Commonwealth Bank of Australia (CMWAY) 20-F 2004 FY Annual report (foreign)

SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

(Mark one)
[  ]	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2004

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from    to    

Commission file number: 001-02419

Commonwealth Bank of Australia

A.B.N. 48 123 123 124

(Exact name of Registrant as Specified in its Charter)

Commonwealth of Australia
(Jurisdiction of Incorporation or Organization)

48 Martin Place
Sydney, New South Wales 1155
Commonwealth of Australia
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Commonwealth Bank of Australia Ordinary Shares

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report (at June 30, 2004).

Commonwealth Bank of Australia Ordinary Shares: 1,264,006,062 fully paid shares

     Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]    No  [  ]

     Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  [  ]     Item 18  [X]

This report includes the disclosure requirements for both Australia and the United States Securities and Exchange Commission (‘SEC’)

Commonwealth Bank of Australia
ABN 48 123 123 124

Table of Contents

Form 20-F Cross Reference Index	4
Highlights	6
Banking Analysis	15
Funds Management Analysis	24
Insurance Analysis	29
Shareholder Investment Returns	33
Life Company Valuations	34
Group Operating Expenses	35
Other Group Items	37
Integrated Risk Management	38
Off Balance Sheet Arrangements	42
Critical Accounting Policies and Estimates	46
Description of Business Environment	48
Chairman’s Statement	53
Corporate Governance	55
Directors’ Details	61
Five Year Financial Summary (Australian GAAP)	69
Financial Statements	71
Statements of Financial Performance	72
Statements of Financial Position	73
Statements of Changes in Shareholders’ Equity	74
Statements of Cash Flow	75
Notes to the Financial Statements	76
Independent Audit Report	203
Shareholding Information	204
Additional Information	214
Signatures	217
Exhibits	218
International Representation	219
EX-1 AMENDED CONSTITUTION
EX-4.3 EMPLOYMENT AGREEMENT
EX-4.4 EMPLOYMENT AGREEMENT
EX-4.5 EMPLOYMENT AGREEMENT
EX-4.6 EMPLOYMENT AGREEMENT
EX-8 LIST OF CONTROLLED ENTITIES
EX-11 CODE OF ETHICS
EX-12 CERTIFICATIONS
EX-13 CERTIFICATIONS
EX-15 CONSENT OF ERNST & YOUNG

Form 20-F Cross Reference Index

Form 20-F Cross Reference Index (for purpose of filing with US Securities and Exchange Commission)

		Page
Financial Information Definitions			5
Currency of Presentation Exchange Rates and Certain Definitions			10,211
Part I
Item 1	Identity of Directors, Senior Management and Advisers(1)
Item 2	Offer Statistics and Expected Timetable(1)
Item 3	Key Information		10-14, 38-41, 69-70
Item 4	Information on the Company		15-32, 48-52, 144-147, 154, 169-171, 219
Item 5	Operating and Financial Review and Prospects		6-9 15-45
Item 6	Directors, Senior Management and Employees		11, 37, 50-51, 55, 57-58, 63, 132-137, 173-182, 204, 208-210
Item 7	Major Shareholders and Related Party Transactions		173-183, 204-205
Item 8	Financial Information		64,  71-202
Item 9	The Offer And Listing		204,  206
Item 10	Additional Information		5,  214-216
Item 11	Quantitative and Qualitative Disclosures about Market Risk		157-167
Item 12	Description of Securities Other Than Equity Securities(1)
Part II
Item 13	Defaults, Dividends and Delinquencies(2)
Item 14	Material Modification to the Rights of Security Holders and use of Proceeds(3)
Item 15	Controls and Procedures		60
Item 16A	Audit Committee Financial Expert		58
Item 16B	Code of Ethics		59
Item 16C	Principal Accountant Fees and Services		154
Item 16D	Exemptions from the Listing Standards for Audit Committee(1)
Item 16E	Purchases of Equity Securities by the Issuer and Affiliated Purchasers(1)
Part III
Item 17	Financial Statements(4)
Item 18	Financial Statements		72-75, 188-202
Item 19	Exhibits		218
Signatures			217
Consolidated Statements of Income for years ended 30 June 2004, 2003 and 2002			72
Consolidated Balance Sheets as at 30 June 2004 and 2003			73
Consolidated Statements of Changes in Shareholders’ Equity for years ended 30 June 2004, 2003 and 2002			74
Consolidated Statements of Cash Flows for years ended 30 June 2004, 2003 and 2002			75
Notes to the Accounts			76-202
Report of Independent Auditors			203

⁽¹⁾ Not required in this annual report.

⁽²⁾ Item 13 (A) and (B) None.

⁽³⁾ Item 14 (A) and (B) none, (C) not applicable and (D) no changes.

⁽⁴⁾ Not applicable as Item 18 complied with.

Special Note Regarding Forward-Looking Statements

     Certain statements under the captions ‘Operating and Financial Review and Prospects’, ‘Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments’, ‘Disclosures about Fair Value of Instruments’ and elsewhere in this Report constitute ‘forward-looking statements’ within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements including economic forecasts and assumptions and business and financial projections involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Group to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include demographic changes, changes in competitive conditions in Australia, New Zealand, Asia, the United States or United Kingdom, changes in the regulatory structure of the banking and life insurance industries in Australia, New Zealand or Asia, changes in political, social, credit and economic conditions in Australia or New Zealand, legislative proposals for reform of the banking and life insurance industries in Australia, and various other factors beyond the Group’s control. Given these risks, uncertainties and other factors, potential investors are cautioned not to place undue reliance on such forward-looking statements.

     Details on significant risk factors applicable to the Group are detailed on pages 13-14.

Documents on Display

     Documents referred to in this report are available for inspection. Please contact the Company Secretary, Level 2, 48 Martin Place, Sydney NSW Australia 1155 for further information. In addition, the Group files reports and other information with the SEC. You can read and copy these reports and other information at the SEC Public Reference Room at 450 Fifth Street, North West, Washington DC 20549 or at the SEC website at www.sec.gov through EDGAR. You can telephone the SEC at 1-800-SEC-330 for further information on the Public Reference Room.

4

Financial Information Definitions

Financial Information Definitions

     In addition to discussing the Australian GAAP financial information in this annual report, certain “non-GAAP financial measures” (as defined in Regulation G under the US Securities and Exchange Commission (the “SEC”)) of the financial performance and results of the Group are included. These non-GAAP financial measures are not calculated in accordance with either Australian GAAP or US GAAP and are described below. This annual report contains reconciliations of these non-GAAP financial measures to our financial results prepared in accordance with Australian GAAP. In this annual report, the Bank presents its profit from ordinary activities after tax on a “statutory basis”, which is calculated in accordance with Australian GAAP, and on a “cash basis”. “Cash basis” is defined by management as net profit after tax and outside equity interests, before goodwill amortisation and funds management and life insurance appraisal value uplift/(reduction). “Cash basis” net profit after tax represents profit derived from business operating income and operating expenses after tax. The only items excluded from the net profit after tax are goodwill amortisation and appraisal value uplift/(reduction). The goodwill amortisation is an annual accounting charge to profit, with amortisation principally over a 20-year period. The appraisal value reduction or uplift is a movement in the value of the funds management and life insurance businesses which in part is driven by external economic factors and markets, such as world equity markets and interest rates. Management believes “cash basis” is a meaningful measure of the Bank’s performance and provides the basis for the determination of the Bank’s dividends. Also for the financial year ended 30 June 2004, the Bank has added back the non-recurring ‘Which new Bank’ costs in considering the amount to be distributed as dividends to shareholders.

     The Bank also presents its earnings per share on a statutory basis and on a cash basis. Earnings per share on a statutory basis are affected by the impact of changes in the appraisal value of our funds management and life insurance businesses. “Earnings per share (cash basis)” is defined by management as net profit after tax and outside equity interests, before goodwill amortisation and funds management and life insurance appraisal value uplift/(reduction), net of dividends paid on preference shares and other equity instruments, divided by the weighted average of the Bank’s ordinary shares outstanding over the relevant period. This measure shows the “cash basis” net profit after tax, as described above, per share.

     The Bank also presents its dividend payout ratio on a statutory and cash basis. The dividend payout ratio is calculated by dividing the dividends paid on ordinary shares by the Net profit after tax (“statutory basis”), net of dividends on preference shares. The dividend payout ratio (“cash basis”) is calculated by dividing the dividends paid on ordinary shares by the net profit after tax (“cash basis”), net of dividends on preference shares. Similarly, the Bank presents “Dividend cover – statutory”, which is net profit attributable to members of the bank after preference share dividends divided by dividends on ordinary shares for the financial year, and “Dividend cover – cash”, which is net profit attributable to members of the bank (“cash basis”) after preference share dividends divided by dividends on ordinary shares for the financial year. These ratios are provided on both a statutory and cash basis since net profit after tax, the primary component of these ratios, is also presented on a statutory and cash basis, for the reasons described above.

     “Operating Expenses – Initiatives including Which new Bank” refers to incremental expenses associated with these initiatives. Prior period numbers refer to the strategic initiatives as outlined in the Bank’s annual report for the year ended 30 June 2003 and June 2002 Employee Share Acquisition Plan costs paid in October 2002 following changes to the Bank’s remuneration structures and policy. These incremental costs principally relate to restructuring expenses. “Operating expenses – Initiatives including Which new Bank” plus “Other operating expenses” is equal to the Australian GAAP measure “operating expenses”. Management believes it is meaningful to highlight these items in an analysis of our results.

     The Bank presents an Adjusted Common Equity ratio (the “ACE ratio”). The ACE ratio is one measure considered by Standard & Poor’s in evaluating the Bank’s credit rating and is calculated in accordance with Standard & Poor’s methodology. The ACE ratio has been provided in response to an increased focus by equity analysts on this measure and to permit comparability by investors with other financial institutions.

5

Highlights

     (Except where otherwise stated, all figures relate to the Financial Year ended 30 June 2004 and comparatives for the profit and loss are to the Financial Year ended 30 June 2003 and 30 June 2002. ‘$’ and ‘A$’ refer to Australian dollars, while ‘US$’ refers to US dollars. Reference to ‘Group’ means all banking, insurance and funds management operations of the Commonwealth Bank Group. Reference to ‘Bank’ means the banking operations only of the Group.)

Financial Year 2004 vs Financial Year 2003

Financial Performance and Business Review

     The Group’s net profit after tax (“statutory basis”) for the year ended 30 June 2004 was $2,572 million, an increase of 28% on the prior year’s result of $2,012 million. The current year’s result included an appraisal value uplift of $201 million, compared with a reduction in the appraisal value of controlled entities of $245 million for the previous year. The appraisal value movement is discussed within the “Life Company Valuations” section.

     Factors contributing to the growth in operating performance included:

• Continued strong home lending growth domestically and in New Zealand were the major contributors to the growth in lending asset balances, which increased 18% to $206 billion;

• Improved performance in Funds Management following positive investor sentiment in the market and higher assets under administration;

• Significantly stronger general and life Insurance results;

• A favourable credit environment, with very low levels of corporate and personal defaults;

• Initial benefits arising from the Which new Bank program, offset by

• Some margin compression, in line with the industry, with net interest margin down 14 basis points to 2.53%.

     In addition, buoyant domestic and global equity markets led to investment returns on shareholders’ funds in Funds Management and Insurance increasing to $152 million (after tax) against $73 million in the prior year.

     The net profit after tax (“cash basis”) for the year was $2,695 million, an increase of 5% over the prior year. This result was achieved after absorbing $535 million (after tax) of incremental expenses in relation to the Which new Bank program.

Which new Bank Program

     The Group has made excellent progress in the Which new Bank program announced to the market in September 2003, meeting all critical project milestones set for the year. Net benefits realised in 2004 of $237 million exceeded the projection to the market of $200 million.

     Investment spend of $634 million for the twelve months was below the target of $660 million, however, total impact on 2004 profitability was slightly higher due mainly to lower levels of capitalisation.

     Focus during the 2005 financial year is expected to be on the execution of several major IT projects, as well as a significant cultural transformation of the domestic operations. Following the successful pilot of the Group’s new integrated customer service system, CommSee, in Tasmania, the roll out will commence progressively across the network as further development of the system is completed.

     Overall, the program remains on track to deliver a total annual net benefit of an estimated $900 million by 2006 and beyond, with a total investment of an estimated $1,480 million over the three years. More detail is included on page 9.

Dividends

     The total dividend for the year was another record at 183 cents per share, an increase of 29 cents or 18.8% on the prior year, and the dividend payout ratio (“statutory basis”) for the year is 93.5%. The board of directors of the Bank determined the dividend after adding back the expenses related to the Which new Bank program which, although charged against profit, is regarded as an investment.

     The dividend payment for the second half of the year was 104 cents per share (85 cents per share in the previous year). This dividend payment is fully franked and was paid on 24 September 2004 to owners of ordinary shares at the close of business on 20 August 2004 (record date). Shares were quoted ex-dividend on 16 August 2004.

     During the year, the Bank issued $201 million of shares to satisfy shareholder participation in the Dividend Reinvestment Plan (“DRP”) in respect of the final dividend for 2002/03 and $188 million in respect of the interim dividend for 2003/04. The Bank expects to issue around $250 million of shares in respect of the DRP for the final dividend for 2003/04.

Financial Year 2003 vs Financial Year 2002

     The Group recorded a net profit after tax in Financial Year 2003 of $2,012 million, or 24% below the prior year, after deducting goodwill amortisation of $322 million and a net reduction in appraisal value of $245 million.

     The net profit after tax (“cash basis”) for the year ended 30 June 2003 was $2,579 million, an increase of $78 million or 3% on the prior year.

     This result was achieved inclusive of $239 million of significant expenses related to strategic initiatives of $214 million and $25 million of expense relating to two years allocations of shares issued to employees under the employee share program.

     This result reflected a strong banking performance primarily driven by the Australian and New Zealand retail banking operations. The housing market primarily drove the banking performance, with balance growth at over 17% for the year. This was partially offset by a decrease in Net Interest Margin. The New Zealand performance reflected strong industry conditions combined with growth in market shares for retail, business and rural lending (Source: Reserve Bank of New Zealand).

     Results for Institutional and Business Banking were subdued, primarily reflecting the difficult industry conditions. The weakened demand for credit in the institutional segment and conditions in global markets resulted in flat earnings outcomes.

     In Funds Management, falling equity markets globally reduced funds under management and depressed volumes of inflows, particularly in the first half of the year.

     The profit performance of the Insurance business included a write down of an investment asset within Australia. Excluding this the results of all regions, particularly Asia, were favourable. The Insurance result also benefited from a rebound in equity markets in the second half of the year.

     Total operating expenses increased by 2% over the year, primarily driven by increased volumes, the set up of the new Premium Financial Services Division together with increased regulatory expenses associated with the Funds Management business.

6

Highlights (continued)

     The credit quality of the portfolio improved with bad debt charge as a percentage of risk weighted assets decreasing from 0.32% at June 2002 to 0.21% at June 2003. This reflected an absence of significant corporate defaults compared with the prior year. The home lending portfolio continues to show low levels of delinquency and write-offs relative to historical trends.

	Full Year Ended
	30/06/04			30/06/03			30/06/02
	$M			$M			$M
Contributions to Profit (after income tax)
Banking		2,176			2,234			2,067
Funds Management		268			216			368
Insurance		251			129			66
Net Profit after Income Tax (“cash basis”)		2,695			2,579			2,501
Appraisal value uplift/(reduction)		201			(245	)		477
Goodwill amortisation		(324	)		(322	)		(323	)
Net Profit after Income Tax (“statutory basis”)		2,572			2,012			2,655

	Full Year Ended
	30/06/04		30/06/03		30/06/02
Shareholder Summary
Dividends per share - fully franked (cents)		183		154		150
Dividend cover - statutory (times)		1.1		0.9		1.4
Dividend cover - cash (times)(1)		1.1		1.3		1.3
Earnings per share (cents)
Statutory - basic		196.9		157.4		209.6
Statutory - fully diluted		196.8		157.3		209.3
Cash basis - basic(2)		206.6		202.6		197.3
Cash basis - fully diluted(3)		206.5		202.5		197.0
Dividend payout ratio (%)
Statutory		93.5		97.7		71.7
Cash basis(4)		89.1		75.9		76.2
Weighted average number of shares - basic (number)		1,256		1,253		1,250
Weighted average number of shares - fully diluted (number)		1,257		1,254		1,252

(1)	Net profit attributable to members of the bank (“cash basis”) after preference share dividends divided by dividends on ordinary shares for the financial year.
(2)	Net profit attributable to members of the bank after preference share dividends divided by dividends on ordinary shares for the financial year.
(3)	Calculated by excluding appraisal value uplift and goodwill amortisation from earnings used to calculate Earnings per share - statutory – fully diluted and dividing the result by the weighted average number of shares – fully diluted
(4)	Dividends paid on ordinary shares divided by earnings excluding appraisal value uplift and goodwill amortisation, net of dividends on preference shares.

Important Dates for Shareholders

24 September 2004	Full Year Dividend Payment
5 November 2004	Annual General Meeting
9 February 2005	2005 Interim Results Announcement

7

Highlights (continued)

	Full Year Ended
	30/06/04			30/06/03			30/06/02
	$M			$M			$M
Net Profit after Income Tax (“statutory basis”)		2,572			2,012			2,655
Net Profit after Income Tax (“cash basis”)		2,695			2,579			2,501
Net Interest Income		5,410			5,026			4,710
Other banking income		2,846			2,627			2,552
Funds management income		1,158			1,115			1,200
Insurance income		678			598			595
Total Operating Income		10,092			9,366			9,057
Shareholder investment returns		196			91			47
Policyholder tax benefit/(expense)		203			(58	)		(36	)
Total Income		10,491			9,399			9,079
Initiatives including Which new Bank(1)		749			239			—
Other operating expenses		5,500			5,312			5,201
Total Operating Expenses		6,249			5,551			5,201
Charge for bad and doubtful debts		276			305			449
Net Profit Before Income Tax		3,966			3,543			3,418
Policyholder tax expense/(benefits)		203			(58	)		(36	)
Corporate tax expense		1,059			1,016			952
Outside equity interests		9			6			1
Net Profit after Income Tax (“cash basis”)		2,695			2,579			2,501
Appraisal value uplift/(reduction)		201			(245	)		477
Goodwill amortisation		(324	)		(322	)		(323	)
Net Profit after Income Tax (“statutory basis”)		2,572			2,012			2,655

⁽¹⁾ June 2004 results reflect the Which new Bank program, while prior year includes strategic initiatives undertaken and the cost of the June 2002 ESAP paid in October 2002.

	Full Year Ended
	30/06/04		30/06/03		30/06/02
Key Performance Indicators	$M		$M		$M
Banking
Net interest margin (%)		2.53		2.67		2.76
Average interest earning assets		214,187		188,270		170,634
Average interest bearing liabilities		197,532		174,737		157,105
Funds Management
Funds under administration		109,883		98,566		106,927
Insurance
Inforce premiums		1,167		1,076		810
Capital Adequacy
Tier 1 (%)		7.43		6.96		6.78
Total (%)		10.25		9.73		9.80
Adjusted common equity(1)		4.75		—		—

⁽¹⁾ Adjusted Common Equity (“ACE”) is one measure considered by Standard & Poor’s in evaluating the Bank’s credit rating. The ACE ratio has been calculated in accordance with the Standard & Poor’s methodology. As the Bank did not disclose this ratio for the previous year, no comparatives are published.

Capital Management

     The Group believes that it maintains a strong capital position. This is recognised in its credit ratings which again remained unchanged during the year.

Credit Ratings	Long Term	Short Term		Affirmed
Fitch Ratings	AA		F1+	Feb 04
Moody’s Investor Services	Aa3		P-1	Dec 03
Standards & Poor’s	AA-		A-1+	Apr 04

     Ratings are not a recommendation to purchase, hold or sell securities, and may be changed, superseded or withdrawn at any time.

     Additional information regarding the Group’s capital management initiatives are disclosed in Note 31 to the Financial Statements.

8

Highlights (continued)

	30/06/04		30/06/03		30/06/02
Balance Sheet Summary	$M		$M		$M
Total assets		305,995		265,110		249,648
Total liabilities		281,110		242,958		228,592
Shareholders’ equity		24,885		22,152		21,056
Assets held and Funds under administration
On Balance Sheet
Banking assets		265,062		229,289		211,130
Insurance Funds under administration		22,952		22,144		22,355
Other insurance and internal funds management assets		17,981		13,677		13,163
		305,995		265,110		249,648
Off Balance Sheet Funds under administration		86,931		76,422		83,457
		392,926		341,532		333,105

	Full Year Ended
	30/06/04		30/06/03		30/06/02
Productivity and Efficiency(1)					$M
Banking
Expense to income (%)		59.2		54.7		54.1
Funds Management
Expense to average funds under administration (%)(2)		0.80		0.87		0.73
Insurance
Expense to average inforce premiums (%)(2)		47.3		50.4		68.8
Total operating income per FTE ($)		278,047		261,292		243,469
Full time staff equivalent (FTE’s) - Australia		28,814		29,608		31,489
Full time staff equivalent (FTE’s) - International		7,060		6,237		5,756
		35,874		35,845		37,245
Full time staff equivalent (FTE’s) - Which new Bank(3)		422		—		—
Full time staff equivalent (FTE’s)		36,296		35,845		37,245

⁽¹⁾ Productivity changes shown as an annualised percentage change.

⁽²⁾ Ratios for Financial Year 2003 and 2002 have not been restated for the segment definition changes in Financial Year 2004. The effect of restatement is not material.

⁽³⁾ Full time staff equivalents working on the Which new Bank program

	Full Year			Market
	30/06/04			Commitment
Which new Bank Program	$M			$M
Program expenses incurred		634			660
Provision for future costs		208			210
Investment capitalised		(112	)		(180	)
Gross Which new Bank expense		730			690
Normal project spend		(200	)		(200	)
Expensing of previously capitalised software		219			215
Incremental Which new Bank expense - before tax		749			705
Incremental Which new Bank expense - after tax		535			500

	Full Year Ended 30 June 2004
	Revenue			Costs		Total
Which new Bank Benefits	$M			$M		$M
Gross benefits		152			145		297
Additional operating expenses		(60	)		—		(60	)
Net benefits		92			145		237

     The impact on current year expenses is the net of $145 million cost benefits, less the impact of additional operating expenses of $60 million, totalling $85 million.

9

Financial Review

	Year ended 30 June
	2004			2004			2003			2002			2001			2000
	(A$ millions, except where indicated)
Selected Consolidated Income Statement Data	US$M(3)
Australian GAAP
Interest income		9,237			13,287			11,528			10,455			11,900			8,842
Interest expense		(5,476	)		(7,877	)		(6,502	)		(5,745	)		(7,426	)		(5,123	)
Net Interest income		3,761			5,410			5,026			4,710			4,474			3,719
Charge for bad and doubtful debts		(192	)		(276	)		(305	)		(449	)		(385	)		(196	)
Non interest income		3,672			5,282			4,373			4,835			4,824			2,512
Operating expenses (incl. Goodwill)		(4,570	)		(6,573	)		(5,873	)		(5,524	)		(5,508	)		(3,464	)
Appraisal value reduction(1)		—			—			(245	)		—			—			—
Operating profit before income tax and abnormal items		2,672			3,843			2,976			3,572			3,405			2,571
Income tax expense attributable to operating profit before abnormal items		(877	)		(1,262	)		(958	)		(916	)		(993	)		(820	)
Operating profit after income tax and before abnormal items		1,794			2,581			2,018			2,656			2,412			1,751
Abnormal (expense)/income before income tax(4)		—			—			—			—			—			967
Abnormal income tax (expense)/credit		—			—			—			—			—			20
Operating profit after income tax		1,794			2,581			2,018			2,656			2,412			2,738
Outside equity interest		(6	)		(9	)		(6	)		(1	)		(14	)		(38	)
Net income		1,788			2,572			2,012			2,655			2,398			2,700
Dividends declared ($)		914			1,315			1,066			1,913			1,720			1,431
Weighted average number of shares (basic)		1,256m			1,256m			1,253m			1,250m			1,260m			927m
Earnings per share, basic before abnormal items (cents)		136.9			196.9			157.4			209.6			189.6			184.8
Earnings per share, basic after abnormal items (cents)		136.9			196.9			157.4			209.6			189.6			291.2
Earnings per share, fully diluted before abnormal items (cents)		136.8			196.8			157.3			209.3			189.3			184.4
Earnings per share, fully diluted after abnormal items (cents)		136.8			196.8			157.3			209.3			189.3			290.7
Dividends per share (cents)		127			183			154			150			136			130
Dividends payout ratio (%)(2)					93.5			97.7			71.7			71.2			83.5
Adjusted for US GAAP
Operating profit after income tax		1,420			2,043			3,000			1,682			1,586			1,502
Earnings per share after abnormal items (cents) - basic		110.1			158.3			235.7			131.5			125.2			162.0
Earnings per share after abnormal items (cents) - diluted		110.0			158.2			235.6			131.3			125.0			161.7

(1)	Appraisal value adjustment relating to life insurance business for Financial Year 2003 was a reduction and has been disclosed as an expense. For Financial Year 2004 ($201 million), 2002 ($477 million), 2001 ($474 million) and 2000 ($92 million), appraisal value adjustments were uplifts have been included in non interest income.
(2)	Dividends per share divided by earnings per share (before abnormal items for the Financial Year 2000).
(3)	US$ translated from A$ at period end rates (see table below for rates).
(4)	Relates to restructuring costs, net market valuation of funds management businesses and change of valuation bases of Commonwealth Life insurance business

Exchange Rates

     For each of the Group’s Financial Years indicated, the period end and average noon buying rate in New York City for cable transfers in Australian Dollars as certified for customs purposes by the Federal Reserve Bank of New York (the ‘Noon Buying Rate’) are set out below, together with the high and low rates for the previous six months.

	Year Ended 30 June
	2004		2003		2002		2001		2000
			(expressed in US dollars per $1.00)
Period End		0.6952		0.6713		0.5628		0.5100		0.5971
Average Rate		0.7142		0.5847		0.5236		0.5372		0.6284

The Noon Buying Rate on 10 November 2004 was US$0.7592 = $1.00.

	October		September		August		July		June		May
	(expressed in US dollars per $1.00)
High		0.7478		0.7244		0.7245		0.7334		0.7067		0.7337
Low		0.7207		0.6880		0.7001		0.6980		0.6840		0.6866

10

Financial Review (continued)

	Year ended 30 June
	2004		2004		2003		2002		2001		2000
	(A$ millions, except where indicated)
Consolidated Balance Sheet Data	US$M(5)
(at year end)
Australian GAAP
Assets
Cash and liquid assets		4,486		6,453		5,575		6,044		3,709		2,575
Receivables due from other financial institutions		5,818		8,369		7,066		7,728		4,622		5,154
Trading securities		10,356		14,896		10,435		8,389		6,909		7,347
Investment securities		7,958		11,447		11,036		10,766		9,705		9,149
Loans, advances and other receivables		131,665		189,391		160,347		147,074		136,059		132,263
Bank acceptances of customers		10,441		15,019		13,197		12,517		12,075		11,107
Insurance investment assets		20,120		28,942		27,835		30,109		31,213		27,036
Deposits with regulatory authorities		26		38		23		89		61		46
Property, plant and equipment		837		1,204		821		862		919		1,073
Investments in associates		166		239		287		313		400		403
Intangible Assets		3,271		4,705		5,029		5,391		5,716		5,935
Other assets		17,583		25,292		23,459		20,366		19,023		16,171
Total Assets		212,728		305,995		265,110		249,648		230,411		218,259
Liabilities
Deposits and other public borrowings		113,441		163,177		140,974		132,800		117,355		112,594
Payable due to other financial institutions		4,617		6,641		7,538		7,864		6,903		4,633
Bank acceptances		10,441		15,019		13,197		12,517		12,075		11,107
Provision for dividend		10		14		12		1,040		779		708
Income tax liability		564		811		876		1,276		1,355		1,823
Other provisions		693		997		819		834		1,007		1,554
Insurance policy liabilities		17,128		24,638		23,861		25,917		27,029		25,282
Debt issues		30,618		44,042		30,629		23,575		24,484		25,275
Bills payable and other liabilities		13,306		19,140		19,027		17,342		13,872		11,549
		190,818		274,479		236,933		223,165		204,859		194,525
Loan capital(1)		4,610		6,631		6,025		5,427		5,704		5,299
Total liabilities and loan capital		195,428		281,110		222,958		228,592		210,563		199,824
Total Shareholders’ Equity(2)		17,300		24,885		22,152		21,056		19,848		18,435
Adjusted for US GAAP
Total Assets		210,950		303,437		264,387		247,563		235,401		221,220
Shareholders’ equity(3)		12,169		17,504		17,291		16,299		16,236		16,022
Consolidated Operating Data
(number) (at year end)
Full time staff equivalent(4)				36,296		35,845		37,245		37,460		39,631
Branches/service centres (Australia)				1,012		1,014		1,020		1,161		1,387
Agencies (Australia)				3,866		3,893		3,936		3,927		4,081

(1)	Represents interest bearing liabilities qualifying as regulatory capital.
(2)	Including minority interests (see Note 30 for details).
(3)	Exclusive of minority interests.
(4)	Staff numbers include all permanent full time staff, part time staff equivalents and external contractors employed by third party agencies.
(5)	US$ translated from A$ at period end rates (see table on Page 10 for rates).

11

Financial Review (continued)

	Year ended 30 June
	2004		2004		2003		2002		2001		2000
	(A$ millions, except where indicated)
Consolidated Ratios and Operating Data	US$M(6)
Australian GAAP
Profitability
Net Interest Margin (%)(1)				2.53		2.67		2.76		2.78		2.88
Interest Spread (%)(2)				2.22		2.40		2.47		2.32		2.47
Return on average shareholders’ equity(3)
before abnormal items (%)				13.00		10.73		14.67		13.50		22.06
after abnormal items (%)				13.00		10.73		14.67		13.50		34.78
Return on average total assets(3)
before abnormal items (%)				0.90		0.78		1.11		1.07		1.08
after abnormal items (%)				0.90		0.78		1.11		1.07		1.70
Productivity Total operating income per full time (equivalent) employee ($)		193,298		278,047		262,212		262,856		252,400		211,842
Staff expense/total operating income (%)(4)				24.3		26.1		26.4		26.7		27.8
Total operating expenses excluding goodwill amortisation/total operating income (%)(4)				59.6		59.1		57.4		58.6		55.5
Ratio of earnings to fixed charges				1.3		1.3		1.6		1.5		1.7
Capital Adequacy (at year end)
Risk weighted assets		117,712		169,321		146,808		141,049		138,383		128,484
Tier 1 capital		8,751		12,588		10,213		9,561		9,015		9,618
Tier 2 capital		4,629		6,658		6,177		6,040		5,784		6,097
Total capital(5)		12,065		17,355		14,276		13,820		12,680		12,518
Tier 1 capital/risk weighted assets (%)				7.43		6.96		6.78		6.51		7.49
Tier 2 capital/risk weighted assets (%)				3.93		4.21		4.28		4.18		4.75
Total capital/risk weighted assets (%)				10.25		9.73		9.80		9.16		9.75
Average shareholders’ equity/average total assets (%)				8.24		8.39		8.51		8.06		4.81
Adjusted for US GAAP
Net income as a percentage of year end:
Total assets				0.67		1.13		0.68		0.67		0.68
Shareholders’ equity				11.67		17.35		10.32		9.77		9.37
Dividends as a percentage of net income				64.37		35.52		116.36		92.21		95.27
Shareholders’ equity as a percentage of total assets				5.77		6.54		6.58		6.89		7.24
Ratio of earnings to fixed charges				1.2		1.4		1.4		1.4		1.5

(1)	Net interest income divided by average interest earning assets for the year.
(2)	Difference between the average interest rate earned and the average interest rate paid on funds.
(3)	Calculations based on operating profit after tax and outside equity interests applied to average shareholders’ equity and average total assets respectively.
(4)	Total operating income represents net interest income before deducting charges for bad and doubtful debts plus non interest income.
(5)	Represents Tier 1 capital and Tier 2 capital less deductions under statutory guidelines imposed by the Reserve Bank of Australia. Refer note 31 of the financial statements for further details.
(6)	US$ translated from A$ at period end rates (see table on Page 10 for rates).

12

Financial Review (continued)

	Year ended 30 June
	2004		2004		2003		2002		2001		2000
	(A$ millions, except where indicated)
Consolidated Ratios and Operating Data	US$M(7)
Australian GAAP
Asset Quality Data(1)
Non accrual loans(2)		252		363		665		943		647		1,001
Total impaired assets (net of interest reserved)(3)		236		340		639		884		649		1,004
Specific provisions for impairment(4)		99		143		205		270		234		432
General provisions for impairment		968		1,393		1,325		1,356		1,399		1,358
Net impaired assets (net of interest reserved)		137		197		434		614		415		572
Total provisions for impairment/average credit risk (%)(5)				0.6		0.7		0.8		0.8		1.0
Charge for bad and doubtful debts/average credit risk (%)(5)				0.1		0.1		0.2		0.2		0.1
Gross impaired assets/credit risk(%)(6)				0.1		0.3		0.4		0.3		0.5
Net impaired assets/total shareholders’ equity (%)				0.8		2.0		2.9		2.1		3.1
General provision for impairment/risk weighted assets (%)				0.8		0.9		1.0		1.0		1.1

(1)	All impaired asset balances and ratios are net of interest reserved.
(2)	Non accrual facilities comprise any credit risk exposure where a specific provision for impairment has been raised, or is maintained on a cash basis because of significant deterioration in the financial position of the borrower, or where loss of principal or interest is anticipated.
(3)	Total impaired assets comprise non accrual loans, restructured loans, Other Real Estate Owned (OREO) assets and Other Assets Acquired Through Security Enforcement (OAATSE).
(4)	Specific provisions for impairment include provisions raised against off balance sheet credit risk.
(5)	Average credit risk is based on gross credit risk less unearned income. Averages are based on current and previous year end balances.
(6)	Gross credit risk less unearned income.
(7)	US$ translated from A$ at period end rates (see table on Page 10 for rates).

Segment Performance

     Performance summaries for the major segments of the Group (Banking, Funds Management and Insurance) for Financial Years 2002, 2003 and 2004 are detailed in Note 33 to the Financial Statements.

Risk Factors

     This section describes the principal risk factors that could affect the Group’s businesses. The factors below should be considered in connection with any forward-looking statements in this Form 20-F and the Integrated Risk Management section of this report as detailed on pages 38 to 41. The Integrated Risk Management section provides details on how the Group manages its risks in respect of credit, market, operational, life insurance, and derivatives exposures.

     The major areas of exposure below could materially affect the Group’s business, its revenues, operating income, net income, net assets, liquidity and capital resources.

A downturn in the Australian and New Zealand economies could adversely impact our results

     As a financial group whose core businesses are banking, insurance and funds management, the performance of the Group is dependent on the state of the Australian economy, customer confidence and prevailing market rates. The results of the Group in recent years have benefited from historically high rates of growth of the Australian economy, low unemployment and historically low rates of inflation. We can give no assurances as to the likely future states of the Australian and New Zealand economies, which can be influenced by many factors outside of our control.

     A material downturn in the Australian and New Zealand economies could adversely impact future results and could potentially result in an increase in the amount overdue on individual loans. Recessive economic cycles also have a negative influence on liquidity levels, credit defaults of corporations and other borrowers and return on assets. Our banking business is affected by market conditions in that there may be less demand for loan products or certain customers may face financial difficulty. In particular, a significant decrease in the Australian and New Zealand housing market or property valuations could adversely affect our home mortgage portfolio. Furthermore, continued weaknesses in global securities markets could result in a decline in our revenues from our funds management and insurance business.

We are subject to extensive regulation, which could impact our results

     The Group’s banking and insurance activities are subject to extensive regulation, mainly relating to liquidity levels, solvency, provisioning, and insurance policy terms and conditions. Our business and earnings are also affected by the fiscal or other policies that are adopted by various regulatory authorities of the Australian government.

     The requirement to maintain certain levels of Tier 1 and Tier 2 eligible capital determines the level of lending activity, or, alternatively, requires the issue of additional equity capital or subordinated debt, which are additional sources of funds to the Group. Any change in regulation, including changes to increase the requirements for capital adequacy could have an adverse impact on the Group’s results of operations.

     In June 2004, the Basel Committee on Banking Supervision (“Basel Committee”) issued the Revised Framework for the calculation of capital adequacy for banks, commonly known as Basel II. Further details on are contained in Capital Adequacy – Regulatory Changes on page 138-139 of this report.

Market risks, interest rate and currency risk could adversely impact our results

     The Group is subject to the risks typical of banking, insurance and funds management activities, such as interest rate fluctuations, exchange rate variations and capital and equity market volatility. Many of these risks are outside the control of the Group. The results of our banking and insurance operations are affected by our management of interest rate sensitivity. Activity in the securities markets generally also affects our banking, funds management and insurance business. We also offer a number of financial products that expose us to risks associated with fluctuations in interest rates, securities prices or the value of real estate assets. For a description of these specific risks, see Note 39 to the Financial Statements.

Liquidity and funding risks, operational risk and life insurance risk could adversely impact our results

     The Group is subject to liquidity and funding risks, operational risk and life insurance risks. These risks are described in detail on under ‘Integrated Risk Management’ commencing on page 40.

13

Financial Review (continued)

We face intense competition, which could adversely impact our results

     The Group faces intense competition in all of its principal areas of operation and geographical markets, principally in Australia and New Zealand. Competition in the banking and funds management markets has, however, had the most significant effect on the Group’s results and operations. Further details on the competition faced by the Group are detailed in ‘Competition’ on pages 49-50 of this report.

14

Banking Analysis

Financial Performance and Business Review

     For the Financial Year 2004, net profit after tax (“statutory basis”) declined $60 million or 3% to $1,874 million, mainly due to Which new Bank initiatives costs of $698 million before tax (Financial Year 2003: $201 million) and $499 million after tax (Financial Year 2003: $142 million). Excluding this, the banking operations posted a strong result of $2,373 million for the year. This result was driven by strong growth in home loan and other personal lending, an improved credit environment and increased volumes.

     Banking operations produced a very strong result in Financial Year 2003. The net profit after income tax (“statutory basis”) increased from Financial Year 2002 by $168 million or 10% to $1,934 million.

     Excluding strategic initiatives and Employee Share Acquisition Plan (ESAP) expenses, the growth in profit after income tax was 15% or $309 million. This was achieved through strong balance growth, fee initiatives and an improvement in asset quality.

     There was some margin compression, in line with the industry, with net interest margin down 14 basis points to 2.53%.

     Other operating expenses remained relatively flat, increasing by $53 million or 1%, which includes increased volume and the expense of establishing the new premium financial services division.

Australian Retail

     During Financial Year 2004, the strong performance of the retail banking operations was driven by continued growth in the residential housing market, improved growth in other personal lending and solid deposit growth. Performance highlights for the year to June included:

• Home lending growth of 20%, underpinned by record sales volumes in both proprietary and broker channels.

• Strong performance in other personal lending, assisted by enhancements to the Personal Loan product and the launch of a new “Platinum” credit card in March 2004.

• Improved arrears levels across the retail lending portfolios, notwithstanding strong volume growth.

• Strong gains in underlying productivity levels, supported by efficiency improvements in operations processing areas and branch operations.

• Continued growth in online channels, with the Bank’s NetBank service recognised during the year as the number one Internet Banking site in Australia (source: Australian NetGuide magazine May 2004).

     Significant progress has been made in the Which new Bank service transformation program designed to ensure a better service outcome for our customers. The major initiatives undertaken across the retail bank during the year included:

•		Changes to our home loan process, which make applying for a new loan or changing details on an existing loan much simpler and easier. Through system and process improvements, the great majority of home loan applications through retail proprietary channels are now either conditionally approved on the spot or within one business day. Around 70% of maintenance transactions (such as amending loan repayments on existing loans) can now be completed immediately in the branch or over the telephone, compared with up to 10 days previously.
•		The commencement of our “Breakaway” Service and Sales program across our 1,000-strong retail branch network, encompassing a number of changes to improve frontline customer service, including new service-focused performance measures for all frontline staff, dedicated service and sales coaching and changes to staff roles designed to ensure a greater proportion of time is spent on servicing customers. Early signs of significant improvements in service and sales outcomes are being experienced as this has been rolled out.
•		The refurbishment of 125 branches to a modern layout more conducive to effective customer service. A further 200 to 250 branches are targeted for refurbishment over the next two years.
•		A continued emphasis on reducing customer waiting times, with some branches showing up to a 50% improvement.
•	��	The implementation of world class processing techniques in our back-office processing areas, delivering both significant efficiency benefits and improved turnaround times for our customers.

     Performance for Financial Year 2003 was driven by a combination of strong revenue growth and expense efficiencies flowing from process simplification. The buoyant housing market and increased volumes of credit card transactions drove the strong retail revenue and balance performance for the year.

     Several key initiatives were implemented during Financial Year 2003 designed to improve customer service and efficiency outcomes. These included:

• Development of the premium financial services distribution model. This added new expenses to the Bank, primarily funded by the benefits from other strategic initiatives. The premium distribution model is team-based and involves providing clients with access to a team of advisers, all of whom were aware of the clients’ relationships with the Bank and equipped to satisfy the customers’ financial needs utilising the full range of wealth management services. This has been specifically developed to facilitate superior client experience and resulted in over 195,000 banking clients being serviced through this model.

• The introduction of a new telling system, improving service and efficiency levels across the branch network.

• A new home loan system introduced for branch and mobile lenders, with automatic linkages to back-office processing areas for significant improvement in customer service and efficiency levels.

• The acquisition of the Australian retail brokerage operations of TD Waterhouse Investor Services, a subsidiary of Toronto-Dominion Bank, Canada. This business has been integrated into CommSec which in aggregate now has over one million Equities Trading Accounts.

• Refinement of the credit card loyalty program, Commonwealth Awards, enhancing many of its features for customers. Fee structures for all credit cards were reviewed and changes implemented effective January 2003.

Asia Pacific

     Asia Pacific Banking incorporates the Bank’s retail and commercial banking operations in New Zealand, Fiji, and Indonesia. ASB Bank in New Zealand represents the majority of the Asia Pacific Banking business.

     During the Financial Year 2004, ASB Bank achieved strong growth across the loan portfolio, particularly in housing credit.

	Performance highlights were:
•	Lending growth at well above market rates in the retail, commercial and rural sectors continued throughout the year. Home loan market share increased to 22.2% from 20.6% in June 2003 (Source: Reserve Bank of NZ).
•	Leading customer service in the Banking sector. For the sixth consecutive year, ASB was recognised as the top major retail bank in terms of satisfied and very satisfied customers in the Auckland University Bank Customer Satisfaction survey. For the fifth consecutive year, ASB was rated the top business bank on the same criteria.

15

Banking Analysis (continued)

• A focus on technology innovation has led to the ASB website being judged the best Finance website for the second consecutive year by Net Guide Web Awards.

• The continued focus on process efficiencies has delivered an end-to-end credit card approval process which is faster, at a lower cost, and with improved service delivery.

     The banking operations in Indonesia and Fiji continued to achieve strong balance sheet growth.

     The New Zealand economy grew strongly throughout Financial Year 2003. Interest rates were increased modestly, which attracted international investors and resulted in a stronger NZ currency. As a result, lending and funding growth rates contributed to good balance sheet growth.

     During Financial Year 2003, ASB continued to make progress in its core business objectives of quality growth, best service, best team, best processes and best distribution. Key achievements during the year were:

• Lending growth at well above market rates (Source: Reserve Bank of New Zealand) in the retail, commercial and rural sectors. The successful spring and summer lending campaigns, strong customer service emphasis and the success of the ‘One Team’ referral program were key factors contributing to this achievement;

• Recognition for leading customer service in the Banking sector. For the fifth consecutive year, ASB was recognised as the top major retail bank in terms of satisfied and very satisfied customers in the Auckland University Bank Customer Satisfaction survey.

• The focus on process efficiencies has led to many operational improvements, which also improved service levels and lowered expenses to serve, an example being the approval of housing loans within an hour of application; and

• A focus on the development of distribution capability led to the launch of ‘financial markets online’, which provides business and institutional customers with the ability to purchase foreign exchange on-line, replacing the telephone ordering service.

Banking operations in Fiji and Indonesia performed well with modest profit growth for the year.

Premium, Business, Corporate & Institutional

     The strong domestic economy and strict credit discipline have led to continued good credit quality in Financial Year 2004. The market has been characterised by a drive to gain market share via aggressive pricing and competitive terms and conditions. Within this competitive environment we have increased market share in some segments whilst maintaining share for the others. Major achievements during the year have been:

• Growing market share in the business lending market (source: RBA) with strong performance in the institutional and corporate segments.

• Gained traction in the Transaction Banking segments through some major client wins. Market share in both the top 500 and commercial segments continued to increase (source: East & Partners).

• Strong growth in Asset Finance market share (source: AELA).

• Ranked second in Asia Pacific for project finance deals (source: Thomson).

• Maintained number one position in capital markets in Australia (source: Bloomberg, IFR, INSTO).

• Acted as joint advisor on the acquisition of the Loy Yang A power station. This was a landmark transaction in the energy sector and is the largest secondary market trade sale in the Australian infrastructure sector.

     As discussed below, In Financial Year 2003, the client base was segmented into Institutional, Corporate and Business Banking groups. In Financial Year 2004, the Premium Financial Services and Institutional & Business Services business units merged on 18 May 2004 to more effectively meet the many common needs of premium and business customers. This newly formed business unit, Premium Business Services is intended to enhance our ability to deepen relationships and in doing so, better identify high quality and relevant ideas for our customers.

     Other initiatives undertaken during the year to strengthen the business have been:

• Completion of the redesign program to deliver better customer alignment and simplified processes.

• Development of the CommSee application to further enhance customer service capabilities.

• Continued focus on Customer Service Centres for day to day servicing to support the relationships with our clients.

     The business climate was subdued over Financial Year 2003 and as a result, market competition intensified.

     In light of the business environment the focus for the year was on the continued delivery of innovative solutions and transforming the business for future growth.

     During the Financial Year 2003, a new client-servicing model, based on client need was implemented. This involved segmentation of the client base into Institutional, Corporate and Business Banking groups, with distinct regional segments within business banking established to meet the needs of clients based outside the metropolitan areas. In conjunction with the new segmentation, simplified technology platforms and streamlined credit processes for all client segments were rolled out. These measures were designed to enable a more responsive service to clients, improved productivity and increase the focus on generating new business, while preserving the overall risk profile of the Bank.

     Supporting the client-servicing model, a range of new or expanded products were launched during the year. These include specialised leasing and infrastructure financing products, environmental, agricultural and precious metal offerings. We were the first bank in Australia to launch the “Verified by Visa” and “MasterCard SecureCode” online security programs designed to make Internet transactions safer for both clients and merchants.

16

Banking Analysis (continued)

	Full Year Ended
	30/06/04			30/06/03			30/06/02
Key Performance Indicators	$M			$M			$M
Net interest income		5,410			5,026			4,710
Other operating income		2,846			2,627			2,552
Total Operating Income		8,256			7,653			7,262
Initiatives including Which new Bank(1)		698			201			—
Other operating expenses		4,191			3,982			3,929
Total Operating Expenses		4,889			4,183			3,929
Charge for bad and doubtful debts		276			305			449
Net Profit before Income Tax		3,091			3,165			2,884
Income tax expense		914			931			816
Outside equity interests		1			—			1
Net Profit after Income Tax (“cash basis”)		2,176			2,234			2,067
Goodwill amortisation		(302	)		(300	)		(301	)
Net Profit after Income Tax (“statutory basis”)		1,874			1,934			1,766
Productivity and other measures
Expense to income (%)		59.2			54.7			54.1
Effective corporate tax rate (%)		29.6			29.4			28.3
Balance Sheet
Lending assets ($m)		205,945			175,074			161,216
Average interest earning assets ($m)		214,187			188,270			170,634
Average interest bearing liabilities ($m)		197,532			174,737			157,105
Asset Quality
Risk weighted assets ($m)		169,321			146,808			141,049
Net impaired assets ($m)		197			434			614
General provision/Risk weighted assets (%)		0.82			0.90			0.96
Total provisions/Gross impaired assets (net of interest reserved) (%)		451.8			239.4			183.9
Bad debt expense/Risk weighted assets (%)		0.16			0.21			0.32

⁽¹⁾ June 2004 results reflect the Which new Bank program, while prior year results include strategic initiatives undertaken and the cost of the June 2002 ESAP paid in October 2002.

Net Interest Income

     Net interest income increased by 8% to $5,410 million for the Financial Year 2004. This increase was achieved through an increase of 14% in average interest earning assets to $214 billion, offset by a 14 basis point reduction in the net interest margin to 2.53%.

     Net Interest Income for the Financial Year 2003 increased by 7% or $316 million from $4,710 million in Financial Year 2002 to $5,026 million in Financial Year 2003.

     The increase in net interest income was due to a 10% or $18 billion increase in average interest earning assets between 30 June 2002 and 30 June 2003. This was partially offset by a reduction in the average net interest margin of 9 basis points from 2.76% for Financial Year 2002 to 2.67% for Financial Year 2003.

Volume

     The increase in average interest earning assets for the Financial Year 2004 represents an increase of $21 billion in lending assets and $5 billion in non-lending interest earning assets. The increase in average interest earning assets contributed $673 million to growth in net interest income.

     The largest contributor to the increase in average interest earning assets continued to be the strong residential lending market in Australia and New Zealand, with average loan balances increasing by 20% since 30 June 2003 to $111.4 billion (net of securitisation) at 30 June 2004, accounting for over 85% of the total increase in average lending assets.

     The growth in average interest earning assets in Financial Year 2003 reflects an increase of $13 billion in lending assets and $2 billion in investment and trading securities as at 30 June 2003. The continued strong housing market in Australia and New Zealand during Financial Year 2003 has primarily driven the lending asset growth, while the opportunity to obtain overseas funding has driven the growth in investment and trading securities as the funding acquired more than exceeded lending asset growth. The growth in average lending assets contributed an additional $479 million volume benefit in net interest income.

Margin

     The reduction of 14 basis points in the average Net Interest Margin (NIM) from 2.67% for the year to 30 June

17

Banking Analysis (continued)

2003 to 2.53% reduced net interest income by $289 million. Factors impacting the margin reduction include:

• Non lending interest earning assets: Non lending interest earning assets increased by $4.7 billion during the year largely as a result of increased liquidity requirements due to balance sheet growth and increased market making activities in Global Markets. This reduced the NIM by six basis points.

• Funding Mix: The strong growth in home loans outpaced growth in retail deposits, resulting in a higher reliance on wholesale funding. The impact was to reduce NIM by four basis points.

• Asset Mix: The continued strong growth in home loan balances compared with other lending reduced margins by three basis points.

• Competition: Represents the net impact of pricing changes on asset and liability products. Spreads on housing loans have tightened, offset by improved spreads on deposit products. The net impact of competition is a one basis point reduction in the NIM.

     The reduction in the average net interest margin from 2.76% for Financial Year 2002 to 2.67% for Financial Year 2003 had a negative effect on interest income of $163 million in Financial Year 2003. The decline in margin can be attributed as follows:

• A benefit of two basis points from the movement in Australian official rates in June 2002, which was fully reflected in the Financial Year 2003 and New Zealand cash rate increases. This was offset by:

• The global environment of low overseas interest rates, combined with favourable Australian dollar exchange rates created opportunities for acquiring overseas funding through debt issues. The funding acquired more than exceeded the lending asset growth. The excess funding was deposited in high quality liquid assets, reducing the Bank’s net interest margin by eight basis points.

• Further penetration of the home lending broker market and strong competition across all lending products reduced the bank margin by one basis point.

• The higher mix of home lending assets and trading and investment securities, lower yielding products, as a percentage of the total portfolio reduced the margin by one basis point.

• Institutional and business deposits combined with the growth in debt issues has increased the proportion of funding from wholesale funding sources compared with retail funding, thus reducing the margin by one basis point.

Other Banking Operating Income

     In the Financial Year 2004, other banking operating income increased by 8% to $2,846 million for the year compared with $2,627 million for the previous year. This includes non-interest income earned on transaction accounts for the Bank’s personal, business and corporate customers.

     Factors impacting other banking operating income were:

• Fees and commissions increased by 8% to $1,503 million driven by increased volumes. CommSec experienced record trading levels during the year resulting in an increase in commissions of 72%. The acquisition and integration of TD Waterhouse effective 1 May 2003 also contributed to this increase. Spending on credit cards by customers increased by 17% during the year though this was partially offset by the impact of RBA interchange regulations. Included in fees and commissions are personal transaction fees, which are less than 5% of the Bank’s total income.

• Lending fees increased by 11% to $724 million. Growth in retail lending fees was the result of the increased activity in home lending, margin lending and overdraft line fees, which was partly offset by increased mortgage broker volumes and valuation fees. Institutional and Business fees increased, reflecting an improvement in market conditions.

• Trading income was in line with last year at $499 million.

• Other banking income increased by $41 million to $120 million. The current year includes the profit on sale of the Fleet Lease business of $43 million and Bank of Queensland shares of $28 million partially offset by equity accounted losses of an associate entity principally related to a change in its accounting policy ($32 million).

     In Financial Year 2003, other banking operating income increased by $75 million or 3% on the prior year, increasing from $2,552 million for 2002 to $2,627 million for 2003. Included within other banking operating income is non-interest income earned on transaction accounts for the Bank’s personal, business and corporate customers.

     The income for General Insurance (previously reported in Other Banking Income) has been reallocated to the Insurance segment and Financial Year 2003 numbers and ratios have been restated. This reduced other banking operating income by $47 million for the year ended 30 June 2003 and $59 million for the year ended 30 June 2004, with a similar increase in the Insurance total operating income. Financial Year 2002 numbers have not been restated. General Insurance income for the Financial Year 2002 was $53 million.

     The income from the Bank’s financial planners was reallocated to Funds Management, reducing other banking operating income by $24 million for the year ended 30 June 2003 and $15 million for the year ended 30 June 2004. Financial Year 2002 numbers have not been restated. Any impact is not likely to be material.

Other Operating Expenses

     Other operating expenses increased by 5% to $4,191 million for the Financial Year 2004. The increase was due to:

• Salary increases of 4% awarded under the Enterprise Bargaining Agreement (EBA).

• The full year effect of establishing the Premium Financial Services business which supported the strong growth in other banking operating income.

• Increases in volume related expenses including credit card loyalty.

• Operational (non-lending) losses incurred in retail banking and institutional banking.

     These increases were partly offset by initial Which new Bank savings.

     Expenses from comparable businesses had increased by 1% or $53 million, from $3,929 million during Financial Year 2002 to $3,982 million for Financial Year 2003. Expenses in Financial Year 2003 reflected:

• The benefits from strategic initiatives implemented during the year, offset by:

• Expenses associated with the development of the Premium Business model.

• Volume related increases in credit cards and home lending.

• Increased software amortisation charges following the implementation of the Bank’s new financial and HR systems.

• Increased expenses on New Zealand operations as a result of the appreciation of its currency relative to the Australian dollar.

• Enterprise Bargaining Agreement (EBA) increases have been met through other expense efficiencies.

     The Banking expense to income ratio for Financial Year 2004 was 59.2% compared to 54.7% in Financial Year 2003. This was largely due to Which new Bank expenses. Excluding the effects of these expenses, efficiency continued to improve from 52.0% for the Financial Year 2003 to 50.8% for the Financial Year 2004, a productivity improvement of 2.3%.

18

Banking Analysis (continued)

     The expense to income ratio for Financial Year 2003 of 54.7% was slightly worse than Financial Year 2002’s ratio of 54.1%. This is largely due to the initiative expenses of $201 million in Financial Year 2003.

     It is expected that productivity gains will accelerate over the remaining two years of the Which new Bank program as further cost initiatives are implemented, and the full year benefits realised.

Which new Bank Program

     The key strategic activities carried out in the current year included service process improvements and branch refurbishments in Retail Banking Services, as well as the continued implementation of the IBS redesign program and process improvements.

     We estimate that net benefits realised within the Banking operations during the year ended 30 June 2004 totalled $214 million pre tax. These benefits are split between estimated ongoing cost savings of $124 million and estimated revenue benefits of $90 million, and were realised across the following areas:

• Redesign of business and corporate banking and associated supporting functions.

• Several initiatives in the retail banking and premium financial segments.

• General procurement and IT&T savings.

Bad and Doubtful Debts

     The total charge for bad and doubtful debts of $276 million in the Financial Year 2004 was low compared with the prior two years ($305 million for the year ended 30 June 2003 and $449 million for the year ended 30 June 2002).

     The low interest rates continued to contribute to a good credit environment, with personal and corporate arrears and default levels at low levels.

     The Bank remains well provisioned, with total provisions for impairment as a percentage of gross impaired assets net of interest reserved of 451.8% (30 June 2003: 239.4%; 30 June 2002: 183.9%) and a general provision as a percentage of risk weighted assets of 0.82% at 30 June 2004, compared with 0.90% at 30 June 2003 and 0.96% at 30 June 2002.

Taxation Expense

     The corporate tax charge of $914 million in Financial Year 2004 is in line with the Financial Year 2003 and reflects the effect of the incremental Which new Bank program expenses. The effective tax rate increased by 20 basis points to 29.6%.

     The corporate tax charge was $931 million for Financial Year 2003, an increase of 14% or $115 million on Financial Year 2002. The primary cause of the increased tax charge has been increased profits. The increase in effective rate of taxation from 28.3% in Financial Year 2002 to 29.4% in Financial Year 2003 reflects the utilisation of capital losses in the prior year, which did not recur in Financial Year 2003.

19

Banking Analysis (continued)

Assets & Liabilities

Retail

Lending Assets

     Australian retail banking lending assets increased by 19% to $118 billion. Lending assets comprise Australian Home Lending and Personal Lending.

Home Lending

     Home loan balances net of securitisation increased by 20% since 30 June 2003 to $105 billion. The increase in home loans was the major factor contributing to the increase in total lending assets during the year. This reflects continued strong demand in both owner occupied and investment loans. Market share as at 31 May 2004 was an estimated 19.3%, compared with an estimated 19.5% as at March 2003 as reported at June 2003 (source: APRA/ABS). The Bank’s market share as at June 2003 was an estimated 19.3% (source: APRA/ABS).

     Despite a decrease in markets share from 19.5% in Financial Year 2003 to 19.3% in Financial Year 2004, the Bank maintained its position as Australia’s leading home loan provider and has increased its share of broker originated loans which now account for 16% of the total Australian book compared with 11% at June 2003, while 26% of new home loans funded were originated by third party brokers.

Personal Lending

     Personal lending includes Personal Loans, Credit Cards and Margin Loans. Balances increased by 10% over the year to $13.2 billion reflecting growth in Credit Card balances and margin lending.

Retail Deposits

     Retail deposits showed good growth, with total balances increasing by over $3 billion to $72.4 billion. Competition has intensified within the market as the improved investment market performance has started to attract customers back to equity based products. The sale of Commonwealth Custodial Services Limited during the year negatively impacted the Bank’s deposit market share by an estimated 24 basis points.

	30/06/04		30/06/03
Major Balance Sheet Items (gross of impairment)	$M		$M
Lending assets - Home Lending		104,883		87,592
Lending assets - Personal Lending		13,160		11,989
Deposits		72,360		68,702

Market Share	30/06/04			30/06/03(1)
Home Loans(3)		19.3	%(2)		19.5	%
Retail deposits(4)		23.6	%		24.2	%
Credit cards(4)		22.7	%(2)		22.8	%

(1)	As reported in the Dec-2003 Profit Announcement
(2)	As at May 2004
(3)	Source: APRA / ABS
(4)	Source: Reserve Bank of Australia

Asia Pacific

Lending Assets

     The New Zealand lending volumes were very strong during the Financial Year 2004 across all sectors, particularly in housing and business lending. Credit demand was strong and housing activity remained buoyant.

     ASB Bank achieved Personal lending growth of 27%, Rural lending growth of 22% and Business/Commercial lending growth of 23% in Financial Year 2004. Total operations loans and advances growth was 26.5%. This compared with the annual market growth of 11.7% as measured by Private Sector Credit (Residents only) for Financial Year 2004.

     ASB Bank’s share of the home lending market continued to grow, with market share increasing to an estimated 22.2% from an estimated 20.6% (source: Reserve Bank of New Zealand). Focused marketing activity and ASB Bank’s award winning service and sales performance underpinned this result.

Deposits

     Retail funding within ASB Bank increased 15% to $14.2 billion.

20

Banking Analysis (continued)

	30/06/04		30/06/03
Major Balance Sheet Items (gross of impairment)	$M		$M
Lending assets - Home Lending		16,967		12,611
Lending assets - Other		10,018		7,269
Trading & investment securities		2,459		2,953
Debt issues		5,500		2,281
Deposits		19,176		17,168

Market Share	30/06/04			30/06/03(1)
NZ Lending for housing(2)		22.2	%		20.6	%
NZ Retail Deposits(2)		17.5	%		16.4	%

(1)	As reported in the December 2003 Profit Announcement
(2)	Source: Reserve Bank of NZ

Institutional and Business and Group Treasury

Lending Assets

     Institutional and Business Lending assets have increased $5.8 billion or 11% over the Financial Year 2004 to $60.9 billion. This growth reflected good transaction activity in Institutional Banking, a stronger performance in Corporate Banking and steady growth in Business Banking. Market share as at May 2004 has increased to an estimated 14.2% compared with 30 June 2003 of an estimated 14.0% (source: APRA).

Trading and Investment Securities

     Trading and investment securities increased by $5.4 billion to $23.9 billion at 30 June 2004. This increase is primarily due to increased liquidity requirements arising from liability growth.

Debt Issues

     Debt issues were $38.5 billion at 30 June 2004, an increase of $10 billion. The increase reflects offshore funding raised on favourable terms to fund the growth in the Bank’s assets.

Deposits

     Deposits were $71.6 billion, an increase of $16.5 billion. This primarily reflects an increase in business deposit market share as well as increased use of wholesale funding to fund the growth in the Bank’s assets.

	30/06/04		30/06/03
Major Balance Sheet Items (gross of impairment)	$M		$M
Lending assets		60,918		55,060
Trading & investment securities		23,884		18,518
Debt issues		38,542		28,347
Deposits		71,641		55,104

Market Share	30/06/04			30/06/03(1)
Transaction Services (Commercial)(3)		24.4	%(2)		22.7	%
Transaction Services (Corporate)(4)		20.9	%(2)		18.1	%
Business Lending(5)		14.2	%(2)		14.0	%
Asset Finance(6)		16.0	%		15.1	%

(1)	As reported in the Dec-2003 Profit Announcement
(2)	as at May 2004
(3)	Source: East & Partners. Survey respondents included companies with $20 million to $340 million turnover.
(4)	Source: East & Partners. Survey respondents are companies with turnover greater than $340 million
(5)	Source: APRA / RBA
(6)	Source: AELA (Aust Equip Lessors Assoc)

21

Banking Analysis (continued)

Total Banking

	30/06/04			30/06/03
Major Balance Sheet Items (gross of impairment) - by Product	$M			$M
Gross housing		129,455			106,683
Securitisation		(7,605	)		(6,480	)
Housing (net of securitisation)		121,850			100,203
Personal		13,208			12,369
Institutional and Business		55,869			49,305
Bank acceptances		15,019			13,197
Total Lending Assets		205,946			175,074
Trading & Investment Securities		26,343			21,471
Deposits and Other Public Borrowings		163,177			140,974
Debt Issues		44,042			30,629

⁽¹⁾ Honeymoon refers to loans with special rates at the beginning of the term of the loan.

22

Banking Analysis (continued)

	30/06/04		30/06/03		30/06/02
Provisions for Impairment	$M		$M		$M
General provisions		1,393		1,325		1,356
Specific provisions		143		205		270
Total Provisions		1,536		1,530		1,626
Total provisions for impairment as a % of gross impaired assets net of interest reserved		451.8		239.4		183.9
Specific provisions for impairment as a % of gross impaired assets net of interest reserved		42.1		32.1		30.54
General provisions as a % of risk weighted assets		0.82		0.90		0.96
Bad debt expense as a % of risk weighted assets		0.16		0.21		0.32

     Total provisions for impairment for the Bank at 30 June 2004 were $1,536 million. This level of provisioning is considered adequate to cover any bad debt write offs from the current lending portfolio having regard to the current outlook.

     Specific provisions for impairment have decreased by 30% to $143 million at 30 June 2004, primarily as a result of significant reductions in the level of impaired assets (Gross Impaired Assets net of interest reserved have reduced by $299 million from June 2003, a reduction of 47%).

     The general provision for impairment has increased to $1,393 million at 30 June 2004, an increase of 5% since June 2003. The general provision as a percentage of Risk Weighted Assets reduced to 0.82% from 0.90% in the year. This level is generally consistent with that of other major Australian banks. The general provision as a percentage of risk weighted assets has declined over the last three years reflecting:

• Major growth in credit has been in home loans which have a lower credit risk than other portfolios;

• Continuing strong asset quality in the business book; and

• The reduction in gross impaired assets to the lowest level in the past decade.

