Commonwealth Bank of Australia Annual Report 2013 ANNUAL REPORT SCAN THE QR CODE ABOVE 2013 TO DOWNLOAD OUR COMMONWEALTH BANK INVESTOR RELATIONS APP CBA1421 190813 010912 COMMONWEALTH BANK OF AUSTRALIA | ACN 123 123 124 This page has been intentionally left blank Contents Chairman’s Statement 2 Chief Executive Officer’s Statement 4 Highlights 6 Group Performance Analysis 10 Group Operations and Business Settings 20 Sustainability 30 Corporate Governance 34 Directors’ Report 40 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 185 Independent Auditor’s Report 186 Shareholding Information 188 International Representation 192 Contact Us 194 Corporate Directory 195 Annual Report 2013 1 Subject to Chairman’s Review Chairman’s Statement Introduction income ratio improved to 45.0% reflecting higher revenues and productivity improvements; and Over the past twelve months, the global economy (outside Australia) has gradually improved, which is better than our . Loan impairment expense decreased 1% to $1,082 view last year. In particular there has been some positive million, reflecting the gradual improvement in credit card momentum in the United States. and home loan arrears, with economic overlays maintained at existing levels. There has however not been similar momentum in Europe, and the structural imbalances between North and South seem The Group’s assets increased by $35 billion over the prior as challenging as ever. year, despite subdued underlying credit growth. This was largely driven by an increase in home lending, business and In China there appears to have been a shift from corporate lending balances and higher derivative asset infrastructure led growth to one driven by consumption with balances. resultant growth prospects settling at a slightly lower level than seen in the past. The Group’s funding requirements were mainly generated from deposits, growing by 7% to $405 billion. Customer This combination of conditions has not had a positive impact deposits now make up 63% of total funding. on the Australian economy where notwithstanding some recent softening, the Australian dollar remains high. The Dividends and Capital outlook for continued investment in the resources sector has done little to improve consumer and corporate confidence. The Group’s ability to deliver strong performance and to be This in turn has meant that credit growth has remained one of a handful of global banks which have maintained subdued. double A credit ratings, has been underpinned by our decision to retain conservative business settings, particularly On the positive side however, there have been signs of a with respect to provisioning, liquidity, funding and capital. gradual improvement in demand for housing finance where falling interest rates have encouraged buyers to return to the As far as capital is concerned, global regulators, including our market. domestic regulator, the Australian Prudential Regulation Authority (APRA), have introduced significant reforms in Despite the subdued environment, the Group has delivered response to the problems faced by many financial institutions another good result, which is a tribute to our continued as a result of the Global Financial Crisis. execution of key strategic and operational initiatives both within Australia and to a lesser extent in our businesses Further capital reforms are expected over the next twelve overseas where our capability continues to grow. months and the coming years, including the introduction of the Level 3 conglomerate reforms in 2014 and the In this low growth environment, value has been delivered by implementation of the capital conservation buffer in 2016. recognising the importance of enhancing the financial wellbeing of our customers, by continued investment in The Group adopted the Basel III measurement and technology and through a relentless focus on productivity and monitoring of regulatory capital effective from 1 January 2013, process simplification. and has taken a conservative and proactive approach to capital management. This is reflected in the overall strength In short, we have focused on quality, both in customer service of the Group’s capital position. The CET1 ratio (on an and business processes. This focus will remain a priority in internationally harmonised basis) has increased by nearly both the coming and future years. 60% since the Global Financial Crisis (June 2007). The The Group continues to be managed conservatively with Group’s 30 June 2013 internationally harmonised CET1 ratio strong capital, high levels of liquidity and robust provisioning. of 11.0%, places it well above the average of its international The Group remains well funded, which has enabled us to peers and comfortably above your Board’s approved target. continue supporting our customers, some of whom are finding There has inevitably been a significant cost and investment of the current environment challenging. management time in relation to implementing increasingly complex regulatory reforms. The Group welcomes the recent Operating and Financial Results announcement by the Basel Committee of Banking The Group has delivered another good result despite Supervision of a review of the Basel capital framework in subdued underlying credit growth. order to balance risk sensitivity and ensure simplicity and Net profit after tax on a cash basis increased 10% on the prior comparability. year to $7,819 million. The Group delivered a strong Return Last year, I reported that your Board had reviewed the on Equity (ROE) performance of 18.4%, again on a cash Group’s dividend policy. This revised policy included a target basis. Key elements of the result were: payout ratio of between 70% and 80% of cash earnings and a . Net interest income increased 6% to $13,944 million, more even distribution as between the interim and final reflecting 4% growth in average interest earning assets dividend. I also indicated that the Board would consider and a four basis point increase in net interest margin; minimising the dilutive impacts of the Dividend Reinvestment Plan (“DRP”) through neutralisation initiatives. Other banking income increased by 7% to $4,221 million driven by a rebound in Markets trading income and a Consistent with this revised policy the Group has, this year: modest increase in lending fees; . Increased the total dividend payment by 9% to $3.64, . Funds management income increased 10% to which represents a payout ratio for the year of 75.4% of $2,146 million, driven by a combination of factors, cash earnings, compared with last year’s ratio of 75.0%; including a 13% increase in Funds Under Administration . Increased the interim dividend by 20% to $1.64 with the as investment markets improved, strong net flows into final dividend up 2% on last year’s final to $2.00; and the FirstChoice and Customs Solutions Platforms and . In light of the Group’s strong capital position, neutralised higher performance fees received by CFSGAM; the dilutive impact of the DRP through an on market . Insurance income increased 8% to $1,034 million, driven share purchase for the interim dividend and intends by 16% average inforce premium growth as strong doing the same for the final dividend payable in October sales, and favourable claims experience in retail life was 2013. partially offset by unfavourable claims experience in The other major capital initiative for the year was the issue, in wholesale life and increased lapse rates in retail life; October 2012, of $2 billion Perpetual Exchangeable . Operating expenses increased 4% to $9,605 million, Resalable Listed Securities (PERLS VI), which is a Basel III driven by inflation-related salary increases and higher compliant, Additional Tier One Capital security. The proceeds superannuation expenses, higher occupancy and of this issue were used, to the extent necessary, to refinance equipment expenses and an increase in information PERLS IV and otherwise to fund the Group’s business. technology costs driven by system enhancements and Existing holders of CBA ordinary shares and hybrid increased software amortisation. The Group’s cost to instruments were given priority in subscribing for PERLS VI. 2 Commonwealth Bank of Australia Chairman’s Statement Corporate Governance and Board Outlook Performance As I said earlier and looking back on last year’s letter, it would The Board’s Non-Executive Directors meet at least annually be fair to say that the improvement in the international macro for an open discussion on the Board’s performance and to environment has been slightly better than we had anticipated. identify where improvements can be made in Board In particular, the United States economy seems to be on a processes. The review process includes a performance much sounder footing and looks to have good positive assessment of the Board Committees and each Director. momentum, although there are clearly still longer term structural issues to be resolved. In Europe, volatility seems to This year the Board again used an independent facilitator for have reduced and the outlook is more positive than it was this its performance review, which reported on progress against time last year. Having said that, I still believe it will take some last year’s findings in terms of both collective challenge and time before the Eurozone returns to a period of sustainable individual contributions. It was a positive review, which also economic growth. endorsed the current Board and Committee processes. The assessment has been considered by the Board and individual In China the political concerns of last year appear to have Director assessments have been diarised with Directors by abated, although economic growth seems to be settling at a the Chairman of the Board. slightly lower level than previously. I have no doubt that China will continue to experience some volatility but medium to While there were no new Non-Executive Directors appointed longer term economic prospects remain positive.