Bank of China (New Zealand) Limitedpic.bankofchina.com/bocappd/NewZealand/201803/P...Bank of China...

Bank of China (New Zealand) Limited

Disclosure Statement for the year ended

31 December 2017

TABLE OF CONTENTS

1 GENERAL INFORMATION AND DEFINITIONS ............................................................................................................ 1

2 GENERAL MATTERS ................................................................................................................................................... 1

3 GUARANTEE ARRANGEMENTS .................................................................................................................................. 2

4 DIRECTORATE ............................................................................................................................................................ 3

5 CONFLICTS OF INTEREST ........................................................................................................................................... 4

6 INTERESTED PARTY TRANSACTIONS ......................................................................................................................... 5

7 AUDITOR ................................................................................................................................................................... 5

8 CONDITIONS OF REGISTRATION ............................................................................................................................... 5

9 PENDING PROCEEDINGS OR ARBITRATION ............................................................................................................ 10

10 CREDIT RATINGS ...................................................................................................................................................... 10

11 PRIORITY OF CREDITORS’ CLAIMS ........................................................................................................................... 12

12 OTHER MATERIAL MATTERS ................................................................................................................................... 12

13 HISTORICAL SUMMARY OF FINANCIAL STATEMENTS ............................................................................................. 12

14 DIRECTORS' STATEMENTS ....................................................................................................................................... 13

APPENDIX 1 - DEED OF GUARANTEE ............................................................................................................................... 14

APPENDIX 2 - FINANCIAL STATEMENTS FOR THE PERIOD ENDED 31 DECEMBER 2017 ................................................ 24


Disclosure Statement for the year ended 31 December 2017

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1 GENERAL INFORMATION AND DEFINITIONS

This is the Disclosure Statement for the year ended 31 December 2017. Certain information contained in this Disclosure

Statement is required by section 81 of the Reserve Bank of New Zealand Act 1989 (“Reserve Bank Act”) and the Registered

Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014 (as amended) (the “Order”).

In this Disclosure Statement:

The "Bank" means Bank of China (New Zealand) Limited (Company Number 5305661);

"Banking Group" means the Bank and its subsidiaries. As at the date of this Disclosure Statement, the Bank does not

have any subsidiaries and is the only member of the Banking Group;

"BoC" means Bank of China Limited which is the ultimate parent bank of the Bank;

"Board" means the Board of Directors of the Bank;

"RMB" means Renminbi, being the official currency of the People's Republic of China; and

“Reserve Bank” means the Reserve Bank of New Zealand.

Words and phrases not defined in this Disclosure Statement, but defined by the Order, have the meaning given by the Order

when used in this Disclosure Statement. All amounts referred to in this Disclosure Statement are in New Zealand dollars unless

otherwise stated.

The Disclosure Statement of the Bank is available for download, free of charge, on the Bank’s website

(www.bankofchina.com/nz). A printed copy will also be made available, free of charge, upon request and will be dispatched by

the end of the second working day after the day on which the request is made.

2 GENERAL MATTERS

2.1 Registered Bank

The Bank was incorporated under the Companies Act 1993 on 16 June 2014.

The Bank’s registered office and principal place of business is Level 17, Tower 1, 205 Queen Street, Auckland 1010, New

Zealand.

2.2 Ultimate parent bank and ultimate holding company

The Bank is a wholly-owned subsidiary of BoC. BoC is the Bank's ultimate parent bank and ultimate holding company. BoC is

incorporated in China and is subject to regulatory oversight by the China Banking Regulatory Commission (the “CBRC”) and the

Government of the People's Republic of China (China).

At 31 December 2017, BoC (as the ultimate parent bank of the Bank) has a direct qualifying interest in 100% of the voting rights

of the Bank. In addition, BoC is able to directly appoint up to 100% of the Board. All appointments to the Board must be approved

by the Reserve Bank.

2.3 Limits on material financial support by the Ultimate Parent Bank

There are no regulations, legislation or other restrictions of a legally enforceable nature in China that may materially inhibit the

legal ability of BoC to provide material financial support to the Bank.

http://www.bankofchina.com/nz



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3 GUARANTEE ARRANGEMENTS

3.1 Details of the guarantor

As at the date this Disclosure Statement was signed, the obligations of the Bank are guaranteed by BoC, the ultimate parent bank.

The address for service of BoC is No.1, Fuxingmen Nei Dajie, Beijing 100818, People's Republic of China.

BoC is not a member of the Banking Group.

As disclosed in BoC’s unaudited consolidated results for the nine months ended 30 September 2017, BoC’s net capital for capital

adequacy purposes was RMB1,674,724 million and its capital adequacy ratio was 13.87%. Capital ratios are calculated in

accordance with the Capital Rules for Commercial Banks (Provisional) (Y.J.H.L [2012] No.1) issued by CBRC.

BoC has the following credit ratings applicable to its long-term senior unsecured obligations payable in RMB as at the date this

Disclosure Statement was signed:

Rating agency Current credit rating Rating outlook

Standard & Poor's Ratings Services A Stable

Moody's Investors Services A1 Stable

Fitch Ratings A Stable

On 2 March 2016, Moody’s changed the outlook on BoC’s ratings to negative from stable.

On 24 May 2017, Moody’s changed the outlook on the BoC’s rating to stable from negative.

For an explanation of the credit rating scales, see the table under the “10.2 Description of credit rating scales” on page 11 of this Disclosure Statement.

3.2 Details of guaranteed obligations

As at the date of this Disclosure Statement, subject to the terms of the Deed of Guarantee (“the Guarantee”) included in Appendix

1, the obligations of the Bank are guaranteed by BoC.

Subject to the Guarantee:

(1) The Guarantee is an unlimited, irrevocable, all monies, continuing guarantee.

(2) The Guarantee is capable of being terminated in accordance with its terms.

(3) There are no material conditions applicable to the Guarantee other than non-performance by the Bank of its

'Obligations' (as defined therein) provided claims are made in accordance with its terms and accompanied with the

relevant information set out therein.

(4) There are no material legislative or regulatory restrictions in China that would have the effect of subordinating the claims

under the Guarantee of any of the Bank’s creditors, to other claims against BoC in a winding up of BoC.

(5) The Guarantee does not have an expiry date.



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4 DIRECTORATE

4.1 Directors

Shanjun Hu retired as a Director of the Bank, effective from 2 November 2017.

The Directors of the Bank at the date when this Disclosure Statement was signed were:

Name: Hon. Chris Tremain

Non-executive: Yes

Qualifications: Bachelor of Business Studies

(Accounting), Diploma in Business Studies (Marketing)

Primary occupation: Director

Secondary occupation: Property investment

Country of residence: New Zealand

Independent Director: Yes

External Directorships:

Chairman: Hawke’s Bay Regional Investment

Company Limited

Director: Tremain Capital Limited, Tremain Capital

Management Limited

Name: Hon. Ruth Richardson

Non-executive: Yes

Qualifications: LLB (Hons)

Primary occupation: Director

Secondary occupation: Public Policy Consultant



External Directorships:

Chairman: Syft Technologies Limited, Kula Fund II

Advisory Committee, Kiwi Innovation Network

Limited, New Zealand Merino Company Limited;

Director: Synlait Milk Limited

Name: Dongyi Hua

Non-executive: Yes

Qualifications: Ph.D. in Engineering, Applied

Geophysics

Primary occupation: Frontier Service Group - Executive

Director and Acting CEO

Secondary occupation: VDM Group Limited - Executive

Director of Mining

Country of residence: Hong Kong, China


External Directorships: Executive Director of VDM

Group Limited

Name: Huaiyu Chen

Non-executive: Yes

Qualifications: Bachelor degree of Linguistics,

Master degree of Economics

Primary occupation: General Manager & Country Head

–Australia, Bank of China Limited

Secondary occupation: None

Country of residence: Australia

Independent Director: No

External Directorships: None



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Name: Mang Li

Non-executive: Yes

Qualifications: Master of Economics

Primary occupation: General Manager, Global Trade

Services Department, Bank of China Limited


Country of residence: P.R. China


External Directorships: Non-executive Director of

BOC Aviation

Name: Lei Wang

Non-executive: No

Qualifications: MBA, Majoring in Finance

Primary occupation: Executive Director, Bank of China

(New Zealand) Limited




External Directorships: None

4.2 Audit Committee

The Bank has an Audit Committee.

The members of the Audit Committee as at the date of this Disclosure Statement are:

Hon. Chris Tremain, Independent Director

Hon. Ruth Richardson, Independent Director

Dongyi Hua, Independent Director

4.3 Responsible person

Each of the current directors of the Board named above have authorized Mr. Lei Wang in writing to sign this Disclosure

Statement on their behalf in accordance with section 82 of the Reserve Bank Act.

4.4 Address for communications

All communications may be sent to the Directors and the Responsible Person at the registered office of the Bank, Level 17,

Tower 1, 205 Queen Street, Auckland 1010, New Zealand.

5 CONFLICTS OF INTEREST

The Board is responsible for ensuring that actual and potential conflicts of interest between the Directors’ duty to the Bank and

their personal, professional or business interests are avoided or dealt with.

Accordingly, each Director must:

(a) Disclose to the Board any actual or potential conflicts of interest that may exist or might reasonably be thought to

exist as soon as the situation arises.

(b) If required by the Board, take steps as are necessary and reasonable to resolve any conflict of interest within an

appropriate period.

The Board will determine whether or not the Director declaring a conflict should remain present when the Board discusses

matters about which the conflict relates.



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6 INTERESTED PARTY TRANSACTIONS

There have been no transactions entered into by any Director, or any immediate relative or close business associate of any

Director, with the Bank:

(a) on terms other than on those which would, in the ordinary course of business of the Bank, be given to any other

person of like circumstances or means; or

(b) which could otherwise be reasonably likely to materially influence the exercise of that Director’s duties.

7 AUDITOR

The name of the Bank's auditor whose audit or review statement is referred to in this Disclosure Statement is Ernst & Young.

Ernst & Young's address is EY Building, 2 Takutai Square, Britomart, Auckland 1010, New Zealand.

8 CONDITIONS OF REGISTRATION

These conditions of registration apply on and after 1 Oct 2016 as per Reserve Bank of New Zealand’ letter to the Bank, except

as provided otherwise. The registration of the Bank as a registered bank is subject to the following conditions:

1. That—

(a) the Total capital ratio of the Banking Group is not less than 8%;

(b) the Tier 1 capital ratio of the Banking Group is not less than 6%;

(c) the Common Equity Tier 1 capital ratio of the Banking Group is not less than 4.5%;

(d) the Total capital of the banking group is not less than $30 million;

(e) the bank must not include the amount of an Additional Tier 1 capital instrument or Tier 2 capital instrument

issued after 1 January 2013 in the calculation of its capital ratios unless it has received a notice of non-

objection to the instrument from the Reserve Bank; and

(f) the bank meets the requirements of Part 3 of the Reserve Bank of New Zealand document "Application

requirements for capital recognition or repayment and notification requirements in respect of capital"

(BS16) dated November 2015 in respect of regulatory capital instruments.

For the purposes of this condition of registration,—

the Total capital ratio, the Tier 1 capital ratio, the Common Equity Tier 1 capital ratio and Total capital must be

calculated in accordance with the Reserve Bank of New Zealand document: “Capital Adequacy Framework

(Standardised Approach)” (BS2A) dated November 2015;

An Additional Tier 1 capital instrument is an instrument that meets the requirements of subsection 8(2)(a) or (c) of

the Reserve Bank of New Zealand document “Capital Adequacy Framework (Standardised Approach)” (BS2A) dated

November 2015.

A Tier 2 capital instrument is an instrument that meets the requirements of subsection 9(2)(a) or (c) of the Reserve

Bank of New Zealand document “Capital Adequacy Framework (Standardised Approach)” (BS2A) dated November

2015.

1A. That—

(a) the bank has an internal capital adequacy assessment process (“ICAAP”) that accords with the requirements set



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out in the document “Guidelines on a Bank’s Internal Capital Adequacy Assessment Process (“ICAAP”)” (BS12)

dated December 2007;

(b) under its ICAAP, the bank identifies and measures its “other material risks” defined as all material risks of the

banking group that are not explicitly captured in the calculation of the Common Equity Tier 1 capital ratio, the

Tier 1 capital ratio and the Total capital ratio under the requirements set out in the document “Capital Adequacy

Framework (Standardised Approach)” (BS2A) dated November 2015; and

(c) the bank determines an internal capital allocation for each identified and measured “other material risk”.

1B. That, if the buffer ratio of the Banking Group is 2.5% or less, the Bank must:

(a) according to the following table, limit the aggregate distributions of the Bank’s earnings to the percentage limit

to distributions that corresponds to the Banking Group’s buffer ratio:

Banking Group’s buffer ratio Percentage limit to distributions of the Bank’s earnings

0% – 0.625% 0%

>0.625 – 1.25% 20%

>1.25 – 1.875% 40%

>1.875 – 2.5% 60%

(b) prepare a capital plan to restore the Banking Group’s buffer ratio to above 2.5% within any timeframe

determined by the Reserve Bank for restoring the buffer ratio; and

(c) have the capital plan approved by the Reserve Bank.


“buffer ratio”, “distributions”, and “earnings” have the same meaning as in Part 3 of the Reserve Bank of New Zealand

document: “Capital Adequacy Framework (Standardised Approach)” (BS2A) dated November 2015.

2. That the Banking Group does not conduct any non-financial activities that in aggregate are material relative to its total

activities.

In this condition of registration, the meaning of “material” is based on generally accepted accounting practice.

3. That the Banking Group’s insurance business is not greater than 1% of its total consolidated assets.

For the purposes of this condition of registration, the Banking Group’s insurance business is the sum of the following

amounts for entities in the Banking Group:

(a) if the business of an entity predominantly consists of insurance business and the entity is not a subsidiary of

another entity in the banking group whose business predominantly consists of insurance business, the amount

of the insurance business to sum is the total consolidated assets of the group headed by the entity; and

(b) if the entity conducts insurance business and its business does not predominantly consist of insurance business

and the entity is not a subsidiary of another entity in the banking group whose business predominantly consists

of insurance business, the amount of the insurance business to sum is the total liabilities relating to the entity’s

insurance business plus the equity retained by the entity to meet the solvency or financial soundness needs of its

insurance business.

In determining the total amount of the Banking Group’s insurance business—

(a) all amounts must relate to on balance sheet items only, and must comply with generally accepted accounting

practice; and



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(b) if products or assets of which an insurance business is comprised also contain a non- insurance component, the

whole of such products or assets must be considered part of the insurance business.


“insurance business” means the undertaking or assumption of liability as an insurer under a contract of insurance:

“insurer” and “contract of insurance” have the same meaning as provided in sections 6 and 7 of the Insurance

(Prudential Supervision) Act 2010.

4. That the aggregate credit exposures (of a non-capital nature and net of any allowances for impairment) of the

Banking Group to all connected persons do not exceed the rating-contingent limit outlined in the following matrix:

Credit rating of the Bank1 Connected exposure limit

(% of the Banking Group’s Tier One Capital)

AA/Aa2 and above 75

AA-/Aa3 70

A+/A1 60

A/A2 40

A-/A3 30

BBB+/Baa1 and below 15

(1)This table uses the rating scales of Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. (Fitch Ratings’

scale is identical to Standard & Poor’s.).

Within the rating-contingent limit, credit exposures (of a non-capital nature and net of any allowances for

impairment) to non-bank connected persons shall not exceed 15 percent of the banking group’s tier 1 capital.

For the purposes of this condition of registration, compliance with the rating- contingent connected exposure limit is

determined in accordance with the Reserve Bank of New Zealand document entitled “Connected Exposures Policy”

(BS8) dated November 2015.

5. That exposures to connected persons are not on more favourable terms (e.g. as relates to such matters as credit

assessment, tenor, interest rates, amortisation schedules and requirement for collateral) than corresponding

exposures to non-connected persons.

6. That the bank complies with the following corporate governance requirements:

(a) the board must have at least five directors;

(b) the majority of the Board members must be non-executive Directors;

(c) at least half the Board members must be independent Directors;

(d) an alternate Director,—

(i) for a non-executive Director must be non-executive; and

(ii) for an independent Director must be independent;

(e) at least half of the independent directors of the registered bank must be ordinarily resident in New Zealand;

(f) the chairperson of the board of the registered bank must be independent; and

(g) the bank’s constitution must not include any provision permitting a director, when exercising powers or

performing duties as a director, to act other than in what he or she believes is the best interests of the

company (i.e. the bank).



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For the purposes of this condition of registration, “non-executive” and “independent” have the same meaning as in

the Reserve Bank of New Zealand document entitled “Corporate Governance” (BS14) dated July 2014.

7. That no appointment of any director, chief executive officer, or executive who reports or is accountable directly to the

chief executive officer, is made in respect of the registered bank unless:

(a) the Reserve Bank has been supplied with a copy of the curriculum vitae of the proposed appointee; and

(b) the Reserve Bank has advised that it has no objection to that appointment.

8. That a person must not be appointed as chairperson of the Board of the Bank unless:

(a) the Reserve Bank has been supplied with a copy of the curriculum vitae of the proposed appointee; and

(b) the Reserve Bank has advised that it has no objection to that appointment.

9. That the Bank has a Board audit committee, or other separate Board committee covering audit matters, that meets

the following requirements:

(a) the mandate of the committee must include: ensuring the integrity of the Bank’s financial controls, reporting

systems and internal audit standards;

(b) the committee must have at least three members;

(c) every member of the committee must be a non-executive Director of the Bank;

(d) the majority of the members of the committee must be independent; and

(e) the chairperson of the committee must be independent and must not be the chairperson of the Bank.

For the purposes of this condition of registration, “non-executive” and “independent” have the same meaning as in

the Reserve Bank of New Zealand document entitled “Corporate Governance” (BS14) dated July 2014.