     Total provisions for impairment for the Bank at 30 June 2003 were $1,530 million, down 5.9% from 30 June 2002. This level of provisioning was considered adequate by the Bank to cover any bad debt write offs from the lending portfolio having regard to the outlook at 30 June 2003.

     Specific provisions for impairment decreased 24.1% from $270 million at 30 June 2002 to $205 million at 30 June 2003, primarily as a result of lower corporate defaults in the year as well as a number of provision reductions due to better than anticipated recoveries and provision write-offs.

     The general provisions for impairment were reduced to $1,325 million at 30 June 2003 from $1,356 million at 30 June 2002, a decrease of 2.3%. The general provision as a percentage of Risk Weighted Assets reduced to 0.90% from 0.96%. This level was consistent with that of other major Australian banks. As with Financial Year 2004, the decline in the general provision as a percentage of risk weighted assets reflected the fact that the major growth in credit has been in home loans which generally have lower credit risk than other portfolios. Gross impaired assets less interest reserved decreased 27.7% from $884 million to $639 million over the Financial Year 2003. As with Financial Year 2004, this was primarily due to lower corporate defaults in the year as well as a number of provision reductions due to better than anticipated recoveries and provision write-offs.

23

Funds Management Analysis

Financial Performance and Business Review

Performance Highlights

     Net profit after tax (“statutory basis”) increased during the Financial Year 2004 to $156 million from a loss of $93 million in the previous year. This was largely due to the appraisal value reduction which decreased by $196 million to $95 million in Financial Year 2004. Excluding the effect of appraisal value reduction, net profit after tax increased by $53 million. This result was achieved on increased revenues of 4% while in a competitive environment the business focused on tight cost control which resulted in a 4% reduction in non-volume related expenses. Appraisal values are discussed on page 34.

     Funds under administration (FUA) ended the Financial Year 2004 at $110 billion, which is up 11% on Financial Year 2003 levels, assisted by stronger domestic and international investment markets together with good inflows to the FirstChoice product in Australia and wholesale mandates in the United Kingdom.

     Net profit after tax (“statutory basis”) for the Financial Year 2003 decreased from $731 million in Financial Year 2002 to a loss of $93 million. The main reasons were:

• Appraisal value was a reduction of $291 million in Financial Year 2003 compared to an uplift of $381 million in Financial Year 2002.

• Expenses from new initiatives in Financial Year 2003 of $38 million.

• Effect of depressed equity markets for most of the Financial Year 2003 on funds under management, lower fund flows and the impact of increased compliance and regulatory expenses.

Business Review — 2004

     During the Financial Year 2004 there was a recovery of investment markets and an associated improvement in investor confidence. These conditions resulted in a recovery in flows into the retail funds sector after two years of relatively poor market returns.

     The emerging preference of retail investors for platform products resulted in the more traditional retail products being in net outflow for the year. In the platform sector, the Bank was well positioned with the FirstChoice product increasing its FUA to over $7 billion. This resulted in the FirstChoice product being the industry leader in platform net flows during the year (Source: Plan for Life: March 2004).

     International net flows were very strong, particularly in the United Kingdom, with FUA increasing by 32.5% over the year.

     During the Financial Year 2004, volume related costs increased in line with increase in revenue. Non-volume related expenses decreased $26 million due to focus on costs during the Financial Year 2004. This was achieved despite the business continuing to incur significant additional costs in respect of regulatory and compliance matters.

Which new Bank Program

     The Funds Management business is a key contributor to the Group’s Which new Bank transformation program. The majority of the Funds Management initiatives undertaken during the Financial Year 2004 centred on developing the platform offerings and investing in our adviser network.

     There was also a continuation of the system simplification program within the legacy product business which has and is expected to result in significant cost savings. These initiatives are expected to substantially improve our capacity to serve our customers and position the business to meet the changing preferences of investors. Key highlights of the initiatives during the year were:

• A continuation of the product migration strategy away from older style closed products. The number of product systems supporting legacy products has been reduced from 17 to 11, and is targeted to reach five by December 2005.

• Launch of the improved FirstChoice mastertrust platform, with additional services and reporting for financial planners.

• A restructure of back office services to reduce costs and provide simpler processes.

• A strategic review of our UK operations which resulted in a more targeted product range and a reduction in the cost base of this business.

Business Review — 2003

     The Financial Year 2003 was characterised by declining world equity markets; changing customer preferences for managed investment products and reforms to the regulatory environment. The uncertainty for consumers created by the third straight year of negative equity returns and the effects of other world events such as the war on terrorism placed pressure on net fund flows for the industry as a whole. The negative returns on equity markets also impacted on the existing funds under management and associated fee revenue.

     In addition to these external influences the changes in management in the earlier part of the year and the resultant downgrading of ratings on certain Colonial First State funds by some research houses contributed to the adverse fund flow of the business. The scheduled withdrawal of funds by Winterthur in the UK and the sale of the UK private clients business had a structural impact on the business.

     Against this background increased emphasis was placed on customer retention and improving product and distribution offerings. The key initiatives included:

• First Choice product, which was launched in May 2002, performed strongly, achieving $3.2 billion in funds by 30 June 2003. The business retained more than 60% of these funds to manage internally.

• In September 2002, the respective unit holders approved the merger of Colonial First State Property Trust Group (CFT) with the Commonwealth Property Office Funds (CPA) and Gandel Retail Trust (GAN). The merger resulted in CPA and GAN creating two leading sector specific listed property trusts and the addition of $2.2 billion in FUM. These businesses have now been integrated and further strengthen the Bank’s position as a leading property fund manager.

• The establishment of a strategic alliance with 452 Capital, giving exposure to the growing boutique segment of the funds management industry.

• Extension of the First Choice product offering into the business superannuation market with the launch of “First Choice Employer Super”.

• Rationalising our position in the UK market with the sale of the Stewart Ivory Private Client business giving a clearer focus on our core funds management business in the UK.

• The investment team in the UK continued to deliver solid investment results against benchmark, and fund flows in the second half of the year increased substantially.

     The key strategic initiatives implemented during the Financial Year 2003 were focused on process and system simplification and eliminating duplication. The key initiatives included:

• Successful integration of the Commonwealth Investment Management business with Colonial First State Investments, achieved with minimal loss of FUM.

• Rationalisation of the on-sale product range. In particular the Colonial First State product suite has largely been adopted as the on-sale product suite, with most of the older products from other entities being closed to new business.

• Commencement of a migration product within the closed products, aimed at reducing the number of products and systems.

24

Funds Management Analysis (continued)

• The continued migration of closed products into First State products and onto the First State platform.

• The sale of the Bank’s custody business to National Australia Bank.

Investment Performance

     The absolute returns of most of the funds were strong during Financial Year 2004 reflecting the recovery of investment markets. On a relative basis 70% of funds out-performed their benchmark during the year. The flagship Australian Equity and Global Equity funds, however, were below benchmark on a one year comparative performance which negatively impacted fund flows.

Operating Income

     Operating income increased by 4% to $1,172 million for the Financial Year 2004. This was achieved despite the negative impact from the appreciation of the Australian Dollar and the reduction of income following the sale of the Group’s custody business.

     The revenue increase was supported by an 11% increase in FUA balances from $99 billion in 2003 to $110 billion. Average funds under administration for the year were $105.5 billion, which is 6% higher than in the prior year. FUA margins were very resilient to difficult market conditions, with the income to average FUA ratio decreasing by three basis points to 1.11% over the year.

     Operating income for the Financial Year 2003 was $1,128 million, an $85 million or 7% decrease on Financial Year 2002. Despite unfavourable market conditions and significant changes in the product mix, the operating income to average funds under management ratio was stable at 1.14%.

     The key driver of the reduction in operating income during the Financial Year 2003 was the decline in funds under administration, which was adversely affected by the decline in equity markets.

Shareholder Investment Returns

     Shareholder investment returns attributable to the Funds Management business of $26 million in Financial Year 2004 were double the prior year figure of $13 million reflecting the strong investment markets during the year. Shareholder investment returns of $13 million for Financial Year 2003 were consistent with Financial Year 2002.

Operating Expenses

	Operating expenses consist of two components:
•	Ongoing operating costs; and
•	Volume related costs which vary in relation to the level of business and revenue.

     Operating costs were $26 million lower in Financial Year 2004 than in the prior year, reducing from $666 million to $640 million. The reduction was due to:

• The exit from non-core products in the UK business;

• Rationalisation of back office processes;

• Rationalisation of legacy systems; and

• Favourable exchange rate movements.

     Volume related expenses were $8 million higher than in the prior year, an increase of 5% which was in line with revenue growth.

     Operating expenses for the Financial Year 2003 were $862 million, a $101 million or 13% increase on Financial Year 2002. This reflects:

• An increase in expenses associated with ASB’s funds management business whose share of retail managed fund inflows remained consistently in the top three of all fund managers in New Zealand.

• Increased expenses in Australia, incurred in complying with new regulatory changes, increased compliance expenses on legacy business and staff expense increases. This was partly offset by lower commissions as a result of lower volumes of inflows.

• Expenses relating to strategic initiatives, including the one-off cost relating to sale of the custody business of $38 million.

Productivity Efficiency

     Operating expenses as a percentage of average funds under administration of 0.80% were down seven basis points compared with Financial Year 2003, a productivity improvement of 8%.

Which new Bank Program

     Costs of $37 million relating to Which new Bank initiatives include the expenses of continued rationalisation of systems, development of FirstChoice mastertrust platform, with a new version launched in May 2004 and redundancies resulting from the strategic review of the UK operations. The prior year also includes the one-off cost relating to the sale of the custody business.

Taxation

     The corporate tax charge for the Financial Year 2004 was $79 million, an effective tax rate of 22% compared with 20% last year. The low effective tax rate in this business is largely due to transitional tax relief on investment style funds management products within life insurance legal entities. The benefits derived from this relief are being phased out over a five year period ending in 2005.

     The corporate taxation charge for the Financial Year 2003 is $57 million a reduction of 41% on the prior year. This reduction is in line with the reduction in profits with the effective tax rate stable at 20%.

25

Funds Management Analysis (continued)

Profit Summary

	Full Year Ended
	30/06/04			30/06/03			30/06/02
Key Performance Indicators	$M			$M			$M
Funds Management
Operating income - external		1,158			1,115			1,200
Operating income - internal		14			13			13
Total Operating Income		1,172			1,128			1,213
Shareholder investment returns		26			13			12
Policyholder tax expense/(benefits)		149			(62	)		(65	)
Funds Management Income		1,347			1,079			1,160
Volume based expenses		166			158			146
Other operating expenses		640			666			615
Operating expenses		806			824			761
Initiatives including Which new Bank(1)		37			38			—
Total Operating Expenses		843			862			761
Net Profit before Income Tax		504			217			399
Policyholder tax expense/(benefits)		149			(62	)		(65	)
Corporate tax expense		79			57			96
Outside equity interests		8			6			—
Net Profit after Income Tax (“cash basis”)		268			216			368
Goodwill amortisation		(17	)		(18	)		(18	)
Appraisal value (reduction)/uplift		(95	)		(291	)		381
Net Profit after Income Tax (“statutory basis”)		156			(93	)		731

⁽¹⁾  June 2004 results reflect the Which new Bank program, while prior year results include strategic initiatives undertaken including the one off cost relating to the sale of the custody business.

Funds Under Administration
Funds under administration - average	105,458	99,280
Net flows	846	(686	)
Productivity and Other Measures
Operating income to average funds under administration (%)	1.11	1.14
Expenses to average funds under administration - actual (%)	0.80	0.87
Effective corporate tax rate (%)	22.3	20.4		21

26

Funds Management Analysis (continued)

Funds under Administration

Definition

     Funds under administration include all funds sourced by platforms such as FirstChoice and Avanteos, including the assets which are externally managed. This represents a change from the funds under management disclosed in previous years.

     The change has been made as platform sales represent the largest growth area in the retail funds industry and to exclude these funds would present an incomplete view of the business performance.

     The Group monitors the leading market share position under both definitions. Comparative numbers have been restated.

     Funds under administration for FirstChoice and Avanteos have been represented together for the first time. Comparative numbers including inflows, outflows and investment income have been restated.

Highlights

     Funds under administration increased by 11% to $110 billion at 30 June 2004. The primary drivers of FUA growth were the strong investment markets which added $10 billion; the positive net flows in the FirstChoice product, and the international business.

     Offsetting this was the net outflow of the other retail products due to:

• Run-off of legacy products;

• Reduced support for the Australian equity funds; and

• Industry trend towards platform products.

     Average funds under administration of $105.5 billion for the year ended 30 June 2004 was 6% higher than the prior year.

     Funds under administration were $99 billion at 30 June 2003, a decline of $7.2 billion or 7% from 30 June 2002. This result is comprised of net outflows of $0.7 billion, investment return losses of $2.5 billion, net disposals of $2.8 billion and foreign exchange movements of $1.2 billion. The majority of these movements occurred in the first half of the year.

FirstChoice and Avanteos

     FirstChoice achieved $7 billion funds under administration during the Financial Year 2004, an increase of 119% over the prior year. This follows the pattern of Financial Year 2003 when First Choice grew by $3 billion. Net flows of $3 billion during the year placed the product at the top of the industry in Australia for platform flows (source: Plan for Life March 04). The relaunch of FirstChoice in May 2004 resulted in record net flows into the product in June. The product was first launched in May 2002.

     A provider of wholesale wrap products, the Avanteos business, which was acquired during 2003, experienced strong inflows during the year with FUA approaching $2 billion at the end of the Financial Year 2004.

Other Retail (including Legacy Products)

     Other Retail has two major components, being the closed legacy products and the traditional CFS retail products.

     Other CFS retail funds under administration have continued to struggle to attract and retain customers as investors move away from traditional single entity managers to flexible mastertrust and wrap platforms, like FirstChoice.

     The net outflow position of the legacy products results from the business decision to close most of these products to new clients. There remains a substantial inforce business in the legacy products and retention measures to minimise outflows from these products have been implemented.

     Other retail funds remained steady reflecting investment returns for the year of positive $3.9 billion, offset by net outflows of $3.9 billion.

     Other retail funds under management were $38 billion as at 30 June 2003, a decrease of 10% over 30 June 2002.

     The net flows from other retail products were impacted by some substitution of sales from these products into First Choice, the combined impact of which was a funds inflow of $1 billion.

     The other primary cause of the outflows has been customer sentiment regarding investment markets, and a slowing of inflows and increased redemptions on equity based products. Consistent with this change in sentiment the business has also seen a shift from international and Australian equity products to more defensive investments such as property and fixed interest.

Wholesale

     Wholesale funds under administration have risen 6% to $27 billion during the Financial Year 2004. Investment returns were $2.7 billion for the year partly offset by $1.1 billion in net outflows. The net outflows on the wholesale business was largely attributable to Australian equity funds. Other asset classes showed good inflows.

     Wholesale funds under management were $25 billion as at 30 June 2003, a decrease of $4 billion from 30 June 2002. The reduction of $4 billion includes $0.5 billion of investment losses as a result of market volatility and $3.2 billion in net outflows. The net out flows occurred primarily in the Australian business as a result of lost equity mandates following the departure of personnel in the first half of Financial Year 2003. Consistent with the trend in retail products, there was also a slowing of inflows and increased redemptions of equity products generally, which was exacerbated by some downgrades in researcher ratings of the Colonial First State Australian equity funds.

Property

     Property funds under administration comprise both listed and unlisted (wholesale) funds. Total property funds under administration grew by $0.8 billion or 7% in Financial Year 2004, benefiting from both asset revaluations and acquisitions of new properties.

Internationally Sourced

     International funds net inflows were $2.4 billion for the Financial Year 2004 due to some large mandate wins into the Global Emerging Markets product. Combined with good investment returns, this resulted in a 32.5% increase in international FUA over the year.

     Net outflows in international funds were $5 billion in Financial Year 2003. Included within this was an outflow of $3.5 billion following the previous sale of the UK life business to Winterthur and $1.5 billion in relation to the sale by First State UK of its private client business.

27

Funds Management Analysis (continued)

	Year Ended 30 June 2004
	Opening														Closing
	Balance							Investment		Acquisitions &			Fx		Balance
	30/06/03		Inflows		Outflows			Income		Disposals			Movements (1)		30/06/04
Funds Under Administration	$M		$M		$M			$M		$M			$M		$M
FirstChoice & Avanteos		4,192		5,431		(1,370	)		757		—			—		9,010
Cash Management		4,963		3,178		(3,930	)		203		—			—		4,414
Other Retail		37,749		4,893		(8,820	)		3,916		—			—		37,738
Wholesale		25,485		12,322		(13,453	)		2,666		—			—		27,020
Property		11,790		2,023		(2,079	)		890		—			—		12,624
Domestically Sourced		84,179		27,847		(29,652	)		8,432		—			—		90,806
Internationally Sourced		14,387		7,769		(5,118	)		1,592		(255	)		702		19,077
Total - Funds Under Administration		98,566		35,616		(34,770	)		10,024		(255	)		702		109,883

	Year Ended 30 June 2003
	Opening																Closing
	Balance							Investment			Acquisitions &			Fx			Balance
	30/06/02		Inflows		Outflows			Income			Disposals			Movements(1)			30/06/03
Funds Under Administration	$M		$M		$M			$M			$M			$M			$M
FirstChoice & Avanteos		568		4,221		(614	)		17			—			—			4,192
Cash Management		5,634		1,121		(1,970	)		178			—			—			4,963
Other Retail		41,953		11,356		(13,867	)		(1,693	)		—			—			37,749
Wholesale		29,240		10,126		(13,329	)		(552	)		—			—			25,485
Property		8,895		963		(183	)		(43	)		2,158			—			11,790
Domestically Sourced		86,290		27,787		(29,963	)		(2,093	)		2,158			—			84,179
Internationally Sourced		19,522		4,603		(3,113	)		(424	)		(5,000	)		(1,201	)		14,387
Total - Funds Under Administration		105,812		32,390		(33,076	)		(2,517	)		(2,842	)		(1,201	)		98,566

⁽¹⁾  Includes foreign exchange gains and losses from translation of internationally sourced business.

Market Share	30/06/04			30/06/03
Australian Retail – administrator view(2)		14.4%	(1)		14.5	%
New Zealand(3)		14.4%	(1)		14.5	%
Australian Property(4)		5.5%			n/a

⁽¹⁾  as at March 2004

⁽²⁾  Source: Plan for Life. The administrator view considers market share from the perspective of the company, which administers the product, and also includes badged products distributed by separate entities.

⁽³⁾  Source: Fund Source Research

⁽⁴⁾  Source: UBS Warburg

28

Insurance Analysis

Financial Performance and Business Review

Performance Highlights

     Net profit after tax (“statutory basis”) increased $371 million to $542 million in Financial Year 2004. This was partly due to the increase in appraisal value uplift from $46 million in Financial Year 2003 to $296 million in Financial Year 2004. Excluding the effect of appraisal value uplifts, profit after tax for the Insurance business for the year was up 98% over the prior year. This result was achieved with a 13% increase in operating income due to improved underwriting and favourable claims experience. Non volume related expenses were maintained at last year’s levels driven by improved efficiency.

     The Insurance net profit after income tax increased by $13 million in Financial Year 2003 over Financial Year 2002 to $171 million. This includes two offsetting impacts – the non-inclusion of general insurance income of $53 million in Financial Year 2002 and the decrease in appraisal value uplift by $50 million from $96 million in Financial Year 2002 to $46 million in Financial Year 2003. The improvement in underlying performance reflected a turnaround in the Asian business and strong profit growth in New Zealand, partly offset by a write down of an asset in the Australian Business.

Business and Financial Review

Australia

     The profit growth in Financial Year 2004 in the Australian business was achieved from strong underwriting performance in both the general and life risk insurance categories. This was driven largely by robust claims management, favourable claims experience and improved profitability in the annuities market.

     Non volume related management expenses were maintained at last year’s levels at the same time as providing enhanced customer service levels. This was achieved through significant business process re-engineering delivering enhanced productivity and efficiency in the business.

	Key drivers of the current year’s result were:
•	Premium growth with Life Risk Premiums up 8%.
•	Strong investment returns.
•	Improved margins in the annuity market as a result of a return to more rational competitive pricing behaviour.
•	Robust claims management activity driving enhanced claims expense outcomes despite some large weather related claims in the general insurance segment early in the year.

     The group maintained its number one market share of risk premiums with an estimated 14.8% share of the market (Source: Plan for Life).

     The Australian business grew strongly (9% increase in inforce premiums) in a difficult market to become Australia’s largest writer of Life risk premium with an estimated 15.0% market share (Source: Plan for Life).

     Growth was achieved through product innovation, diversifying distribution and focusing on customer service.

     During Financial Year 2003 CommInsure introduced some innovative new benefits and options on personal risk products, with several firsts in the market such as cash back, accidental death top ups and loyalty benefits.

     In addition, diversification of new business sales has been achieved by an increase in the business volumes being written through the network channel and also from increased telemarketing capacity.

     Initiatives in improving customer service and productivity implemented during the Financial Year 2003 were:

• Assistance to customers in completing disability income tax statements.

• Development of a new front end delivery system for use in the retail network.

• Introduction of continuation of insurance cover when loans were paid out or refinanced.

     The business was impacted by a failure of a large investment that resulted in a $30 million loss.

New Zealand

     The life insurance operations in New Zealand operate predominantly under the Sovereign brand.

     The market for risk products was subdued during Financial Year 2004. However, Sovereign increased market share in new business from 27% to 28% and maintained its market leadership position with 28.2% of the inforce premium market (source: ISI Statistics). The business continued to expand sales through aligned channels such as ASB Bank while maintaining the levels of support from traditional independent financial advisers.

     During the year the business fundamentals were further improved through product repricing, tighter underwriting standards and continued rationalisation of products and systems.

     The New Zealand business generated $55 million profit after tax. This represents a 20% increase on last year’s result of $46 million.

     Sovereign maintained its market leadership position during Financial Year 2003 with an estimated market share of in-force business premium income increasing to 28.3% at April 2003 compared with 26.2% at April 2002(source: ISI Statistics).This was achieved through product re-pricing, above market persistency rates and the continued roll out of Sovereign’s distribution model.

Asia

     Asia includes life insurance and pension administration operations in Hong Kong, together with life businesses in China, Vietnam, Indonesia and Fiji. Hong Kong represents our largest operation in the region. During the Financial Year 2003, the Philippines life insurance operation was divested.

     The Asian business continued to improve. Key initiatives during the year included:

• Improved risk profile of Hong Kong business following amendments to investment mix, product repricing and product mix;

• Significant reductions in expense levels for the Hong Kong operations; and

• Development of new distribution capabilities.

     The Asian business produced $3 million in operating margins compared with a loss of $9 million for the prior year. The favourable result for the current year was driven by:

• Improved investment markets;

• Increased sales across all markets;

• Expense containment; and

• Improved persistency.

     The result was impacted by a $16 million write off of capitalised pre-licence start-up costs in China which was reflected in Australian shareholder investment returns.

     North Asian economies faced difficult market conditions during Financial Year 2003 due to the impact of the SARS crisis. The life industry across the region also suffered from volatility in international equity markets.

     Notwithstanding these conditions, the Asian business improved its results, primarily as a result of the following key initiatives:

• Expense control initiatives in the Hong Kong operations, and

• Disposal of the loss making Philippines business.

Operating Income

     Operating income of $678 million for Financial Year 2004 was 13% higher than in the prior year. Operating income in the prior year included a write-down of an asset in the Australian annuity fund of $30 million. Taking this item into account, operating income was up 8% on the prior year. This was mainly attributable to growth in inforce

29

Insurance Analysis (continued)

premiums, positive experience on claims and an increase in general insurance income.

     Operating Income was $598 million for Financial Year 2003, a decrease of $3 million on Financial Year 2002. This is primarily due to the non-inclusion of general insurance income of $53 million in Financial Year 2002 (included in Banking) offset by a $30 million asset write-down referred to above, combined with a reduction in income in Asia following the sale of the Philippine business. Underlying performance has been positive across all regions.

Shareholder Investment Returns

     Shareholder investment returns attributable to the insurance business of $170 million for the Financial Year 2004 represent an increase of $92 million on the prior year, reflecting the rebound in domestic and overseas equity

     Shareholder investment returns were $78 million for Financial Year 2003, an increase of $43 million or 123% on Financial Year 2002. This reflected the rebound in global equity markets in the second half of the financial year.

Operating Expenses

     Operating expenses of $517 million decreased by $2 million for Financial Year 2004 compared with the prior year, due to a drop in volume related costs in the Asian business. Non volume related costs were in line with the prior year, with Enterprise Bargaining Agreement (EBA) related increases in staff costs, and increased compliance and regulatory related costs being offset by savings achieved by tight cost control and from process reengineering in the back-office.

     The expense to average inforce premium ratio of 47.3% represents a 6% productivity improvement over the year.

     Operating expenses were $519 million in Financial Year 2003, a decline of $5 million on Financial Year 2002. The sale of the Philippine business in Asia, a reduction in operating expenses in Hong Kong as a result of expense control initiatives, and a reduction in business start up expense contributed to this decrease.

Corporate Taxation

     The corporate tax charge for the Financial Year 2004 was $66 million, an effective tax rate of 20.8% compared with 17.8% last year. The low effective tax rate in this business is largely due to transitional tax relief on certain products within life insurance legal entities. The benefits derived from this relief are being phased out over a five year period ending in 2005.

     The corporate tax expense of $28 million in Financial Year 2003 was a reduction from Financial Year 2002 tax expense of $40 million. The effective tax rate in the Financial Year 2002 reflected losses in the Asian business. There was no tax benefit booked in respect of these losses, as it was not considered to be virtually certain that the losses would be recovered. The Financial Year 2003 result reflects a small profit from the Asian business.

30

Insurance Analysis (continued)

Profit Summary

	Full Year Ended
Summary Financial Performance	30/06/04			30/06/03			30/06/02
(excluding appraisal value (reduction)/uplift)	$M			$M			$M
Insurance
Life Insurance Operating Income		618			551			595
General Insurance Operating Income(1)		60			47			—
Total Operating Income		678			598			595
Shareholder investment returns		170			78			35
Policyholder tax		54			4			29
Total Insurance Income		902			680			659
Volume based expenses		224			228			234
Other operating expenses - external		279			278			285
Other operating expenses - internal		14			13			13
Operating expenses		517			519			524
Initiatives including Which new Bank(2)		14			—			—
Total operating expenses		531			519			524
Net Profit before Income Tax		371			161			135
Income tax expense attributable to:
Policyholder		54			4			29
Corporate		66			28			40
Net Profit after Income Tax (“cash basis”)		251			129			66
Goodwill amortisation		(5	)		(4	)		(4	)
Appraisal value uplift		296			46			96
Net Profit after Income Tax (“statutory basis”)		542			171			158
Productivity and Other Measures
Expenses to average inforce premiums (actual %)		47.3			50.4			68.8
Effective corporate tax rate (%)		20.8			17.8			38

	Full Year Ended
	30/06/04			30/06/03			30/06/02
Sources of Profit from Insurance Activities	$M			$M			$M
The Margin on Services profit from ordinary activities after income tax is represented by:
Planned profit margins		107			104			94
Experience variations		—			(42	)		(43	)
Other		(8	)		(8	)		(10	)
General insurance operating margin		19			11			—
Operating margins		118			65			41
After tax shareholder investment returns		133			64			25
Net profit after Income Tax (“cash basis”)		251			129			66

Geographical Analysis of Business Performance

	Full Year Ended
	Australia						New Zealand						Asia								Total
Net Profit after Income Tax	2004		2003		2002		2004		2003		2002		2004		2003			2002			2004		2003		2002
(“cash basis”)	$M		$M		$M		$M		$M		$M		$M		$M			$M			$M		$M		$M
Operating margins		78		43		66		37		31		25		3		(9	)		(50	)		118		65		41
Investment earnings on assets in excess of policyholder liabilities		101		35		18		18		15		3		14		14			4			133		64		25
Net Profit after Income Tax		179		78		84		55		46		28		17		5			(46	)		251		129		66

⁽¹⁾  General Insurance income of $53 million not reclassified from Banking for Financial Year 2002.

⁽²⁾  June 2004 result reflects the Which new Bank program.

31

Insurance Analysis (continued)

Inforce Premiums

	Full Year Ended 30 June 2004
	Opening										Closing
	Balance		Sales/New					Other			Balance
	30/06/03		Business		Lapses			Movements(1)			30/06/04
Annual Inforce Premiums	$M		$M		$M			$M			$M
General Insurance		196		46		(50	)		—			192
Personal Life		626		156		(85	)		6			703
Group Life		254		53		(34	)		(1	)		272
Total		1,076		255		(169	)		5			1,167
Australia		771		177		(133	)		—			815
New Zealand		221		42		(16	)		11			258
Asia		84		36		(20	)		(6	)		94
Total		1,076		255		(169	)		5			1,167

⁽¹⁾  Consists mainly of foreign exchange movements.

	Full Year Ended 30 June 2003
	Opening										Closing
	Balance		Sales/New					Other			Balance
	30/06/02		Business		Lapses			Movements(2)			30/06/03
Annual Inforce Premiums(1)	$M		$M		$M			$M			$M
General Insurance		172		51		(27	)		—			196
Personal Life		580		129		(78	)		(5	)		626
Group Life		229		58		(30	)		(3	)		254
Total		981		238		(135	)		(8	)		1,076
Australia		698		180		(107	)		—			771
New Zealand		187		43		(16	)		7			221
Asia		96		15		(12	)		(15	)		84
Total		981		238		(135	)		(8	)		1,076

⁽¹⁾  Life Insurance results for both New Zealand and Asia include savings products. Savings products are disclosed within Funds Management for the Australian business. Inforce premium relates to risk business only.

⁽²⁾  Consists mainly of foreign exchange movements.

     Annual inforce premiums increased by $91 million or 8% to $1,167 million for the year ended 30 June 2004. General Insurance lapses include $19 million of rebadged premiums which ceased to be attributable to the CBA business due to a Financial Services Reform Act 2001 (“FSRA”) related business restructuring.

     The Australian business maintained its leading market share of inforce premiums despite a reduction from an estimated 15.3% at 30 June 2003 to and estimated 14.8% at 31 March 2004 (Source: Plan for Life). Sovereign maintained its leading position in New Zealand with a market share of an estimated 28.2%, slightly down from an estimated 28.3% at 30 June 2003 (Source: ISI Statistics).

Market Share – Annual Inforce Premiums	30/06/04			30/06/03(1)
New Zealand(4)		28.2	%(2)		28.3	%
Australia (Total Risk)(5)		14.8	%(3)		15.3	%
Australia (Individual Risk)(5)		12.8	%(3)		13.0	%
Hong Kong(6)		2.5	%(3)		2.8	%

⁽¹⁾  As reported in the December 2003 Profit Announcement

⁽²⁾  as at May 2004

⁽³⁾  as at March 2004

⁽⁴⁾  Source: ISI Statistics

⁽⁵⁾  Source: Plan for Life

⁽⁶⁾  Source: HK Insurance Assoc

32

Shareholder Investment Returns

	Full Year Ended
	30/06/04		30/06/03		30/06/02
Shareholder Investment Returns	$M		$M		$M
Funds Management Business		26		13		12
Insurance Business		170		78		35
Shareholder Investment Returns before Tax		196		91		47
Taxation		44		18		14
Shareholder Investment Returns after Tax		152		73		33

At 30 June 2004	Australia		New Zealand		Asia		Total
Shareholder Investments Asset Mix (%)	%		%		%		%
Local equities		10		1		4		7
International equities		4		6		6		5
Property		22		4		—		14
Other(1)		—		3		4		1
Sub-total		36		14		14		27
Fixed interest		39		38		61		44
Cash		25		35		7		23
Other		—		13		18		6
Sub-total		64		86		86		73
Total		100		100		100		100

At 30 June 2004	Australia		New Zealand		Asia		Total
Shareholder Investments Asset Mix ($M)	$M		$M		$M		$M
Local equities		166		3		25		194
International equities		64		26		38		128
Property		357		17		—		374
Other(1)		—		14		21		35
Sub-total		587		60		84		731
Fixed interest		644		156		364		1,164
Cash		415		147		42		604
Other		—		52		110		162
Sub-total		1,059		355		516		1,930
Total		1,646		415		600		2,661

⁽¹⁾  Other assets include the excess of carrying value over net tangible assets.

     Domestic and international investment markets rebounded strongly over the Financial Year 2004, with the benchmark S&P/ASX200 price index increasing by 16.7% and the MSCI World index by 21.8%. All other asset classes (fixed interest, property and cash) posted positive returns.

33

Life Company Valuations

     The following table sets out the components of the carrying values of the Group’s life insurance and funds management businesses. These are Directors’ valuations, based on appraisal values using a range of economic and business assumptions determined by management, which were reviewed by independent actuaries, Trowbridge Deloitte.

     In determining the carrying value, Directors have taken account of certain market based factors which result in the adoption of a more conservative valuation that is $450 million lower at 30 June 2004 ($450 million lower at 30 June 2003) than that determined by Trowbridge Deloitte. The key consideration by Directors in determining their value is the continued uncertainty of investment markets and industry funds flows.

				Life Insurance
	Funds
	Management			Australia		New Zealand		Asia(1)			Total
Carrying Value at 30 June 2004	$M			$M		$M		$M			$M
Shareholders net tangible assets		515			1,131		415		600			2,661
Value of inforce business		1,850			295		286		—			2,431
Embedded Value		2,365			1,426		701		600			5,092
Value of future new business		2,774			235		277		24			3,310
Carrying Value		5,139			1,661		978		624			8,402
Increase/(Decrease) in Carrying Value since 30 June 2003		(334	)		73		129		(12	)		(144	)

				Life Insurance
	Funds
	Management			Australia			New Zealand			Asia(1)			Total
Analysis of Movement Since 30 June 2003	$M			$M			$M			$M			$M
Profits		268			180			54			17			519
Capital movements(2)		(27	)		108			(29	)		—			52
Dividends paid		(470	)		(421	)		(9	)		—			(900	)
FX Movements		(10	)		—			19			(25	)		(16	)
Change in Shareholders NTA		(239	)		(133	)		35			(8	)		(345	)
Appraisal value uplift/(reduction)		(95	)		206			94			(4	)		201
Increase/(Decrease) to 30 June 2004		(334	)		73			129			(12	)		(144	)

⁽¹⁾  The Asian life businesses are not held in a market value environment and are carried at net assets plus any excess representing the difference between appraisal value and net assets at the time of acquisition. This excess, which effectively represents goodwill, is being amortised on a straight line basis over 20 years subject to impairment.

⁽²⁾  Includes capital injections, transfers and movements in intergroup loans.

Change in Valuations

     The valuations adopted have resulted in a total negative change in value of $144 million since 30 June 2003. The main components comprised:

• A $345 million decrease in net tangible assets partially reflecting improved capital efficiency.

• An appraisal value uplift of $201 million, reflecting projected sales levels, higher retention rates and improved equity markets and their effect on industry flows.

34

Group Operating Expenses

     The following table sets out the Group’s operating expenses for Financial Years 2004, 2003 and 2002.

							GROUP
	2004			2003			2002
	$M			$M			$M
Staff Expenses
Salaries and wages		2,152			2,106			2,016
Superannuation contributions		8			13			11
Provisions for employee entitlements		41			11			44
Payroll tax		115			107			92
Fringe benefits tax		32			26			32
Other staff expenses		100			120			132
Comparable business		2,448			2,383			2327
Initiatives including Which new Bank		273			155			—
Total Staff Expenses (excluding share based compensation)		2,721			2,538			2,327
Share Based Compensation
Comparable business		105			94			63
Initiatives including Which new Bank		—			25			—
Total Share Based Compensation		105			119			63
Occupancy and Equipment Expenses
Operating lease rentals		340			354			324
Depreciation
Buildings		21			24			26
Leasehold improvements		55			51			47
Equipment		50			53			55
Repairs and maintenance		68			58			56
Other		47			69			70
Comparable business		581			609			578
Initiatives including Which new Bank		20			3			—
Total Occupancy and Equipment Expenses		601			612			578
Information Technology Services
Projects and development		281			194			189
Data processing		238			255			275
Desktop		159			178			169
Communications		205			171			175
Software amortisation		11			78			44
Information technology equipment depreciation		1			1			—
Comparable business		895			877			852
Initiatives including Which new Bank		292			30			—
Total Information Technology Services		1,187			907			852
Other Expenses
Postage		112			109			111
Stationery		114			118			104
Fees and commissions		598			551			609
Advertising, marketing and loyalty		311			259			242
Other		336			312			315
Comparable business		1,471			1,349			1,381
Initiatives including Which new Bank		164			26			—
Total Other Expenses		1,635			1,375			1,381
Comparable business		5,500			5,312			5,201
Initiatives including Which new Bank		749			239			—
Total Operating Expenses before goodwill amortisation		6,249			5,551			5,201
Appraisal value uplift/(reduction)		201			(245	)		477
Goodwill amortisation		(324	)		(322	)		(323	)
Profit from ordinary activities before income tax		3,843			2,976			3,572

35

Group Operating Expenses (continued)

     The Group’s operating expenses were $6,249 million in Financial Year 2004, an increase of $698 million or 13%. The key reasons for this were:

• Increase in Initiatives including Which new Bank costs by $510 million to $749 million. Details of the program are on page 6; and

• Increase in staff costs by $65 million or 3% due to an increase in level of salaries and wages as provided for in the Enterprise Bargaining Agreement (EBA).

     The Group’s operating expenses were $5,551 million for Financial Year 2003, an increase of $350 million or 7% from Financial Year 2002. $239 million of the increase is attributable to significant costs of $214 million related to strategic initiatives and another $25 million is due to the cost of two years of shares issued to employees under the employee share programme (ESAP). For details on ESAP, refer to Note 29 of the Financial Statements. Excluding these significant costs, costs were $5,312 million, which is $111 million or 2% higher than the prior financial year.

     This increase in Financial Year 2003 is mainly relating to:

     • Increase in total staff expenses of $56 million. This was caused by an increase in the level of salaries and wages as provided for in the Enterprise Bargaining Agreement (EBA). The increase was partially offset by decrease in staff numbers and lower expense for provisions for employee entitlements.

     • Increase in operating lease rentals of $30 million, largely due to the sale and leaseback programme, under which the Group sold some properties in Financial Year 2002 and 2003 and leased them back, and additional space required for new businesses set up.

     • Increase in software amortisation of $34 million due to higher levels of capitalised software.

36

Other Group Items

Staff Numbers

     The table below details the Group’s staff numbers as at 30 June 2004, 2003 and 2002.

Staff Numbers as at 30 June	2004		2003		2002
Australia		29,236		29,608		31,489
New Zealand		4,630		4,144		3,932
Other Overseas		2,430		2,093		1,824
Full time staff equivalent		36,296		35,845		37,245

     Full time equivalent staff have been weighted for the lower costs per employee of staff on extended leave, for example, maternity leave, unpaid sick leave or career break.

	Year Ended 30 June
	2004			2003			2002
Income Tax Expense	$M			$M			$M
Banking		914			931			816
Funds Management - Corporate		79			57			96
Insurance - Corporate		66			28			40
Corporate tax		1,059			1,016			952
Policyholder		203			(58	)		(36	)
Total Income Tax Expense		1,262			958			916
Effective tax rate
Banking		30	%		29	%		28	%
Funds Management - Corporate		22	%		20	%		21	%
Insurance - Corporate		21	%		18	%		38	%

     Income tax increased by $304 million or 32% in Financial Year 2004. The main reason for this is the increase in policyholder tax of $261 million to $203 million, as a result of improved investment earnings. Segment tax expense and rates are discussed in the Banking, Funds Management and Insurance analysis sections.

     The income tax expense for Financial Year 2003 increased 5% from $916 million for Financial Year 2002 to $958 million. The tax expense consists of corporate tax of $1,016 million and policyholder tax of $58 million credit.

     The banking effective tax rate is marginally higher at 29% in Financial Year 2003 compared to 28% in Financial Year 2002, mainly due to higher recognition of capital losses in Financial Year 2002.

     Policyholder tax decreased $22 million from Financial Year 2002 to Financial Year 2003, in line with the increased capital losses made in the insurance and funds management businesses.

37

Integrated Risk Management

Risk Management

     The integrated risk management framework identifies, assesses, manages and reports risks and risk adjusted returns on a consistent and reliable basis.

     Independent review is carried out through the audit role.

     The Group’s risk profile is measured by the difference between capital available to absorb loss and risk as assessed by target equity required.

     “Target equity” is defined as the potential risk of loss of one year’s earnings, measured at a standard consistent with an AA credit rating.

     Target equity is derived from underlying exposures to credit, market, operational and life insurance risks in the banking, insurance and funds management businesses of the Group. In the banking business, economic equity is a measure of the potential risk of loss of cash earnings. In the insurance and funds management businesses, target equity is a measure of the potential risk of loss of the fair value of the business.

     The composition of economic equity of the Group during the financial year ended 30 June 2004 was 54% credit risk, 11% market risk, 34% operational risk and 1% insurance risk.

     The component measures of economic equity for the banking, insurance and funds management businesses were as follows:

• Banking: 73% credit risk, 4% market risk and 23% operational risk;

• Insurance: 40% market risk, 50% operational risk, 6% credit risk and 4% insurance risk; and

• Funds Management: 11% market risk and 89% operational risk.

     The following sections describe the integrated risk management framework components.

Credit Risk

     Credit risk is the potential of loss arising from failure of a debtor or counterparty to meet their contractual obligations.

     Credit risk arises in the banking business from lending activities, the provision of guarantees including letters of credit and commitments to lend, investment in bonds and notes, financial markets transactions and other associated activities. In the insurance business credit risk arises from investment in bonds and notes, loans, and from reliance on reinsurance. The funds management business does not generally involve credit risk from a shareholder perspective.

     The measurement of credit risk is based on an internal credit risk rating system, and utilises analytical tools to calculate expected and unexpected loss for the credit portfolio.

     The Group uses a diversified portfolio approach for the management of credit risk (refer to Note 14) comprised of the following:

• A system of industry limits and targets for exposures by industry;

• A process for considering the risk associated with correlations between large exposures;

• A large credit exposure policy for aggregate exposures to individual, commercial and industrial client groups tiered by credit risk rating and loan duration; and

• A system of country limits for geographic exposures.

     These policies assist in the diversification of the credit portfolio.

     The credit portfolio is managed in two distinct segments:

•	Statistically Managed Segment
	Comprises exposures that are generally less than $250,000 and is dominated by the housing loan portfolio. Other products in this segment are credit cards, personal loans and some leasing business. Credit facilities are approved using scoring and check sheet techniques.
-	Risk Rated Segment
	Comprises all other credit exposures. Management is based on the internal credit risk rating system, which makes an assessment of the potential for default for each exposure and the amount of loss if default should occur.

     Provision for expected credit loss in the banking business commences when an exposure first arises. The expected loss is re-assessed on a regular basis and provisioning adjusted accordingly.

     A centralised exposure management system records all significant credit exposures of the Group. Customers, industry, geographic and other significant groupings of exposure are regularly monitored.

     A centralised portfolio model is used to assess risk and return on an overall portfolio basis and for segments of the portfolio. The model also assists in determining economic equity and general provision requirements, and credit portfolio stress testing.

Off Balance Sheet Arrangements

     The Group is involved with a number of special purpose entities in the ordinary course of business, primarily to provide funding and financial services to our customers. Under Australian GAAP these entities are consolidated in the financial statements if they meet the criteria of control. The definition of control depends upon substance rather than form, and accordingly, determination of the existence of control involves management judgment. The Group has no off balance sheet financing entities that it is considered to control.

     As detailed in Note 1 (jj), the Group conducts a Loan Securitisation program through which it packages and sells loans as securities to investors. Liquidity facilities are provided at arm’s length to the program by the Group in accordance with the Australian Prudential Regulation Authority (“APRA”) Prudential Guidelines. These liquidity facilities are disclosed within Contingent Liabilities as commitments to provide credit.

Market Risk

     Market risk is the potential for change in the value of on and off balance sheet positions caused by a change in the value, volatility or relationship between market rates and prices.

     Market risk arises from the mismatch between assets and liabilities in both the banking and insurance businesses and from controlled trading undertaken in pursuit of profit. The Group is exposed to diverse financial instruments including interest rates, foreign currencies, equities and commodities and transacts in both physical and derivative instruments.

     A discussion and analysis of the Group’s market risk is contained in Note 39 to the financial statements. Information on trading securities is further contained in Note 10 to the financial statements. Note 2 to the financial statements contains financial markets trading income contribution to the Group.

     In the trading book of the banking business, market risk is measured by a value-at-risk (VaR) model. This model uses the distribution of historical changes in market prices to assess the potential for future losses. The VaR model takes into account correlations between risks and the potential for movements in one portfolio to offset movements in another. Actual results are backtested to check the validity of the VaR model.

     In addition, because the VaR model cannot encompass all possible outcomes, tests covering a variety of stress scenarios are regularly performed to simulate the effect of extreme market conditions.

38

Integrated Risk Management (continued)

     The following table provides a summary of VaR by product. This is one element of the total integrated risk model used by the Group. Refer to Note 39 to the financial statements for further details.

	Average VaR			Average VaR			Average VaR			Average VaR
	During			During			During			During
	June 2004			December 2003			June 2003			December 2002
VaR Expressed based	Half Year			Half Year			Half Year			Half Year
on 97.5% confidence	$M			$M			$M			$M
Group
Interest rate risk		2.88			3.02			3.43			3.37
Exchange rate risk		1.09			1.24			1.31			1.47
Implied volatility risk		0.84			0.92			0.62			0.59
Equities risk		0.70			0.56			0.73			0.32
Commodities risk		0.37			0.33			0.32			0.35
Prepayment risk		0.58			0.36			0.38			0.30
ASB Bank		0.14			0.20			0.15			0.19
Diversification benefit		(2.49	)		(2.51	)		(2.32	)		(2.14	)
		4.11			4.12			4.62			4.45
Credit Spread(1)		4.92			—			—			—
Total		9.03			4.12			4.62			4.45

	Average VaR			Average VaR			Average VaR			Average VaR
	During			During			During			During
	June 2004			December 2003			June 2003			December 2002
VaR Expressed based	Half Year			Half Year			Half Year			Half Year
on 99.0% confidence	$M			$M			$M			$M
Group
Interest rate risk		3.69			3.99			4.31			4.45
Exchange rate risk		1.28			1.50			1.64			1.75
Implied volatility risk		1.04			1.26			0.79			0.71
Equities risk		0.98			0.70			0.93			0.39
Commodities risk		0.45			0.40			0.41			0.42
Prepayment risk		0.58			0.36			0.38			0.30
ASB Bank		0.19			0.25			0.20			0.24
Diversification benefit		(3.21	)		(3.26	)		(3.02	)		(2.70	)
		5.00			5.20			5.64			5.57
Credit Spread(1)		5.84			—			—			—
Total		10.84			5.20			5.64			5.57

⁽¹⁾  At 30 June 2004 the value at risk of the movement of credit spreads has been added to the VaR model. This had previously been captured in the “Specific Risk” allocation capital charge. Inclusion of a separate risk class reflects growth in this particular market segment and increasing availability of data on which to model.

     In the non-traded book of the banking business, a range of techniques is adopted to measure market risk. These include simulation of the effects of market price changes on assets and liabilities for business activities where there are no direct measures of the effects of market prices on those activities.

     Liquidity risk is the risk that assets cannot be liquidated in time to meet maturing obligations. Limits are set to ensure that holdings of liquid assets do not fall below prudent levels. The liquid assets held are assets that are eligible for repurchase by the Reserve Bank of Australia (over and above those required to meet the Real Time Gross Settlement obligations), certificates of deposits and bills of exchange accepted by other banks and overnight interbank loans. More detailed comments on the Group’s liquidity and funding risks are provided in Note 39.

     Market risk in the life insurance business arises from mismatches between assets and liabilities. Guaranteed returns are offered on some classes of policy. These liabilities may not be capable of being easily hedged through matching assets. In addition, market risk may arise from adverse movements in market prices affecting fee income on investment-linked policies and from the returns obtained from investing the shareholders’ capital held in each life company.

     Wherever possible, the Group segregates policyholder’s funds from shareholder’s funds and sets investment mandates that are appropriate for each. The investment mandates for assets in policyholder’s funds attempt to match asset characteristics with the nature of policy obligations. The ability to match asset characteristics with policy obligations may be constrained by a number of factors including regulatory constraints, the lack of suitable investments as well as by the nature of the policy liabilities themselves.

     A large proportion of policyholder’s assets is held for investment linked policies where the policyholder takes the risk of falls in the market value of the assets. However, as the Group earns fees on investment linked policies that are based on the amount of assets invested, it may receive lower fees should markets fall. Asset allocation for investment linked policies is at the discretion of the policyholder.

     A smaller proportion of policyholder’s assets is held to support policies where life companies have guaranteed either the principal invested or the investment return (‘guaranteed policies’). Investment mandates for these classes of policies emphasise investment in lower volatility assets such as cash and fixed interest. The Group no longer sells guaranteed policies in Australia or New Zealand but they continue to be sold in Asia. The Australian and New Zealand books of inforce business contain guaranteed policies sold in the past and on which it continues to collect premiums.

     Thus, it is likely to be several years before the Australian and New Zealand inforce book of guaranteed policies will decline significantly as the policy payments on maturing policies continues to be offset by the premium

39

Integrated Risk Management (continued)

income on the remaining policies. Some guaranteed policies were sold on the basis of profits being shared between policyholders and shareholders. Profits are allocated to policyholders by the declaration of ‘bonuses’.

     Bonuses may be declared annually (‘annual bonuses’) or upon maturity of the policy (‘terminal bonuses’). Once declared, annual bonuses form part of the guaranteed sum assured.

     The current investment mandate for shareholders’ funds reflects a decision taken during this year to reduce the overall exposure of shareholders’ fund to growth assets. As at 30 June 2004, shareholders’ funds in the life insurance business are invested 73% in income assets (cash and fixed interest) and 27% in growth assets (shares and property), although the asset mix varies from company to company. Policyholder funds are invested to meet policyholder reasonable expectations without putting the policyholder at undue risk.

     Market risk in the funds management business is the risk that an adverse movement in market prices will result in a reduction of that element of fee income related to earnings performance.

     Liquidity risk is not a significant issue in life insurance companies. The life insurance companies in the Group hold substantial investments in highly liquid assets such as listed shares, government bonds and bank deposits and continue to receive substantial premium income. Furthermore, processing time for claims and redemptions enables each company to forecast and manage its liquidity needs with a high degree of accuracy.

Liquidity and Funding

     Balance sheet liquidity risk is the risk of being unable to meet financial obligations as they fall due. The Group manages liquidity requirements by currency and by geographical location of its operations. Subsidiaries are also included in the Group’s liquidity policy framework. Liquidity policies are in place to manage liquidity in a day-to-day sense, and also under crisis assumptions.

     Under current APRA Prudential Standards, each bank is required to develop a liquidity management strategy that is appropriate for itself, based on its size and nature of operations. The objectives of the Group’s funding and liquidity policies are to:

•	Ensure all financial obligations are met when due;
•	Provide adequate protection, even under crisis scenarios, at lowest cost; and
•	Achieve sustainable, lowest-cost funding within the limitations of funding diversification requirements.
	Funding risk

     Funding risk is the risk of over-reliance on a funding source to the extent that a change in that funding source could increase overall funding costs or cause difficulty in raising funds. The funding policy augments the Group’s liquidity policy with its aim to assure the Group has a stable diversified funding base without over-reliance on any one market sector.

     Domestically, the Group continues to obtain the majority of its AUD funding from a stable retail deposit base which has a lower interest cost than wholesale funds. The retail funding percentage has fallen from 67% in June 2003 to 60% in June 2004 due to the growth of “at call” savings. The relative size of the Group’s retail base has enabled it to source funds at a lower than average rate of interest than the other major Australian banks. However, some of this benefit is offset by the cost of the Group’s extensive retail network and the Group’s large share of pensioner deeming accounts.

     The cost of funds for Financial Year 2004, calculated as a percentage of interest exposure to average interest bearing liabilities, was 4.0% on a group basis compared with the 3.7% on a group basis for Financial Year 2003.

     The Group obtains a significant proportion of its funding for the domestic balance sheet from wholesale sources – approximately 29.7% (2003: 22.7%), excluding Bank Acceptances. The cost of funds raised in the wholesale markets is affected by independently assessed credit ratings.

Derivatives

     Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices defined in the contract. The Group enters into derivatives transactions including swaps, forward rate agreements, futures, options and combinations of these instruments. The sale of derivatives to customers as risk management products and their use for trading purposes is integral to the Group’s financial markets activities. Derivatives are also used to manage the Group’s own exposure to market risk. The Group participates in both exchange traded and Over the Counter (“OTC”) derivatives markets.

     Exchange traded derivatives

     Exchange traded derivatives are executed through a registered exchange, for example the Sydney Futures Exchange and the Australian Stock Exchange. The contracts have standardised terms and require lodgment of initial and variation margins in cash or other collateral at the Exchange, which guarantees ultimate settlement.

     OTC traded derivatives

     The Group buys and sells financial instruments that are traded ‘over-the-counter’, rather than on recognised exchanges. The terms and conditions of these transactions are negotiated between the parties, although the majority conform to accepted market conventions. Industry standard documentation is used, most commonly in the form of a master agreement supported by individual transaction confirmations. The documentation protects the Group’s interests should the counterparty default, and provides the ability to net outstanding balances in jurisdictions where the relevant law allows.

     The Group’s exposure to derivatives is disclosed in Note 39 Market Risk.

Operational and Strategic Business Risk

     The Group’s operational and strategic business risk management framework supports the achievement of the Group’s financial and business goals.

     Operational Risk is defined as the risk of economic gain or loss resulting from:

Inadequate or failed internal processes and methodologies;

- People;

- Systems; or

- External events.

     Strategic Business Risk is defined as the risk of economic gain or loss resulting from changes in the business environment caused by the following factors:

- Economic;

- Competitive;

- Social trends; or

- Regulatory.

     In each of the businesses, management is responsible for the identification, assessment and treatment of these risks. These business managers are supported by the Group’s framework consisting of a governance structure, a suite of risk mitigating policies, a measurement methodology and skilled operational risk employed throughout the Group.

     The Group’s operational risk measurement methodology provides the basis for the expert assessment of individual risk exposures and the calculation of operational risk economic equity.

     Target equity for the banking business is calculated by aggregating individual risk measures which are based on expert assessment. For the insurance and funds management businesses target equity is calculated using worst-case scenarios that impact upon business risk factors such as pricing, margins and business volumes.

     The Group continues to benchmark and monitor its insurance risk transfer program for efficiency and effectiveness. This is primarily achieved through a methodology to optimise total shareholder returns in

40

Integrated Risk Management (continued)

determining the most appropriate blend of insurance risk transfer and economic capital.

Business Continuity Management

     Business Continuity Management (“BCM”) within the Group involves the development, maintenance and testing of advance action plans to respond to defined risk events. This ensures that business processes continue with minimal adverse impact on customers, staff, products, services and brands.

     BCM constitutes an essential component of the Group’s risk management process by providing a controlled response to potential operational risks that could have a significant impact on the Group’s critical processes and revenue streams. It includes both cost-effective responses to mitigate the impact of risk events or disasters and crisis management plans to respond to crisis events.

     A comprehensive BCM program including plan development, testing and education has been rolled out across all business units to embed BCM methodologies and capability throughout the Group.

Insurance Risk

     There are two risk types that are considered to be unique to life insurance businesses. These are the risks that the incidence of mortality (death) and morbidity (illness and injury) claims are higher than assumed when pricing life insurance policies, or is greater than best estimate assumptions used to determine the fair value of the business.

     Insurance risk may arise through reassessment of the incidence of claims, the trend of future claims and the effect of unforeseen diseases or epidemics. In addition, in the case of morbidity, the time to recovery may be longer than assumed. Insurance risk is controlled by ensuring underwriting standards adequately identify potential risk, retaining the right to amend premiums on risk policies where appropriate and through the use of reinsurance. The experience of the Group’s life insurance business and those of the industry as a whole are reviewed annually.

Cross Border Outstandings

     Cross-border outstandings are based on the country of domicile of the borrower or guarantor of the ultimate risk. Outstandings include loans, acceptances and other monetary assets denominated in other than the counterparties’ local currency. Local currency activities with local residents by foreign branches and controlled entities of the Bank are excluded.

     At 30 June 2002, 2003 and 2004 cross-border outstandings of the Group by industry category, where outstanding individual countries exceed 1% of the Group’s total assets, was nil.

     At 30 June 2004, Germany totaling $2.7 billion and the United States of America totaling $2.4 billion both exceeded 0.75% of the Group’s total assets. At 30 June 2003 there were no countries with cross border outstandings greater than 0.75% of the Group’s total assets.

41

Off-Balance Sheet Arrangements

     The Group is a full service financial institution that offers a range of on balance sheet and off balance sheet arrangements and commitments to customers in the normal course of business. In addition, the Group has a number of other arrangements that form part of its day to day business operations. Such activities include traditional off balance sheet credit risk related instruments, commitments under capital and operating leases, long term debt issues, provision of liquidity facilities to securitisation programs and other contractual arrangements. These transactions combine varying levels of credit, interest rate, foreign exchange and liquidity risk. In accordance with Group policy, exposure to any of these transactions is not carried at a level that would have a material effect on the financial condition of the Group. The impact on the Statement of Financial Performance from these off balance sheet arrangements is not material. There are no significant differences between Australian and US GAAP arising out of off balance sheet arrangements.

Consolidated Entities

     The Group is involved with a number of special purpose entities in the ordinary course of business, primarily to provide funding and financial services to our customers. Under Australian GAAP these entities are consolidated in the financial statements if they meet the criteria of control. The definition of control depends upon substance rather than form and, accordingly, determination of the existence of control involves management judgement. The Group has no off balance sheet financing entities that it is considered to control under Australian GAAP. Under US GAAP, the criteria for consolidation differ from Australian GAAP. See section on Asset Backed-Finance Programs below for further details.

Asset Backed Finance Programs

     The Group is an active participant in the asset backed financing market where it assists customers’ financing needs through providing customer access to the capital markets through issuer special purpose entities under master series agreements. The issuers are separate bankruptcy remote entities in the business of acquiring approved investments and/or entering into hedge transactions or other agreements by issuing debt securities. The issuers operate through segregated series and the debt issues of different series may have different credit ratings. The primary source of repayment of the debt issues is the cash flow from the pools of assets. Investors in the debt issues have no recourse to the general assets of the Group.

     The issuers are not owned or controlled by the Group and have independent directors. Under Australian GAAP the assets and liabilities or the issuers are not consolidated into the Group’s Statement of Financial Position. For US GAAP, the issuers are a type of variable interest entity as defined by FASB Interpretation No 46, “Consolidation of Variable Interest Entities”. Under the provisions of FIN 46, the variable interest entity is deemed to be controlled by the Group, if the Group has most of the risks and/or benefits. As a result of the application of the standard, a number of entities are consolidated by the Group, resulting in an increase in assets of $531 million and liabilities of $531 million for US GAAP.

     Under the management deeds, the issuers have appointed the manager, subject to certain limitations, to manage on the issuer’s behalf the performance of the issuer’s obligations and the exercise of the issuers’ rights under the transaction documents. The issuers have appointed a wholly owned subsidiary of the Group as manager. The liability of the manager is limited to fraud or a negligent or wilful default by the manager of its obligations under the management deed.

     As manager of the program, the Group provides deal origination services, asset portfolio monitoring, treasury and financial administration services for the issuers. Assets acquired by the issuers are appropriately diversified and credit enhanced to support its debt issuances. The Group does not service these assets and does not transfer its own assets to the issuers. The Group receives management fees at arms length for its services to the issuer.

In certain instances the Group provides deal specific credit enhancements as an arms length financial arrangement for the issuers in the form of liquidity facilities and derivatives. The following tables summarises the total amount of the Group’s arrangements to the program:

Group Arrangements with Issuers

	2004		2003		2002
	$M		$M		$M
Management fee paid to the Group		3		1		1
Liquidity facilities utilised by Issuers		—		6		94
Derivatives face value provided to Issuers		839		644		378

Credit Risk Related Instruments

     The Group is involved in a range of transactions that give rise to contingent and/or future liabilities. These transactions meet the financing requirements of customers and include endorsed bills of exchange, letters of credit, guarantees and commitments to provide credit. These are transacted on a commercial basis to attract fees in line with market prices for similar arrangements, with terms and conditions having due regard to the nature of the transaction and the risks involved. They are not sold or traded. The items generally do not involve cash payments other than in the event of default. The fee pricing is set as part of the broader customer credit process and reflects the probability of default. The only material commitment is the $64,651 million commitment to provide credit, of which $57,655 million is committed within the next year. The commitment to provide cash under these instruments is managed within the Group’s liquidity and funding policies under current APRA Prudential Standards.

     The Group has a funding policy that augments its liquidity policy to assure the Group has a stable diversified funding base without over-reliance on any one funding source. The objectives of the liquidity and funding policies are to:

• Ensure all financial obligations are met when due;

• Provide adequate protection, even under crisis scenarios, at lowest cost; and

• Achieve sustainable, lowest-cost funding within the limitations of funding diversification requirements.

     Details of contingent liabilities and off balance sheet business are set out in Note 38 Contingent Liabilities, except for Derivatives, which is set out in Note 39 Market Risk. The table on the following page outlines the Group’s credit risk related instruments:

42

Off-Balance Sheet Arrangements (continued)

	Face Value				Credit Equivalent
	2004		2003		2004		2003
	$M		$M		$M		$M
Credit risk related instruments
Guarantees		2,230		2,075		2,230		2,075
Standby letters of credit		362		380		362		380
Bill endorsements		308		589		308		589
Documentary letters of credit		171		110		34		22
Performance related contingents		898		882		449		441
Commitments to provide credit		64,651		58,310		12,329		10,519
Other commitments		7,158		2,720		1,156		1,081
Total credit risk related instruments		75,778		65,066		16,868		15,107

     Guaranteesrepresent unconditional undertakings by the Group to support the obligations of its customers to third parties.

     Standby letters of creditare undertakings by the Group to pay against production of documents an obligation in the event of a default by a customer.

     Bill endorsementsrelate to bills of exchange that have been endorsed by the Group and represent liabilities in the event of default by the acceptor and the drawer of the bill.

     Documentary lettersof creditrepresent an undertaking to pay or accept drafts drawn by an overseas supplier of goods in the event of payment default by a customer.

     Performance related contingentsinvolve undertakings by the Group to pay third parties if a customer fails to fulfil a contractual non-monetary obligation.

     Commitments to provide creditinclude all obligations on the part of the Group to provide credit facilities.

     Other commitmentsinclude the Group’s obligations under sale and repurchase agreements, outright forward purchases and forward deposits and underwriting facilities.

     The transactions are categorised and credit equivalents calculated under APRA guidelines for the risk based measurement of capital adequacy. The credit equivalent amounts are a measure of the potential loss to the Group in the event of possible non performance by a counterparty.

     Where the potential loss depends on the performance of a counterparty, the Group utilises the same credit policies and assessment criteria for off balance sheet business as it does for on balance sheet business and if it is deemed necessary, collateral is obtained based on management’s credit evaluation of the counterparty. If a probable loss is identified, suitable provisions are raised.

     The maximum potential amount of future payments that may be required for Guarantees as defined in FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others is set out by term below:

									As at 30 June 2004
	Less than 1 year		1 to 3 year		3 to 5 years		over 5 years		Total		Carrying
											Value
	$M		$ M		$M		$M		$M		$M
Guarantees		2,124		1				105		2,230		3.6
Standby letters of Credit		228		75		11		48		362		0.6
Bill endorsements		308								308		0.5
Documentary letters of credit		171								171		0.3
Performance related contingents		897						1		898		1.4
Total		3,728		76		11		154		3,969		6.4

									As at 30 June 2003
	Less than 1 year		1 to 3 year		3 to 5 years		over 5 years		Total		Carrying
											Value
	$M		$M		$M		$M		$M		$M
Guarantees		1,945		24		—		106		2,075		2.9
Standby letters of Credit		202		—		136		42		380		0.5
Bill endorsements		589		—		—		—		589		0.8
Documentary letters of credit		110		—		—		—		110		0.2
Performance related contingents		875		7		—		—		882		1.2
Total		3,721		31		136		148		4,036		5.6

Securitisation of Assets

     The Group conducts a Loan Securitisation program through which it packages loans and issues securities to investors. The Group has a policy of funding diversification and assets are securitised to provide greater diversification of the Group’s funding sources. The Group is not over-reliant on funding from any one

43

Off-Balance Sheet Arrangements(continued)

market sector (refer Market Risk – Note 39). In addition, the Group’s capital management benefits from reduced risk under APRA Prudential capital adequacy guidelines.

