Commonwealth Bank of Australia ANNUAL REPORT 2009 Determined to be better than we’ve ever been. Back to be updated Annual Report 2010 The text pages of the Annual Report are printed on Terrapress Silk produced in Kabel, Germany. Stora Enso Kabel is certified under ISO 9001, ISO 14001 and EMAS (Eco Management and Audit System). All virgin fibre used by Stora Enso products originates from well managed forests and controlled sources. www.commbank.com.au CBA1421 010908 Commonwealth Bank of Australia ACN 123 123 124 Contents Chairman‟s Statement 2 Chief Executive Officer‟s Statement 4 Presentation of Financial Information 7 Highlights 8 Group Performance Analysis 13 Asset Quality 19 Retail Banking Services 20 Business and Private Banking 22 Institutional Banking and Markets 24 Wealth Management 26 New Zealand 30 Bankwest 34 Other Divisions 36 Investment Experience 38 Risk Management 39 Capital Management 44 Description of Business Environment 50 Sustainability 53 Corporate Governance 57 Directors‟ Report 63 Five Year Financial Summary 91 Financial Statements 93 Income Statements 94 Statements of Comprehensive Income 95 Balance Sheets 96 Statements of Changes in Equity 97 Statements of Cash Flows 99 Notes to the Financial Statements 101 Directors‟ Declaration 232 Independent Auditor‟s Report 233 Shareholding Information 235 International Representation 239 Contact Us 240 Corporate Directory 241 Chairman‟s Statement Introduction Underlying profit after tax for the Wealth Management business increased 15% on the prior year to $592 million. Cash net profit This is my first Statement to you as Chairman of the after tax for the Wealth Management business was significantly Commonwealth Bank of Australia (”the Group”). It was a great honour to be offered the position and to take over from John higher compared with the prior year at $718 million. Schubert on his retirement in February this year. Cash net profit after tax for our New Zealand based ASB and Sovereign was NZ$461 million, a decrease of 14% on the prior The Group is a strong organisation and the resilience and year. The result reflected the impact of tightening credit markets, strength of the Group‟s business franchise was well demonstrated by its financial and operating performance through which in turn led to increased funding costs along with the the global financial crisis which continued into the 2010 financial recession in New Zealand. year in which the Group has delivered another good result. Bankwest cash net profit after tax for the year ended 30 June 2010 was $60 million, up from the pro forma profit of $3 million Although the outlook for the 2011 financial year is somewhat uncertain I am confident that the Group will continue to perform last year. The result reflected a strong operating performance, well as we pursue our vision of becoming Australia‟s finest partly offset by higher loan impairment expense. financial services organisation through excelling in customer Cash net profit after tax for our Asian banking businesses was service. $45 million, an increase of 50% on the prior year. The result was underpinned by strong income growth from the Chinese retail Results banks and Indonesian life insurance business, partially offset by The Group‟s statutory net profit after tax for the full year ended an increase in impairment expense. 30 June 2010 was $5,664 million, which represents a 20% increase on the prior reported year. Global Banking Regulation Cash net profit after tax for the full year was $6,101 million, Following the problems experienced by the United States and which represents an increase of 42% on the prior year. This European banking systems during the global financial crisis we result was achieved in a better macroeconomic environment have seen global regulators looking to introduce changes to banking regulation aimed at preventing similar problems from than 2009, but the outlook still remains uncertain, mainly due to volatility in international markets, and doubts about the speed of arising again. Broadly they have focused on proposals that recovery of the United States and European economies. banks carry higher levels of capital and more liquidity. While regulators in some jurisdictions clearly need to address Key financial performance highlights for the year included: the adequacy of their regulatory regime post the global financial Net interest income growth of 11% on the prior year which crisis, it is important that we, in Australia, think carefully before reflected solid retail lending and deposit growth; adopting a “one size fits all” approach. There are at least three Other banking income was 3% down on the prior year and reasons why we should be cautious: was impacted by lower credit card loyalty, exception and ATM fee income, combined with lower trading income from Firstly, the major Australian banks came through the global reduced financial markets volatility; financial crisis relatively unscathed