ManagingWestpac’s approach to sustainability

As an acknowledged global leader in sustainability we continue to adapt our approach and actions to fit the changing world within which we live.

Our sustainability strategy is based upon the use of the widely accepted global standard for Corporate Responsibility and Sustainable Development (AA10001).

Our sustainability approachprinciples

WeIn line with the global standard, we have a set of goals to make sustainability part ofadopted the way we do business including embedding sustainability into our strategy, values, culture and processes including supply chain, risk management, and product development.

During the year ended 30 September 2011, work was also undertaken to redefine our sustainability strategy with a focus on emerging social issues.

Application of the AA1000 Principles

Our approach to sustainability is aligned to the AA1000 AccountAbility Principles Standard (2008), a voluntary framework developed by the UK based AccountAbility organisation. The standard establishes a framework for identifying, managing and communicating sustainability issues. Underpinning the framework arestandard’s three key principles:principles. These are:

§1.       inclusivity;Involving all stakeholders upon whom we have an impact in developing our strategy – Inclusivity

§sustainability materiality; and

§responsiveness.;

Utilising these principles assists us2.Evaluating all issues identified to identifydetermine the impact they may have on our stakeholders and respond to issuesourselves – Sustainability materiality; and

3.Ensuring that matterour decisions, actions and performance, as well as our communication with stakeholders, are responsive to the long-term prosperity ofissues identified with our business, our customers, our people and our communities.stakeholders – Responsiveness.

Inclusivity

Open dialogue with a wide range of stakeholder groups is important to better understand how we impact upon each other. Open dialogue also assists us to understand emerging trends and issues so we can best respond to these challenges.

Key components of our approach to inclusivity during 20112012 have included:

§          continued work to better understand and address customer concerns;

§specific engagement with external stakeholders to identify future areas of sustainability focus;

§          workcollaborating with key external stakeholders in order to inform our approach;

§consulting with employees so as to better understand the drivers of strong employee advocacy;engagement;

§          the continued use of Net Promoter Score (NPS) measures across the Group;

§the further roll out of more explicitongoing monitoring of our reputation across a wide range of stakeholders;mediums; and

§          a review of our main stakeholder consultation body, the Community Consultative Council (CCC), which has led to the creation of a smaller, more focused stakeholder reference group.

We have increased our engagementclose working relationship with the localnumerous community as well as maintained specific issue-based engagementsorganisations through employee volunteering, workplace giving and our CCC.community support.

1AA1000 is a voluntary framework developed by the AccountAbility organisation using a multi-stakeholder consultation process. This standard provides a framework for identifying, prioritising and responding to sustainability challenges.

Competition

The Westpac Group operates in a highly competitive environment across the regions in which we operate.do business.

We serve the banking and wealth needs of a broad set of customer segments from small businesses to large corporate and institutional clients on thein our business sidesegments and across all consumer segments. The Westpac Group competes with other industry players for customers covering their needs of transacting, saving, investing, protecting and their business,borrowing with other players across a wide rangeset of products and services. Our competitors range from large global organisations with broad offerings to entities more focused on specific regions or products. Our competitors also include a range of other financial services and advisory companies such as banks, investment banks, credit unions, building societies, mortgage originators, credit card issuers, brokerage firms, fund and asset management companies, insurance companies and internet-based financial services providers.

Our competitive position across customer segments, products and geographies is determined by a variety of factors. These factors include:

§          the type of customers or customer segments served;

§          customer service quality and convenience;

§          the effectiveness of, and access to, distribution channels;

§          brand reputation and preference;

§          the quality, range, innovation and pricing of products and services offered;

§          technology solutions; and

§          the talent and experience of our employees.

In Australia, we have seen intense competition for deposits intensify as some traditional sources of funding, such as securitisation, have become more difficult.continue to be driven in part by clearer global regulatory requirements for liquidity management and balance sheet composition. Banks and other financial institutions also seek to reduceachieve a higher proportion of deposit funding as credit rating agencies and debt investors look for strong balance sheet positions in their reliance on wholesale funding to better position themselves for pending regulatory liquidity requirements.assessment of quality institutions.

We expect competition for lending to also remain intense.high, with slower credit growth compared to the significant credit expansion Australia experienced over the majority of the last two decades. Businesses and consumers are cautious about the global outlook and continue to trim back debt. In mortgages, this lower growth and the desire of some players to aggressively maintain or growexpand their market share using price has seen particularly aggressivestrong competition over the last 12 months and thisyear. This is expected to continue, particularly if lending growth remains modest. InServing business lending, competition is likely to increase when business confidence improvescustomers’ transaction and investment returns.trade financing needs has been at the centre of competitive activity as customer expectations increase.