     The Group securitises mortgage loans to a special purpose entity (SPE). The SPE is a separate bankruptcy remote entity that operates under master series agreements. The SPE operates through segregated series and the securities issued in different series may have different credit ratings. The primary source of repayment of the securities issued is the cash flow from the pools of assets. Investors in the securities issued have no recourse to the general assets of the Group. Under Australian GAAP these loans are removed from the Group’s Statement of Financial Position. For US GAAP the conditions to allow securitised loans to be removed from the Statement of Financial Position include the provision that the transferor does not retain effective control over, or more than a trivial interest in, the transferred assets. The Group meets the requirements of US GAAP not to consolidate the SPE.

     The outstanding balance of securitised loans at 30 June 2004 was $7,605 million (2003: $6,480, 2002: $7,047). No credit losses were incurred by the Group in relation to these securitised loans during the Financial Year 2004. The credit risk in respect of these loans is fully covered through mortgage insurance

     Interest rate swaps and liquidity facilities are provided at arms length to the program by the Group in accordance with APRA Prudential Guidelines. These liquidity facilities are disclosed within Contingent Liabilities as commitments to provide credit (2004:$292 million; 2003: $272 million). Interest rate swaps (2004: $10,577 million; 2003: $6,881 million) are disclosed within the Market Risk note. These commitments are very minor in the totality of the Group’s business.

     For its services to the program, the Group receives fees such as loan servicing and program management fees on an arms length basis. Fee income is recognised in income on an accruals basis in relation to the period in which the costs of providing these services are incurred. The Group is entitled to any residual income of the program after all payments due to investors and costs of the program have been met. The value of securitisation fee and residual income is not a material component of the Group’s fee income.

     Cashflows paid to CBA from the SPE in Financial Years 2004, 2003 and 2002 were:

	2004		2003		2002
	$M		$M		$M
Servicing fee		15		17		16
Management fee		2		2		2
Excess servicing fee		36		30		11
Proceeds from sale of mortgage loans		3,436		1,664		2,512
Interest rate swaps		27		35		57
Total cash receipts		3,516		1,748		2,598

Contractual and Commercial Commitments

     At the end of Financial Year 2004 the Group has commitments for capital expenditure (see Note 36) and lease commitments (see Note 37). These commitments are minor in the totality of the Group’s commitments.

     The Group also has various monetary contractual liabilities, such as deposits and other public borrowings, payables to other financial institutions, bank acceptances, life liabilities, debt issues and loan-capital, and other monetary liabilities. Refer to note 32 to the Financial Statements for the maturity distribution of these monetary contractual liabilities. Details of the Group’s contractual obligations are set out in the following table:

Contractual Obligations

	As at 30 June 2004
									Payments due by period
	Total		Less than 1 year		1–3 years		3–5 years		More than 5 years
	$M		$M		$M		$M		$M
On balance sheet
Debt issues		44,043		20,401		12,130		5,413		6,099
Deposits and other borrowing		163,177		158,745		2,556		1,038		838
Loan capital		6,631		458		1,073		547		4,553
Total on balance sheet		213,851		179,604		15,759		6,998		11,490
Off balance sheet
Credit risk related instruments		75,778		62,450		5,313		6,392		1,623
Commitments for Capital Expenditure Not Provided for in the Accounts		46		44		2		—		—
Lease Commitments – Property, Plant and Equipment		1,148		295		268		378		207
Total off balance sheet		76,972		62,789		5,583		6,770		1,830

44

Off-Balance Sheet Arrangements(continued)

		As at 30 June 2003
									Payments due by period
	Total		Less than 1 year		1–3 years		3–5 years		More than 5 years
	$M		$M		$M		$M		$M
On balance sheet
Debt issues		30,629		17,255		6,797		3,629		2,948
Deposits and other borrowing		140,974		134,858		3,283		1,678		1,155
Loan capital		6,025		504		376		1,123		4,022
Total on balance sheet		177,628		152,617		10,456		6,430		8,125
Off balance sheet
Credit risk related instruments		65,066		57,669		4,138		2,357		902
Commitments for Capital Expenditure Not Provided for in the Accounts		48		48		—		—		—
Lease Commitments – Property, Plant and Equipment		1,011		264		344		243		160
Total off balance sheet		66,125		57,981		4,482		2,600		1,062

     Leases entered into by the Group are for the purpose of accommodating the Group’s business needs. Leases may be over retail, commercial, industrial and residential premises and reflect the needs of the occupying business and market conditions. All leases are negotiated with external professional property resources acting for the Group.

     Rental payments are determined in terms of relevant lease requirements – usually reflecting market rentals as described by standard valuation practice.

Indemnities under UK Sale Agreement

     The Group has contingent liabilities that relate to indemnities given under an agreement for the sale of Colonial Life (UK) Ltd and Colonial Pension Fund Ltd to the Winterthur Group.

     These indemnities cover potential claims that could arise from mis-selling activities in the UK for pension products and mortgage endowment products. Under the sales agreement the liabilities are shared between Winterthur and the Group on a pre-determined basis.

Long Term Contracts

     In 1997, the Bank entered into a ten year contract with an associated entity, EDS (Australia) Pty Ltd, relating to the provision of information technology services. In 2000, the Bank entered into a telecommunications services agreement with TCNZ Australia Pty Ltd for five years. The exact amounts of these contracts are unable to be reliably determined as they are dependent upon business volumes over the period of the contracts.

Liquidity support

     In accordance with the regulations and procedures governing clearing arrangements contained within the Australian Paper Clearing System (“Clearing Stream 1”) and the Bulk Electronic Clearing System (“Clearing Stream 2”) and the High Value Clearing System (“Clearing Stream 4”, only if operating in ‘bypass mode’) of the Australian Payments Clearing Association Limited, the Bank is subject to a commitment to provide liquidity support to these clearing streams in the event of a failure to settle by a member institution.

Service agreements

     The maximum contingent liability for termination benefits in respect of service agreements with the Chief Executive Officer and other executives of the Company and its controlled entities at 30 June 2004 was $8 million (2003: $10.6 million).

Transactions in Own Shares

     The Group has in place the following employee share plans:

• Commonwealth Bank Employee Share Acquisition Plan;

• Commonwealth Bank Equity Participation Plan;

• Commonwealth Bank Equity Reward Plan; and

• Commonwealth Bank Non-Executive Directors Share Plan.

     The plans provide staff and directors with potential to receive shares or options over shares in the Group. Full details of these plans are set out in Note 29 Share Capital. The impact of these plans have no material impact on the Group’s Statement of Financial Performance.

45

Critical Accounting Policies and Estimates

     The Notes to the Financial Statements contain a summary of the Group’s significant accounting policies. Certain of these policies are considered to be more important in the determination of the Group’s financial position, since they require management to make difficult, complex or subjective judgements, some of which may relate to matters that are inherently uncertain. These decisions are reviewed by a Committee of the Board.

     These policies include judgements as to levels of provisions for impairment for loan balances, actuarial assumptions in determining life insurance policy liabilities and market valuations of life insurance controlled entities. An explanation of these policies and the related judgements and estimates involved is set out below.

     Provisions for Impairment

     Provisions for impairment are maintained at an amount adequate to cover anticipated credit related losses.

     Credit losses arise primarily from loans but also from other credit instruments such as bank acceptances, contingent liabilities, financial instruments and investments and assets acquired through security enforcement.

     Specific Provisions

     Specific provisions are maintained where full recovery of principal is considered doubtful.

     Specific provisions are made against individual facilities in the credit risk rated managed segment where exposure aggregates to $250,000 or more, and a loss of $10,000 or more is expected. The provisions are established based primarily on estimates of the realisable (fair) value of collateral taken.

     Specific provisions (in bulk) are also made against each statistically managed segment to cover facilities which are not well secured and past due 180 days or more, against the credit risk rated segment for exposures aggregating to less than $250,000 and 90 days or more past due, and against emerging credit risks identified in specific segments in the credit risk rated managed portfolio. These provisions are derived primarily by reference to historical ratios of write-offs to balances in default.

     Specific provisions are provided for from the general provision.

     All facilities subject to a specific provision for impairment are classified as non-accrual, as set out in Note 15.

     General Provision

     The general provision represents management’s estimates of non-identifiable probable losses and latent risks inherent in the overall portfolio of loans and other credit transactions.

     The evaluation process is subject to a series of estimates and judgements.

     In the credit risk rated managed segment, the risk rating system, including the frequency of default and loss given default rates, loss history, and the size, structure and diversity of individual credits are considered. Current developments in portfolios (industry, geographic and term) are reviewed.

     In the statistically managed segment the history of defaults and losses, and the size, structure and diversity of portfolios are considered.

     In addition management considers overall indicators of portfolio performance, quality and economic conditions.

     Changes in these estimates could have a direct impact on the level of provision determined.

     The amount required to bring the general provision to the level assessed is taken to profit and loss as set out in Note 13.

     Life Insurance Policyholder Liabilities

     Life insurance policyholder liabilities are accounted for under AASB 1038: Life Insurance Business. A significant area of judgement is in the determination of policyholder liabilities, which involve actuarial assumptions.

     All policyholder liabilities are recognised in the Statement of Financial Position and are measured at net present values or, if not materially different, on an accumulation basis after allowing for acquisition expenses. They are calculated in accordance with the principles of Margin on Services (“MoS”) profit reporting as set out in Actuarial Standard AS 1.03: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board.

     The areas of judgement where key actuarial assumptions are made in the determination of policyholder liabilities are:

• Business assumptions including:

- amount, timing and duration of claims/policy payments;

- policy lapse rates; and

- acquisition and long term maintenance expense levels;

• Long term economic assumptions for discount and interest rates, inflation rates and market earnings rates; and

• Selection of methodology, either projection or accumulation method. The selection of the method is generally governed by the product type.

     The determination of assumptions relies on making judgements on variances from long-term assumptions. Where experience differs from long term assumptions:

- Recent results may be a statistical aberration; or

- There may be a commencement of a new paradigm requiring a change in long term assumptions.

     The Group’s actuaries arrive at conclusions regarding the statistical analysis using their experience and judgement.

     Additional information on the accounting policy is set out in Note 1(ii) Life Insurance Business, and Note 34 Life Insurance Business details the key actuarial assumptions.

     Market Valuation of Life Insurance Controlled Entities

     Interests in controlled entities held by the life insurance companies are subject to revaluation each period, such that the investment in the controlled entity is recorded at market value.

     On consolidation the investment in controlled entities is eliminated and the excess of market value of controlled entities over their underlying net assets is separately recognised in Other Assets (Note 21) on the balance sheet as ‘Excess of Net Market Value over Net Tangible Assets of Life Insurance Controlled Entities’. This amount is assessed periodically as part of the valuation of investments with changes in value taken to profit. This excess does not require amortisation in the financial statements.

     Appraisal valuations are used to assist the directors in setting the market value. There are several key economic and business assumptions involved in the appraisal valuations, the selection of which involves actuarial judgement.

     Economic assumptions are the long term view on key economic drivers and comprise investment earnings rates, risk discount rates and inflation. The economic assumptions are reviewed as a suite to take account of the correlation between the movements in each factor.

     Business assumptions relate to the performance of the Group’s businesses, both stand alone and relative to the market. These assumptions are only altered when there is a long-term change in views, which is supported by clearly discernible trends. The assumption setting process is similar to that used for Margin on Services policyholder liabilities. The major business assumptions for life businesses are:

- Sales/new business;

- Claims;

- Persistency; and

- Expenses.

     The major business assumptions for funds management businesses are:

- Sales/new business;

- Margins/business mix;

- Redemptions; and

- Cost to income ratio.

46

Critical Accounting Policies and Estimates (continued)

     Details of the key assumptions used in the valuations are set out in Note 34 Life Insurance Business.

     Provision for Which new Bank costs

     On 19 September 2003, the Group launched its Which new Bank customer service vision. This is a three year transformation program and involves the Group in additional expenditure in the key areas of staff training and skilling, systems and process simplification, and technology. In the period to 30 June 2004 such expenses have totaled $749 million and principally comprise redundancies, expensing of previously capitalised software of $219 million, process improvements and branch refurbishment.

     The Group is required to book a provision for restructuring costs to the extent that it has announced a plan or started implementing a plan, and has no realistic alternative but to proceed with the restructuring.

     There is a level of management judgement involved in estimating the planned costs involved and the level of commitment to the plan, such that it is judged that the plan will proceed to completion.

     On this basis a provision for ‘Which new Bank’ costs of $208 million was outstanding at 30 June 2004, which is included in the expenses referred to above.

     The cost estimates for the provision were determined by the businesses concerned taking into account the details of the planned initiatives and their timing. Other provisions for restructuring established in the past have proved to be appropriately estimated at the time. The provision established in June 2000 when the Group acquired the Colonial Limited Group of companies to cover the integration of the Colonial operations into the existing Group is described in Note 1(z) of the financial statements for the year ended 30 June 2003. This provision for restructuring was estimated at $400 million at 30 June 2000. This initial estimate was subsequently revised up to $545 million in the year ended 30 June 2001. The revision to costs of restructure principally related to additional staff redundancy payments and information technology contract termination costs.

     The current Which new Bank transformation initiative is a three year program that is estimated to cost $1,480 million over the 2004 to 2006 period. It is expected that additional provisions for ‘Which new Bank’ costs will be established over this period as the provisioning criteria in the accounting standard are met.

Significant US GAAP adjustments

     For US GAAP reporting purposes a number of adjustments are required (see note 48) to reconcile Australian GAAP reported net profit, shareholders’ equity and total assets to US GAAP reported information. The most significant of these are;

• Life insurance – the methodology used for estimating policy holder liabilities, for deferring costs and valuing controlled entities is markedly different under US GAAP compared to Australian GAAP (results in a $270 decrease in net income for Financial Year 2004, $24 million increase for Financial Year 2003, and $618 million reduction for Financial Year 2002.);

• Derivatives – Australian GAAP requires derivative hedges of non trading assets and liabilities to be brought to account on an accruals basis, whereas US GAAP requires the fair value of all derivatives to be on the balance sheet (results in a decrease of $736 million in net income for Financial Year 2004, $636 million increase in net income for Financial Year 2003 and $300 million reduction for Financial Year 2002);

• Pensions – Australian GAAP requires pension expenses for defined benefit pension plans to be accounted for on an incurred basis, whereas US GAAP requires an accrual basis (results in a $13 million decrease in net income for Financial Year 2004, $6 million decrease for Financial Year 2003 and $21 million increase for Financial Year 2002).

• Goodwill amortisation – Australian GAAP requires goodwill to be amortised over its useful life up to a maximum of 20 years. Effective 1 July 2002, goodwill is not amortised under US GAAP but is reviewed for impairment every period end. The goodwill amortisation expense reversed was $324 million for Financial Year 2004 and $322 million for Financial Year 2003.

• Fin 46 Variable Interest Entities: US GAAP requires the consolidation of variable interest entities if the conditions outlined in the FIN 46 are met. For the year ended 30 June 2004, this resulted in an increase in assets of $531 million, increase in liabilities of $2,104 million, a decrease in shareholders’ equity of $1,573 million and a decrease in income of $55 million.

47

Description of Business Environment

Overview

     Commonwealth Bank of Australia provides a comprehensive range of banking, financial, insurance and funds management services in Australia, New Zealand, throughout Asia and in the United Kingdom. These services include general banking, finance company activities, life and risk business insurance and investment and funds management. The Bank is Australia’s largest bank in terms of housing loans and retail deposits. At 30 June 2004, the Group had total consolidated assets of over $306 billion and loans outstanding of $189 billion. The Group’s net profit after tax was $2,572 million for Financial Year 2004.

     The Commonwealth Bank of Australia became the successor in law to the State Bank of New South Wales (known as Colonial State Bank) and to all the assets and liabilities of State Bank of New South Wales effective on 4 June 2001 pursuant to legislation.

     The address of the Bank’s principal executive office is 48 Martin Place, Sydney, New South Wales, 1155, Australia and its telephone number is (612) 9378 2000.

     The Group’s return on average assets has increased from 0.8% in Financial Year 2003 to 0.9% in Financial Year 2004, mainly due to the appraisal value uplift of $201 million in Financial Year 2004 compared to $245 million reduction in Financial Year 2003. The Group has remained capitalised at over 9% of total risk weighted assets for the last five years, which is above the Australian Prudential Regulation Authority (‘APRA’) regulatory requirement of 8%.

     The Group’s net interest margin has contracted from 2.88% for Financial Year 2000 to 2.53% for Financial Year 2004. Refer Group Interest Margins and Spreads for further analysis on the net interest margin.

     Staff productivity (total operating income per full time equivalent employee) has increased by 40% between Financial Year 2000 and Financial Year 2004. Total operating expenses versus total operating income rose from 57.2% in Financial Year 2000 to 59.6% in Financial Year 2004.

     The Group is managed within three primary business segments, being banking, funds management and life insurance.

Banking

     The Group’s banking operations contributed approximately 73% of its total net profit after tax for Financial Year 2004 and represented approximately 87% of the Group’s total assets at 30 June 2004. The Group’s banking operations consist primarily of the operations of the Bank and ASB Bank.

Funds Management

     The Group’s funds management operations consist primarily of the Colonial First State Group (acquired as part of the Colonial Limited acquisition in June 2000). The Commonwealth Funds Management business was merged into the Colonial First State Group during the Financial Year 2003. For Financial Year 2004 the funds management operations contributed $156 million (6% of the Group) in net profit after tax. As at 30 June 2004 the funds management operations held $110 billion in assets under administration.

Insurance

     The Group’s insurance operations consist primarily of Commonwealth Life Limited, Colonial Mutual Life Assurance (CMLA), ASB Life Limited, operations in the Asian region and Commonwealth Insurance Limited. The Asian operations include both 100% owned subsidiaries and joint venture operations. The insurance operations of the Group contributed 21% ($542 million) of the Group’s net profit after tax for Financial Year 2004. As at 30 June 2004 the insurance assets totaled $21 billion and represented 7% of total Group assets.

     Each of these businesses is described more fully within the preceding Banking, Funds Management and Insurance Business Analysis Sections.

     The operations of the core business functions are carried out by four customer-facing business units. They are International Financial Services, Investment and Insurance Services, Premium Business Services and Retail Banking Services. Other functions of the Group that support these core business functions include; Finance and Risk Management, Group Strategic Development, Group Technology and Human Resources.

International Financial Services (IFS)

     International Financial Services provides banking, insurance and investment product distribution services to corporate, business and retail customers in the Asia Pacific region. Our banking and insurance products are offered through a wide range of access points including branch networks, agents, financial planners, the telephone and internet.

     IFS comprises ASB Bank and Sovereign insurance in New Zealand, Colonial National Bank, Colonial Life and First State in Fiji, life, pension administration and financial planning operations branded CMG Asia, CommServe and AMTD in Hong Kong, PT Bank Commonwealth providing retail banking in Indonesia, representative offices in China and three life insurance joint ventures in Shanghai, Vietnam and Indonesia.

     The international arm serves a wide range of customers, many of whom have strong links to Australia. ASB Bank has over 1 million customers, who can access services through over 100 branches, over 300 ATMs and over 15,000 EFTPOS terminals. ASB Bank also has more than 250,000 online customers.

Investment and Insurance Services (IIS)

     Investment and Insurance Services is responsible for the manufacturing and sales of investment and insurance products and services.

     IIS also provides strategic and operational support for all distribution of investment and insurance products, and for the management of all Commonwealth Bank property requirements. Additionally, IIS operates funds management businesses in Hong Kong, Singapore and the UK.

     IIS has distribution strength across the Third Party Independent Financial Advisers channel (IFA), Bank planners and insurance consultants and advisers within our dealership groups.

Premium Business Services (PBS)

     Premium Business Services manages the Bank’s Premium Individual, Institutional, Corporate and Business client relationships.

     PBS provides customised products and services for clients with more complex financial needs, designs and produces business products for distribution across the Bank, and undertakes financial markets activities in foreign exchange, debt, and derivatives.

     Premium Individual clients

     PBS services clients with a household income greater than $120,000 or footings greater than $250,000.

     Client relationships are serviced by a team-based distribution model, which gives clients access to a team of advisers who are all aware of the clients’ relationships with the Bank and can satisfy their financial needs through the full range of wealth management services.

     PBS’s integrated broking and banking platform gives clients access to:

- borrowing and deposit services

- direct and indirect investment

- debt and equity products

- transactional banking and full advisory services

     Australia’s most popular broker, CommSec is part of PBS. CommSec currently manages more than 1.1 million accounts. Through the CommSec website, clients can

48

Description of Business Environment (continued)

place, buy and sell orders, monitor their portfolio, research the market and search for companies that match their goals.

     PBS developed a unique customer management system, which provides Relationship Managers access to all client data, accurate contact management records, client risk profiles, and details of product and marketing initiatives in a single view. An enhanced version of the system, known as CommSee, has been piloted in Tasmania and will be implemented across the Bank.

     Institutional, Corporate and Business clients

     PBS is responsible for managing the Bank’s relationships with institutional, corporate and business clients, who access our services through over 1,000 branches, 42 Business Banking Centres and 18 Corporate Banking sites in Australia.

     In regional Australia, PBS provides services through more than 100 sites, with 700 frontline people empowered to make decisions about loan applications.

     Overseas, PBS has offices in Auckland, London, New York, Hong Kong, Singapore and Tokyo.

Retail Banking Services (RBS)

     Retail Banking Services delivers customised service, focusing on meeting the financial needs of retail customers seeking accessible and affordable banking. Our end-to-end business brings together teams in branches, call centres, area offices, third party banking, retail operations and support office.

     We are Australia’s most accessible bank, and provide service to customers across a wide range of outlets.

Financial and Risk Management

     Financial and Risk Management provides professional services and support to other divisions in the Group as well as to external parties. Value is added through policy formulation, strategic support and specialist advice on financial, risk and capital management as well as managing investor relations.

History and Ownership

     The origins of the Bank lie in the former Commonwealth Bank of Australia which was established in 1911 by Act of Parliament to conduct commercial and savings banking businesses. Its functions were later expanded to encompass those of a central bank. Subsequent legislative amendment in 1959 created a separate Reserve Bank of Australia to take over the central bank functions.

     In December 1990, the Commonwealth Bank’s Restructuring Act 1990 was passed, which provided for:

• the conversion of the Bank into a public company with a share capital, governed by its Memorandum and Articles of Association but subject to certain overriding provisions of the Banking Act – this conversion occurred on 17 April 1991;

• the Bank to become the successor in law of the State Bank of Victoria (SBV) – this occurred on 1 January 1991; and

• the issue of shares in the Bank to the public.

     An offer of just under 30% of the issued voting shares in the Bank was made to members of the Australian public and staff of the Bank in July 1991. This was done to strengthen the Bank’s capital base following its acquisition of SBV and to provide a sound foundation for further development of the Bank’s business.

     In October 1993, the Commonwealth Government sold a portion of its shareholding in the Bank, thereby reducing its shareholding to 50.4% of the total number of issued voting shares.

     In June 1996, the Commonwealth Government made a public offer of its remaining 50.4% shareholding in the Bank. The offer was fully subscribed. In conjunction with this offer, the Bank, pursuant to a buy-back Agreement between the Bank and the Commonwealth of Australia, agreed to buy-back 100 million shares in the Bank from the Commonwealth. The public offer and buy-back were completed on 22 July 1996.

     In connection with the public offer of the Commonwealth’s shares in 1996, transitional arrangements were implemented which provided that:

• all demand and term deposits were to be guaranteed by the Commonwealth government for a period of three years from 19 July 1996, when the Commonwealth of Australia ceased to hold more than 50% of the total voting shares in the Bank, with term deposits outstanding at the end of that three year period being guaranteed until maturity; and

• all other amounts payable under a contract that was entered into before, and was outstanding at 19 July 1996, were to be guaranteed by the Commonwealth Government until their maturity.

     Under the terms of an agreement reached between the Commonwealth and the Bank, the Bank reports to the Commonwealth annually on the level and maturity profile of outstanding liabilities which are subject to the Commonwealth’s guarantees.

     The agreement also includes an undertaking from the Bank that it will not seek to extend the maturity profile of its deposit liabilities beyond that required in the normal course of business during the three years following the effective time. The liabilities of the Bank’s subsidiary Commonwealth Development Bank Limited will continue to remain guaranteed by the Commonwealth. For full details of all guarantee arrangements refer Note 26 to the Financial Statements.

     In June 2000, the Group acquired 100% of the share capital of Colonial Limited, a life insurance, banking and funds management group. Colonial had operations in Australia, New Zealand, the United Kingdom and throughout Asia and the Pacific. The Group purchased ASB Bank Community Trust’s remaining 25% interest in the ASB Group in New Zealand in August 2000

Competition — Australia

     The Australian banking market is highly transparent and competitive. The banks, life companies and non-bank financial institutions compete for customer deposits, the provision of lending, funds management, life insurance and other financial services.

     In all there were 51 banking groups operating in Australia at 30 June 2004. Banks in Australia can be divided into the following categories: Australian owned banks, foreign bank subsidiaries and branches of foreign owned banks.

     Among the Australian owned banks (of which there are 14) the four largest (Commonwealth Bank of Australia, National Australia Bank, Westpac and ANZ) are typically referred to as Australia’s major banks. Each of the major banks offers a full range of financial products and services through branch networks across Australia.

     Of the other Australian owned banks, there are 5 regional banks. Each of these had their origins as a building society and their operations were initially largely state based. While the smaller of the regional banks have typically limited their activities to servicing customers in a particular state or region, they are now targeting interstate customers and expanding their operations across state borders. Their growth in mortgage lending has been facilitated by the proliferation of non-bank mortgage originators and brokers. The larger regional banks now operate in several states, if not nationally. Over recent years the regional banking sector has undergone substantial consolidation with several of these institutions amalgamating with other regional banks or being acquired by major banks.

     There are 13 foreign owned banks operating in Australia through a locally incorporated subsidiary. An additional 24 banks conduct operations through a foreign bank branch. While many foreign banks operating in Australia initially focused their activities on the provision of banking services to the Australian clients of their overseas parent bank, most have now diversified their

49

Description of Business Environment (continued)

operations, offering local clients a broad range of financial products and services. Foreign bank branches in Australia are not able to offer retail deposit and transaction accounts to customers. Five foreign banks are represented in Australia by both a locally incorporated subsidiary and a branch.

     Non-bank financial intermediaries such as building societies and credit unions compete strongly in the areas of accepting deposits and residential mortgage lending, mainly for owner-occupied housing. These state-based institutions are also making headway in achieving multi-state coverage, partly encouraged by a more accommodating regulatory environment.

     A further development over recent years has been the establishment of local single branch banks collectively referred to as ‘community banks’. Under this model, the local community effectively purchases, from a regional bank, the right to operate a franchise of the bank but within the auspices of the regional bank’s banking authority. The presence of community banks has added another dimension to the competitive dynamics of the market.

     In addition, international fund managers and global investment banks are also increasing their presence in Australia.

     Changes in the financial needs of consumers, deregulation, and technology developments have also changed the mode of competition. In particular, the development of electronic delivery channels and the reduced reliance on a physical network facilitate the entry of new players from related industries, such as retailers, telecommunication companies and utilities. Technological change has provided opportunities for new entrants with differing combinations of expertise and has enabled the unbundling of the value chain.

     Another significant factor in disintermediation in Australia has been the substantial growth in funds under management, especially within the superannuation (pension funds) industry. Future growth will be underpinned by the Australian Government’s continued encouragement of long-term saving through superannuation, a mandatory superannuation guarantee levy on employers and by means of taxation concessions. This growth potential continues to attract new entrants to this market.

     The pool of capital represented by funds under management provides an alternative source of capital to bank finance for borrowers. The corporate bond market in Australia has benefited from the growth in funds under management with many of the major Australian corporates directly accessing capital markets in Australia and around the world. The Bank, in competition with numerous domestic and foreign banks, is actively involved as an originator of corporate debt in the capital markets, especially in the Euro-AUD and Euro-NZD sector, and in the creation of new financing structures including as arranger and underwriter in major infrastructure projects undertaken by the corporate sector.

Competition – New Zealand

     Like Australia, the New Zealand banking system is characterised by strong competition. The Group’s activities in New Zealand are conducted through ASB Group. Banks in New Zealand are free to compete in almost any area of financial activity. As in Australia, there is strong competition with non-bank financial institutions in the areas of funds management and the provision of insurance.

     New Zealand banking activities are led by four financial services groups, all owned by Australian-based banks operating through nationwide branch networks.

     The Group’s major competitors in New Zealand are ANZ and the National Bank of New Zealand (both wholly- owned subsidiaries of the ANZ Group), Bank of New Zealand (a wholly-owned subsidiary of NAB), and Westpac. In addition, there are several financial institutions operating largely in the wholesale banking sector including Deutsche Bank and ABN Amro.

     Through its wholly owned subsidiaries, Sovereign Group and ASB Group Investments, ASB Group also competes in the New Zealand insurance and investment market, where Asteron (part of the Promina Group) and AXA are major competitors.

��    Following the acquisition of Colonial Ltd in June 2000, the Group’s retail operations were extended into the United Kingdom, several Asian markets and the Fiji Islands; in these markets, the Bank competes directly with established providers.

Employees

     The Group currently employs approximately 36,300 employees on a full-time basis. June 2000 saw the addition of approximately 8,500 full-time equivalent staff as a result of the Colonial acquisition. Allowing for this, between 30 June 1999 and 30 June 2004 employee numbers have decreased by approximately 3,118 measured on a full-time equivalent basis.

     2004 Enterprise Bargaining Agreements (EBAs).

     A number of the Bank’s EBAs expired on 2 April 2004. On 17 February 2004 the Bank outlined its proposal for the new EBAs in an Executive Letter. On 12 March 2004 the Bank received the Finance Sector Unions (FSU’s) Log of Claims.

     The Bank’s EBA objectives are as follows:

•	The EBA framework must support the broader change strategies of the Which new Bank transformation, ie. the EBA outcome must help us give excellent customer service, engage our people, and simplify our processes.
•	Provide staff with real (above CPI) wage increases. All EBA covered staff have now received a 4% pay increase effective 1 July 2004. It is proposed that a further 4% increase in base pay from 1 July 2005.
•	Providing staff with more choice and flexibility around work/life balance, through:
	- Being able to purchase additional leave to meet personal or family needs; and
	- The ability for staff who qualify for long service leave to take this in more flexible ways.

     Overall, the Bank has sought to have constructive negotiation with a fair and quick outcome to benefit our employees, our customers and shareholders. Therefore, the existing agreements will continue to operate until they are replaced.

     The EBAs continue to offer, where appropriate, an Australian Workplace Agreement (AWA), or other forms of individual contract as an alternative to the EBA.

     People Strategy

     Our people strategy is to deliver excellence in customer service through ‘Engaged people who are empowered, motivated and skilled to deliver’. During the year, we have completed a number of activities that realise our people engagement strategy.

     A performance management system provides staff and their managers with an opportunity to engage in regular conversations about job performance. During the year the Bank’s system was reviewed to more closely align it with the Bank’s business objectives. Performance will be measured against business outcomes as well as our People Principles – clear and decisive, empowered and accountable, learn and grow, trust and team spirit, discipline and excellence, and challenge and innovate. In other words, what is achieved and how it is achieved will be relevant to performance assessment. The changes in the system go to the heart of the connection between excellence in customer service and an individual’s own performance. The relationship between performance and recognition and reward has also been strengthened.

     Retaining and managing talented individuals plays a key role in contributing to employee engagement and excellence in customer service. Talent management systems have been enhanced. The role of the Manager one Removed (MoR) has been simplified while talent reviews have broadened to enrich the assessment of potential high performers. Significantly, these new

50

Description of Business Environment (continued)

approaches have already informed decisions to extend and expand certain roles and choices about who should fill them.

     The Bank’s leadership program is being comprehensively redesigned around the Bank’s People Principles. The redesigned program will be implemented during the second quarter of Financial Year 2005.

     As a committed Equal Employment Opportunity (“EEO”) employer, the Bank has focused on enhancing the quality and accessibility of its EEO resources. The information manuals available to staff to help them balance their work and personal commitments have been reviewed and are being simplified. The Bank’s EEO intranet sites have also been reviewed and a new site will be launched early next year.

     The Fair Treatment Review system provides staff with the opportunity to raise issues they feel affect them unfairly. The system has been enhanced by introducing a specialist EEO investigations stream and simplifying the system.

Financial System Regulation

     Australia has by international standards a high quality system of financial regulation. Following a comprehensive inquiry into the Australian financial system (the ‘Wallis Inquiry’), the Australian Government introduced a new framework for regulating the financial system. The previous framework, which applied regulations according to the type of institution being regulated, resulted in similar products being regulated differently. The new functional approach regulates products consistently regardless of the particular type of institutions providing them.

     Since July 1998, the new regulatory arrangements have comprised four separate agencies: The Reserve Bank of Australia, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission. Each of these agencies has system wide responsibilities for the different objectives of government oversight of the financial system. A description of these agencies and their general responsibilities and functions is set out below.

     Reserve Bank of Australia (“RBA”) – is responsible for monetary policy, financial system stability and regulation of the payments system.

     Australian Prudential Regulation Authority (“APRA”) – has comprehensive powers to regulate prudentially banks and other deposit-taking institutions, insurance companies and superannuation (pension funds). Unless an institution is authorised under the Banking Act 1959 or exempted by APRA, it is prohibited from engaging in the general business of deposit-taking.

     Australian Securities and Investments Commission (“ASIC”) – has responsibility for market conduct, consumer protection and corporate regulation functions across the financial system including for investment, insurance and superannuation products and the providers of these products.

     Australian Competition and Consumer Commission (“ACCC”) – has responsibility for competition policy and consumer protection across all sectors of the economy.

     Consistent with its functional approach to regulation, the Wallis Inquiry proposed a single licensing regime for financial sales, advice and dealings in relation to financial products, consistent and comparable financial product disclosure and a single authorisation procedure for financial exchanges and clearing and settlement facilities. The Financial Services Reform Act 2001 enacting these proposals came into force in March 2004. It is intended to facilitate innovation and promote business while at the same time ensuring adequate levels of consumer protection and market integrity.

     The Government passed into law in June 2004 a package of proposals (known as CLERP 9) dealing with audit regulation and corporate disclosure designed to ensure Australia has an effective regulatory and disclosure framework that provides the structures and incentives for a fully informed market.

Supervisory Arrangements

     The Bank is an authorised deposit-taking institution under the Banking Act and is subject to prudential regulation by APRA as a bank.

     In carrying out its prudential responsibilities, APRA closely monitors the operations of banks to ensure that they operate within the prudential framework it has laid down, and that they follow sound management practices.

     APRA currently supervises banks by a system of off-site examination. It closely monitors the operations of banks through the collection of regular statistical returns and regular prudential consultations with each bank’s management. APRA also conducts a program of specialised on-site visits to assess the adequacy of individual banks’ systems for identifying, measuring and controlling risks associated with the conduct of these activities.

     In addition, APRA has established arrangements under which each bank’s external auditor reports to APRA regarding observance of prudential standards and other supervisory requirements.

     The prudential framework applied by APRA is embodied in a series of prudential standards including:

(i) Capital Adequacy

     Under APRA capital adequacy guidelines, Australian banks are required to maintain a ratio of capital (comprising Tier One and Tier Two capital components) to risk weighted assets of at least 8%, of which at least half must be Tier One capital. Regulatory capital requirements are measured for the Bank (“Level 1”) and for the Bank together with its banking subsidiaries (“Level 2”). APRA capital requirements are generally consistent with those agreed upon by the Basel Committee on Banking Supervision. APRA has advised that a third level of capital adequacy (“Level 3”) for conglomerate groups will be implemented to coincide with Basel 2. For information on the capital position of the Bank, see Note 31 to the Financial Statements, Capital Adequacy.

(ii) Funding and Liquidity

     APRA exercises liquidity control by requiring each bank to develop a liquidity management strategy that is appropriate for itself. Each policy is formally approved by APRA. A key element of the Group’s liquidity policy is the holding of a stock of high quality liquid assets to meet day to day fluctuations in liquidity. The liquid assets held are assets that are available for repurchase by the RBA (over and above those required to meet the Real Time Gross Settlement (“RTGS”) obligations, A$ Certificates of Deposits/Bills of other banks and A$ overnight interbank loans). More detailed comments on the Group’s liquidity and funding risks are provided in Note 39 to the Financial Statements.

(iii) Large Credit Exposures

     APRA requires banks to ensure that, other than in exceptional circumstances, individual credit exposures to non-bank, non-government clients do not exceed 25% of the capital base (prior to 1 July 2003 the limit was 30%). Exposure to authorised deposit taking institutions (“ADIs”) is not to exceed 50% of the capital base. Prior consultation must be held with APRA if a bank intends to exceed set thresholds. For information on the Bank’s large exposures refer to Note 14 to the Financial Statements.

(iv) Ownership and Control

     In pursuit of transparency and risk minimisation, the Financial Sector (Shareholding) Act 1998 embodies the principle that regulated financial institutions should maintain widespread ownership. The Act applies a common 15% shareholding limit for authorised deposit taking institutions, insurance companies and their holding companies. The Treasurer has the power to approve acquisitions exceeding 15% where this is in the national interest, taking into account advice from the Australian Competition and Consumer Commission in relation to

51

Description of Business Environment (continued)

competition considerations and APRA on prudential matters. The Treasurer may also delegate approval powers to APRA where one financial institution seeks to acquire another.

     The Government’s present policy is that mergers among the four major banks will not be permitted until the Government is satisfied that competition from new and established participants in the financial industry, particularly in respect of small business lending, has increased sufficiently.

     Proposals for foreign acquisition of Australian banks are subject to approval by the Treasurer under the Foreign Acquisitions and Takeovers Act 1975.

(v) Banks’ Association With Non-Banks

     There are formal guidelines (including maximum exposure limits applicable from 1 July 2003) that control investments and dealings with subsidiaries and associates. A bank’s equity associations with other institutions should normally be in the field of finance. APRA has expressed an unwillingness to allow subsidiaries of a bank to exceed a size which would endanger the stability of the parent. No bank can enter into any agreements or arrangements for the sale or disposal of its business, or effect a reconstruction or carry on business in partnership with another bank, without the consent of the Commonwealth Treasurer.

(vi) Supervision of Non-Bank Group Entities

     The Australian life insurance company and general insurance company subsidiaries of the group also come within the supervisory purview of APRA.

     APRA’s prudential supervision of both life insurance and general insurance companies is exercised through the setting of minimum standards for solvency and financial strength to ensure obligations to policyholders can be met.

     General insurance companies are subject to prudential standards covering capital adequacy, liability valuation, risk management and reinsurance arrangements.

     The financial condition of life insurance companies is monitored through regular financial reporting, lodgment of audited accounts and supervisory inspections. Compliance with APRA regulation for general insurance companies is monitored through regular returns, lodgment of an audited annual return, and auditor certification covering prudential matters.

(vii) New Zealand Supervision

     In New Zealand, our operations are supervised by the Reserve Bank of New Zealand. The framework of supervision includes monitoring financial performance, large exposures, individual country exposures and capital adequacy. Like Australia, the Reserve Bank of New Zealand capital adequacy guidelines are generally in line with the Basle Committee on Banking Regulation and Supervisory Practices.

(viii) United States Supervision

     Our New York branch is licensed and supervised as a federal branch by the Office of the Comptroller of the Currency, or the Comptroller. In general, such a branch can exercise the same rights and privileges, and is subject to the same restrictions, as would apply to a US national bank at the same location. As a foreign bank in the United States, however, our New York branch may not take domestic retail deposits and its deposits are not insured by the Federal Deposit Insurance Corporation.

     The Comptroller can examine and supervise the activities of the Bank at its New York branch. Such examination authority may include annual assessments on the operations of the Bank to fund Comptroller’s operations. In addition, the Bank is required to maintain certain liquid assets on deposit and pledged to the Comptroller based on the amount of branch assets of the Bank in New York. Furthermore, the Bank is subject to supervisory guidance based on examinations at its New York branch and the examiners’ assessment of risk management, operational controls, compliance and asset quality of the Bank’s New York branch. The Bank may also be subject to prudential guidance regarding the amount of US deposited funds it may repatriate to Australia for funding of the entirety of the Bank.

     Under the International Banking Act of 1978, or IBA, all the operations of the Bank in the United States are also subject to supervision and regulation as a bank holding company by the Board of Governors of the Federal Reserve System, or Federal Reserve. Under the IBA, the Bank may not open any branch, agency or representative office in the United States, or acquire more than 5% of the voting stock of any United States bank or bank holding company, without the prior approval of Federal Reserve. In addition, it would be required to obtain the prior approval of the Federal Reserve to engage in non-banking activities in the United States or to acquire more than 5% of the voting stock of any company that is engaged in non-banking activities in the United States. With certain exceptions, the Federal Reserve can only approve applications involving activities it had previously determined, by regulation or order, are so closely related to banking as to be properly incident thereto.

Legal Proceedings

     Neither the Commonwealth Bank nor any of its controlled entities is engaged in any litigation or claim which is likely to have a materially adverse effect on the business, financial condition or operating results of the Group. Where a material loss is probable an appropriate provision has been made.

52

Chairman’s Statement

     Set forth below is the Chairman’s Statement on the overview of the business as taken from the Bank’s Annual Report to shareholders and the Chairman’s Address at the 2004 Annual General Meeting held on 5 November 2004.

     The Group experienced another strong year with the Australian economy continuing to perform well. Housing lending remained buoyant for most of the year with early signs of some slowing towards the end of the year. Very low levels of corporate and personal defaults were experienced in a favourable credit environment. Investment markets recovered which led to an improvement in the performance of the funds management and insurance businesses as well as contributing to an increase in the assessed value of the funds management business.

     The Group embarked on the three year Which new Bank program during the year, the successful execution of which is critical to the long term success of the Group. So it is pleasing to be able to report that very good progress was made in the first year of the program in the achievement against the milestones set for the program.

Results

     The Group’s statutory net profit after tax for the year ended 30 June 2004 was $2,572 million, an increase of 28% over that earned in the prior financial year. Net profit from ordinary activities (“cash basis”) was $2,695 million, an increase of 5% over that earned in the prior year. This increase was achieved after expensing $749 million ($535 million after tax) on the Which new Bank program.

     The banking result was driven by the continued good performance of the Australian and New Zealand lending operations, partly offset by an anticipated contraction in the net interest margin. In funds management, recovery in funds flows was underpinned by strong international flows and the continued growth of FirstChoice, while for the insurance business, performance improved across all regions.

     Loan asset quality strengthened during the year, reflecting the Bank’s ongoing, disciplined approach to risk management. Productivity improvement was evident across all businesses, particularly insurance and funds management.

     For more information on the company’s financial performance, please refer to the Highlights beginning on page 6.

Dividends and Capital Position

     At last year’s Annual General Meeting I informed shareholders that, although we would be charging the costs of the Which new Bank program against profit, we regarded that expenditure as being in the nature of an investment in the future of the Group. I said that, for this reason, we would add back the after-tax cost of the program to the profit in determining the dividends for the year. This we did, and determined the total dividend out of the year’s profit would be $1.83 per share which represented 73.9% of the adjusted result and a 19% increase on the dividend for the prior year.

     The dividend of $1.83 per share continues the uninterrupted growth in the dividend rate since the Bank was privatised and listed as a public company twelve years ago. The final dividend of $1.04 per share, fully franked, will be paid on 24 September 2004

     The Group’s capital position remained strong throughout the year, sitting comfortably above the Group’s target ranges and in conformance with the requirements of regulators. During the year, the Group undertook a number of capital management initiatives that were well received by shareholders and which provide capital flexibility for the future. These included the issuance of hybrid capital and PERLS II, a $532 million share buyback, a $467 million share purchase plan, and a share sale facility for small shareholdings. These initiatives were in addition to the issue of new shares to the value of $389 million under the Dividend Reinvestment Plan during the year.

Which new Bank

     As foreshadowed in last year’s annual report, the Which new Bank program was announced to the market in September 2003. Which new Bank is a three-year strategic program aimed at supporting the Group’s vision to excel in customer service. The aim of the program is to provide better service to customers by engaged people using improved systems and simpler processes. The focus is very much on the training and motivating of people within the Group and giving them the authority and accountability to be able to deliver excellence in service. They can only do this if they have the systems and processes that allow them to do it. Customers are beginning to notice differences and these differences will become more pronounced as the Which new Bank program is implemented.

     During the year, the Board has actively participated in activities that facilitate a better understanding of the prerequisites for strategic transformation. In September 2003, the Bank’s Directors spent five days touring the Bank’s branches, processing centres and call centres in Australia and New Zealand, gaining first hand experience of the Bank’s systems and processes. In May 2004, the Board was pleased to conduct its monthly Board meeting in Townsville, the Bank’s first regional branch in Australia. The Board will continue to be active in gaining first-hand knowledge of the operations of the Bank and its service standards throughout the duration of the program and beyond.

Outlook

     The Global economy has improved noticeably, with an expectation of monetary tightening across the major economies in the near term.

     The Australian economy continues to perform well although growth in domestic spending has slowed as the construction sector loses some momentum.

     Consumer confidence is high while job security concerns are low and personal incomes are rising. Businesses should continue to benefit from sustained capital spending. High levels of spending on infrastructure are underway. The consequences of the housing slowdown remain a key domestic issue, although the effects so far have been muted.

     Subject to market conditions being maintained, the Group is targeting:

• Growth in cash Earnings Per Share (“EPS”) exceeding 10% compound annual growth rate (“CAGR”) over the three year period to 30 June 2006, which is expected to be ahead of industry growth;

• Improvement in productivity between 4-6% CAGR over this period; and

• Growth in profitable market share across major product lines.

     Having regard to the factors considered in determining the dividend as set out on page 132, and subject to no significant change in the Group’s strategy and operating environment, the ratio of dividends per share to “cash” earnings is expected to be maintained at around the current level (that is, the ratio with Which new Bank costs added back). The Group expects that the impact of expenses related to Which new Bank will be significantly lower going forward, and benefits will continue to increase. Accordingly, cash earnings should be significantly higher and we expect to increase the dividend per share each year.

     The Bank’s outlook statement was further articulated by the former Chairman, Mr JT Ralph, at the Bank’s Annual General Meeting held on 5 November 2004 as follows:

     “In launching Which new Bank we said that, subject to market conditions continuing over the three years of Which new Bank, the Bank would target a compound

53

Chairman’s Statement (continued)

annual growth rate in cash earnings per share exceeding 10% per annum, 4-6% compound annual productivity improvement, profitable market share growth across major product lines and increases in the dividend per share each year. Since that time, we have kept our investment spend within the planned expenditure and achieved benefits in excess of plan.

     In the first four months of trading, home lending has continued to grow solidly, but not at the very high rate we witnessed up until December 2003. In the business segment, we are still seeing reasonable growth. We continue to see contraction of margins and the conditions for market trading continue to be quite difficult, with very little volatility in financial markets.

     Credit quality remains strong, with personal and corporate defaults at very low levels. The insurance and fund management businesses have made good progress and investment markets have performed above expectations.

     Looking forward we see no change in the highly competitive environment for financial services. While continuing difficult market trading conditions and regulatory costs will have implications for the Bank’s target cost to income ratio, we still anticipate achieving the targets for Which new Bank. As stated at the time of the full year profit announcement, for the 2005 financial year, the impact of expenses related to Which new Bank will be significantly lower going forward and benefits will continue to increase. Accordingly, cash earnings should be significantly higher and the Bank expects to increase the dividend per share in each year of the program.”

Board Changes

     This Annual General Meeting marked my retirement as Chairman and as a Director of the Bank. Mr Ross Adler also retired from the Board at that meeting. Mr Adler has been a committed and consistent valuable contributor to the deliberations of the Board since his appointment in 1990. He has served on the Audit, Remuneration and Risk Committees of the Board at various times and has always been a diligent member of those committees.

     There have been many changes in the Bank and in the financial services industry since I joined the Board in 1985 and since I became chairman in 1999. Early during my term on the Board the Bank was privatised and became a publicly listed company. There were other significant structural changes along the way, including the merger with the State Bank of Victoria and the acquisition of ASB Bank and Colonial Limited, all of which contributed to the strengthening of the competitive positioning of the Bank. During this time there has been considerable innovation as the Bank has diversified into new lines of wealth management businesses and led the introduction of banking technologies, such as telephone and internet banking and internet broking, with CommSec now servicing the greatest number of broking transactions in the market.

     Currently, the Group is engaged in the most important change since its privatisation, with the Which new Bank program. The execution of this program is vital for the long term success of the Group and it is pleasing, therefore, that such good progress has been made to date. It is an important underpinning of the Board’s commitment to achieving strong growth in all of the Group’s businesses and in growing sustainable and reliable returns for shareholders.

     I have been privileged to serve on your Board and as Chairman for the last five years. I am confident that the Board is well positioned for the future under the capable chairmanship of John Schubert who will be succeeding me. I would like to take the opportunity to thank shareholders, customers and staff for their continued support of the Group.

54

Corporate Governance

Board of Directors

Charter

     The role and responsibilities of the Board of Directors are set out in the Board Charter. The responsibilities include:

- The corporate governance of the Bank, including the establishment of Committees;

- Oversight of the business and affairs of the Bank by:

– establishing, with management, the strategies and financial objectives;

– approving major corporate initiatives;

– establishing appropriate systems of risk management; and

– monitoring the performance of management;

- Communicating with shareholders and the community, results of, and developments in, the operations of the Bank;

- Appointment of the Chief Executive Officer; and

- Approval of the Bank’s major HR policies and overseeing the development strategies for senior and high performing executives.

     There is in place a comprehensive set of management delegations to allow management to carry on the business of the Bank.

Composition

     There are currently 10 Directors of the Bank and details of their experience, qualifications, special responsibilities and attendance at meetings are set out in the Directors’ report.

     Membership of the Board and Committees is set out below:

DIRECTOR	BOARD MEMBERSHIP		COMMITTEE MEMBERSHIP
			Nominations	Remuneration	Audit	Risk
J T Ralph, AC(1)	Non-executive, Independent	Chairman	Chairman	Chairman		Chairman
J M Schubert(2)	Non-executive, Independent	Deputy Chairman	Member		Chairman	Member
D V Murray	Executive	Chief Executive Officer				Member
N R Adler, AO(1)	Non-executive, Independent				Member	Member
R J Clairs, AO	Non-executive, Independent			Member		Member
A B Daniels, OAM	Non-executive, Independent			Member		Member
C R Galbraith, AM	Non-executive, Independent					Member
S C Kay	Non-executive, Independent					Member
W G Kent, AO	Non-executive, Independent					Member
F D Ryan	Non-executive, Independent				Member	Member
F J Swan	Non-executive, Independent Non-executive,		Member			Member
B K Ward	Independent				Member	Member

(1)	Retired 5 November 2004
(2)	Appointed Chairman to the Board 5 November 2004

     The Constitution of the Bank specifies that:

- The Chief Executive Officer and any other executive director shall not be eligible to stand for election as Chairman of the Bank;

- The number of Directors shall not be less than 9 nor more than 13 (or such lower number as the Board may from time to time determine). The Board has determined that upon the retirement of Mr Ralph and Mr Adler at the 2004 Annual General Meeting, the number of directors shall be 10; and

- At each Annual General Meeting one-third of Directors (other than the Chief Executive Officer) shall retire from office and may stand for re-election.

     The Board has established a policy that, with a phasing in provision for existing Directors, the term of directors’ appointments would be limited to 12 years (except where succession planning for Chairman and appointment of Chairman requires an extended term. On appointment, the Chairman will be expected to be available for that position for five years). Directors do not stand for re-election after attaining the age of 70.

Independence

     The Board regularly assesses the independence of each Director. For this purpose an independent Director is a non-executive Director whom the Board considers to be independent of management and free of any business or other relationship that could materially interfere with the exercise of unfettered and independent judgment.

     In addition to being required to conduct themselves in accordance with the ethical policies of the Bank, Directors are required to be meticulous in their disclosure of any material contract or relationship in accordance with the Corporations Act and this disclosure extends to the interests of family companies and spouses. Directors are required to strictly adhere to the constraints on their participation and voting in relation to matters in which they may have an interest in accordance with the Corporations Act and the Bank’s policies.

     Each Director may from time to time have personal dealings with the Bank. Each Director is involved with other companies or professional firms which may from time to time have dealings with the Bank. Details of offices held by Directors with other organisations are set out in the Directors’ Report and on the Bank’s website. Full details of related party dealings are set out in notes to the Company’s accounts as required by law.

     All the current non-executive Directors of the Bank have been assessed as independent Directors. In reaching that determination, the Board has taken into account (in addition to the matters set out above):

- The specific disclosures made by each Director as referred to above;

55

Corporate Governance (continued)

- Where applicable, the related party dealings referrable to each Director, noting that those dealings are not material under accounting standards;

- That no non-executive Director has ever been employed by the Bank or any of its subsidiaries;

- That no Director is, or has been associated with a supplier, professional adviser, consultant to or customer of the Bank which is material under accounting standards; and

- That no non-executive Director personally carries on any role for the Bank otherwise than as a Director of the Bank.

     The Bank does not consider that term of service on the Board is a factor affecting a Director’s ability to act in the best interests of the Bank. Independence is judged against the ability, integrity and willingness of the Director to act. The Board has established a policy limiting Directors’ tenures to ensure that skill sets remain appropriate in a dynamic industry.

Education

     Directors participate in an induction programme upon appointment and in a refresher program on a regular basis. The Board has established a program of continuing education to ensure that it is kept up to date with developments in the industry both locally and globally. This includes sessions with local and overseas experts in the particular fields relevant to the Bank’s operations.

Review

     The Board has in place a process for annually reviewing its performance, policies and practices. These reviews seek to identify where improvements can be made and also assess the quality and effectiveness of information made available to Directors. Every two years, this process is facilitated by an external consultant, with an internal review conducted in the intervening years. The review includes an assessment of the performance of each Director.

     After consideration of the results of the performance assessment, the Board will determine its endorsement of the Directors to stand for re-election at the next Annual General Meeting.

     The non-executive Directors meet at least annually, without management, in a forum intended to allow for an open discussion on Board and management performance. This is in addition to the consideration of the Chief Executive Officer’s performance and remuneration which is conducted by the Board in the absence of the Chief Executive Officer.

     The Chairman meets at least annually with members of the senior executive team to discuss with them the Board’s performance and level of involvement from their perspective.

Selection of Directors

     The Nominations Committee has developed a set of criteria for director appointments which have been adopted by the Board. The criteria set the objective of the Board as being as effective, and preferably more effective than the best boards in the comparable peer group. These criteria, which are reviewed annually, ensure that any new appointee is able to contribute to the ongoing effectiveness of the Board, have the ability to exercise sound business judgment, to think strategically and have demonstrated leadership experience, high levels of professional skill and appropriate personal qualities.

     The Committee regularly reviews the skill base and experience of existing Directors to enable identification of attributes required in new Directors.

     An executive search firm is engaged to identify potential candidates based on the identified criteria.

     Candidates for appointment as Directors are considered by the Nominations Committee, recommended for decision by the Board and, if appointed, stand for election, in accordance with the Constitution, at the next general meeting of shareholders.

- That no Director is, or has been associated directly with, a substantial shareholder of the Bank;

     The Bank has adopted a policy whereby, on appointment, a letter is provided from the Chairman to the new Director setting out the terms of appointment.

Policies

     Board policies relevant to the composition and functions of Directors include:

- The Board will consist of a majority of independent non-executive Directors and the membership of the Nominations, Remuneration and Audit Committees should consist solely of independent non-executive Directors. The Risk Committee should consist of a majority of independent non-executive Directors;

- The Chairman will be an independent non-executive Director. The Audit Committee will be chaired by an independent non-executive Director other than the Board Chairman;

- The Board will generally meet monthly with an agenda designed to provide adequate information about the affairs of the Bank, allow the Board to guide and monitor management and assist in involvement in discussions and decisions on strategy. Matters having strategic implications are given priority on the agenda for regular Board meetings. In addition, ongoing strategy is the major focus of at least two of the Board meetings annually;

- The Board has an agreed policy on the basis on which Directors are entitled to obtain access to company documents and information and to meet with management; and

- The Bank has in place a procedure whereby, after appropriate consultation, Directors are entitled to seek independent professional advice, at the expense of the Bank, to assist them to carry out their duties as Directors. The policy of the Bank provides that any such advice is generally made available to all Directors.

Ethical Standards

     Conflicts of Interest

     In accordance with the Constitution and the Corporations Act 2001, Directors are required to disclose to the Board any material contract in which they may have an interest. In compliance with section 195 of the Corporations Act 2001 any Director with a material personal interest in a matter being considered by the Board will not be present when the matter is being considered and will not vote on the matter. In addition, any director who has a conflict of interest in connection with any matter being considered by the Board or a Committee does not receive a copy of any paper dealing with the matter.

     Share Trading

     The restrictions imposed by law on dealings by Directors in the securities of the Bank have been supplemented by the Board of Directors adopting guidelines which further limit any such dealings by Directors, their spouses, any dependent child, family company or family trust.

     The guidelines provide, that in addition to the requirement that Directors not deal in the securities of the Bank or any related company when they have or may be perceived as having relevant unpublished price-sensitive information, Directors are only permitted to deal within certain periods. These periods include between three and 30 days after the announcement of half yearly and final results and from three days after release of the annual report until 30 days after the Annual General Meeting. Further, the guidelines require that Directors not deal on the basis of considerations of a short term nature or to the extent of trading in those securities. Similar restrictions apply to executives of the Bank.

     In addition, Bank policy prohibits:

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Corporate Governance (continued)

- For Directors and executives who report to the Chief Executive Officer, any hedging of publicly disclosed shareholding positions; and

Remuneration Arrangements

     Remuneration Committee

     The Board has established a Remuneration Committee to:

- Consider changes in remuneration policy likely to have a material impact on the Group;

- Consider senior executive appointments;

- Determine remuneration for senior management; and

- Be informed of leadership performance, legislative compliance in employment issues, industrial agreements and incentive plans operating across the Group.

     The policy of the Board is that the Committee shall consist entirely of independent non-executive Directors. The Chief Executive Officer attends Committee meetings by invitation but does not attend in relation to matters that can affect him.

     The Committee has an established work plan which allows it to review all major human resource policies, strategies and outcomes.

     Non-Executive Directors’ Remuneration

     The Constitution and the Australian Stock Exchange (“ASX”) Listing Rules specify that the aggregate fees of non-executive Directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined, is divided among the Directors as they agree. The policy of the Board is that the aggregate amount should be set at a level which provides the Bank with the necessary degree of flexibility to enable it to attract and retain the services of directors of the highest calibre. The latest determination was at the Annual General Meeting held on 28 October 1999 when shareholders approved aggregate fees of $1,500,000 per year. The Nominations Committee reviews the fees payable to non-executive Directors. Details of individual Directors’ remuneration are set out in Note 44 to the Financial Statements. Directors’ fees do not incorporate any bonus or incentive element.

     In August 2000, the Board approved the introduction of the Non-Executive Directors’ Share Plan which requires the acquisition of shares by non-executive Directors at market price through the mandatory application of 20% of their annual fees. Details of this Plan were set out in the Notice of Meeting for the 2000 Annual General Meeting.

     The Non-Executive Directors’ Retirement Allowance Scheme which provides for retirement benefits to be paid to non-executive Directors was approved by shareholders at the 1997 Annual General Meeting. The terms of this scheme allowed for a benefit on a pro-rata basis to a maximum of four years total emoluments after 12 years service. In July 2002, the Board closed the scheme to any newly appointed directors. The entitlement of the non-executive Directors at the time were not affected and continued to accrue further benefits.

     Chief Executive Officer Remuneration

     The remuneration of Mr Murray (Chief Executive Officer) is fixed by the Board, pursuant to the Constitution, as part of the terms and conditions of his appointment. Those terms and conditions are established in a contract of employment with Mr Murray which was effective from 2 July 2001, with remuneration subject to review, from time to time, by the Board, and are consistent with those applying to other executives of the Bank.

     Executive Remuneration

     The Bank’s remuneration systems complement and reinforce its leadership and succession planning systems.

     The Bank’s remuneration framework aims to reward executives with a mix of remuneration appropriate to their level in the organisation and incorporates a significant weighting towards variable (“at risk”) pay linked to performance, both short term and long term. This focus aims to:

- For executives, any trading (including hedging) in positions prior to vesting of shares or options.

- reward executives for bankwide, business unit and individual performance against targets set by reference to appropriate benchmarks;

- align the interests of executives with those of shareholders;

- link executive reward with the strategic goals and performance of the Bank; and

- ensure total remuneration is competitive by market standards.

     Remuneration and terms and conditions of employment are specified in an individual contract of employment with each executive which is signed by the executive and the Bank. Remuneration of the Bank’s executives consists of three key elements:

- Fixed Remuneration;

- Short Term Incentive (“STI”); and

- Long Term Incentive (“LTI”).

     The relationship of fixed remuneration and variable pay (potential short term and long term incentives) is established for each level of executive management by the Remuneration Committee.

     Fixed remuneration is reviewed annually by the Remuneration Committee through a process that considers bankwide, business unit and individual performance, relevant comparative remuneration in the market and internal and, where appropriate, external advice on policies and practices. The Committee has access to external advice independent of management.

     Actual STI payments for executives depend on the extent to which operating targets set at the beginning of the financial year are met.

     These targets consist of a number of Key Result Areas (“KRAs”) covering both financial and non-financial measures of performance. Included are measures such as contribution to net profit after tax (“NPAT”), customer service, risk management, product management, and leadership/team contribution.

     STI Payments to executives are usually delivered in two components

- Fifty percent made as an immediate cash payment; and

- Fifty percent deferred in the form of shares in the Bank.

     The shares acquired vest in two equal instalments after one and two years respectively. Dividends on the shares are not paid to the executive unless and until the shares vest. Generally, the executive will need to be an employee of the Bank at the relevant vesting date to receive the shares.

     LTI grants to executives are delivered in the form of Reward Shares under the Bank’s Equity Reward Plan (“ERP”).

     No value accrues to the executive unless the Bank’s Total Shareholder Return (“TSR”) at least meets the median of a peer comparator group of companies. To receive the full value of the LTI grant, the Bank’s performance must be in the top quartile of the peer group.

     The percentage of shares vesting in the executive will be based on a sliding scale where 50% of allocated shares vest if the Bank’s TSR is equal to the median return, 75% vest at the 67th percentile and 100% when the return exceeds the 75th percentile, ie. when the Bank’s return is in the top quartile.

     Where the rating is below the median return on the third anniversary of grant, the shares can still vest if the rating reaches the median prior to the fifth anniversary, but the maximum vesting will be 50%.

     Purchase of Shares on the Market

     Currently, Reward Shares purchased on market to satisfy incentives earned by executives under the ERP are charged against profit and loss as are incentives paid in cash and in deferred shares under the Equity Participation Plan (“EPP”). As from the beginning of the 2003 financial

57

Corporate Governance (continued)

year, total remuneration, which includes the full cost of the ERP and EPP and also the distribution of shares to employees under the ESAP, have been expensed against profits.

     Further Information

     Further detail of remuneration arrangements for Directors and executives of the Bank is outlined in the Directors’ Report. Individual remuneration details of Directors and Specified Executives are set out in Note 44 to the Financial Statements.

Audit Arrangements

     Audit Committee

     The Charter of the Audit Committee incorporates a number of policies and practices to ensure that the Committee is independent and effective. Among these are:

– The Audit Committee consists entirely of independent non-executive Directors, all of whom have familiarity with financial management and at least one has expertise in financial accounting and reporting. The Chairman of the Bank is not permitted to be the Chairman of the Audit Committee;

– At least twice a year the Audit Committee meets with the external auditors and the chief internal audit executive and also separately with the external Auditors independently of management;

– The Audit Committee is responsible for nominating the external auditor to the Board for appointment by shareholders. The Audit Committee approves the terms of the contract with the external auditor, agrees the annual audit plan and approves payments to the Auditor;

– The Audit Committee discusses and receives assurances from the external auditors on the quality of the Bank’s systems, its accounting processes and its financial results. It also receives a report from the Auditors on any significant matters raised by the Auditors with management;

– All material accounting matters requiring exercise of judgement by management are specifically reviewed by the Audit Committee and reported on by the Committee to the Board; and

– Certified assurances are received by the Audit Committee and the Board that the Auditors meet the independence requirements as recommended by the Blue Ribbon Committee of the New York Stock Exchange and the National Association of Securities Dealers of the USA.

– In carrying out these functions, the Committee:

– Reviews the financial statements and reports of the Group;

– Reviews accounting policies to ensure compliance with current laws, relevant regulations and accounting standards;

– Conducts any investigations relating to financial matters, records, accounts and reports which it considers appropriate; and

– Reviews all material matters requiring exercise of judgment by management and reports those matters to the Board.

     The Committee regularly considers, in the absence of management and the external auditor, the quality of the information received by the Committee and, in considering the financial statements, discusses with management and the external auditor:

– The financial statements and their conformity with accounting standards, other mandatory reporting and statutory requirements; and

– The quality of the accounting policies applied and any other significant judgments made.

     The external audit partner attends meetings of the Audit Committee by invitation and attends the Board meetings when the annual and half yearly accounts are approved and signed.