10. That a substantial proportion of the bank’s business is conducted in and from New Zealand.

11. That the banking group complies with the following quantitative requirements for liquidity-risk management:

(a) the one-week mismatch ratio of the banking group is not less than zero per cent at the end of each business

day;

(b) the one-month mismatch ratio of the banking group is not less than zero per cent at the end of each business

day; and

(c) the one-year core funding ratio of the banking group is not less than 75 per cent at the end of each business

day.

For the purposes of this condition of registration, the ratios identified must be calculated in accordance with the

Reserve Bank of New Zealand documents entitled “Liquidity Policy” (BS13) dated July 2014 and “Liquidity Policy

Annex: Liquid Assets” (BS13A) dated December 2011.

12. That the registered bank has an internal framework for liquidity risk management that is adequate in the registered

bank’s view for managing the bank’s liquidity risk at a prudent level, and that, in particular:

(a) is clearly documented and communicated to all those in the organisation with responsibility for managing

liquidity and liquidity risk;

(b) identifies responsibility for approval, oversight and implementation of the framework and policies for

liquidity risk management;



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(c) identifies the principal methods that the bank will use for measuring, monitoring and controlling liquidity

risk; and

(d) considers the material sources of stress that the bank might face, and prepares the bank to manage stress

through a contingency funding plan.

13. That no more than 10% of total assets may be beneficially owned by a SPV.

For the purposes of this condition,—

“total assets” means all assets of the banking group plus any assets held by any SPV that are not included in the

banking group’s assets:

“SPV” means a person—

(a) to whom any member of the banking group, has sold, assigned, or otherwise transferred, any asset;

(b) who has granted, or may grant, a security interest in its assets for the benefit of any holder of any covered

bond; and

(c) who carries on no other business except for that necessary or incidental to guarantee the obligations of any

member of the banking group under a covered bond:

“covered bond” means a debt security issued by any member of the banking group, for which repayment to holders is

guaranteed by a SPV, and investors retain an unsecured claim on the issuer.

14. That—

(a) no member of the banking group may give effect to a qualifying acquisition or business combination that

meets the notification threshold, and does not meet the non-objection threshold, unless:

(i) the registered bank has notified the Reserve Bank in writing of the intended acquisition or business

combination and at least 10 working days have passed; and

(ii) at the time of notifying the Reserve Bank of the intended acquisition or business combination, the

registered bank provided the Reserve Bank with the information required under the Reserve Bank

of New Zealand Banking Supervision Handbook document “Significant Acquisitions Policy” (BS15)

dated December 2011; and

(b) no member of the banking group may give effect to a qualifying acquisition or business combination that

meets the non-objection threshold unless:

(i) the registered bank has notified the Reserve Bank in writing of the intended acquisition or business

combination;

(ii) at the time of notifying the Reserve Bank of the intended acquisition or business combination, the

registered bank provided the Reserve Bank with the information required under the Reserve Bank of

New Zealand Banking Supervision Handbook document “Significant Acquisitions Policy” (BS15)

dated December 2011; and

(iii) the Reserve Bank has given the registered bank a notice of non- objection to the significant

acquisition or business combination.

For the purposes of this condition of registration, “qualifying acquisition or business combination”, “notification

threshold” and “non-objection threshold” have the same meaning as in the Reserve Bank of New Zealand Banking

Supervision Handbook document “Significant Acquisitions Policy” (BS15) dated December 2011.



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15. That, for a loan-to-valuation measurement period, the total of the bank’s qualifying new mortgage lending amount in

respect of property-investment residential mortgage loans with a loan-to-valuation ratio of more than 60%, must not

exceed 5% of the total of the qualifying new mortgage lending amount in respect of property-investment residential

mortgage loans arising in the loan- to-valuation measurement period.

16. That, for a loan-to-valuation measurement period, the total of the bank’s qualifying new mortgage lending amount in

respect of non property-investment residential mortgage loans with a loan-to-valuation ratio of more than 80%, must

not exceed 10% of the total of the qualifying new mortgage lending amount in respect of non property-investment

residential mortgage loans arising in the loan-to-valuation measurement period.

17. That the bank must not make a residential mortgage loan unless the terms and conditions of the loan contract or the

terms and conditions for an associated mortgage require that a borrower obtain the registered bank’s agreement

before the borrower can grant to another person a charge over the residential property used as security for the loan.

In these conditions of registration,—

“banking group” means BOC (New Zealand) Limited (as reporting entity) and all other entities included in the group as

defined in section 6(1) of the Financial Markets Conduct Act 2013 for the purposes of Part 7 of that Act.

“generally accepted accounting practice” has the same meaning as in section 8 of the Financial Reporting Act 2013.

In conditions of registration 15 to 17,—

“loan-to-valuation ratio”, “non property-investment residential mortgage loan”, “property-investment residential

mortgage loan”, “qualifying new mortgage lending amount in respect of property-investment residential mortgage

loans”, “qualifying new mortgage lending amount in respect of non property-investment residential mortgage loans”,

and “residential mortgage loan” have the same meaning as in the Reserve Bank of New Zealand document entitled

“Framework for Restrictions on High-LVR Residential Mortgage Lending” (BS19) dated October 2016:

“loan-to-valuation measurement period” means a period of six calendar months ending on the last day of the sixth

calendar month, the first of which ends on the last day of March 2017.

Changes to conditions of registration

During the reporting period there were no changes to the Bank’s conditions of registration.

9 PENDING PROCEEDINGS OR ARBITRATION

As at the date of this Disclosure Statement, there are no pending legal proceedings or arbitration concerning any member of

the Banking Group, whether in New Zealand or elsewhere, that may have a material adverse effect on the Bank or the Banking

Group.

10 CREDIT RATINGS

10.1 The Bank’s credit ratings

The Bank has the following credit ratings as at the date this Disclosure Statement was signed.

Credit ratings Standard & Poor's Moody’s Investor Service

Long-term counterparty credit rating A A1

Short-term counter party credit rating A-1 Prime-1

Outlook Stable Stable



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There have been no changes to the above credit ratings since the ratings were obtained. There are no qualifications to the

rating for the Bank.

On 4 March 2016, Moody’s changed the outlook on the Bank’s rating to negative from stable, reflecting the change to negative

outlook on BOC’s rating and the Chinese sovereign rating.

On 24 March 2017, Moody’s has reaffirmed the Long-term counterparty credit rating at A1 and the outlook at negative for the

Bank.

On 26 May 2017, Moody’s changed the outlook on the Bank’s rating to stable from negative.

On 23 August 2017, Standard & Poor’s Global Ratings assigned its ‘A’ long-term and ‘A-1’ short-term counterparty credit rating

and ‘Stable ‘outlook to the Bank.

A credit rating is not a recommendation to buy, sell or hold securities of the Bank. Such ratings are subject to revision,

qualification, suspension or withdrawal at any time by the assigning rating agency.

Investors in the Bank’s securities are cautioned to evaluate each rating independently of any other rating.

10.2 Description of credit rating scale

The following is the description of the major rating category of each rating agency for the rating of long term senior unsecured

obligations:

Standard & Poor's

Moody’s Investors

Service Fitch Ratings Description of ratings1

10.2.1 The following grades display investment grade characteristics:

AAA Aaa AAA

Ability to repay principal and interest is extremely strong. This is the highest investment category.

AA Aa AA Very strong ability to repay principal and interest.

A A A Strong ability to repay principal and interest although susceptible to adverse changes in economic, business or financial conditions.

BBB Baa BBB Adequate ability to repay principal and interest. More vulnerable to adverse changes.

10.2.2 The following grades have predominantly speculative characteristics:

BB Ba BB Significant uncertainties exist which could affect the payment of principal and interest on a timely basis.

B B B Greater vulnerability and therefore greater likelihood of default.

CCC Caa CCC Likelihood of default considered high. Timely repayment of principal and interest is dependent on favorable financial conditions.

CC Ca CC to C Highest risk of default.

SD to D C RD to D Obligation currently in default.

((1) This is a general description of the rating categories based on information published by Moody’s Investors Service.

Moody’s Investors Service apply numeric modifiers 1, 2 and 3 to show relative standing within the major ratings categories

with 1 indicating the higher end of that category and 3 indicating the lower end.



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Credit ratings by Standard & Poor’s Ratings Services and Fitch Ratings may be modified by the addition of a plus or minus sign

to show relative standing within the major rating categories.

11 PRIORITY OF CREDITORS’ CLAIMS In the unlikely event that the Bank is put into liquidation or ceased to trade, claims of secured creditors and those creditors set

out in the Seventh Schedule of the Companies Act 1993 would rank ahead of the claims of unsecured creditors. Deposits from

customers are unsecured and rank equally with other unsecured liabilities of the Bank, and such liabilities rank ahead of any

subordinated instruments issued by the Bank.

12 OTHER MATERIAL MATTERS There are no matters relating to the business or affairs of the Banking Group which are not contained elsewhere in the

Disclosure Statement and which would materially affect the decision of a person to subscribe for debt securities of which the

Bank or any member of the Banking Group is the issuer.

13 HISTORICAL SUMMARY OF FINANCIAL STATEMENTS

For the year ended All in $000's

31 December 2017 31 December 2016 31 December 2015 31 December 2014

Audited Audited Audited Audited

12 months 12 months 12 months 7 months

Financial performance

Interest income 28,498 11,992 3,505 441

Interest expense (16,687) (6,712) (496) -

Net interest income 11,811 5,280 3,009 441

Other operating income/(expense)

9,778 3,443 (502) 159

Net Operating Income 21,589 8,723 2,507 600

Operating expenses (12,411) (10,071) (9,057) (1,417)

Provision for Impairment losses (12,018) (501) (436) -

Profit / (loss) before Tax (2,840) (1,849) (6,986) (817)

Income tax (expense)/credit 2,147 222 817 -

Net Profit / (loss) for the period

(693) (1,627) (6,169) (817)

Financial position

As at All in $000's

31 December 2017 31 December 2016 31 December 2015 31 December 2014

Total assets 1,665,641 514,534 208,356 68,143

Total individually impaired assets

33,028 - - -

Total liabilities 1,451,640 459,840 152,035 5,653

Total shareholder's equity 214,001 54,694 56,321 62,490



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APPENDIX 1 - DEED OF GUARANTEE



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APPENDIX 2 - FINANCIAL STATEMENTS FOR THE PERIOD ENDED 31 December 2017 STATEMENT OF COMPREHENSIVE INCOME ..................................................................................................................................... 25 STATEMENT OF FINANCIAL POSITION .............................................................................................................................................. 26 STATEMENT OF CHANGES IN EQUITY ............................................................................................................................................... 27 STATEMENT OF CASH FLOWS ........................................................................................................................................................... 28 1 ACCOUNTING POLICIES ............................................................................................................................................................ 29 2 INTEREST INCOME .................................................................................................................................................................... 37 3 INTEREST EXPENSE ................................................................................................................................................................... 37 4 OTHER OPERATING INCOME / (EXPENSE) ................................................................................................................................ 38 5 OPERATING EXPENSES ............................................................................................................................................................. 38 6 PROVISION FOR IMPAIRMENT LOSSES ..................................................................................................................................... 39 7 INCOME TAX EXPENSE ............................................................................................................................................................. 40 8 CASH AND LIQUID ASSETS ........................................................................................................................................................ 40 9 RECEIVABLES DUE FROM OTHER FINANCIAL INSTITUTIONS .................................................................................................... 41 10 FINANCIAL ASSETS HELD FOR TRADING AND DERIVATIVE FINANCIAL INSTRUMENTS ............................................................ 42 11 AVAILABLE-FOR-SALE FINANCIAL ASSETS ................................................................................................................................. 43 12 LOANS AND ADVANCES ............................................................................................................................................................ 43 13 ASSET QUALITY ......................................................................................................................................................................... 43 14 PROPERTY AND EQUIPMENT .................................................................................................................................................... 46 15 OTHER ASSETS .......................................................................................................................................................................... 46 16 PAYABLES DUE TO OTHER FINANCIAL INSTITUTIONS .............................................................................................................. 47 17 CUSTOMER DEPOSITS ............................................................................................................................................................... 47 18 DEBT SECURITIES ON ISSUE ...................................................................................................................................................... 47 19 OTHER LIABILITIES .................................................................................................................................................................... 47 20 CONTRIBUTED EQUITY ............................................................................................................................................................. 48 21 RETAINED LOSSES ..................................................................................................................................................................... 48 22 ADDITIONAL INFORMATION ON STATEMENT OF FINANCIAL POSITION .................................................................................. 48 23 CONTINGENCIES AND COMMITMENTS .................................................................................................................................... 49 24 OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES ............................................................................................. 49 25 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES ................................................................................................................ 49 26 RELATED PARTY TRANSACTIONS .............................................................................................................................................. 52 27 KEY MANAGEMENT PERSONNEL .............................................................................................................................................. 53 28 CONCENTRATION OF CREDIT EXPOSURES ................................................................................................................................ 54 29 CREDIT EXPOSURE TO CONNECTED PERSONS AND NON-BANK CONNECTED PERSONS ......................................................... 58 30 CONCENTRATION OF FUNDING ................................................................................................................................................ 60 31 INSURANCE BUSINESS, SECURITISATION, FUNDS MANAGEMENT, OTHER FIDUCIARY ACTIVITIES AND THE MARKETING AND DISTRIBUTION OF INSURANCE PRODUCTS ....................................................................................................................................... 61 32 RISK MANAGEMENT ................................................................................................................................................................. 62 33 CAPITAL ADEQUACY ................................................................................................................................................................. 74 34 EVENTS SUBSEQUENT TO THE REPORTING DATE .................................................................................................................... 83 INDEPENDENT AUDITOR’S REPORT .................................................................................................................................................. 84



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STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2017 Note

Audited Audited

31 December 2017 31 December 2016

$000 $000

Interest income 2 28,498 11,992

Interest expense 3 (16,687) (6,712)

Net interest income 11,811 5,280

Other operating income/(expense) 4 9,778 3,443

Net Operating Income 21,589 8,723

Operating expenses 5 (12,411) (10,071)

Provision for Impairment losses 6 (12,018) (501)

Profit / (loss) before Tax (2,840) (1,849)

Income tax (expense)/credit 7 2,147 222

Profit / (loss) after income Tax (693) (1,627)

Other comprehensive income, net of tax

Items that will not be reclassified to profit or loss - -

Items that may be reclassified to profit or loss:

Net change in available-for sale revaluation reserve (net of tax)

- -

Net change in cash flow hedge reserve (net of tax) - -

Total other comprehensive income for the period, net of tax

- -

Total comprehensive profit/(loss) for the period (693) (1,627)

The above statement of comprehensive income should be read in conjunction with the accompanying notes.



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STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2017 (Audited)

Note Contributed

equity Reserves

Retained losses

Total equity

$000 $000 $000 $000

Balance as at 1 January 2017 20 63,307 - (8,613) 54,694

Capital injection from shareholders 160,000 - 160,000

Total comprehensive profit/(loss) for the period

- - (693) (693)

Balance as at 31 December 2017 223,307 - (9,306) 214,001

For the year ended 31 December 2016 (Audited)

Note Contributed

equity Reserves

Retained losses

Total equity

$000 $000 $000 $000

Balance as at 1 January 2016

63,307 - (6,986) 56,321

Capital injection from shareholders - - - -

Total comprehensive profit/(loss) for the period

- - (1,627) (1,627)

Balance as at 31 December 2016 63,307 - (8,613) 54,694

The above statement of changes in equity should be read in conjunction with the accompanying notes.



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STATEMENT OF CASH FLOWS

For the year ended 31 December 2017 Note

Audited Audited


$000 $000

Cash flows from operating activities

Interest received

25,501 11,306

Interest paid

(12,522) (5,420)

Other operating income received

11,751 3,062

Operating expenses paid

(13,948) (9,969)

Income taxes paid

- -

Net cash flows from operating activities before changes in operating assets and liabilities

10,782 (1,021)

Net changes in operating assets and liabilities:

Net change in loans and advances

(1,080,833) (200,768)

Net change in financial assets held for trading

- -

Net change in derivative assets and liabilities

- -

Net change in customer deposits

178,694 179,359

Net change in payable due to other financial institutions

654,620 126,832

Net change in receivables due from other financial institutions

79,673 (34,922)

Net change in tax recoverable

- -

Net change in current tax liabilities

- -

Net change in other assets

(159) 6

Net change in other liabilities

442 393

Net cash flow from operating activities

(156,781) 69,879

Cash flow from investing activities

Purchase of property and equipment

(104) (32)

Purchase of available-for-sale assets

- -

Net cash flow from investing activities

(104) (32)

Cash flow from financing activities

Issuance of ordinary shares

160,000 -

Issuance of debt securities

149,656 -

Interest paid on debt securities

(15) -

Net cash flow from financing activities

309,641 -

Net change in cash and cash equivalents

152,756 69,847

Cash and cash equivalents at beginning of the period

86,105 16,258

Cash and cash equivalents at end of the period 8 238,861 86,105

The above statement of cash flows should be read in conjunction with the accompanying notes.


Notes to the Financial Statement for the year ended 31 December 2017

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1 ACCOUNTING POLICIES

1.1 Reporting Entity

The reporting entity is the Bank. The Bank is a company incorporated in New Zealand under the Companies Act 1993 on 16

June 2014 and is registered under Company Number 5305661. The Bank’s principal place of business is Level 17, Tower 1,

205 Queen Street, Auckland 1010, New Zealand. The principal activity of the Bank is the provision of a range of banking

products and services to business, retail, corporate and institutional customers.

The financial statements are for the period from 1 January 2017 to 31 December 2017 and have been prepared in

accordance with the requirements of the Financial Markets Conduct Act 2013 and the Registered Bank Disclosure

Statements (New Zealand Incorporated Registered Banks) Order 2014 (as amended) (“the Order”). They were approved for

issue by the Board of Directors of the Bank (the “Board”) on 28 March 2018.