In our wealth business, we expect competition to increase as financial institutions and industry funds move to capture a greater share of this fast growing market, particularly in superannuation (or pensions) and financial advice as the market responds to emerging regulatory changes.

With a solid operating performance across all divisions in Full Year 2012, combined with a strongfurther strengthening of the balance sheet, Westpac believes it is well positioned to respond to this challenging operating environment. Nevertheless, in 2012 the GroupParticular areas of focus will seek to further improve its efficiency to maintain sound returns. This will include focus on:include:

§          further building oncontinuing to improve productivity, including completion of the productivity initiativesnew supplier arrangements commenced in late 2010, including the implementation of new sourcing arrangements and further optimising our multi-brand model;early 2012;

§          continued strengthening of the balance sheet with a particular focus on improving the asset/liability mix; and

§ensuring we gain maximum return from the significant investment already made across the business over recent years; and

§          responding pro-actively and in a disciplined way to the increased regulatory agenda.

The Group will also continue to invest in the year ahead with our approach remaining highly targeted to areas where the greatest opportunities exist. These include the build-out of Bank of Melbourne, organic expansionand commencing the development of a new wealth platform. The Group will also continue to build its capacity and capability in Asia via an increased network and continuing to improve the sale of wealth and insurance products via cross sell.by further building relationships with strategic partners. Our SIPs investment program is also a key element of this agendainvestment that we expect to continue to enhance and strengthen our technology infrastructure.infrastructure, particularly in online and mobile banking.

1All data and opinions under ‘Outlook’ are generated by our internal economists and management.

Westpac, along with the other defendant banks, was found liable to repay its intention to confirm the permanent continuanceshare of the Financial Claims Scheme (FCS).monies received from the Bell Group plus interest. The FCSdefendant banks appealed the decision. Judgment was establishedhanded down by the Court of Appeal of the Supreme Court of Western Australia on 17 August 2012. By a majority decision, the defendant banks were unsuccessful in the appeal and the amount of interest payable was increased. The defendant banks have applied for special leave to appeal to the High Court of Australia.

Tax developments

Following the Tax Forum conducted by the Australian Federal Government in 2008,Canberra on 4 and provides depositors5 October 2011, to discuss tax reform following the report from Australia’s Future Tax System Review (the Henry Review), the Deputy Prime Minister and Treasurer announced the appointment of a free guaranteebusiness tax working group to look at how the Australian tax system could be improved. Measures considered by this working group include the carry back of depositstax losses and the possible reduction of the corporate tax rate where it is funded by the business tax base broadening. The working group released a draft final report on 24 October 2012. The working group concluded that while there could be benefits associated with a cut in eligible Authorised Deposit-taking Institutions (ADIs) upthe company tax rate, they declined to and including $1 million. In Septembermake a recommendation as to how such a cut could be undertaken in a revenue neutral manner. This was based on a conclusion by the working group that there was a lack of agreement in the business community as to how to fund such a reduction in the corporate tax rate.

On 30 March 2011, the Australian GovernmentAssistant Treasurer announced a reduced capreview of the tax consolidation provisions dealing with rights to future income and the residual tax cost setting rules. The consideration was whether these rules needed to be amended, and, if so, whether any amendments will take effect retrospectively. The residual tax cost setting rules are the provisions under which amounts were allocated to the St.George in the money derivatives in the tax consolidation process (and from which deductions are claimed by Westpac under the general taxing provisions).

In June 2012, the Government passed new legislation (Tax Laws Amendment (2012 Measures No.2) Act) that introduced from 1 February 2012a number of $250,000 per person per institution.changes to the income tax law as it applied to the Taxation of Financial Arrangements (TOFA) and tax consolidated groups. The new cap is permanent, subjectlegislation:

§confirmed the tax treatment adopted by Westpac for the derivative assets and liabilities consolidated as part of the St.George Bank merger. This gave rise to continued advice from Australia’sa reduction in income tax expense of approximately $685 million for the 2010 financial regulatorsyear and approximately $1,110 million for the 2011 financial year, as previously announced in October 2010 and March 2011; and

§applied retrospective amendments to TOFA that applied to certain liabilities consolidated as part of the cap remains appropriate.

The FCS appliesSt.George Bank merger. This gave rise to an eligible ADI if APRA has appliedadditional income tax expense of approximately $165 million for the winding up2012 financial year, as reported on 27 June 2012.