     The Board has determined that Fergus Ryan is an “audit committee financial expert” within the meaning of that term as described in the SEC rules. Although the Board has determined that this individual has the requisite attributes defined under the rules of the SEC, his responsibilities are the same as those of the other Audit Committee members. He is not an auditor, does not perform “field work” and is not a full time employee. The SEC has determined that an audit committee member who is designated as an audit committee financial expert will not be deemed to be an “expert” for any purpose as a result of being identified as an audit committee financial expert.

     The Audit Committee is responsible for oversight of management in the preparation of the Bank’s financial statements and financial disclosures. The Audit Committee relies on the information provided by management and the external auditor. The Audit Committee does not have the duty to plan or conduct audits to determine whether the Bank’s financial statements and disclosures are complete and accurate.

     Non-Audit Services

     The Board has in place an External Auditor Services Policy which only permits the Independent Auditor to carry out audit services and audit related services which are an extension of the audit services and certain other services pre-approved by the Audit Committee. All other non-audit services are prohibited. The objective of this policy is to avoid prejudicing the independence of the Auditors.

     The policy also ensures that the Auditors do not, among other things:

– Assume the role of management or act as an employee;

– Become an advocate for the Bank;

– Audit their own work;

– Create a mutual or conflicting interest between the Auditor and the Bank;

– Seek contingency fees; nor

– Have a direct financial or business interest or a material indirect financial or business interest in the Bank or any of its affiliates, or an employment relationship with the Bank or any of its affiliates.

     Under the policy, the Auditor shall not provide the following services:

• Bookkeeping or services relating to accounting records or financial statements of the Bank;

• Financial information systems design and implementation;

• Appraisal or valuation services and fairness opinions;

• Actuarial services;

• Internal audit outsourcing services;

• Management functions, including acting as an employee;

• Human resources;

• Broker-dealer, investment adviser or investment banking services;

• Legal services; or

• Expert services unrelated to the audit.

     In general terms, the permitted services are:

• Audit services to the Bank or an affiliate, covered by an engagement letter approved by the Audit Committee, financial and statutory audits of affiliates and services connected with the lodgement of statements or documents with ASX, ASIC, APRA, SEC or other regulatory or supervisory bodies;

• Services reasonably related to the performance of the audit services;

• Agreed upon procedures or comfort letters provided by the Auditor to third parties in connection with the Bank’s financing or related activities; and

• Other services pre-approved by the Audit Committee.

     Auditor

     Ernst & Young was appointed as the Auditor of the Bank at the 1996 Annual General Meeting and continues in that office.

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Corporate Governance (continued)

     The audit partner from Ernst & Young attends the Annual General Meetings of the Bank and is available to respond to shareholder audit related questions.

     The Bank currently requires that the partner managing the audit for the external Auditor be changed within a period of five years.

     The Chief Executive Officer is authorised to appoint and remove the chief internal audit executive only after consultation with the Audit Committee.

     The U.S. Securities and Exchange Commission (“SEC”) has requested that the Bank produce documents and information relating to all services provided by the Bank’s external auditors, Ernst & Young, since July 1, 2000, that may impact on the independence of the external auditors under U.S. rules. The Bank understands that the SEC has made similar requests to certain other Australian companies registered with the SEC and their accounting firms.

     The Bank has produced the documents and information requested, which include information regarding a number of engagements in each fiscal year involving the “secondment” of Ernst & Young personnel to entities in the Commonwealth Bank Group, including the internal audit department, and non-management assistance in relation to portions of the financial statements.

     In addition, Ernst & Young has reported to the Bank’s Audit Committee and to the SEC that, during the past three fiscal years, certain Ernst & Young professionals maintained deposit accounts or had other financial relationships with the Commonwealth Bank Group that are prohibited by the SEC’s auditor independence rules. Ernst & Young has advised that the deposit accounts and other financial relationships were generally small in size and that they have been terminated or rectified. Ernst & Young has also reported to the Bank’s Audit Committee regarding (i) certain small non-consolidated trusts managed by a subsidiary of the Bank in Fiji, where three Ernst & Young partners in Fiji owned a company that was appointed as trustee of the trusts prior to the Bank’s acquisition of the manager, and (ii) certain non-operating indirect subsidiaries of the Bank in the United Kingdom, where the Ernst & Young firm in Edinburgh was appointed as liquidator of those subsidiaries. Those activities may also be impermissible under the SEC rules.

     If the SEC determines that the above matters or any other services provided by Ernst & Young to the Commonwealth Bank Group did not comply with applicable rules, the SEC may impose or negotiate a broad range of possible sanctions. Examples of sanctions imposed on audit firms or other companies for breaches of the SEC’s rules have included fines, the entry of cease-and-desist orders or injunctions, or a requirement to engage a different accounting firm to perform procedures and report on aspects of the relevant accounts or financial statements that may have been impacted by auditor independence concerns. Although the Bank cannot predict the nature of any future action by the SEC, based on information currently available to the Bank, the Bank does not believe the outcome of the SEC’s ongoing inquiry will have a material adverse financial effect on the Commonwealth Bank Group.

Risk Management

     Risk Committee

     The Risk Committee oversees credit, market, and operational risks assumed by the Bank in the course of carrying on its business.

     The Committee considers the Group’s credit policies and ensures that management maintains a set of credit underwriting standards designed to achieve portfolio outcomes consistent with the Group’s risk/return expectations. In addition, the Committee reviews the Group’s credit portfolios and recommendations by management for provisioning for bad and doubtful debts.

     The Committee approves risk management policies and procedures for market, funding and liquidity risks incurred or likely to be incurred in the Group’s business. The Committee reviews progress in implementing management procedures and identifying new areas of exposure relating to market, funding and liquidity risk.

     In addition, the Committee ratifies the Group’s operational risk policies for approval by the Board and reviews and informs the Board of the measurement and management of operational risk. Operational risk is a basic line management responsibility within the Group consistent with the policies established by the Committee. A range of insurance policies maintained by the Group mitigates some operational risks.

     Framework

     The Bank has in place an integrated risk management framework to identify, assess, manage and report risks and risk adjusted returns on a consistent and reliable basis.

     A full description of the functions of the framework and the nature of the risks is set out in the section of the Annual Report entitled Integrated Risk Management and in Notes 14 and 39 to the Financial Statements.

Nominations Committee

     The Nominations Committee of the Board critically reviews, at least annually, the corporate governance procedures of the Bank and the composition and effectiveness of the Commonwealth Bank Board and the boards of the major wholly owned subsidiaries. The policy of the Board is that the Committee shall consist solely of independent non executive directors. The Chief Executive Officer attends the meeting by invitation.

     In addition to its role in proposing candidates for director appointment for consideration by the Board, the Committee reviews fees payable to non-executive directors and reviews, and advises the Board in relation to Chief Executive Officer succession planning.

Continuous Disclosure

     The Corporations Act 2001 and the ASX Listing Rules require that a company discloses to the market matters which could be expected to have a material effect on the price or value of the company’s securities. The Bank’s “Guidelines for Communication between the Bank and Shareholders” sets out the processes to ensure that shareholders and the market are provided with full and timely information about the Bank’s activities in compliance with continuous disclosure requirements. Management procedures are in place throughout the Commonwealth Bank Group to ensure that all material matters which may potentially require disclosure are promptly reported to the Chief Executive Officer, through established reporting lines, or as a part of the deliberations of the Bank’s Executive Committee. Matters reported are assessed and, where required by the Listing Rules, advised to the market. The Company Secretary is responsible for communications with the ASX and for ensuring that such information is not released to any person until the ASX has confirmed its release to the market.

Ethical Policies

     Values Statement

     The Bank demands the highest standards of honesty and loyalty from all its people and strong governance within the Bank.

     Our values statement – “trust, honesty and integrity” — reflects this standard.

     Statement of Professional Practice

     The Bank has adopted a code of ethics, known as a Statement of Professional Practice, which sets standards of behaviour required of all employees and directors including:

- To act properly and efficiently in pursuing the objectives of the Bank;

- To avoid situations which may give rise to a conflict of interest;

- To know and adhere to the Bank’s Equal Employment Opportunity policy and programs;

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Corporate Governance (continued)

- To maintain confidentiality in the affairs of the Bank and its customers; and

– To be absolutely honest in all professional activities.

     These standards are regularly communicated to staff. In addition, the Bank has established insider trading guidelines for staff to ensure that unpublished price sensitive information about the Bank or any other company is not used in an illegal manner.

     Code of Ethics

     The Bank has also adopted a Code of Ethics for Senior Financial Officials. The Code applies to the Chief Executive Officer, Chief Financial Officer and Executive General Manager, Group Finance. The Bank has adopted the Code to promote honest and ethical conduct; to promote full, fair, accurate, timely and understandable disclosure; to promote compliance with applicable laws; and to deter any wrongdoing.

     The Code of Ethics for Senior Financial Officials is attached as an exhibit to this annual report on Form 20-F and can be found on the Bank’s website at http://shareholders.commbank.com.au

Our People

     The Bank is committed to providing fair, safe, challenging and rewarding work, recognising the importance of attracting and retaining high quality staff and consequently, being in a position to provide good service to our customers.

     There are various policies and systems in place to enable achievement of these goals, including:

- Fair Treatment Review systems;

- Equal Employment Opportunity policy;

- Occupational Health and Safety Systems;

- Recruitment and selection policies;

- Performance feedback and review processes;

- Career assessment and succession planning;

- Employee share plan; and

- Supporting Professional Development.

Behaviour Issues

     The Bank is strongly committed to maintaining an ethical workplace, complying with legal and ethical responsibilities. Policy requires staff to report fraud, corrupt conduct, mal-administration or serious and substantial waste by others. A system has been established which allows staff to remain anonymous, if they wish for reporting of these matters.

     The policy has been extended to include reporting of auditing and accounting issues, which will be reported to the Chief Compliance Officer by the Chief Security Officer, who administers the reporting and investigation system. The Chief Security Officer reports any such matters to the Audit Committee, noting the status of resolution and actions to be taken.

Governance Philosophy

     The Board has consistently placed great importance on the governance of the Bank, which it believes is vital to the well-being of the corporation. The Bank has adopted a comprehensive framework of Corporate Governance Guidelines which are designed to properly balance performance and conformance and thereby allow the Bank to undertake, in an effective manner, the prudent risk-taking activities which are the basis of its business. The Guidelines and the practices of the Bank comply with all the current best practice recommendations set by the ASX Corporate Governance Council.

US Sarbanes-Oxley Act

     On 30 July 2002, a broad US financial reporting and corporate governance reform law, called the Sarbanes-Oxley Act of 2002 (“SOX Act”), was enacted. By its terms, this Act applies to the Group because it has certain securities registered with the SEC under the Securities Exchange Act of 1934 (“Exchange Act”).

     Under the Exchange Act, the Bank files periodic reports with the SEC, including an annual report on Form 20-F. Pursuant to the requirements of the SOX Act, the SEC has adopted rules requiring that the Group’s Chief Executive Officer and Chief Financial Officer personally provide certain certifications with respect to the disclosure contained in the annual report on Form 20-F.

     The SOX Act prohibits an issuer from extending or maintaining credit, arranging for the extension of credit, or renewing an extension of credit, in the form of a personal loan, to or for any director or executive officer of the Group, unless an exception is available. Loans maintained by the Group before 30 July 2002 are exempt so long as there is no material modification to any term of the extension of credit or any renewal of the extension of credit. Ordinary course lending that is considered “consumer credit” is in certain circumstances also exempt. Furthermore, in April 2004, the SEC adopted a rule exempting from the prohibition loans made by foreign banks meeting certain requirements. All loans to directors and executive officers of the Bank:

(1) were made in the ordinary course of business;

(2) were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons; and

(3) did not involve more than the normal risk of collectability or present other unfavorable features.

     Evaluation of disclosure controls and procedures

     Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Group’s management, have evaluated the effectiveness of the Group’s disclosure controls and procedures as of 30 June 2004. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that the Group’s disclosure controls and procedures are effective.

     Changes in internal control over financial reporting

     No changes in our internal controls over financial reporting occurred during the year ended 30 June 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Material changes in our internal controls over financial reporting are expected to occur from 1 July 2005 with the transition to International Financial Reporting Standards, refer to Note 1 (pp) to the Financial Statements.

Company Secretaries

     The details of the Bank’s company secretaries, including their experience and qualifications are set out below.

     John Hatton has been Company Secretary of the Commonwealth Bank since 1994.

     From 1985-1994, he was a solicitor with the Bank’s Legal Department.

     He has a law degree from Sydney University and was admitted as a solicitor in New South Wales. He is a Fellow of the Chartered Secretaries Australia and a Member of the Australian Institute of Company Directors.

     Henry Broekhuijse was appointed a Company Secretary to the Bank in August 2001.

     He joined the Commonwealth Bank Legal Department in January 1979 and has approximately 25 years experience as an in-house lawyer.

     He has a BA from Sydney University and an LLB from the University of New South Wales. He is a Member of the Law Society of NSW; Australian Corporate Lawyers Association; City of Sydney Law Society; and the Risk Management Association – Australia.

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Directors’ Details

     Set forth below is the Directors’ Report, as taken from the Bank’s Annual Report to shareholders.

     The names of the Directors holding office during the financial year and until the date of this report are set out below together with details of Directors’ experience, qualifications, special responsibilities and organisations in which each of the Directors has declared an interest.

John T Ralph, AC, Chairman

Mr Ralph has been a member of the Board since 1985 and Chairman since 1999. He is also Chairman of the Risk, Remuneration and Nominations Committees. He is a Fellow of the Australian Society of Certified Practising Accountants and has over fifty years’ experience in the mining and finance industries.

Deputy Chairman: Telstra Corporation Limited.

Other Interests: Melbourne Business School (Board of Management), Australian Foundation for Science (Chairman), Australian Farm Institute (Chairman), Australian Institute of Company Directors (Fellow), Australian Institute of Management (Fellow), Australian Academy of Science (Fellow), Australian Academy of Technological Science and Engineering (Fellow), Scouts Australia Victorian Branch (President) and St Vincent’s Institute Foundation (Patron).

Mr Ralph is a resident of Victoria. Age 71.

Mr Ralph retired from the Board on 5 November 2004.

John M Schubert, Deputy Chairman

Dr Schubert has been a member of the Board since 1991 and is Chairman of the Audit Committee and a member of the Risk and Nominations Committees. He holds a Bachelor’s Degree and PhD in Chemical Engineering and has experience in the petroleum, mining and building materials industries. Dr Schubert is the former Managing Director and Chief Executive Officer of Pioneer International Limited and the former Chairman and Managing Director of Esso Australia Ltd.

Chairman: Worley Group Limited and G2 Therapies Limited.

Director: BHP Billiton Limited, BHP Billiton plc, and Qantas Airways Limited.

Other Interests: Academy of Technological Science (Fellow), Great Barrier Reef Research Foundation (Deputy Chairman), AGSM Advisory Board (Member), and Business Council of Australia (Member).

Dr Schubert is a resident of New South Wales. Age 61.

Dr Schubert was appointed Chairman on 5 November 2004.

David V Murray, Managing Director and Chief Executive Officer

Mr Murray has been a member of the Board and Chief Executive Officer since June 1992. He holds a Bachelor of Business, Master of Business Administration, an honorary PhD from Macquarie University and has thirty-seven years’ experience in banking. Mr Murray is a member of the Risk Committee.

Director: Tara Anglican School for Girls Foundation Limited.

Other Interests: International Monetary Conference (Member), Asian Bankers’ Association (Member), Australian Bankers’ Association (Member), Asia Pacific Bankers’ Club (Member), Business Council of Australia (Member), and the Financial Sector Advisory Council (Member).

Mr Murray is a resident of New South Wales. Age 55.

N R (Ross) Adler, AO

Mr Adler has been a member of the Board since 1990 and is a member of the Audit and Risk Committees. He holds a Bachelor of Commerce and a Master of Business Administration. He has experience in various commercial enterprises, more recently in the oil and gas and chemical trading industries. He is the former Managing Director and Chief Executive Officer of Santos Limited.

Chairman: Austrade and Amtrade International Pty Ltd.

Director: Australian Institute of Commercialisation Ltd and AWL Enterprises Pty Ltd.

Other Interests: Adelaide Festival (Chairman), University of Adelaide (Council Member and Chairman of the Finance Committee) and Executive Member of the Australian Japan Business Co-operation Committee.

Mr Adler is a resident of South Australia. Age 59.

Mr Adler retired from the Board on 5 November 2004.

Reg J Clairs, AO

Mr Clairs has been a member of the Board since March 1999 and is a member of the Remuneration and Risk Committees. As the former Chief Executive Officer of Woolworths Limited, he had thirty-three years’ experience in retailing, branding and customer service.

Director: David Jones Ltd and The Cellnet Group.

Deputy Chairman: National Australia Day Council.

Other Interests: Institute of Company Directors (Member).

Mr Clairs is a resident of Queensland. Age 66.

A B (Tony) Daniels, OAM

Mr Daniels has been a member of the Board since March 2000 and is a member of the Remuneration and Risk Committees. He has extensive experience in manufacturing and distribution, being Managing Director of Tubemakers of Australia for eight years to December 1995, during a long career with that company. He has also worked with government in superannuation, competition policy and export facilitation.

Director: Australian Gas Light Company and O’Connell St Associates.

Other Interests: Australian Institute of Company Directors (Fellow) and Australian Institute of Management (Fellow).

Mr Daniels is a resident of New South Wales. Age 69.

Colin R Galbraith, AM

Mr Galbraith has been a member of the Board since June 2000 and is a member of the Risk Committee. He was previously a Director of Colonial Limited, appointed 1996. He is a partner of Allens Arthur Robinson, Lawyers.

Chairman: BHP Billiton Community Trust.

Director: GasNet Australia (Group) and OneSteel Limited.

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Directors’ Details (continued)

Other Interests: Council of Legal Education in Victoria (Honorary Secretary), CARE Australia (Director) and Royal Melbourne Hospital Neuroscience Foundation (Trustee).

Mr Galbraith is a resident of Victoria. Age 56.

S Carolyn H Kay

Ms Kay has been a member of the Board since March 2003 and is also a member of the Risk Committee. She holds Bachelor Degrees in Law and Arts and a Graduate Diploma in Management. She has extensive experience in international finance. She was a senior executive at Morgan Stanley in London and Melbourne for 10 years and prior to that she worked in international banking and finance both as a lawyer and banker in London, New York and Melbourne.

Director: Mayne Group Limited and Deputy Chair Victorian Funds Management Corporation.

Other Interests: Australian Institute of Company Directors (Fellow).

Ms Kay is resident in Victoria. Age 42.

Warwick G Kent, AO

Mr Kent has been a member of the Board since June 2000 and is a member of the Risk Committee. He was previously a Director of Colonial Limited, appointed 1998. He was Managing Director and Chief Executive Officer of BankWest until his retirement in 1997. Prior to joining BankWest, Mr Kent had a long and distinguished career with Westpac Banking Corporation.

Chairman: Coventry Group Limited and West Australian Newspapers Holdings Limited.

Director: Perpetual Trustees Australia Limited Group.

Other Interests: Walter and Eliza Hall Trust (Trustee), Australian Institute of Company Directors (Fellow), Australian Society of CPAs (Fellow), Australian Institute of Bankers (Fellow) and the Chartered Institute of Company Secretaries (Fellow).

Mr Kent is a resident of Western Australia. Age 68.

Fergus D Ryan

Mr Ryan has been a member of the Board since March 2000 and is a member of the Audit and Risk Committees. He has extensive experience in accounting, audit, finance and risk management. He was a senior partner of Arthur Andersen until his retirement in August 1999 after thirty three years with that firm including five years as Managing Partner Australasia. Until November 2002, he was Strategic Investment Co-ordinator and Major Projects Facilitator for the Commonwealth Government.

Member: Prime Minister’s Community Business Partnership and Council of the National Library of Australia.

Director: Australian Foundation Investment Company Limited and Clayton UTZ.

Other Interests: Committee for Melbourne (Patron), Pacific Institute (Counsellor) and Special Committee for Mature Age Workers (Chairman).

Mr Ryan is a resident of Victoria. Age 61.

Frank J Swan

Mr Swan has been a member of the Board since July 1997 and is a member of the Risk and Nominations Committees. He holds a Bachelor of Science degree and has twenty three years senior management experience in the food and beverage industries.

Chairman: Foster’s Group Limited and Centacare Catholic Family Services.

Director: National Foods Limited.

Other Interests: Institute of Directors (Fellow), Australian Institute of Company Directors (Fellow) and Australian Institute of Management (Fellow).

Mr Swan is a resident of Victoria. Age 63.

Barbara K Ward

Ms Ward has been a member of the Board since 1994 and is a member of the Audit and Risk Committees. She holds a Bachelor of Economics and Master of Political Economy and has experience in policy development and public administration as a senior ministerial adviser and experience in the transport and aviation industries, most recently as Chief Executive of Ansett Worldwide Aviation Services.

Chairperson: Country Energy.

Director: Lion Nathan Limited, Allens Arthur Robinson, Multiplex Limited and Multiplex Funds Management Limited.

Other Interests: Sydney Opera House Trust (Trustee), Australia Day Council of New South Wales (Member) and Australian Institute of Company Directors (Member).

Ms Ward is a resident of New South Wales. Age 50.

62

Directors’ Details (continued)

Directors’ Meetings

     The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors of the Commonwealth Bank during the financial year were:

DIRECTOR	DIRECTORS’ MEETINGS
	No. of Meetings Held(1)		No. of Meetings Attended
J T Ralph		11		11
J M Schubert		11		11
D V Murray		11		11
N R Adler		11		11
R J Clairs		11		11
A B Daniels		11		11
C R Galbraith		11		11
S C Kay		11		11
W G Kent		11		11
F D Ryan		11		10
F J Swan		11		9
B K Ward		11		9

⁽¹⁾ The number of meetings held during the time the Director held office during the year.

DIRECTOR	COMMITTEE MEETINGS
	Risk Committee				Audit Committee				Remuneration Committee
	No. of		No. of		No. of		No. of		No. of		No. of
	Meetings		Meetings		Meetings		Meetings		Meetings		Meetings
	Held(1)		Attended		Held(1)		Attended		Held(1)		Attended
J T Ralph		8		8						8		8
J M Schubert(2)		4		4		7		7
D V Murray		8		8
N R Adler(2)		4		3		7		7
R J Clairs(2)		4		4						8		8
A B Daniels(2)		4		4						8		8
C R Galbraith		8		8
S C Kay		8		8
W G Kent		8		8
F D Ryan(2)		4		4		7		7
F J Swan		8		7
B K Ward(2)		4		3		7		7

DIRECTOR	NOMINATIONS COMMITTEE
	No. of Meetings Held(1)		No. of Meetings Attended
J T Ralph		2		2
J M Schubert		2		2
D V Murray		2		2
F J Swan		2		2

(1)	The number of meetings held during the time the Director was a member of the relevant committee.
(2)	Directors appointed to Risk Committee in April 2004.

Principal Activities

     The Commonwealth Bank Group is one of Australia’s leading providers of integrated financial services including retail, business and institutional banking, superannuation, life insurance, general insurance, funds management, broking services and finance company activities. The principal activities of the Commonwealth Bank Group during the financial year were:

(i) Banking

     The Group provides a full range of retail banking services including housing loans, credit cards, personal loans, savings and cheque accounts, and demand and term deposits. The Group has leading domestic market shares in home loans, personal loans, retail deposits and discount stockbroking, and is one of Australia’s largest issuers of credit cards. The Group also offers a full range of commercial products including business loans, equipment and trade finance, and rural and agribusiness products. For our corporate and institutional clients, we offer a broad range of structured finance, equities and advisory solutions, financial markets and equity markets solutions, transactions banking, and merchant acquiring. The Group also has full service banking operations in New Zealand and Fiji. The Group has wholesale banking operations in London, New York, Hong Kong, Singapore and Tokyo.

(ii) Funds Management

     The Group is Australia’s largest funds manager and largest retail funds manager in terms of its total value of funds under administration. The Group’s funds management business is managed as part of the Investment and Insurance Services division. This business manages a wide range of wholesale and retail investment, superannuation and retirement funds. Investments are across all major asset classes including Australian and International shares, property, fixed interest and cash.

     The Group also has funds management businesses in New Zealand, UK and Asia.

(iii) Insurance

     The Group provides term insurance, disability insurance, annuities, master trusts, investment products and household general insurance.

63

Directors’ Details (continued)

     The Group is Australia’s third largest insurer based on life insurance assets held, and is Australia’s largest manager in retail superannuation, allocated pensions and annuities by funds under management.

     Life insurance operations are also conducted in New Zealand, where the Group has the leading market share, and throughout Asia and the Pacific.

     There have been no significant changes in the nature of the principal activities of the Group during the financial year.

Consolidated Profit

     Consolidated operating profit after tax and outside equity interests for the financial year ended 30 June 2004 was $2,572 million (2003: $2,012 million).

     The principal contributing factors to this profit increase were a growth in net interest income reflecting continued strong housing loan growth together with growth in commissions, and a decrease in charge for bad and doubtful debts. Operating expenses, excluding Which new Bank expenses have increased by 4% over the year, primarily due to salary increases and increases in volume related expenses. Funds management and insurance income rose, which reflects the effect of rising equity markets for most of the year and improved underwriting and claims management.

     On 19 September 2003, the Group launched its Which new Bank customer service vision. This is a three year transformation program and involves the Group in additional expenditure in the key areas of staff training and skilling, systems and process simplification, and technology. In the period to 30 June 2004 such expenses and provisions have totalled $749 million and principally comprise redundancies, expensing of previously capitalised software of $219 million, process improvements and branch refurbishment. The outstanding provision for Which new Bank costs at 30 June 2004 is $208 million.

Dividends

     The Directors have declared a fully franked (at 30%) final dividend of 104 cents per share amounting to $1,315 million. The dividend will be payable on 24 September 2004 to shareholders on the register at 5pm on 20 August 2004. Dividends paid since the end of the previous financial year:

• As declared in last year’s report, a fully franked final dividend of 85 cents per share amounting to $1,066 million was paid on 8 October 2003. The payment comprised cash disbursements of $865 million with $201 million being reinvested by participants through the Dividend Reinvestment Plan; and

• In respect of the current year, a fully franked interim dividend of 79 cents per share amounting to $996 million was paid on 30 March 2004. The payment comprised cash disbursements of $808 million with $188 million being reinvested by participants through the Dividend Reinvestment Plan.

• Additionally, quarterly dividends totalling $37 million for the year were paid on the PERLS preference shares; $15 million on the PERLS II (for distributions in March 2004 and June 2004); $40 million on the Trust Preferred Securities; and $9 million on the ASB Capital preference shares.

Review of Operations

     An analysis of operations for the financial year is set out in the Highlights on pages 6 to 9 and business analysis on pages 15 to 37.

Changes in State of Affairs

     During the year, the Group made significant progress in implementing a number of strategic initiatives under the Which new Bank program launched in September 2003.

     The program is designed to ensure a better service outcome for the Group’s customers.

     The major initiatives undertaken during the year included:

• Changes to the home loan process, which make applying for a new loan much simpler and easier;

• The refurbishment of 125 branches to a modern layout conducive to effective customer service;

• A continued emphasis on reducing customer waiting times and changes to frontline customer service roles designed to ensure a greater proportion of staff time is spent serving customers; and

• A restructure of funds management back office services to reduce costs and provide simpler processes.

     In May 2004 the Bank announced the merger of its Premium Financial Services and Institutional and Business Services divisions to form Premium Business Services. This merger did not result in any significant change in the nature of the business activities.

     There were no other significant changes in the state of affairs of the Group during the financial year.

Events Subsequent to Balance Date

     The Directors are not aware of any matter or circumstance that has occurred since the end of the financial year that has significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years.

Future Developments and Results

     Major developments, which may affect the operations of the Group in subsequent financial years, are referred to in the Chairman’s Statement on page 53. In the opinion of the Directors, disclosure of any further information on likely developments in operations would be unreasonably prejudicial to the interests of the Group.

Environmental Regulation

     The Bank and its controlled entities are not subject to any particular or significant environmental regulation under a law of the Commonwealth or of a State or Territory, but can incur environmental liabilities as a lender. The Bank has developed credit policies to ensure this is managed appropriately.

Directors’ Shareholdings

     Particulars of shares in the Commonwealth Bank or in a related body corporate are set out in a separate section at the end of the financial report titled ‘Shareholding Information’ which is to be regarded as contained in this report.

Options

     An Executive Option Plan (“EOP”) was approved by shareholders at the Annual General Meeting on 8 October 1996 and its continuation was further approved by shareholders at the Annual General Meeting on 29 October 1998. At the 2000 Annual General Meeting, the EOP was discontinued and shareholders approved the establishment of the Equity Reward Plan (“ERP”). The last grant of options to be made under the ERP was the 2001 grant, with options being granted on 31 October 2001, 31 January 2002 and 15 April 2002. A total of 3,007,000 options were granted by the Bank to 81 executives in the 2001 grant. During the financial year, the performance hurdles for the August 1999 and September 2000 EOP grants were met. During the financial year and for the period to the date of this report 1,837,600 shares were allotted by the Bank consequent to the exercise of options granted under the Executive Option Plan and Equity Reward Plan. Full details of the Plan are disclosed in Note 29 to the financial statements. No options have been allocated since the beginning of the 2001/02 financial year.

     The names of persons who currently hold options in the Plan are entered in the register of option holders kept by the Bank pursuant to Section 170 of the Corporations Act 2001. The register may be inspected free of charge.

64

Directors’ Details (continued)

     For details of the options previously granted to the Chief Executive Officer, being a director, refer to Note 44 to the Financial Statements.

Directors’ Interests in Contracts

     A number of Directors have given written notices, stating that they hold office in specified companies and accordingly are to be regarded as having an interest in any contract or proposed contract that may be made between the Bank and any of those companies.

Directors’ and Officers’ Indemnity

     Article 19 of the Commonwealth Bank’s Constitution provides: “To the extent permitted by law, the company indemnifies every director, officer and employee of the company against any liability incurred by that person (a) in his or her capacity as a director, officer or employee of the company and (b) to a person other than the company or a related body corporate of the company. The company indemnifies every director, officer and employee of the company against any liability for costs and expenses incurred by the person in his or her capacity as a director, officer or employee of the company (a) in defending any proceedings, whether civil or criminal, in which judgment is given in favour of the person or in which the person is acquitted or (b) in connection with an application, in relation to such proceedings, in which the Court grants relief to the person under the Corporations Act 2001, provided that the director, officer or employee has obtained the company’s prior written approval (which shall not be unreasonably withheld) to incur the costs and expenses in relation to the proceedings”.

     An indemnity for employees, who are not directors, secretaries or executive officers, is not expressly restricted in any way by the Corporations Act 2001.

     The Directors, as named on pages 61 to 62 of this report, and the Secretaries of the Commonwealth Bank, being J D Hatton and H J Broekhuijse are indemnified under Article 19 as are all the executive officers of the Commonwealth Bank.

     Deeds of Indemnity have been executed by Commonwealth Bank in terms of Article 19 above in favour of each Director.

Directors’ and Officers’ Insurance

     The Commonwealth Bank has, during the financial year, paid an insurance premium in respect of an insurance policy for the benefit of those named and referred to above and the directors, secretaries, executive officers and employees of any related bodies corporate as defined in the insurance policy. The insurance grants indemnity against liabilities permitted to be indemnified by the company under Section 199B of the Corporations Act 2001. In accordance with commercial practice, the insurance policy prohibits disclosure of the terms of the policy including the nature of the liability insured against and the amount of the premium.

Remuneration

     This report outlines the remuneration arrangements for Directors and executives of the Bank. In compiling this report, the Bank has taken into account the requirements of the Government’s Corporate Law and Economic Reform Program (“CLERP 9”) which is to take effect for reporting periods commencing from 1 July 2004. Whilst the Bank is not required to report under the new CLERP 9 framework for the year ended 30 June 2004, the Bank believes that this report will assist in meeting the intent of these reforms and will ensure that these requirements are met for future reporting periods.

     Remuneration Committee

     The Bank’s remuneration arrangements are overseen by the Remuneration Committee of the Board. The Committee considers changes in remuneration policy likely to have a material impact on the Bank and is informed of leadership performance, legislative compliance in employment issues, industrial agreements and incentive plans operating across the Bank.

     The Committee also considers senior appointments and remuneration arrangements for senior management. The remuneration arrangements for the CEO and his direct reports are approved by the full Board.

     The policy of the Board is that the Committee shall consist entirely of independent Non-Executive Directors. The Chief Executive Officer attends Committee meetings by invitation but does not attend in relation to matters that can affect him.

     The Committee engages an external consultant to advise it directly in relation to the remuneration of executives.

     Non-Executive Director Remuneration

     The Constitution and the ASX Listing Rules specify that the aggregate remuneration of Non-Executive Directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined, is divided between the directors as they agree. The policy of the Board is that the aggregate amount should be set at a level which provides the Bank with the necessary degree of flexibility to enable it to attract and retain the services of directors of the highest calibre. The latest determination was at the Annual General Meeting held on 28 October 1999 when shareholders approved an aggregate remuneration of $1,500,000 per year. The Nominations Committee reviews the fees payable to Non-Executive Directors. Directors’ fees do not incorporate any bonus or incentive element.

     In August 2000, the Board approved the introduction of the Non-Executive Directors’ Share Plan which requires the acquisition of shares by Non-Executive Directors at market price through the mandatory application of 20% of their annual fees. Details of this Plan were set out in the Notice of Meeting to the 2000 Annual General Meeting.

     Under the Directors’ Retirement Allowance Scheme, which was approved by shareholders at the 1997 Annual General Meeting, Directors accumulate a retirement benefit on a pro-rata basis to a maximum of four years’ total emoluments after twelve years’ service. No benefit accrues until the Director has served three years on the Board. In 2002 the Board decided to discontinue the Directors’ Retirement Allowance Scheme without affecting the entitlements of then existing Non-Executive Directors. After that time new Directors are not entitled to participate in the scheme. As part of a proposed arrangement relating to remuneration, the Board will be seeking shareholder approval at the 2004 Annual General Meeting to terminate accrual of further benefits under the Scheme and freeze the entitlements of current members until their respective retirements. This approach will result in remuneration arrangements being expressed in a more transparent manner which does not include retirement benefits (other than compulsory superannuation).

     Remuneration Principles and Structure

     The Bank’s remuneration systems complement and reinforce its leadership and succession planning systems.

     The Bank’s remuneration framework aims to reward executives with a mix of remuneration appropriate to their level in the organisation and incorporates a significant weighting towards variable (‘at risk’) pay linked to performance, both short term and long term. This focus aims to:

• Reward executives for bankwide, business unit and individual performance against targets set by reference to appropriate benchmarks;

• Align the interests of executives with those of shareholders;

• Link executive reward with the strategic goals and performance of the Bank; and

• Ensure total remuneration is competitive by market standards.

     In determining appropriate levels of executive remuneration, the Remuneration Committee engaged an external consultant to provide independent advice both in

65

Directors’ Details (continued)

the form of a written report detailing market levels of remuneration for comparable executive roles as well as the participation of the independent consultant in the meeting from which the Committee makes its recommendations to the Board.

     Remuneration and terms and conditions of employment are specified in an individual contract of employment with each executive which is signed by the executive and the Bank. Remuneration of the Bank’s executives consists of three key elements:

• Fixed Remuneration;

• Short Term Incentive (“STI”); and

• Long Term Incentive (“LTI”).

     The relationship of fixed remuneration and variable pay (potential short term and long term incentives) is established for each level of executive management by the Remuneration Committee.

     Currently, the variable component of remuneration is in the general range of around 35% to 80% of an executive’s total potential remuneration depending on their level in the organisation. As a result of the review with the external consultant of developments in the market, and benchmarking against peer organisations, the distribution of total potential remuneration for executives is being modified in the current year so as to increase the percentage for the STI component and decrease the percentage for the LTI component. For senior executives, including the CEO, the maximum STI potential available will generally be an amount equal to fixed remuneration.

     The structure for some specialists differs from that which applies generally to executive management. With specialists, a greater proportion of the variable component of remuneration may be in short term rather than long term incentives but the overall mix of remuneration is still heavily weighted towards ‘at risk’ pay.

     Fixed Remuneration

     Fixed remuneration is competitively set so that the Bank can attract, motivate and retain high calibre local and international executive staff.

     Fixed remuneration is reviewed annually by the Remuneration Committee through a process that considers bankwide, business unit and individual performance, relevant comparative remuneration in the market and internal and, where appropriate, external advice on policies and practices. As noted above, the Committee has access to external advice independent of management.

     Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles) as well as employer contributions to superannuation.

     Variable Pay – Short Term Incentive (“STI”)

     Actual STI payments for executives depend on the extent to which operating targets set at the beginning of the financial year are met.

     These targets consist of a number of Key Result Areas (“KRAs”) covering both financial and non-financial measures of performance. Included are measures such as contribution to net profit after tax, customer service, risk management, product management, and leadership/team contribution.

     Depending on the executive’s level within the organisation, any actual STI payments received are based on a combination of bankwide, business unit and individual performance.

     On an annual basis, after consideration of performance against KRAs, an overall performance rating for the Bank and each individual business unit is approved by the Remuneration Committee. Individual performance is assessed by the executive’s manager based on the Bank’s performance management system.

     Executives who are not meeting the expectations of their role will generally not receive a payment.

     The aggregate of annual STI payments available for executives across the Bank is subject to the approval of the Remuneration Committee. In the case of the Chief Executive Officer and his senior direct reports, individual payments are subject to the approval of the Board.

     STI payments to executives are usually delivered in two components:

• Fifty percent made as an immediate cash payment; and

• Fifty percent deferred in the form of shares in the Bank.

     Shares are acquired under the mandatory component of the Bank’s Equity Participation Plan, more details of which may be found in Note 29 to the Financial Statements. The shares acquired vest in two equal instalments of one and two years respectively. Dividends on the shares are not paid to the executive unless and until the shares vest. Generally, the executive will need to be an employee of the Bank at the relevant vesting date to receive the shares.

     Variable Pay – Long Term Incentive (“LTI”)

     LTI grants to executives are delivered in the form of Reward Shares under the Bank’s Equity Reward Plan (“ERP”).

     LTI grants are only made to executives who are able to influence the generation of shareholder wealth and thus have a direct impact on the Bank’s performance against the relevant hurdle. Participation is thus restricted to executives who, in a reporting sense, are no more than three levels removed from the Chief Executive Officer.

     The quantum of grants made to each executive depends on their level within the organisation and has regard to the desired mix between fixed remuneration, short term and long term incentive as well as the performance and potential of the individual executive.

     No value will accrue to the executive unless the Bank’s Total Shareholder Return (“TSR”) at least meets the median of a peer comparator group of companies. To receive the full value of the LTI grant, the Bank’s performance must be in the top quartile of the peer group. The table over the page provides a summary of the ERP grants that were in operation during the 2003/04 year.

66

Directors’ Details (continued)

	2000 Grant	2001 Grant	2002 Grant	2003 Grant
Commencement Date	13 Sep 2000	3 Sep 2001	2 Sep 2002	1 Sep 2003
First Possible Vesting Date	14 Sep 2003	4 Sep 2004	3 Sep 2005	2 Sep 2006
Final Possible Vesting Date	13 Sep 2005	3 Sep 2006	2 Sep 2007	1 Sep 2008

Performance Hurdle TSR vs Peer Group. If the performance hurdle is not reached after three years the options may nevertheless be exercisable or the shares vest, only where the hurdle is subsequently reached within five years from the commencement date. TSR vs Peer Group. Where the rating is at least at the 50th percentile on the third anniversary of the grant, the shares will vest at a time nominated by the executive, within the trading windows, over the next two years. The vesting percentage will be at least that achieved on the third anniversary of the grant and the executive will be able to delay vesting until a subsequent half yearly window prior to the fifth anniversary of the grant. The vesting percentage will be calculated by reference to the rating at that time.

Where the rating is below the 50th percentile on the third anniversary of grant, the shares can still vest if the rating reaches the 50th percentile prior to the fifth anniversary, but the maximum vesting will be 50%.

Vesting Scale < Weighted Average of Peers = 0%
> Weighted Average of Peers = 100% < 50^th percentile = NIL
50^th – 67^th percentile = 50% - 75%
68^th – 75^th percentile = 76% - 100%

Status as at 30 June 2004 Vested on 31 Mar 04 Not yet vested Not yet vested Not yet vested

Peer Group	•	Adelaide Bank
	•	Australia & New Zealand Banking Group
(GIO and BankWest were	•	AMP
included prior to 19/01/00	•	AXA
and 26/08/03 respectively)	•	Bank of Queensland
	•	Bendigo Bank
	•	IAG
	•	Macquarie Bank
	•	National Australia Bank
	•	St George
	•	Suncorp-Metway
	•	QBE Insurance
	•	Westpac Banking Corporation

     The use of a relative TSR based hurdle is currently market best practice as it ensures an alignment between comparative shareholder return and reward for executives.

     In assessing whether the performance hurdles for each grant have been met, the Bank receives independent data from Standard & Poors which provides both the Bank’s TSR growth from the commencement of each grant and that of the peer group (excluding the Bank). The Bank’s performance against the hurdle is then determined as follows:

• For grants prior to 2002, the TSR of each company in the peer group is weighted by market capitalisation to form an index against which the Bank’s TSR is compared; and

• For grants in 2002 and 2003, each company in the peer group and the Bank is ranked in order of TSR growth from the commencement of each grant. The Bank’s percentile ranking is determined by aggregating the weighting within the peer group (based on market capitalisation) of each company ranked below the Bank.

     The peer group chosen for comparison reflects the Bank’s current business mix.

     Further details of the ERP may be found in Note 29 to the Financial Statements.

     Severance Arrangements

     The Bank’s executive contracts generally provide for severance payments of up to six months in the case of retrenchment. The contracts generally provide for a four week notice period.

     On exit from the Bank, executives are entitled to receive their statutory entitlements of accrued annual and long service leave as well as accrued superannuation benefits.

     Executives who leave the Bank during a given performance year (i.e. 1 July to 30 June) will generally not receive an STI payment for that year except in the circumstances of retrenchment, retirement or death. In those circumstances a pro-rated payment may be made based on the length of service during the performance year.

     Deferred shares from previous STI grants are usually forfeited where the executive resigns or is dismissed. In circumstances of retrenchment, retirement and death any unvested shares will generally vest immediately.

     LTI grants are generally forfeited where the executive resigns or is dismissed. In circumstances of retrenchment, retirement or death the executive or their estate may, at Board discretion, retain a pro-rated grant of long term incentives. Vesting of any long term incentives retained by the executive will still be subject to the performance hurdle relevant to that grant.

     Chief Executive Officer Remuneration

     The remuneration of Mr Murray (Chief Executive Officer) is fixed by the Board, pursuant to the Constitution, as part of the terms and conditions of his appointment. Those terms and conditions are established in a contract of employment with Mr Murray which was effective from 2 July 2001, with remuneration subject to review, from time to time, by the Board.

     Mr Murray’s remuneration arrangements are in line with other executives except in relation to the need to seek shareholder approval of LTI grants.

     At the 2004 Annual General Meeting (“AGM”), the Board will be seeking the approval of shareholders for a

67

Directors’ Details (continued)

maximum of 250,000 shares to be allocated to Mr Murray under the ERP in two tranches prior to the 2006 AGM. Mr Murray was granted 110,000 shares in 2002 and 90,000 shares in 2003 from the 200,000 shares approved at the 2001 AGM. At the 2001 AGM, shareholders also approved 1,000,000 options to be granted to Mr Murray. In line with the Bank’s decision to cease granting options to executives in 2002 none of the 1,000,000 options approved by shareholders were allocated and it is not intended to allocate these options.

     The severance arrangements in Mr Murray’s contract, other than for misconduct, provide for a notice period of six months and a pro-rata payment of the average of the previous three years short term incentive payment, payable in the event of termination by the Bank, after 1 May but before 30 June each year. In such circumstances, Mr Murray may exercise all vested options and obtain vested shares (including those that vest within two years from the Termination Date) within a period of three years from the Termination Date.

     Individual Remuneration details for Directors and Specified Executives

     The CLERP 9 reforms mentioned earlier in this report require that individual remuneration details of Directors and Specified Executives be included in this report. These requirements duplicate those of Accounting Standard AASB 1046 which requires these same details to be set out in the notes to the accounts. To avoid duplication, individual remuneration details of Directors and Specified Executives are set out in Note 44 to the financial statements.

Incorporation of Additional Material

     This report incorporates the Financial Highlights, Business Analysis, Corporate Governance and Shareholding Information sections of this Annual Report.

Roundings

     The amounts contained in this report and the financial statements have been rounded to the nearest million dollars unless otherwise stated, under the option available to the Company under ASIC Class Order 98/100 (as amended by ASIC Class Order 04/667).

     Signed in accordance with a resolution of the Directors.

68

Five Year Financial Summary (Australian GAAP)

	2004			2003			2002			2001			2000
	$M			$M			$M			$M			$M
Financial Performance
Net interest income		5,410			5,026			4,710			4,474			3,719
Other operating income		5,081			4,373			4,358			4,350			2,420
Total operating income		10,491			9,399			9,068			8,824			6,139
Charge for bad and doubtful debts		276			305			449			385			196
Operating expenses:
Comparable business		5,500			5,312			5,201			5,170			3,407
Initiatives including Which New Bank		749			239			—			—			—
		6,249			5,551			5,201			5,170			3,407
Operating profit before goodwill amortisation, appraisal value uplift, abnormal items and income tax expense		3,966			3,543			3,418			3,269			2,536
Income tax expense		(1,262	)		(958	)		(916	)		(993	)		(820	)
Outside equity interests		(9	)		(6	)		(1	)		(14	)		(38	)
Net profit after tax (“cash basis”)		2,695			2,579			2,501			2,262			1,678
Abnormal items		—			—			—			—			967
Income tax credit on abnormal items		—			—			—			—			20
Appraisal value uplift/(reduction)		201			(245	)		477			474			92
Goodwill amortisation		(324	)		(322	)		(323	)		(338	)		(57	)
Operating profit after income tax attributable to members of the Bank		2,572			2,012			2,655			2,398			2,700
Contributions to profit (after tax)
Banking		2,176			2,234			2,067			1,793			1,513
Funds management		268			216			368			323			36
Insurance		251			129			66			146			129
Profit on operations (“cash basis”)		2,695			2,579			2,501			2,262			1,678
Goodwill amortisation		(324	)		(322	)		(323	)		(338	)		(57	)
Appraisal value uplift/(reduction)		201			(245	)		477			474			92
Abnormal income/(expense) after tax		—			—			—			—			987
Operating profit after income tax		2,572			2,012			2,655			2,398			2,700
Financial Position
Loans, advances and other receivables		189,391			160,347			147,074			136,059			132,263
Total assets		305,995			265,110			249,648			230,411			218,259
Deposits and other public borrowings		163,177			140,974			132,800			117,355			112,594
Total liabilities		281,110			242,958			228,592			210,563			199,824
Shareholders’ equity		22,405			20,024			19,030			18,393			17,472
Net tangible assets		17,700			14,995			13,639			12,677			11,942
Risk weighted assets		169,321			146,808			141,049			138,383			128,484
Average interest earning assets		214,187			188,270			170,634			160,607			129,163
Average interest bearing liabilities		197,532			174,737			157,105			145,978			117,075
Assets (on balance sheet)
Australia		252,652			221,248			208,673			196,918			187,452
New Zealand		35,059			27,567			24,579			20,208			16,661
Other		18,284			16,295			16,396			13,285			14,146
Total Assets		305,995			265,110			249,648			230,411			218,259

69

Five Year Financial Summary (Australian GAAP) continued

	2004			2003			2002			2001			2000
Shareholder Summary
Dividends per share (cents) — fully franked		183			154			150			136			130
Dividend cover (times) — statutory		1.1			0.9			1.4			1.4			1.2
Dividend cover (times) — cash		1.1			1.3			1.3			1.3			1.6
Earnings per share (cents)
Basic
before abnormal items		196.9			157.4			209.6			189.6			184.8
after abnormal items		196.9			157.4			209.6			189.6			291.2
cash basis(1)		206.6			202.6			197.3			178.8			181.0
Fully Diluted
before abnormal items		196.8			157.3			209.3			189.3			184.4
after abnormal items		196.8			157.3			209.3			189.3			290.7
cash basis(1)		206.5			202.5			197.0			178.6			180.6
Dividend payout ratio (%)(2)
before abnormal items		93.5			97.7			71.7			71.2			83.5
after abnormal items		93.5			97.7			71.7			71.2			53.0
cash basis(1)		89.1			75.9			76.2			75.5			85.3
Net tangible assets per share ($)		12.2			11.4			10.3			9.6			9.2
Weighted average number of shares (basic) (m)		1,256			1,253			1,250			1,260			927
Weighted average number of shares (fully diluted)(m)		1,257			1,254			1,252			1,262			929
Number of shareholders		714,901			746,073			722,612			709,647			788,791
Share prices for the year ($)
Trading high		33.54			32.75			34.94			34.15			27.95
Trading low		27.00			23.05			24.75			26.18			22.54
End (closing price)		32.58			29.55			32.93			34.15			27.69
Performance Ratios (%)
Return on average shareholders’ equity(3)(4)
before abnormal items		13.0			10.7			14.7			13.5			22.1
after abnormal items		13.0			10.7			14.7			13.5			34.8
cash basis		13.2			13.3			13.1			12.0			19.1
Return on average total assets(3)
before abnormal items		0.9			0.8			1.1			1.1			1.1
after abnormal items		0.9			0.8			1.1			1.1			1.7
cash basis		0.9			1.0			1.0			1.0			0.9
Capital adequacy — Tier 1		7.43			6.96			6.78			6.51			7.49
Capital adequacy — Tier 2		3.93			4.21			4.28			4.18			4.75
Deductions		(1.11	)		(1.44	)		(1.26	)		(1.53	)		(2.49	)
Capital adequacy – Total		10.25			9.73			9.80			9.16			9.75
Net interest margin		2.53			2.67			2.76			2.78			2.88
Other Information (numbers)
Full time staff equivalent(5)		36,296			35,845			37,245			37,460			39,631
Branches/service centres (Australia)		1,012			1,014			1,020			1,066			1,441
Agencies (Australia)		3,866			3,893			3,936			3,928			4,020
ATMs (Proprietary)		3,109			3,116			3,049			2,931			3,092
EFTPOS terminals		126,049			129,959			126,613			122,074			116,064
EzyBanking		815			760			730			659			603
Productivity
Total Operating Income per full-time (equivalent) employee ($)		278,047			262,212			262,856			235,558			198,479
Staff Expense/Total Operating Income (%)		24.3			26.1			26.4			26.7			27.8
Total Operating Expenses(6)/Total Operating Income (%)		59.6			59.1			57.4			58.6			57.2

⁽¹⁾  ‘Cash earnings’ for the purpose of these financial statements is defined as net profit after tax and before abnormal items, goodwill amortisation and life insurance and funds management appraisal value uplift.

⁽²⁾  Dividends paid divided by earnings.

⁽³⁾  Calculations based on operating profit after tax and outside equity interests applied to average shareholders’ equity/average total assets.

⁽⁴⁾  2004 and 2003 shareholders’ equity includes retained earnings before provision for final dividend of $ 1,315 million and $1,066 million respectively. Prior periods’ return on average shareholders’ equity – cash basis have been restated to exclude the provision for final dividend.

⁽⁵⁾  Staff numbers include all permanent full time staff, part time staff equivalents and external contractors employed by third party agencies.

⁽⁶⁾  Total Operating Expenses excluding goodwill amortisation and charge for bad and doubtful debts. Note the different business mix following the Colonial acquisition impacts comparison with prior years.

70

Financial Statements

Statements of Financial Performance		53
Statements of Financial Position		54
Statements of Changes in Shareholders’ Equity		55
Statements of Cash Flows		56
Notes to the Financial Statements		57
1.	Summary of Significant Accounting Policies	57
2.	Operating Profit	65
3.	Revenue from Ordinary Activities	67
4.	Average Balances and Related Interest	68
5.	Income Tax Expense	72
6.	Dividends	74
7.	Earnings Per Share	75
8.	Cash and Liquid Assets	75
9.	Receivables from Other Financial Institutions	75
10.	Trading Securities	76
11.	Investment Securities	77
12.	Loans, Advances and Other Receivables	80
13.	Provisions for Impairment	83
14.	Credit Risk Management	87
15.	Asset Quality	94
16.	Insurance Investment Assets	99
17.	Deposits with Regulatory Authorities	99
18.	Shares in and Loans to Controlled Entities	99
19.	Property, Plant and Equipment	100
20.	Intangible Assets	102
21.	Other Assets	103
22.	Deposits and Other Public Borrowings	104
23.	Payables to Other Financial Institutions	105
24.	Income Tax Liability	105
25.	Other Provisions	106
26.	Debt Issues	107
27.	Bills Payable and Other Liabilities	109
28.	Loan Capital	110
29.	Share Capital	112
30.	Outside Equity Interests	118
31.	Capital Adequacy	119
32.	Maturity Analysis of Monetary Assets and Liabilities	123
33.	Financial Reporting by Segments	125
34.	Life Insurance Business	129
35.	Remuneration of Auditors	135
36.	Commitments for Capital Expenditures Not Provided for in the Accounts	135
37.	Lease Commitments - Property, Plant and Equipment	135
38.	Contingent Liabilities and Assets	136
39.	Market Risk	138
40.	Superannuation Commitments	149
41.	Controlled Entities	150
42.	Investments in Associated Entities and Joint Ventures	153
43.	Standby Arrangements and Unused Credit Facilities	153
44.	Director and Executive Disclosures	154
45.	Related Party Disclosures	164
46.	Statement of Cash Flow	165
47.	Disclosures about Fair Value of Financial Instruments	167
Directors’ Declaration		169
Independent Audit Report		170
Shareholding Information		171
International Representation		175

71

Statements of Financial Performance
for the year ended 30 June 2004

									GROUP						BANK
			2004			2003			2002			2004			2003
	Note		$M			$M			$M			$M			$M
Interest income		2		13,287			11,528			10,455			11,053			9,477
Interest expense		2		7,877			6,502			5,745			6,649			5,336
Net interest income				5,410			5,026			4,710			4,404			4,141
Other income:
Revenue from sale of assets				943			128			718			1,398			67
Written down value of assets sold				(874	)		(106	)		(628	)		(1,823	)		(52	)
Other				2,777			2,605			2,462			3,737			3,339
Net banking operating income				8,256			7,653			7,262			7,716			7,495
Funds management fee income including premiums		3		1,175			1,149			1,083			—			—
Investment revenue		3		1,967			8			(393	)		—			—
Claims and policyholder liability expense				(1,809	)		(91	)		457			—			—
Net funds management operating income				1,333			1,066			1,147			—			—
Premiums and related revenue		3		1,012			1,131			866			—			—
Investment revenue		3		840			620			293			—			—
Claims and policyholder liability expense				(950	)		(1,071	)		(500	)		—			—
Insurance margin on services operating income				902			680			659			—			—
Total net operating income before appraisal value uplift/(reduction)				10,491			9,399			9,068			7,716			7,495
Charge for bad and doubtful debts		2,13		276			305			449			263			266
Operating expenses:
Comparable business		2		5,500			5,312			5,201			4,226			3,997
Initiatives including Which new Bank(1)		2		749			239			—			725			239
		2		6,249			5,551			5,201			4,951			4,236
Appraisal value uplift/(reduction)		34		201			(245	)		477			—			—
Goodwill amortisation				(324	)		(322	)		(323	)		(186	)		(186	)
Profit from ordinary activities before income tax				3,843			2,976			3,572			2,316			2,807
Income tax expense		5		1,262			958			916			669			708
Profit from ordinary activities after income tax				2,581			2,018			2,656			1,647			2,099
Outside equity interests in net profit				(9	)		(6	)		(1	)		—			—
Net profit attributable to members of the Bank				2,572			2,012			2,655			1,647			2,099
Foreign currency translation adjustment				(8	)		(129	)		(146	)		10			(7	)
Revaluation of properties				54			3			(1	)		43			—
Total valuation adjustments				46			(126	)		(147	)		53			(7	)
Total changes in equity other than those resulting from transactions with owners as owners				2,618			1,886			2,508			1,700			2,092
			Cents per share
Earnings per share based on net profit distributable to members of the Bank:
Basic		7		196.9			157.4			209.6
Fully diluted		7		196.8			157.3			209.3
Dividends per share attributable to shareholders of the Bank:
Ordinary shares		6		183			154			150
Preference shares (issued 6 April 2001)		6		1,065			1,019			970
Other equity instruments (issued 6 August 2003)				7,306			—			—
Other equity instruments (issued 6 January 2004)				402			—			—

⁽¹⁾  June 2004 results reflects the Which new Bank program, while prior year includes strategic initiatives undertaken and the cost of the June 2002 ESAP paid in October 2002.

72

Statements of Financial Position
as at 30 June 2004

					GROUP				BANK
			2004		2003		2004		2003
	Note		$M		$M		$M		$M
Assets
Cash and liquid assets		8		6,453		5,575		6,485		5,356
Receivables due from other financial institutions		9		8,369		7,066		7,068		5,436
Trading securities		10		14,896		10,435		12,877		8,072
Investment securities		11		11,447		11,036		6,626		6,831
Loans, advances and other receivables		12		189,391		160,347		154,139		131,537
Bank acceptances of customers				15,019		13,197		15,160		13,521
Insurance investment assets		16		28,942		27,835		—		—
Deposits with regulatory authorities		17		38		23		4		2
Shares in and loans to controlled entities		18		—		—		23,677		23,559
Property, plant and equipment		19		1,204		821		722		608
Investment in associates		42		239		287		220		252
Intangible assets		20		4,705		5,029		2,522		2,708
Other assets		21		25,292		23,459		18,849		16,748
Total Assets				305,995		265,110		248,349		214,630
Liabilities
Deposits and other public borrowings		22		163,177		140,974		142,469		122,946
Payables due to other financial institutions		23		6,641		7,538		6,611		7,504
Bank acceptances				15,019		13,197		15,160		13,521
Due to controlled entities				—		—		14,176		11,308
Provision for dividend		6		14		12		13		12
Income tax liability		24		811		876		690		527
Other provisions		25		997		819		819		684
Insurance policyholder liabilities		34		24,638		23,861		—		—
Debt issues		26		44,042		30,629		24,449		16,684
Bills payable and other liabilities		27		19,140		19,027		17,888		17,456
				274,479		236,933		222,275		190,642
Loan Capital		28		6,631		6,025		7,338		5,937
Total Liabilities				281,110		242,958		229,613		196,579
Net Assets				24,885		22,152		18,736		18,051
Shareholders’ Equity
Share capital:
Ordinary share capital		29		13,359		12,678		13,359		12,678
Preference share capital		29		687		687		687		687
Other equity instruments		29		1,573		—		737		—
Reserves				3,946		3,850		2,148		2,095
Retained profits				2,840		2,809		1,805		2,591
Shareholders’ equity attributable to members of the Bank				22,405		20,024		18,736		18,051
Outside equity interests:
Controlled entities		30		304		304		—		—
Insurance statutory funds and other funds		30		2,176		1,824		—		—
Total outside equity interests				2,480		2,128		—		—
Total Shareholders’ Equity				24,885		22,152		18,736		18,051

73

Statements of Changes in Shareholders’ Equity
for the year ended 30 June 2004

									GROUP						BANK
			2004			2003			2002			2004			2003
	Note		$M			$M			$M			$M			$M
Ordinary Share Capital		29
Opening balance				12,678			12,665			12,455			12,678			12,665
Buy back				(213	)		—			—			(213	)		—
Buy back for dividend reinvestment plan				—			(361	)		(158	)		—			(361	)
Dividend reinvestment plan				389			361			329			389			361
Employee share ownership schemes				38			13			39			38			13
Share purchase plan				467			—			—			467			—
Closing balance				13,359			12,678			12,665			13,359			12,678
Preference Share Capital		29
Opening balance				687			687			687			687			687
Closing balance				687			687			687			687			687
Other Equity Instruments		29
Opening balance				—			—			—			—			—
Issue of instruments				1,573			—			—			737			—
Closing balance				1,573			—			—			737			—
Retained profits
Opening balance				2,809			1,452			1,160			2,591			1,402
Reversal of provision for final dividend at 30 June 2002 (on adoption of AASB 1044)				—			1,027			—			—			1,027
Share buy back				(319	)		—			—			(319	)		—
Transfers from reserves				142			250			250			—			—
Operating profit attributable to members of Bank				2,572			2,012			2,655			1,647			2,099
Total available for appropriation				5,204			4,741			4,065			3,919			4,528
Transfers to reserves				(201	)		—			(700	)		—			(9	)
Interim dividend — cash component				(808	)		(699	)		(693	)		(808	)		(699	)
Interim dividend — dividend reinvestment plan				(188	)		(166	)		(159	)		(188	)		(166	)
Provision for final dividend — cash component				—			—			(1,027	)		—			—
Payment of final dividend — cash component				(865	)		(832	)		—			(865	)		(832	)
Payment of final dividend — dividend reinvestment plan				(201	)		(195	)		—			(201	)		(195	)
Other dividends				(101	)		(40	)		(34	)		(52	)		(36	)
Closing balance				2,840			2,809			1,452			1,805			2,591
Reserves
General Reserve
Opening balance				3,751			3,998			3,548			570			570
Appropriation from profits				201			—			700			—			—
Transfer to retained profits				(142	)		(247	)		(250	)		—			—
Closing balance				3,810			3,751			3,998			570			570
Capital Reserve
Opening balance				289			289			289			1,531			1,531
Reversal of revaluation deficit on sale of property				(9	)		—			—			—			—
Closing balance				280			289			289			1,531			1,531
Asset Revaluation Reserve
Opening balance				7			4			5			—			—
Revaluation of investments and properties				54			3			(1	)		43			—
Closing balance				61			7			4			43			—
Dividend Reinvestment Plan Reserve
Opening balance				—			—			168			—			—
Conversion to ordinary share capital and cash dividend				—			—			(168	)		—			—
Closing balance				—			—			—			—			—
Foreign Currency Translation Reserve
Opening balance				(197	)		(65	)		81			(6	)		(8	)
Currency translation adjustments				(8	)		(129	)		(146	)		10			(7	)
Transfer to retained profits				—			(3	)		—			—			9
Closing balance				(205	)		(197	)		(65	)		4			(6	)
Total Reserves				3,946			3,850			4,226			2,148			2,095
Shareholders’ Equity Attributable to Members of the Bank				22,405			20,024			19,030			18,736			18,051

74

Statements of Cash Flows
for the year ended 30 June 2004

										GROUP						BANK
				2004			2003			2002			2004			2003
	Note			$M			$M			$M			$M			$M
Cash Flows From Operating Activities
Interest received					13,101			11,452			10,683			11,045			9,204
Dividends received					6			4			5			798			579
Interest paid					(7,543	)		(6,455	)		(5,805	)		(6,351	)		(5,248	)
Other operating income received					3,410			3,135			3,706			2,375			2,668
Expenses paid					(5,529	)		(5,438	)		(5,366	)		(4,459	)		(4,233	)
Income taxes paid					(1,366	)		(1,258	)		(926	)		(886	)		(838	)
Net increase in trading securities					(4,324	)		(2,484	)		(1,159	)		(4,672	)		(1,814	)
Life insurance:
Investment income					841			644			870			—			—
Premiums received(1)					3,562			4,130			5,689			—			—
Policy payments(1)					(4,529	)		(5,855	)		(5,704	)		—			—
Net Cash provided by/(used in) Operating Activities		46	(c)		(2,371	)		(2,125	)		1,993			(2,150	)		318
Cash Flows from Investing Activities
Payments for acquisition of entities and management rights					—			(173	)		(57	)		—			—
Proceeds from disposal of entities and businesses		46	(f)		63			33			314			885			—
Disposal of shares in other companies					114			—			—			114			—
Net movement in investment securities:
Purchases					(25,587	)		(18,055	)		(23,488	)		(15,157	)		(15,761	)
Proceeds from sale					697			23			295			390			31
Proceeds at or close to maturity					24,407			17,719			22,192			14,904			16,449
Withdrawal (lodgement) of deposits with regulatory authorities					(15	)		66			(28	)		(2	)		52
Net increase in loans, advances and other receivables					(29,328	)		(13,577	)		(11,702	)		(22,873	)		(11,022	)
Net amounts paid to controlled entities					—			—			—			1,412			1,027
Proceeds from sale of property, plant and equipment					69			72			109			7			64
Purchase of property, plant and equipment					(536	)		(143	)		(164	)		(175	)		(103	)
Net decrease/(increase) in receivables due from other financial institutions not at call					292			513			(855	)		(344	)		731
Net decrease/(increase) in securities purchased under agreements to resell					(1,023	)		50			(1,376	)		(1,039	)		(298	)
Net decrease/(increase) in other assets					(1,461	)		301			(241	)		(1,537	)		125
Life insurance:
Purchases of investment securities					(20,286	)		(13,091	)		(13,926	)		—			—
Proceeds from sale/maturity of investment securities					21,500			14,628			14,618			—			—
Net Cash used in Investing Activities					(31,094	)		(11,634	)		(14,309	)		(23,415	)		(8,705	)
Cash Flows from Financing Activities
Buy back of shares					(532	)		—			—			(532	)		—
Proceeds from issue of shares (net of costs)					505			13			39			505			13
Proceeds from issue of preference shares to outside equity interests					—			182			—			—			—
Proceeds from issue of other equity instruments (net of costs)					1,573			—			—			737			—
Net increase in deposits and other borrowings					21,997			5,129			15,135			19,254			3,004
Net movement in debt issues					13,413			7,054			(967	)		7,765			4,931
Dividends paid (including DRP)					(1,774	)		(1,933	)		(1,661	)		(1,726	)		(1,929	)
Net movements in other liabilities					(242	)		(926	)		1,809			113			(1,024	)
Net increase/(decrease) in payables due to other financial institutions not at call					(929	)		(796	)		211			(909	)		(869	)
Net increase in securities sold under agreements to repurchase					206			3,046			310			269			3,045
Issue of loan capital					985			901			—			1,784			600
Redemptions of loan capital					(317	)		—			—			(317	)		—
Other					(2	)		19			(100	)		(16	)		(15	)
Net Cash provided by Financing Activities					34,883			12,689			14,776			26,927			7,756
Net Increase/(Decrease) in Cash and Cash Equivalents					1,418			(1,070	)		2,460			1,362			(631	)
Cash and Cash Equivalents at beginning of period					1,428			2,498			38			277			908
Cash and Cash Equivalents at End of Period		46	(a)		2,846			1,428			2,498			1,639			277

⁽¹⁾  These were gross premiums and policy payments before splitting between policyholders and shareholders.