1.2 Basis of preparation

These general purpose financial statements have been prepared in accordance with Generally Accepted Accounting Practice

in New Zealand (“NZ GAAP”). The financial statements of the Bank comply with New Zealand equivalents to International

Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards as appropriate for for-profit

entities. The financial statements have been prepared on a historical cost basis, modified by the application of fair value

measurements required or allowed by relevant accounting standards. These financial statements also comply with

International Financial Reporting Standards.

1.3 Accounting estimates and assumptions

The preparation of these financial statements requires the use of certain critical accounting estimates. It also requires

management to exercise its judgment in the process of applying the Bank’s accounting policies. Although the Bank has

internal control systems in place to ensure that estimates can be reliably measured, actual amounts may differ from those

estimates. The areas involving a higher degree of judgment or areas where assumptions are significant to the Bank include

following:

- Fair value of financial assets (Note 1.4(d))

- Provision for Loan losses (Note 1.4 (e), Note 6)

- Fair value of Derivative instruments (Note 1.4 (h))

- Loan origination costs (Note 1.4 (k))

- Deferred tax assets recovery (Note 1.4 (m))

1.4 Summary of significant accounting policies

(a) Foreign currency

Both the functional and presentation currency of the Bank is New Zealand Dollars.

Transactions in foreign currencies are translated into the functional currency at the exchange rates prevailing at the date of

the transaction. All monetary assets and liabilities denominated in foreign currencies are retranslated at the spot rates of

exchange prevailing at the end of the reporting period. Impacts of changes in the spot rates are recorded in the statement of

comprehensive income.



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Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange

rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated

using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-

monetary items measured at fair value is treated in line with the recognition of gain or loss on change in fair value of the

item (i.e., translation differences on items whose fair value gain or loss is recognised in other comprehensive income or

profit or loss are also recognised in other comprehensive income or profit or loss, respectively).

(b) Cash and cash equivalents

For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with an original maturity of

less than three months, including non-restricted balances with the central bank, due from banks, placements with banks and

other financial institutions, short-term bills and notes classified as financial assets held for trading and available-for-sale

financial assets.

(c) Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between

market participants at the measurement date. The fair value measurement is based on the presumption the transaction to

sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability, or

In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible by the Bank.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing

the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic

benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in

its highest and best use.

The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to

measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

(d) Financial assets

Financial assets comprise items such as receivable due from other financial institutions, financial assets held for trading,

available-for-sale financial assets, derivative financial instruments and loans and advances to customers. Financial assets are

classified into the following categories: financial assets at fair value through profit or loss, available-for-sale financial assets,

investments held to maturity and loans and receivables.

Financial assets at fair value through profit or loss

Financial assets in this category include financial assets held for trading. A financial asset is classified as held for trading if it

is acquired principally for the purpose of selling or repurchasing in the near term, or forms part of a portfolio of financial

instruments that are managed together and for which there is evidence of short term profit taking, or it is a derivative (not in

a qualifying hedging relationship). Purchases and sales of financial assets classified at fair value through profit or loss are

recognised at fair value on trade date, with transaction costs being recognised in profit or loss immediately. Subsequent

changes in fair value are recorded in net gain or loss on financial assets at fair value through profit or loss in the profit or loss.

Available-for-sale financial assets

Available-for-sale financial assets comprise non-derivative financial assets that are designated as available for sale or are not



- 31 -

categorised into any of the categories of: (i) fair value through profit or loss; or (ii) held to maturity; or (iii) loans and

receivables.

Available-for-sale financial assets are initially recognised at fair value plus transaction costs. Gains and losses arising from

subsequent changes in fair value are included in other comprehensive income until the asset is derecognised or impaired, at

which time the cumulative gain or loss is transferred to the profit or loss.

Held-to-maturity investments

Non-derivative financial assets with fixed payments and fixed maturity are classified as held to maturity when the Bank has

the positive intention and ability to hold to maturity.

Held-to-maturity investments are subsequently measured at amortised cost. This cost is computed as the amount initially

recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest rate method

of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees paid or

received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all

other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in profit or loss

when the investments are derecognised or impaired, as well as through the amortisation process.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments, that are not quoted in an

active market and which are not classified as available for sale or at fair value through profit or loss. Loans and receivables

are initially recognised at fair value including direct and incremental transaction costs and subsequently recorded at

amortised cost, using the effective interest method, and adjusted for impairment losses. Gains and losses are recognised in

the profit or loss when such assets are derecognised or impaired, as well as through the amortisation process. Under the

effective interest method, fee income and costs directly related to the origination of the loan are deferred over the expected

life of the asset or, where appropriate, a shorter period. Loans and receivables include receivables due from other financial

institutions and loans and advances provided to customers.

(e) Impairment of financial assets

Assets carried at amortised cost

The Bank assesses at each reporting date whether there is objective evidence that a financial asset or group of financial

assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only

if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of

the asset (a ‘‘loss event’’) and that loss event (or events) has an impact on the estimated future cash flows of the financial

asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is

impaired includes observable data that comes to the attention of the Bank about the following loss events:

(1) significant financial difficulty of the issuer or obligor;

(2) a breach of contract, such as a default or delinquency in interest or principal payments;

(3) the Bank granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty, a

concession that the lender would not otherwise consider;

(4) it becoming probable that the borrower will enter into bankruptcy or other financial reorganisation;

(5) the disappearance of an active market for that financial asset because of financial difficulties; or

(6) observable data indicating there is a measurable decrease in the estimated future cash flows from a group of

financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the



- 32 -

individual financial assets in the bank, including:

(a) adverse changes in the payment status of borrowers in the group; or

(b) national or local economic conditions that correlate with defaults on the assets in the group.

The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually

significant. The Bank then performs a collective assessment for all other financial assets that are not individually significant

or for which impairment has not yet been identified. If the Bank determines that no objective evidence of impairment exists

for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk

characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for

which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments has been

incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of

estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s

original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the

amount of the loss is recognised in the statement of comprehensive income. If a loan or held-to-maturity investment has a

variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined

under the contract. As a practical expedient, the Bank may measure impairment on the basis of an instrument’s fair value

using an observable market price.

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash

flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is

probable.

For the purposes of a collective assessment of impairment, financial assets are grouped on the basis of similar and relevant

credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets

by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being

evaluated.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of

the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics

similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the

effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the

effects of conditions in the historical period that do not exist currently.

Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in

related observable data from period to period. The methodology and assumptions used for estimating future cash flows are

reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience.

When a loan is uncollectible, it is written off against the related allowances for loan impairment. Such loans are written off

after all the necessary procedures have been completed and the amount of the loss has been determined.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an

event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously

recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the

statement of comprehensive income.

(f) Financial liabilities

Financial liabilities comprise items such as payable due to other financial institutions, derivative financial instruments, customer deposits and debt securities on issue.



- 33 -

Financial liabilities may be held at fair value through profit or loss or at amortised cost. Items held at fair value through profit or loss comprise both items held for trading and items specifically designated at fair value through profit or loss on initial recognition. A financial liability is classified as held for trading if it is incurred principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short term profit taking, or it is a derivative (not in a qualifying hedge relationship).

Financial liabilities held at fair value through profit or loss are initially recognised at fair value with transaction costs being recognised immediately in the profit or loss. Subsequently, they are measured at fair value and any gains and losses are recognised in the profit or loss as they arise.

All other financial liabilities, including customer deposits, payable due to other financial institutions, debt securities on issue and amount due to related entities are measured at amortised cost using the effective interest method.

Customer deposits and borrowing

Customer deposits and borrowing include term deposits, call deposits, payable due to other financial institutions and due to

related entities. They are brought to account at the value of the outstanding balance. Interest is taken to account as accrued.

Debt securities on issue

Debt securities on issue are discounted bills initially recognised at amortised cost including directly attributable transaction

costs and subsequently measured at amortised cost. Interest and yield related fees are recognised on an effective interest

basis.

(g) Derecognition of financial assets and financial liabilities

The Bank derecognises financial assets when the rights to receive cash flows from the asset have expired or when the Bank

transfers its rights to receive cash flows from the asset together with substantially all the risks and rewards of the asset. The

Bank enters into certain transactions where it transfers financial assets recognised on the statement of financial position but

retains either all or a majority of the risks and rewards of the transferred financial assets. If all or substantially all risks and

rewards are retained, the transferred financial assets are not derecognised from the statement of financial position.

A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Where an

existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an

existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original

liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the

statement of comprehensive income.

(h) Derivative financial instruments

The Bank is exposed to changes in interest rates and foreign exchange rates from its activities. The Bank uses cross-currency

swaps and interest-rate swaps as derivative financial instruments to hedge these risks. Derivative financial instruments are

classified as held for trading. Such derivative financial instruments are initially recognised at fair value on the date on which

a derivative contract is entered into and are subsequently remeasured at fair value with changes in fair value recognised in

the profit or loss. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is

negative.

The fair value of forward exchange contracts is calculated by reference to current forward exchange rates for contracts with

similar maturity profiles. The fair value of interest rate swap contracts is determined by reference to market values for

similar instruments.

The Bank does not apply hedge accounting under NZ IAS 39 – Financial Instruments: Recognition and Measurement.



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(i) Property and equipment

Cost and valuation

All classes of property and equipment are measured at cost less accumulated depreciation and any impairment in value. The

cost of an item of property and equipment comprises purchase price, tax and any directly attributable costs of bringing it to

its present working condition and location for its intended use. Any subsequent expenditures incurred are capitalised when

future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably.

Other expenditures, such as repairs and maintenance, are recognised in the profit or loss in the period in which they are

incurred.

Depreciation

Depreciation amount of an item of property, plant and equipment is calculated using the straight-line method to allocate the

cost less any estimated residual value over its estimated useful life.

Leasehold improvements lesser of 5 years or the remaining lease term

Office furniture and equipment 5 years

Computer equipment 3 years

Motor vehicles 6 years

Residual values and useful lives are reviewed and adjusted if appropriate at each balance date. Assets are periodically

reviewed for impairment. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is

written down immediately through the statement of comprehensive income to its recoverable amount.

(j) Contributed equity

Issued and paid up share capital is recognised at the fair value of the consideration received by the Bank. Transaction costs

(if any) arising on issue of ordinary shares are recognised in the value of share capital.

(k) Revenue and expense recognition

Income is recognised to the extent that it is probable the economic benefits will flow to the entity and the revenue can be

reliably measured.

Net interest income is reflected in the statement of comprehensive income using the effective interest method. Fees and

direct costs related to loan origination, financing or restructuring and loan commitments are deferred and amortised to

interest income over the life of the loan using the effective interest method.

Other operating income includes fee and commission income and foreign exchange gains and losses. Unless included in the

effective interest calculation, fees and commissions are recognised on an accrual basis when the related service has been

provided.

Operating lease payments are recognised in the statement of comprehensive income on a straight-line basis over the term

of the lease, unless another systematic basis is more representative of the time pattern of the benefit received. All other

expenses, excluding interest expense, are recognised in the statement of comprehensive income on an accrual basis.

(l) Goods and Services Tax (“GST”)

The financial statements have been prepared so that all components are stated exclusive of GST except where the GST is not

recoverable from the IRD. In these circumstances the GST component is recognised as part of the underlying items. Trade

and other receivables and payables are stated GST inclusive. The net amount of GST recoverable from or payable to the IRD

is included within these categories.



- 35 -

(m) Income tax

Income tax expense comprises of current and deferred income tax expenses based on applicable tax laws.

Current income tax

Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from

or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or

substantively enacted, at the reporting date in the countries where the Bank operates and generates taxable income.

Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of profit

or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable

tax regulations are subject to interpretation and establishes provisions where appropriate.

Deferred tax

Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities

and their carrying amounts for financial reporting purposes at the reporting date.

Deferred tax liabilities are recognised for all taxable temporary differences, except: When the deferred tax liability arises

from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the

time of the transaction, affects neither the accounting profit nor taxable profit or loss.

Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any

unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available

against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses, can

be utilised except: When the deferred tax asset relating to the deductible temporary difference arises from the initial

recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction,

affects neither the accounting profit nor taxable profit or loss.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer

probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has

become probable that future taxable profits will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is

realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the

reporting date.

Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are

recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets

against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation

authority.

Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, are recognised subsequently if new information about facts and circumstances change. The adjustment is either treated as a reduction in goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period or recognised in profit or loss.

(n) Employee leave benefits

Employee benefits refer to all forms of consideration and other related expenditure given by the Bank in exchange for

services rendered by employees. The benefits payable are recognised as liabilities during the period in which the employees



- 36 -

have rendered services to the Bank. If the effect of discounting the benefits payable which are payable after one year from

the end of the reporting period is significant, the Bank will present them at their present value.

(o) Comparative figures

Certain comparative information has been revised where appropriate to conform to changes in the current year to enhance

comparability. These reclassifications have no impact on the overall financial performance or financial position for the

comparative year.

(p) Roundings

The amount contained in this report and the financial statements are presented in thousand New Zealand Dollars.

(q) Changes in accounting policies

The same accounting policies and methods of computation have been followed for these financial statements as

were used in preparing the financial statements for the period ended 31 December 2017.

(r) New accounting standards and interpretations

The following new standards and amendments to standards relevant to the Bank have been issued. The Bank does

not intend to apply these standards until their effective dates.

(1) NZ IFRS 9

NZ IFRS 9 Financial Instruments contains new accounting requirement for classification, measurement and

impairment of financial assets and general hedge accounting requirement. NZ IFRS 9 is mandatory on 1 January

2018.

Classification and measurement

According to the new standard, financial assets that are debt instruments will be classified based on (1) the

objective of the entity's business model for managing the financial assets; (2) the characteristics of the contractual

cash flows. It allows an irrevocable election on initial recognition to present gains and losses on investments in

equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these

investments that are a return on investment can be recognised in profit or loss and there is no impairment or

recycling on disposal of the instrument. Financial assets can be designated and measured at fair value through profit

or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition

inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on

different bases. Where the fair value option is used for financial liabilities the change in fair value is to be accounted

for as follows: The change attributable to changes in credit risk is presented in other comprehensive income (OCI);

and the remaining change is presented in profit or loss.

Having completed its assessment, the Bank has concluded that:

The debt securities classified as available for sale under NZ IAS 39 are expected to be measured FVOCI.

Impairment of financial assets

NZ IFRS 9 requires a forward-looking expected credit loss (ECL) approach be taken for an entity to record an

allowance for expected losses for all loans and other debt financial assets not held at fair-value-through-profit-and-

loss, together with loan commitments and financial guarantee contracts. The Bank will record an adjustment to its

opening retained earnings for periods beginning on 1 January 2018, to reflect the application of NZ IFRS 9 in

financial statement. Based on current implementation status, we expect the adoption of NZ IFRS 9 impairment

requirement will not materially decrease the shareholder’s equity.



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(2) NZ IFRS 15

NZ IFRS 15 Revenue from Contracts with Customers is effective for annual periods beginning on or after 1 January

2018 and addresses recognition of revenue from contracts with customers. It replaces the current revenue

recognition guidance in IAS 18 Revenue and is applicable to all entities with revenue. The core principle of NZ IFRS

15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an

amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or

services. The Bank has considered the full impact of NZ IFRS 15 and determined that there is no material impact

resulting from the introduction of new model to revenue recognition on the financial statements.

(3) NZ IFRS 16

NZ IFRS 16 Leases was issued in February 2016. NZ IFRS 16 introduces a single lessee accounting model and requires

a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying

asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying

leased asset and a lease liability representing its obligation to make lease payments. NZ IFRS 16 substantially carries

forward the lessor accounting requirements in NZ IAS 17 Leases. Accordingly, a lessor continues to classify its leases

as operating leases or finance leases, and to account for those two types of leases differently. NZ IFRS 16 is not

mandatorily effective for the Bank until 1 January 2019. The Bank is in the process of assessing the impact of

application of NZ IFRS 16 and has not yet fully estimate the impact on its financial statements.

2 INTEREST INCOME

For the period ended

Audited Audited


$000 $000

Cash and liquid assets 1,022 773

Loans and advances 25,367 10,376

Securities 69 -

Receivable due from other financial institutions 2,040 843

Total interest income 28,498 11,992

3 INTEREST EXPENSE


Audited Audited


$000 $000

Customer deposits 4,992 2,676

Payable due to other financial institutions 10,404 4,036

Debt securities on issue 1,291 -

Total interest expense 16,687 6,712



- 38 -

4 OTHER OPERATING INCOME / (EXPENSE)


Audited Audited


$000 $000

Lending and credit facility related fee income 5,082 1,762

Fund management fee income 1,720 384

Other fees and commissions 1,715 25

Foreign currency exchange gains/(losses) 1,261 1,272

Total other operating income / (expense) 9,778 3,443

5 OPERATING EXPENSES


Audited Audited


$000 $000

Professional fee¹ 582 329

Rent expense on operating leases 295 242

Depreciation 337 323

Promotion and marketing cost 952 655

Personnel expenses 9,359 7,702

Other administrative expenses 886 820

Total operating expenses 12,411 10,071

¹The Professional fee includes Auditors’ remuneration. The auditor of the Bank is Ernst & Young.

