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Preliminary Final Report

Document date:  Thu 24 Oct 2002
Published:  Thu 24 Oct 2002 12:57:56
Document No:  196680
Document part:  P
Market Flag:  Y
Classification:  Preliminary Final Report , Periodic Reports - Other , Dividend Record Date , Dividend Pay Date , Dividend Rate


HOMEX - Melbourne                                                     


ANZ is underpinned by an ongoing focus on risk issues and strategy at
the highest levels and a comprehensive risk management framework

* The Board, providing leadership, approving risk appetite and
strategy and monitoring progress.

* A strong framework for development and maintenance of Group-wide
risk management policies, procedures and systems, overseen by an
independent central team of risk professionals reporting directly to
the Chief Executive Officer.

* The use of sophisticated risk tools, applications and processes to
execute our global risk management strategy across the Group.

* Primary Business Unit-level accountability for management of risks
in alignment with the Group's strategy.


The Board of Directors, through the Risk Management Committee,
approves the Group's risk appetite and is responsible for reviewing
and approving ANZ's risk management strategy and policies. The Risk
Management Committee meets regularly to ensure that the requisite
culture, practices and systems are in place across the Group, and to
discuss the Group's response to emerging risk issues and trends. The
Board of Directors also reviews the effectiveness of the risk
management systems through reports from management and from three
specific management Risk Committees: the Credit & Trading Risk
Committee, the Group Asset and Liability Committee and the Operating
Risk Executive Committee.


Management has the primary responsibility for identifying and
evaluating significant risks to the business and for implementing
suitable controls.

Responsibility for the implementation of risk policy and for ensuring
that there is an effective top-level control framework is delegated
to the Chief Risk Officer who reports to the Chief Executive Officer.

The Chief Risk Officer implements the risk strategies and policies
approved by the Board by leveraging specialist expertise within Group
Risk Management in three key types of risk: Credit Risk, Market Risk
and Operational Risk. Group Risk Management is also responsible for
setting risk policy, determining risk measurement methodology,
overseeing the Business Units' compliance with policies, regulations
and laws, and undertaking regular risk evaluation and reporting. All
of these functions are undertaken by risk professionals with
extensive experience and have been the subject of substantial
additional investment in recent years.


Within each Business Unit the Managing Director has primary
responsibility for risk management. Each Business Unit has a risk
management team and receives further assistance from a senior risk
professional who provides strategic guidance and advice. This
partnership approach ensures timely communication about risk issues
as they arise and also provides the means for effective governance
and oversight by the Chief Risk Officer.

The various risks inherent in the operations of the Group may be
broadly grouped together under the following three categories:


Group Risk Management's responsibilities for credit risk policy and
management are principally executed through two dedicated departments
- Wholesale Risk, and Retail Risk.

Wholesale Risk services the Group's Corporate, Institutional and
Global Investment Banking activities, while Retail Risk services the
Group's consumer-based businesses.

All major credit decisions (or automated decision processes) for the
Group's corporate and consumer businesses require dual approval by
both Group Risk Management and Business Unit-based personnel.


2002 was a very difficult year in the international credit markets
highlighted by large corporate failures and accounting frauds,
continued difficulties in the energy and telecommunications
industries, increased share market volatility and an overall trend
towards increased risk aversion. In recognition of these events, and
consistent with ANZ's objective to continually improve our core risk
management processes to industry leading levels we have implemented a
number of substantial enhancements to our framework for managing
credit risk in 2002.

Specific improvements include:

* Continuing the trend of previous years, ANZ's largest corporate
exposures were further materially reduced in 2002. The aggregate of
our top 10 committed exposures as a percentage of Adjusted Common
Equity declined over the last year from greater than 130% in
September 2001 to approximately 100% in September 2002.

* Further substantial reductions were made to the limits applying to
our single customer exposures. These limits vary with the credit
rating and geographical location of the customer; the limits
applicable to offshore customers are 40% lower than those applicable
in Australia and New Zealand. In addition, inner sublimits on funded
exposures were introduced in October 2002.

* Cross-border limits were further materially reduced (post September
11) in South Asia, Middle East and Asia.

* ANZ's internal credit ratings are now regularly and systematically
reviewed against movements in external ratings, market indices,
credit spreads and other industry indicators for "early warning"

* ANZ's internal risk grading scale was expanded from 10 to 27
customer credit ratings.