     It should be noted that the Group does not use this accounting Statement of Cash Flows in the internal management of its liquidity positions.

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Notes to the financial statements

NOTE 1 Summary of Significant Accounting Policies

(a) Bases of accounting

     In this financial report Commonwealth Bank of Australia is referred to as the ‘Bank’ or ‘Company’, and the ‘Group’ or the ‘Consolidated Entity’ consists of the Bank and its controlled entities. The financial report is a general purpose financial report which complies with the requirements of the Banking Act, Corporations Act 2001, applicable Accounting Standards and other mandatory reporting requirements so far as the requirements are considered appropriate to a banking corporation.

     The accounting polices applied are consistent with those of the previous year, except that the criteria for capitalised information technology software was amended, refer below.

     The Statements of Cash Flows has been prepared in accordance with the International Accounting Standard IAS 7: Cash Flow Statements.

     The preparation of the financial report in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates although it is not anticipated that such differences would be material.

     Unless otherwise indicated, all amounts are shown in $ million and are expressed in Australian currency.

     Software Capitalisation

     The criteria for information technology software capitalisation has been amended, such that only computer software projects costing $10 million or more are being capitalised and capitalisation is limited to those investments that will deliver identifiable and sustainable customer value and an increase in returns, in a significant line of business.

     This change has been applied retrospectively and has resulted in the expensing of $219 million of previously capitalised software at 1 July 2003.

(b) Historical cost

     The financial statements of the Bank and the consolidated financial statements have been prepared in accordance with the historical cost convention and, except for AASB 1038: Life Insurance Business requirements and where indicated, do not reflect current valuations of non monetary assets. Domestic bills discounted which are included in loans, advances and other receivables and held by the Company and securities and derivatives held for trading purposes have been marked to market. The carrying amounts of all non current assets are reviewed to determine whether they are in excess of their recoverable amount at balance date.

     If the carrying amount of a non current asset exceeds the recoverable amount, the asset is written down to the lower amount. In assessing recoverable amounts for particular classes of assets the relevant cash flows have not been discounted to their present value unless otherwise stated.

(c) Consolidation

     The consolidated financial statements include the financial statements of the Bank and all entities where it is determined that there is a capacity to control as defined in AASB 1024: Consolidated Accounts. All balances and transactions between Group entities have been eliminated on consolidation.

(d) Investments in associated companies

     Associated companies are defined as those entities over which the Group has significant influence but there is no capacity to control. Details of material associated companies are shown in Note 42 to the Financial Statements.

     Investments in associates are carried at cost plus the Group’s share of post-acquisition profit or loss. The Group’s share of profit or loss of associates is included in the profit from ordinary activities.

(e) Foreign currency translations

     All foreign currency monetary assets and liabilities are revalued at spot rates of exchange prevailing at balance date. Foreign currency forward, futures, swaps and option positions are valued at the appropriate market rates applying at balance date. Unrealised gains and losses arising from these revaluations and gains and losses arising from foreign exchange dealings are included in the results.

     The foreign currency assets and liabilities of overseas branches and overseas controlled entities are converted to Australian currency at 30 June 2004 in accordance with the current rate method. Profit and loss items for overseas branches and overseas controlled entities are converted to Australian dollars progressively throughout the year at the spot exchange rate at the date of the transaction.

     Translation differences arising from conversion of opening balances of shareholders’ funds of overseas controlled entities at year end exchange rates are excluded from profit and loss and reflected in a Foreign Currency Translation Reserve. The Group maintains a substantially matched position in assets and liabilities in foreign currencies and the level of net foreign currency exposure does not have a material effect on its financial condition.

(f) Roundings

     The amounts contained in this report and the financial statements have been rounded to the nearest million dollars unless otherwise stated, under the option available to the Company under ASIC Class Order 98/100 (as amended by ASIC Class Order 04/667).

(g) Financial instruments

     The Group is a full service financial institution that offers an extensive range of on balance sheet and off balance sheet financial instruments.

     For each class of financial instrument listed below, except for restructured facilities referred to in Note 1(m), financial instruments are transacted on a commercial basis to derive an interest yield/cost with terms and conditions having due regard to the nature of the transaction and the risks involved.

(h) Cash and liquid assets

     Cash and liquid assets includes cash at branches, cash at bankers and money at short call.

     They are brought to account at the face value or the gross value of the outstanding balance where appropriate.

     Interest is taken to profit when earned.

(i) Receivables due from other financial institutions

     Receivables from other financial institutions includes loans, nostro balances and settlement account balances due from other banks. They are brought to account at the gross value of the outstanding balance. Interest is taken to profit when earned.

(j) Trading securities

     Trading securities are short and long term public, bank and other debt securities and equities that are acquired and held for trading purposes. They are brought to account at net fair value based on quoted market prices, broker or dealer price quotations. Realised gains and losses on disposal and unrealised fair value adjustments are reflected in ‘Other Income’. Interest on trading securities is reported in net interest earnings. Trading securities are recorded on a trade date basis.

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NOTE 1 Summary of Significant Accounting Policies continued

(k) Investment securities

     Investment securities are securities purchased with the intent of being held to maturity.

     Investment securities are short and long term public, bank and other securities and include bonds, bills of exchange, commercial paper, certificates of deposit and equities. These securities are recorded at cost or amortised cost. Premiums and discounts are amortised through profit and loss each year from the date of purchase so that securities attain their redemption values by maturity date. Interest is reflected in profit when earned. Dividends on equities are brought to account in profit on declaration date. Any profits or losses arising from disposal prior to maturity are taken to profit in the period in which they are realised. The cost of securities sold is calculated on a specific identification basis. Unrealised losses related to permanent diminution in the value of investment securities are recognised in profit and the recorded values of those securities adjusted accordingly.

     Investment securities are recorded on a trade date basis. The relationship between book and net fair values of investment securities is shown in Note 11.

(l) Repurchase agreements

     Securities sold under agreements to repurchase are retained within the investment or trading portfolios and accounted for accordingly. Liability accounts are used to record the obligation to repurchase and are disclosed as deposits and other public borrowings. Securities held under reverse repurchase agreements are recorded as liquid assets.

(m) Loans, advances and other receivables

     Loans, advances and other receivables include overdrafts, home, credit card and other personal lending, term loans, leasing, bill financing, redeemable preference shares and leverage leases. They are carried at the recoverable amount represented by the gross value of the outstanding balance adjusted for provisions for bad and doubtful debts, interest reserved and unearned tax remissions on leveraged leases. Interest and yield related fees are reflected in profit when earned. Yield related fees received in advance are deferred, included as part of the carrying value of the loan and amortised to profit as ‘Interest Income’ over the term of the loan. Note 1(n) provides additional information with respect to leasing and leveraged leasing.

     Non Accrual Facilities

     Non accrual facilities (primarily loans) are recorded on a cash basis for recognition of income. Upon classification as non accrual, all interest charged in the current financial period is reversed from profit and reserved if it has not been received in cash.

     If necessary, a specific provision for impairment is recognised so that the carrying amount of the facility does not exceed the expected future cash flows. In subsequent periods, interest in arrears/due on non accrual facilities is taken to profit and loss when a cash payment is received/realised and the amount is not designated as a principal payment. Non accrual facilities are restored to an accrual basis when all principal and interest payments are current and full collection is probable.

     Restructured Facilities

     When facilities (primarily loans) have the original contractual terms modified, the accounts become classified as restructured. Such accounts will have interest accrued to profit as long as the facility is performing on the modified basis in accordance with the restructured terms. If performance is not maintained, or collection of interest and/or principal is no longer probable, the account will be returned to the non accrual classification. Facilities are generally kept as non accrual until they are returned to a performing basis.

     Assets Acquired Through Securities Enforcement (“AATSE”)

     Assets acquired in satisfaction of facilities in default (primarily loans) are recorded at net market value at the date of acquisition. Any difference between the carrying amount of the facility and the net market value of the assets acquired is represented as a specific provision for diminution of value or written off. AATSE are further classified as Other Real Estate Owned (“OREO”) or Other Assets Acquired Through Security Enforcement (“OAATSE”). Such assets are classified in the appropriate asset classifications in the balance sheet.

     Bad Debts

     Bad debts are written off in the period in which they are recognised. Bad debts previously specifically provided for are written off against the related specific provisions, while bad debts not provided for are written off through the general provision. Any subsequent cash recovery is credited to the general provision.

(n) Leasing and leveraged leasing

     Finance leases are accounted for using the finance method and are included in loans, advances and other receivables. Income, determined on an actuarial basis, is taken to account over the term of the lease in relation to the outstanding investment balance.

     The finance method also applies to leveraged leases but with income being brought to account at the rate which yields a constant rate of return on the outstanding investment balance over the life of the transaction so as to reflect the underlying assets, liabilities, revenue and expenses that flow from the arrangements. Where a change occurs in the estimated lease cash flows or available tax benefits at any stage during the term of the lease, the total lease profit is recalculated for the entire lease term and apportioned over the remaining lease term.

     In accordance with amendments to AASB 1008: Leases, all leveraged leases with a lease term beginning from 1 July 1999 are accounted for as finance leases with income brought to account progressively over the lease term.

     Leveraged lease receivables are recorded under loans, advances and other receivables at amounts that reflect the equity participation in the lease. The debt provider in the transaction has no recourse other than to the unremitted lease rentals and the equipment under lease.

     Operating lease rental revenue and expense is recognised in the profit in equal periodic amounts over the effective lease term.

(o) Provisions for impairment

     Provisions for credit losses are maintained at an amount adequate to cover anticipated credit related losses. Credit losses arise primarily from loans but also from other credit instruments such as bank acceptances, contingent liabilities, financial instruments and investments and assets acquired through security enforcement.

     Specific provisions are established where full recovery of principal is considered doubtful. Specific provisions are made against individual facilities in the credit risk rated managed segment where exposure aggregates to $250,000 or more, and a loss of $10,000 or more is expected. A specific provision is also established against each statistically managed portfolio in the statistically managed segment to cover facilities which are not well secured and past due 180 days or more, against the credit risk rated managed segment for exposures aggregating to less than $250,000 and 90 days past due or more, and against emerging credit risks identified in specific segments in the credit risk rated managed portfolio. These provisions are funded primarily by reference to historical

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NOTE 1 Summary of Significant Accounting Policies continued

ratios of write offs to balances in default.

     General provisions for bad and doubtful debts are maintained to cover non identified probable losses and latent risks inherent in the overall portfolio of advances and other credit transactions. The provisions are determined having regard to the general risk profile of the credit portfolio, historical loss experience, economic conditions and a range of other criteria.

     The amounts required to bring the provisions for impairment to their assessed levels are charged to profit. The balance of provisions for impairment and movements therein are set out in Note 13.

     All facilities subject to a specific provision are classified as non accrual and interest is only taken to profit when received in cash.

(p) Bank acceptances of customers

     The exposure arising from the acceptance of bills of exchange that are sold into the market is brought to account as a liability. An asset of equal value is raised to reflect the offsetting claim against the drawer of the bill. Bank acceptances generate fee income that is taken to profit when earned.

(q) Deposits with regulatory authorities

     In several countries in which the Group operates, the law requires that the Group lodge regulatory deposits with the local central bank at a rate of interest below that generally prevailing in that market. The amount of the deposit and the interest rate receivable are calculated in accordance with the requirements of the local central bank. Interest is taken to profit when earned.

(r) Shares in and loans to controlled entities

     These investments are recorded at the lower of cost or recoverable amount.

(s) Property, plant and equipment

     At year end, independent market valuations, reflecting current use, were obtained for all individual property holdings (other than leasehold improvements). Directors adopt a valuation based on this independent advice. Adjustments arising from revaluation are reflected in Asset Revaluation Reserve, except to the extent the adjustment reverses a revaluation previously recognised in profit and loss. The potential effect of any capital gains tax on disposal has not been taken into account in the determination of the revalued carrying amount.

     Depreciation on owned buildings is based on the assessed useful life of each building. The book value of buildings demolished as part of the redevelopment of a site is written off in the financial year in which the buildings are demolished. Leasehold improvements are capitalised and depreciated over the unexpired term of the current lease.

     Equipment and assets held for lease is shown at cost less depreciation calculated principally on a category basis at rates applicable to each category’s useful life. Depreciation is calculated using the straight line method. It is treated as an operating expense and charged to profit. The amounts charged for the year are shown in Note 2. Profit or loss on sale of property is treated as operating income or expense. Realised amounts in Asset Revaluation Reserve are transferred to Capital Reserve.

     Investment property carried at lower of cost and recoverable amount is not depreciated in accordance with the depreciation guidance in AASB1021: Depreciation.

     The useful lives of major depreciable assets are as follows:

Buildings
- Shell	Maximum 30 years
- Integral plant and equipment
- carpets	10 years
- all other (air-conditioning, lifts)	20 years
- Non integral plant and equipment
- fixtures and fittings	10 years
Leasehold improvements	Lesser of unexpired lease
	term or lives as above
Equipment
- Security surveillance systems	10 years
- Furniture	8 years
- Office machinery	5 years
- EFTPOS machines	3 years

     The Bank has outsourced the majority of its information processing and does not own any material amounts of computer or communications equipment.

(t) Goodwill

     Goodwill, representing the excess of purchase consideration plus incidental expenses over the fair value of the identifiable net assets at the time of acquisition of an entity, is capitalised and brought to account in the balance sheet.

     The goodwill so determined is amortised on a straight line basis over the period of expected benefit but not exceeding 20 years. Purchased goodwill resulting from the acquisition of the Colonial Group in June 2000, the merger with the State Bank of Victoria in 1991 and from the acquisition of the 25% minority interest in ASB Group in New Zealand in August 2000 is each being amortised over 20 years. The periods of goodwill amortisation are subject to review annually by the Directors.

(u) Other assets

     Other assets include all other financial assets and includes interest, fees, market revaluation of trading derivatives and other unrealised income receivable and securities sold not delivered. These assets are recorded at the cash value to be realised when settled.

     Capitalisation of Computer Software Costs

     In accordance with the American Institute of Certified Public Accountants Statement of Position 98-1 ‘Accounting for the Costs of Computer Software Developed or Obtained for Internal Use’, the Group carries net unamortised capitalised computer software costs of $107 million as at 30 June 2004 (2003: $248 million). The criteria for capitalised computer software costs was amended, effective 1 July 2003, refer to Note 1 (a).

     Such costs are amortised over the assessed useful life of the projects. An amortisation period of 21/2 years is adopted for most software developments. Software maintenance costs continue to be expensed as incurred.

(v) Deposits and other public borrowings

     Deposits and other public borrowings includes certificates of deposits, term deposits, savings deposits, cheque and other demand deposits, debentures and other funds raised publicly by borrowing corporations. They are brought to account at the gross value of the outstanding balance. Interest is charged to profit when incurred..

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NOTE 1 Summary of Significant Accounting Policies continued

(w) Payables due to other financial institutions

     Payables due to other financial institutions includes deposits, vostro balances and settlement account balances due to other banks. They are brought to account at the gross value of the outstanding balance. Interest is charged to profit when incurred.

(x) Income taxes

     The Group has adopted the liability method of tax effect accounting. The tax effect of timing differences which arise from items being brought to account in different periods for income tax and accounting purposes is disclosed as a future income tax benefit or a provision for deferred income tax. Amounts are offset where the tax payable and realisable benefit are expected to occur in the same financial period. The future income tax benefit relating to tax losses is not carried forward as an asset unless the benefit is virtually certain of being utilised (Notes 5 and 21).

     The Commonwealth Bank of Australia has elected to be taxed as a single entity under the tax consolidation system with effect from 1 July 2002. The Bank has formally notified the Australian Taxation Office of its adoption of the tax consolidation regime. For further details, refer to Note 5.

(y) Provisions for employee entitlements

     The provision for long service leave is subject to actuarial review and is maintained at a level that accords with actuarial advice.

     The provision for annual leave represents the outstanding liability as at balance date. Actual payments made during the year are included in Salaries and Wages.

     The provision for other employee entitlements represents liabilities for staff housing loan benefits, a subsidy to a registered health fund with respect to retired employees and current employees, and employee incentives under employee share plans and bonus schemes.

     The level of these provisions has been determined in accordance with the requirements of AASB 1028: Accounting for Employee Entitlements.

(z) Provisions for restructuring

     Provisions for restructuring are brought to account where there is a detailed formal plan for restructure and a demonstrated commitment to that plan.

     Provision for ‘Which new Bank’ costs

     On 19 September 2003, the Group launched its Which new Bank customer service vision. This is a three year transformation programme and involves the Bank in additional expenditure in the key areas of staff training and skilling, systems and process simplification, and technology. In the period to 30 June 2004 such expenses have totalled $749 million and principally comprise redundancies, expensing of previously capitalised software of $219 million, process improvements and branch refurbishment. The outstanding provision for ‘Which new Bank’ costs at 30 June 2004 is $208 million.

(aa) Provision for self insurance

     The provision for self insurance covers certain non lending losses and non transferred insurance risks. Actuarial reviews are carried out at regular intervals with provisioning effected in accordance with actuarial advice.

(bb) Debt issues

     Debt issues are short and long term debt issues of the Group including commercial paper, notes, term loans and medium term notes which are recorded at cost or amortised cost. Premiums, discounts and associated issue expenses are amortised through profit and loss each year from the date of issue so that securities attain their redemption values by maturity date.

     Interest is charged against profit as incurred. Any profits or losses arising from redemption prior to maturity are taken to profit in the period in which they are realised.

     Further details of the Group’s debt issues are shown in Note 26.

(cc) Bills payable and other liabilities

     Bills payable and other liabilities includes all other financial liabilities and includes interest, fees, market revaluation of trading derivatives and other unrealised expenses payable and securities purchased not delivered.

     These liabilities are recorded at the cash value to be realised when settled.

(dd) Loan capital

     Loan capital is debt issued by the Group with terms and conditions, such as being undated or subordinated, which qualify the debt issue for inclusion as capital under APRA guidelines. Loan capital debt issues are recorded at cost or amortised cost.

     Premiums, discounts and associated issue expenses are amortised through profit each year from the date of issue so that securities attain their redemption values by maturity date. Interest is reflected in profit as incurred. Any profits or losses arising from redemption prior to maturity are taken to profit in the period in which they are realised.

     Further details of the Group’s loan capital debt issues are shown in Note 28.

(ee) Shareholders’ equity

     Ordinary share capital is the amount of paid up capital from the issue of ordinary shares.

     Preference Share Capital and Other Equity Instruments is the amount of paid up capital from the issue of preference shares and other equity instruments respectively.

     General reserve is derived from revenue profits and is available for dividend except for undistributable profits in respect of the Group’s life insurance businesses of $3,106 million, including the appraisal value uplift (2003: $2,905 million and 2002: $3,150 million).

     Capital reserve is derived from capital profits and is available for dividend.

     Dividend reinvestment plan reserve is appropriated from revenue profits when the Bank is expecting to satisfy the dividend reinvestment by the issue of new shares. The amount of the reserve represents the estimate of the minimum expected amount that will be reinvested in the Bank’s dividend reinvestment plan. The allotment of shares under the plan is subsequently applied against the reserve. This accounting treatment reflects the probability that a fairly stable proportion of the Bank’s final dividend will be reinvested in equity via the dividend reinvestment plan. No entry is passed to this reserve when the Bank has determined to satisfy the dividend reinvestment by an on market purchase of existing shares.

     Further details of share capital, outside equity interests and reserves are shown in Notes 29, 30 and Statements of Changes in Shareholders’ Equity.

(ff) Derivative financial instruments

     The Group enters into a significant volume of derivative financial instruments that include foreign exchange contracts, forward rate agreements, futures, options and interest rate, currency, equity and credit swaps. Derivative financial instruments are used as part of the Group’s trading activities and to hedge certain assets and liabilities.

     Derivative financial instruments held or issued for trading purposes

     Traded derivative financial instruments are recorded at net fair value based on quoted market prices, broker or dealer price quotations. A positive revaluation amount of a

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contract is reported as an asset and a negative revaluation amount of a contract as a liability. Changes in net fair value are reflected in profit immediately as they occur.

     Derivative financial instruments held or issued for purposes other than trading

     The principal objective in holding or issuing derivative financial instruments for purposes other than trading is to manage balance sheet interest rate, exchange rate and credit risk associated with certain assets and liabilities such as loans, investment securities, deposits and debt issues. To be effective as hedges, the derivatives are identified and allocated against the underlying hedged item or class of items and generally modify the interest rate, exchange rate or credit characteristics of the hedged asset or liability. Such derivative financial instruments are purchased with the intent of being held to maturity. Derivatives that are designated and effective as hedges are accounted for on the same basis as the instruments they are hedging.

     Swaps

     Interest rate swap receipts and payments are accrued to profit as interest of the hedged item or class of items being hedged over the term for which the swap is effective as a hedge of that designated item. Premiums or discounts to market interest rates that are received or made in advance are deferred and amortised to profit over the term for which the swap is effective as a hedge of the underlying hedged item or class of items.

     Similarly with cross currency swaps, interest rate receipts and payments are brought to account on the same basis outlined in the previous paragraph. In addition, the initial principal flows are reported net and revalued to market at the current market exchange rate. Revaluation gains and losses are taken to profit against revaluation losses and gains of the underlying hedged item or class of items.

     Credit default swaps are utilised to manage credit risk in the asset portfolio. Premiums are accrued to profit and loss as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge. Any principal cash flow on default is brought to account on the same basis as the designated item being hedged. Credit default swaps held at balance date are immaterial.

     Equity swaps are utilised to manage the risk associated with both the capital investment in equities and the related yield. These swaps enable the income stream to be reflected in profit and loss when earned. Any capital gain or loss at maturity of the swap is brought to account on the same basis as the underlying equity being hedged.

     Forward rate agreements and futures

     Realised gains and losses on forward rate agreements and futures contracts are deferred and included as part of the carrying value of the hedged item or class of items being hedged. The cash flow is amortised to profit as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge.

     Options

     Where options are utilised in the management of balance sheet risk, premiums on options and any realised gains and losses on exercise are deferred and included as part of the carrying value of the hedged item or class of items being hedged. The cash flows are amortised to profit as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge.

     Early termination

     Where a derivative instrument hedge is terminated prior to its ‘maturity date’, realised gains and losses are deferred and included as part of the carrying value of the hedged item or class of items being hedged.

     The cash flows are amortised to profit as interest of the hedged item or class of items being hedged over the period for which the hedge would have been effective. Where the underlying hedged item or class of items being hedged ceases to exist, the derivative instrument hedge is terminated and realised and unamortised gains or losses taken to profit and loss.

     Further information on derivative financial instruments is shown in Note 39.

(gg) Commitments to extend credit, letters of credit, guarantees, warranties and indemnities issued

     These financial instruments generally relate to credit risk and attract fees in line with market prices for similar arrangements. They are not sold or traded. The items generally do not involve cash payments other than in the event of default. The fee pricing is set as part of the broader customer credit process and reflects the probability of default. They are recorded as contingent liabilities at their face value. Further information is shown in Note 38.

(hh) Revenue recognition

     Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The principal sources of revenue are interest income and fees and commissions.

     Interest income

     Interest income is reflected in profit when earned on an accrual basis. Further information is included in Notes 1(k) Investment securities, 1(m) Loans, advances and other receivables and 1(n) Leasing and leveraged leasing.

     Lending fees

     Material non refundable front end loan fees that are yield related and do not represent cost recovery, are taken to profit over the period of the loan. Associated costs incurred in these lending transactions are deferred and netted against yield related loan fees. Where non refundable front end loan fees are received that represent cost recovery or charges for services not directly related to the yield on a loan, they are taken to income in the period in which they are received. Where fees are received on an ongoing basis and represent the recoupment of the costs of maintaining and administering existing loans, these fees are taken to income on an accrual basis.

     Commission and other fees

     When commission charges and fees relate to specific transactions or events, they are recognised as income in the period in which they are received. However, when they are charged for services provided over a period, they are taken to income on an accrual basis.

     Other income

     Trading income is brought to account when earned based on changes in net fair value of financial instruments and recorded from trade date. Further information is included in Notes 1(e) Foreign currency translations, 1(j) Trading securities and 1(ff) Derivative financial instruments. Life insurance business income recognition is explained in Note 1(ii) below.

(ii) Life Insurance Business

     The Group’s life insurance business is accounted for in accordance with the requirements of Accounting Standard AASB 1038: Life Insurance Business, which is summarised below:

(i)	All assets, liabilities, revenues, expenses and equity are included in the financial report irrespective of whether they are designated as relating to policyholders or to shareholders.
(ii)	All assets are measured at net market values.

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(iii)	All liabilities are measured at net present values. Policy liabilities are calculated in accordance with the principles of Margin on Services (MoS) profit reporting as set out in Actuarial Standard AS 1.03: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board. Other Liabilities are measured at net present value at reporting date.
(iv)	Any life insurers within the Group that are parent entities recognise and disclose any excess or deficiency of the net market values of interests in subsidiaries over the net assets of those subsidiaries as an item in the financial report of the life insurer economic entity.
(v)	Premiums and claims are separated on a product basis into their revenue, expense and change in liability components unless the separation is not practicable or the components cannot be reliably measured.
(vi)	Returns on all investments controlled by a life insurer entity in the Group are recognised as revenues.
(vii)	Participating benefits vested in relation to the financial year, other than transfers from unvested policyholder benefits liabilities, are recognised as expenses.
(viii)	Reinsurance contracts entered into are recognised on a gross basis.

     The Group conducts life insurance business through Commonwealth Insurance Holdings Limited (CIHL), Colonial Mutual Life Assurance Society Limited (CMLA) in Australia, Sovereign Assurance Company Limited in New Zealand, and several subsidiaries and joint ventures throughout Asia. CIHL is the top tier life insurance company within the life insurance corporate structure and values its interests at market in its controlled entities at each reporting date.

     Accounting policies and disclosures specific to life insurance business are required under AASB 1038. These are provided in this note and Notes 16, 21 and 34.

     Premiums and Claims

(i)	Investment linked business
	Premiums received, which are in the nature of investment deposits, have the fee portion of the premium recognised as revenue and the deposit portion recognised as an increase in policy liabilities. Premiums with no due date are recognised on a cash received basis. Fees earned by the Shareholder for managing the funds invested are recognised as revenue. Claims under investment linked businesses represent withdrawals of investment deposits and are recognised as a reduction in policy liabilities.
(ii)	Non-investment linked business
	Premiums received for providing services and bearing risks are recognised as revenue. Premiums with a regular due date are recognised as revenue on an accruals basis. Non-investment linked claims are recognised as an expense when a liability has been established

     Market Value Accounting

     All assets are valued at net market value (“NMV”) and all liabilities at net present value at balance date. Consistent with the principles of market value accounting, movements in the net market value of assets and net present value of liabilities during the period are immediately recognised in profit.

     Life Insurance Investment Assets

     Investments are measured at net market values at balance date. Listed securities are valued at the price ruling at balance date. Where no quoted market exists, the Directors adopt various methods determined by internal and external valuers. In these cases the values are deemed equivalent to net market value. Details of particular methods adopted are as follows:

- Valuation of the investment in the life insurance controlled entities is based on the appraisal value. The appraisal value comprises the present value of future profits from in force business, the estimated value of profits from future business and the shareholders interest in the net worth of the life insurance Statutory and Shareholder Funds.

- Non life insurance controlled entities are valued using a discounted cash flow method applied to anticipated future income streams, allowing for assumptions about future sales growth, redemptions, expenses, investment returns and fee margins. This method allows the values so calculated to be expressed in the form of appraisal values, consistent with those calculated for the life insurance controlled entities. Valuation of the investment in the non life insurance controlled entities is then based on these calculated appraisal values as at reporting date.

Properties are valued annually by qualified independent valuers.

     Excess of Net Market Value over Net Assets of Controlled Entities

     Interests in controlled entities held by the life insurance companies are subject to revaluation each period, such that the investment in the controlled entity is recorded at market value.

     On consolidation the investment in controlled entities is eliminated and the excess of market value of controlled entities over their underlying net assets is separately recognised in Other Assets (Note 21) on the balance sheet as ‘Excess of Net Market Value over Net Tangible Assets of Life Insurance Controlled Entities’. This amount is assessed periodically as part of the valuation of investments with changes in value taken to profit. This excess does not require amortisation in the financial statements.

     Life Insurance Policy Liabilities and Margin on Services Profit

     Policy liabilities are calculated in accordance with the principles of Margin on Services (“MoS”) profit reporting as set out in Actuarial Standard AS 1.03: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board. Policy liabilities are calculated in a way that allows for the systematic release of planned profit margins as services are provided to policyowners and the revenues relating to those services are received. Selected profit carriers including premiums and anticipated annuity payments are used to determine profit recognition.

     Profit

     Life insurance business operating under this profit recognition methodology can be analysed as follows:

(i)	Emergence of planned profit margins:
	In setting premium rates, life insurers will include planned margins of revenues over expenses. When the life insurer has performed the services necessary to establish a valid claim to those margins and has received the revenues relating to those services, the planned margins are recognised in profit. Where actual experience replicates planned margin assumptions, the planned profit margin will be released over the life of the policy.
(ii)	Difference between actual and planned experience:
	Experience profits/(losses) are realised where actual experience differs from the expected performance used to determine planned margins. Circumstances giving rise to experience profits/(losses) include experience variations in claims, expenses, mortality, discontinuance and investment returns. For example, an experience profit will emerge when the expenses of maintaining all in force business in a year are lower than those allowed for in the planned margin.

81

Notes to the financial statements

NOTE 1 Summary of Significant Accounting Policies continued

(iii)	Loss recognition on groups of related products or reversals of previously recognised losses:
	Where future expenses for a group of related products exceeds future revenues, the anticipated loss is recognised immediately. If unprofitable business becomes profitable, previously recognised losses are reversed immediately.
(iv)	Investment earnings on assets in excess of policy liabilities:
	Investment assets are held in excess of those required to meet policy liabilities. Investment earnings are directly influenced by market conditions and as such this component of profit will vary from year to year.

     Participating Policies

     Policy liabilities attributable to participating policies include the value of future planned shareholder profit margins and an allowance for future supportable bonuses. The value of supportable bonuses and planned shareholder profit margins account for all profit on participating policies based on best estimate assumptions.

     Under Margin on Services profit recognition methodology, the value of supportable bonuses and the shareholder profit margin relating to a reporting year will emerge as planned profits in that year.

     Policy Acquisition Costs

     Policy acquisition costs include the fixed and variable costs of acquiring new business. These costs are effectively deferred through the determination of policy liabilities at the balance date to the extent that they are deemed recoverable from premium or policy charges. Deferred acquisition costs are effectively amortised over the life of the policy.

(jj) Loan Securitisation

     The Group conducts a loan securitisation program through which it packages and sells loans as securities to investors. For its services to the program, the Group receives fees such as loan servicing, program management and trustee fees on an arms length basis. Fee income is recognised in income on an accruals basis in relation to the period in which the costs of providing these services are incurred.

     Interest rate swaps and liquidity facilities are provided at arms length to the program by the Group in accordance with APRA Prudential Guidelines.

     The Group is entitled to any residual income of the program after all payments due to investors and costs of the program have been met.

     Due to the significant uncertainties inherent in estimating the underlying loan repayment rates and interest margins, future cash flows cannot be reliably measured. Therefore, no asset/liability or gain/loss on sale of the loans has been recognised. The residual income is recognised in Other Income when receivable. Interest rates swaps are recognised in income on an accruals basis.

(kk) Fiduciary activities

     The Bank and designated controlled entities act as Responsible Entity, Trustee and/or Manager for a number of Wholesale, Superannuation and Investment Funds, Trusts and Approved Deposit Funds. Further details are shown in Note 38.

     The assets and liabilities of these Trusts and Funds are not included in the consolidated financial statements as the Bank does not have direct or indirect control of the Trusts and Funds as defined by AASB 1024. Commissions and fees earned in respect of the activities are included in the profit of the Group and the designated controlled entity.

(ll) Superannuation plans

     The Group sponsors a range of superannuation plans for its employees. The assets and liabilities of these plans are not included in the consolidated financial statements.

     The superannuation contributions expense principally represents the annual funding, determined after having regard to actuarial advice, to provide for future obligations of defined benefit plans. Contributions to all superannuation plans are made in accordance with the rules of the plans.

(mm) Comparative figures

     Where necessary, comparative figures have been adjusted to conform with changes in presentation in these financial statements.

(nn) Definitions

     ‘Overseas’ represents amounts booked in branches and controlled entities outside Australia.

     ‘Borrowing Corporation’ as defined by Section 9 of the Corporations Act 2001 is CBFC Limited, Colonial Finance Limited and their controlled entities.

     ‘Net Fair Value’ represents the fair or market value adjusted for transaction costs.

     ‘Cash Basis’ is defined as net profit after tax and outside equity interest before goodwill amortisation and funds management and life insurance appraisal value uplift/(reduction).

     (oo) Policy changes (2003)

     The consolidated entity, adopted the new Accounting Standard AASB 1044: Provisions, Contingent Liabilities and Contingent Assets, from 1 July 2002 which resulted in a change in the accounting for the dividend provisions. Previously, the consolidated entity recognised a provision for dividend based on the amount that was proposed or declared after the reporting date. In accordance with the requirements of the new standard, a provision for dividend is only recognised at the reporting date where the dividends are declared, determined or publicly recommended prior to the reporting date. The effect of the revised policy was to increase consolidated retained profits and decrease provisions at the beginning of the year ended 30 June 2003 by $1,027 million. In accordance with the new Standard, no provision for dividend has been recognised at year end. The change in accounting policy has had no effect on basic and fully diluted earnings per share.

     The Group adopted the revised accounting standard AASB 1012: Foreign Currency Translation from 1 July 2002. There were no material changes to the related calculations.

     The Group adopted the revised accounting standard AASB 1028: Employee Benefits from 1 July 2002. All employee benefit liabilities expected to be settled more than 12 months after the reporting date were previously subject to actuarial review. As a result there were no material changes to the related liabilities on the adoption of the revised standard.

     Share Based Compensation

     In August 2002 the Bank announced that it will purchase shares to cover the Employee Share Acquisition Plan (“ESAP”) and include the full cost as an expense against profits. ESAP shares earned in respect of the 2002 financial year had not been awarded at the time of the announcement, and as such the cost of $25 million was a one off expense in the 2003 financial year. In addition, 2003 year ESAP expense accrued for the 2003 financial year was $20 million. Similarly, the Executive Reward Plan was restructured effective from 1 July 2002, whereby incentives allocated were in the form of Reward shares and not options. This resulted in an increased expense for the 2003 year of $5 million. Other share based compensation expense for the 2003 year was $69 million. This was incurred and charged against profit on a consistent basis with prior periods.

82

Notes to the financial statements

(pp) International Financial Reporting Standards (IFRS)Transition Management

     The Bank is well progressed in the process of ensuring that it will comply with the Australian equivalent of International Financial Reporting Standards (“IFRS”) by June 2005. This is in line with the conversion timetable as set out by the Financial Reporting Council of Australia.

     The Bank completed its review of the IFRS and their impact during the planning stage of the project. Conversion issues were then identified and methodologies designed to resolve these issues.

     The Bank is now progressing to the implementation of these changes and will complete this process prior to 30 June 2005.

     The Bank has not finalised the financial impact of the change to IFRS.

Key Accounting Issues

     The following key areas of difference between current accounting practice and the treatment under IFRS have been identified:

(i) Hedge Accounting

     Under IFRS all derivative financial instruments, including those used for balance sheet hedging purposes, are to be recognised on-balance sheet and measured at fair value. Hedge accounting can be applied, subject to certain rules, for fair value hedges, cash flow hedges, and hedges of investments in foreign operations. The Bank has formulated a strategy based on the use of both cash flow and fair value hedging. Cash flow hedges are expected to be the predominant form of hedging applied by the Bank.

     It is expected that these new rules around accounting for hedge instruments will introduce significant volatility within equity reserves, and the potential for some minor volatility within the statement of financial performance.

(ii) Employee Benefits

     With the introduction of IFRS, the net surpluses or deficits that arise within defined benefit superannuation plans must be recognised in the statement of financial position. The annual movements in those surpluses or deficits must be recorded in the statement of financial performance.

     The Bank currently sponsors two defined benefit plans. Actuarial valuations of these plans are carried out periodically, and a large surplus currently exists on a net basis. On transition to IFRS, the comparative period beginning 1 July 2004 will record an opening Retained Earnings adjustment reflecting the value of this surplus. For subsequent periods, the profit is likely to be affected by significant volatility as the value of the surplus fluctuates. Given the potential significance of this item we expect to show it as a separate line item in the statement of financial performance.

(iii) Provisions for Loan Impairment

     In line with market practice, the Bank’s current general provisioning for impaired loans is designed to take account of our expectations of probable future losses and latent risks inherent in the credit portfolio. Under IFRS the Bank must raise collective provisions in respect of only those losses for which there is ‘objective evidence’ of impairment as at each balance date. The methodology to calculate this provision is still being developed.

     As a result of this change, there may be a reduction in the amount of the Bank’s general provisioning for impaired loans.

     The practice of recording specific provisions for loan impairment will continue under IFRS, however, such provisions must be based on the discounted values of estimated future cash flows. The discount unwinds during the period between the initial recognition of the provision and the eventual recovery of the written down amount, resulting in the recording of interest in the statement of financial performance, within interest income.

(iv) Consolidation of Special Purpose Vehicles

     IFRS requires the consolidation of certain special purpose vehicles that are not consolidated under the current accounting standards.

     Vehicles related to the securitisation of Bank assets, and certain other customer asset securitisation vehicles, may be consolidated under IFRS. This would result in a gross up of the assets and liabilities recorded within the statement of financial position.

     There is not expected to be any profit impact arising from consolidation of these vehicles.

(v) Classification of Hybrid Financial Instruments

     The Bank currently has on issue two types of hybrid financial instruments: Perpetual Exchangeable Resettable Listed Securities (“PERLS I and II”); and Trust Preferred Securities (“TPS”). Refer to Note 29 for details. These instruments are currently classified as equity instruments.

     Under IFRS these instruments will be reclassified as debt within the statement of financial position and dividends paid will be shown as interest expense.

(vi) Revenue and Expense Recognition

     Under IFRS, the Bank will change the way it currently recognises certain revenue and expense items. Any fee income integral to the yield of an originated financial instrument, net of any direct incremental costs, must be capitalised and deferred over the expected life of the instrument. This is not expected to have a material impact on net profit within the statement of financial performance, however, some re-classifications of revenue between fee income and interest income will occur.

(vii) Accounting for Life Insurance Business

     On transition to IFRS, the asset representing the excess of the net market value over net assets of the Bank’s life insurance controlled entities can no longer be recognised in full. As a result, the Bank will, on the adoption of the IFRS, cease to recognise any movement in the appraisal value in the statement of financial performance. The write off of the internally generated component will ultimately be reflected against the General Reserve; and the acquired component will be reclassified as Goodwill within the statement of financial position and subjected to an annual impairment test.

(viii) Accounting for Goodwill

     On transition to IFRS, Goodwill will no longer be amortised, but instead, is subject to an annual assessment for impairment to ensure that the carrying value of Goodwill is not greater than the recoverable amount. As a result, the statement of financial performance will no longer include an expense item reflecting the annual Goodwill amortisation.

(ix) Taxation

     A “balance sheet” approach to tax effect accounting is followed under IFRS replacing the current “statement of financial performance” approach. This approach recognises deferred tax balances when there is a difference between the carrying value of an asset or liability and its tax base. It is likely there will be some increases in levels of deferred tax assets and liabilities.

(x) Statement of Financial Position

     The following new material line items are expected to appear within the statement of financial position.

- ‘Derivative assets’ line item, being the fair value of the Bank’s hedging derivative financial instruments portfolio which have a positive market value; and a ‘Derivative liabilities’ line item, being the fair value of the Bank’s hedging derivative financial instruments portfolio which have a negative market value.

- An ‘Available-for-sale assets’ line item, being the fair value of those investment securities and other financial assets categorised as available-for-sale.

- A ‘Retirement benefit surplus’ asset line item, being the defined benefit plan surplus.

83

Notes to the financial statements

NOTE 1 Summary of Significant Accounting Policies continued

- An ‘Investment contract liabilities’ line item, being the fair value of the policyholder liabilities associated with those investment style contracts, which can no longer be classified as insurance contracts.

- A ‘Cash Flow Hedge Reserve’, being the hedge reserve associated with cash flow hedge accounting.

- An ‘Available-for-Sale Securities Revaluation Reserve’ being the reserve associated with the unrealised fair value gains and losses on investment securities and other financial assets categorised as available-for-sale.

Regulatory Capital Treatment

     Several of the above accounting issues affect the assets and equity items currently included in the calculation of the Bank’s regulatory capital. Current accounting definitions for asset and equity measurement are central to the capital adequacy requirements set by prudential regulators. The Bank anticipates that APRA will review the measurement rules in its Prudential Standards in response to the IFRS changes, however, it is unclear whether capital measurement will be fully immunised from the IFRS changes.

NOTE 2 Operating Profit

Profit from ordinary activities before income tax has been determined as follows:

							GROUP					BANK
	2004			2003			2002		2004			2003
	$M			$M			$M		$M			$M
Interest Income
Loans		11,675			10,126			9,231		9,504			8,077
Other financial institutions		182			191			165		90			70
Cash and liquid assets		198			150			142		214			135
Trading securities		600			454			359		486			362
Investment securities		607			566			517		229			256
Dividends on redeemable preference shares		25			41			41		3			—
Controlled entities		—			—			—		527			577
Total Interest Income		13,287			11,528			10,455		11,053			9,477
Interest Expense
Deposits		5,949			4,732			4,256		4,833			3,795
Other financial institutions		160			198			193		159			197
Debt issues		1,506			1,352			1,064		1,081			889
Controlled entities		—			—			—		282			243
Loan capital		262			220			232		294			212
Total Interest Expense		7,877			6,502			5,745		6,649			5,336
Net Interest Income		5,410			5,026			4,710		4,404			4,141
Other Operating Income
Lending fees		724			652			618		702			599
Commission and other fees		1,503			1,394			1,242		1,256			1,157
Trading income
Foreign exchange earnings		228			200			243		203			175
Trading securities		165			190			113		128			162
Other financial instruments (incl derivatives)		106			112			133		106			112
Dividends - controlled entities		—			—			—		794			577
- other		6			4			5		4			2
Net gain/(loss) on investments and loans		80			(9	)		78		(416	)		(9	)
Net (loss)/profit on sale of property, plant and equipment		(11	)		22			12		(10	)		13
Funds management income		1,333			1,066			1,147		—			—
Insurance income		902			680			712		—			—
Other(1)		45			62			55		545			566
Total Other Operating Income		5,081			4,373			4,358		3,312			3,354
Total Net Operating Income before appraisal value uplift/(reduction)		10,491			9,399			9,068		7,716			7,495
Charge for Bad and Doubtful Debts (Note 13)
General provisions		276			305			449		263			266
Total Charge for Bad and Doubtful Debts		276			305			449		263			266

⁽¹⁾  Includes an equity accounted loss of $32 million for the year ended 30 June 2004. Principally relates to a change in revenue recognition accounting policy by the associate entity.

84

Notes to the financial statements

NOTE 2 Operating Profit continued

							GROUP						BANK
	2004			2003			2002			2004			2003
	$M			$M			$M			$M			$M
Staff Expenses
Salaries and wages		2,152			2,106			2,016			1,683			1,694
Superannuation contributions		8			13			11			(14	)		(3	)
Provisions for employee entitlements		41			11			44			34			5
Payroll tax		115			107			92			101			95
Fringe benefits tax		32			26			32			28			24
Other staff expenses		100			120			132			46			78
Comparable business		2,448			2,383			2327			1,878			1,893
Initiatives including Which new Bank		273			155			—			267			155
Total Staff Expenses (excluding share based compensation)		2,721			2,538			2,327			2,145			2,048
Share Based Compensation
Comparable business		105			94			63			104			93
Initiatives including Which new Bank		—			25			—			—			25
Total Share Based Compensation		105			119			63			104			118
Occupancy and Equipment Expenses
Operating lease rentals		340			354			324			280			289
Depreciation
Buildings		21			24			26			18			20
Leasehold improvements		55			51			47			45			41
Equipment		50			53			55			22			22
Repairs and maintenance		68			58			56			61			49
Other		47			69			70			28			52
Comparable business		581			609			578			454			473
Initiatives including Which new Bank		20			3			—			20			3
Total Occupancy and Equipment Expenses		601			612			578			474			476
Information Technology Services
Projects and development		281			194			189			247			165
Data processing		238			255			275			214			227
Desktop		159			178			169			157			176
Communications		205			171			175			178			144
Software amortisation		11			78			44			2			71
Information technology equipment-depreciation		1			1			—			1			1
Comparable business		895			877			852			799			784
Initiatives including Which new Bank		292			30			—			274			30
Total Information Technology Services		1,187			907			852			1,073			814
Other Expenses
Postage		112			109			111			98			96
Stationery		114			118			104			88			90
Fees and commissions		598			551			609			369			210
Advertising, marketing and loyalty		311			259			242			260			204
Other		336			312			315			176			154
Comparable business		1,471			1,349			1,381			991			754
Initiatives including Which new Bank		164			26			—			164			26
Total Other Expenses		1,635			1,375			1,381			1,155			780
Comparable business		5,500			5,312			5,201			4,226			3,997
Initiatives including Which New Bank		749			239			—			725			239
Total Operating Expenses before goodwill amortisation		6,249			5,551			5,201			4,951			4,236
Appraisal value uplift/(reduction)		201			(245	)		477			—			—
Goodwill amortisation		(324	)		(322	)		(323	)		(186	)		(186	)
Profit from ordinary activities before income tax		3,843			2,976			3,572			2,316			2,807

85

Notes to the financial statements

NOTE 3 Revenue from Ordinary Activities

					GROUP					BANK
	2004		2003		2002			2004		2003
	$M		$M		$M			$M		$M
Banking
Interest income		13,287		11,528		10,455			11,053		9,477
Fee and commissions		2,227		2,046		1,860			1,958		1,756
Trading income		499		502		489			437		449
Dividends		6		4		5			798		579
Proceeds from sale of property, plant and equipment		69		72		109			9		65
Proceeds from sale of investments and loans		874		56		609			1,398		2
Other income		45		53		108			535		555
		17,007		14,261		13,635			16,188		12,883
Funds Management and Insurance
Funds management income including premiums		1,175		1,149		1,083			—		—
Insurance premium and related income		1,012		1,131		866			—		—
Investment income		2,807		628		(100	)		—		—
		4,994		2,908		1,849			—		—
Appraisal value uplift(1)		201		—		477			—		—
Total revenue from ordinary activities		22,202		17,169		15,961			16,188		12,883

There were no sources of revenue from non-operating activities.

⁽¹⁾  Appraisal value reduction of $ 245 million for year ended 30 June 2003.

86

Notes to the financial statements

NOTE 4 Average Balances and Related Interest

     The table lists the major categories of interest earning assets and interest bearing liabilities of the Group together with the respective interest earned or paid and the average interest rates for each of the years ending 30 June 2002, 30 June 2003 and 30 June 2004. Averages used are predominantly daily averages.

     The overseas component comprises overseas branches of the Bank and overseas domiciled controlled entities. Overseas intragroup borrowings have been adjusted in the interest spread and margin calculations to more appropriately reflect the overseas cost of funds. Non-accrual loans are included in Interest Earning Assets under loans, advances and other receivables.

Full Year Ended

	2004								2003								2002
	Average						Average		Average						Average		Average						Average
	Balance			Interest			Rate		Balance			Interest			Rate		Balance			Interest			Rate
	$M			$M			%		$M			$M			%		$M			$M			%
Average Interest Earning Asset and Income Expense
Cash and liquid assets
Australia		4,027			181			4.5		3,293			133			4.0		4,290			138			3.2
Overseas		868			17			2.0		813			17			2.1		285			4			1.4
Receivables due from other financial institutions
Australia		3,382			32			0.9		2,446			37			1.5		3,231			69			2.1
Overseas		3,776			150			4.0		3,734			154			4.1		2,663			96			3.6
Deposits with regulatory authorities
Australia		—			—			—		—			—			—		—			—			—
Overseas		62			—			—		56			—			—		174			—			—
Trading securities
Australia		9,682			444			4.6		7,360			326			4.4		5,138			248			4.8
Overseas		3,445			156			4.5		3,395			128			3.8		2,698			111			4.1
Investment securities
Australia		4,411			298			6.8		4,240			261			6.2		3,774			211			5.6
Overseas		8,440			310			3.7		8,062			305			3.8		7,339			306			4.2
Loans, advances and other receivables
Australia		149,487			9,927			6.6		131,746			8,538			6.5		121,597			7,984			6.6
Overseas		26,607			1,772			6.7		23,125			1,629			7.0		19,445			1,288			6.6
Other interest earning assets		—			—			—		—			—			—		—			—			—
Intragroup loans
Australia		—			—			—		—			—			—		—			—			—
Overseas		4,102			17			0.4		3,604			31			0.9		3,232			65			2.0
Average interest earning assets and interest income including intragroup		218,289			13,304			6.1		191,874			11,559			6.0		173,866			10,520			6.1
Intragroup eliminations		(4,102	)		(17	)		0.4		(3,604	)		(31	)		0.9		(3,232	)		(65	)		2.0
Total average interest earning assets and interest income		214,187			13,287			6.2		188,270			11,528			6.1		170,634			10,455			6.1
Average Non-Interest Earning Assets
Bank acceptances
Australia		13,877								13,144								11,965
Overseas		1								53								66
Insurance investment assets
Australia		24,430								26,333								26,853
Overseas		4,120								4,070								4,129
Property, plant and equipment
Australia		792								627								681
Overseas		161								197								203
Other assets
Australia		29,452								24,046								23,617
Overseas		2,264								3,303								3,411
Provisions for impairment
Australia		(1,411	)							(1,497	)							(1,546	)
Overseas		(150	)							(150	)							(143	)
Total average non-interest earning assets		73,536								70,126								69,236
Total average assets		287,723								258,396								239,870
Percentage of total average assets applicable to overseas operations		18.7	%							19.5	%							18.1	%

87

Notes to the financial statements

NOTE 4 Average Balances and Related Interest continued

Average Liabilities and Interest Expense
Full Year Ended

	2004								2003								2002
	Average						Average		Average						Average		Average						Average
	Balance			Interest			Rate		Balance			Interest			Rate		Balance			Interest			Rate
	$M			$M			%		$M			$M			%		$M			$M			%
Average Interest Bearing Liabilities and Loan Capital and Interest Expense
Time deposits
Australia		57,186			2,683			4.7		45,674			1,956			4.3		41,283			1,901			4.6
Overseas		15,963			1,062			6.7		14,255			876			6.1		12,479			761			6.1
Savings deposits
Australia		31,178			514			1.6		32,780			492			1.5		32,078			412			1.3
Overseas		3,028			105			3.5		2,788			100			3.6		2,444			82			3.4
Other demand deposits
Australia		39,044			1,499			3.8		34,043			1,230			3.6		29,517			1,037			3.5
Overseas		3,432			86			2.5		2,906			78			2.7		2,386			63			2.6
Payables due to other financial institutions
Australia		1,916			35			1.8		1,752			34			1.9		2,043			65			3.2
Overseas		5,042			125			2.5		6,712			164			2.4		5,320			128			2.4
Debt issues
Australia		21,885			1,292			5.9		17,651			1,047			5.9		14,578			800			5.5
Overseas		12,855			213			1.7		10,738			305			2.8		9,398			264			2.8
Loan capital
Australia		5,793			255			4.4		5,234			212			4.1		5,491			227			4.1
Overseas		210			8			3.8		204			8			3.9		88			5			5.7
Other interest bearing liabilities		—			—			—		—			—			—		—			—			—
Intragroup borrowings
Australia		4,102			17			0.4		3,604			31			0.9		3,232			65			2.0
Overseas		—			—			—		—			—			—		—			—			—
Average interest bearing liabilities and loan capital and interest expense including intragroup		201,634			7,894			3.9		178,341			6,533			3.7		160,337			5,810			3.6
Intragroup eliminations		(4,102	)		(17	)		0.4		(3,604	)		(31	)		0.9		(3,232	)		(65	)		2.0
Total average interest bearing liabilities and loan capital and interest expense		197,532			7,877			4.0		174,737			6,502			3.7		157,105			5,745			3.7
Non-Interest Bearing Liabilities
Deposits not bearing interest
Australia		5,112								4,784								5,424
Overseas		1,059								871								705
Liability on bank acceptances
Australia		13,877								13,146								11,965
Overseas		1								53								66
Insurance policy liabilities
Australia		20,658								20,828								23,092
Overseas		3,548								3,596								3,457
Other liabilities
Australia		20,655								16,034								14,628
Overseas		3,131								2,739								3,026
Total average non-interest bearing liabilities		68,041								62,051								62,363
Total average liabilities and loan capital		265,573								236,788								219,468
Shareholders’ equity		22,150								21,608								20,402
Total average liabilities, loan capital and shareholders’ equity		287,723								258,396								239,870
Percentage of total average liabilities applicable to overseas operations		18.2	%							18.9	%							17.9	%

88

Notes to the financial statements

NOTE 4 Average Balances and Related Interest continued

	30/06/04 vs 30/06/03									30/06/03 vs 30/06/02
	Changes due to									Changes due to
Changes in Net Interest Income:	Volume			Rate			Total			Volume			Rate			Total
Volume and Rate Analysis	$M			$M			$M			$M			$M			$M
Interest Earning Assets
Cash and liquid assets
Australia		31			17			48			(36	)		31			(5	)
Overseas		1			(1	)		—			5			(5	)		—
Receivables due from other financial institutions
Australia		12			(17	)		(5	)		22			(12	)		10
Overseas		2			(6	)		(4	)		41			17			58
Trading securities
Australia		105			13			118			103			(25	)		78
Overseas		2			26			28			27			(10	)		17
Investment securities
Australia		11			26			37			27			23			50
Overseas		14			(9	)		5			29			(17	)		12
Loans, advances and other receivables
Australia		1,164			225			1,389			565			(53	)		512
Overseas		239			(96	)		143			251			90			341
Other interest earning assets		—			—			—			—			—			—
Intragroup loans
Australia		—			—			—			—			—			—
Overseas		3			(17	)		(14	)		5			(39	)		(34	)
Change in interest income including intragroup		1,615			130			1,745			1,056			(17	)		1,039
Intragroup eliminations		(3	)		17			14			(5	)		39			34
Change in interest income		1,597			162			1,759			1,080			(7	)		1,073
Interest Bearing Liabilities and Loan Capital
Time Deposits
Australia		517			210			727			195			(140	)		55
Overseas		109			77			186			108			7			115
Savings Deposits
Australia		(25	)		47			22			10			70			80
Overseas		8			(3	)		5			12			6			18
Other demand deposits
Australia		186			83			269			161			32			193
Overseas		14			(6	)		8			14			1			15
Payables due to other financial institutions
Australia		3			(2	)		1			(7	)		(24	)		(31	)
Overseas		(41	)		2			(39	)		34			2			36
Debt Issues
Australia		251			(6	)		245			175			72			247
Overseas		48			(140	)		(92	)		38			3			41
Loan Capital
Australia		24			19			43			(11	)		(4	)		(15	)
Overseas		—			—			—			6			(3	)		3
Other interest bearing liabilities		—			—			—			—			—			—
Intragroup borrowings
Australia		3			(17	)		(14	)		5			(39	)		(34	)
Overseas		—			—			—			—			—			—
Change in interest expense including intragroup		877			484			1,361			666			57			723
Intragroup eliminations		(3	)		17			14			(5	)		39			34
Change in interest expense		879			496			1,375			650			107			757
Change in net interest income		673			(289	)		384			479			(163	)		316

89

Notes to the financial statements

NOTE 4 Average Balances and Related Interest continued

Changes in Net Interest Income: Volume and Rate Analysis

     The preceding table shows the movement in interest income and expense due to changes in volume and changes in interest rates. Volume variances reflect the change in interest from the prior period due to movement in the average balance. Rate variance reflects the change in interest from the prior year due to changes in interest rates.

     Volume and rate variance for total interest earning assets and liabilities have been calculated separately (rather than being the sum of the individual categories).

					GROUP
	2004		2003		2002
	$M		$M		$M
Net interest income		5,410		5,026		4,710
Average interest earning assets		214,187		188,270		170,634

Interest Margins and Spreads

     Interest spread represents the difference between the average interest rate earned and the average interest rate paid on funds.

     Interest margin represents net interest income as a percentage of average interest earning assets. The calculations for Australia and Overseas include intragroup cross border loans/borrowings and associated interest.

	2004		2003		2002
	%		%		%
Australia
Interest Spread(1)		2.46		2.68		2.75
Benefit of net free liabilities, provisions and equity(2)		0.22		0.20		0.25
Net Interest Margin(3)		2.68		2.88		3.00
Overseas
Interest Spread(1)		1.18		1.22		1.16
Benefit of net free liabilities, provisions and equity(2)		0.56		0.49		0.43
Net Interest Margin(3)		1.74		1.71		1.59
Group
Interest Spread(1)		2.22		2.40		2.47
Benefit of net free liabilities, provisions and equity(2)		0.31		0.27		0.29
Net Interest Margin(3)		2.53		2.67		2.76

(1)	Difference between the average interest rate earned and the average interest rate paid on funds.
(2)	A portion of the Group’s interest earning assets is funded by net interest free liabilities and shareholders’ equity. The benefit to the Group of these interest free funds is the amount it would cost to replace them at the average cost of funds.
(3)	Net interest income divided by average interest earning assets for the year.

90

Notes to the financial statements

NOTE 5 Income Tax Expense

     Income tax expense shown in the financial statements differs from the prima facie tax charge calculated at current taxation rates on operating profit.

							GROUP						BANK
	2004			2003			2002			2004			2003
	$M			$M			$M			$M			$M
Operating profit from ordinary activities before income tax
Banking		3,091			3,165			2,884			2,502			2,993
Funds Management		504			217			399			—			—
Insurance		371			161			135			—			—
Appraisal value uplift/(reduction)		201			(245	)		477			—			—
Goodwill amortisation		(324	)		(322	)		(323	)		(186	)		(186	)
		3,843			2,976			3,572			2,316			2,807
Prima facie income tax at 30%
Banking		927			950			866			751			898
Funds Management		151			65			120			—			—
Insurance		111			48			40			—			—
Appraisal value uplift/(reduction)		60			(73	)		143			—			—
Goodwill amortisation		(97	)		(97	)		(97	)		(56	)		(56	)
		1,152			893			1,072			695			842
Add/(deduct) permanent differences expressed on a tax effect basis:
Current Period
Specific provisions for offshore bad and doubtful debts not tax effected		3			13			(3	)		(2	)		8
Taxation offsets (net of accruals)		(47	)		(36	)		(24	)		(224	)		(146	)
Tax adjustment referable to policy holder income		142			(41	)		(25	)		—			—
Non assessable income - life insurance surplus		(30	)		(18	)		(25	)		—			—
Change in excess of net market value over net assets of life insurance controlled entities		(60	)		73			(143	)		—			—
Non deductible goodwill amortisation		97			97			97			56			56
Non deductible intergroup losses		—			—			—			136			—
Tax losses recognised		—			(18	)		(35	)		1			—
Employee share acquisition plan		—			—			(8	)		—			—
Other		17	��		(5	)		17			5			(52	)
		122			65			(149	)		(28	)		(134	)
Prior Periods
Other		(12	)		—			(7	)		2			—
Total Income Tax Expense		1,262			958			916			669			708
Income tax attributable to profit from ordinary activities
Banking		914			931			816			669			708
Funds management		79			57			96			—			—
Insurance		66			28			40			—			—
Corporate tax		1,059			1,016			952			669			708
Policyholder tax		203			(58	)		(36	)		—			—
Total Income Tax expense		1,262			958			916			669			708
Income tax expense comprises:
Current taxation provision		1,128			917			1,385			639			625
Deferred income (benefit)/tax provision		138			(24	)		(408	)		(32	)		42
Future income tax benefit		(24	)		45			(86	)		57			35
Notional tax expense — leveraged leases		23			22			12			5			6
Other		(3	)		(2	)		13			—			—
Total Income Tax Expense		1,262			958			916			669			708
The components of income tax expense consist of the following:
Current
Australia		977			853			1,239			633			610
Overseas		156			112			146			12			15
		1,133			965			1,385			645			625
Deferred
Australia		99			(1	)		(403	)		20			83
Overseas		30			(6	)		(66	)		4			—
		129			(7	)		(469	)		24			83

91

Notes to the financial statements

NOTE 5 Income Tax Expense continued

							GROUP						BANK
	2004			2003			2002			2004			2003
	$M			$M			$M			$M			$M
The significant temporary differences are as follows:
Deferred income tax assets arising from:
Provisions not tax deductible until expense incurred		369			353			337			274			242
Other		195			172			288			149			70
Future income tax benefits (Note 21)		564			525			625			423			312
Intergroup deferred tax receivable (Note 21)		—			—			—			317			—
Deferred income tax liabilities arising from:
Leveraged leasing		232			302			240			232			116
Lease financing		100			96			100			100			2
Other		52			16			240			—			44
Total deferred income tax liabilities (Note 24)		384			414			580			332			162
Intergroup deferred tax payable (Note 27)		—			—			—			153			—
Future income tax benefits attributable to tax losses carried forward as an asset		5			36			124			—			—
Future income tax benefits not taken to account Valuation allowance
Opening balance		142			168			146			62			132
Prior year adjustments		(6	)		(34	)		(8	)		(3	)		(71	)
Benefits now taken to account		(6	)		(18	)		(27	)		(5	)		(17	)
Benefits arising during the year not recognised		40			26			57			40			18
Closing balance (Note 21)		170			142			168			94			62

Tax Consolidation

     Legislation has been enacted to allow Australian resident entities to elect to consolidate and be treated as a single entity for Australian tax purposes. The Commonwealth Bank of Australia has elected to be taxed as a single entity with effect from 1 July 2002. The Bank has formally notified the Australian Taxation Office of its adoption of the tax consolidation regime. Members of the tax consolidation group have entered into a tax sharing arrangement which provides for the allocation of income tax liabilities between the entities should the head entity, Commonwealth Bank of Australia, default on its tax payment obligations.

     The Commonwealth Bank of Australia has also entered into a tax funding agreement with the members of the tax consolidation group. The tax funding agreement is effective from 1 July 2002. The agreement is aimed at achieving an allocation of the Group’s income tax liability to subsidiaries within the tax consolidated group as if they were operating on a stand-alone basis. The subsidiaries party to the agreement will reimburse the Commonwealth Bank of Australia for an amount calculated as if they were taxed on a stand-alone basis. Similarly, the Commonwealth Bank of Australia will reimburse subsidiaries for losses when they are utilised to reduce the group tax payable.

     Calculations at 30 June 2004 have been based on legislation enacted to that date. Legislation in respect of leasing and leasing partnerships has not yet been finalised. Based on the enacted legislation, these calculations have resulted in a tax credit adjustment of $37 million to the consolidated tax expense for the year ended 30 June 2004. The tax benefit principally arises from the generation of capital losses which have been offset against capital gains arising during the year. This tax benefit has been partially offset by non tax effected capital writedowns.

ASB Bank

     The ASB Bank is being audited by the Inland Revenue Department as part of the normal Inland Revenue Department procedures, with a particular focus on structured finance transactions. No tax assessments have been issued.

