		-		331,802		323,545		-	2,700,068

	15,152		281,374		-		221,998		952,292		-	3,494,113

	15,152		283,517		127,777		341,086		284		-	2,195,484

	15,152		162,978		299,530		331,818		533		-	2,391,459

	18,182		730,160		-		723,576		-		-	3,401,489

	18,182		827,073		-		661,203		-		-	3,799,203



	-		245,423		773,203		228,378		-		261,623	2,843,488

	15,910		554,318		-		610,999		-		-	2,986,145

	-		(236,591)		(1,131,223)		-		-		192,380	348,538

	20,455		600,960		867,287		-		-		-	3,490,931

^9.

Other cash and other equity allocations for M Carnegie relate to previously disclosed compensation for bonus opportunity foregone and deferred remuneration forfeited.

^10.

K Corbally commenced in a Disclosed Executive role on 19 March 2018. So his 2018 remuneration reflects partial service year. In relation to K Corbally’s role before his appointment to the Group Executive Committee, in August 2016 the Board approved an equity retention award of $600,000 vesting in August 2019.

^11.

A George commenced in a Disclosed Executive role on 1 December 2016. So her 2017 remuneration reflects partial service year. A George’s fixed remuneration was adjusted in May 2018 when she commenced in the expanded role of Deputy CEO and Group Executive, Wealth Australia. As disclosed in 2017, in relation to A George’s role before her appointment to the Group Executive Committee, in July 2016 the Board approved a cash retention award of $500,000 with partial vesting in June 2017 ($250,000) and December 2017 ($250,000).

^12.

D Hisco’s fixed remuneration is paid in NZD and converted to AUD. The year-on-year differences in cash salary, retirement benefit accrual and long service leave accrual relate to fluctuations in the exchange rate.

^13.

In 2016 D Hisco and F Ohlsson, and in 2018 D Hisco, were eligible to receive shares in relation to the Employee Share Offer. That offer provides a grant of ANZ shares in each financial year to eligible employees subject to Board approval. See Note 31 Employee Share and Option Plans for further details on the Employee Share Offer.

^14.

Other cash and other equity allocations for M Jablko relate to previously disclosed compensation for bonus opportunity foregone and deferred remuneration forfeited.

^15.

G Hodges concluded in his role 13 May 2018 and ceased employment 30 September 2018. Statutory remuneration table reflects his remuneration up to his date of termination (noting his annual fixed remuneration for 2018 remained unchanged at $1.05 million). Share-based payments include expensing treatment on termination for unvested deferred remuneration (including reversals for forfeiture on retirement). For 2018 G Hodges’ VR is $800,000 of which $264,000 is delivered as cash and $264,000 is delivered as share rights deferred evenly over four years. Performance rights will not be granted as they would have been forfeited on retirement.

^16.

N Williams concluded in his role 30 March 2018 and ceased employment 2 November 2018. Statutory remuneration table reflects 13 months of remuneration up to his date of termination (noting his annual fixed remuneration for 2018 remained unchanged at $1.35 million). Share-based payments include expensing treatment on termination for unvested deferred remuneration (including reversals for forfeiture on termination).

REMUNERATION REPORT 57

REMUNERATION REPORT (continued)

5. 2018 OUTCOMES (continued)

5.5 PERFORMANCE RIGHTS VESTING OUTCOMES

Performance rights granted to the CEO and Disclosed Executives (excluding the CRO) in November 2014 reached the end of their performance period in November 2017.

Hurdle

Grant date

First date
exercisable

ANZ

TSR over
three years

Median
TSR over
  three years

%
vested

Outcome

Relative TSR – Select Financial Services Comparator Group

21-Nov-14

20-Nov-17

9.39%

16.67%

Performance
rights lapsed

Relative TSR – ASX 50 Comparator Group

21-Nov-14

20-Nov-17

9.39%

25.79%

Performance
rights lapsed

The performance rights we awarded in late 2015 will be tested against their hurdles in November 2018 to determine vesting.

6. NON-EXECUTIVE DIRECTOR (NED) REMUNERATION

The Board reviewed NED fees for 2018 and determined once again not to increase their fees (which remain unchanged from 2016).

While the NEDs do not receive variable remuneration, the Board accepts that it is appropriate that they too share some accountability for the failures highlighted by the Royal Commission. As a consequence, the NEDs, who have served on the Board in FY18, have agreed to a 20% reduction of their fee for FY19 (20% reduction to the Chairman fee from $825,000 to $660,000, and 20% reduction to the NED member fee from $240,000 to $192,000).

NEDs receive a base fee for being a Director of the Board, and additional fees for either chairing, or being a member of a Board Committee. The Chairman of the Board does not receive additional fees for serving on a Board Committee.

In setting Board and Committee fees, the Board considers: general industry practice; best principles of corporate governance; the responsibilities and risks attached to the NED role; the time commitment expected of NEDs on Group and Company matters; and fees paid to NEDs of comparable companies.

ANZ compares NED fees to a comparator group of Australian listed companies with a similar market capitalisation, with particular focus on the major financial services institutions. This is considered an appropriate group, given similarity in size, nature of work and time commitment by NEDs.

To maintain NED independence and impartiality:

•

NED fees are not linked to the performance of the Group; and

•

NEDs are not eligible to participate in any of the Group’s variable remuneration arrangements.

The current aggregate fee pool for NEDs of $4 million was approved by shareholders at the 2012 Annual General Meeting. The annual total of NEDs’ fees, including superannuation contributions, is within this agreed limit.

This table shows the NED fee policy structure for 2018:

Board¹

Audit
Committee²

Risk
Committee²

Human
Resources
Committee²

Digital Business
& Technology
Committee²

Ethics,

Environment,
Social &

Governance
Committee²

DRIVING A PURPOSE AND VALUES LED TRANSFORMATION

ACTIONS WE ARE TAKING

OUR PROGRESS: FULL YEAR 2015 TO FULL YEAR 2018¹

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