Auditors’ remuneration


Audited Audited


$000 $000

Fee paid to Ernst & Young for:

Audit of financial statements 90 75

Other services

Total operating expenses 90 75



- 39 -

6 PROVISION FOR IMPAIRMENT LOSSES

For the period ended 31 December 2017 (Audited)

Residential mortgages

Corporate exposures

Other exposures excluding

sovereigns and central banks

Total credit exposures

$000 $000 $000 $000

Balance as at 1 January 2017 - 937 - 937

Movement in collectively assessed provisions - 2,109 - 2,109

Movement in individually assessed provisions - 9,909 - 9,909

Bad debts written-off directly to the profit or loss

- - - -

Bad debts recovered - - - -

Total provision for impairment losses - 12,955 - 12,955

For the period ended 31 December 2016 (Audited)


Corporate exposures

Other exposures excluding

sovereigns and central banks


$000 $000 $000 $000

Balance as at 1 January 2016 - 436 - 436

Movement in collectively assessed provisions - 501 - 501

Movement in individually assessed provisions - - - -

Bad debts written-off directly to the profit or loss

- - - -

Bad debts recovered - - - -

Total provision for impairment losses - 937 - 937

At 31 December 2017, Bank of China (New Zealand) Limited has identified a loan with a carrying value of €19.50 million (NZ$33.02 million), gross of provisions for impairment losses, to be impaired. The loan is impaired on the basis of objective evidence indicating the recoverable amount of the loan is less than the carrying value. The information surrounding the financial condition of the borrower and recoverability of the loan is complex in nature and limited in availability. Judgement and estimation are required in determining the amount of the provision for impairment loss. The provision for impairment loss on the loan reflects management’s best estimate of loss incurred and the amount recovered may be more or less than the provision recognised at 31 December 2017. However, there is a high degree of judgement and uncertainty in the provision and the loss ultimately suffered by the bank may be significantly greater or less than the amount provided.



- 40 -

7 INCOME TAX EXPENSE


Audited Audited


$000 $000

Current tax charge/ (credit) 1,528 -

Temporary Differences for tax purposes (3,543) (1,039)

Prior period adjustment (132)

Income tax expense reported in the Profit and Loss (2,147) (1,039)

Numerical reconciliation of income tax expense to prima facie tax payable:

Total Profit / (Loss) Before Tax (2,840) (1,849)

Prima facie income tax at 28% (795) (518)

Unutilised tax losses - 256

Non-deductible expenses for tax purposes 47 40

Tax losses utilised (1,267) -

Prior period adjustments (132) -

Total income tax expense/(credit) (2,147) (222)

Effective tax rate 0.00% 12.00%

Income tax charged directly to equity

Current tax - -

Deferred tax - -

Total income tax charged directly to equity - -

Deferred Tax

Deferred tax relates to the following:

Property, plant and equipment 107 70

Impairment provisions 3,628 265

Employee provision 942 663

Other accrued costs 38 41

Net deferred Tax Asset/(Liability) 4,715 1,039

8 CASH AND LIQUID ASSETS

Reconciliation of cash and cash equivalents

As at

Audited Audited


$000 $000

Cash and balances with central banks 212,152 75,284

Current deposits in other institutions - 2,038

Transaction balances with other institutions 26,709 8,783

Total cash and liquid assets 238,861 86,105



- 41 -

Reconciliation from net profit after tax to the net cash flows from operating activities

As at

Audited Audited


$000 $000

Net profit/(loss) for the period from operating activities (1,548) (1,849)

Adjustments for non-cash items:

Provisions for loans and advances 12,018 501

Net gain/loss on disposal of available-for-sales financial assets

- -

Unrealised gain/loss on financial instruments (84) (761)

Depreciation expense 329 316

Total adjustments for non-cash items 12,263 56

Changes in assets and liabilities

Net change in payables due to other financial institutions 656,477 127,395

Net change in receivables due from other financial institutions

79,740 (34,882)

Net change in loans and advances (1,080,833) (200,768)

Net change in tax recoverable - -

Net change in other assets (5,259) (1,233)

Net change in deferred tax assets - -

Net change in customer deposits 178,697 179,359

Net change in other liabilities 3,682 1,803

Net Changes in assets and liabilities (167,496) 71,674

Net cash flows from operating activities (156,781) 69,879

9 RECEIVABLES DUE FROM OTHER FINANCIAL INSTITUTIONS

As at

Audited Audited


$000 $000

Due from other financial institutions-term - 75,411

Due from related entities-term - 4,329

Total receivables due from other financial institutions - 79,740



- 42 -

10 FINANCIAL ASSETS HELD FOR TRADING AND DERIVATIVE FINANCIAL INSTRUMENTS

Financial assets held for trading

As at

Audited Audited


$000 $000

Debt securities – listed - -

Debt securities – unlisted - -

Equity investments – listed - -

Equity investments – unlisted - -

Total financial assets held for trading - -

Derivative financial instruments

As at 31 December 2017 (Audited)

Notional principal amount

Fair value assets Fair value liabilities

$000 $000 $000

Forward exchange derivatives:

Forward foreign exchange contracts 6,294 122 117

Swaps 22,560 82 -

Option contracts - - -

Total foreign exchange derivatives 28,854 204 117

Interest rate derivatives:

Forward rate agreements - - -

Swaps 225,000 373 373


Total interest rate derivatives 225,000 373 373


Notional principal amount

Fair value assets Fair value liabilities

$000 $000 $000

Forward exchange derivatives:

Forward foreign exchange contracts - - -

Swaps 2,197 10 7


Total foreign exchange derivatives 2,197 10 7

Interest rate derivatives:

Forward rate agreements - - -

Swaps - - -


Total interest rate derivatives - - -



- 43 -

11 AVAILABLE-FOR-SALE FINANCIAL ASSETS

As at

Audited Audited


$000 $000

Commercial paper - -

Bank securities - -

Local authority bonds - -

other bonds - -

Total available-for-sale financial assets - -

12 LOANS AND ADVANCES

As at

Audited Audited


$000 $000

Gross loans and advances: 1,426,752 345,919

Housing loans 378,373 33,759

Personal loans - -

Corporate loans 1,044,833 309,387

Corporate overdrafts 3,546 2,773

Provision for impairment: 12,955 937

Collective provision 3,046 937

Individually assessed provision 9,909 -

Net loans and advances 1,413,797 344,982

13 Asset Quality

As set out in the accounting policy, the Bank has individually assessed provisions and collectively assessed provisions.

Individually assessed provisions are made against loans that exceed specified thresholds and which have been

individually assessed as impaired. If the Bank determines that no objective evidence of impairment exists for an

individually assessed loan, it includes that loan in a group of loans with similar credit risk characteristics and collectively

assesses them for impairment. Loans that are individually assessed and for which an impairment loss is, or continues to

be, recognised are not included in a collective assessment of impairment.



- 44 -



Other Retail exposures

Corporate exposures


$,000 $,000 $,000 $,000

Neither past due nor individually impaired 378,373 - 1,015,351 1,393,724

Past due but not individually impaired

Less than 30 days past due - - - -

At least 30 days but less than 60 days past due - - - -


At least 90 days past due - - - -

Total past due assets not individually impaired - - - -

Movements in Individually impaired assets

Pre-allowance opening balance at beginning of the period

- - - -

Additions - - 33,028 33,028

Amounts written off - - - -

Deletions - - - -

Pre-allowance closing balance at end of the period

- - 33,028 33,028

Total gross loans and advances 378,373 - 1,048,379 1,426,752

Movements in balances of total individual credit impairment allowances

Balance at beginning of the period - - - -

The charge (credit) to the statement of financial performance for an increase or decrease in individual credit impairment allowances

- - 9,909 9,909


Recoveries of amounts written off in previous period

- - - -

Reversals of previously recognised impairment losses

- - - -

Other movements

Balance at end of the period - - 9,909 9,909

Movements in balance of collective credit impairment allowances

Balance at beginning of the period - - 937 937

The charge (credit) to the statement of financial performance for an increase or decrease in the collective credit impairment allowances

- - 2,109 2,109

Other movements - -

Balance at end of the year - - 3,046 3,046

Total provision for credit impairment - - 12,955 12,955

Total net loans and advances 378,373 - 1,035,424 1,413,797 Note:

1. No collective provision has been recognised in respect of residential mortgages as the Bank does not have historical loss experience for these loans, the

likelihood of default has been assessed as low, as the loans are performing and the loans are appropriately secured to mitigate loss at default. All loans to

value ratios are below 80%.

2. As at the reporting date, the aggregate amount of any undrawn balances on lending commitments to counterparties for whom drawn balances are classified as individually impaired and the amount of other assets under administration were nil.



- 45 -



Other Retail exposures

Corporate exposures


$,000 $,000 $,000 $,000

Neither past due nor individually impaired 33,759 - 312,160 345,919

Past due but not individually impaired

Less than 30 days past due - - - -



At least 90 days past due - - - -

Total past due assets not individually impaired - - - -

Movements in individually impaired assets

Pre-allowance opening balance at beginning of the period

- - - -

Additions - - - -


Deletions - - - -

Pre-allowance closing balance at end of the year

- - - -

Total gross loans and advances 33,759 - 312,160 345,919

Movements in balances of total individual credit impairment allowances

Balance at beginning of the period - - - -

The charge (credit) to the statement of financial performance for an increase or decrease in individual credit impairment allowances

- - - -


Recoveries of amounts written off in previous period

- - - -

Reversals of previously recognised impairment losses

- - - -

Other movements

Balance at end of the year - - - -

Movements in balance of collective credit impairment allowances

Balance at beginning of the year - - 436 436

The charge (credit) to the statement of financial performance for an increase or decrease in the collective credit impairment allowances

- - 501 501

Other movements - - -

Balance at end of the period - - 937 937

Total provision for credit impairment - - 937 937

Total net loans and advances 33,759 - 311,223 344,982



- 46 -

14 PROPERTY AND EQUIPMENT


Office furniture and equipment

Leasehold improvements

Total

$000 $000 $000

Movement of property and equipment:

Cost 76 27 103

Accumulated depreciation (162) (167) (329)

Accumulated impairment - - -

Net amount (86) (140) (226)

Reconciliations of the carrying amounts for each class:

Opening balance 321 493 814

Purchase 76 27 103

Written off - - -

Depreciation (162) (167) (329)

Closing balance 235 353 588


Office furniture and equipment

Leasehold improvements

Total

$000 $000 $000

Movement of property and equipment:

Cost 9 23 32

Accumulated depreciation (156) (160) (316)

Accumulated impairment - - -

Net amount (147) (137) (284)

Reconciliations of the carrying amounts for each class :

Opening balance 468 630 1,098

Purchase 9 23 32

Written off - - -

Depreciation (156) (160) (316)

Closing balance 321 493 814

15 OTHER ASSETS

As at

Audited Audited


$000 $000

Accrued interest receivable 4,244 1,180

Prepaid expenses 2,672 520

Deferred Expense 187 144

Total other assets 7,103 1,844



- 47 -

16 PAYABLES DUE TO OTHER FINANCIAL INSTITUTIONS

As at

Audited Audited


$000 $000

Due to other financial institutions 302,002 25,445

Due to related entities 594,970 215,050

Total payables due to other financial institutions 896,972 240,495

17 CUSTOMER DEPOSITS

As at

Audited Audited


$000 $000

Term deposits 339,586 188,788

Saving/Demand deposits 47,215 21,828

Margin deposits 6,076 3,564

Total customer deposits 392,877 214,180

18 DEBT SECURITIES ON ISSUE

As at

Audited Audited


$000 $000

Certificates of deposits - -

Medium-term notes 150,000

Other debt securities - -

Total debt securities issued 150,000 -

Debt securities issued at fair value - -

Debt securities issued at face value 150,000 -

Total debt securities issued 150,000 -

Movement in debt securities issued

Balance at beginning of the year - -

Issuance during the year 150,000 -

Repayments during the year - -

Net effect of transaction costs and accruals (344) -

Balance at end of the year 149,656 -

19 OTHER LIABILITIES

As at

Audited Audited


$000 $000

Accrued interest payable 3,031 737

Accounts payable 8,614 4,421

Total other liabilities 11,645 5,158



- 48 -

20 CONTRIBUTED EQUITY

As at

Audited Audited


$000 Number of shares

Ordinary shares

Balance at beginning of the period 63,307 63,307,266

Shares issued during the period 160,000 160,000,000

Balance at end of the period 223,307 223,307,266

The authorised ordinary share capital of the Bank comprises 223,307,266 shares, which do not have a par value. On 16 June

2014, the Bank issued 100 ordinary shares without consideration when the Bank was first incorporated. On 30 October 2014

and 10 April 2017, the Bank further issued 63,307,166 ordinary shares and 160,000,000 ordinary shares to BoC respectively,

being its ultimate parent bank for $1.00 per share, which have been fully paid.

Each of the 223,307,266 ordinary shares entitles the shareholders to one vote at meetings of shareholders and share equally

in dividends authorised in respect of the ordinary shares and any proceeds available to ordinary shareholders on winding up

of the Bank.

During the years ended 31 December 2017 and 31 December 2016 the Bank paid dividends of $nil to BoC (equivalent to

$nil per share).

21 RETAINED LOSSES

As at

Audited Audited


$000 $000

Opening balance (8,613) (6,986)

Dividends paid to owner - -

Loss attributable to owner (693) (1,627)

Closing balance (9,306) (8,613)

22 ADDITIONAL INFORMATION ON STATEMENT OF FINANCIAL POSITION

As at

Audited Audited


$000 $000

Total interest earning and discount bearing assets 1,665,717 511,735

Total interest and discount bearing liabilities 1,436,958 453,985

Financial assets pledged as collateral - -

Total amount due from related entities 30,283 15,888

Total amount due to related entities 594,970 215,050



- 49 -

23 CONTINGENCIES AND COMMITMENTS

As at

Audited Audited


$000 $000

Lease commitments:

One year or less 312 243

Between one and five years 890 808

Over five years 390 556

Total lease commitments 1,592 1,607

Capital commitments:

Due within one year - -

Due within two year or more - -

Total capital commitments - -

Credit related commitments and contingent liabilities:

Commitments to extend credit1 392,687 143,397

Trade letters of credit2 -

Standby letters of credit3 37,431 9,748

Total credit related commitments and contingent liabilities

430,118 153,145

Other contingent liabilities4 - -

Total commitments and contingent liabilities 431,710 154,752

24 OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES There were no assets and liabilities which were subject to offsetting, enforceable master netting arrangements and

similar agreements at 31 December 2017 and 31 December 2016.

25 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the Bank is the current bid price. Derivative contracts classified as held for trading are fair valued by comparing the contracted rate to the current market rate for a contract with the same remaining period to maturity. The fair value of currency swaps and forwards are calculated using an interpolation method which is a method of constructing new data points within the range of a discrete set of known data points determined by using forward exchange market rates at the reporting date.

Fair value hierarchy of financial instruments measured at fair value

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within

1 Commitments to extend include all obligations on the part of the NZ Banking Group to provide credit facilities. As facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. In addition to the commitments disclosed as at 31 December 2017, the NZ Banking Group has offered nil facilities to customers, which had not yet been accepted. 2 Trade letters of credit are undertakings by the NZ Banking Group to pay or accept drafts drawn by an overseas supplier of goods against presentation of documents in the event of default by a customer. 3 Standby letters of credit are undertakings to pay, against presentation documents, an obligation in the event of a default by a customer. 4 Other commitments include underwriting facilities.

http://en.wikipedia.org/wiki/Discrete_set



- 50 -

the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

(a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)

(b) Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable (level 2), and

(c) Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable (level 3).


Level 1 Level 2 Level 3 Total

$000 $000 $000 $000

Financial assets

Trading securities - - - -

Derivative financial assets - 577 - 577

Available-for-sale securities - - - -

Total financial assets carried at fair value - 577 - 577

Financial liabilities

Trading liabilities - - - -

Derivative financial liabilities - 490 - 490

Debt securities issued at fair value - - - -

Total financial liabilities carried at fair value - 490 - 490


Level 1 Level 2 Level 3 Total

$000 $000 $000 $000

Financial assets

Trading securities - - - -

Derivative financial assets - 10 - 10 - Available-for-sale securities - - - -

Total financial assets carried at fair value - 10 - 10


Trading liabilities - - - -

Derivative financial liabilities - 7 - 7

Debt securities issued at fair value - - - -

Total financial liabilities carried at fair value - 7 - 7

Fair value of financial instrument not measured at fair value

Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. NZ IFRS 7 requires the disclosure of fair value of those financial instruments not carried at fair value in balance sheet. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value disclosure does not cover those assets and liabilities that are not considered to be financial instruments, such as fixed assets.



- 51 -

The following table summarises the carrying amounts and the estimated fair values of those financial instruments not measured at fair value:

As at (Audited)


Fair Value Carrying Amount

Fair Value Carrying Amount

$000 $000 $000 $000

Financial Assets

Cash and liquid assets 238,861 238,861 86,105 86,105

Receivables due from other financial institutions

- - 79,740 79,740

Loans and advances 1,400,073 1,413,797 344,333 344,982

Other financial assets 4,244 4,244 1,180 1,180

Total financial assets 1,643,178 1,656,902 511,358 512,007


Payable due to other financial institutions 896,972 896,972 240,495 240,495

Customer deposits 392,876 392,877 214,187 214,180

Debt securities on issue 151,803 149,656 - -

Other financial liabilities 3,031 3,031 737 737

Total financial liabilities 1,444,682 1,442,536 455,419 455,412


As at Fair

Value Level 1 Level 2 Level 3

Fair Value

Level 1 Level 2 Level 3

(Audited) $000 $000 $000 $000 $000 $000 $000 $000

Financial Assets

Cash and liquid assets 238,861 238,861 - - 86,105 86,105 - -


- - - - 79,740 - - 79,740

Loans and advances 1,400,073 - - 1,400,073 344,333 - - 344,333

Other financial assets 4,244 - - 4,244 1,180 - - 1,180

Total financial assets 1,643,178 238,861 - 1,404,317 511,358 86,105 - 425,253


Payable due to other financial institutions

896,972 - - 896,972 240,495 - - 240,495

Customer deposits 392,876 - 392,876 - 214,187 - 214,187 -

Debt securities on issue 151,803 - 151,803 - - - - -

Other financial liabilities 3,031 - 3,031 - 737 - 737 -

Total financial liabilities 1,444,682 - 547,710 896,972 455,419 - 214,924 240,495

The following methods and assumptions were used to estimate the fair values:

Cash and liquid assets, Due from central banks and other institution, Due to central banks and other institution

These assets and liabilities are primarily short term in nature or are receivable or payable on demand. In such



- 52 -

cases the carrying amounts approximate their fair value or have been determined using discounting cash flow models based on observable market prices as appropriate.