92

Notes to the financial statements

NOTE 6 Dividends

					GROUP				BANK
	2004		2003		2002		2004		2003
	$M		$M		$M		$M		$M
Ordinary Shares
Interim ordinary dividend (fully franked) (2004: 79 cents, 2003: 69 cents, 2002: 68 cents)
Interim ordinary dividend paid - cash component only		808		699		693		808		699
Interim ordinary dividend paid - dividend reinvestment plan		188		166		159		188		166
Declared final ordinary dividend (fully franked) (2004: nil provided, 2003: nil provided, 2002: 82 cents)
Provision for final ordinary dividend - cash component only		—		—		832		—		—
Provision for final ordinary dividend - dividend reinvestment plan		—		—		195		—		—
Preference Shares
Preference dividends paid (fully franked) (2004: 1,065 cents, 2003: 1,019 cents, 2002: 970 cents)		28		28		26		28		28
Provision for preference dividend		9		8		8		9		8
Other Equity Instruments
Dividends paid		55		—		—		15		—
Dividends to outside equity interests		8		4		—		—		—
Total Dividends Provided or Paid		1,096		905		1,913		1,048		901
Other provision carried		5		4		5		4		4
Dividends proposed and not recognised as a liability (fully franked) (2004: 104 cents, 2003: 85 cents, 2002: nil)(1)		1,315		1,066		—		1,315		1,066

⁽¹⁾ The 2003 final dividend was satisfied by cash disbursements of $865 million and the issue of $201 million of ordinary shares through the dividend reinvestment plan. The 2004 final dividend is expected to be satisfied by cash disbursements of $1,065 million and the estimated issue of $250 million of ordinary shares through the dividend reinvestment plan.

Dividend Franking Account

     After fully franking the final dividend to be paid for the year ended 30 June 2004 the amount of credits available as at 30 June 2004 to frank dividends for subsequent financial years is $75 million (2003: $417 million). This figure is based on the combined franking accounts of the Bank at 30 June 2004, which have been adjusted for franking credits that will arise from the payment of income tax payable on profits for the year ended 30 June 2004, franking debits that will arise from the payment of dividends proposed for the year and franking credits that the Bank may be prevented from distributing in subsequent financial periods. The Bank expects that future tax payments will generate sufficient franking credits for the Bank to be able to continue to fully frank future dividend payments. Dividend payments on or after 1 July 2004 will be franked at the 30% tax rate. These calculations have been based on the taxation law as at 30 June 2004.

Dividend History

	Cents		Half-year			Full Year			Full Year			DRP		DRP
	Per		Payout			Payout			Payout Ratio			Price		Participation
Half Year Ended	Share		Ratio(1)			Ratio(1)			Cash Basis(2)			$		Rate(3)
31 December 2001		68		71.8	%		—			—			32		18.7	%
30 June 2002		82		71.6	%		71.7	%		76.2	%		31.9		19.0	%
31 December 2002		69		143.2	%		—			—			24.8		19.2	%
30 June 2003		85		77.7	%		97.7	%		75.9	%		28		18.9	%
31 December 2003		79		82.7	%		—			—			31.6		18.8	%
30 June 2004		104		103.8	%		93.5	%		89.1	%		—		—

(1)	Dividend Payout Ratio: dividends divided by earnings.
(2)	Payout ratio based on net profit after tax before goodwill amortisation and appraisal value uplift/(reduction).
(3)	DRP Participation Rate: the percentage of total issued share capital participating in the Dividend Reinvestment Plan.

93

Notes to the financial statements

NOTE 7 Earnings Per Share

					GROUP
	2004		2003		2002
	c		c		c
Earnings Per Ordinary Share
- Basic		196.9		157.4		209.6
- Fully diluted		196.8		157.3		209.3

	$M		$M		$M
Reconciliation of earnings used in the calculation of earnings per share
Profit from ordinary activities after income tax	2,581		2,018		2,656
Less: Preference share dividends	(37	)	(36	)	(34	)
Less: Other equity instrument dividends	(55	)	—		—
Less: Dividends to outside equity interests	(8	)	(4	)	—
Less: Outside equity interests	(9	)	(6	)	(1	)
Earnings used in calculation of earnings per share	2,472		1,972		2,621

	Number of Shares
	2004		2003		2002
	M		M		M
Weighted average number of ordinary shares used in the calculation of basic earnings per share		1,256		1,253		1,250
Effect of dilutive securities - share options		1		1		2
Weighted average number of ordinary shares used in the calculation of fully diluted earnings per share		1,257		1,254		1,252

NOTE 8 Cash and Liquid Assets

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Australia
Notes, coins and cash at bankers		1,488		1,426		1,423		1,330
Money at short call		3		14		—		—
Securities purchased under agreements to resell		4,091		2,900		4,091		2,900
Bills receivable and remittances in transit		158		217		156		218
Total Australia		5,740		4,557		5,670		4,448
Overseas
Notes, coins and cash at bankers		60		65		—		2
Money at short call		261		377		77		14
Bills receivable and remittances in transit		18		33		—		—
Securities purchased under agreements to resell		374		543		738		892
Total Overseas		713		1,018		815		908
Total Cash and Liquid Assets		6,453		5,575		6,485		5,356

NOTE 9 Receivables from Other Financial Institutions

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Australia		4,914		3,324		4,910		3,287
Overseas		3,455		3,742		2,158		2,149
Total Receivables from Other Financial Institutions		8,369		7,066		7,068		5,436

94

Notes to the financial statements

NOTE 10 Trading Securities

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Australia
Listed:
Australian Public Securities
Commonwealth and States		621		551		621		551
Local and semi-government		1,114		755		1,114		755
Bills of exchange		1,576		947		1,576		947
Commercial paper		885		397		889		505
Certificates of deposit		5,088		2,141		5,088		2,142
Medium term notes		1,410		745		1,410		745
Other securities		273		679		267		675
Unlisted:
Medium term notes		268		106		268		106
Other securities		75		13		—		13
Total Australia		11,310		6,334		11,233		6,439
Overseas
Listed:
Government securities		826		698		284		87
Eurobonds		524		938		524		938
Bills of exchange		772		785		—		—
Floating rate notes		836		603		836		608
Commercial paper		403		726		—		—
Unlisted:
Commercial paper		17		—		—		—
Other securities		208		351		—		—
Total Overseas		3,586		4,101		1,644		1,633
Total Trading Securities		14,896		10,435		12,877		8,072

95

Notes to the financial statements

NOTE 11 Investment Securities

					GROUP				BANK
	2004		2003		2002		2004		2003
	$M		$M		$M		$M		$M
Australia
Listed:
Australian Public Securities
Commonwealth and States		2,209		1,915		1,969		2,209		1,915
Bills of exchange		30		—		18		—		—
Other securities and equity investments		444		439		456		433		433
Unlisted:
Australian Public Securities
Local and semi-government		80		80		80		—		—
Medium term notes		448		942		968		58		57
Other securities and equity investments		611		965		578		69		58
Total Australia		3,822		4,341		4,069		2,769		2,463
Overseas
Listed:
Government securities		758		484		804		715		463
Treasury notes		—		5		—		—		—
Certificates of deposit		1,242		1,357		1,379		1,228		1,343
Eurobonds		792		993		1,045		655		796
Medium term notes		425		239		—		142		239
Floating rate notes		732		324		377		121		111
Other securities		1,121		1,392		787		279		631
Unlisted:
Government securities		137		98		113		—		—
Eurobonds		155		230		212		155		230
Medium term notes		1,200		583		114		189		117
Floating rate notes		709		900		784		273		438
Other securities and equity investments		354		90		1,082		100		—
Total Overseas		7,625		6,695		6,697		3,857		4,368
Total Investment Securities		11,447		11,036		10,766		6,626		6,831

96

Notes to the financial statements

NOTE 11 Investment Securities continued

					GROUP
			Market Value at 30 June
	2004		2003		2002
	$M		$M		$M
Australia
Australian Public Securities
Commonwealth and States		2,328		2,118		2,109
Bills of exchange		30		—		18
Medium term notes		449		935		973
Other securities and equity investments		1,034		1,400		1,042
Total Australia		3,841		4,453		4,142
Overseas
Government securities		897		593		928
Treasury notes		—		5		—
Certificates of deposit		1,223		1,357		1,379
Eurobonds		983		1,260		1,263
Medium term notes		1,622		816		114
Floating rate notes		1,442		1,215		1,158
Other securities and equity investments		1,482		1,488		1,867
Total Overseas		7,649		6,734		6,709
Total Investment Securities		11,490		11,187		10,851
Net Unrealised Surplus		43		151		85

Gross Unrealised Gains and Losses of Group

     The following table sets out the gross unrealised gains and losses of the Group’s investment securities.

					At 30 June 2004								At 30 June 2003
	Amortised		Gross		Unrealised		Fair		Amortised		Gross		Unrealised		Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
	$M		$M		$M		$M		$M		$M		$M		$M
Australia
Australian Public Securities
Commonwealth and States		2,289		46		7		2,328		1,995		123		—		2,118
Bills of exchange		30		—		—		30		—		—		—		—
Medium term notes		448		1		—		449		942		4		11		935
Other securities and equity investments(1)		1,055		11		32		1,034		1,404		—		4		1,400
Total Australia		3,822		58		39		3,841		4,341		127		15		4,453
Overseas
Government securities		895		3		1		897		582		11		—		593
Treasury notes		—		—		—		—		5		—		—		5
Certificates of deposit(2)		1,242		—		19		1,223		1,357		—		—		1,357
Eurobonds		947		36		—		983		1,223		56		19		1,260
Medium term notes		1,625		—		3		1,622		822		12		18		816
Floating rate notes		1,441		1		—		1,442		1,224		—		9		1,215
Other securities and equity investments		1,475		7		—		1,482		1,482		6		—		1,488
Total Overseas		7,625		47		23		7,649		6,695		85		46		6,734
Total Investment Securities		11,447		105		62		11,490		11,036		212		61		11,187

     Investment securities are carried at cost or amortised cost and are purchased with the intent of being held to maturity. The investment portfolio is managed in the context of the full balance sheet of the Group.

(1)

Equity derivatives are in place to hedge equity market risk in respect of structured equity products for customers. There are $31 million of net deferred gains on these contracts (2003: $4 million net deferred gains) which offset the above unrealised losses and these are disclosed within Note 39. At the end of the financial year there were no net deferred gains or losses (2003: $1 million of deferred losses) included in the amortised cost value. The net fair value of the equity investments relating to the $32 million loss is $309 million.

(2)

Unrealised losses relate to the whole of the net fair value disclosed above. The loss is temporary as it is caused by movements in interest rates and will reverse on maturity.

97

Notes to the financial statements

NOTE 11 Investment Securities continued

Maturity Distribution and Average Yield

     The following table analyses the maturities and weighted average yields of the Group’s holdings of investment securities.

																	GROUP
	Maturity Period at 30 June 2004
	1 to 12 months				1 to 5 years				5 to 10 years				10 years or more				Total
	$M		%		$M		%		$M		%		$M		%		$M
Australia
Australian Public Securities Commonwealth and States		204		6.09		1,303		5.97		717		6.41		65		6.14		2,289
Bills of exchange		30		5.30		—		—		—		—		—		—		30
Medium term notes		425		7.40		23		9.19		—		—		—		—		448
Other securities, commercial paper and equity investments		334		5.03		721		5.61		—		—		—		—		1,055
Total Australia		993				2,047				717				65				3,822
Overseas
Government securities		633		3.06		196		2.23		66		1.33		—		—		895
Certificates of deposit		1,228		2.16		14		0.74		—		—		—		—		1,242
Eurobonds		190		6.02		695		5.76		62		5.50		—		—		947
Medium term notes		92		5.72		942		3.82		591		4.21		—		—		1,625
Floating rate notes		446		4.16		722		3.88		232		4.00		41		1.02		1,441
Other securities, commercial paper and equity investments		16		4.26		529		4.68		930		5.81		—		—		1,475
Total Overseas		2,605				3,098				1,881				41				7,625
Total Investment Securities		3,598				5,145				2,598				106				11,447
Maturities at Fair Value		3,587				5,200				2,597				106				11,490

Additional Disclosure

     Proceeds at or close to maturity of investment securities were $24,407 million (2003: $17,719 million; 2002: $22,192 million).

     Proceeds from sale of investment securities were $697 million (2003: $23 million; 2002: $295 million).

     Realised capital gains were $6 million and realised capital losses were $4 million (2003: realised capital gains $7 million and realised capital losses $5 million; 2002: realised capital gains $86 million and realised capital losses $14 million).

98

Notes to the financial statements

NOTE 12 Loans, Advances and Other Receivables

				GROUP						BANK
	2004			2003			2004			2003
	$M			$M			$M			$M
Australia
Overdrafts		2,423			2,452			2,423			2,452
Housing loans		104,883			87,592			101,717			87,149
Credit card outstandings		5,890			5,227			5,890			5,227
Lease financing		3,843			3,988			1,279			1,543
Bills discounted		3,454			2,303			3,454			2,303
Term loans		39,708			36,742			36,943			31,115
Reedemable preference share financing		37			—			37			—
Equity participation in leveraged leases		1,120			1,276			433			446
Other lending		420			604			587			618
Total Australia		161,778			140,184			152,763			130,853
Overseas
Overdrafts		2,481			2,005			—			—
Housing loans		16,967			12,611			46			51
Credit card outstandings		358			296			—			—
Lease financing		175			197			81			80
Term loans		10,314			7,444			3,222			2,098
Redeemable preference share financing		262			511			—			—
Other lending		60			13			—			—
Total Overseas		30,617			23,077			3,349			2,229
Gross Loans, Advances and Other Receivables		192,395			163,261			156,112			133,082
Less
Provisions for impairment (Note 13)
General provision		(1,393	)		(1,325	)		(1,242	)		(1,152	)
Specific provision against loans and advances		(143	)		(205	)		(121	)		(157	)
Unearned income
Term loans		(758	)		(618	)		(412	)		(12	)
Lease financing		(541	)		(549	)		(151	)		(157	)
Leveraged leases		(111	)		(143	)		(21	)		(39	)
Interest reserved		(23	)		(26	)		(23	)		(25	)
Unearned tax remissions on leveraged leases		(35	)		(48	)		(3	)		(3	)
		(3,004	)		(2,914	)		(1,973	)		(1,545	)
Net Loans, Advances and Other Receivables		189,391			160,347			154,139			131,537
Lease receivables, net of unearned income
(included above)
Current		1,072			1,402			592			743
Non current		2,405			2,234			617			724
		3,477			3,636			1,209			1,467

Leasing Arrangements

     Retail Banking Services provides vehicle and equipment lease finance to a broad range of industries including transport, service, earthmoving, construction, manufacturing and mining. Most lease finance arrangements are for terms of between three and five years and rentals are generally payable monthly in advance. Premium Business Services provides leasing services and hire purchase to corporate clients for a range of equipment. They also arrange off-balance sheet finance for large scale long life plant and equipment across different tax jurisdictions.

99

Notes to the financial statements

NOTE 12 Loans, Advances and Other Receivables continued

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Finance Leases
Minimum lease payments receivable:
No later than one year		1,189		1,385		640		826
Later than one year but not later than five years		1,861		2,082		570		686
Later than five years		968		718		150		111
Lease financing		4,018		4,185		1,360		1,623
Leverage Leases
Minimum lease payments receivable:
No later than one year		421		304		217		59
Later than one year but not later than five years		546		575		97		203
Later than five years		153		397		119		184
Equity Participation in Leveraged Leases		1,120		1,276		433		446

100

Notes to the financial statements

NOTE 12 Loans, Advances and Other Receivables continued

Maturity Distribution of Loans

     The following table sets forth the contractual maturity distribution of the Group’s loans, advances and other receivables (excluding bank acceptances) at 30 June 2004.

							GROUP
	Maturity Period at 30 June 2004
			Maturing
	Maturing		Between		Maturing
	One Year		One & Five		After Five
	or Less		Years		Years		Total
	$M		$M		$M		$M
Australia
Government and public authorities		241		339		552		1,132
Agriculture, forestry and fishing		1,451		1,595		879		3,925
Financial, investment and insurance		2,754		468		471		3,693
Real estate
Mortgage (1)		14,417		13,411		77,055		104,883
Construction (2)		1,688		686		252		2,626
Personal		5,029		5,139		47		10,215
Lease financing		1,564		2,299		1,100		4,963
Other commercial and industrial		19,987		7,375		2,979		30,341
Total Australia		47,131		31,312		83,335		161,778
Overseas
Government and public authorities		69		78		35		182
Agriculture, forestry and fishing		619		1,292		1,366		3,277
Financial, investment and insurance		2,211		1,816		1,830		5,857
Real estate
Mortgage (1)		2,268		5,220		9,479		16,967
Construction (2)		98		81		78		257
Personal		375		39		1		415
Lease financing		66		109		—		175
Other commercial and industrial		2,001		1,012		474		3,487
Total Overseas		7,707		9,647		13,263		30,617
Gross Loans, Advances and Other Receivables		54,838		40,959		96,598		192,395
Interest Rate Sensitivity of Lending
Australia		32,398		17,523		53,767		103,688
Overseas		3,558		2,827		3,935		10,320
Total Variable Interest Rates		35,956		20,350		57,702		114,008
Australia		14,733		13,789		29,568		58,090
Overseas		4,149		6,820		9,328		20,297
Total Fixed Interest Rates		18,882		20,609		38,896		78,387
Gross Loans, Advances and Other Receivables		54,838		40,959		96,598		192,395

⁽¹⁾ Principally owner occupied housing. While most of these loans would have a contractual term of 20 years or more, the actual average term of the portfolio is less than five years.

⁽²⁾ Financing real estate and land development projects.

101

Notes to the financial statements
NOTE 13 Provisions For Impairment

													GROUP						BANK
	2004			2003			2002			2001			2000			2004			2003
	$M			$M			$M			$M			$M			$M			$M
General Provisions
Opening balance		1,325			1,356			1,399			1,358			1,081			1,152			1,190
Charge against profit		276			305			449			385			196			263			266
Acquired provisions, including fair value adjustments		—			—			—			51			214			—			—
Transfer to specific provisions		(202	)		(350	)		(495	)		(411	)		(140	)		(189	)		(322	)
Bad debts recovered		79			74			56			88			54			66			63
Adjustments for exchange rate fluctuations and other items		2			(9	)		1			(29	)		(3	)		19			(3	)
		1,480			1,376			1,410			1,442			1,402			1,311			1,194
Bad debts written off		(87	)		(51	)		(54	)		(43	)		(44	)		(69	)		(42	)
Closing balance		1,393			1,325			1,356			1,399			1,358			1,242			1,152
Specific Provisions
Opening balance		205			270			234			432			275			157			231
Charge against profit		—			—			—			—			—			—			—
Acquired provisions, including fair value adjustments		—			—			—			6			219			—			—
Transfer from general provision for
New and increased provisioning		264			416			546			495			236			243			382
Less write-back of provisions no longer required		(62	)		(66	)		(51	)		(84	)		(96	)		(54	)		(60	)
Net transfer		202			350			495			411			140			189			322
Adjustments for exchange rate fluctuations and other items		3			(11	)		(11	)		(17	)		5			2			(17	)
		410			609			718			832			639			348			536
Bad debts written off		(267	)		(404	)		(448	)		(598	)		(207	)		(227	)		(379	)
Closing balance		143			205			270			234			432			121			157
Total Provisions for Impairment		1,536			1,530			1,626			1,633			1,790			1,363			1,309
Specific provisions for impairment comprise the following segments:
Provisions against loans and advances		143			205			270			233			431			121			157
Provisions for diminution		—			—			—			1			1			—			—
Total		143			205			270			234			432			121			157

	%	%	%	%	%	%	%
Provision Ratios
Specific provisions for impairment as % of gross impaired assets net of interest reserved	42.06	32.08	30.54	36.06	43.03	36.00	24.84
Total provisions for impairment as % of gross impaired assets net of interest reserved	451.76	239.44	183.94	251.62	178.29	403.55	207.25
General provisions as % of risk weighted assets	0.82	0.90	0.96	1.01	1.06	0.79	0.84

	$M			$M			$M			$M			$M			$M			$M
Charge to profit and loss for bad and doubtful debts comprises:
General provisions		276			305			449			385			196			263			266
Specific provisions		—			—			—			—			—			—			—
Total Charge for Bad and Doubtful Debts		276			305			449			385			196			263			266
Ratio of net charge-offs during the period to average gross loans, advances and other receivables outstanding during the period		0.16	%		0.19	%		0.31	%		0.28	%		0.16	%		0.18	%		0.21	%

102

Notes to the financial statements
NOTE 13 Provisions For Impairment continued

				GROUP						BANK
	2004			2003			2004			2003
	$M			$M			$M			$M
Total charge for bad and doubtful debts		276			305			263			266
The charge is required for:
Specific Provisioning
New and increased provisioning		264			416			243			382
Less provisions no longer required		(62	)		(66	)		(54	)		(60	)
Net specific provisioning		202			350			189			322
Provided from general provision		(202	)		(350	)		(189	)		(322	)
Charge to profit and loss		—			—			—			—
General Provisioning
Direct write-offs		87			51			69			42
Recoveries of amounts previously written off		(79	)		(74	)		(66	)		(63	)
Movement in general provision		66			(22	)		71			(35	)
Funding of specific provisions		202			350			189			322
Charge to profit and loss		276			305			263			266
Total Charge for Bad and Doubtful Debts		276			305			263			266

Specific Provisions for Impairment by Industry Category

     The following table sets forth the Group’s specific provisions for impairment by industry category and the percentage of loans in each category to total loans as at 30 June 2000, 2001, 2002, 2003 and 2004.

																	GROUP
																	At 30 June
	2004				2003				2002				2001				2000
	$M		%		$M		%		$M		%		$M		%		$M		%
Australia
Government and public authorities		—		1		—		1		—		2		—		1		—		1
Agriculture, forestry and fishing		2		2		3		2		10		3		8		3		35		3
Financial, investment and insurance		1		2		2		1		26		1		24		3		23		4
Real estate				—
Mortgage(1)		6		54		6		54		6		50		4		47		8		47
Construction(2)		4		2		—		1		4		1		6		2		6		2
Personal		38		5		36		7		35		8		28		8		17		9
Lease financing		3		3		4		3		6		4		7		8		6		5
Other commercial and industrial		74		15		112		16		134		18		77		19		110		17
Total Australia		128		84		163		86		221		86		154		88		205		88
Overseas
Government and public authorities		—		—		10		—		11		—		15		—		13		—
Agriculture, forestry and fishing		—		2		1		1		—		1		—		1		—		1
Financial, investment and insurance		—		3		—		2		12		2		4		2		1		2
Real estate
Mortgage(1)		6		9		7		8		3		7		7		6		3		5
Construction(2)		—		—		—		—		—		—		—		—		—		—
Personal		8		—		4		1		3		—		3		—		69		1
Lease financing		—		—		—		—		—		—		—		—		—		—
Other commercial and industrial		1		2		20		2		20		3		51		3		141		2
Total Overseas		15		16		42		14		49		14		80		12		227		12
Total Specific Provisions		143		100		205		100		270		100		234		100		432		100

(1)	Principally owner occupied housing.
(2)	Primarily financing real estate and land development projects.

103

Notes to the financial statements

NOTE 13 Provisions For Impairment continued

Bad Debts Written Off by Industry Category

     The following table sets forth the Group’s bad debts written-off and bad debts recovered for financial years ended 30 June 2000, 2001, 2002, 2003 and 2004.

										GROUP
							Year Ended 30 June
	2004		2003		2002			2001			2000
	$M		$M		$M			$M			$M
Bad Debts Written Off
Australia
Government and public authorities		—		—		—			—			—
Agriculture, forestry and fishing		2		4		6			10			6
Financial, investment and insurance		6		26		6			1			2
Real estate
Mortgage(1)		5		8		11			10			8
Construction(2)		1		—		4			14			24
Personal		228		209		177			142			104
Lease financing		8		11		18			16			11
Other commercial and industrial		75		171		178			301			90
Total Australia		325		429		400			494			245
Overseas
Government and public authorities		6		—		1			—			—
Agriculture, forestry and fishing		—		—		—			—			—
Financial, investment and insurance		1		16		58			6			—
Real estate
Mortgage(1)		1		2		2			1			1
Construction(2)		—		—		—			—			—
Personal		7		7		6			38			4
Lease financing		—		—		—			—			—
Other commercial and industrial		14		1		35			102			1
Total Overseas		29		26		102			147			6
Gross Bad Debts Written Off		354		455		502			641			251
Bad Debts Recovered
Australia		73		57		49			59			46
Overseas		6		17		7			29			8
Bad Debts Recovered		79		74		56			88			54
Net Bad Debts Written Off		275		381		446			553			197

(1)	Principally owner occupied housing.
(2)	Primarily financing real estate and land development projects.

104

Notes to the financial statements

NOTE 13 Provisions For Impairment continued

Bad Debts Recovered by Industry Category

     The following table sets forth the Group’s bad debts recovered by industry category for financial years ended 30 June 2000, 2001, 2002, 2003 and 2004.

										GROUP
							Year Ended 30 June
	2004		2003		2002			2001			2000
	$ M		$ M		$ M			$ M			$ M
Australia
Government and public authorities		—		—		—			—			—
Agriculture, forestry and fishing		5		1		1			—			2
Financial, investment and insurance		1		4		—			9			1
Real estate
Mortgage(1)		1		—		1			1			1
Construction(2)		—		—		—			1			2
Personal		50		38		30			30			28
Lease financing		3		2		—			1			2
Other commercial and industrial		13		12		17			17			10
Total Australia		73		57		49			59			46
Overseas
Government and public authorities		—		—		—			—			—
Agriculture, forestry and fishing		—		—		—			—			—
Financial, investment and insurance		1		1		1			—			2
Real estate
Mortgage(1)		—		—		—			—			—
Construction(2)		—		—		3			1			1
Personal		4		4		—			3			3
Lease financing		—		—		—			—			—
Other commercial and industrial		1		12		3			25			2
Total Overseas		6		17		7			29			8
Bad Debts Recovered		79		74		56			88			54

(1)	Principally owner occupied housing.
(2)	Primarily financing real estate and land development projects.

105

Notes to the financial statements

NOTE 14 Credit Risk Management

     The Group has clearly defined credit policies for the approval and management of credit risk. Credit underwriting standards, which incorporate income/repayment capacity, acceptable terms and security and loan documentation tests exist for all major lending areas.

     The Group relies, in the first instance, on the assessed integrity and ability of the debtor or counterparty to meet its contracted financial obligations for repayment. Collateral security, in the form of real property or a floating charge is generally taken for business credit except for major government, bank and corporate counterparties of strong financial standing. Longer term consumer finance is generally secured against real estate while short term revolving consumer credit is generally unsecured.

     The credit risk portfolio is divided into two segments, statistically managed and credit risk rated.

     Statistically managed exposures generally comprise facilities of less than $250,000 for housing loan, credit card, personal loan and some leasing products. These exposures are generally not individually reviewed unless arrears occur. The portfolios are reviewed by the business unit with an overview by the Risk Asset Review unit.

     Facilities in the statistically managed segment become classified for remedial management by centralised units based on arrears status. Impaired assets in this segment are those ‘classified’ facilities that are not well secured and past due 180 days or more. Most of these facilities are written off immediately on becoming past due 180 days or more.

     Credit risk rated exposures generally comprise business and corporate exposures, including bank and government exposures. Each exposure is assigned an internal risk rating that is based on an assessment of the risk of default and the risk of loss in the event of default. Credit risk rated exposures are generally required to be reviewed annually, unless they are small transactions that are managed on a behavioural basis after their initial rating at origination. The risk rated segment is subject to inspection by the Risk Asset Review unit, which is independent of the business units and which reports quarterly on its findings to the Board Risk Committee.

     Most risk rated portfolios are reviewed on a random basis, usually within a period of twenty four months, by the Risk Asset Review unit. High risk portfolios are reviewed more frequently. Credit processes, including compliance with policy and underwriting standards, and application of risk ratings, are examined, and reported where cases of non-compliance are observed.

     Facilities in the credit risk rated segment become classified for remedial management by centralised units based on assessment in the risk rating system. These facilities are generally those classified as troublesome (which equate to the APRA classifications of special mention and substandard) and impaired assets. Impaired assets in this segment are those facilities where a specific provision for impairment has been raised, the facility is maintained on a cash basis, a loss of principal or interest is anticipated, facilities have been restructured or other assets have been accepted in satisfaction of an outstanding debt. Loans are generally classified as non-accrual when receivership, insolvency or bankruptcy occurs. Provisions for impairment are raised for an amount equal to the difference between the exposure and the estimated amount ultimately recoverable from the borrower.

     A centralised exposure management system records all significant credit risks borne by the Group.

     The Risk Committee of the Board operates under a charter of the Board in terms of which the Committee oversees the Group’s credit management policies and practices. The Committee usually meets every two months, and more often if required.

     The Group uses a portfolio approach to the management of its credit risk. A key element is a well diversified portfolio. The Group uses various portfolio management tools, including a centralised portfolio model that assesses risk and return on an overall portfolio and segmented basis, to assist in diversifying the credit portfolio. The Group is involved in credit derivative transactions, has purchased various assets in the market, and has carried out various asset securitisations and a Collateralised Loan Obligation issue.

106

Notes to the financial statements

NOTE 14 Credit Risk Management continued

Total Gross Credit Risk by Industry

     The following table sets out the Group’s total gross credit risk by industry as at 30 June 2000, 2001, 2002, 2003 and 2004. The industry profile of the loans, advances and other receivables content for the five financial years to 30 June 2004 is shown on page 112.

													GROUP
														At 30 June
	2004			2003			2002			2001				2000
Industry	$M			$M			$M			$M				$M
Australia
Government and public authorities		5,672			5,810			5,955			6,012				6,195
Agriculture, forestry and fishing		5,616			5,100			5,480			6,308				6,141
Financial, investment and insurance		26,301			19,867			20,926			22,490				20,908
Real estate
Mortgage(1)		110,209			91,956			85,032			73,800				63,696
Construction(2)		3,619			2,722			3,837			4,547				4,205
Personal		10,665			12,327			11,718			10,979				12,911
Lease financing		4,963			5,264			5,425			6,628				6,937
Other commercial and industrial		59,711			51,469			43,531			42,893				47,297
Total Australia		226,756			194,515			181,904			173,657				168,290
Overseas
Government and public authorities		2,307			1,709			1,390			385				1,152
Agriculture, forestry and fishing		3,277			2,278			1,863			1,564				1,017
Financial, investment and insurance		22,098			14,828			14,192			11,897				8,008
Real estate
Mortgage(1)		17,722			13,428			10,735			8,085				7,268
Construction(2)		258			210			185			198				152
Personal		420			1,391			343			449				1,487
Lease financing		175			197			256			146				217
Other commercial and industrial		5,894			9,080			10,173			10,359				10,300
Total Overseas		52,151			43,121			39,137			33,083				29,601
Total Gross Credit Risk		278,907			237,636			221,041			206,740				197,891
Less Unearned Income		(1,410	)		(1,310	)		(1,219	)		(1,343	)			(1,465	)
Total Credit Risk		277,497			236,326			219,822			205,397				196,426
Charge for Bad and Doubtful Debts		276			305			449			385				196
Loss Rate(3)		0.10	%		0.13	%		0.20	%		0.19	%			0.11	%

(1)	Principally owner occupied housing.
(2)	Primarily financing real estate and land development projects.
(3)	The loss rate is the charge as a percentage of the credit risk.

     The Group has a good quality and well diversified credit portfolio in Australia, with 48.7% of the exposure in mortgage loans and a further 11.6% in finance, investment and insurance (primarily banks). 18.7% of exposure is overseas, of which 34.0% is in mortgage loans. Overall over 67% of individually risk rated exposures in the commercial portfolio (including government and finance) are of investment grade or equivalent quality.

107

Notes to the financial statements

NOTE 14 Credit Risk Management continued

     The following table sets out the Group’s credit risk by industry and asset class at 30 June 2004.

					Loans
					Advances		Bank
	Trading		Investment		and Other		Acceptances		Contingent
	Securities		Securities		Receivables		of Customers		Liabilities		Derivatives		Total
Industry	$M		$M		$M		$M		$M		$M		$M
Australia
Government and public authorities		1,735		2,289		1,132		11		437		68		5,672
Agriculture, forestry and fishing		—		—		3,925		1,517		65		109		5,616
Financial, investment and insurance		6,664		—		3,693		684		1,186		9,160		21,387
Real estate														—
Mortgage(1)		—		—		104,883		—		5,326		—		110,209
Construction(2)		—		—		2,626		302		642		49		3,619
Personal		—		—		10,215		333		116		1		10,665
Lease financing		—		—		4,963		—		—		—		4,963
Other commercial and industrial		2,911		1,533		30,341		12,172		5,956		6,798		59,711
Total Australia		11,310		3,822		161,778		15,019		13,728		16,185		221,842
Overseas
Government and public authorities		1,050		902		182		—		98		37		2,269
Agriculture, forestry and fishing		—		—		3,277		—		—		—		3,277
Financial, investment and insurance		2,058		5,592		5,857		—		1,733		3,403		18,643
Real estate		—		—		—		—		—		—		—
Mortgage(1)		—		—		16,967		—		755		—		17,722
Construction(2)		—		—		257		—		1		—		258
Personal		—		—		415		—		2		3		420
Lease financing		—		—		175		—		—		—		175
Other commercial and industrial		478		1,131		3,487		—		551		247		5,894
Total Overseas		3,586		7,625		30,617		—		3,140		3,690		48,658
Gross Balances		14,896		11,447		192,395		15,019		16,868		19,875		270,500
Other Risk Concentrations Receivables due from other financial institutions														8,369
Deposits with regulatory authorities														38
Total Gross Credit Risk														278,907

(1)	Principally owner occupied housing.
(2)	Primarily financing real estate and land development projects.

     Risk concentrations for contingent liabilities and derivatives are based on the credit equivalent balance in Note 38, Contingent Liabilities and Assets and Note 39, Market Risk respectively.

108

Notes to the financial statements

NOTE 14 Credit Risk Management continued

     The following table sets out the Group’s credit risk by industry and asset class as at 30 June 2003.

					Loans
					Advances		Bank
	Trading		Investment		and Other		Acceptances		Contingent
	Securities		Securities		Receivables		of Customers		Liabilities		Derivatives		Total
Industry	$M		$M		$M		$M		$M		$M		$M
Australia
Government and public authorities		1,703		1,995		1,505		2		494		111		5,810
Agriculture, forestry and fishing		—		—		3,677		1,281		74		68		5,100
Financial, investment and insurance		3,089		—		2,024		699		1,766		8,964		16,542
Real estate
Mortgage(1)		—		—		87,592		—		4,364		—		91,956
Construction(2)		—		—		1,701		387		420		214		2,722
Personal		—		—		11,972		263		90		2		12,327
Lease financing		—		—		5,264		—		—		—		5,264
Other commercial and industrial		1,542		2,346		26,449		10,490		4,499		6,143		51,469
Total Australia		6,334		4,341		140,184		13,122		11,707		15,502		191,190
Overseas
Government and public authorities		698		582		222		—		148		36		1,686
Agriculture, forestry and fishing		—		—		2,278		—		—		—		2,278
Financial, investment and insurance		1,135		3,143		3,210		62		1,773		1,764		11,087
Real estate
Mortgage(1)		—		—		12,611		—		817		—		13,428
Construction(2)		—		—		209		—		—		1		210
Personal		—		—		1,391		—		—		—		1,391
Lease financing		—		—		197		—		—		—		197
Other commercial and industrial		2,268		2,970		2,959		13		662		208		9,080
Total Overseas		4,101		6,695		23,077		75		3,400		2,009		39,357
Gross Balances		10,435		11,036		163,261		13,197		15,107		17,511		230,547
Other Risk Concentrations
Receivables due from other financial institutions														7,066
Deposits with regulatory authorities														23
Total Gross Credit Risk														237,636

(1)	Principally owner occupied housing.
(2)	Primarily financing real estate and land development projects.

109

Notes to the financial statements

NOTE 14 Credit Risk Management continued

Impaired Assets by Industry and Status

     The following table sets out the Group’s impaired asset position by industry and status as at 30 June 2004.

	Total		Impaired		Provisions for							Net
	Risk		Assets		Impairment		Write-offs		Recoveries			Write-offs
Industry	$M		$M		$M		$M		$M			$M
Australia
Government and public authorities		5,672		—		—		—		—			—
Agriculture, forestry and fishing		5,616		19		2		2		(5	)		(3	)
Financial, investment and insurance		21,387		6		1		6		(1	)		5
Real estate
Mortgage(1)		110,209		—		6		5		(1	)		4
Construction(2)		3,619		15		4		1		—			1
Personal		10,665		6		38		228		(50	)		178
Lease financing		4,963		5		3		8		(3	)		5
Other commercial and industrial		59,711		294		74		75		(13	)		62
Total Australia		221,842		345		128		325		(73	)		252
Overseas
Government and public authorities		2,269		—		—		6		—			6
Agriculture, forestry and fishing		3,277		—		—		—		—			—
Financial, investment and insurance		18,643		5		—		1		(1	)		—
Real estate
Mortgage(1)		17,722		11		6		1		—			1
Construction(2)		258		—		—		—		—			—
Personal		420		1		8		7		(4	)		3
Lease financing		175		—		—		—		—			—
Other commercial and industrial		5,894		1		1		14		(1	)		13
Total Overseas		48,658		18		15		29		(6	)		23
Gross Balances		270,500		363		143		354		(79	)		275
Receivables due from other financial institutions		8,369
Deposits with regulatory authorities		38
Total Gross Credit Risk		278,907

(1)	Principally owner occupied housing.
(2)	Primarily financing real estate and land development projects.

110

Notes to the financial statements

NOTE 14 Credit Risk Management continued

     The following table sets out the Group’s impaired asset position by industry and status as at 30 June 2003.

	Total		Impaired		Provisions for							Net
	Risk		Assets		Impairment		Write-offs		Recoveries			Write-offs
Industry	$M		$M		$M		$M		$M			$M
Australia
Government and public authorities		5,810		—		—		—		—			—
Agriculture, forestry and fishing		5,100		19		3		4		(1	)		3
Financial, investment and insurance		16,542		6		2		26		(4	)		22
Real estate
Mortgage(1)		91,956		—		6		8		—			8
Construction(2)		2,722		5		—		—		—			—
Personal		12,327		11		36		209		(38	)		171
Lease financing		5,264		12		4		11		(2	)		9
Other commercial and industrial		51,469		492		112		171		(12	)		159
Total Australia		191,190		545		163		429		(57	)		372
Overseas
Government and public authorities		1,686		46		10		—		—			—
Agriculture, forestry and fishing		2,278		—		1		—		—			—
Financial, investment and insurance		11,087		5		—		16		(1	)		15
Real estate
Mortgage(1)		13,428		—		7		2		—			2
Construction(2)		210		—		—		—		—			—
Personal		1,391		1		4		7		(4	)		3
Lease financing		197		—		—		—		—			—
Other commercial and industrial		9,080		68		20		1		(12	)		(11	)
Total Overseas		39,357		120		42		26		(17	)		9
Gross Balances		230,547		665		205		455		(74	)		381
Receivables due from other financial Institutions		7,066
Deposits with regulatory authorities		23
Total Gross Credit Risk		237,636

⁽¹⁾ Principally owner occupied housing.

⁽²⁾ Primarily financing real estate and land development projects.

Large Exposures

     Concentration of exposure to any debtor or counterparty group is controlled by a large credit exposure policy. All exposures outside the policy are approved by the Board Risk Committee.

     The following table shows the aggregate number of the Bank’s counterparty Corporate and Industrial exposures (including direct and contingent exposure) which individually were greater than 5% of the Group’s capital resources (Tier One and Tier Two capital):

	2004		2003		2002		2001		2000
	Number		Number		Number		Number		Number
10% to less than 15% of Group’s capital resources		—		—		—		—		—
5% to less than 10% of Group’s capital resources		1		—		1		2		1

111

Notes to the financial statements

NOTE 14 Credit Risk Management continued

Credit Portfolio Receivables by Industry

     The following table sets out the distribution of the Group’s loans, advances and other receivables (excluding bank acceptances) by industry at 30 June 2000, 2001, 2002, 2003 and 2004.

													At 30 June
	2004			2003			2002			2001			2000
Industry	$M			$M			$M			$M			$M
Australia
Government and public authorities		1,132			1,505			2,466			1,655			1,681
Agriculture, forestry and fishing		3,925			3,677			3,893			4,734			4,686
Financial, investment and insurance		3,693			2,024			1,435			4,670			5,167
Real estate
Mortgage(1)		104,883			87,592			75,394			65,466			63,471
Construction(2)		2,626			1,701			2,182			2,548			2,627
Personal		10,215			11,972			11,488			10,576			11,759
Lease financing		4,963			5,264			5,425			6,628			6,937
Other commercial and industrial		30,341			26,449			26,866			25,782			23,603
Total Australia		161,778			140,184			129,149			122,059			119,931
Overseas
Government and public authorities		182			222			204			165			204
Agriculture, forestry and fishing		3,277			2,278			1,863			1,258			996
Financial, investment and insurance		5,857			3,210			3,035			2,824			2,278
Real estate
Mortgage(1)		16,967			12,611			10,444			8,045			7,266
Construction(2)		257			209			185			177			152
Personal		415			1,391			337			440			1,470
Lease financing		175			197			256			146			217
Other commercial and industrial		3,487			2,959			4,573			4,081			3,254
Total Overseas		30,617			23,077			20,897			17,136			15,837
Gross Loans, Advances and Other Receivables		192,395			163,261			150,046			139,195			135,768
Provisions for bad and doubtful debts, unearned income, interest reserved and unearned tax remissions on leverage leases		(3,004	)		(2,914	)		(2,972	)		(3,136	)		(3,504	)
Net Loans, Advances and Other Receivables		189,391			160,347			147,074			136,059			132,264

(1)	Principally owner occupied housing.
(2)	Primarily financing real estate and land development projects.

112

Notes to the financial statements

NOTE 15 Asset Quality

Impaired Assets

     The Group follows the Australian disclosure requirements for impaired assets contained in AASB 1032: Specific Disclosures by Financial Institutions.

     There are three classifications of impaired assets:

(a) Non accruals, comprising:

• Any credit risk facility against which a specific provision for impairment has been raised;

• Any credit risk facility maintained on a cash basis because of significant deterioration in the financial position of the borrower; and

• Any credit risk facility where loss of principal or interest is anticipated.

     All interest charged in the relevant financial period that has not been received in cash is reversed from profit and loss when facilities become classified as non accrual. Interest on these facilities is then only taken to profit if received in cash.

(b) Restructured Facilities, comprising:

• Credit risk facilities on which the original contractual terms have been modified due to financial difficulties of the borrower. Interest on these facilities is taken to profit and loss. Failure to comply fully with the modified terms will result in immediate reclassification to non accrual.

(c) Assets Acquired Through Security Enforcement (AATSE), comprising:

• Other Real Estate Owned (OREO), comprising real estate where the Group has assumed ownership or foreclosed in settlement of a debt; and

• Other Assets Acquired Through Security Enforcement (OAATSE), comprising assets other than real estate where the Group has assumed ownership or foreclosed in settlement of a debt.

					GROUP
	2004		2003		2002
	%		%		%
Impaired Asset Ratios
Gross impaired assets net of interest reserved as percentage of risk weighted assets		0.20		0.44		0.63
Net impaired assets as percentage of:
Risk weighted assets		0.12		0.30		0.44
Total shareholders’ equity		0.79		1.96		2.92

Accounting by Creditors for Impairment of Loans

					GROUP
(US GAAP Definitions)			Year Ended 30 June
	2004		2003		2002
	$M		$M		$M
Impaired Loans (non accrual)		346		651		920
Impaired Loans with allowance for credit losses		194		530		673
- allowance for credit losses		94		159		225
Impaired Loans with no allowance for credit loss		152		121		247
Average investment in Impaired Loans		499		786		810
Income recognised on Impaired Loans		14		30		30

113

Notes to the financial statements

NOTE 15 Asset Quality continued

Impaired Assets

     The following table sets forth the Group’s impaired assets as at 30 June 2000, 2001, 2002, 2003 and 2004.

													GROUP
													At 30 June
	2004			2003			2002			2001			2000
	$M			$M			$M			$M			$M
Australia
Non-accrual loans:
Gross balances		345			545			732			518			722
Less interest reserved		(23	)		(25	)		(54	)		(63	)		(128	)
Gross balance (net of interest reserved)		322			520			678			455			594
Less provisions for impairment		(128	)		(163	)		(221	)		(154	)		(205	)
Net Non-Accrual Loans		194			357			457			301			389
Restructured loans:
Gross balances		—			—			—			1			1
Less interest reserved		—			—			—			—			—
Gross balance (net of interest reserved)		—			—			—			1			1
Less specific provisions		—			—			—			—			—
Net Restructured Loans		—			—			—			1			1
Assets Acquired Through Security Enforcement (AATSE):
Gross balances		—			—			—			—			1
Less provisions for impairment		—			—			—			—			—
Net AATSE		—			—			—			—			1
Net Australian Impaired Assets		194			357			457			302			391
Overseas
Non-accrual loans:
Gross balances		18			120			211			197			410
Less interest reserved		—			(1	)		(5	)		(5	)		(3	)
Gross balance (net of interest reserved)		18			119			206			192			407
Less provisions for impairment		(15	)		(42	)		(49	)		(79	)		(226	)
Net Non-Accrual Loans		3			77			157			113			181
Restructured loans:
Gross balances		—			—			—			—			—
Less interest reserved		—			—			—			—			—
Gross balance (net of interest reserved)		—			—			—			—			—
Less specific provisions		—			—			—			—			—
Net Restructured Loans		—			—			—			—			—
Asset Acquired Through Security Enforcement (AATSE):
Gross balances		—			—			—			1			1
Less provisions for impairment		—			—			—			(1	)		(1	)
Net AATSE		—			—			—			—			—
Net overseas impaired assets		3			77			157			113			181
Total Net Impaired Assets		197			434			614			415			572

114

Notes to the financial statements

NOTE 15 Asset Quality continued

Movement in Impaired Asset Balances

     The following table provides an analysis of the movement in the gross impaired asset balances for financial years 2000, 2001, 2002, 2003 and 2004.

													GROUP
										Year Ended 30 June
	2004			2003			2002			2001			2000
Gross Impaired Assets	$M			$M			$M			$M			$M
Gross impaired assets at period beginning		665			943			717			1,135			657
New and increased		532			617			1,069			707			414
Balances written off		(278	)		(456	)		(481	)		(666	)		(226	)
Returned to performing or repaid		(556	)		(439	)		(362	)		(459	)		(194	)
		363			665			943			717			651
Colonial impaired assets		—			—			—			—			484
Gross Impaired Assets at Period End		363			665			943			717			1,135

									GROUP
									At 30 June
	2004		2003		2002		2001		2000
Loans Accruing But Past Due 90 Days or More	$M		$M		$M		$M		$M
Accruing loans past due 90 days or more
Housing loans		168		157		176		218		211
Other loans		78		91		73		90		64
Total		246		248		249		308		275

									GROUP
							Year Ended 30 June
	2004		2003		2002		2001		2000(1)
Net Interest Foregone on Impaired Assets	$M		$M		$M		$M		$M
Interest income forgone
Australia non accrual facilities		10		15		21		8		4
Overseas non accrual facilities		—		3		7		8		5
Total		10		18		28		16		9

									GROUP
							Year Ended 30 June
	2004		2003		2002		2001		2000(1)
Interest Taken to Profit on Impaired Assets	$M		$M		$M		$M		$M
Australia
Non accrual facilities		11		26		27		37		45
Restructured facilities		—		—		—		—		—
Overseas
Non accrual facilities		3		4		3		14		6
OREO		—		—		—		—		—
Total Interest Taken to Profit		14		30		30		51		51

⁽¹⁾ Excluding Colonial

115

Notes to the financial statements

NOTE 15 Asset Quality continued

Impaired Assets

							GROUP									GROUP
	Australia			Overseas			Total			Australia			Overseas			Total
	2004			2004			2004			2003			2003			2003
	$M			$M			$M			$M			$M			$M
Non Accrual Loans
With provisions		193			13			206			431			113			544
Without provisions		152			5			157			114			7			121
Gross Balances		345			18			363			545			120			665
Less interest reserved		(23	)		—			(23	)		(25	)		(1	)		(26	)
Net Balances		322			18			340			520			119			639
Less provisions for impairment		(128	)		(15	)		(143	)		(163	)		(42	)		(205	)
Net Non Accrual Loans		194			3			197			357			77			434
Restructured Loans
Gross balances		—			—			—			—			—			—
Less interest reserved		—			—			—			—			—			—
Net balances		—			—			—			—			—			—
Less provisions for impairment		—			—			—			—			—			—
Net Restructured Loans		—			—			—			—			—			—
Other Real Estate Owned (OREO)
Gross balances		—			—			—			—			—			—
Less provisions for impairment		—			—			—			—			—			—
Net OREO		—			—			—			—			—			—
Other Assets Acquired Through Security Enforcement (OAATSE)
Gross balances		—			—			—			—			—			—
Less provisions for impairment		—			—			—			—			—			—
Net OAATSE		—			—			—			—			—			—
Total Impaired Assets
Gross balances		345			18			363			545			120			665
Less interest reserved		(23	)		—			(23	)		(25	)		(1	)		(26	)
Net balances		322			18			340			520			119			639
Less provisions for impairment		(128	)		(15	)		(143	)		(163	)		(42	)		(205	)
Net Impaired Assets		194			3			197			357			77			434
Non Accrual Loans by Size of Loan
Less than $1 million		108			13			121			158			1			159
$1 million to $10 million		114			5			119			138			6			144
Greater than $10 million		123			—			123			249			113			362
Total		345			18			363			545			120			665
Accruing Loans 90 days past due or more(1)		224			22			246			227			21			248

⁽¹⁾ These are loans that are well secured and not classified as impaired assets but which are in arrears 90 days or more. Interest on these loans continues to be taken to profit.

116

Notes to the financial statements

NOTE 15 Asset Quality continued

Colonial State Bank

Indemnified Loan Book

     Pursuant to the Sale Agreement between Colonial and the New South Wales Government, Colonial State Bank’s loan book as at 31 December 1994 and any further loan losses (including interest) arising are indemnified by the NSW Government. This indemnity is to the extent of 90% of the losses after an initial $60 million (which was provided for by Colonial State Bank as at 31 December 1994). All loans (other than impaired loans) were covered for a period of three years from 31 December 1994 and for the duration of the loan in the case of impaired loans so classified as at 31 December 1997. The sale agreement also allows for loans to be withdrawn from the indemnity provided the withdrawal is approved by Colonial State Bank and the NSW Government and the due processes are followed.

     Pursuant to the sale agreement, the costs of funding and managing non-performing loans that are covered by the loan indemnities are reimbursed by the NSW Government on a quarterly basis.

Selected Regional Exposures

Asia

     Over 66% of total exposures relate to financial institutions. Exposures to Indonesia, Thailand and Korea represent approximately 25% of the Group’s Asian credit risk.

     The Group’s credit risk exposure to Asian countries as at 30 June 2004 is set out below. The exposures exclude Group equity investments.

Asian Exposures													GROUP
					CUSTOMER TYPE						2004		2003
Country			Corporate/				Project				Total		Total
		Finance	Multinational		Government		Finance(1)		APL/NZPL		Exposure(2)		Exposure
	$M		$M		$M		$M		$M		$M		$M
China		171		5		—		—		1		177		165
Hong Kong		803		462		—		—		227		1,492		1,878
		974		467		—		—		228		1,669		2,043
Japan		411		94		35		—		6		546		759
Malaysia		100		240		40		—		—		380		111
Singapore		592		244		7		—		37		880		498
Phillipines		641		—		—		—		—		641		—
Taiwan		313		1		—		—		—		314		22
Other		1		2		—		—		—		3		2
		2,058		581		82		—		43		2,764		1,392
Indonesia		17		16		171		32		10		246		137
South Korea		636		85		264		—		—		985		477
Thailand		199		4		17		—		—		220		91
		852		105		452		32		10		1,451		705
Total		3,884		1,153		534		32		281		5,884		4,140

Other Regional Exposures

													GROUP
					CUSTOMER TYPE						2004		2003
Region			Corporate/				Project		APL/NZPL		Total		Total
		Finance	Multinational				Government		Finance(1)		Exposure(2)		Exposure
	$M		$M		$M		$M		$M		$M		$M
Eastern Europe		—		1		—		—		—		1		—
Latin America		—		—		—		—		—		—		—
Middle East		65		8		—		—		—		73		56

(1)	Project Finance - Long term lending for large scale projects (such as mining and infrastructure) where repayment is primarily reliant on the cash flow from the project.
(2)	Total Exposure - The maximum of the limit or balance utilised for committed facilities, whichever is highest, and the balance utilised for uncommitted facilities. For derivative facilities, balances are reported on a ‘mark to market plus potential exposure basis.

117

Notes to the financial statements

NOTE 16 Insurance Investment Assets

			GROUP
	2004		2003
	$M		$M
Equity Security Investments
Direct		4,433		3,559
Indirect		8,025		8,408
		12,458		11,967
Debt Security Investments
Direct		3,518		3,574
Indirect		7,710		8,273
		11,228		11,847
Property Investments
Direct		80		80
Indirect		2,330		2,151
		2,410		2,231
Other Assets		2,846		1,790
Total Insurance Investment Assets		28,942		27,835

     Direct investments refer to investments that are directly with the issuer of the investment. Indirect investments refer to investments that are held through unit trusts or similar investment vehicles.Disclosure on Asset Restriction

     Investments held in the Australian statutory funds can only be used within the restrictions imposed under the Life Insurance Act 1995.

     The main restrictions are that assets in a fund can only be used to meet the liabilities and expense of the fund, to acquire investments to further the business of the fund or as distributions when solvency and capital adequacy requirements are met.

     Participating policyholders can receive a distribution when solvency requirements are met, whilst shareholders can only receive a distribution when the higher level of capital adequacy requirements are met.

     These investment assets held in the statutory funds are not available for use by the Commonwealth Bank’s operating businesses.

NOTE 17 Deposits with Regulatory Authorities

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Central Banks Overseas		38		23		4		2
Total Deposits with Regulatory Authorities		38		23		4		2

NOTE 18 Shares in and Loans to Controlled Entities

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Shares in controlled entities		—		—		12,156		11,772
Loans to controlled entities		—		—		11,521		11,787
Total Shares in and Loans to Controlled Entities		—		—		23,677		23,559

118

Notes to the financial statements

NOTE 19 Property, Plant and Equipment

				GROUP						BANK
	2004			2003			2004			2003
	$M			$M			$M			$M
(a) Land and Buildings
Land
At 30 June 2004 valuation		160			—			148			—
At 30 June 2003 valuation		—			141			—			129
Closing balance		160			141			148			129
Buildings
At 30 June 2004 valuation		253			—			231			—
At 30 June 2003 valuation		—			302			—			233
Closing balance		253			302			231			233
Total Land and Buildings		413			443			379			362
These valuations were established by the Directors and are lower than valuations prepared by independent valuers. This valuation process is conducted on an annual basis.
(b) Leasehold Improvements
At cost		657			579			545			458
Provision for depreciation		(376	)		(351	)		(310	)		(283	)
Closing balance		281			228			235			175
(c) Equipment
At cost		639			557			333			279
Provision for depreciation		(448	)		(407	)		(225	)		(208	)
Closing balance		191			150			108			71
(d) Assets Under Lease
At cost		67			—			—			—
Provision for depreciation		—			—			—			—
Closing balance		67			—			—			—
(e) Investment Property(1)
At cost		252			—			—			—
Total Property, Plant and Equipment		1,204			821			722			608

⁽¹⁾ This investment represents a 50% interest in a long term freehold lease over property.

119

Notes to the financial statements

NOTE 19 Property, Plant and Equipment continued

				GROUP						BANK
	2004			2003			2004			2003
Reconciliation	$M			$M			$M			$M
Reconciliation of the carrying amount of property, plant and equipment at the beginning and end of the 2004 and 2003 financial years.
Land
Opening balance		141			160			129			149
Disposals		(8	)		(19	)		(3	)		(20	)
Net revaluations		27			—			22			—
Closing balance		160			141			148			129
Buildings
Opening balance		302			358			233			276
Acquisitions		2			1			—			1
Disposals		(57	)		(33	)		(5	)		(24	)
Revaluation		27			—			21			—
Depreciation		(21	)		(24	)		(18	)		(20	)
Closing balance		253			302			231			233
Leasehold Improvements
Opening balance		228			205			175			158
Acquisitions		119			78			117			62
Disposals		(11	)		(4	)		(12	)		(4	)
Depreciation		(55	)		(51	)		(45	)		(41	)
Closing balance		281			228			235			175
Equipment
Opening balance		150			139			71			58
Acquisitions		96			64			58			35
Disposals		(4	)		—			—			—
Depreciation		(51	)		(53	)		(21	)		(22	)
Closing balance		191			150			108			71
Assets Under Lease
Opening balance		—			—			—			—
Acquisitions		67			—			—			—
Depreciation		—			—			—			—
Closing balance		67			—			—			—
Investment Property
Opening balance		—			—			—			—
Acquisitions		252			—			—			—
Closing balance		252			—			—			—

120

Notes to the financial statements

NOTE 20 Intangible Assets

				GROUP						BANK
	2004			2003			2004			2003
	$M			$M			$M			$M
Purchased goodwill - Colonial		5,591			5,591			2,671			2,671
Purchased goodwill - Other		1,155			1,155			835			835
Realisation of life insurance synergy benefits		(332	)		(332	)		—			—
Accumulated amortisation		(1,709	)		(1,385	)		(984	)		(798	)
Total Intangibles		4,705			5,029			2,522			2,708

Segment Allocation of Goodwill

     In recognition of the disclosure requirements of US SFAS 141: Business Combinations and the Australian Accounting Standard AASB 138: Intangible Assets (effective 1 July 2005), the Group’s carrying amount of goodwill at 30 June 2004 is disclosed for each segment of business.

	2004		2003
Segment	$M		$M
Banking(1)		4,379		4,681
Funds Management(2)		253		270
Insurance(2)		73		78
Total		4,705		5,029

⁽¹⁾ The allocation to banking includes goodwill related to the acquisitions of Colonial, State Bank of Victoria and 25% of ASB Bank.

⁽²⁾ The allocation to funds management and insurance principally relates to the goodwill on acquisition of Colonial.

     Additional to the Colonial goodwill acquired, $2,548 million in excess of net market value over net assets of life insurance controlled entities was booked at acquisition of the Colonial funds management and life insurance businesses in June 2000.

121

Notes to the financial statements

NOTE 21 Other Assets

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Accrued interest receivable		1,208		1,023		1,247		1,239
Shares in other companies		223		145		80		50
Accrued fees/reimbursements receivable		600		492		602		268
Securities sold not delivered		1,540		727		1,347		500
Future income tax benefits		564		525		423		312
Excess of net market value over net assets of life insurance controlled entities		5,741		5,540		—		—
Excess related to outside equity interests(1)		111		111		—		—
Unrealised gains on trading derivatives (Note 39)		12,827		13,907		12,798		13,908
Intergroup current tax receivable		—		—		104		—
Intergroup deferred tax receivable		—		—		317		—
Other(2)		2,478		989		1,931		471
Total Other Assets		25,292		23,459		18,849		16,748

⁽¹⁾ This is an outside equity interest in a funds management business acquired during 2003, and is not included in the revaluation in Note 34 Life Insurance Business.

⁽²⁾ Increase primarily relates to increased volume and exchange rate increments receivable on forward foreign exchange balance sheet hedging contracts of $1,160 million.

Potential future income tax benefits of the Company arising from:

• Capital losses arising under the tax consolidations system; and

• Tax loses and timing differences in offshore centres, have not been recognised as assets because recovery is not virtually certain.

These benefits could amount to:

• $34 million in tax consolidation potential benefits; and

• $136 million (2003: $142 million) in offshore centres.

These potential tax benefits will only be obtained if:

• The Company derives future capital gains and assessable income of a nature and of an amount sufficient to enable the benefit from the losses to be realised;

• The Company continues to comply with the conditions for claiming capital losses and deductions imposed by tax legislation; and

• No changes in tax legislation adversely affect the Company in realising the benefit from the deductions for the losses.

Excess of net market value over net assets of controlled entities of the life insurance businesses:

					GROUP
					At 30 June 2004
					Excess of
	Market		Net		Market Value
	Value		Assets		Over Net Assets
	$M		$M		$M
Commonwealth and Colonial entities		7,424		2,246		5,178
ASB entities		978		415		563
		8,402		2,661		5,741

					GROUP
					At 30 June 2003
					Excess of
	Market		Net		Market Value
	Value		Assets		Over Net Assets
	$M		$M		$M
Commonwealth and Colonial entities		7,697		2,626		5,071
ASB entities		849		380		469
		8,546		3,006		5,540

122

Notes to the financial statements

NOTE 22 Deposits and Other Public Borrowings

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Australia
Certificates of deposit		20,516		11,228		20,516		11,228
Term deposits		38,530		32,398		36,714		30,992
On demand and short term deposits		71,115		68,507		71,289		68,932
Deposits not bearing interest		5,407		5,001		5,431		5,031
Securities sold under agreements to repurchase and short sales		3,585		3,231		3,648		2,688
Total Australia		139,153		120,365		137,598		118,871
Overseas
Certificates of deposit		3,716		2,900		1,906		1,130
Term deposits		11,724		10,326		2,448		2,295
On demand and short term deposits		6,852		5,871		73		59
Deposits not bearing interest		1,174		921		11		7
Securities sold under agreements to repurchase and short sales		558		591		433		584
Total Overseas		24,024		20,609		4,871		4,075
Total Deposits and Other Public Borrowings		163,177		140,974		142,469		122,946

Maturity Distribution of Certificates of Deposit and Time Deposits

     The following table sets forth the maturity distribution of the Group’s certificates of deposit and time deposits as at 30 June 2004.

									GROUP At 30 June 2004
					Maturing
	Maturing		Maturing		Between		Maturing
	Three		Between		Six &		After
	Months or		Three & Six		Twelve		Twelve
	Less		Months		Months		Months		Total
	$M		$M		$M		$M		$M
Australia
Certificates of deposit(1)		16,874		1,222		293		2,127		20,516
Time deposits		20,777		12,890		3,087		1,776		38,530
Total Australia		37,651		14,112		3,380		3,903		59,046
Overseas
Certificates of deposit(1)		2,728		711		276		1		3,716
Time deposits		8,484		1,894		818		528		11,724
Total Overseas		11,212		2,605		1,094		529		15,440
Total Certificates of Deposit and Time Deposits		48,863		16,717		4,474		4,432		74,486

⁽¹⁾ All certificates of deposit issued by the Bank are for amounts greater than $100,000.

123

Notes to the financial statements

NOTE 23 Payables to Other Financial Institutions

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Australia		2,383		2,527		2,383		2,527
Overseas		4,258		5,011		4,228		4,977
Total Payables to Other Financial Institutions		6,641		7,538		6,611		7,504

NOTE 24 Income Tax Liability

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Australia
Provision for income tax		402		433		352		355
Provision for deferred income tax		355		414		332		162
Total Australia		757		847		684		517
Overseas
Provision for income tax		25		29		6		10
Provision for deferred income tax		29		—		—		—
Total Overseas		54		29		6		10
Total Income Tax Liability		811		876		690		527

124

Notes to the financial statements

NOTE 25 Other Provisions

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Provision for:
Long service leave		300		300		293		294
Annual leave		130		143		112		127
Other employee entitlements		98		117		98		116
Which new Bank costs		208		—		208		—
Restructuring costs		—		30		—		29
General insurance claims		79		66		—		—
Self insurance/non lending losses		60		56		59		55
Other		122		107		49		63
Total Other Provisions		997		819		819		684

				GROUP						BANK
	2004			2003			2004			2003
	$M			$M			$M			$M
Which new Bank costs:
Opening balance		—			—			—			—
Additional provision		208			—			208			—
Amounts utilised during the year		—			—			—			—
Closing balance		208			—			208			—
Restructuring costs:
Opening balance		30			35			29			21
Additional provision		—			20			—			20
Amounts utilised during the year		(30	)		(25	)		(29	)		(12	)
Closing balance		—			30			—			29
General insurance claims:
Opening balance		66			63			—			—
Additional provision		44			75			—			—
Amounts utilised during the year		(31	)		(72	)		—			—
Closing balance		79			66			—			—
Self insurance/non lending losses:
Opening balance		56			55			55			53
Additional provision		13			11			13			12
Amounts utilised during the year		(9	)		(10	)		(9	)		(10	)
Closing balance		60			56			59			55
Other:
Opening balance		107			77			63			30
Additional provision		70			51			6			39
Amounts utilised during the year		(54	)		(18	)		(20	)		(6	)
Foreign exchange translation adjustment		(1	)		(3	)		—			—
Closing balance		122			107			49			63

125

Notes to the financial statements

NOTE 26 Debt Issues

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Short term debt issues		20,401		17,255		6,127		6,577
Long term debt issues		23,641		13,374		18,322		10,107
Total Debt Issues		44,042		30,629		24,449		16,684
Short Term Debt Issues
AUD Promissory Notes		1,450		1,643		—		—
AUD Bank Bills		490		777		—		—
US Commercial Paper		9,381		6,163		—		—
Euro Commercial Paper		3,638		5,738		2,498		3,842
Long Term Debt Issues with less than One Year to Maturity		5,442		2,934		3,629		2,735
Total Short Term Debt Issues		20,401		17,255		6,127		6,577
Long Term Debt Issues
USD Medium Term Notes		8,790		4,517		8,146		4,517
AUD Medium Term Notes		4,453		3,510		2,813		2,307
JPY Medium Term Notes		734		414		520		414
GBP Medium Term Notes		3,837		1,799		1,981		—
Other Currencies Medium Term Notes		5,583		2,752		4,822		2,682
Offshore Loans (all JPY)		40		187		40		187
Eurobonds		204		195		—		—
Total Long Term Debt Issues		23,641		13,374		18,322		10,107
Maturity Distribution of Debt Issues
Less than 3 months		6,949		13,348		1,925		3,994
3 months to 12 months		13,452		3,907		4,202		2,696
Between 1 and 5 years		17,542		10,426		12,224		7,958
Greater than 5 years		6,099		2,948		6,098		2,036
Total Debt Issues		44,042		30,629		24,449		16,684

     The Bank has a Euro Medium Term Note programme under which it may issue notes (“EMTNs”) up to an aggregate amount of USD25 billion. Notes issued under the programme are both fixed and variable rates. Interest rate risk associated with the notes is incorporated within the Bank’s interest rate risk framework.