which is largely due to Funds management income increased by 4% on the prior the fact that we were well capitalised and had put in place rigorous internal processes as a result of the adoption of year due to improved investment markets returns driving higher average Funds Under Management and Funds advanced accreditation under Basel lI; Under Administration; and Secondly, we, unlike some countries, already have a strong regulatory environment and a good oversight Insurance income increased by 2% on the prior year, as a system; and, result of solid inforce premium growth, partially offset by higher claims experience. Finally there is a danger that higher capital and/or liquidity levels could significantly increase the cost of, or reduce the Cash Return on Equity for the year ended 30 June 2010 was a availability of, credit to our customers. healthy 18.7%, up 370 basis points due to increasing profitability and effective capital management. So, rather than rush in and adopt a “global solution” we will continue to work closely with Government and our own The final dividend declared was $1.70 per share, an increase of regulators on sensible policy initiatives that don‟t impact 48% on the prior year. The total dividend for the year to 30 June negatively on our customers, our shareholders and the 2010 was $2.90, taking the dividend payout ratio to 73.9%. Australian economy. Retail Banking Services cash net profit after tax was $2,461 Dividends and Capital million, which represented an increase of 17% on the prior year. This result reflects strong volume growth and continued focus on The final dividend of 170 cents per share, which is fully franked, cost efficiency. will be paid on 1 October 2010. The Group will satisfy the Dividend Reinvestment Plan for the 2010 financial year through Business and Private Banking delivered a strong performance, the full or partial on-market purchase and transfer of shares. achieving 21% growth in cash net profit after tax to $893 million. This result reflected continued momentum across all businesses During the year dividend and interest payments were also made with operating performance growth of 19% and total banking to the holders of the Group‟s various capital securities: PERLS III, PERLS IV, PERLS V, Trust Preferred Securities 2003, Trust income up by 11%. Preferred Securities 2006, ASB Capital Preference Shares and Institutional Banking and Markets achieved a cash net profit after ASB Capital No 2 Preference Shares. tax of $1,182 million, a significant increase on the prior year. Lower impairment charges were the main driver of the result supported by growth in operating income in line with improved market conditions. 2 Commonwealth Bank of Australia Annual Report 2010 Chairman‟s Statement The Group maintains a strong capital position with the capital remain fragile. This fragility manifested itself in a slowing in the ratios remaining well in excess of both APRA minimum capital underlying momentum in our business at the end of the 2010 adequacy requirements and the Board‟s approved minimum financial year. target at all times throughout the period. Tier One Capital and As a result it is appropriate to maintain a degree of caution about Total Capital ratios as at 30 June 2010 were 9.15% and 11.49% the prospects for our business for the coming year. We intend to respectively. retain conservative capital and liquidity settings for the The following significant initiatives were undertaken during the foreseeable future so that we are able to provide support to our financial year to actively manage the Group‟s Tier One Capital: customers in these uncertain times. The allocation of $685 million ordinary shares in order to Conclusion satisfy the DRP in respect of the final dividend for the 2010 has been another successful year for the Group in a 2008/2009 financial year, representing a DRP participation number of respects. The result demonstrates that the Group is in rate of 39%, inclusive of DRP discount of 1.5%; a strong financial position with a robust and sustainable The allocation of $772 million of ordinary shares in order to business model. We are also seeing the disciplined execution of satisfy the DRP, in respect of the interim dividend for the the Group‟s strategy focussed on customers, people and 2009/2010 financial year, representing a participation rate technology. Our Australian business is continuing to support its of 42%, inclusive of DRP discount of 1.5%; and customers in difficult times while consistently delivering better The Group issued $2 billion ($1,964 million net of issue results. This performance is a tribute to the strength of the Group costs) PERLS V securities in October 2009 which qualify business model and the enormous commitment and hard work as Non-Innovative Tier One Capital. of our people who are delivering good results for our customers The strength of the Group‟s capital position continues to be and shareholders.