Trading securities, Available for sale investments and Trading liabilities.

Trading securities include treasury bills, bank bills and bonds, promissory notes, and government and other securities. Trading liabilities include short sales of securities. Available for sale investments include listed equity securities and other securities. These assets and liabilities are recorded at fair value based on quoted closing market prices as at the reporting date. Where quoted market prices are not available, the Bank obtains the fair value by means of discounted cash flows and other valuation techniques based on observable market prices.

Loans and advances to customers

The carrying value of loans and advances is net of allowance for impairment losses, credit risk adjustment, unearned and deferred income. Floating rate loans to customers generally reprice within six months, therefore, their fair value is assumed to equate their carrying value. For fixed rate loans, the fair value is estimated by discounting the expected future cash flows based on maturity of the loans and advances, using current market interest rates of similar types of loans and advances or interest rate swap rates.

Derivative financial instruments

The fair value of trading and hedging derivative, including foreign exchange contracts, interest rate swap, interest rate and currency option contracts, and currency swaps, are obtained from observable market prices as at the reporting date, discounted cash flow models or option pricing models as appropriate.

Deposits from customers

With respect to deposits from customers, the fair value of non-interest-bearing, call and variable rate deposits and fixed rate deposits repricing within six months is approximated as the carrying value as at the reporting date. For other fixed rate term deposits, the fair value is estimated by discounting the cash flow based on the maturity of the deposit, using current market rates.

Debt Securities

Debt Securities are recorded at fair value based on a discounted cash flow model using a yield curve appropriate to the remaining maturity of the instruments. This is based on observable market prices as at the reporting date where available, otherwise alternative observable market source data is used.

Other financial assets and liabilities

For these balances, such as receivable and payable accrued interest, the carrying amount is considered to approximate the fair value, as they are short term in nature or are receivable / payable on demand.

26 RELATED PARTY TRANSACTIONS

The Bank is a wholly owned subsidiary of Bank of China Limited (BoC), a company incorporated in China. The Ultimate

Parent Bank of the Bank is also BoC. The Ultimate Parent Bank Group refers to the Ultimate Parent Bank and its

subsidiaries. As at 31 December 2017, the Bank had no controlled entities.

Transactions with related parties


Audited Audited


$000 $000

Interest income received from related parties 224 76

Interest expense paid to related parties 8,520 3,529

Non-interest income received from related parties 725 16

Operating expenses paid to related parties 32 11

There were no debts with any related parties written off or forgiven during the years ended 31 December 2017 and 31



- 53 -

December 2016.

Balances with related parties

As at

Audited Audited


$000 $000

Due from Ultimate Parent Bank 29,106 15,041

Due from other related parties 1,177 847

Total related party assets 30,283 15,888

Due to Ultimate Parent Bank 585,374 186,913

Due to other related parties 9,596 28,137

Total related party liabilities 594,970 215,050

No provisions for impairment loss were recognised in respect of loans given to related parties as at 31 December 2017

and 31 December 2016.

The Bank undertakes transactions with BoC and other members of the Ultimate Parent Bank Group.

The Bank issued 100 ordinary shares, 63,307,166 ordinary shares and 160,000,000 ordinary shares on 16 June 2014, 30

October 2014 and 10 April 2017 respectively, to BoC. Refer to Note 20 for further details of the rights and preference

attached to the shares.

27 KEY MANAGEMENT PERSONNEL

Key management personnel are defined as those persons having authority and responsibility for planning, directing and

controlling the activities of the entity, directly or indirectly. The key management personnel of the Bank are defined as

the Directors and members of the senior executive team of the Bank. The information relating to the key management

personnel disclosed in the tables below includes transactions with those individuals, their close family members and

their controlled entities.

The table below shows the amount of compensation paid to key management personnel of the Bank.

As at

Audited Audited


$000 $000

Salaries and short-term benefits 1,284 866

Post-employment benefits - -

Other termination benefits - -

Share-based payments - -

Total key management personnel compensation 1,284 866

There were no loans or deposits with key management personnel in the years ended 31 December 2017 and 31 December 2016. No Director received any other benefit that was additional to his or her total remuneration.

As at 31 December 2017, no provisions have been recognised in respect of loans given to key management personnel

and their related parties.

There were no debts written off or forgiven during the years ended 31 December 2017 and 31 December 2016.

There were no other transactions with key management personnel during the years ended 31 December 2017 and 31

December 2016.



- 54 -

28 CONCENTRATION OF CREDIT EXPOSURES

28.1 Concentration of Credit Exposures

The Banking Group’s concentrations of credit exposures arise where the Banking Group is exposed to risk in activities or

industries of a similar nature, and in particular geographies. Australia and New Zealand Standard Industrial Classification

(ANZSIC) 2006 codes have been used as the basis for disclosing customer and industry sectors. The credit concentration

is monitored as part of the Banking Group’s credit risk management framework on a regular basis.

The analysis by industry and by geographical location is as follows:


Cash and liquid assets

$000

Receivable due from

other financial

institutions $000

Available-for-sale

financial assets

$000

Loan and advances

$000

Interest receivable

$000

Other financial

assets $000

Total (on balance

sheet) $000

Credit Commitme

nts and contingent

liabilities $000

Industry sector

Agriculture - - - 31,777 65 - 31,842 -

Forestry and fishing institutions

- - - 48,906 165 - 49,071 1,143

Mining - - - - - - - -

Manufacturing - - - 183,199 718 - 183,917 122,567

Electricity, gas, water and waste services

- - - 60,586 56 - 60,642 15,572

Construction - - - 124,575 434 - 125,009 32,998

Wholesale trade - - - 795 - - 795 5,005

Retail trade - - - 5,364 11 - 5,375 113

Accommodation and food services

- - - - - - - -

Transport, postal and warehousing

- - - 56,500 66 - 56,566 496

Information media and telecommunications

- - - 12,169 53 - 12,222 3,335

Financial and insurance services

238,861 - - 116,947 529 - 356,337 28,291

Rental, hiring and real estate services

- - - 298,443 1,174 - 299,617 76,614

Professional, scientific and technical services

- - - 99,478 281 - 99,759 50,000

Administrative and support services

- - - - - - - -

Public administration and safety

- - - - - - - 90,000

Education and training - - - - - - - -

Health care and social assistance

- - - - - - - -

Arts and recreation services - - - 3,757 20 - 3,777 3,949

Personal lending - - - 378,373 655 - 379,028 -

Others - - - 5,884 16 577 6,477 34

Subtotal 238,861 - - 1,426,752 4,244 577 1,670,434 430,118

Provisions for impairment losses on loans and advances

- - - 12,955 - - 12,955 -

Deferred and other unearned - - - - - - - -



- 55 -



$000

Receivable due from

other financial

institutions $000

Available-for-sale

financial assets

$000

Loan and advances

$000

Interest receivable

$000

Other financial

assets $000

Total (on balance

sheet) $000

Credit Commitme

nts and contingent

liabilities $000

future income and expenses

Fair value hedge adjustments - - - - - - - -

Due from related parties - - - - - - - -

Total credit exposures 238,861 - - 1,413,797 4,244 577 1,657,479 430,118

Geographic area

New Zealand 238,861 - - 1,083,441 3,311 577 1,326,190 387,435

Overseas - - - 330,356 933 - 331,289 42,683

Total credit exposures 238,861 - - 1,413,797 4,244 577 1,657,479 430,118



$000

Receivable due from

other financial

institutions $000

Available-for-sale

financial assets

$000

Loan and advances

$000

Interest receivable

$000

Other financial

assets $000

Total (on balance

sheet) $000

Credit Commitme

nts and contingent

liabilities $000

Industry sector

Agriculture - - - 26,897 10 - 26,907 35,173

Forestry and fishing institutions - - - 30,000 152 - 30,152 997

Mining - - - - - - - -

Manufacturing - - - 17,279 58 - 17,337 1,099

Electricity, gas, water and waste services

- - - 37,913 40 - 37,953 -

Construction - - - 51,493 373 - 51,866 36,216

Wholesale trade - - - 1,814 91 - 1,905 5,068

Retail trade - - - 6,911 10 - 6,921 -

Accommodation and food services - - - - - - - -

Transport, postal and warehousing - - - 15,000 2 - 15,002 -

Information media and telecommunications

- - - 12,827 49 - 12,876 2,372

Financial and insurance services 86,105 79,740 - 14,281 11 - 180,137 1,200

Rental, hiring and real estate services

- - - 85,755 230 - 85,985 16,600

Professional, scientific and technical services

- - - - - - - -

Administrative and support services

- - - - - - - -

Public administration and safety - - - - - - - 50,000

Education and training - - - - - - - -

Health care and social assistance - - - - - - - -

Arts and recreation services - - - 5,977 36 - 6,013 4,420

Personal lending - - - 33,759 51 - 33,810 -

Others - - - 6,013 25 1,530 7,568 -

Subtotal 86,105 79,740 - 345,919 1,138 1,530 514,431 153,145

Provisions for impairment losses on loans and advances

- - - 937 - - 937 -



- 56 -



$000

Receivable due from

other financial

institutions $000

Available-for-sale

financial assets

$000

Loan and advances

$000

Interest receivable

$000

Other financial

assets $000

Total (on balance

sheet) $000

Credit Commitme

nts and contingent

liabilities $000

Deferred and other unearned future income and expenses

- - - - - - - -

Fair value hedge adjustments - - - - - - - -

Due from related parties - - - - - - - -

Total credit exposures 86,105 79,740 - 344,982 1,138 1,530 513,495 153,145

Geographic area

New Zealand 86,105 79,740 - 214,637 871 1,530 382,883 145,153

Overseas - - - 130,345 267 - 130,612 7,992

Total credit exposures 86,105 79,740 - 344,982 1,138 1,530 513,495 153,145

28.2 Concentration of credit exposure to individual counterparties

Credit exposure is calculated on the basis of actual exposures [net of individual credit impairment provision]. In addition, credit exposures to individual counterparties (not being members of a group of closely related counterparties) and to groups of closely related counterparties exclude exposures to connected persons, to the central government of any country with a long-term credit rating of A- or A3 or above, or its equivalent, or to any bank with a long-term credit rating of A- or A3 or above, or its equivalent.

The peak end-of-day aggregate credit exposure to an individual counterparty or a group of closely related counterparties for the period between the reporting date for the previous disclosure statement and the reporting date for the disclosure statement is derived by determining the maximum end-of-day aggregate amount of credit exposure over the period, and then dividing that amount by the Bank’s equity as at the reporting date for the disclosure statement.

The number of individual bank counterparties (which are not (i)members of a group of closely related counterparties or (ii) a groups of closely related counterparties of which a bank is the parent) to which the Banking Group has an aggregate credit exposure or peak end-of-day aggregate credit exposure that equals or exceeds 10% of the Banking Groups’s equity:

As at 31 Dec 2017 was nil; and

In respect of peak end-of-day aggregate credit exposure for the three months ended 31 Dec 2017, there was one bank counterparty with “B” rated with credit exposure 10%-15% of shareholder’s equity.



- 57 -

The following table shows the number of individual non-bank counterparties (which are not (i) members of a group of closely related counterparties or (ii) a group of closely related counterparties of which a bank is the parent) to which the Banking Group has an aggregate credit exposure or peak end-of-day aggregate credit exposure that equals or exceeds 10% of the Banking Group’s equity:

During the three months ended 31 December 2017

Peak End of Day Credit Exposures Number of Counterparties

(Audited)

As at the Reporting Date Number of Counterparties

(Audited)

Percentage of Shareholder’s Equity

“A” Rated

“B” Rated

Unrated Total “A” Rated

“B” Rated

Unrated Total

10-15% 1 1 5 7 1 1 5 7

16-20% - - 2 2 - - 2 2

21-25% - - 3 3 - - 3 3

26-30% - - 3 3 - 3 3

31-35% - - - - - - - -

36-40% - - - - - - - -

41-45% 1 - 1 2 1 - 1 2

46-50% - - 2 2 - - 2 2

51-55% 1 - - 1 1 - - 1

Note: “A” Rated – those counterparties that have a long-term credit rating of A- or A3 or above, or its equivalent.

“B” Rated – those counterparties that have long-term credit rating of at least BBB- or Baa3, or its equivalent, and at most BBB+ or Baa1, or its equivalent.

Unrated – those counterparties that do not have a long-term credit rating for the reporting period.

The number of individual bank counterparties (which are not (i) members of a group of closely related counterparties or (ii) a group of closely related counterparties of which a bank is the parent) to which the Banking Group has an aggregate credit exposure or peak end-of-day aggregate credit exposure that equals or exceeds 10% of the Banking Group’s equity:

As at 31 Dec 2016, there was one bank counterparty with “B” rated and credit exposure 10%-15% of shareholder’s equity; and

In respect of peak end-of-day aggregate credit exposure for the three months ended 31 Dec 2016, there was one bank counterparty with “B” rated with credit exposure 10%-15% of shareholder’s equity.



- 58 -

The following table shows the number of individual non-bank counterparties (which are not (i) members of a group of closely related counterparties or (ii) a group of closely related counterparties of which a bank is the parent) to which the Banking Group has an aggregate credit exposure or peak end-of-day aggregate credit exposure that equals or exceeds 10% of the Bank’s equity:

During the three months ended 31 December 2016

Peak End of Day Credit Exposures Number of Counterparties

(Audited)

As at the Reporting Date Number of Counterparties

(Audited)

Percentage of Shareholder’s Equity

“A” Rated

“B” Rated

Unrated Total “A” Rated

“B” Rated

Unrated Total

10-15% - 1 4 5 - 1 4 5

16-20% - - 7 7 - - 5 5

21-25% - - 5 5 - - 5 5

26-30% - - 3 3 - - 3 3

31-35% - - - - - - - -

36-40% - - - - - - - -

41-45% - - - - - - - -

46-50% - - 1 1 - - 1 1

51-55% - 1 2 3 - 1 2 3

56-60% - - - - - - - -

91-95% 1 - - 1 1 - - 1

111-115% 1 - - 1 1 - - 1

Note:

“A” Rated – those counterparties that have a long-term credit rating of A- or A3 or above, or its equivalent.

“B” Rated – those counterparties that have long-term credit rating of at least BBB- or Baa3, or its equivalent, and at most BBB+ or

Baa1, or its equivalent.

Unrated – those counterparties that do not have a long-term credit rating for the reporting period.

29 CREDIT EXPOSURE TO CONNECTED PERSONS AND NON-BANK CONNECTED PERSONS

The Bank’s credit exposure to connected persons is derived in accordance with the Bank’s conditions of registration and

the Reserve Bank document Connected Exposures Policy (BS8). The amounts are net of specific provision for doubtful

debts and exclude advances of a capital nature. For the purposes of this Policy, connected exposures are defined as

Bank of China, subsidiaries of Bank of China, entities in which Bank of China has a substantial interest or a director of

the Bank. An exposure is considered to be a direct credit exposure to the entity, and it is not considered to be a

contingent exposure as a result of risk mitigation activities

Credit exposure concentrations are disclosed on the basis of actual credit exposures and calculated on a gross basis.

Peak end-of-day credit exposures to connected and non-bank connected persons expressed as a percentage of Tier 1

capital of the bank have been derived by determining the maximum end-of-day aggregate amount of credit exposure

over the year ended 31 December 2017 and then dividing that amount by the Bank’s Tier 1 capital at the date the

maximum end-of-day aggregate amount of credit exposure occurred.

The rating-contingent limit, which is applicable to the Bank as at balance date, is 40%. There have been no rating-



- 59 -

contingent limit changes during the last quarter. Within the rating-contingent limit there is a sub-limit of 15%, which

applies to non-bank connected persons. All limits on aggregate credit exposure to all connected persons and non-bank

connected persons in the Bank’s Conditions of Registration have been complied with at all times over the last quarter.

There are no specific provisions against credit exposures to connected persons as at 31 December 2017 and 31

December 2016.

Audited $000

% of Tier One Capital as at 31 December 2017

As at end of period 40,294 19.3%

Credit exposure to connected persons 40,294 19.3%

Credit exposure to non-bank connected persons -

Peak end-of-day for the period ended 85,525 39.8%

Credit exposure to connected persons 85,525 39.8%

Credit exposure to non-bank connected persons - -

* The peak end-of-day credit exposure to connected persons occurred on 15 May 2017, when the Bank’s rating-contingent limit was 60%. On 23 August 2017, Standard & Poor’s Global Ratings assigned an ‘A’ long-term rating to BOCNZ, the Bank’s rating-contingent limit reduced from 60% to 40%.

Audited $000

% of Tier One Capital as at 31 December 2016

As at end of period 14,865 28%

Credit exposure to connected persons 14,865 28%


Peak end-of-day for the period ended 31,398 59%

Credit exposure to connected persons 31,398 59%




- 60 -

30 CONCENTRATION OF FUNDING

The Banking Group’s concentrations of funding arise where the Banking Group is funded by industries of a similar

nature or in particular geographies. The following table presents the Banking Group’s concentrations of funding, which

are reported by customer and industry sector and in terms of geographical area.