	Subsequent to 30 June 2004, the Bank has issued:
•	USD medium term notes: 3 months to less than 12 months – USD26 million (AUD38 million); between 1 and 5 years – USD964 million (AUD1,379 million); greater than 5 years – USD468 million (AUD669 million);
•	CHF medium term notes: between 1 and 5 years – CHF250million (AUD287 million);
•	EUR medium term notes: 3 months to less than 12 months – EUR6.7 million (AUD11.5 million); between 1 and 5 years – EUR356 million (AUD613 million); greater than 5 years – EUR2.5 million (AUD4.3 million);
•	JPY medium term notes: Greater than 5 years – JPY1.2 billion (AUD15.3 million);
•	CAD medium term notes: between 1 and 5 years – CAD400 million (AUD431 million); and
•	HKD medium terms notes: Greater than 5 years – HKD202 million (AUD307 million).

     Where any debt issue is booked in an offshore branch or subsidiary, the amounts have first been converted into the base currency of the branch at a branch defined exchange rate, before being converted into the AUD equivalent.

     Where proceeds have been employed in currencies other than that of the ultimate repayment liability, swap or other hedge arrangements have been entered into.

126

Notes to the financial statements

NOTE 26 Debt Issues continued

Short Term Borrowings

     The following table analyses the Group’s short term borrowings for the financial years ended 30 June 2002, 2003 and 2004.

							GROUP
				Year Ended 30 June
	2004			2003			2002
	(AUD Millions, except where indicated)
US Commercial Paper
Outstanding at period end(1)		9,381			6,163			6,082
Maximum amount outstanding at any month end(2)		11,983			8,973			7,158
Approximate average amount outstanding(2)		8,161			5,890			6,173
Approximate weighted average rate on:
Average amount outstanding		1.1	%		1.4	%		2.3	%
Outstanding at period end		1.2	%		1.2	%		1.8	%
Euro Commercial Paper
Outstanding at period end(1)		3,638			5,738			2,651
Maximum amount outstanding at any month end(2)		6,402			5,990			3,805
Approximate average amount outstanding(2)		4,798			3,132			2,883
Approximate weighted average rate on:
Average amount outstanding		1.0	%		1.3	%		1.2	%
Outstanding at period end		1.2	%		1.1	%		0.9	%
Bill Reliquification(3)
Outstanding at period end(1)		—			—			72
Maximum amount outstanding at any month end(2)		—			250			564
Approximate average amount outstanding(2)		—			23			268
Approximate weighted average rate on:
Average amount outstanding		—			4.9	%		4.8	%
Outstanding at period end		—			—			5.0	%
Other Commercial Paper
Outstanding at period end(1)		1,940			2,420			2,750
Maximum amount outstanding at any month end(2)		3,216			3,066			3,455
Approximate average amount outstanding(2)		2,675			2,476			2,912
Approximate weighted average rate on:
Average amount outstanding		5.2	%		3.7	%		4.5	%
Outstanding at period end		5.6	%		3.9	%		5.3	%

⁽¹⁾ The amount outstanding at period end is reported on a book value basis (amortised cost).

⁽²⁾ The maximum and average amounts over the period are reported on a face value basis because the book values of these amounts are not available. Any difference between face value and book value would not be material given the short term nature of the borrowings.

⁽³⁾ Commercial bills sold under non recourse arrangements.

Exchange Rates Utilised

As at		30 June 2004		30 June 2003
AUD 1.00 =	USD		0.6894		0.6677
	GBP		0.3823		0.4043
	JPY		74.914		80.036
	NZD		1.097		1.145
	HKD		5.378		5.207
	DEM		1.116		1.143
	CHF		0.8720		0.9037
	IDR		6,487		5,528
	THB		28.229		28.051
	FJD		1.239		1.250
	PHP		38.731		35.737
	EUR		0.5706		0.5842

127

Notes to the financial statements

NOTE 26 Debt Issues continued

Guarantee Arrangements

Commonwealth Bank of Australia

     The due payment of all monies payable by the Bank was guaranteed by the Commonwealth of Australia under section 117 of the Commonwealth Bank’s Act 1959 (as amended) at 30 June 1996. This guarantee has been progressively phased out following the sale of the Commonwealth of Australia’s shareholding in the Bank on 19 July 1996.

     The transitional arrangements for phasing out the Commonwealth of Australia’s guarantee are contained in the Commonwealth Bank Sale Act 1995.

     In relation to the Commonwealth of Australia’s guarantee of the Bank’s liabilities, transitional arrangements provided that:

• All demand deposits and term deposits were guaranteed for a period of three years from 19 July 1996, with term deposits outstanding at the end of that three year period being guaranteed until maturity; and

• All other amounts payable under a contract that was entered into, or under an instrument executed, issued, endorsed or accepted by the Bank at 19 July 1996 will be guaranteed until their maturity.

     Accordingly, demand deposits are no longer guaranteed. Term deposits outstanding at 19 July 1999 remain guaranteed until maturity. The run-off of the Government guarantee has no effect on the Bank’s access to deposit markets.

Commonwealth Development Bank

     On 24 July 1996, the Commonwealth of Australia sold its 8.1% shareholding in the Commonwealth Development Bank Limited (CDBL) to the Bank for $12.5 million.

     Under the arrangements relating to the purchase by the Bank of the Commonwealth of Australia’s shareholding in the CDBL:

• All lending assets as at 30 June 1996 have been quarantined in CDBL, consistent with the charter terms on which they were written;

• The CDBL’s liabilities continue to remain guaranteed by the Commonwealth; and

• CDBL ceased to write new business or incur additional liabilities from 1 July 1996. From that date, new business that would have previously been written by CDBL is being written by the rural arm of the Bank.

     The due payment of all monies payable by CDBL is guaranteed by the Commonwealth of Australia under Section 117 of the Commonwealth Banks Act 1959 (as amended). This guarantee will continue to be provided by the Commonwealth whilst quarantined assets are held. The value of the liabilities under the guarantee will diminish as quarantined assets reach maturity and are repaid.

State Bank of NSW (known as Colonial State Bank)

     The enabling legislation for the sale of the State Bank of New South Wales Limited (SBNSW), the State Bank (Privatisation) Act 1994 – Section 12 and the State Bank (Corporatisation) Act 1989 – Section 12 (as amended), provides in general terms for a guarantee by the NSW Government in respect of all funding liabilities and off balance sheet products (other than demand deposits) incurred or issued prior to 31 December 1997 by SBNSW until maturity and a guarantee for demand deposits accepted by SBNSW up to 31 December 1997. Other obligations incurred before 31 December 1994 are also guaranteed to their maturity. On 4 June 2001 Commonwealth Bank of Australia became the successor in law to SBNSW pursuant to the Financial Sector Transfers of Business Act 1999. The NSW Government guarantee of the liabilities and products as described above continues unchanged by the succession.

NOTE 27 Bills Payable and Other Liabilities

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Bills payable		980		993		950		874
Accrued interest payable		1,325		991		1,140		842
Accrued fees and other items payable		1,151		740		829		567
Securities purchased not delivered		1,649		699		1,458		479
Unrealised losses on trading derivatives (Note 39)		12,188		13,528		12,156		13,502
Intergroup deferred tax payable		—		—		153		—
Other liabilities		1,847		2,076		1,202		1,192
Total Bills Payable and Other Liabilities		19,140		19,027		17,888		17,456

128

Notes to the financial statements

NOTE 28 Loan Capital

						GROUP										BANK
		Currency				2004		2003		2002		2004		2003		2002
		Amount (M)	Footnotes			$M		$M		$M		$M		$M		$M
Tier 1 Capital
Exchangeable	FRN	USD38		(1	)		55		59		70		55		59		70
Exchangeable	FRN	USD95		(2	)		138		142		168		138		142		168
Undated	FRN	USD100		(3	)		145		150		177		145		150		177
Undated	TPS	USD550		(4	)		—		—		—		799		—		—
							338		351		415		1,137		351		415
Tier 2 Capital
Extendible	FRN	AUD25		(5	)		25		25		25		25		25		25
Extendible	FRN	AUD275		(5	)		275		275		275		275		275		275
Subordinated	MTN	AUD185		(6	)		—		185		186		—		185		186
Subordinated	FRN	AUD115		(6	)		—		115		115		—		115		115
Subordinated	FRN	AUD25		(7	)		25		25		25		25		25		25
Subordinated	MTN	AUD200		(8	)		200		199		199		200		199		199
Subordinated	FRN	AUD50		(8	)		50		50		50		50		50		50
Subordinated	Notes	USD300		(9	)		549		549		532		549		549		532
Subordinated	FRN	USD450		(9	)		650		672		795		650		672		795
Subordinated	EMTN	JPY20,000		(10	)		240		248		293		240		248		293
Subordinated	EMTN	USD200		(11	)		313		313		313		313		313		313
Subordinated	EMTN	USD75		(12	)		115		115		115		115		115		115
Subordinated	EMTN	USD100		(13	)		152		152		152		152		152		152
Subordinated	EMTN	USD400		(14	)		501		501		501		501		501		501
Subordinated	EMTN	GBP200		(15	)		408		408		408		408		408		408
Subordinated	EMTN	JPY30,000		(16	)		429		444		525		429		444		525
Subordinated	Loan	NZD100		(17	)		92		88		90		—		—		—
Subordinated	FRN	AUD210		(18	)		210		210		210		210		210		210
Subordinated	FRN	AUD38		(19	)		38		38		38		38		38		38
Subordinated	Notes	AUD130		(20	)		130		130		130		130		130		130
Subordinated	Other	AUD21		(21	)		21		35		35		21		35		35
Subordinated	Notes	USD350		(22	)		512		524		—		512		524		—
Subordinated	EMTN	GBP150		(23	)		373		373		—		373		373		—
Subordinated	MTN	AUD300		(24	)		300		—		—		300		—		—
Subordinated	FRN	AUD200		(24	)		200		—		—		200		—		—
Subordinated	EMTN	JPY 10,000		(25	)		127		—		—		127		—		—
Subordinated	EMTN	USD250		(26	)		358		—		—		358		—		—
							6,293		5,674		5,012		6,201		5,586		4,922
Total Loan Capital							6,631		6,025		5,427		7,338		5,937		5,337

     Where a foreign currency hedge is in place to utilise a loan capital issue in a currency other than that of its original issue, the AUD equivalent value is shown net of the hedge.

⁽¹⁾ USD 300 million undated Floating Rate Notes (“FRNs”) issued 11 July 1988 exchangeable into dated FRNs.

Outstanding notes at 30 June 2004 were:
Due July 2004	:	USD0.5 million
Due July 2006	:	USD32.5 million
Undated	:	USD5 million

⁽²⁾ USD 400 million undated FRNs issued 22 February 1989 exchangeable into dated FRNs.

Outstanding notes at 30 June 2004 were:
Due February 2005	:	USD64 million
Due February 2006	:	USD24 million
Due February 2008	:	USD7 million

(3)	USD 100 million undated capital notes issued on 15 October 1986.
	The Bank has entered into separate agreements with the Commonwealth of Australia relating to each of the above issues (the ‘Agreements’) which qualify the issues as Tier One capital.
	The agreements provide that, upon the occurrence of certain events listed below, the Bank may issue either fully paid ordinary shares to the Commonwealth of Australia or (with the consent of the Commonwealth of Australia) rights to all shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the relevant note issue or issues plus any interest paid in respect of the notes for the most recent financial year and accrued interest. The issue price of such shares will be determined by reference to the prevailing market price for the Bank’s shares.

129

Notes to the financial statements

NOTE 28 Loan Capital continued

Any one or more of the following events may trigger the issue of shares to the Commonwealth of Australia or a rights issue:

• A relevant event of default (discussed below) occurs in respect of a note issue and the Trustee of the relevant notes gives notice to the Bank that the notes are immediately due and payable;

• The most recent audited annual financial statements of the Group show a loss (as defined in the Agreements);

• The Bank does not declare a dividend in respect of its ordinary shares;

• The Bank, if required by the Commonwealth of Australia and subject to the agreement of the APRA, exercises its option to redeem a note issue; or

• In respect of Undated FRNs which have been exchanged to Dated FRNs, the Dated FRNs mature.

	Any payment made by the Commonwealth of Australia pursuant to its guarantee in respect of the relevant notes will trigger the issue of shares to the Commonwealth of Australia to the value of such payment.
	The relevant events of default differ depending on the relevant Agreement. In summary, they cover events such as failure of the Bank to meet its monetary obligation in respect of the relevant notes; the insolvency of the Bank; any law being passed to dissolve the Bank or the Bank ceasing to carry on general banking business in Australia; and the Commonwealth of Australia ceasing to guarantee the relevant notes. In relation to Dated FRNs which have matured to date, the Bank and the Commonwealth agreed to amend the relevant Agreement to reflect that the Commonwealth of Australia was not called upon to subscribe for fully paid ordinary shares up to an amount equal to the principal value of the maturing FRNs.
(4)	USD550 million undated Trust Preferred Securities (TPS) issued on 6 August 2003.
(5)	AUD300 million extendible floating rate note issued December 1989:
	Due December 2004 : AUD25 million
	Due December 2009 : AUD275 million
	The Bank has entered into a separate agreement with the Commonwealth of Australia relating to the above issue (the ‘Agreement’) which qualifies the issue as Tier Two capital. For capital adequacy purposes Tier Two debt based capital is reduced each year by 20% of the original amount during the last 5 years to maturity.
	The agreement provides for the Bank to issue either fully paid ordinary shares to the Commonwealth of Australia or (with the consent of the Commonwealth of Australia) rights to all shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the note issue plus any interest paid in respect of the notes for the most recent financial year and accrued interest. The issue price will be determined by reference to the prevailing market price for the Bank’s shares.
	Any one or more of the following events will trigger the issue of shares to the Commonwealth of Australia or a rights issue:

• A relevant event of default occurs in respect of the note issue and, where applicable, the Trustee of the notes gives notice of such to the Bank;

• The Bank, if required by the Commonwealth of Australia and subject to the agreement of the APRA, exercises its option to redeem such issue; or

• Any payment made by the Commonwealth of Australia pursuant to its guarantee in respect of the issue will trigger the issue of shares to the Commonwealth of Australia to the value of such payment.

(6)	AUD300 million subordinated notes, issued February 1999; due February 2009, split into AUD185 million fixed rate notes and AUD115 million floating rate notes. Called and redeemed February 2004.
(7)	AUD25 million subordinated FRN, issued April 1999, due April 2029.
(8)	AUD250 million subordinated notes, issued November 1999, due November 2009; split into AUD200 million fixed rate notes and AUD50 million floating rate notes.
(9)	USD750 million subordinated notes, issued June 2000, due June 2010; split into USD300 million fixed rate notes and USD450 million floating rate notes.
(10)	JPY20 billion perpetual subordinated EMTN, issued February 1999.
(11)	USD200 million subordinated EMTN, issued November 1999, due November 2009.
(12)	USD75 million subordinated EMTN, issued January 2000, due January 2010.
(13)	USD100 million subordinated EMTN, issued January 2000, due January 2010.
(14)	USD400 million subordinated EMTN issued June 1996 due July 2006.
(15)	GBP200 million subordinated EMTN issued March 1996 due December 2006.
(16)	JPY30 billion subordinated EMTN issued October 1995 due October 2015.
(17)	NZD100 million subordinated loan matures 15 December 2009.
(18)	AUD210 million Euro FRN issued September 1996, maturing September 2004.
(19)	AUD38 million FRN issued December 1997, maturing December 2004.
(20)	AUD130 million subordinated notes comprised as follows: AUD10 million fixed rate notes issued 12 December 1995, maturing 12 December 2005. AUD110 million floating rate notes issued 12 December 1995, maturing 12 December 2005. AUD5 million fixed rate notes issued 17 December 1996, maturing 12 December 2005. AUD5 million floating rate notes issued 17 December 1996, maturing 12 December 2005.
(21)	Comprises 8 subordinated notes and FRN issues. The face value amounts are less than $10 million each and are all in Australian Dollars. The maturities range from August 2009 to October 2009.
(22)	USD350 million subordinated fixed rate note, issued June 2003, due June 2018.
(23)	GBP150 million subordinated EMTN, issued June 2003, due December 2023.
(24)	AUD500 million subordinated notes, issued February 2004, due February 2014; split into AUD300 million fixed rate notes and AUD200 million floating rate notes.
(25)	JPY10 billion subordinated EMTN, issued May 2004, due May 2034.
(26)	USD250 million subordinated EMTN issued June 2004, due August 2014.

Subsequent to 30 June 2004, the Bank has issued:

USD250 million increase to the subordinated EMTN issued June 2004, due August 2014.

130

Notes to the financial statements

NOTE 29 Share Capital

	2004			BANK 2003
Issued and Paid Up Ordinary Capital	$M			$M
Ordinary Share Capital
Opening balance		12,678			12,665
Dividend Reinvestment Plan: 2002/2003 Final Dividend		201			—
Dividend Reinvestment Plan: 2003/2004 Interim Dividend		188			—
Share buy back		(213	)		—
Share purchase plan		467			—
Buy Back for DRP: 2001/02 Final Dividend		—			(195	)
DRP2001/2002 Final Dividend		—			195
Buy Back for DRP: 2002/2003 Interim Dividend		—			(166	)
DRP2002/2003 Interim Dividend		—			166
Exercise of Executive Options		38			13
Closing balance		13,359			12,678
Shares on Issue	Number			Number
Opening balance		1,253,581,363			1,252,921,363
Dividend reinvestment plan issues:
2002/2003 Final Dividend fully paid ordinary shares at $28.03		7,165,289			—
2003/2004 Interim Dividend fully paid ordinary shares at $31.61		5,916,319			—
Share buy back		(19,360,759	)
Share purchase plan shares issued at $31.36		14,891,250
Buy Back for DRP: 2001/2002 Final Dividend		—			(6,111,510	)
2001/2002 Final Dividend fully paid shares at $31.92		—			6,111,510
Buyback for 2002/2003 Interim Dividend		—			(6,753,320	)
2002/2003 Interim Dividend fully paid ordinary shares at $24.75		—			6,753,320
Exercise under Executive Option Plan		1,812,600			660,000
Closing balance		1,264,006,062			1,253,581,363

Terms and Conditions of Ordinary Share Capital

     Ordinary shares have the right to receive dividends as declared and in the event of winding up the company, to participate in the proceeds from sale of surplus assets in proportion to the number of and amounts paid up on shares held. A shareholder has one vote on a show of hands and one vote for each fully paid share on a poll. A shareholder may be present at a general meeting in person or by proxy or attorney, and if a body corporate it may also authorise a representative.

Preference Share Capital	BANK
	2004		2003
PERLS	$M		$M
PERLS Capital issued and paid up		687		687
	Number		Number
		3,500,000		3,500,000

     Commonwealth Bank PERLS (“PERLS”) are perpetual preference shares that offer a quarterly, floating rate dividend. PERLS represent a less expensive form of equity funding than ordinary shares and increase the diversity and flexibility of the Bank’s capital base.

     A holder of PERLS on the relevant record date is entitled to receive on each relevant dividend payment date, if determined by the Directors to be payable, a dividend. If a dividend is not paid the Bank will not be permitted to pay dividends on any of its ordinary shares until four consecutive dividends are paid on the PERLS. Holders of Commonwealth Bank PERLS will rank ahead of holders of ordinary shares in a winding up to the extent of the issue price of the Commonwealth Bank PERLS. PERLS are listed and traded on the Australian Stock Exchange.

     Holders of PERLS are entitled to vote at a general meeting of the issuer in limited circumstances.

	GROUP					BANK
	2004		2003		2004		2003
Other Equity Instruments	$M		$M		$M		$M
Other equity instruments issued and paid up		1,573		—		737		—
	Number		Number		Number		Number
		4,300,000		—		550,000		—

131

Notes to the financial statements

NOTE 29 Share Capital continued

Issue of other equity instruments

Trust Preferred Securities

     On 6 August 2003 a wholly owned entity of the Bank issued USD550 million (AUD832 million) of perpetual non call 12 year trust preferred securities into the US Capital Markets. These securities offer a non-cumulative fixed rate distribution of 5.805% per annum payable semi-annually. The securities qualify as Tier One capital of the Bank.

PERLS II

     On 6 January 2004 a wholly owned entity of the Bank (Commonwealth Managed Investments Limited as Responsible Entity of the PERLS II Trust) issued $750 million of Perpetual Exchangeable Resettable Listed Securities (“PERLS II”). These securities are units in a registered managed investments scheme, perpetual in nature, offering a non-cumulative floating rate distribution payable quarterly. The securities qualify as Tier One capital of the Bank.

Share Buy-back

     On 29 March 2004 the Bank announced the successful completion of its off-market share buy-back. A total of 19,360,759 shares were bought back at $27.50 per share, for a total cost of $532.4 million. An amount of $11 per share of the consideration for each share bought back was charged to paid up capital (total $213.0 million). The balance of $16.50 per share was deemed to be a fully franked dividend for tax purposes and charged to retained profits (total $319.4 million).

     In accordance with the draft ATO Class Ruling CR2004/65, the “market value” of the shares bought back for tax purposes is $30.42 (“Tax Value”). For capital gains tax purposes an Australian resident individual or complying superannuation entity shareholder participating in the buy-back will be deemed to have disposed of each share bought back for deemed capital proceeds of $11.00 plus the amount by which the Tax Value exceeds the buy-back price. The Tax Value exceeds the buy-back price by $2.92 ($30.42 — $27.50). Accordingly, for capital gains tax purposes, the deemed disposal price for each share sold into the buy-back is $13.92 ($11.00 + $2.92).

Share Purchase Plan

     The Bank introduced a Share Purchase Plan (SPP) during the year. On 25 June 2004 a total of 14,891,250 shares were issued at $31.36 per share, for a total of $467 million, in respect of the SPP.

Dividends

     The Directors have declared a fully franked (at 30%) final dividend of 104 cents per share amounting to $1,315 million. The dividend will be payable on 24 September 2004 to shareholders on the register at 5pm on 20 August 2004.

     Dividends per share are based on net profit after tax (“cash basis”) per share, having regard to a range of factors including:

• Current and expected rates of business growth and the mix of business;

• Capital needs to support economic, regulatory and credit ratings requirements;

• The rate of return on assets; and

• Investments and/or divestments to support business development.

     Dividends paid since the end of the previous financial year:

• As declared in last year’s Annual Report, a fully franked final dividend of 85 cents per share amounting to $1,066 million was paid on 8 October 2003. The payment comprised cash disbursements of $865 million with $201 million being reinvested by participants through the Dividend Reinvestment Plan; and

• In respect of the current year, a fully franked interim dividend of 79 cents per share amounting to $996 million was paid on 30 March 2004. The payment comprised cash disbursements of $808 million with $188 million being reinvested by participants through the Dividend Reinvestment Plan.

• Additionally, quarterly dividends totaling $37 million for the year were paid on the PERLS preference shares; $15 million on the PERLS II (for distributions in March 2004 and June 2004); $40 million on the Trust Preferred Securities, and; $9 million on the ASB Capital preference shares.

Dividend Reinvestment Plan

     The Bank expects to issue around $250 million of shares in respect of the DRP for the final dividend for 2003/04.

     The Dividend Reinvestment Plan continues to be capped at 10,000 shares per shareholder.

Record Date

     The register closes for determination of dividend entitlement and for participation in the dividend reinvestment plan at 5:00pm on 20 August 2004 at ASX Perpetual Registrars Limited, Locked Bag A14, Sydney South, 1235.

Ex Dividend Date

     The ex dividend date is 16 August 2004.

Employee Share Plans

     The Bank has in place the following employee share plans:

• Commonwealth Bank Employee Share Acquisition Plan (“ESAP”);

• Commonwealth Bank Equity Participation Plan (“EPP”);

• Commonwealth Bank Equity Reward Plan (“ERP”); and

• Commonwealth Bank Non-Executive Directors Share Plan (“NEDSP”).

     The ESAP and ERP were each approved by shareholders at the Annual General Meeting (“AGM”) on 26 October 2000. Shareholders’ consent was not required for either the EPP or NEDSP but details were included in the Explanatory Memorandum to the meeting to ensure shareholders were fully informed.

     Employee Share Acquisition Plan (“ESAP”)

     The ESAP was introduced in 1996 and provides employees with up to $1,000 worth of free shares per annum subject to a performance target being met. The performance target is growth in annual profit of the greater of 5% or consumer price index plus 2%. Whenever annual profit growth exceeds CPI change, the Board may use its discretion in determining whether any grant of shares will be made.

     Under ESAP, shares granted are restricted for sale for three years or until such time as the participating employee ceases employment with the Group, whichever is earlier. Shares granted under the ESAP receive full dividend entitlements, voting rights and there are no forfeiture or vesting conditions attached to the shares granted.

     Effective from 1 July 2002, shares granted under ESAP offers have been expensed against the profit and loss account. In the current year, 683,617 shares were granted to eligible employees in respect of the 2003 grant.

     The Bank has determined to allocate each eligible employee shares up to a value of $1,000 in respect of the 2004 grant. As a result, an amount of $24 million has been accrued in respect of the year ended 30 June 2004. The shares will be purchased on-market at the then market price.

132

Notes to the financial statements

NOTE 29 Share Capital continued

From 1 July 2000 to 30 June 2002, details of issues under ESAP were:

	Bonus Ordinary		No. of		Shares issued to		Issue
Issue Date	Shares Issued(1)		Participants		Each Participant		Price(2)
13 Oct 2000		872,620		24,932		35	$	27.78
20 Dec 2000		805		23		35	$	27.78
31 Oct 2001		893,554		26,281		34	$	28.95
3 Dec 2001		3,876		114		34	$	28.95
31 Jan 2002		1,938		57		34	$	28.95

From 1 July 2002, details of shares purchased under ESAP are as follows:

Purchase	Ordinary Shares		No. of		Shares Allocated to		Allocation
Date	Purchased		Participants		Each Participant		Price(3)
31 Oct 2002		830,874		25,178		33	$	29.71
22 Jan 2003		1,584		48		33	$	29.71
31 Oct 2003		683,617		23,573		29	$	27.53

⁽¹⁾ For Offers in 2000 and 2001 both new and existing shareholders were granted Bonus Ordinary Shares issued from the Share Capital Account.

⁽²⁾ The Issue Price x Shares issued to each Participant effectively represents about $1,000 of free shares.

⁽³⁾ The Allocation Price for the offer is equal to the market value which is determined by calculating the weighted average of the prices at which the shares were traded on the ASX during the 5 trading day period up to and including the grant date. The Allocation Price x Shares issued to each participant effectively represents about $1,000 of free shares for the 2002 Offer and $800 of free shares for the 2003 Offer.

Equity Participation Plan (“EPP”)

     The EPP facilitates the voluntary sacrifice of both fixed remuneration and annual short term incentives (STIs) to be applied in the acquisition of shares. The Plan also facilitates the mandatory sacrifice of STI payments.

     All shares acquired by employees under this Plan are purchased on-market at the current market price. A total number of 5,812,425 shares have been acquired under the EPP since the plan commenced in 2001.

Details of purchases under the EPP from 1 July 2003 to 30 June 2004 were as follows:

Allotment Date	Participants		Shares Purchased		Average Purchase Price
30 Sept 2003		62		8,175	$	27.89
31 Oct 2003		2,453		2,147,975	$	27.62
31 Dec 2003		73		9,915	$	29.46
31 Mar 2004		63		7,527	$	33.32
30 Jun 2004		71		9,496	$	32.72

     Under the voluntary component of the EPP, shares purchased are restricted for sale for two years or when a participating employee ceases employment with the Bank, whichever is earlier. Shares purchased under the voluntary component of the EPP carry full dividend entitlements, voting rights and there are no forfeiture or vesting conditions attached to the shares.

     Under the mandatory component of the EPP, fully paid ordinary shares are purchased and held in Trust until such time as the vesting conditions have been met. The vesting condition attached to the shares specifies that participants must remain employees of the Bank until the vesting date (generally a period of one and two years after the STI award period).

     Each participant of the mandatory component of the EPP for whom shares are held by the Trustee on their behalf, has a right to receive dividends. Once the shares vest, dividends which have accrued during the vesting period are paid to participants. The participant may also direct the Trustee on how the voting rights attached to the shares are to be exercised during the vesting period.

     Where participating employees do not satisfy the vesting conditions, shares and dividend rights are forfeited.

The movement in shares purchased under the mandatory component of the EPP has been as follows:

Details of Movements	July 02 - June 03			July 03 - June 04
Shares held under the plan at the beginning of year		1,478,423			2,497,184
Shares allocated during year		1,968,197			2,121,075
Shares vested during year		(836,437	)		(1,715,807	)
Shares forfeited during year		(112,999	)		(112,099	)
Shares held under the plan at end of year		2,497,184			2,790,353

     Shares acquired under both the voluntary and mandatory components of the EPP have been expensed against the profit and loss account. In the current year, $67 million was expensed against the profit and loss account to reflect the cost of allocations under the Plan.

133

Notes to the financial statements

NOTE 29 Share Capital continued

Equity Reward Plan (“ERP”)

     The Board has envisaged that up to a maximum of 500 employees would participate each year in the ERP.

     Previous grants under the ERP were in two parts, comprising grants of options and grants of shares. Since 2001/02, no options have been issued under the ERP. From 2002/03, Reward Shares have only been issued under this plan.

     The exercise of previously granted options and the vesting of employee legal title to the shares is conditional on the Bank achieving a prescribed performance hurdle. The ERP performance hurdle is based on relative Total Shareholder Return (“TSR”) with the Bank’s TSR performance being measured against a comparator group of companies.

     The prescribed performance hurdle for options and Reward Shares issued prior to 2002/03 was:

• The Bank’s TSR (broadly, growth in share price plus dividends reinvested) over a minimum three year period, must equal or exceed the index of TSR achieved by the comparator group of companies. The comparator group (previously companies represented in the ASX’s ‘Banks and Finance Accumulation Index’ excluding the Bank) was widened in 2001/02 to better reflect the Bank’s business mix; and

• If the performance hurdle is not reached within that three years the options may nevertheless be exercisable or the shares vest, only where the hurdle is subsequently reached within 5 years from the grant date.

     For Reward Shares granted from 2002/03 onwards, a tiered vesting scale was introduced so that 50% of the allocated shares vest if the Bank’s TSR is equal to the median return, 75% vest at the 67th percentile and 100% when the Bank’s return is in the top quartile.

     Where the rating is at least at the 50^th percentile on the third anniversary of the grant, the shares will vest at a time nominated by the executive, within the trading windows, over the next two years. The vesting percentage will be at least that achieved on the third anniversary of the grant and the executive will be able to delay vesting until a subsequent half yearly window prior to the fifth anniversary of the grant. The vesting percentage will be calculated by reference to the rating at that time.

     Where the rating is below the 50^th percentile on the third anniversary of grant, the shares can still vest if the rating reaches the 50^th percentile prior to the fifth anniversary, but the maximum vesting will be 50%.

     Reward Shares acquired under the share component of the ERP are purchased on-market at the current market price. The cost of shares acquired is expensed against the profit and loss account over a three year period, reflecting the minimum vesting period. In the current year, $8 million has been expensed to the profit and loss account reflecting the cost of Reward Shares purchased and allocated under the plan.

     Executive options issued up to September 2001 have not been recorded as an expense by the Group.

Details of options issued and shares acquired under ERP as well as movements in the options and shares are as follows:

Options

Year of	Commencement	Issue	Options		Options				Exercise			Exercise
Grant	Date	Date	Issued		Outstanding(1)		Participants		Price			Period
2000	13 Sep 2000	7 Feb 01		577,500		402,500		16	$	26.97	(2)	14 Sep 2003 to 13 Sep 2010(4)
	13 Sep 2000	31 Oct 01		12,500		—		1	$	26.97	(2)	14 Sep 2003 to 13 Sep 2010(4)
2001	3 Sep 2001	31 Oct 01		2,882,000		2,122,700		61	$	30.12	(3)	4 Sep 2004 to 3 Sep 2011(5)
	3 Sep 2001	31 Jan 02		12,500		12,500		1	$	30.12	(3)	4 Sep 2004 to 3 Sep 2011(5)
	3 Sep 2001	15 Apr 02		100,000		100,000		1	$	30.12	(3)	4 Sep 2004 to 3 Sep 2011(5)

⁽¹⁾ Options outstanding as at the date of the report.

⁽²⁾ The premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.

⁽³⁾ Will be subject to adjustment by the premium formula (based on the actual difference between the dividend and bond yields at the date of the vesting).

⁽⁴⁾ Performance hurdle was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010.

⁽⁵⁾ Performance hurdle must be satisfied between 4 September 2004 and 3 September 2006, otherwise options will lapse.

Options - Details of Movements	July 02 - June 03				July 03 - June 04
Year of Grant	2000		2001		2000		2001
Total options:
Held by participants at the start of year		572,500		2,863,100		427,500		2,336,400
Granted during year		—		—		—		—
Exercised during year		—		—		—		—
Lapsed during year		145,000		526,700		—		101,200
Outstanding at the end of year		427,500		2,336,400		427,500		2,235,200
Granted from 30 June to date of report		—		—		—		—
Exercised from 30 June to date of report		—		—		25,000		—
Lapsed from 30 June to date of report		—		—		—		—
Outstanding as at the date of report		427,500		2,336,400		402,500		2,235,200

134

Notes to the financial statements

NOTE 29 Share Capital continued

Reward Shares

										Average
Year of	Purchase	Shares		Shares						Purchase
Grant	Date	Purchased		Allocated			Participants		Vesting Period	Price
2000	20 Feb 2001		361,100		361,100			61	14 Sept 2003 to 13 Sept 2005(4)	$	29.72
	31 Oct 2001		2,000		2,000			1	14 Sept 2003 to 13 Sept 2005(4)	$	29.25
2001	31 Oct 2001		652,100		661,500	(1)		241	4 Sept 2004 to 3 Sept 2006(5)	$	29.25
2002	22 Nov 2002		357,500		545,500	(2)		195	3 Sept 2005 to 2 Sept 2007(5)	$	28.26
2003	12 Nov 2003		285,531		595,600	(3)		255	2 Sept 2006 to 1 Sept 2008(5)	$	28.33

⁽¹⁾ In October 2001, 11,400 reward shares were re-allocated to participants receiving the 2001 grant as a result of reward shares forfeited from previous ERP grant.

⁽²⁾ In November 2002, 188,000 reward shares were re-allocated to participants receiving the 2002 grant as a result of shares forfeited from previous grants.

⁽³⁾ In November 2003, 310,069 reward shares were re-allocated to participants receiving the 2003 grant as a result of shares forfeited from previous grants.

⁽⁴⁾ Performance hurdle was satisfied on 31 March 2004 and as a result 195,700 shares vested to participants of the 2000 grant.

⁽⁵⁾ Performance hurdle must be satisfied within the vesting period, otherwise shares will be forfeited.

Reward Shares - Details of Movements

	July 02 - June 03						July 03 - June 04
Year of Grant	2000		2001		2002		2000		2001		2002		2003
Total reward shares -
Held by participants at the start of year		337,300		638,800		—		217,100		518,500		515,300		—
Granted during year		—		—		552,000		—		—		—		597,100
Vested during year		—		—		—		195,700		—		—		—
Lapsed during year		120,200		120,300		36,700		21,400		59,000		43,225		10,725
Outstanding at the end of year		217,100		518,500		515,300		—		459,500		472,075		586,375
Granted from 30 June to date of report		—		—		—		—		—		—		—
Vested from 30 June to date of report		—		—		—		—		—		—		—
Lapsed from 30 June to date of report		—		—		—		—		22,500		26,250		28,875
Outstanding as at the date of report		217,100		518,500		515,300		—		437,000		445,825		557,500

     During the vesting period, reward shares are held in Trust. Each participant on behalf of whom Reward Shares are held by the Trustee, has a right to receive dividends. Once the shares vest dividends are paid in relation to those accrued during the vesting period. The participant may also direct the trustee on how the voting rights attached to the shares are to be exercised during the vesting period.

     For a limited number of executives including overseas based staff and those approved by the Chief Executive Officer and ratified by Remuneration Committee and Board, a cash based ‘share replicator’ ERP scheme is operated by way of grants of performance units. The performance unit grants are subject to the same vesting conditions as the Reward Share component of the ERP. On meeting the vesting condition, a cash payment is made to executives whereby the value is determined based on the current share price on vesting plus an accrued dividend value. An amount of $5 million has been expensed to the profit and loss account in respect of the year ended 30 June 2004 to reflect future payments which may be required under the ‘share replicator’ plan.

Executive Option Plan (“EOP”)

     As previously notified to shareholders, this plan was discontinued in 2000/01.

     Under the EOP, the Bank granted options to purchase ordinary shares to those key executives who, being able by virtue of their responsibility, experience and skill to influence the generation of shareholder wealth, were declared by the Board of Directors to be eligible to participate in the Plan. Non-executive directors were not eligible to participate in the Plan.

     Options cannot be exercised before each respective exercise period and the ability to exercise is conditional on the Bank achieving a prescribed performance hurdle. The option plan did not grant rights to the option holders to participate in a share issue of any other body corporate.

     The performance hurdle is the same TSR comparator hurdle as outlined above for the Equity Reward Plan (ERP) grants prior to 2002/03.

     The last grant under EOP was made in September 2000. The performance hurdles for the August 1999 grant and the September 2000 grant were met in 2004.

135

Notes to the financial statements

NOTE 29 Share Capital continued

Details of issues made under EOP as well as movements for 2002/03 and 2003/04 are as follows:

Executive Option Plan (“EOP”)

Commencement	Issue	Options		Options				Exercise			Exercise
Date	Date	Issued		Outstanding		Participants		Price(1)			Period
3 Nov 1997	11 Dec 1997		2,875,000		—		27	$	15.53	(2)	4 Nov 00 to 3 Nov 02
25 Aug 1998	30 Sep 1998		3,275,000		—		32	$	19.58	(2)	26 Aug 01 to 25 Aug 03
24 Aug 1999	24 Sep 1999		3,855,000		1,875,000		38	$	23.84	(2)	25 Aug 02 to 24 Aug 09(3)
13 Sep 2000	13 Oct 2000		2,002,500		1,144,600		50	$	26.97	(2)	14 Sep 03 to 13 Sep 10(4)

⁽¹⁾ Market value at the commencement date. Market value is defined as the weighted average of the prices at which shares were traded on the ASX during the one week period before the commencement date.

⁽²⁾ Premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.

⁽³⁾ Performance hurdle for the 1999 grant was satisfied on 28 February 2004 and options may be exercised up to 24 August 2009.

⁽⁴⁾ Performance hurdle for the 2000 grant was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010.

Details of Movements

	1 July 2002 to 30 June 2003(1)								1 July 2003 to 30 June 2004(1)
Year of Grant	1997		1998		1999		2000		1998		1999		2000
Total options -
Held by participants at the start of year		50,000		1,047,500		3,525,000		1,691,700		312,500		3,221,000		1,336,200
Exercised during year		—		660,000		—		—		312,500		1,271,000		129,100
Lapsed during year		50,000		—		304,000		355,500		—		25,000		12,500
Outstanding at the end of year		—		387,500		3,221,000		1,336,200		—		1,925,000		1,194,600
Exercised from 30 June to date of report		—		—		—		—		—		50,000		50,000
Lapsed from 30 June to date of report		—		75,000		—		—		—		—		—
Outstanding as at the date of report		—		312,500		3,221,000		1,336,200		—		1,875,000		1,144,600

⁽¹⁾ The EOP was discontinued in 2000/01 and no options have been granted under the plan during the last two reporting periods.

Summary of shares issued during the period 1 July 2003 to the date of the report as a result of options being exercised are:

Option	Shares		Price paid		Total
Issue Date	Issued		per Share		Consideration Paid
30 Sep 1998		312,500	$	19.58	$	6,118,750
24 Sep 1999		1,321,000	$	23.84	$	31,492,640
13 Oct 2000		179,100	$	26.97	$	4,830,327
7 Feb 2001		25,000	$	26.97	$	674,250

No amount is unpaid in respect of the shares issued upon exercise of the options during the above period.

     Under the Bank’s EOP and ERP an option holder generally has no right to participate in any new issue of securities of the Bank or of a related body corporate as a result of holding the option except that if there is a pro rata issue of shares to the Bank’s shareholders by way of bonus issue involving capitalisation (other than in place of dividends or by way of dividend reinvestment) an option holder is entitled to receive additional shares upon exercise of the options being the number of bonus shares that the option holder would have received if the options had been exercised and shares issued prior to the bonus issue.

136

Notes to the financial statements

NOTE 29 Share Capital continued

Non-Executive Directors Share Plan (“NEDSP”)

     The NEDSP provides for the acquisition of shares by non-executive directors through the mandatory sacrifice of 20% of their annual fees (paid on a quarterly basis). Shares purchased are restricted for sale for 10 years or when the Director leaves the Board, whichever is earlier.

Shares acquired under the plan receive full dividend entitlements and voting rights. There are no forfeiture or vesting conditions attached to shares granted under the NEDSP.

     Shares are purchased on-market at the current market price and a total of 34,009 shares have been purchased under the NEDSP since the plan commenced in 2001.

Details of grants under the NEDSP from 1 July 2003 to 30 June 2004 were as follows:

	Total Fees				Shares		Average
Quarter Ending	Sacrificed		Participants		Purchased		Purchase Price
30/09/2003	$	74,584		11		2,678	$	27.87
31/12/2003	$	74,650		11		2,534	$	29.46
31/03/2004	$	73,762		11		2,214	$	33.32
30/06/2004	$	73,616		11		2,250	$	32.72

No trading restrictions were lifted on shares during the period 1 July 2003 to the date of this report.

For the current year, $297,000 was expensed to the profit and loss account reflecting shares purchased and allocated under the NEDSP.

NOTE 30 Outside Equity Interests

	GROUP
	2004		2003
	$M		$M
Controlled Entities:
Share capital(1)		300		300
Reserves		—		—
Retained profits		4		4
Life insurance statutory funds		2,176		1,824
Total Outside Equity Interests		2,480		2,128

⁽¹⁾ ASB Perpetual Preference Shares — $182 million.

     On 10 December 2002, ASB Capital Limited, a New Zealand subsidiary, issued NZD200 million (AUD182 million) of perpetual preference shares. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly and are non-cumulative.

     Gandel Listed Property Trusts — $111 million.

     In July 2002 Colonial First State Property Retail Pty Ltd was incorporated and in August 2002, the Colonial First State Property Retail Trust (“CFSPRT”) was established. Both of these entities are owned 60% by the CBA Group and 40% by outside equity interests. On 30 September 2002, unitholders of the Colonial First State Property Trust Group (“CFT”), the Commonwealth Property Office Fund (“CPA”) and the Gandel Retail Trust (“GAN”) approved a proposal which saw CPA acquire the industrial/office assets of CFT and GAN acquire the retail assets of CFT. GAN changed its name to the CFS Gandel Retail Trust and CFSPRT became the delegated manager of this trust along with the retail component of a wholesale property trust.

137

Notes to the financial statements

NOTE 31 Capital Adequacy

     Commonwealth Bank of Australia (“the Bank”) is subject to regulation by the Australian Prudential Regulation Authority (“APRA”) under the authority of the Banking Act 1959. APRA has set minimum regulatory capital requirements for banks that are consistent with the Basel Accord. These requirements define what is acceptable as capital and provide for standard methods of measuring the risks incurred by the Bank. APRA has set minimum ratios that compare the regulatory capital with risk weighted on and off balance sheet assets. Regulatory capital requirements are measured for the Bank (known from 1 July 2003 as “Level 1”) and for the Bank and its banking subsidiaries (known from 1 July 2003 as “Level 2”). The life insurance and funds management businesses are not consolidated for capital adequacy purposes.

     Regulatory capital is divided into Tier One and Tier Two capital. Certain deductions are made from the sum of Tier One and Tier Two capital to arrive at the capital base. Tier One capital consists of shareholders’ equity plus other capital instruments acceptable to APRA, less goodwill and less the intangible element of the investment in life insurance and funds management businesses. Tier Two capital consists of the general provision for credit losses and other hybrid and debt instruments acceptable to APRA. The tangible element of the investment in life insurance and funds management businesses and any holdings of capital instruments issued by other banks are deducted from the sum of Tier One and Tier Two capital to arrive at the capital base.

     In accordance with APRA’s methodology, the standard method of measuring risk requires one of a number of risk weights to be applied to each category of assets on the balance sheet and to categories of off-balance sheet obligations. The standard risk weights are 100%, 50%, 20% and 0%. It should be noted that the risk weights are not consistent with the loss experience of the Bank and its subsidiaries. In addition, there is an agreed method for measuring market risk for traded assets.

     The regulatory capital ratios of the Bank are shown on page 140. An analysis of the movement in the capital ratios is shown on page 139.

Dividends

     Banks may not pay dividends if immediately after payment, they are unable to meet the minimum capital requirements. Banks cannot pay dividends from retained earnings without APRA’s prior approval. Under APRA guidelines, the expected dividend must be deducted from Tier One capital.

Regulatory Capital Requirements for Other ADIs in the Group

     ASB Bank Limited is subject to regulation by the Reserve Bank of New Zealand (“RBNZ”). RBNZ applies a similar methodology to APRA in calculating regulatory capital requirements. At 30 June 2004 ASB Bank Limited Group had a Tier One ratio of 8.22% and a Total Capital ratio of 10.18%.

Regulatory Capital Requirements for Life Insurance and Funds Management Business

     The Group’s life insurance businesses in Australia are also regulated by APRA. The Life Insurance Act 1995 includes a framework for the calculation of the regulatory capital requirements for life insurance companies. The required calculations are based on tests aimed at ensuring each statutory fund in each life insurance company has sufficient assets to meet policy and other liabilities under a range of adverse circumstances. There are two tiers to the regulatory capital requirements – ‘solvency’ and ‘capital adequacy’. The solvency test is made assuming each fund is closed to new business. Failure to meet the solvency test may result in the appointment of a judicial manager by APRA. The capital adequacy test assumes each fund remains open to new business and the reasonable expectations of policyholders are met. Failure to meet the capital adequacy test means capital or retained profits may not be transferred from the statutory funds. Failure may also result in closer regulatory monitoring by APRA. The capital adequacy test is always equal to or greater than the solvency test. At all times during the year to 30 June 2004, all statutory funds of the Group’s life insurance companies in Australia met the capital adequacy test. At 30 June 2004, for Australian life insurance companies, the estimated excess over capital adequacy within statutory funds amounted to $337 million in aggregate.

     The Group owns two life insurance companies in Australia: Commonwealth Insurance Holdings Limited (“CIHL”), and The Colonial Mutual Life Assurance Society Limited (“CMLA”). The life insurance business of Commonwealth Life Limited (“CLL”) was amalgamated into CMLA on 1 July 2003 using the provisions of part 9 of the Life Insurance Act. CLL was subsequently deregistered.

     There are no regulatory capital requirements for life insurance companies in New Zealand. However, the Group determines the capital requirements for New Zealand on a basis similar to Australia.

     The life insurance business in Hong Kong is regulated by the Insurance Authority of Hong Kong. The minimum regulatory requirement comprises a solvency test as defined in local regulations and ordinances.

     Funds managers in Australia are subject to responsible entity regulation by the Australian Securities and Investment Commission (“ASIC”). The regulatory capital requirements vary for responsible entities depending on the type of Australian Financial Services or Authorised Representatives’ Licence held but a requirement of up to $5 million of net tangible assets applies.

     APRA supervises approved trustees of superannuation funds and requires them to also maintain net tangible assets of at least $5 million. These requirements are not cumulative where an entity is both an approved trustee for superannuation purposes and a responsible entity.

     The total Group’s life and funds management companies held an estimated $710 million excess over regulatory capital requirements at 30 June 2004 in aggregate.

Regulatory Changes

Basel II

     In June 2004, the Basel Committee on Banking Supervision (“the Basel Committee”) issued the Revised Framework for the calculation of capital adequacy for banks, commonly known as Basel II. The objective of the Basel II Framework is to develop capital adequacy guidelines that are more accurately aligned with the individual risk profile of banks.

     The Basel II Framework is based on three “pillars”. Pillar 1 covers the capital requirements for banks, Pillar 2 covers the supervisory review process and Pillar 3 relates to market disclosure. There are three approaches to credit risk under the Basel II Framework. These are Standardised and two internal ratings-based (“IRB”) approaches. The Standardised Approach is a modified version of the current approach, but with risk weights aligned with the credit ratings of borrowers and counterparties. Under the IRB approaches (Foundation and Advanced), banks such as Commonwealth Bank that use internal models to calculate and allocate the amount of capital required for credit risk, may be able to use components of their own calculations to determine the amount of regulatory capital required for credit risk. Under the Foundation IRB Approach, the regulator will, in most cases, provide the parameters. Under the Advanced IRB Approach, substantially all of the parameters will be those

138

Notes to the financial statements

NOTE 31 Capital Adequacy continued

used by the bank in its internal models. The Commonwealth Bank is intending to implement the Advanced IRB approach.

     The Basel II Framework introduces a capital requirement for operational risk. As with credit risk, there are multiple approaches. The Bank is intending to implement the Advanced Measurement Approach.

     The Basel Committee intends member countries to adopt and implement the Basel II Framework for financial years ending in 2006. However, the most advanced approaches to credit and operational risk will be implemented for financial years ending in 2007, in order that further impact studies and parallel calculations can be completed.

     The current capital requirements for market risk are not expected to change significantly under the Basel II Framework.

     There remain a number of uncertainties regarding the Basel II Framework as it will be applied by APRA and it is not possible to provide reliable information on the regulatory position of the Bank under the new rules.

International Financial Reporting Standards

     The Bank will be required to adopt International Financial Reporting Standards (“IFRS”) for the financial year commencing 1 July 2005 and will report for the first time under IFRS when the results for the half year ended 31 December 2005 are announced.

     Many of the IFRS changes will have an affect upon the reporting of the Bank’s assets and equity. Current accounting definitions for asset and equity measurement are central to the capital adequacy requirements set by prudential regulators. APRA has stated that it will revise its prudential standards in response to the IFRS changes. However, it is currently unclear the impact this will have on the Bank’s capital adequacy position. Refer to page 83 for further discussion of IFRS.

Conglomerate Groups

     APRA has advised that a third level of capital adequacy (“Level 3”) will be implemented to coincide with Basel II. APRA defines a conglomerate group as a group of companies containing one or more Australian incorporated Authorised Deposit-taking Institutions (“ADIs”). The Bank is an ADI and the Commonwealth Bank Group falls within APRA’s definition of a conglomerate group. Each conglomerate group will be required to hold capital that corresponds to the corporate structure of that conglomerate. The calculation will have regard to all group members and the capacity to move surplus capital from one group entity to another.

     The regulatory capital requirements for each conglomerate group will be specific to that group.

     The proposals indicate that the use of internal capital estimation and allocation models may be permitted. However, APRA has not yet specified their requirements for internal models, nor when they will complete their review of the Bank’s models.

     Whilst the Bank considers that it is strongly capitalised (as evidenced by its credit ratings), no assurance can be given that our models will meet APRA’s requirements or that the Bank meets the Level 3 capital requirements.

Capital Expenditure

     From 1 July 2004, APRA requires banks to deduct certain capitalised expenses from Tier One capital. On a pro-forma basis, at 30 June 2004 this deduction would have been $111 million resulting in a decrease in Tier One Capital from 7.43% to 7.37% and a decrease in Total Capital from 10.25% to 10.18%.

Active Capital Management

     The Bank maintains a strong capital position. The Tier One Capital Ratio increased from 6.96% to 7.43% and the Total Capital Ratio increased from 9.73% to 10.25% during the year to 30 June 2004. The Bank’s credit ratings remained unchanged.

     During the year, the Bank achieved strong growth in Risk Weighted Assets from $147 billion to $169 billion. The following significant initiatives were undertaken to actively manage the Bank’s capital:

	Tier One Capital
•	Issue of USD550 million (AUD832 million) of trust preferred securities in August 2003;
•	Issue of $750 million of Perpetual Exchangeable Resettable Listed Securities (“PERLS II”) in January 2004;
•	Issue of $201 million shares in October 2003 to satisfy the Dividend Reinvestment Plan (“DRP”) in respect to the final dividend for 2002/03;
•	Issue of $188 million shares in March 2004 to satisfy the DRP in respect to the interim dividend for 2003/04;
•	In accordance with APRA guidelines, the estimated issue of $250 million shares to satisfy the DRP in respect of the final dividend for 2003/04;
•	The issue of $467 million shares pursuant to a Share Purchase Plan (“SPP”); and
•	An off-market share buy-back of $532 million in March 2004 which reduced Tier One Capital.

Further details of these transactions are provided in Note 29.

	Tier Two Capital
•	Issue of $500 million subordinated medium term notes settled in February 2004. The notes mature in 2014 and are callable in 2009. The notes qualify as Lower Tier Two capital;
•	Issue of JPY10 billion (AUD127 million) subordinated medium term notes settled in May 2004. The notes mature in May 2034 and are callable in May 2010. The notes qualify as Lower Tier Two capital; and
•	Issue of USD250 million (AUD358 million) subordinated medium term notes settled in June 2004. The notes mature in August 2014 and are callable in August 2009. The notes qualify as Lower Tier Two capital.

     Deductions from Total Capital

     The following movements in deductions have occurred during the year:

• Sale of investment in Bank of Queensland; and

• Dividend of $194 million paid to the Bank from the life insurance and funds management businesses in excess of the dividend paid in respect of the after-tax profits of these businesses.

     In July 2004, the Bank issued USD250 million (AUD357 million) subordinated medium term notes. The notes mature in 2014 and are callable in 2009. The notes qualify as Lower Tier Two capital.

139

Notes to the financial statements

NOTE 31 Capital Adequacy continued

				GROUP
	2004			2003
	Actual			Actual
Risk Weighted Capital Ratios	%			%
Tier One		7.43			6.96
Tier Two		3.93			4.21
Less deductions		(1.11	)		(1.44	)
Total		10.25			9.73
Adjusted Common Equity(1)		4.75

				GROUP
	2004			2003
Regulatory Capital	$M			$M
Tier One capital
Shareholders’ equity		24,885			22,152
Eligible loan capital		338			351
Estimated reinvestment under Dividend Reinvestment Plan(2)		250			—
Foreign currency translation reserve related to non-consolidated subsidiaries		179			147
Deduct:
Asset revaluation reserve		(61	)		(7	)
Goodwill		(4,705	)		(5,029	)
Expected dividend		(1,315	)		(1,066	)
Intangible component of investment in non-consolidated subsidiaries(3)		(4,674	)		(4,388	)
Outside equity interest in entities controlled by non-consolidated subsidiaries		(114	)		(123	)
Outside equity interest in insurance statutory funds and other funds		(2,176	)		(1,824	)
Other		(19	)		—
Total Tier One Capital		12,588			10,213
Tier Two capital
Asset revaluation reserve		61			7
General provision for bad and doubtful debts(4)		1,390			1,321
Future Income Tax Benefit related to general provision		(398	)		(391	)
Upper Tier Two note and bond issues		267			250
Lower Tier Two note and bond issues(5)(6)		5,338			4,990
Total Tier Two Capital		6,658			6,177
Total capital		19,246			16,390
Deduct:
Investment in non-consolidated subsidiaries (net of intangible component deducted from Tier One capital)(3)		(1,886	)		(2,072	)
Other deductions		(5	)		(42	)
Capital Base		17,355			14,276

(1)	Adjusted Common Equity (“ACE”) is one measure considered by Standard & Poor’s in evaluating the Bank’s credit rating. The ACE ratio has been calculated in accordance with the Standard & Poor’s methodology. As the Bank did not disclose this ratio for the previous year, no comparatives are published.
(2)	Based on reinvestment experience related to the Bank’s Dividend Reinvestment Plan.
(3)	Refer to Note 34 for a reconciliation of the components of the carrying value of the life insurance and funds management business to the value of investments in non-consolidated subsidiaries.
(4)	Excludes general provision for bad and doubtful debts in non-consolidated subsidiaries.
(5)	APRA requires these Lower Tier Two note and bond issues to be included as if they were un-hedged.
(6)	For regulatory capital purposes, Lower Tier Two note and bond issues are amortised by 20% of the original amount during each of the last five years to maturity.

140

Notes to the financial statements

NOTE 31 Capital Adequacy continued

	2004
Adjusted Common Equity(1)	$M
Tier One capital		12,588
Deduct:
Eligible loan capital		(338	)
Preference share capital		(687	)
Other equity instruments		(1,573	)
Outside equity interest (net of outside equity interest component deducted from Tier One capital)		(190	)
Investment in non-consolidated subsidiaries (net of intangible component deducted from Tier One capital)(2)		(1,886	)
Other deductions		(5	)
Other		139
Total Adjusted Common Equity		8,048

(1)	Adjusted Common Equity (“ACE”) is one measure considered by Standard & Poor’s in evaluating the Bank’s credit rating. The ACE ratio has been calculated in accordance with the Standard & Poor’s methodology. As the Bank did not disclose this ratio for the previous year, no comparatives are published.
(2)	Refer to Note 34 for a reconciliation of the components of the carrying value of the life insurance and funds management business to the value of investments in non-consolidated subsidiaries.

										GROUP
	Face Value				Risk					Risk-Weighted
					Weights					Balance
	2004		2003					2004		2003
Risk-Weighted Assets	$M		$M		%			$M		$M
On balance sheet assets
Cash, claims on Reserve Bank, short term claims on Australian Commonwealth and State Government and Territories, and other zero-weighted assets		27,554		23,832		0	%		—		—
Claims on OECD banks and local governments		15,020		12,427		20	%		3,004		2,485
Advances secured by residential property(1)		125,026		103,987		50	%		62,513		51,993
All other assets		83,256		74,472		100	%		83,256		74,472
Total On Balance Sheet Assets - Credit Risk(2)(3)		250,856		214,718					148,773		128,950

											GROUP
	Face Value						Credit				Risk-Weighted
							Equivalent				Balance
	2004		2003		2004		2003		2004		2003
	$M		$M		$M		$M		$M		$M
Off-balance sheet exposures
Direct credit substitutes		3,293		3,746		3,293		3,746		2,836		3,238
Trade and performance related items		1,069		992		483		463		453		435
Commitments		65,097		58,674		12,745		10,882		9,238		7,832
Foreign exchange, interest rate and other market related transactions		769,742		603,726		20,069		17,475		5,614		5,028
Total Off Balance Sheet Exposures - Credit Risk(4)		839,201		667,138		36,590		32,566		18,141		16,533
Total risk weighted assets - credit risk										166,914		145,483
Risk weighted assets - market risk										2,407		1,325
Total Risk Weighted Assets										169,321		146,808

(1)	For loans secured by residential property approved after 5 September 1994, a risk weight of 100% applied where the loan to valuation ratio is in excess of 80%. Effective from 28 August 1998, a risk weight of 50% applies to these loans if they are totally insured by an acceptable lender’s mortgage insurer. Loans that are risk weighted at 100% are reported under ‘All other assets’.
(2)	The difference between total on balance sheet assets and the Group’s balance sheet reflects the alternative treatment of some assets and provisions as prescribed in APRA’s capital adequacy guidelines; principally goodwill, general provision for bad and doubtful debts, and investments in life insurance and fund management business.
(3)	Total on balance sheet assets exclude debt and equity securities in the trading book and all on balance sheet positions in commodities, as they are included in the calculation of notional market risk weighted assets.
(4)	Off balance sheet exposures secured by the residential property account for $6.2 billion of off balance sheet credit equivalent assets ($3.1 billion of off balance sheet risk weighted assets).

141

Notes to the financial statements

NOTE 32 Maturity Analysis of Monetary Assets and Liabilities

     The maturity distribution of monetary assets and liabilities is based on contractual terms. The majority of the longer term monetary assets are variable rate products, with actual maturities shorter than the contractual terms. Therefore this information is not relied upon by the Bank in the management of its interest rate risk in Note 39.

																GROUP
	Maturity Period At 30 June 2004
					0 to 3		3 to 12		1 to 5		Over		Not
	At Call		Overdrafts		months		months		years		5 years		specified			Total
	$M		$M		$M		$M		$M		$M		$M			$M
Assets
Cash and liquid assets		888		—		5,565		—		—		—		—			6,453
Receivables due from other financial institutions		774		—		7,126		80		70		319		—			8,369
Trading securities(1)		—		—		14,896		—		—		—		—			14,896
Investment securities		—		—		1,952		1,646		5,145		2,704		—			11,447
Loans, advances and other receivables(2)		2,646		4,904		27,597		19,883		39,957		95,797		(1,393	)		189,391
Bank acceptances of customers		—		—		8,643		6,376		—		—		—			15,019
Life assets(3)		51		—		2,948		554		3,924		3,466		17,999			28,942
Other monetary assets		390		—		17,963		5		—		—		174			18,532
Total Monetary Assets		4,749		4,904		86,690		28,544		49,096		102,286		16,780			293,049
Liabilities
Deposits and other public borrowings(3)		88,691		—		48,863		21,191		3,594		838		—			163,177
Payables due to other financial institutions		536		—		4,564		1,529		12		—		—			6,641
Bank acceptances		—		—		8,643		6,376		—		—		—			15,019
Life liabilities		—		—		—		—		—		—		24,638			24,638
Debt issues and loan capital		—		—		7,160		13,699		19,162		10,249		403			50,673
Other monetary liabilities		9		—		17,996		918		32		8		196			19,159
Total Monetary Liabilities		89,236		—		87,226		43,713		22,800		11,095		25,237			279,307

(1)	Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months.
(2)	$102 billion of this figure represents owner occupied housing loans. While most of these loans would have a contractual term of 20 years or more, and are analysed accordingly, the actual average term of the portfolio has historically been less than 5 years.
(3)	Includes substantial ‘core’ deposits that are contractually at call customer savings and cheque accounts. History demonstrates such accounts provide a stable source of long term funding for the Bank. Also refer to the Interest Rate Risk Sensitivity table in Note 39.

     During the financial year, significant growth in variable rate, long-term loans occurred. This has been funded principally by retail deposits and wholesale funding.

142

Notes to the financial statements

NOTE 32 Maturity Analysis of Monetary Assets and Liabilities continued

																GROUP
	Maturity Period At 30 June 2003
					0 to 3		3 to 12		1 to 5		Over		Not
	At Call		Overdrafts		months		Months		years		5 years		specified			Total
	$M		$M		$M		$M		$M		$M		$M			$M
Assets
Cash and liquid assets		1,033		—		4,542		—		—		—		—			5,575
Receivables due from other financial institutions		1,256		—		5,054		756		—		—		—			7,066
Trading securities(1)		—		—		10,435		—		—		—		—			10,435
Investment securities		—		—		1,339		2,034		6,407		1,256		—			11,036
Loans, advances and other receivables(2)		1,515		4,457		14,128		18,094		37,167		86,311		(1,325	)		160,347
Bank acceptances of customers		—		—		13,197		—		—		—		—			13,197
Life assets		—		—		3,922		656		4,075		3,878		15,304			27,835
Other monetary assets		582		—		15,616		7		5		—		631			16,841
Total Monetary Assets		4,386		4,457		68,233		21,547		47,654		91,445		14,610			252,332
Liabilities
Deposits and other public borrowings(3)		81,385		—		38,334		15,138		4,962		1,155		—			140,974
Payables due to other financial institutions		1,438		—		5,724		376		—		—		—			7,538
Bank acceptances		—		—		13,197		—		—		—		—			13,197
Life liabilities(4)		—		—		—		—		—		—		23,861			23,861
Debt issues and loan capital		—		—		13,352		3,911		12,005		6,970		416			36,654
Other monetary liabilities		1		—		17,043		24		—		—		284			17,352
Total Monetary Liabilities		82,824		—		87,650		19,449		16,967		8,125		24,561			239,576

(1)	Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within three months.
(2)	$87 billion of this figure represents owner occupied housing loans. While most of these loans would have a contractual term of 20 years or more, and are analysed accordingly, the actual average term of the portfolio has historically been less than 5 years.
(3)	Includes substantial ‘core’ deposits that are contractually at call customer savings and cheque accounts. History demonstrates such accounts provide a stable source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table in Note 39.
(4)	The maturity profile of Life assets has been reclassified to be on a consistent basis with current year.