* A new credit cost calculator, "C-Risk", was implemented, which
calculates economic credit costs for individual facilities.

* A wider application of sophisticated risk measurement tools in the
retail sector, resulting in more efficient and effective credit
assessment processes. Credit policies were tightened in certain
specific areas.

Despite a difficult economic environment in 2002, the overall quality
of ANZ's corporate and consumer credit portfolios remains sound. As
noted in the 2002 Interim Results, Australian and New Zealand risk
profiles remain stable with the International profile being affected
by a small number of large corporate downgrades. In response, the
assessment of counterparty credit worthiness has been enhanced
through providing greater weighting to the quality and integrity of
counterparties' financial disclosure. Additionally, concentration
limits on certain industries and sectors and customers have been
reviewed and further aligned to the Group's risk appetite.


Market Risk is the risk that the Group will incur losses from changes
in interest rates, foreign exchange rates or the prices of equity
shares and indices, commodities, debt securities and other financial
contracts, including derivatives. It is managed by a variety of
different techniques with Group Risk Management setting limits to
control trading positions and interest rate risk up to a Board
authorised total.


During the year, rollout of a new "Market Risk Engine" was completed.
This major initiative enables better aggregation and measurement of
market risks across asset classes (eg, equities, foreign exchange and
interest rate products), and positions ANZ at the forefront of market
risk management capability.

Other key undertakings over the year, which focus particularly on the
crossover dynamics between Credit Risk and Market Risk, include:

* Establishment of a new framework to enable trading in credit
derivatives. This capability introduces another tool to support "best
practice" management of the Group's credit portfolio, the creation of
structured investment products for clients, and enhanced trading

* Evaluation of market risk management capabilities of clients
exposed to significant market risks in their core business, thereby
improving the Group's overall management of credit risk associated
with these clients.


Operating risk is the risk of direct or indirect loss resulting from
inadequate or failed internal processes, people and systems or from
external events.

Group Risk Management is responsible for establishing Group policy
and for the measurement, monitoring and reporting of operating risk
across the Group.


ANZ's operating risk framework, policy and procedures continue to be
strengthened in line with new and emerging risk trends. Key activity
in 2002 included:

* Further development of ANZ's methodology for operational risk
measurement and economic capital allocation.

* Strong focus on fraud risk management, including implementation of
a Group fraud policy, enhanced technology tools and development of
industry solutions in conjunction with Government and industry

* Refinement of the Group's business continuity capability in line
with new and emerging threats, reinforced by crisis management

* Significant enhancement to ANZ's Regulatory Compliance framework,
including policies to prevent money laundering, criminal and
terrorist financing and to address privacy and customer disability,
and procedures for electronic funds transfer.


ANZ's risk management capabilities are considered to be a strategic
asset and a source of competitive advantage. Through effective use of
technology and strong management focus, we seek to further strengthen
the Group's risk capabilities and culture to ensure that ANZ remains
at the forefront of risk management capability within the financial
services industry.


The exposure definitions in the following tables are consistent with
the ones used by Standard & Poor's in their assessment of regional
risk published in February 1998.

Both local currency and cross border exposures are included.

Trade finance is captured at 100% of face value.

All cross border exposure is recorded on the basis of the Country
where the asset is booked.

Treasury funded exposures includes predominantly bank Money Market
lines and Certificates of Deposit.

Treasury unfunded exposure includes Foreign Exchange and Interest
Rate contracts (forwards, options and swaps). The exposure is
calculated using a conservative "mark to market plus potential
exposure" methodology. This methodology calculates the market value
of a contract and adds a factor for the potential change in value
from the valuation date to maturity. The mark to market of off
balance sheet exposures is netted by counterparty where the Group
holds a valid legally enforceable netting agreement with that

Financial guarantees represents lending to entities outside of Asia
(typically Australia) where there is a relationship with the parent
entity through a guarantee standby letter of credit.

Term lending is split into three categories: exposure to
multinationals covers lending in countries to international or global
companies, frequently involving US, UK, European or Australian
parents of joint venture partners, term lending in local currency
which is principally franchise countries, and cross border term
lending (mostly USD).

Project finance includes a mix of products and is net of Political
Risk Insurance (PRI) cover provided by either a large Government
Multi Lateral Agency or a large Global Private Insurance company.

Securities include traded debt instruments and are measured at
assessed market value (mark to market).