The analysis by industry and by geographical location is as follows:

As at

Audited Audited


$000 $000

Funding comprises

Payable due to other financial institutions 896,972 240,495

Deposits from customers 392,877 214,180

Debt securities issued 149,656 -

Other liabilities - -

Total funding 1,439,505 454,675

Concentration of funding by industry sector

Agriculture, Forestry and fishing institutions 3,625 6,659

Mining - -

Manufacturing 49,440 16,062

Electricity, gas, water and waste services 37,084 50,033

Construction 41,751 47,489

Wholesale trade 7,836 5,880

Retail trade 2,944 1,559

Accommodation and food services 10,000 -

Transport, postal and warehousing 253 -

Information media and telecommunications - -

Financial and insurance services 1,089,360 286,524

Rental, hiring and real estate services 39,307 9,815

Professional, scientific and technical services 31,086 2,832

Administrative and support services - -

Public administration and safety 110,000 20,350

Education and training - -

Health care and social assistance - -

Arts and recreation services - -

Households 16,778 6,431

Other 41 1,042

Total funding 1,439,505 454,675

Concentration of funding by geographical location

New Zealand 620,231 167,563

China 629,358 266,673

Australia 183,887 20,439

United States - -

Europe - -

Other countries 6,029 -

Total funding 1,439,505 454,675



- 61 -

31 INSURANCE BUSINESS, SECURITISATION, FUNDS MANAGEMENT, OTHER FIDUCIARY ACTIVITIES AND THE MARKETING AND DISTRIBUTION OF INSURANCE PRODUCTS

Funds management and other fiduciary activities

The Bank markets and distributes wholesale funds management products to a range of institutional customers. The Bank provides banking services for funds management products administered by BNP Paribas Fund Services Australasia Ltd. The Bank also provides private banking services to a number of wholesale customers which include advice on, administration, and management of, investment portfolios. The Bank is not responsible for any decline in performance of the underlying assets of the investors due to market forces.

The Bank established the Bank of China (NZ) Wholesale Fund Number One (No 1 Fund) by a Trust Deed dated 7 March 2016 between it and the Public Trust. The No 1 Fund was launched to the public on 1 August 2016. The Bank is the Manager and Issuer of the No 1 Fund. The No 1 Fund currently invests in a number of wholesale investment schemes offered by external fund managers. The fund’s banking arrangements are provided by the Bank. All arrangements are conducted on normal commercial terms.

As funds under management are not controlled by the Bank, they are not included in these financial statements. The Bank derives fee and commission income from the sale and management of investment funds, unit trusts and the provision of private banking services to customers. The Bank derives commission income from the sale of third party funds management products.

Investments made in the No 1 Fund do not represent deposits or other liabilities of the Bank, and are subject to investment risk, including possible delays in repayment and loss of income and principal invested. None of the Bank, or the Supervisor (Public Trust), any Director of any of them, the Crown or any other person guarantees (either fully or in part) the performance or returns of the No 1 Fund or the repayment of capital.

The value of assets related to fund management activities is set out in the table below.

As at

31 December 2017 Audited

31 December 2016 Audited

$000 $000

BOCNZ Wholesale No 1 Fund 334,881 200,402

Discretionary Investment Management Service (DIMS)

1,633 1,523

Total funds under management 336,514 201,925

Funds under custodial arrangements 336,514 201,925

Provision of financial services Financial services provided by the Bank to entities which are involved in trust, custodial, funds management and other fiduciary activities are provided on arm’s length terms and conditions and at fair value. The Bank did not purchase any assets from any member of the Banking group during the reporting period. The Bank does not market or distribute any insurance within the Bank.

Risk management

The Bank participating in the activities identified above has in place policies and procedures to ensure that those activities are conducted in an appropriate manner. Should adverse conditions arise, it is considered that these policies and procedures will minimise the possibility that these conditions will adversely impact the Bank. The policies and procedures include comprehensive and prominent disclosure of information regarding products, and formal and regular review of operations and policies by management.

The Bank does not conduct any insurance business. The Bank is also not involved in:

(1) The establishment, marketing, or sponsorship of trust, custodial activities;

(2) The origination of securitised assets; and the marketing or servicing of securitisation schemes; and the marketing and distribution of insurance products.



- 62 -

32 RISK MANAGEMENT

The Bank is committed to the management of risk and has management structure and information systems to manage

individual risks at all levels of its business.

32.1 Risk management structure and governance

As the top decision-making body for risk management in the Bank, the Board of Directors is responsible for the overall

risk management approach, including determining risk management framework, overall risk strategy, general principles

of risk management, risk appetites and risk tolerance, and supervising the daily work of management. The Board of

Directors has reviewed and approved the Bank’s revised General Principles of Risk Management and Risk Appetite

Statement. The Board has the responsibility to monitor the overall risk process within the Bank and has appointed a

Board Risk Committee to carry out this function.

As a special committee under the Management, the Risk Management Committee (RMC) conducts overall risk

management on behalf of Management, and has the overall responsibility for the developing and implementing the risk

strategy and appetites, frameworks, policies and limits designed by the Board, establishing and improving various risk

management procedures, guiding and supervising the implementation of the strategies throughout the Bank, and

maintaining the operation of internal control system.

The Risk and Compliance Department is responsible for the management of various risks under the direction of the

Management, including managing risk decisions, and monitoring risk levels and reports on a regular basis to the Board.

The risk ownership is an assigned to associated business unit which is responsible for implementing and maintaining risk

related procedures to ensure an independent control process is maintained. The business unit works closely with the

Risk Management Committee to ensure that procedures are compliant with the overall framework.

The Bank is establishing a Three Lines of Defence approach to risk management and operating within the Bank’s desired

risk profile. The Bank embeds risk culture and maintains an awareness of risk management responsibilities through

regular communication, training and other targeted approaches that support its risk management.

General Principles

The Bank’s General Principles of Risk Management are the key guidelines for all risk management within the Bank.

These principles reflect the standards and ideals expressed in the Bank’s vision, values and code of conduct and are

embedded in all levels of risk management policy including rules, procedures and training.

Regular reviews of loans by both frontline and management ensure the Bank is well positioned to assess the financial

position of customers. Risks such as credit risk, market risk, operational risk/AML, liquidity and funding risk are

monitored, reviewed and reported to management and the Risk Management Committee on a monthly basis and the

Board of directors on a quarterly basis.

32.2 Credit risk

Credit risk arises from the potential inability of a debtor or counterparty to meet their contractual obligations. Credit

risk mainly arises within the Bank from its core business of providing lending facilities, and the Bank is predominantly a

lender to corporate and commercial customers. The Bank evaluates credit requests by undertaking detailed individual

customer and transaction risk analysis, and customers are assigned the Bank’s internal credit rating based on their

financial performance. Loans are generally secured by full General Security Agreement (GSA) and/or 1st

ranking

mortgage over land and properties. Customers must satisfy a number of conditions when applying for credit including

demonstrating an ability to service the loan through the economic cycle.



- 63 -

It is the Bank’s policy to maintain accurate and consistent risk ratings across the credit portfolio and the ratings are

derived in accordance with the Bank’s rating policy. To obtain a loan’s final risk classification, a standard process of

initially classifying, checking, reviewing by internal rating specialists, and approving by authorised loan classification

approvers is performed.

(a) Maximum exposure

Credit Equivalent Amount - all On and Off Balance Sheet exposures, which give rise to credit risk, are converted into

credit equivalent amounts in accordance with the Reserve Bank of New Zealand capital adequacy guidelines.

As at

Audited 31 December 2017

$000

Audited 31 December 2016

$000

On Balance Sheet

Cash and liquid assets 238,861 86,105

Receivables due from other financial institutions - 79,740

Available-for-sale financial assets

Loan and advances 1,413,797 344,982

Interest receivable 4,244 1,180

Derivative assets 577 10

Total On Balance Sheet Exposure 1,657,479 512,017

Off Balance Sheet

Financial derivatives 253,854 2,197

Loan commitment 392,687 143,397

Letter of guarantee 37,431 9,747

Credit card facility

Total Off Balance Sheet Exposure 683,972 155,342

Total Exposure 2,341,451 667,359

(b) Coverage provided by collateral held on loan

BoC NZ takes collateral where it is considered necessary to support credit risk on financial instruments. An evaluation is

undertaken of the customer’s credit risk on a case by case basis and the amount of collateral taken, if deemed

necessary, is based on management’s credit evaluation of the counterparty. In terms of BoC NZ residential mortgage

lending, credit is extended within predetermined loan to valuation ratios, and independent credit evaluations are

undertaken where this is deemed necessary. All residential mortgage lending is fully secured as at the end of full year

2017. In terms of corporate lending, credit is granted based on the mixture of collateral, including GSA, Specific Security

Agreement (SSA) and guarantee, and also include unsecured loans to well rated corporate entities. The table below

presents the maximum exposure to credit risk by counterparty before collateral held or other credit enhancement:



- 64 -


Maximum exposure to

credit risk $000

Financial effect of

collaterals $000

Unsecured portion of credit

exposure $000

On-balance sheet financial instruments

Cash and liquid assets 238,861 238,861 -

Receivable due from other financial institutions - - -

Financial assets held for trading - - -

Derivative assets 577 - 577

Available-for-sale securities - - -

Loans and advances 1,413,797 609,495 804,302

Total on-balance sheet financial instruments 1,653,235 848,356 804,879

Off-balance sheet financial instruments

Credit related commitments and contingent liabilities 683,972 39,199 644,773

Total off-balance sheet financial instruments 683,972 39,199 644,773

Total exposure to credit risk 2,337,207 887,555 1,449,652


Maximum exposure to

credit risk $000

Financial effect of

collaterals $000

Unsecured portion of credit

exposure $000

On-balance sheet financial instruments

Cash and liquid assets 86,105 86,105 -

Receivable due from other financial institutions 79,740 79,740 -

Financial assets held for trading - - -

Derivative assets 10 - 10

Available-for-sale securities - - -

Loans and advances 344,982 149,528 195,454

Total on-balance sheet financial instruments 510,837 315,373 195,464

Off-balance sheet financial instruments

Credit related commitments and contingent liabilities 155,342 26,171 129,170

Total off-balance sheet financial instruments 155,342 26,171 129,170

Total exposure to credit risk 666,179 341,544 324,635

(c) Collateral and other credit enhancements

The amount and type of collateral required depends on the assessment of the credit risk of the counterparty.

Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The collateral

for residential mortgage lending is mortgages over residential properties.

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying

agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for

impairment losses. For loans where collateral consists of property, the market value is assessed independently by

professional property valuers.



- 65 -

Cash and balances

with central banks

This category includes deposits with the Reserve Bank of New Zealand and People’s Bank of

China.

Due from other

financial

institutions

This balance sheet category includes reverse repurchase agreements which are fully

collateralised by highly liquid debt securities which have been legally transferred to the Banking

Group subject to an agreement to resell for a fixed price. There are no repurchase agreements as

at 31 December 2017.

Derivative financial

assets

Credit risk from derivatives is mitigated where possible through netting agreements whereby

derivative assets and liabilities with the same counterparty can be offset. All netting

arrangements are legally documented. The ISDA Master Agreements contractually bind both

parties to apply close-out netting across all outstanding transactions covered by an agreement if

either party defaults or other predetermined events occur.

Loan and advances The most common types of collateral mitigating credit risk over loans and advances include

security over real estate (including residential, commercial, industrial and rural property); cash

(usually in the form of a charge over a deposit); and other security over business assets including

specific plant and equipment, inventory, accounts receivable and guarantees.

(d) Credit risk mitigation

The Bank generally takes collateral security in the form of real estate property for which it can enter into credit

exposures arising from on and off-balance sheet transactions. The Bank revalues exposures and collateral related to

financial markets positions on a daily basis to monitor the net risk position. The Bank recognises cash deposits as eligible

collateral for credit risk mitigation by way of risk reduction.

32.3 Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from

external events. It also includes legal and regulatory risk to the extent that the impacts are related to operational risk

events.

The Bank recognizes the need for Operational Risk Management (ORM) as a consideration in strategic and operational

planning, day-to-day and operational risk management and decision making at all levels in the organisation.

The ORM policy aims at assisting the formation of an effective internal controls system to sustain a safe banking

environment residing in compliance with other internal policies, applicable laws and regulations. Effective operational

risk management within the Bank is based upon a three lines of defence model. The Bank’s business unit management

is the first line of defence and accountable for the identification of risk and the implementation of control strategies and

follow up on a day-to-day basis.

Second line oversight and support is provided by the Risk and Compliance Department, the Risk Management

Committee, the Chief Executive Officer and the senior executive team of the Bank. The Bank’s Risk and Compliance

Department also facilitates the development and implementation of an operational risk management framework.

Third line assurance is provided by the internal audit function.

32.4 Market risk

Market risk of the Bank is defined as the risk of losses in the value of the balance sheet and earnings as a result of

changes in financial market rates and prices. The market risks faced by the Bank comprise the following risks: interest

rate/yield risk, foreign exchange risk, equity risk, trading risk, basis risk and mismatch risk. The Bank does not take any



- 66 -

trading positions on its own behalf.

Market risk management is an important part of the Bank’s risk management framework. The Board of Directors

(“BOD”) holds the ultimate supervision authority with appropriate delegation to the Chief Executive Officer (“CEO”) and

Asset and Liability Management Committee (“ALCo”). All levels of management and related business units apply

functions and responsibilities with reference to the relevant policies and procedures.

Interest rate risk

Interest rate risk is defined as the risk of loss to the Bank arising from adverse movements in market interest rates.

The Bank manages its exposure to interest rate risk in accordance with the Bank’s relevant market risk management

policies and procedures. The objective of these documents is to support the delivery of the Bank’s financial targets

whilst protecting future financial security.

Interest rate risk arises mainly from mismatches in the repricing periods of financial assets and liabilities. The Bank

manages interest rate risk primarily through repricing gap analysis. Gap analysis measures the difference between the

amount of interest-earning assets and interest-bearing liabilities that mature or must be repriced within certain periods.

The Bank also uses the data generated by repricing gap analysis to perform sensitivity analysis, which provides relevant

information in adjusting the repricing profile of interest-earning assets and interest-bearing liabilities. The Bank closely

follows local and foreign currency interest rate trends and where possible promptly adjusts the interest rates of local

and foreign currency deposits and loans in order to reduce interest rate risk.

The Bank’s interest repricing gap analysis as at 31 December 2017 is as follows:

As at 31 December 2017 (Audited) Up to 3

months $000

Over 3 months and

up to 6 months

$000

Over 6 months

and up to 1 year

$000

Over 1 year and

up to 2 years $000

Over 2 years $000

Non-interest bearing

$000 Total $000

Financial Assets

Cash and liquid assets 238,861 - - - - - 238,861


- - - - - - -

Financial assets held for trading - - - - - - -

Derivative assets - - - - - 577 577

Available-for-sale financial assets - - - - - - -

Loans and advances 973,580 79,542 134,273 238,241 1,220 - 1,426,856

Property and equipment - - - - - 588 588

Tax recoverable - - - - - - -

Deferred tax assets - - - - - 4,715 4,715

Other assets - - - - - 7,103 7,103

Total assets 1,212,441 79,542 134,273 238,241 1,220 12,983 1,678,700

Financial Liabilities

Payables due to other financial institutions

894,425 - - - - 2,547 896,972

Derivative liabilities - - - - - 490 490

Customer deposits 296,678 71,740 24,459 - - - 392,877

Debt securities on issue - - - - 149,656 - 149,656

Current tax liabilities - - - - - - -



- 67 -


months $000

Over 3 months and

up to 6 months

$000

Over 6 months

and up to 1 year

$000

Over 1 year and

up to 2 years $000

Over 2 years $000


$000 Total $000

Deferred tax liabilities - - - - - - -

Other liabilities - - - - - 11,645 11,645

Total liabilities 1,191,103 71,740 24,459 - 149,656 14,682 1,451,640

Net gap 21,338 7,802 109,814 238,241 (148,436)

(1,699) 227,060

The Bank’s interest repricing gap analysis as at 31 December 2016 is as follows:


months $000

Over 3 months and

up to 6 months

$000

Over 6 months

and up to 1 year

$000

Over 1 year and

up to 2 years $000

Over 2 years $000


$000 Total $000

Financial Assets



79,740 - - - - - 79,740

Financial assets held for trading - - - - - - -

Derivative assets - - - - - 10 10

Available-for-sale financial assets - - - - - - -

Loans and advances 289,629 15,941 13,307 25,860 1,220 - 345,957

Property and equipment - - - - - 814 814

Tax recoverable - - - - - - -

Deferred tax assets - - - - - 1,039 1,039

Other assets - - - - - 1,844 1,844

Total assets 455,474 15,941 13,307 25,860 1,220 3,707 515,509

Financial Liabilities

Payables due to other financial institutions

240,495 - - - - - 240,495

Derivative liabilities - - - - - 7 7

Customer deposits 181,887 12,100 20,193 - - - 214,180

Debt securities on issue - - - - - - -

Current tax liabilities - - - - - - -

Deferred tax liabilities - - - - - - -

Other liabilities - - - - - 5,158 5,158

Total liabilities 422,382 12,100 20,193 - - 5,165 459,840

Net gap 33,092 3,841 ( 6,886) 25,860 1,220 (1,458) 55,670



- 68 -

The Bank’s interest rate sensitivity analysis at 31 December 2017 is as follows:

Interest rate risk


Carrying amount

-2% profit or loss

+2% profit or loss

-2% equity +2% equity

$000 $000 $000 $000 $000

Assets

Cash and liquid assets 238,861 (4,777) 4,777 (4,777) 4,777


- - - - -

Loans and advances 1,426,856 (28,537) 28,537 (28,537) 28,537

Total Assets 1,665,717 (33,314) 33,314 (33,314) 33,314

Liabilities

Payable to other financial institutions 896,972 (17,939) 17,939 (17,939) 17,939

Customer deposits 392,877 (7,858) 7,858 (7,858) 7,858

Debt securities on issue 149,656 (2,993) 2,993 (2,993) 2,993

Total Liabilities 1,439,505 (28,790) 28,790 (28,790) 28,790

The Bank’s interest rate sensitivity analysis at 31 December 2016 is as follows:

Interest rate risk


Carrying amount

$000

-2% profit or loss

$000

+2% profit or loss

$000 -2% equity

$000 +2% equity

$000

Assets



79,740 (1,595) 1,595 (1,595) 1,595

Loans and advances 345,957 (6,919) 6,919 (6,919) 6,919

Total Assets 511,802 (10,236) 10,236 (10,236) 10,236

Liabilities

Payable to other financial institutions 240,495 (4,810) 4,810 (4,810) 4,810


Total Liabilities 454,675 (9,094) 9,094 (9,094) 9,094

The sensitivity of the income statement is the effect of the assumed changes in interest rates on the financial

instrument balances at 31 December 2017, based on the floating rate financial assets and financial liabilities. The non-

interest net income and equity are not deemed to be materially subject to the prevailing market interest rate change.

