ANNUAL REPORT 2015 COMMONWEALTH BANK OF AUSTRALIA | ACN 123 123 124 Contents Chairman’s Statement 2 Chief Executive Officer’s Statement 6 Highlights 9 Group Performance Analysis 13 Group Operations and Business Settings 23 Corporate Responsibility 32 Directors’ Report 36 Five Year Financial Summary 68 Financial Statements 70 Income Statements 71 Statements of Comprehensive Income 72 Balance Sheets 73 Statements of Changes in Equity 74 Statements of Cash Flows 76 Notes to the Financial Statements 78 Directors’ Declaration 179 Independent Auditor’s Report 180 Shareholding Information 182 International Representation 186 Contact Us 188 Corporate Directory 189 Commonwealth Bank of Australia – Annual Report 2015 1 Chairman’s Statement Introduction We are very aware that at the Commonwealth Bank we have these results reflect a very solid performance for the financial an important role to play in protecting and enhancing the year. financial wellbeing of all our stakeholders, be they Capital and Dividends shareholders, customers or the wider population. We employ Capital: over 52,000 people, have a customer base of 15 million and have nearly 800,000 Australians who directly own our shares. I referred earlier to increased regulation and our $5 billion We know we must perform well in all respects. entitlement offer as a result of APRA’s adoption of the We are also aware that in order to do this, we need to recommendation of the Financial System Inquiry to increase maintain conservative business settings, set strong capital mortgage risk weights for the major banks. levels, have high levels of liquidity and solid provisioning. The Group’s ability to deliver a strong performance and to be The regulatory environment both in Australia and elsewhere one of a very small number of global banks that have continues to evolve and places increasing responsibilities on maintained ratings in the AA band, in part results from our the management team and the Board. Additionally, the conservative management. In addition, global regulators, Financial System Inquiry, to which I made reference last year, including our domestic regulator, the Australian Prudential recommended, for purposes of increased competition, an Regulation Authority (APRA), have introduced significant increased capital requirement for the major banks in reforms which result in a greater requirement for strength. Australia. This recommendation was adopted by the Bank The Group also adopted the Basel III measurement and and was the principal reason for our decision to raise monitoring of regulatory capital effective from 1 January 2013. $5 billion by way of an entitlement offer for all shareholders in The APRA prudential standards require a minimum CET1 August. ratio of 4.5% effective from 1 January 2013. An additional Turning to our operations, the environment in which we CET1 capital conservation buffer of 3.5% (which includes a operate continues to be volatile. We saw this play out during Domestic Systemically Important Bank (DSIB) requirement the year in the Eurozone with the crisis in Greece, and while of 1%) will be implemented on 1 January 2016, bringing the resolved for the time being, this element of volatility seems CET1 requirement for the Group to 8%. likely to be a recurring theme. In this context, whilst the Group As at 30 June 2015, under this measure, the Group had a has no exposure to Greek Sovereign Debt nor direct CET1 ratio of 9.1%. APRA has undertaken a study on an exposure to Greek banks, it is a situation we monitor very internationally comparable capital ratio which when taking closely, and in particular how it might impact the availability of account of the impact of our $5 billion entitlement offer, would funding should the crisis spread. place the Group well within the top quartile of global peer There has also been a marked slowdown in the rate of growth banks. in the Chinese economy and a consequent slowdown in the Dividends: import of minerals from Australia. Whether or not related, The Group’s dividend policy seeks to deliver: there has also been considerable volatility on the Chinese stock market in recent months. Whilst this again does not . Cash dividends at strong and sustainable levels; directly impact the Group, there is no denying its effect on the . A full-year payout ratio of 70% to 80%; and Australian economy, particularly in activities associated with . The maximum use of franking by paying fully franked the mining industry. dividends. Within the Group and directly associated with our objective to In-line with this policy, the final dividend declared was perform well, we are very focused on strengthening our $2.22 per share, representing a dividend payout ratio on a values-based culture built around integrity, collaboration, cash basis of 80.5%. This brings the total dividend for the excellence, accountability and service. year ended 30 June 2015 to $4.20 per share, an overall Over the last 12 months, the Group undertook an extensive dividend payout ratio of 75.1%. review of our culture, assisted by external advisers, The Shares taken up as a result of the entitlement offer in August Ethics Centre, KPMG and Gilbert & Tobin. While integrity, do not rank for these dividends. collaboration, transparency and trust are all clear ingredients of “ethics”, the task of ensuring that behaviour mirrors Commonwealth Financial Planning excellence in all of these characteristics will be an ongoing In last year’s Annual Report, I described in some detail the task. It has management’s full attention and is central to the Open Advice Review program, a far-reaching and expansive conduct of the Group’s business. program of review and remediation to redress past problems in parts of our financial planning business. Operating and Financial results The program demonstrates our commitment to customers Commentary on the details of the operating and financial who have concerns regarding the financial planning advice results are included in the CEO’s report and in the financial they received and aims to rectify any instances of documents released for the 2015 result. For the period, the inappropriate advice. The program was open for registrations Board declared a final dividend of $2.22 per share bringing for one year from 3 July 2014 to any Commonwealth the total dividend for the year to $4.20 an increase of 5% on Financial Planning or Financial Wisdom customer who had last year. The Group delivered a net profit after tax on a cash received advice between 1 September 2003 and 1 July 2012. basis of $9,137 million, up 5% on last year. Earnings per The program received more than 22,000 expressions of share on a cash basis increased 5% on the prior year to interest from customers, with around 7,000 customers so far 560.8 cents per share and return on equity, also on a cash requesting a formal review of the financial advice they basis, decreased 50 basis points on the prior year to 18.2%. received. We have a large and fully resourced specialist team There is without doubt, more challenge in our industry and working on the program. The sole focus of the program is to 2 Commonwealth Bank of Australia – Annual Report 2015 Chairman’s Statement complete the reviews properly and with the right degree of disclosure regime and a better outcome for the community thoroughness and consistency. It will take time to complete and our shareholders. We also believe that categorising the the reviews and some people will receive the result before ESG risks on a loan by loan basis is leading practice among others, which is normal for a program of this size and commercial banks. complexity. As we are concerned that no one is On the other side of the equation, we are very active in disadvantaged by being later in the queue, we will pay supporting alternative energy sources, both locally and interest on any compensation we offer. Due to the complexity internationally. Over the past five years our exposure to the of the issues and the overriding need to get to the right renewable energy sector has increased significantly, while answer for our customers, we expect the program to take our exposure to coal-based energy has remained static. We about two years to complete. now have exposure to more than 180 projects in the wind Added to this, we have introduced new education standards power, solar power, hydro power and landfill gas generation for our financial advisers and we participated in the Senate sectors. Inquiry which is looking into the inner workings of this sector. With regard to our own environmental performance, our We also advocated for the introduction of an adviser register efforts to reduce carbon emissions and mitigate the risks of to improve transparency for consumers and access to climate change have been recognised by CDP, (the Carbon information to make more information choices about financial Disclosure Project) the world’s largest voluntary system for advisers. collecting climate change related data. CDP focuses on the climate change approach of the ASX 200 and NZX 50 listed Environmental, Social and Governance risks and companies and ranks their performance on leadership opportunities indices. The Bank, for the second year in a row, was awarded Clearly as a financial institution, we understand that the the highest ranking Australian bank listed in the CDP Global decisions we make have an impact on the broader community Index, achieving an overall disclosure score of 100% and an and that we are in a position to use our capabilities and ‘A band’ for climate performance. The Bank is the only resources to make a positive contribution to the economy company in Australia and New Zealand to achieve these two generally and to the environment.