The fixed margin is subjected to interest rate changes but deemed not significant.

For financial assets at fair value through profit and loss, and available for sale, changes in interest rate will directly result

in changes in fair value (mark-to-market) and impact of the mark-to-market has not been included in the above

sensitivity analysis.

We have assessed what is a reasonable possible change in interest rate and have applied it to the sensitivity analysis.

Although the portfolio originates from different countries with different interest rate expectations, a 2% change in

interest rate is adopted as primary assumption for stress scenario analysis and has been applied consistently to all



- 69 -

currencies in order to compare the impact consistently.

Foreign exchange risk

Foreign exchange risk is the potential loss arising from the decline in the value of a financial instrument due to changes

in foreign exchange rates or their implied volatilities.

The Bank is mainly engaged in the transactions of foreign exchange related to foreign trade settlement and customer

foreign exchange deals facilitation. The Bank has no intention to be involved in foreign exchange trading as a market

maker or taking large positions. The cumulative daytime and overnight limits for Foreign Exchange and FX swap

derivatives open positions are established and monitored closely.

The Bank seeks to reduce the foreign exchange exposure by matching the sources and utilisation of funds on a

currency-by-currency basis. In addition, exchange risk is managed and controlled through settlement or economic

hedging transactions.

Net open foreign currency position

The net open position in each foreign currency detailed in the table below represents the net of the non-derivative

assets and liabilities in that foreign currency aggregated with the net expected future cash flows from derivative

financial instrument purchases and sales from foreign exchange transactions in that foreign currency. The amounts are

stated in New Zealand dollar equivalents translated using the exchange rates as at reporting date.

As at

Audited Audited


$000 $000

Net open position

Australian Dollar (AUD) (21) 13

Canadian Dollar (CAD) - -

Chinese Yuan Renminbi (CNY) 22 18

Euro (EUR) (48) (11)

British Pound (GBP) - -

Hong Kong Dollar (HKD) 21 (31)

Japanese Yen (JPY) - -

Singapore Dollar (SGD) - -

US Dollar (USD) 201 112

Total (NZD) 175 101

Foreign exchange rate sensitivity

The table below summarises the pre-tax sensitivity of financial assets and financial liabilities to a 10% depreciation or

appreciation in foreign exchange rates against the New Zealand Dollar. The sensitivity analysis is based on the Bank’s

financial instruments held at reporting date. It is assumed that all other variables remain constant.


Carrying amount

$000

-10% profit or loss

$000

+10% profit or loss

$000

-10% equity

$000

+10% equity

$000

Financial assets


Receivable due from other financial institutions

- - - - -



- 70 -


Carrying amount

$000

-10% profit or loss

$000

+10% profit or loss

$000

-10% equity

$000

+10% equity

$000

Financial assets held for trading - - - - -

Derivative assets - - - - -

Available-for-sale financial assets - - - - -


Other assets 906 (91) 91 (91) 91

Off-balance assets 21,423 (2,142) 2,142 (2,142) 2,142

Total financial assets 392,870 (39,287) 39,287 (39,287) 39,287



355,788 (35,579) 35,579 (35,579) 35,579

Derivative liabilities - - - - -

Customer deposits 9,018 (902) 902 (902) 902

Debt securities on issue - - - - -

Other liabilities 2,134 (213) 213 (213) 213

Off-balance liabilities 25,768 (2,577) 2,577 (2,577) 2,577

Total financial liabilities 392,708 (39,271) 39,271 (39,271) 39,271


Carrying amount

$000

-10% profit or loss

$000

+10% profit or loss

$000

-10% equity

$000

+10% equity

$000

Financial assets

Cash and liquid assets 7,755 (776) 776 (776) 776

Receivable due from other

financial institutions 14,694 (1,469) 1,469 (1,469) 1,469

Financial assets held for trading - - - - -

Derivative assets - - - - -

Available-for-sale financial assets - - - - -


Other assets 359 (36) 36 (36) 36

Off-balance assets 2,009 (201) 201 (201) 201

Total financial assets 119,499 (11,950) 11,950 (11,950) 11,950


Payable due to other financial

institutions 59,121 (5,912) 5,912 (5,912) 5,912

Derivative liabilities - - - - -


Debt securities on issue - - - - -



- 71 -


Carrying amount

$000

-10% profit or loss

$000

+10% profit or loss

$000

-10% equity

$000

+10% equity

$000

Other liabilities 152 (15 ) 15 (15 ) 15

Off-balance liabilities 2,007 (201) 201 (201) 201

Total financial liabilities 119,398 (11,940) 11,940 (11,940) 11,940

32.5 Liquidity and funding risk

Funding risk is related to the risk that an entity does not have diversity of funding sources and hence will have difficulty

in realising assets or otherwise raising funds to meet commitments associated with financial instruments. Prudent

liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding

through an adequate amount of committed credit facilities and the ability to close out market positions. The Bank

manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of

financial assets and liabilities.

Liquidity portfolio management

The Bank held the following financial assets for the purpose of managing liquidity risk:

As at

Audited Audited


$000 $000

Cash and cash equivalents:

Cash and liquid assets 238,861 86,105

Receivables due from other financial institutions - 79,740

Reverse repurchase agreements, Government bonds, notes and securities

- -

Local and semi-government bonds, notes and securities - -

Corporate and other institutions bonds, notes and securities - -

Total liquidity portfolio 238,861 165,845

Contractual maturity analysis of financial assets and financial liabilities

The table below presents the Bank’s cash flows by their remaining period to contractual maturity as at reporting date.

The amounts disclosed in the table are the contractual undiscounted cash flows and include principal and future

interest cash flows and therefore will not agree to the carrying amounts on the balance sheet.

Actual cash flows may differ significantly from the contractual cash flows presented below as a result of future actions of

the Bank and its counterparties such as early repayments or refinancing of underlying instruments.

The contractual maturity analysis for off-balance sheet commitments and contingent liabilities has been prepared using

the earliest date at which the Bank can be called upon to pay. The liquidity risk of credit related commitments and

contingent liabilities may be less than the contract amount and does not necessarily represent future cash

requirements as many of these facilities are expected to be only partially used or to expire unused.



- 72 -


On demand

Up to 3 months

Over 3 months

and up to 6 months

Over 6 months

and up to 1 year

Over 1 year and

up to 2 years

Over 2 years

Total

$000 $000 $000 $000 $000 $000 $000

Non-derivative financial assets



- - - - - - -


- - - - - - -

Available-for-sale securities - - - - - - -

Loans and advances 3,670 76,978 74,978 93,911 262,984 1,350,529 1,863,050

Other assets - - - - - - -

Total non-derivative financial assets

242,531 76,978 74,978 93,911 262,984 1,350,529 2,101,911

Derivative financial assets

Net settled - 577 - - - - 577

Gross settled – cash inflow - - - - - - -

Gross settled – cash outflow - - - - - - -

Total derivative financial assets

- 577 - - - - 577

Non-derivative financial liabilities


20,614 414,601 11,800 5,000 90,009 354,948 896,972

Customer deposits 52,711 245,560 72,882 25,034 - - 396,187

Debt securities on issue - - - - - 149,656 149,656

Other liabilities - - - - - - -

Total non-derivative financial liabilities

73,325 660,161 84,682 30,034 90,009 504,604 1,442,815

Derivative financial liabilities

Net settled - 490 - - - - 490



Total derivative financial liabilities

- 490 - - - - 490

Off balance sheet commitments and contingent liabilities

- - - - - - -

Capital commitments - - - - - - -

Leasing commitments - 84 84 144 223 1,057 1,592

Commitments to extend credit

430,118 - - - - - 430,118

Total off-balance sheet commitments and contingent liabilities

430,118 84 84 144 223 1,057 431,710



- 73 -


On demand

Up to 3 months

Over 3 months

and up to 6 months

Over 6 months

and up to 1 year

Over 1 year and

up to 2 years

Over 2 years

Total

$000 $000 $000 $000 $000 $000 $000

Non-derivative financial assets



- 79,740 - - - - 79,740


- - - - - - -

Available-for-sale securities - - - - - - -

Loans and advances - 72,097 10,422 42,023 72,341 149,075 345,957

Other assets - - - - - - -

Total non-derivative financial assets

86,105 151,836 10,422 42,023 72,341 149,075 511,802

Derivative financial assets

Net settled - 10 - - - - 10



Total derivative financial assets

- 10 - - - - 10

Non-derivative financial liabilities


901 53,582 - 50,512 45,263 90,237 240,495

Customer deposits 24,359 126,624 41,871 9,662 10,632 - 213,146

Debt securities on issue - - - - - - -

Other liabilities - - - - - - -

Total non-derivative financial liabilities

25,259 180,205 41,871 60,174 55,895 90,237 453,641

Derivative financial liabilities

Net settled - 7 - - - - 7



Total derivative financial liabilities

- 7 - - - - 7

Off balance sheet commitments and contingent liabilities

Capital commitments - - - - - - -

Leasing commitments - 63 63 117 202 1,162 1,607

Commitments to extend credit

153,145 - - - - - 153,145

Total off-balance sheet commitments and contingent liabilities

153,145 63 63 117 202 1,162 154,752



- 74 -

32.6 Internal Audit

The Internal Audit function is the third line of defence of the Bank, and plays a significant role in identifying risks,

assessing the design effectiveness of policies, assessing the design and operating effectiveness of internal controls, as

well as assessing the compliance to regulatory requirements and internal policies.

Internal Audit plan is proposed by the Internal Audit function on an annual basis, and communicated to senior

management and the Audit Committee. Audit engagements are conducted as per annual internal audit plan. Types of

internal audits include operational audit, compliance audit, and financial audit.

The Internal Audit function has direct reporting line to the Audit Committee of the Bank.

33 CAPITAL ADEQUACY

The Bank is subject to the capital adequacy requirements for registered banks as specified by the Reserve Bank of New

Zealand (RBNZ). The RBNZ has set minimum regulatory capital requirements for banks that are consistent with the

internationally agreed framework (commonly known as Basel III) developed by the Basel Committee on Banking

Supervision. These requirements define what is acceptable as capital and provide methods for measuring the risks

incurred by the Bank.

The objective of the Basel III Framework is to develop capital adequacy guidelines that are more accurately aligned with

the individual risk profile of banks. Basel III consists of three pillars – Pillar One covers the capital requirements for

banks for credit, operational and market risks, Pillar Two covers all other material risks not already included in Pillar

One, and Pillar Three relates to market disclosure. As a bank adopting the Standardised Approach under the Basel III

regime, the Bank applies the Reserve Bank’s BS2A Capital Adequacy Framework (Standardised Approach) for calculating

regulatory capital requirements.

The Basel III standards for bank capital distinguish between Tier 1 and Tier 2 capital. Tier 1 capital is permanently and

freely available to absorb losses without the bank being obliged to cease trading, while Tier 2 capital generally only

absorbs losses in a winding up. Within Tier 1 capital, Common Equity (CET1) has greater loss absorbing capability than

the other Tier 1 instruments referred to as Additional Tier 1 (AT 1) capital. Common Equity and Additional Tier 1 capital

primarily consists of shareholders’ equity and other capital instruments acceptable to the Reserve Bank less intangible

and deferred tax assets and other prescribed deductions. Tier 2 can comprise other capital instruments acceptable to

the Reserve Bank. The Bank does not have any Tier 2 capital components.

Capital ratios are used to define minimum capital requirements for each of: Common Equity (CET1), Tier 1 capital (CET1

plus AT1), and Total capital (Tier 1 plus Tier 2), as a percentage of risk-weighted assets calculated in accordance with the

Reserve Bank document BS2A Capital Adequacy Framework (Standardised Approach). As a condition of registration, the

Bank must comply with the following minimum requirements set by the RBNZ:

(a) Total capital ratio must not be less than 8% of risk weighted exposures.

(b) Tier 1 capital ratio must not be less than 6% of risk weighted exposures.

(c) Common Equity Tier 1 capital ratio must not be less than 4.5% of risk weighted exposures.

(d) Capital of the Bank must not be less than $30 million.

In addition to minimum capital requirements, Basel III introduces a capital conservation buffer of 2.5 per cent of risk-

weighted assets. There are increasing constraints on capital distributions where a bank’s capital level falls within the

buffer range, which are specified in the conditions of registration on page 6.



- 75 -

Capital management

The Bank has developed a Capital Policy to enable effective and controlled management of the capital. Capital

management involves the measurement, monitoring and reporting of the capital position from both a current and

future perspective.

The Capital Policy along with the Internal Capital Adequacy Assessment Process (ICAAP) forms the basis of effective

capital management within the Bank. The Capital Policy should be read in conjunction with the ICAAP, as it provides the

framework that is used by the Board to understand and manage capital adequacy. ICAAP uses current capital

requirements, as well as forecasted capital levels to determine whether the level of capital held by the Bank is

adequate.

The ICAAP provides the framework that is used by the Board to understand and manage capital adequacy. It uses the

current capital requirements and risks of the Bank, as well as forecasted capital levels to determine whether the level of

capital held by the Bank is adequate.

The Board holds ultimate responsibility for ensuring that capital adequacy is maintained. This includes: setting,

monitoring and obtaining assurance for the Bank’s capital management policy and framework; risk definitions for all

material risks; materiality thresholds; capital adequacy targets; and risk appetite. The Bank actively monitors its capital

adequacy as the part of the Bank’s Internal Capital Adequacy Assessment Process (“ICAAP”), and reports this on a

regular basis to senior management and the Board.

The capital adequacy tables set out on the following pages summarise the composition of regulatory capital, risk-

weighted assets and the capital adequacy ratios for the Bank as at 31 December 2017. During the period, the Bank

complied in full with all externally imposed RBNZ capital requirements as set out in the Bank’s conditions of registration.

Capital

The table below shows the qualifying capital for the Bank.

As at

Unaudited Unaudited


$000 $000

Tier One Capital

Common Equity Tier One capital

Issued and fully paid-up ordinary share capital 223,307 63,307

Retained earnings (net of appropriations) (9,306) (8,613)

Accumulated other comprehensive income and other disclosed reserves

1

- -

Less: deductions from Common Equity Tier One capital:

Intangible assets - -

Deferred tax assets (4,715) (1,039)

Total Common Equity Tier One capital 209,286 53,655

Additional Tier One capital

Nil - -

Total Additional Tier One capital - -

Total Tier One capital 209,286 53,655

Tier Two capital



- 76 -

As at

Unaudited Unaudited


$000 $000

Nil - -

Total Tier Two capital - -

Total capital 209,286 53,655

(1) Accumulated other comprehensive income and other disclosed reserves is an available-for-sale revaluation reserve of $nil.

Capital instruments

In accordance with the Reserve Bank document BS2A Capital Adequacy Framework (Standardised Approach), ordinary

share capital is classified as Common Equity Tier 1 capital.

Refer to Note 20 for the material terms and conditions of the ordinary share capital. In addition, in relation to the

ordinary shares:

(a) there are no options or facilities for early redemptions, conversion, write-down or capital repayment;

(b) there is no predetermined dividend rate;

(c) there is no maturity date; and

(d) there are no options granted or to be granted pursuant to any arrangement. The Bank does not have any other

classes of capital instrument in its capital structure.

Reserves

There were no reserves as at 31 December 2017.

Credit risk

The capital charge for credit risk is derived by following the risk methodology for measuring capital requirements within

Part 4 and 5 of BS2A Capital Adequacy Framework (Standardised Approach).

On-balance sheet exposures

As at 31 December 2017 (Unaudited)

Top exposure after credit

risk mitigation $000

Risk weight %

Risk weighted exposure

$000

Minimum Pillar 1 capital

requirement $000

Cash and gold bullion - 0% - -

Sovereigns and central banks 212,152 0% - -

Multilateral development banks and other international organisation

- - - -

Public sector entities - - - -

Banks – 20% weighting 30,186 20% 6,037 483

Banks – 50% weighting 313 50% 157 13

Banks - 100% weighting

7,906 100%

7,906

632

7,906 100% 7,906 632

Corporate – 50% weighting 27,937 50% 13,969 1,117


Residential mortgages not past due – 35% weighting 259,695 35% 90,893 7,271

Residential mortgages not past due – 40% weighting 119,333 40% 47,733 3,819



- 77 -




Risk weight %


$000


requirement $000

Past due residential mortgages - - - -

Other past due assets - - - -

Equity holdings (not deducted from capital) that are publicly traded

- 300% - -

All other equity holdings (not deducted from capital) - 400% - -

Other assets 4,260 100% 4,260 341

Total on-balance sheet exposures 1,660,926 1,170,099 93,608




Risk weight %


$000


requirement $000

Cash and gold bullion - - - -

Sovereigns and central banks 75,284 0% 0 0

Multilateral development banks and other international organisation

- - - -

Public sector entities - - - -

Banks – 20% weighting 102,728 20% 20,546 1,644

Banks – 50% weighting 2,071 50% 1,036 83



Residential mortgages not past due – 35% weighting 12,655 35% 4,429 354

Residential mortgages not past due – 40% weighting 21,103 40% 8,441 675

Past due residential mortgages - - - -

Other past due assets - - - -

Equity holdings (not deducted from capital) that are publicly traded

- - - -

All other equity holdings (not deducted from capital) - - - -

Other assets 2,668 100% 2,668 213

Total on-balance sheet exposures 513,495 - 320,697 25,656



- 78 -

Off-balance sheet exposures and market related contracts


Total exposure

$000

Credit conversion

factor $000

Credit equivalent

amount $000

Average risk weight

$000


$000


requirement $000

Direct credit substitute 5,050 100% 5,050 100% 5,050 404

Asset sale with recourse - 100% - - - -

Forward asset purchase - 100% - - - -

Commitment with certain drawdown - 100% - - - -

Note issuance facility - 50% - - - -

Revolving underwriting facility - 50% - - - -

Performance-related contingency 28,436 50% 14,218 50% 7,145 572

Trade-related contingency - 20% - - - -

Placements of forward deposits - 100% - - - -

Other commitments where original maturity is more than one year 392,191 50% 196,095 71% 139,976 11,198

Other commitments where original maturity is less than or equal to one year 496 20% 99 100% 99 8

Other commitments that cancel automatically when the creditworthiness of the counterparty deteriorates or that can be cancelled unconditionally at any time without prior notice

- 0% - - - -

Market related contracts

(a) Foreign exchange contracts 28,854 n/a 289 100% 289 23

(b) Interest rate contracts 225,000 n/a - 1% - -

(c) Other – OTC etc. - n/a - - - -

Total off-balance sheet exposures 680,027 215,751 152,599 12,205


Total exposure

$000

Credit conversion

factor $000

Credit equivalent

amount $000

Average risk weight

$000


$000


requirement $000

Direct credit substitute 5,050 100% 5,050 100% 5,050 404

Asset sale with recourse - 100% - - - -

Forward asset purchase - 100% - - - -

Commitment with certain drawdown - 100% - - - -

Note issuance facility - 50% - - - -

Revolving underwriting facility - 50% - - - -

Performance-related contingency 4,697 50% 2,349 87% 2,049 164

Trade-related contingency - 20% - - - -



- 79 -


Total exposure

$000

Credit conversion

factor $000

Credit equivalent

amount $000

Average risk weight

$000


$000


requirement $000

Placements of forward deposits - 100% - - - -

Other commitments where original maturity is more than one year

117,619 50% 58,810 51% 30,016 2,401

Other commitments where original maturity is less than or equal to one year

25,778 20% 5,156 100% 5,156 412

Other commitments that cancel automatically when the creditworthiness of the counterparty deteriorates or that can be cancelled unconditionally at any time without prior notice

- 0% - - - -

Market related contracts - - - - -

(a) Foreign exchange contracts 2,197 n/a 22 100% 22 2

(b) Interest rate contracts - n/a - - - -

(c) Other – OTC etc. - n/a - - - -

Total off-balance sheet exposures 155,342 71,386 42,293 3,383

(1) The credit equivalent amount for market related contracts was calculated using the current exposure method.

Additional mortgage information

Residential mortgages by loan-to-valuation ratio


Does not exceed 80%

Exceeds 80% and not 90%

Exceed 90% Total

Loan-to-valuation ratio

On-balance sheet exposures 378,373 - - 378,373

Off-balance sheet exposures - - - -

Value of exposures 378,373 - - 378,373


Does not exceed 80%

Exceeds 80% and not 90%

Exceeds 90%

Total

$000 $000 $000 $000

Loan-to-valuation ratio

On-balance sheet exposures 33,759 - - 33,759

Off-balance sheet exposures - - - -

Value of exposures 33,759 - - 33,759

The information in the above table relates to the Banking Group and is in respect of the total residential mortgage

lending used to calculate the Bank’s Pillar 1 capital requirement for credit risk, categorised by loan-to-valuation ratio.

Any residential mortgage loan for which no loan-to-valuation ratio is available is included in the category for loan-to-

valuation ratios that exceed 90%.

The following table is reconciliation between any figures disclosed elsewhere in the Disclosure Statement that relate to

mortgages on residential property:



- 80 -

Reconciliation of residential mortgage-related amount

As at

Unaudited 31 December 2017

$000


$000

Term loans – housing (as disclosed in Note 12) and Residential mortgages – total gross loans and advances (as disclosed in Note 12) 378,373 33,759

Reconciling items:

Nil - -

Residential mortgages by loan-to-valuation ratio 63% 59%

Credit risk mitigation

The Bank revalues exposures and collateral related to financial markets positions on a daily basis to monitor the net risk

position. The Bank recognises cash and deposits as eligible collateral for credit risk mitigation by way of risk reduction.

BOC NZ credit risk mitigation includes secured cash deposits only, hence the Bank takes the simple method to calculate

the mitigated amount.


Total value of on-and-off-balance sheet

exposures covered by eligible collateral (after

haircutting) $000


exposures covered by guarantees or credit

derivatives $000

Sovereign or central bank - -

Multilateral development bank - -

Public sector entities - -

Bank - -

Corporate 4,540 -

Residential mortgage - -

Other - -

Total 4,540 -



exposures covered by eligible collateral (after

haircutting) $000


exposures covered by guarantees or credit

derivatives $000

Sovereign or central bank - -

Multilateral development bank - -

Public sector entities - -

Bank - -

Corporate 3,564 -

Residential mortgage - -

Other - -

Total 3,564 -

Operational risk

The capital charge for operational risk is derived by following the risk methodology for measuring capital requirements

within Part 9 of BS2A Capital Adequacy Framework (Standardised Approach).



- 81 -

As at


$000


$000 Implied weighted exposure 118,483 37,712

Total operational risk capital requirement 9,479 3,017

Market risk

Peak end-of-day aggregate capital charge for each category of market risk is derived by determining the maximum over

the relevant period of the aggregate capital charge at the close of each business day derived in accordance with Part 10

of the Reserve Bank document BS2A Capital Adequacy Framework (Standardised Approach).

End-period capital charges Peak end-of-day capital charge


Implied risk weighted exposure

$000

Aggregated capital charge

$000


$000


$000

Interest rate risk 39,656 3,172 83,066 6,645

Foreign currency risk 239 19 5,750 460

Equity risk - - - -

Total 39,895 3,192 88,816 7,105

End-period capital charges Peak end-of-day capital charge



$000


$000


$000


$000

Interest rate risk 20,167 1,613 46,420 3,714

Foreign currency risk 144 11 6,873 550

Equity risk - - - -

Total 20,310 1,625 53,293 4,263

Total capital requirements


Total exposure after credit risk mitigation

$000


$000

Total capital requirement

$000

Total credit risk + Equity 1,876,677 1,322,658 105,812

Operational risk N/A 118,483 9,479

Market risk N/A 39,895 3,192

Total 1,876,677 1,481,036 118,483


Total exposure after credit risk mitigation

$000


$000

Total capital requirement

$000

Total credit risk + Equity 584,881 362,990 29,039

Operational risk N/A 37,712 3,017

Market risk N/A 20,310 1,625

Total 584,881 421,012 33,681



- 82 -

Capital requirements for other risks (Pillar II)

The Basel III capital adequacy regime intends to ensure that banks have adequate capital to support all material risks

inherent in their business activities. Consequently, the Bank’s ICAAP captures all material risks that the Bank faces

including those not captured by Pillar 1 regulatory capital requirements. The other risks for the Bank include balance

sheet risk, liquidity risk, credit concentration risk, strategic risk, contagion and reputational risk. Noting this, it is

considered prudent to cater for these risks through the inclusion of a buffer to cater for all Pillar II risks. This buffer has

been assessed at 2% to arrive at the board trigger. The inclusion of the buffer also reflects the lack of ability to quantify

the capital requirements as a result of these risks.

Capital ratios

As at Unaudited Unaudited


Capital adequacy ratios

Common Equity Tier 1 capital ratio 14.13% 12.74%

Tier 1 capital ratio 14.13% 12.74%

Total capital ratio 14.13% 12.74%

RBNZ Minimum ratio requirement




Buffer ratio

Buffer ratio 6.13% 4.74%

Buffer ratio requirement 2.50% 2.50%

Capital adequacy of Ultimate Parent Bank

The Ultimate Parent Bank of the Bank is BoC. The Ultimate Parent Bank Group comprises the Ultimate Parent Bank and

its subsidiaries. Both the Ultimate Parent Bank and the Ultimate Parent Bank Group are required by the CBRC to hold

minimum capital at least equal to that specified under the Basel II Standardised Approach and are required to publicly

disclose this capital adequacy information on a quarterly basis. This information is available via the Ultimate Parent

Bank’s website (www.boc.cn).

The Ultimate Parent Bank and the Ultimate Parent Bank Group each met the capital requirements imposed on them by

the CBRC as at 30 September 2017, the latest reporting date.

The capital ratios below have been calculated in accordance with the Capital Rules for Commercial Banks (Provisional)

(Y.J.H.L[2012] No.1), issued by the CBRC.

As at (Unaudited)

30 September2017 %

31 December 2016 %

Ultimate Parent Bank Group




Ultimate Parent Bank






- 83 -

Solo capital adequacy

As at (Unaudited)

31 December 2017 %

31 December 2016 %




34 EVENTS SUBSEQUENT TO THE REPORTING DATE New conditions of registration will apply to the Bank on and after 1 January 2018 to refer to a revised version of “Framework for Restrictions on High-LVR Residential Mortgage Lending” (BS19) which amends the LVR restrictions, and a revised version of “Liquidity Policy” (BS13) which amends the definition of total loans and advances.

There were no other material events that occurred subsequent to the reporting date, that require recognition or

additional disclosure in these financial statements.

A member firm of Ernst & Young Global Limited

Independent Auditor’s Report to the Shareholder of Bank of China (New Zealand) Limited

Report on the Audit of the Financial Statements (excluding Supplementary Information Relating to Capital Adequacy)

Opinion

We have audited pages 25 to 74 and Note 34 of the Disclosure Statement of Bank of China (New Zealand) Limited (“the Bank”), which includes the financial statements required by Clause 24 of the Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014 (as amended) (the “Order”) and the supplementary information required by Schedules 4, 7, 13 to 15 and 17 of the Order. The financial statements comprise:

the statement of financial position of the Bank as at 31 December 2017; the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended of the Bank;

and the notes to the financial statements including a summary of significant accounting policies. In our opinion, the financial statements on pages 25 to 74 and Note 34 (excluding the supplementary information disclosed in accordance with Schedules 4, 7, 13 to 15 and 17 of the Order) comply with generally accepted accounting practice in New Zealand and give a true and fair view of the financial position of the Bank as at 31 December 2017 and its financial performance and cash flows for the year then ended in accordance with New Zealand equivalents to International Financial Reporting Standards and International Financial Reporting Standards.

In our opinion, the supplementary information prescribed by Schedules 4, 7, 13 to 15 and 17 of the Order fairly states, in all material respects, the matters to which it relates in accordance with those schedules.

We also report in accordance with the requirements of Clauses 2(1)(d) and 2(1)(e) of Schedule 1 of the Order that in relation to our audit of the financial statements (excluding the supplementary information relating to capital adequacy) for the year ended 31 December 2017:

► we have obtained all the information and explanations we have required; and

► in our opinion, proper accounting records have been kept by the Bank, as far as appears from our examination of those records.

This report is made solely to the Bank's shareholder. Our audit has been undertaken so that we might state to the Bank's shareholder those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Bank and the Bank's shareholder, for our audit work, for this report, or for the opinions we have formed.

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (New Zealand). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.

We are independent of the Bank in accordance with Professional and Ethical Standard 1 (revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Other than in our capacity as auditor we have no relationship with, or interest in, the Bank. Partners and employees of our firm may deal with the Bank on normal terms within the ordinary course of trading activities of the business of the Bank.

Emphasis of Matter – Specific Loan Provision

As explained in Note 6 to the financial statements, the Bank has identified a loan with carrying value of $33m, gross of impairment losses, as impaired. A specific provision of $9.9m has been raised against the loan. However, as explained in Note 6, there is a high degree of judgement and uncertainty involved in this provision and the loss ultimately suffered by the Bank may be significantly greater or less than the amount provided. Our opinion is not modified in respect of this matter.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements in the current year. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of the audit report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our


assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.

Provisions for Impairment Losses

Why significant How our audit addressed the key audit matter

Provisions for Impairment Losses are disclosed in Note 6 in the Disclosure Statement; Provision for Impairment Losses. Provisions for impairment losses are determined under application of NZ IAS 39 Financial Instruments: Recognition and Measurement (“NZ IAS 39”).

This is a key audit matter as significant judgement is involved to determine the need for and amount of provisions for impairment losses.

Key areas of judgement included:

Determining whether the requirements of NZ IAS 39, which is reflected in the Bank’s credit loss provision, are appropriately applied;

the identification of exposures with a significant deterioration in credit quality;

assumptions used in the credit loss provision such as the financial condition of the counterparty and expected future cash flows; and

consideration of the need to apply additional overlays to reflect external factors that are not appropriately captured by the credit loss model.

To address the risk of material misstatement of the provisions for impairment losses, procedures performed included:

Assessing the provisioning techniques/methodology against the requirements of NZ IAS 39;

Assessing and testing the design and operating effectiveness of the controls over the ongoing internal credit quality assessments.

Assessing and testing the calculation of the provision for doubtful debts;

Examining a sample of exposures and performing procedures to evaluate the timely identification of exposures with a significant deterioration in credit quality;

Assessing whether there were any external factors requiring additional overlays not captured by the credit loss model; and

Assessing the adequacy of the disclosures in the financial statements.

Fee Income


Fee Income is disclosed in Note 4 in the Disclosure Statement: Other Operating Income / (Expense). The bank earns fees for the origination of loans and other facilities in the ordinary course of business. The treatment of these fees is determined under application of NZ IAS 39 Financial Instruments: Recognition and Measurement (“NZ IAS 39”).

This is a key audit matter as the bank may not appropriately recognise fees based on the characteristics of the service being provided.

Key considerations included:

The interpretation of the requirements under NZ IAS 39 to determine the appropriate recognition of fee income and whether it is appropriate to recognise the fee directly to income when received or to amortise it over the life of the facility to which it relates;

Assessment of the nature of the fee and service to which it relates.

To address the risk of material misstatement of fee income we performed the following procedures over a sample of fee income amounts:

Assessed the basis for recognising fee income against the requirements of NZ IAS 39;

Agreed fee amounts to supporting evidence; Assessed the design and operating effectiveness of controls over fee

income including IT application controls relevant to calculating the amounts recognised in the profit or loss account. Where we chose not to or concluded we were unable to rely on controls, the impact for our audit was considered, and our audit procedures adjusted where appropriate.

Information Technology (IT) systems and controls over financial reporting


A significant part of the Bank’s financial reporting process is reliant on IT systems with automated processes and controls over the capture, storage and extraction of information. A significant

We focused our audit on those IT systems and controls that are significant for the Bank’s financial reporting process.

As audit procedures over IT systems and controls require specific


component of these processes and the overall control environment includes user access and change management protocols.

These protocols are important because they ensure access and changes to IT systems and related data are made and authorised in an appropriate manner.

As our audit sought to place a high level of reliance on IT systems and application controls over processing financial information and financial reporting, a significant proportion of the overall audit effort was in this area.

expertise, we involved our IT specialists in our audit.

We assessed and tested the design and operating effectiveness of the Bank’s IT controls, including those over user access and change management.

Information Other than the Financial Statements and Auditor’s Report

The directors of the Bank are responsible for the Disclosure Statement, which includes information other than the financial statements and auditor’s report. The other information comprises the information required to be included in the Disclosure Statement in accordance with Schedule 2 of the Order and is included on pages 1 to 24. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained during the audit, or otherwise appears to be materially misstated.

If, based upon the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Directors’ Responsibilities for the Financial Statements (excluding Supplementary Information Relating to Capital Adequacy)

The directors are responsible, on behalf of the entity, for the preparation and fair presentation of the financial statements in accordance with New Zealand equivalents to International Financial Reporting Standards and International Financial Reporting Standards, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing on behalf of the entity the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Bank or cease operations, or have no realistic alternative but to do so.

In addition, the directors are responsible, on behalf of the Bank, for including supplementary information in the Disclosure Statement which complies with Schedules 2, 4, 7, 13 to 15 and 17 of the Order.

Auditor’s Responsibilities for the Audit of the Financial Statements (excluding Supplementary Information Relating to Capital Adequacy)

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole including the supplementary information disclosed in accordance with Clause 24 and Schedules 4, 7, 13 to 15 and 17 of the Order are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing (New Zealand) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of the auditor’s responsibilities for the audit of the financial statements is located at External Reporting Board’s website: https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-2/.

This description forms part of our auditor’s report.

The engagement partner on the audit resulting in this independent auditor’s report is Graeme Bennett.

Report on the Supplementary Information Relating to Capital Adequacy

We have reviewed the supplementary information relating to capital adequacy required by Schedule 9 of the Order as disclosed in Note 33 of the financial statements of the Bank for the year ended 31 December 2017.

Directors’ Responsibility for the Supplementary Information Relating to Capital Adequacy

https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-2/


The directors are responsible for the preparation of the supplementary information relating to capital adequacy that is prepared in accordance with the Bank’s conditions of registration and is disclosed in accordance with Schedule 9 of the Order.

Reviewer’s Responsibilities for the Supplementary Information Relating to Capital Adequacy

Our responsibility is to express a conclusion on the supplementary information relating to capital adequacy, disclosed in Note 33, based on our review.

We conducted our review in accordance with New Zealand Standard on Review Engagements 2410 Review of Financial Statements Performed by the Independent Auditor of the Entity (NZ SRE 2410).

NZ SRE 2410 requires us to conclude whether anything has come to our attention that causes us to believe that the supplementary information has not been prepared in accordance with the bank’s conditions of registration and disclosed in accordance with Schedule 9 of the Order.

As the auditor of the Bank, NZ SRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial statements.

A review of the supplementary information relating to capital adequacy in accordance with NZ SRE 2410 is a limited assurance engagement. The auditor performs procedures, primarily consisting of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with International Standards on Auditing (New Zealand). Accordingly we do not express an audit opinion on the supplementary information relating to capital adequacy.

Conclusion

Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that the supplementary information has not been prepared, in all material respects, in accordance with the bank’s conditions of registration and disclosed in accordance with Schedule 9 of the Order.

Chartered Accountants

Auckland

28 March 2018

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