     During the financial year, significant growth in variable rate, long-term loans occurred. This has been funded principally by at call variable rate retail deposits.

143

Notes to the financial statements

NOTE 33 Financial Reporting by Segments

										GROUP
	Year Ended 30 June 2004
Primary Segment				Funds
Business Segments	Banking			Management			Insurance			Total
Financial Performance	$M			$M			$M			$M
Interest income		13,287			—			—			13,287
Premium and related revenue		—			—			1,012			1,012
Other income		3,720			3,142			840			7,702
Appraisal value uplift/(reduction)		—			(95	)		296			201
Total Revenue		17,007			3,047			2,148			22,202
Interest expense		7,877			—			—			7,877
Segment result before income tax, goodwill amortisation and appraisal value uplift/(reduction)		3,091			504			371			3,966
Income tax expense		(914	)		(228	)		(120	)		(1,262	)
Segment result after income tax and before goodwill amortisation and appraisal value uplift/(reduction)		2,177			276			251			2,704
Outside equity interest		(1	)		(8	)		—			(9	)
Segment result after tax and outside equity interest before goodwill amortisation and appraisal value uplift/(reduction)		2,176			268			251			2,695
Goodwill amortisation		(302	)		(17	)		(5	)		(324	)
Appraisal value uplift/(reduction)		—			(95	)		296			201
Net Profit Attributable to Shareholders of the Bank		1,874			156			542			2,572
Non-Cash Expenses
Goodwill amortisation		302			17			5			324
Charge for bad and doubtful debts		276			—			—			276
Depreciation		110			8			9			127
Which new Bank initiatives		427			—			—			427
Other		38			3			—			41
Financial Position
Total Assets		265,062			19,878			21,055			305,995
Acquisition of Property, Plant & Equipment, Intangibles and other Non-Current Assets		518			6			9			533
Associate Investments		194			1			44			239
Total Liabilities		254,284			17,439			9,387			281,110

144

Notes to the financial statements

NOTE 33 Financial Reporting by Segments continued

										GROUP
	Year Ended 30 June 2003
				Funds
	Banking			Management			Insurance			Total
Financial Performance	$M			$M			$M			$M
Interest income		11,528			—			—			11,528
Premium and related revenue		—			—			1,131			1,131
Other income		2,733			1,157			620			4,510
Total Revenue		14,261			1,157			1,751			17,169
Interest expense		6,502			—			—			6,502
Segment result before income tax, goodwill amortisation and appraisal value (reduction)/uplift		3,165			217			161			3,543
Income tax (expense)/credit		(931	)		5			(32	)		(958	)
Segment result after income tax and before goodwill amortisation and appraisal value (reduction)/uplift		2,234			222			129			2,585
Outside equity interest		—			(6	)		—			(6	)
Segment result after income tax and outside equity interest before goodwill amortisation and appraisal value (reduction)/uplift		2,234			216			129			2,579
Goodwill amortisation(1)		(300	)		(18	)		(4	)		(322	)
Appraisal value (reduction)/uplift		—			(291	)		46			(245	)
Net Profit Attributable to Shareholders of the Bank		1,934			(93	)		171			2,012
Non-Cash Expenses
Goodwill amortisation		300			18			4			322
Charge for bad and doubtful debts		305			—			—			305
Depreciation		109			8			11			128
Appraisal value reduction/(uplift)		—			291			(46	)		245
Other		112			1			—			113
Financial Position
Total Assets		229,289			19,622			16,199			265,110
Acquisition of Property, Plant & Equipment, Intangibles and other Non-current Assets		98			16			6			120
Associate Investments		214			12			61			287
Total Liabilities		216,939			17,044			8,975			242,958

⁽¹⁾ Prior years have been restated to reflect the allocations of goodwill amortisation across businesses.

145

Notes to the financial statements

NOTE 33 Financial Reporting by Segments continued

										GROUP
	Year Ended 30 June 2002
				Funds
	Banking			Management			Insurance			Total
Financial Performance	$M			$M			$M			$M
Interest income		10,455			—			—			10,455
Premium and related revenue		—			—			866			866
Other income		3,180			690			293			4,163
Appraisal value uplift		—			381			96			477
Total Revenue		13,635			1,071			1,255			15,961
Interest Expense		5,745			—			—			5,745
Segment result before tax, goodwill amortisation and appraisal value uplift		2,884			399			135			3,418
Income tax expense		(816	)		(31	)		(69	)		(916	)
Segment result after income tax and before goodwill amortisation and appraisal value uplift		2,068			368			66			2,502
Outside equity interest		(1	)		—			—			(1	)
Segment result after tax and outside equity interest before goodwill amortisation and appraisal value uplift		2,067			368			66			2,501
Goodwill amortisation		(301	)		(18	)		(4	)		(323	)
Appraisal value uplift		—			381			96			477
Net Profit Attributable to Shareholders of the Bank		1,766			731			158			2,655
Non-Cash Expenses
Goodwill amortisation		301			18			4			323
Charge for bad and doubtful debts		449			—			—			449
Depreciation		109			7			12			128
Other		87			2			1			90
Financial Position
Total Assets		211,130			20,531			17,987			249,648
Acquisition of Property, Plant & Equipment, Intangibles and other Non-current Assets		147			17			—			164
Associate Investments		235			30			48			313
Total Liabilities		200,885			18,123			9,584			228,592

146

Notes to the financial statements

NOTE 33 Financial Reporting by Segments continued

	2004				2003				2002
Secondary Segment	$M		%		$M		%		$M			%
GEOGRAPHICAL SEGMENTS
Revenue
Australia		17,746		80.0		14,008		81.6		12,651			79.3
New Zealand		2,671		12.0		2,025		11.8		1,591			10.0
Other Countries(1)		1,785		8.0		1,136		6.6		1,719			10.7
		22,202		100.0		17,169		100.0		15,961			100.0
Net profit attributable to shareholders of the Bank
Australia		2,091		81.3		1,659		82.4		2,569			96.8
New Zealand		309		12.0		265		13.2		178			6.7
Other Countries(1)		172		6.7		88		4.4		(92	)		(3.5	)
		2,572		100.0		2,012		100.0		2,655			100.0
Assets
Australia		252,652		82.6		221,248		83.5		208,673			83.6
New Zealand		35,059		11.4		27,567		10.4		24,579			9.8
Other Countries(1)		18,284		6.0		16,295		6.1		16,396			6.6
		305,995		100.0		265,110		100.0		249,648			100.0
Acquisition of Property, Plant & Equipment, Intangibles and other Non-current Assets
Australia		495		92.9		98		81.7		134			81.7
New Zealand		29		5.4		6		5.0		26			15.9
Other Countries(1)		9		1.7		16		13.3		4			2.4
		533		100.0		120		100.0		164			100.0

(1)	Other Countries are: United Kingdom, United States of America, Japan, Singapore, Hong Kong, Grand Cayman, Philippines, Fiji, Indonesia, China and Vietnam.
	The geographical segments represent the location in which the transaction was booked. The New Zealand net profit for 2003 has been restated onto a consistent basis with other years.

147

Notes to the financial statements

NOTE 34 Life Insurance Business

     The following information, in accordance with AASB 1038: Life Insurance Business, is provided to disclose the statutory life insurance business transactions contained in the Group financial statements and the underlying methods and assumptions used in their calculation. Also refer to Notes 1(ii) and 21. The life insurance segment result is prepared on a business segment basis, refer to Note 33.

				GROUP
	2004			2003
Summarised Statement of Financial Performance	$M			$M
Premium and related revenue		1,362			1,326
Outward reinsurance premiums expense		(194	)		(200	)
Claims expense		(501	)		(471	)
Reinsurance recoveries		139			132
Investment revenue (excluding investments in subsidiaries)
Equity securities		1,582			(680	)
Debt securities		558			894
Property		238			374
Other		399			46
Life insurance policy liabilities expense		(2,315	)		(546	)
Margin on services operating income		1,268			875
Change in excess of net market values over net assets of life insurance controlled entities		201			(245	)
Life insurance operating income		1,469			630
Administration expense		(447	)		(697	)
Operating profit before income tax		1,022			(67	)
Income tax attributable to operating profit		(300	)		45
Operating profit after income tax		722			(22	)
Outside equity interest in operating profit after income tax		(8	)		—
Net Profit After Income Tax		714			(22	)
Sources of life insurance operating profit
The Margin on Services operating profit after income tax is represented by:
Emergence of planned profit margins		186			228
Difference between actual and planned experience		6			(67	)
Movement in excess of net market value over net assets of controlled entities		201			(245	)
Reversal of previously recognised losses or loss recognition on groups of related products		10			(11	)
Investment earnings on assets in excess of policyholder liabilities		311			73
Operating Profit After Income Tax		714			(22	)
Life insurance premiums received and receivable		3,688			4,158
Life insurance claims paid and payable		4,356			5,843

148

Notes to the financial statements

NOTE 34 Life Insurance Business continued

Carrying Values of Life Insurance and Funds Management Business

     The following table sets out the components of the carrying values of the Bank’s life insurance and funds management businesses, together with the key actuarial assumptions that have been used. These are Directors’ valuations based on appraisal values using a range of economic and business assumptions determined by management which are reviewed by independent actuaries Trowbridge Deloitte.

				Life Insurance
	Funds
	Management			Australia			New Zealand			Asia(1)			Total
Analysis of Movement since 30 June 2003	$M			$M			$M			$M			$M
Profits		268			180			54			17			519
Net capital movements(2)		(27	)		108			(29	)		—			52
Dividends paid		(470	)		(421	)		(9	)		—			(900	)
Foreign exchange movements		(10	)		—			19			(25	)		(16	)
Change in Shareholders net tangible assets		(239	)		(133	)		35			(8	)		(345	)
Appraisal value uplift/(reduction)		(95	)		206			94			(4	)		201
Increase/(Decrease) to 30 June 2004		(334	)		73			129			(12	)		(144	)

Shareholders’ Net Tangible Assets	$M			$M			$M			$M			$M
30 June 2003 balance		754			1,264			380			608			3,006
Profits		268			180			54			17			519
Net capital movements(2)		(27	)		108			(29	)		—			52
Dividends paid		(470	)		(421	)		(9	)		—			(900	)
Foreign exchange movements		(10	)		—			19			(25	)		(16	)
30 June 2004 Balance		515			1,131			415			600			2,661

Value Inforce Business	$M		$M		$M		$M			$M
30 June 2003 balance		1,123		245		191		4			1,563
Uplift/(reduction)		727		50		95		(4	)		868
30 June 2004 Balance		1,850		295		286		—			2,431

Value Future New Business	$M			$M		$M			$M		$M
30 June 2003 balance		3,596			79		278			24		3,977
Uplift/(reduction)		(822	)		156		(1	)		—		(667	)
30 June 2004 Balance		2,774			235		277			24		3,310

Carrying Value at 30 June 2004	$M		$M		$M		$M		$M
Shareholders’ net tangible assets		515		1,131		415		600		2,661
Value inforce business		1,850		295		286		—		2,431
Embedded value		2,365		1,426		701		600		5,092
Value future new business		2,774		235		277		24		3,310
Carrying Value		5,139		1,661		978		624		8,402

(1)	The Asian life businesses are not held in the market value environment and are carried at net assets plus any excess representing the difference between appraisal value and net assets at the time of acquisition. This excess which effectively represents goodwill is being amortised on a straight line basis over 20 years, subject to impairment.
(2)	Includes capital injections and movements in intergroup loans.

149

Notes to the financial statements

NOTE 34 Life Insurance Business continued

     The following table reconciles the carrying values of the life insurance and funds management businesses to the value of investments in non-consolidated subsidiaries as shown in the capital adequacy calculation in Note 31.

Reconciliation of the Components of the Carrying Value to the Value of Investments in Non-Consolidated Subsidiaries

	2004			2003
	$M			$M
Intangible component of investment in non-consolidated subsidiaries deducted from Tier One capital comprises:
Value future new business		3,310			3,977
Value of self-generated inforce business		1,279			411
Other(1)		85			—
		4,674			4,388
Investment in non-consolidated subsidiaries deducted from Total Capital comprises:
Shareholders’ net tangible assets in life and funds management businesses		2,661			3,006
Capital in other non-consolidated subsidiaries		351			286
Value of acquired inforce business		1,152			1,152
Less non-recourse debt		(2,278	)		(2,372	)
		1,886			2,072

⁽¹⁾ Relates to revised APRA Prudential Standards effective 1 July 2003.

Key Assumptions Used in Appraisal Values

     The following key assumptions have been used in determining the appraisal values. Other actuarial assumptions used in the valuation are described in the section Actuarial Methods and Assumptions.

			Risk		Value of
	New		Discount		Franking
	Business		Rate		Credits
As at 30 June 2004	Multiplier		%		%
Life insurance entities
Australia		8		10.9		70
New Zealand		9		10.3		—
Asia
- Hong Kong		8		12.0		—
- Other	Various		Various			—
Funds management entities
Australia		n/a		12.5		70

			Risk		Value of
	New		Discount		Franking
	Business		Rate		Credits
As at 30 June 2003	Multiplier		%		%
Life Insurance entities
Australia		8		10.8		70
New Zealand		8		10.9		—
Asia
- Hong Kong		8		11.5		—
- Other	various		various			—
Funds management entities
Australia		n/a		11.9		70

     The movement in the risk discount rate is based on the change in the underlying risk free rate using a capital asset pricing model framework. This framework utilises the local 10-year government bond yield as the proxy for the risk free rate.

     The movement in risk discount rates have been accompanied by broadly equivalent movements in assumed future investment returns on the Australian funds management business.

     The assumptions for the future new business are set after considering current levels of new business and the expected growth in business. A review of current experience has resulted in a reduction in the future sales assumption for Australian funds management.

150

Notes to the financial statements

NOTE 34 Life Insurance Business continued

Policy Liabilities

     Appropriately qualified actuaries have been appointed in respect of each life insurance business and they have reviewed and satisfied themselves as to the accuracy of the policy liabilities included in this financial report, including compliance with the regulations of the Life Insurance Act (Life Act) 1995 where appropriate. Details are set out in the various statutory returns of these life insurance businesses.

	2004			2003
Components of policy liabilities	$M			$M
Future policy benefits(1)		27,779			27,426
Future bonuses		1,346			1,188
Future expenses		1,762			1,637
Future profit margins		1,472			1,420
Future charges for acquisition expenses		(527	)		(916	)
Balance of future premiums		(7,266	)		(6,956	)
Provisions for bonuses not allocated to participating policyholders		72			62
Total Policy Liabilities		24,638			23,861
					��

⁽¹⁾ Including bonuses credited to policyholders in prior years.

Taxation

     Taxation has been allowed for in the determination of policy liabilities in accordance with the relevant legislation applicable in each territory.

Actuarial Methods and Assumptions

     Policy liabilities have been calculated in accordance with the Margin on Services (MoS) methodology as set out in Actuarial Standard 1.03 - Valuation Standard (‘AS1.03’) issued by the Life Insurance Actuarial Standards Board (‘LIASB’). The principal methods and profit carriers used for particular product groups, are as follows:

Product Type	Method		Profit Carrier
Individual
Conventional		Projection		Bonuses or expected claim payments
Investment account		Projection		Bonuses or funds under management
Investment linked		Accumulation		Not applicable
Lump sum risk		Projection		Premiums/claims
Income stream risk		Projection		Expected claim payments
Immediate annuities		Projection		Annuity payments
Group
Investment account		Projection		Bonuses or funds under management
Investment linked		Accumulation		Not applicable
Lump sum risk		Accumulation		Not applicable
Income stream risk		Projection		Expected claim payments

151

Notes to the financial statements

NOTE 34 Life Insurance Business continued

     The ‘Projection Method’ measures the present values of estimated future policy cash flows to calculate policy liabilities. The policy cash flows incorporate investment income, premiums, expenses, redemptions and benefit payments.

     The ‘Accumulation Method’ for investment linked measures the accumulation of amounts invested by policyholders plus investment earnings less fees specified in the policy to calculate policy liabilities. Deferred acquisition costs were offset against this liability.

     Bonuses are amounts added, at the discretion of the life insurer, to the benefits currently payable under Participating Business. Under the Life Act, bonuses are a distribution to policyholders of profits and may take a number of forms including reversionary bonuses, interest credits and capital growth bonuses (payable on the termination of the policy).

Actuarial Assumptions

     Set out below is a summary of the material assumptions used in the calculation of policy liabilities. These assumptions are also used in the determination of appraisal values.

Discount Rates

     These were the rates used to discount further cash flows to determine their net present value in the policy liabilities. The discount rates were determined with reference to the expected earnings rate of the assets that support the policy liabilities adjusted for taxation where relevant. The following table shows the applicable rates for the major classes of business in Australia and New Zealand. The changes relate to changes in long term earnings rates and asset mix.

	Discount Rates
	June 2004		June 2003
Class of Business	Rate Range %		Rate Range %
Traditional — ordinary business (after tax)		6.11 - 6.86		5.44 - 6.19
Traditional — superannuation business (after tax)		7.46 - 8.40		6.65 - 7.58
Annuity business (after tax)		6.17 - 6.98		5.46 - 6.67
Term insurance — ordinary business (after tax)		3.45 - 4.15		3.16 - 3.85
Term insurance — superannuation business (after tax)		3.45 - 4.15		3.16 - 3.85
Disability business (before tax)		5.93		5.50
Investment linked — ordinary business (after tax)		5.61 - 6.04		4.88 - 5.68
Investment linked — superannuation business (after tax)		7.37 - 7.42		6.33 - 6.84
Investment linked — exempt (after tax)		8.41 - 8.80		7.20 - 8.27
Investment account — ordinary business (after tax)		4.32		3.67
Investment account — superannuation business (after tax)		5.25		4.46
Investment account — exempt (after tax)		6.13		5.21

Bonuses

     The valuation assumes that the long-term supportable bonuses will be paid, which is in line with company bonus philosophy. There have been no significant changes to these assumptions.

Maintenance Expenses

     The maintenance expenses are based on an internal analysis of experience and are assumed to increase in line with inflation each year and to be sufficient to cover the cost of servicing the business in the coming year after adjusting for one off expenses. For participating business, expenses continue on the previous charging basis with adjustments for actual experience, and are assumed to increase in line with inflation each year.

Investment Management Expenses

     Investment management expense assumptions are based on the contractual fees (inclusive of an allowance for inflation) as set out in Fund Manager agreements. There have been no significant changes to these assumptions.

Inflation

     The inflation assumption is consistent with the investment earning assumptions.

Benefit Indexation

     The indexation rates are based on an analysis of past experience and estimated long term inflation and vary by business and product type. There have been no significant changes to these assumptions.

Taxation

     The taxation basis and rates assumed vary by territory and product type.

Voluntary Discontinuance

     Discontinuance rates were based on recent company and industry experience and vary by territory, product, age and duration inforce. The experience has generally been favourable resulting in reductions in discontinuance rates for some product lines.

Surrender Values

     Current surrender value bases were assumed to apply in the future. There have been no significant changes to these assumptions.

Unit Price Growth

     Unit prices are assumed to grow in line with assumed investment earnings assumptions, net of asset charges as per current company practice. There have been no significant changes to these assumptions.

Mortality and Morbidity

     Rates vary by sex, age, product type and smoker status. Rates are based on standard mortality tables applicable to each territory e.g. IA90-92 in Australia for risk, IM/IF80 for annuities, adjusted for recent company and industry experience where appropriate.

152

Notes to the financial statements

NOTE 34 Life Insurance Business continued

Solvency

Australian Life Insurers

     Australian life insurers are required to hold prudential reserves in excess of the amount of policy liabilities. These reserves were required to support capital adequacy requirements and provide protection against adverse experience. Actuarial Standard AS2.03 - ‘Solvency Standard’ (“AS2.03”) prescribes a minimum capital requirement and the minimum level of assets required to be held in each life insurance fund. All controlled Australian life insurance entities complied with the solvency requirements of AS2.03. Further information is available from the individual statutory returns of subsidiary life insurers.

Overseas life insurers

     Overseas life insurance subsidiaries were required to hold reserves in excess of policy liabilities in accordance with local Acts and prudential rules.

     Each of the overseas subsidiaries complied with local requirements. Further information is available from the individual statutory returns of subsidiary life insurers.

Managed Assets and Fiduciary Activities

     Arrangements were in place to ensure that asset management and other fiduciary activities of controlled entities are independent of the life insurance funds and other activities of the Bank.

Disaggregated Information

     Life insurance business is conducted through a number of life insurance entities in Australia and overseas. Under the Australian Life Insurance Act 1995, life insurance business is conducted within one or more separate statutory funds, that were distinguished from each other and from the shareholders’ funds. The financial statements of Australian life insurers prepared in accordance with AASB 1038: Life Insurance Business, (and which are lodged with the relevant Australian regulators) show all major components of the financial statements disaggregated between the various life insurance statutory funds and their shareholder funds.

153

Notes to the financial statements

NOTE 35 Remuneration of Auditors

			GROUP				BANK
	2004		2003		2004		2003
	$’000		$’000		$’000		$’000
Amounts paid or due and payable for audit services to:
Ernst & Young		7,714		6,634		2,792		2,555
Other Auditors		134		137		—		—
		7,848		6,771		2,792		2,555
Amounts paid or due and payable for non-audit services to Ernst & Young:
Audit related services		1,113		752		894		571
Taxation services		222		325		136		170
All other services
Corporate finance services		203		628		203		528
Staff assistance services		13		1,263		13		827
Other services		569		321		284		122
		2,120		3,289		1,530		2,218
Total Remuneration of Auditors		9,968		10,060		4,322		4,773

     The Audit Committee has considered the non-audit services provided by Ernst & Young and is satisfied that the services and the level of fees are compatible with maintaining auditors’ independence.

     Fees for audit services includes fees associated with statutory audit services, review of the Group’s half year financial statements, audit of the Group’s US Form 20-F, services in relation to statutory and regulatory requirements, and other services that only the external auditor can provide such as comfort letters on debt issues.

     Audit related fees principally include accounting and regulatory consultations, due diligence in connection with acquisitions and dispositions, and investigations and verifications of internal control systems and financial or regulatory information.

     Taxation fees include income tax and GST compliance and related advice, and tax technology and related training.

     All other fees principally include transaction support services related to potential and actual acquisition and disposition transactions, advice regarding implementation of revised compliance and regulatory requirements, and provision of personnel to assist alleviate short term non-management resource and skill needs.

NOTE 36 Commitments for Capital Expenditure Not Provided for in the Accounts

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Not later than one year		44		48		42		23
Later than one year but not later than two years		2		—		—		—
Total Commitments for Capital Expenditure Not Provided for in the Accounts		46		48		42		23

NOTE 37 Lease Commitments - Property, Plant and Equipment

			GROUP				BANK
	2004		2003		2004		2003
	$M		$M		$M		$M
Commitments in respect of non cancellable operating lease agreements due:
Not later than one year		295		264		241		228
Later than one year but not later than five years		646		587		522		503
Later than five years		207		160		150		104
Total Lease Commitments - Property, Plant and Equipment		1,148		1,011		913		835
Group’s share of lease commitments of associated entities:
Not later than one year		12		9
Later than one year but not later than five years		16		18
Later than five years		—		1
Total Lease Commitments - Property, Plant and Equipment		28		28

Lease Arrangements

     Leases entered into by the Group are for the purpose of accommodating the business needs. Leases may be over retail, commercial, industrial and residential premises and reflect the needs of the occupying business and market conditions. All leases are negotiated using either internal or external professional property resources acting for the Group.

     Rental payments are determined in terms of relevant lease requirements, usually reflecting market rentals.

     The Group as lessee has no purchase options over premises occupied.

     There are no restrictions imposed on the Group’s lease of space other than those forming part of the negotiated lease arrangements for each specific premise.

154

Notes to the financial statements

NOTE 38 Contingent Liabilities and Assets

     The Group is involved in a range of transactions that give rise to contingent and/or future liabilities. These transactions meet the financing requirements of customers and include endorsed bills of exchange, letters of credit, guarantees and commitments to provide credit.

     These transactions combine varying levels of credit, interest rate, foreign exchange and liquidity risk. In accordance with Bank policy, exposure to any of these transactions is not carried at a level that would have a material adverse effect on the financial condition of the Bank and its controlled entities.

     Details of contingent liabilities and off balance sheet business (excluding Derivatives - Note 39) are:

							GROUP
			Face Value		Credit Equivalent
	2004		2003		2004		2003
	$M		$M		$M		$M
Credit risk related instruments
Guarantees		2,230		2,075		2,230		2,075
Standby letters of credit		362		380		362		380
Bill endorsements		308		589		308		589
Documentary letters of credit		171		110		34		22
Performance related contingents		898		882		449		441
Commitments to provide credit		64,651		58,310		12,329		10,519
Other commitments		7,158		2,720		1,156		1,081
Total Credit Risk Related Instruments		75,778		65,066		16,868		15,107

     Guaranteesrepresent unconditional undertakings by the Group to support the obligations of its customers to third parties.

     Standby letters of creditare undertakings by the Group to pay, against production of documents, an obligation in the event of a default by a customer.

     Bill endorsementsrelate to bills of exchange that have been endorsed by the Group and represent liabilities in the event of default by the acceptor and the drawer of the bill.

     Documentary lettersof creditrepresent an undertaking to pay or accept drafts drawn by an overseas supplier of goods against production of documents in the event of payment default by a customer.

     Performance related contingentsinvolve undertakings by the Group to pay third parties if a customer fails to fulfil a contractual non-monetary obligation.

     Commitments to provide creditinclude all obligations on the part of the Group to provide credit facilities.

     Other commitmentsinclude the Group’s obligations under sale and repurchase agreements, outright forward purchases and forward deposits and underwriting facilities.

     The transactions are categorised and credit equivalents calculated under APRA guidelines for the risk based measurement of capital adequacy. The credit equivalent amounts are a measure of the potential loss to the Group in the event of non performance by counterparty.

     The credit equivalent exposure from direct credit substitutes (guarantees, standby letters of credit and bill endorsements) is the face value of the transaction, whereas the credit equivalent exposure to documentary letters of credit and performance related contingents is 20% and 50% respectively of the face value. The exposure to commitments to provide credit is calculated by applying given credit conversion factors to the face value to reflect the duration, the nature and the certainty of the contractual undertaking to provide the facility.

     Where the potential loss depends on the performance of a counterparty, the Group utilises the same credit policies and assessment criteria for off balance sheet business as it does for on balance sheet business and if it is deemed necessary, collateral is obtained based on management’s credit evaluation of the counterparty. If a probable loss is identified, suitable provisions are raised.

     Contingent Assets

     The credit risk related contingent liabilities of $75,778 million (2003: $65,066 million) detailed above also represent contingent assets of the Group. Such commitments to provide credit may in the normal course convert to loans and other assets of the Group.

Litigation

     Neither the Commonwealth Bank nor any of its controlled entities is engaged in any litigation or claim which is likely to have a materially adverse effect on the business, financial condition or operating results of the Commonwealth Bank or any of its controlled entities. Where some loss is probable an appropriate provision has been made.

155

Notes to the financial statements

NOTE 38 Contingent Liabilities and Assets continued

Indemnities under UK Sale Agreement

     The Group has contingent liabilities that relate to indemnities given under an agreement for the sale of Colonial Life (UK) Ltd and Colonial Pension Fund Ltd to the Winterthur Group.

     These indemnities cover potential claims that could arise from prior period mis-selling activities in the UK for pension and mortgage endowment products. Under the sales agreement, the liabilities are shared between Winterthur and the Group on a pre-determined basis.

     Fiduciary Activities

     The Group and its associated entities conduct investment management and other fiduciary activities as responsible entity, trustee, custodian or manager for numerous investment funds and trusts, including superannuation and approved deposit funds, wholesale and retail trusts. The amounts of funds concerned that are not reported in the Group’s balance sheet are as follows:

	2004		2003
	$M		$M
Funds under administration
Australia		67,393		61,556
United Kingdom		10,721		6,908
New Zealand		7,614		6,590
Asia		1,203		1,369
		86,931		76,423
Funds under custody
Australia(1)		—		57,777

⁽¹⁾ The Group has agreed to novate or transfer all of this business to other custodians during the 2004 financial year.

     Certain entities within the Group act as responsible entity or trustee of virtually all managed schemes (“schemes”), wholesale and retail trusts (“trusts”) managed by the Group in Australia, United Kingdom and New Zealand. The above funds under administration do not include on balance sheet investments and policyholder liabilities held in the statutory funds of the life insurance business (refer to Note 16) where an entity within the Group may act as a trustee. Liabilities are incurred by these entities in their capacity as responsible entity or trustee. Rights of indemnity are held against the schemes and trusts whose assets exceeded their liabilities at 30 June 2004. Where entities within the Group act as manager of unit trusts, obligations exist under the relevant Trust Deeds, whereby upon request from a unit holder, the manager has an obligation to repurchase units from the trust or to arrange for the relevant trustee to redeem units from the assets of those trusts. It is considered unlikely that these entities will need to repurchase units from their own funds.

     The Commonwealth Bank of Australia does not guarantee the performance or obligations of its subsidiaries.

Long Term Contracts

     In 1997, the Bank entered into a ten year contract with an associated entity, EDS (Australia) Pty Ltd, relating to the provision of information technology services. In 2000, the Bank entered into a telecommunications services agreement with TCNZ Australia Pty Ltd for five years. The exact amounts of these contracts are unable to be reliably determined as they are dependent upon business volumes over the period of the contracts.

Liquidity support

     In accordance with the regulations and procedures governing clearing arrangements contained within the Australian Paper Clearing System (“Clearing Stream 1”) and the Bulk Electronic Clearing System (“Clearing Stream 2”) and the High Value Clearing System (“Clearing Stream 4”, only if operating in ‘bypass mode’) of the Australian Payments Clearing Association Limited, the Bank is subject to a commitment to provide liquidity support to these clearing streams in the event of a failure to settle by a member institution.

Service Agreements

     The maximum contingent liability for termination benefits in respect of service agreements with the Chief Executive Officer and other executives of the Company and its controlled entities at 30 June 2004 was $8 million (2003: $10.6 million).

156

Notes to the financial statements

NOTE 39 Market Risk

     The Bank in its daily operations is exposed to a number of market risks. A market risk is the risk of an event in the financial markets that results in a loss of earnings or a loss of value, e.g. an adverse interest rate movement.

     Under the authority of the Board of Directors, the Risk Committee of the Board ensures that all the market risk exposure is consistent with the business strategy and within risk tolerance of the Group. Regular market risk reports are tabled before the Risk Committee of the Board.

     Within the Group, market risk is greatest in the balance sheets of the banking and insurance businesses. Market risk also arises in the course of its intermediation activities in financial services and in financial markets trading.

Market Risk in the Balance Sheets

     The Risk Committee of the Board recommends for Board approval, all balance sheet market risk policies and limits. Implementation of the policy is through the Asset and Liability Committee, with operational management delegated to the Group Executives of the associated business units.

     For bank balance sheets, market risk includes liquidity risk, funding risk, interest rate risk and foreign exchange risk. On life and general insurance balance sheets, market risk is part of the principal means by which long term liabilities are managed. In this sense and in contrast to banking, market risk is structural for these businesses.

     Liquidity risk

     Balance sheet liquidity risk is the risk of being unable to meet financial obligations as they fall due. The Group manages liquidity requirements by currency and by geographical location of its operations. Subsidiaries are also included in the Group’s liquidity policy framework. Liquidity policies are in place to manage liquidity in a day-to-day sense, and also under crisis assumptions.

     Under current APRA Prudential Standards, each bank is required to develop a liquidity management strategy that is appropriate for itself, based on its size and nature of operations. The objectives of the Group’s funding and liquidity policies are to:

• Ensure all financial obligations are met when due;

• Provide adequate protection, even under crisis scenarios, at lowest cost; and

• Achieve sustainable, lowest-cost funding within the limitations of funding diversification requirements.

     Funding risk

     Funding risk is the risk of over-reliance on a funding source to the extent that a change in that funding source could increase overall funding costs or cause difficulty in raising funds. The funding policy augments the Group’s liquidity policy with its aim to assure the Group has a stable diversified funding base without over-reliance on any one market sector.

     Domestically, the Group continues to obtain the majority of its AUD funding from a stable retail deposit base which has a lower interest cost than wholesale funds. The retail funding percentage has fallen from 67% in June 2003 to 60% in June 2004 due to the growth of “at call” savings. The relative size of the Group’s retail base has enabled it to source funds at a lower than average rate of interest than the other major Australian banks. However, some of this benefit is offset by the cost of the Group’s extensive retail network and the Group’s large share of pensioner deeming accounts.

     The cost of funds for Financial Year 2004, calculated as a percentage of interest exposure to average interest bearing liabilities, was 4.0% on a group basis compared with the 3.7% on a group basis for Financial Year 2003.

     The Group obtains a significant proportion of its funding for the domestic balance sheet from wholesale sources - approximately 29.7% (2003: 22.7%), excluding Bank Acceptances. The cost of funds raised in the wholesale markets is affected by independently assessed credit ratings.

157

Notes to the financial statements

NOTE 39 Market Risk continued

     A funding diversification policy is particularly important in offshore markets where the absence of any ‘natural’ offshore funding base means the Group is principally reliant on money market and capital market sources for funding. The Group has imposed internal prudential limits on the relative mix of offshore sources of funds.

     The following table outlines the range of financial instruments used by the Group to raise deposits and borrowings, both within Australia and overseas. Funds are raised from well-diversified sources and there are no material concentrations in these categories.

Market Risk

			GROUP
	2004		2003
	$M		$M
Australia
Cheque accounts		24,699		22,341
Savings accounts		31,067		32,411
Term deposits		38,530		32,398
Cash management accounts		20,756		18,756
Debt issues		27,688		19,577
Bank acceptances		15,019		13,122
Certificates of deposit		20,516		11,228
Life insurance policy liabilities		20,834		20,443
Loan capital		6,539		5,937
Securities sold under agreements to repurchase		3,585		3,231
Other		2,383		2,527
Total Australia		211,616		181,971
Overseas
Deposits and interbank		28,282		25,621
Commercial paper		8,776		7,802
Life insurance policy liabilities		3,804		3,418
Other debt issues		7,578		3,250
Loan capital		92		88
Bank acceptances and other		—		75
Total Overseas		48,532		40,254
Total Funding Sources		260,148		222,225
Provisions and other liabilities		20,962		20,733
Total Liabilities		281,110		242,958

158

Notes to the financial statements

NOTE 39 Market Risk continued

     Interest rate risk (Banking)

     Interest rate risk in the bank balance sheet arises from the potential for a change in interest rates to have an adverse affect on the net interest earnings, in the current reporting period and in future years. Interest rate risk arises from the structure and characteristics of the Bank’s assets, liabilities and equity, and in the mismatch in repricing dates of its assets and liabilities. The objective is to manage the interest rate risk to achieve stable and sustainable net interest earnings in the long term.

     The Bank measures and manages balance sheet interest rate risk from two perspectives:

(a) Next 12 months earnings

     The risk to the net interest earnings over the next 12 months for a change in interest rates is measured on a monthly basis. Risk is measured assuming an immediate 1% parallel movement in interest rates across the whole yield curve as well as other interest rate scenarios with variations in size and timing of interest rate movements. Potential variations in net interest earnings are measured using a simulation model that takes into account the projected change in balance sheet asset and liability levels and mix. Assets and liabilities with pricing directly based on market rates are repriced based on the full extent of the rate shock that is applied. Risk on the other assets and liabilities (those priced at the discretion of the Bank) is measured by taking into account both the manner the products have repriced in the past as well as the expected change in price based on the current competitive market environment.

     The figures in the table represent the potential change to net interest earnings during the year (expressed as a percentage of expected net interest earnings in the next 12 months) based on a 1% parallel rate shock and the expected change in price of assets and liabilities held for purposes other than trading.

(expressed as a percentage of	2004		2003
expected next 12 months’ earnings)	%		%
Average monthly exposure		0.9		1.3
High month exposure		1.3		2.1
Low month exposure		0.5		0.4

(b) Economic value

     Some of the Bank’s assets and liabilities have interest rate risk that is not fully captured within a measure of risk to the next 12 months earnings. To measure this longer-term sensitivity, the Bank utilises an economic value-at-risk (“VaR”) analysis. This analysis measures the potential change in the net present value of cash flows of assets and liabilities. Cash flows for fixed rate products are included on a contractual basis, after adjustment for forecast prepayment activities. Cash flows for products repriced at the discretion of the Bank are based on the expected repricing characteristics of those products.

     The total cash flows are revalued under a range of possible interest rate scenarios using the VaR methodology. The interest rate scenarios are based on actual interest rate movements that have occurred over one year and five year historical observation periods. The measured VaR exposure is an estimate to a 97.5% confidence level (one-tail) of the potential loss that could occur if the balance sheet positions were to be held unchanged for a one month holding period. For example, VaR exposure of $1 million means that in 97.5 cases out of 100, the expected net present value will not decrease by more than $1 million given the historical movement in interest rates.

     The figures in the following table represent the net present value of the expected change in future earnings in all future periods for the remaining term of all existing assets and liabilities held for purposes other than trading.

	2004		2003
	$M		$M
Exposure as at 30 June		19		34
Average monthly exposure		40		24
High month exposure		92		64
Low month exposure		19		4

159

Notes to the financial statements

NOTE 39 Market Risk continued

     The following table represents the Bank’s contractual interest rate sensitivity for repricing mismatches as at 30 June 2004 and corresponding weighted average effective interest rates. The net mismatch represents the net value of assets, liabilities and off balance sheet instruments that may be repriced in the time periods shown. All assets and liabilities are shown according to contractual repricing dates. Options are shown in the mismatch report using the delta equivalents of the option face values.

Interest Rate Risk Sensitivity

Repricing Period at 30 June 2004

	Balance																				Not			Weighted
	Sheet			0 to 1			1 to 3			3 to 6			6 to 12		1 to 5			Over 5			Interest			Average
	Total			month			months			months			months		years			years			Bearing			Rate
	$M			$M			$M			$M			$M		$M			$M			$M			%
Australia
Assets
Cash and liquid assets		5,740			4,802			—			—			4		—			—			934			3.27
Receivables due from other financial institutions		4,914			3,657			1,076			78			2		—			—			101			2.88
Trading securities		11,310			11,310			—			—			—		—			—			—			3.53
Investment securities		3,822			81			180			792			17		1,966			782			4			6.09
Loans, advances and other receivables		158,915			96,547			10,283			8,776			14,148		28,444			1,989			(1,272	)		6.89
Bank acceptances of customers		15,019			—			—			—			—		—			—			15,019			—
Insurance investment assets		24,673			761			2,090			203			247		2,934			2,514			15,924			4.62
Deposits with regulatory authorities		—			—			—			—			—		—			—			—			—
Property, plant and equipment		1,053			—			—			—			—		—			—			1,053			—
Intangible assets		4,270			—			—			—			—		—			—			4,270			—
Other assets		23,236			—			—			—			—		—			—			23,236			—
Total Assets		252,952			117,158			13,629			9,849			14,418		33,344			5,285			59,269			5.16
Liabilities
Deposits and other public borrowings		139,153			90,121			20,032			14,160			3,418		3,133			826			7,463			3.89
Payables due to other financial institutions		2,383			2,147			58			153			4		20			—			1			1.19
Bank acceptances		15,019			—			—			—			—		—			—			15,019			—
Provision for dividend		14			—			—			—			—		—			—			14			—
Income tax liability		757			—			—			—			—		—			—			757			—
Other provisions		954			—			—			—			—		—			—			954			—
Insurance policy liabilities		20,834			—			—			—			—		—			—			20,834	(1)		—
Debt issues		27,688			1,428			2,258			1,834			2,022		14,370			5,776			—			5.27
Bills payable and other liabilities		15,802			—			—			—			—		—			—			15,802			—
Loan capital		6,539			331			221			613			999		1,825			2,550			—			4.57
Total Liabilities		229,143			94,027			22,569			16,760			6,443		19,348			9,152			60,844			3.14
Shareholders’ Equity
Share capital		21,079			—			—			—			—		—			—			21,079
Outside equity interests		2,288			—			—			—			—		—			—			2,288
Total Shareholders’ Equity		23,367			—			—			—			—		—			—			23,367
Off Balance Sheet Items
Swaps			(2)		(10,161	)		(12,663	)		8,173			954		8,150			5,547			—				(3)
Options			(2)		(426	)		—			176			—		75			175			—				(3)
FRAs			(2)		—			—			—			—		—			—			—				(3)
Futures			(2)		—			5,171			(10,311	)		6,264		(902	)		(222	)						(3)
Net Mismatch			(2)		12,544			(16,432	)		(8,873	)		15,193		21,319			1,633			(24,942	)			(3)
Cumulative Mismatch			(2)		12,544			(3,888	)		(12,761	)		2,432		23,751			25,384			442				(3)

(1)	Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly so with investment linked policies.
(2)	No balance sheet amount applicable.
(3)	No rate applicable.

160

Notes to the financial statements

NOTE 39 Market Risk continued

Repricing Period at 30 June 2004

	Balance																				Not			Weighted
	Sheet			0 to 1			1 to 3			3 to 6			6 to 12			1 to 5			Over 5		Interest			Average
	Total			month			months			months			months			years			years		Bearing			Rate
	$M			$M			$M			$M			$M			$M			$M		$M			%
Overseas
Assets
Cash and liquid assets		713			493			116			—			30			—			—		74			2.23
Receivables due from other financial institutions		3,455			2,005			1,423			15			—			—			—		12			3.20
Trading securities		3,586			2,021			1,237			221			60			25			22		—			4.29
Investment securities		7,625			827			2,193			622			374			1,843			1,766		—			4.00
Loans, advances and other receivables		30,476			10,868			2,671			2,616			4,233			9,509			700		(121	)		6.87
Bank acceptances of customers		—			—			—			—			—			—			—		—			—
Insurance investment assets		4,269			67			54			32			71			990			955		2,100			2.11
Deposits with regulatory authorities		38			—			—			—			—			—			—		38			—
Property, plant and equipment		151			—			—			—			—			—			—		151			—
Intangible assets		435			—			—			—			—			—			—		435			—
Other assets		2,295			—			—			—			—			—			—		2,295			—
Total Assets		53,043			16,281			7,694			3,506			4,768			12,367			3,443		4,984			5.22
Liabilities
Deposits and other public borrowings		24,024			14,697			4,636			2,605			1,095			515			14		462			4.22
Payables due to other financial institutions		4,258			2,844			928			485			1			—			—		—			2.80
Bank acceptances		—			—			—			—			—			—			—		—			—
Provision for dividend		—			—			—			—			—			—			—		—			—
Income tax liability		54			—			—			—			—			—			—		54			—
Other provisions		43			—			—			—			—			—			—		43			—
Insurance policy liabilities		3,804			—			—			—			—			—			—		3,804			—
Debt issues		16,354			2,919			2,411			8,504			328			1,664			481		47			1.72
Bills payable and other liabilities		3,338			—			—			—			—			—			—		3,338			—
Loan capital		92			—			—			92			—			—			—		—			8.22
Total Liabilities		51,967			20,460			7,975			11,686			1,424			2,179			495		7,748			2.74
Shareholders’ Equity
Share capital		1,326			—			—			—			—			—			—		1,326
Outside equity interests		192			—			—			—			—			—			—		192
Total Shareholders’ Equity		1,518			—			—			—			—			—			—		1,518
Off Balance Sheet Items
Swaps			(1)		3,273			5,205			(186	)		(2,073	)		(6,381	)		115		47				(2)
Options			(1)		—			—			(61	)		61			—			—		—				(2)
FRAs			(1)		(820	)		(137	)		547			410			—			—		—				(2)
Futures			(1)		—			218			(185	)		526			(559	)		—		—				(2)
Net Mismatch			(1)		(1,726	)		5,005			(8,065	)		2,268			3,248			3,063		(4,235	)			(2)
Cumulative Mismatch			(1)		(1,726	)		3,279			(4,786	)		(2,518	)		730			3,793		(442	)			(2)

(1)	No balance sheet amount applicable.
(2)	No rate applicable.

     As noted above the cumulative mismatch reflects contractual repricing periods. The balance sheet is managed based on assessments of expected pricing behaviour having regard to historical trends and competitive positioning.

     The Group has a significant portfolio of loans with fixed interest rates maturing in the one to five years repricing period. Funding is principally raised from retail deposits with at call variable interest rates. The interest rate risk exposure is managed in accordance with the principles outlined above in this note.

161

Notes to the financial statements

NOTE 39 Market Risk continued

Repricing Period at 30 June 2003

	Balance																			Not			Weighted
	Sheet			0 to 1			1 to 3			3 to 6			6 to 12			1 to 5		Over 5		Interest			Average
	Total			month			months			months			months			years		years		Bearing			Rate
	$M			$M			$M			$M			$M			$M		$M		$M			%
Australia
Assets
Cash and liquid assets		4,557			3,667			—			—			—			—		—		890			3.55
Receivables due from other financial institutions		3,325			1,266			1,070			753			36			—		—		200			1.41
Trading securities		6,334			6,334			—			—			—			—		—		—			4.64
Investment securities		4,341			82			521			36			499			2,720		467		16			5.38
Loans, advances and other receivables		137,424			80,485			7,167			8,482			14,772			25,336		2,370		(1,188	)		6.32
Bank acceptances of customers		13,122			—			—			—			—			—		—		13,122			—
Insurance investment assets		24,185			5,344			444			71			305			2,178		2,240		13,603			4.04
Deposits with regulatory authorities		—			—			—			—			—			—		—		—			—
Property, plant and equipment		628			—			—			—			—			—		—		628			—
Goodwill		4,552			—			—			—			—			—		—		4,552			—
Other assets		21,966			—			—			—			—			—		—		21,966			—
Total Assets		220,434			97,178			9,202			9,342			15,612			30,234		5,077		53,789			4.79
Liabilities
Deposits and other public borrowings		120,365			82,397			15,572			7,910			4,286			4,246		861		5,093			2.97
Payables due to other financial institutions		2,527			1,486			892			132			17			—		—		—			1.54
Bank acceptances		13,122			—			—			—			—			—		—		13,122			—
Provision for dividend		12			—			—			—			—			—		—		12			—
Income tax liability		850			—			—			—			—			—		—		850			—
Other provisions		777			—			—			—			—			—		—		777			—
Insurance policy liabilities		20,443			—			—			—			—			—		—		20,443	(1)		—
Debt issues		19,576			4,452			6,378			1,458			1,152			4,949		1,187		—			5.50
Bills payable and other liabilities		16,867			—			—			—			—			—		—		16,867			—
Loan capital		5,937			734			2,050			15			—			1,320		1,818		—			3.31
Total Liabilities		200,476			89,069			24,892			9,515			5,455			10,515		3,866		57,164			2.44
Shareholders’ Equity
Share capital		19,910			—			—			—			—			—		—		19,910
Outside equity interests		1,936			—			—			—			—			—		—		1,936
Total Shareholders’ Equity		21,846			—			—			—			—			—		—		21,846
Off Balance Sheet Items
Swaps			(2)		(21,935	)		8,186			623			39			7,673		5,414		—				(3)
FRAs			(2)		—			—			—			—			—		—		—				(3)
Futures			(2)		—			—			—			—			—		—		—				(3)
Net Mismatch			(2)		(13,826	)		(7,504	)		450			10,196			27,392		6,625		(25,221)				(3)
Cumulative Mismatch			(2)		(13,826	)		(21,330	)		(20,880	)		(10,684	)		16,708		23,333		(1,888)				(3)

(1)	Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly so with investment linked policies.
(2)	No balance sheet amount applicable.
(3)	No rate applicable.

162

Notes to the financial statements

NOTE 39 Market Risk continued

Repricing Period at 30 June 2003

	Balance																					Not			Weighted
	Sheet			0 to 1			1 to 3			3 to 6			6 to 12			1 to 5			Over 5			Interest			Average
	Total			month			months			months			months			years			years			Bearing			Rate
	$M			$M			$M			$M			$M			$M			$M			$M			%
Overseas
Assets
Cash and liquid assets		1,018			868			53			1			—			—			—			96			1.75
Receivables due from other financial institutions		3,741			1,424			2,145			79			—			84			—			9			4.32
Trading securities		4,101			495			1,519			448			237			1,064			308			30			4.31
Investment securities		6,695			626			1,816			1,252			458			2,146			397			—			6.26
Loans, advances and other receivables		22,923			9,155			1,972			2,390			3,687			5,273			483			(37	)		7.36
Bank acceptances of customers		75			—			—			—			—			—			—			75			—
Insurance investment assets		3,650			117			43			24			73			966			710			1,717			2.54
Deposits with regulatory authorities		23			8			—			—			—			—			—			15			2.06
Property, plant and equipment		193			—			—			—			—			—			—			193			—
Goodwill		477			—			—			—			—			—			—			477			—
Other assets		1,780			—			—			—			—			—			—			1,780			—
Total Assets		44,676			12,693			7,548			4,194			4,455			9,533			1,898			4,355			5.72
Liabilities
Deposits and other public borrowings		20,609			11,472			4,299			2,193			749			861			149			886			4.53
Payables due to other financial institutions		5,011			4,021			763			159			68			—			—			—			3.12
Bank acceptances		75			—			—			—			—			—			—			75			—
Provision for dividend		—			—			—			—			—			—			—			—			—
Income tax liability		26			—			—			—			—			—			—			26			—
Other provisions		42			—			—			—			—			—			—			42			—
Insurance policy liabilities		3,418			—			—			—			—			—			—			3,418			—
Debt issues		11,053			1,050			7,987			331			76			1,470			139			—			2.01
Bills payable and other liabilities		2,160			—			—			—			—			—			—			2,160			—
Loan capital		88			—			88			—			—			—			—			—			8.13
Total Liabilities		42,482			16,543			13,137			2,683			893			2,331			288			6,607			3.11
Shareholders’ Equity
Share capital		114			—			—			—			—			—			—			114
Outside equity interests		192			—			—			—			—			—			—			192
Total Shareholders’ Equity		306			—			—			—			—			—			—			306
Off Balance Sheet Items
Options			(1)		579			4,065			405			(2,495	)		(2,349	)		(205	)		—				(2)
Swaps			(1)		368			(562	)		392			(445	)		247			—			—				(2)
FRAs			(1)		514			101			(550	)		(109	)		44			—			—				(2)
Futures			(1)		(1,827	)		(3,260	)		(305	)		(1,016	)		4,991			1,417			—				(2)
Net Mismatch			(1)		(4,216	)		(5,245	)		1,453			(503	)		10,135			2,822			(2,558	)			(2)
Cumulative Mismatch			(1)		(4,216	)		(9,461	)		(8,008	)		(8,511	)		1,624			4,446			1,888				(2)

(1)	No balance sheet amount applicable.
(2)	No rate applicable.

163

Notes to the financial statements

NOTE 39 Market Risk continued

As at 30 June	Exchange Rate						Interest Rate
	Related Contracts						Related Contracts									Total
	2004			2003			2004			2003			2004			2003
	$M			$M			$M			$M			$M			$M
Within 6 months		99			2			(34	)		(11	)		65			(9	)
Within 6 months - 1 year		4			(3	)		(13	)		6			(9	)		3
Within 1 - 2 years		(21	)		1			16			17			(5	)		18
Within 2 - 5 years		59			189			(190	)		13			(131	)		202
After 5 years		7			(8	)		(698	)		143			(691	)		135
Net Deferred Gain/(loss)		148			181			(919	)		168			(771	)		349

     Foreign exchange risk

     Foreign exchange risk is the risk to earnings and value caused by a change in foreign exchange rates. The Bank hedges all balance sheet foreign exchange risks except for long term investments in offshore subsidiaries.

     Net deferred gains and losses

     Net deferred unrealised gains and losses arising from derivative hedging contracts entered into in order to manage risk arising from assets, liabilities, commitments of anticipated future transactions, together with the expected term of deferral are shown above.

     Net deferred gains and losses are only in respect of derivatives and must be considered in the context of the total interest rate and foreign exchange rate risk of the balance sheet. The deferred gains and losses on both derivatives and on balance sheet assets and liabilities are included in the economic VaR measure outline above.

     Additionally, there is $31 million of net deferred gains on derivatives (2003: $4 million net deferred gains) used to hedge equity risk on investments disclosed within Note 11.

Market Risk in Financial Services

     Market risk in the life insurance business arises from mismatches between asset returns and guaranteed liability returns on some policy changes (which may not be capable of being hedged through matching assets), adverse movements in market prices affecting fee income on investment-linked policies and from returns obtained from investing the shareholders capital held in each life company. As at 30 June 2004, shareholders funds in the life insurance business are invested 73% in income assets (cash and fixed interest) and 27% in growth assets (shares and property) with the asset mix varying from company to company. Policyholder funds are invested to meet policyholder reasonable expectations without putting the shareholder at undue risk.

     Market risk in the fund management business is the risk of an adverse movement in market prices, which leads to a reduction in the amount of funds under management and a consequent reduction of fee income.

Market Risk in Financial Markets Trading

     The Group’s policy is that exposure to market risk from trading activities is managed by Premium Business Services. The Group trades and distributes financial markets products and provides risk management services to clients on a global basis.

     The objectives of the Group’s financial markets activities are to:

• Provide risk management products and services to customers;

• Manage the Group’s own market risks; and

• Conduct controlled trading in pursuit of profit, leveraging off the Bank’s market presence and expertise.

     The Group maintains access to markets by quoting bid and offer prices with other market makers and carries an inventory of treasury and capital market instruments, including a broad range of securities and derivatives.

     In foreign exchange, the Group is a participant in all major currencies and is a major participant in the Australian dollar market, providing services for central banks, institutional, corporate and retail customers. Positions are also taken in the interest rate, debt, equity and commodity markets based on views of future market movements. Trading securities are further detailed in Note 10 to the financial statements.

     Income is earned from spreads achieved through market making and from taking market risk. All trading positions are valued and taken to profit and loss on a mark to market basis. Trading profits also take account of interest, dividends and funding costs relating to trading activities. Market liquidity risk is controlled by concentrating trading activity in highly liquid markets.

     Note 2 to the financial statements details Financial Markets Trading Income contribution of $499 million (2003: $502 million) to the income of the Group. The contribution is significant and provides important diversification benefits to the Group.

Residual Value Risk on Operating Leases

     The Bank provides operating leases to customers on equipment such as motor vehicles, computers and industrial equipment. Residual value risk is the risk that the amount recouped by selling the equipment at lease expiry will be less than the residual value of the lease. In managing this risk the Bank utilises industry experts to ensure that the residual value of equipment is prudently estimated at the start of the lease and the Bank realises the maximum value of the equipment at lease expiry.

Derivative Contracts

     The table on the next page details the Group’s outstanding derivative contracts as at the end of the year.

     Each derivative type is split between those held for ‘Trading’ purposes and those for ‘Other than Trading’ purposes. Derivatives classified as ‘Other than Trading’ are transactions entered into in order to manage the risks arising from non-traded assets, liabilities and commitments in Australia and offshore centres.

     The ‘Face Value’ is the notional or contractual amount of the derivatives. This amount is not necessarily exchanged and predominantly acts as a reference value upon which interest payments and net settlements can be calculated and on which revaluation is based.

     The ‘Credit Equivalent’ is calculated using a standard APRA formula and is disclosed for each product class. This amount is a measure of the on balance sheet loan equivalent of the derivative contracts, which includes a specified percentage of the face value of each contract plus the market value of all contracts with an unrealised gain at balance date. The Credit Equivalent does not take into account any benefits of netting exposures to individual counterparties.

     The accounting policy for derivative financial instruments is set out in Note 1(ff).

164

Notes to the financial statements

NOTE 39 Market Risk continued

					GROUP
	Face Value				Credit Equivalent
	2004		2003		2004		2003
	$M		$M		$M		$M
Derivatives
Exchange rate related contracts
Forwards
Trading		151,595		147,998		3,083		4,201
Other than trading		30,983		5,329		1,504		291
Total Forwards		182,578		153,327		4,587		4,492
Swaps
Trading		61,688		47,821		5,242		3,787
Other than trading		38,671		19,737		2,855		1,569
Total Swaps		100,359		67,558		8,097		5,356
Futures
Trading		1		—		—		—
Other than trading		—		—		—		—
Total Futures		1		—		—		—
Options purchased and sold(1)
Trading		64,930		69,984		856		1,234
Other than trading		126		—		2		27
Total Options Purchased and Sold		65,056		69,984		858		1,261
Total Exchange Rate Related Contracts		347,994		290,869		13,542		11,109
Interest rate related contracts
Forwards
Trading		28,311		33,398		13		4
Other than trading		500		2,292		11		37
Total Forwards		28,811		35,690		24		41
Swaps
Trading		139,297		125,610		2,276		3,722
Other than trading		201,510		127,882		3,033		1,719
Total Swaps		340,807		253,492		5,309		5,441
Futures(1)
Trading		38,525		47,881		67		18
Other than trading		17,251		—		—		—
Total Futures		55,776		47,881		67		18
Options purchased and sold
Trading		15,100		14,028		110		152
Other than trading		4,683		5,602		15		28
Total Options Purchased and Sold		19,783		19,630		125		180
Total Interest Rate Related Contracts		445,177		356,693		5,525		5,680
Credit risk related contracts
Swaps
Trading		2,870		702		348		15
Other than trading		3,490		1,204		393		623
Total Swaps		6,360		1,906		741		638
Total Credit Risk Related Contracts		6,360		1,906		741		638
Equity risk related contracts
Swaps
Other than trading		340		355		33		29
Options purchased and sold
Trading		313		247		33		55
Other than trading		25		—		1		—
Total Options Purchased and Sold		338		247		34		55
Total Equity Risk Related Contracts		678		602		67		84
Total Derivatives Exposures		800,209		650,070		19,875		17,511

⁽¹⁾ Prior year face value comparatives have been restated.

The Bank has also entered swaps to hedge property values and income related to investment property risk. Each of these has a face value of $252 million and a credit equivalent of $1 million.

165

Notes to the financial statements

NOTE 39 Market Risk continued

     The fair or market value of trading derivative contracts, disaggregated into gross unrealised gains and gross unrealised losses, are shown below. In line with the Group’s accounting policy, these unrealised gains and losses are recognised immediately in profit and loss, and together with net realised gains on trading derivatives and realised and unrealised gains and losses on trading securities are reported within trading income under foreign exchange earnings or other financial instruments (refer to Note 2). In aggregate, derivatives trading was profitable for the Group during the year.

				Fair Value			Average Fair Value
	2004			2003			2004			2003
	$M			$M			$M			$M
Exchange rate related contracts
Forward contracts:
Gross unrealised gains		2,417			4,753			2,673			3,198
Gross unrealised losses		(2,742	)		(4,922	)		(2,975	)		(3,245	)
		(325	)		(169	)		(302	)		(47	)
Swaps:
Gross unrealised gains		5,718			3,599			5,370			2,996
Gross unrealised losses		(4,335	)		(2,390	)		(4,145	)		(2,078	)
		1,383			1,209			1,225			918
Futures:
Gross unrealised gains		—			2			1			—
Gross unrealised losses		(3	)		—			(3	)		—
		(3	)		2			(2	)		—
Options purchased and sold:
Gross unrealised gains		482			832			822			783
Gross unrealised losses		(634	)		(1,138	)		(1,167	)		(920	)
		(152	)		(306	)		(345	)		(137	)
Net Unrealised Gains on Exchange Rate Related Contracts		903			736			576			734
Interest rate related contracts
Forward contracts:
Gross unrealised gains		4			4			6			7
Gross unrealised losses		(4	)		(4	)		(5	)		(7	)
		—			—			1			—
Swaps:
Gross unrealised gains		4,084			4,431			4,833			4,294
Gross unrealised losses		(4,362	)		(4,899	)		(5,209	)		(4,793	)
		(278	)		(468	)		(376	)		(499	)
Futures:
Gross unrealised gains		24			15			41			33
Gross unrealised losses		(25	)		(18	)		(50	)		(23	)
		(1	)		(3	)		(9	)		10
Options purchased and sold:
Gross unrealised gains		66			258			155			223
Gross unrealised losses		(57	)		(145	)		(123	)		(146	)
		9			113			32			77
Net Unrealised Losses on Interest Rate Related Contracts		(270	)		(358	)		(352	)		(412	)
Credit related trading derivative contracts
Swaps:
Gross unrealised gains		17			13			16			7
Gross unrealised losses		(11	)		(12	)		(13	)		(6	)
Net Unrealised Gains on Credit Related Contracts		6			1			3			1
Equity related contracts
Options purchased and sold:
Gross unrealised gains		15			20			12			17
Gross unrealised losses		(15	)		(20	)		(12	)		(17	)
Net Unrealised Gains on Equity Related Contracts		—			—			—			—
Net Unrealised Gains on Trading Derivative Contracts		639			379			227			323

166

Notes to the financial statements

NOTE 39 Market Risk continued

     In accordance with the accounting policy set out in Note 1(ff) the above trading derivative contract revaluations have been presented on a gross basis on the balance sheet.

	Fair Value
	2004		2003
	$M		$M
Unrealised gains on trading derivatives (Note 21)		12,827		13,907
Unrealised losses on trading derivatives (Note 27)		12,188		13,528
Net Unrealised Gains on Trading Derivatives		639		379

167

Notes to the financial statements

NOTE 40 Superannuation Commitments

     The Group sponsors a range of superannuation plans for its employees world wide. Details of major defined benefit plans with assets in excess of $10 million are:

			Date of Last Actuarial
Name of Plan	Type	Form of Benefit	Review of the Fund
Officers’ Superannuation Fund (“OSF”)	Defined Benefits and Accumulation	Indexed pensions and lump sums	30 June 2003
Commonwealth Bank of Australia (UK)	Defined Benefits	Indexed pensions	1 August 2003
Staff Benefits Scheme (“CBA(UK)SBS”)	and Accumulation	and lump sums

Financial Details of Defined Benefits Plans

     Prior to the financial year ending 30 June 2003, the Bank prepared the following disclosures using values extracted from financial statements and actuarial assessments of each plan which have been prepared in accordance with relevant accounting and actuarial standards and practices. To maintain consistency in values, the Bank updates these values after each actuarial assessment of the fund (when the present value of accrued benefits would be calculated).

     In view of market volatility, the Bank updates the following values annually using most recently available information (including values obtained from unaudited fund financial statements).

				CBA
	OSF(1)			(UK)SBS(2)			Total
	$M			$M			$M
Net Market Value of Assets(3)		5,416			333			5,749
Present Value of Accrued Benefits(4)		3,988			409			4,397
Difference between Net Market of Assets and Present Value of Accrued Benefits		1,428			(76	)		1,352
Difference as a Percentage of Plan Assets		26	%		23	%		24	%
Value of Vested Benefits(4)		3,988			304			4,292

(1)	The values for the OSF are the fund actuary’s estimates as at 31 March 2004. The OSF’s values include the values for the former Colonial Group Staff Superannuation Scheme (“CGSSS”) which was terminated on 3 October 2003 with the plan’s assets, liabilities, member contributions and benefit arrangements transferred to the OSF.
(2)	The values for the CBA(UK)SBS are the fund actuary’s estimates as at 31 March 2004. The CBA(UK)SBS’s values include the values for the former Colonial UK Staff Pension Scheme (“CUKSPS”) and Stewart Ivory & Company Limited Retirement Benefits Scheme (“SI&CRBS”) which were terminated on 31 July 2003 with each plan’s assets, liabilities, member contributions and benefit arrangements transferred to the CBA(UK)SBS.
(3)	These values have been extracted from the latest available fund financial statements (which are unaudited).
(4)	The Present Value of Accrued Benefits and Value of Vested Benefits for the OSF have been calculated in accordance with the Australian Accounting Standards AAS25 — Financial Reporting by Superannuation Plans. For CBA(UK)SBS, the Present Value of Accrued Benefits and Value of Vested Benefits have been calculated in accordance with relevant UK actuarial standards and practices.

Contributions

     For the plans listed in the above table, entities of the Group contribute to the respective plans in accordance with the Trust Deeds following the receipt of actuarial advice.

     With the exception of contributions corresponding to salary sacrifice benefits, the Bank ceased contributions to the OSF from 8 July 1994. Further, the Bank ceased contributions to the OSF relating to salary sacrifice benefits from 1 July 1997.

     An actuarial assessment of the OSF, as at 30 June 2003 was completed during the year ended 30 June 2004. In line with the actuarial advice contained in the assessment, the Bank does not intend to make contributions to the OSF until further consideration of the next actuarial assessment of the OSF as at 30 June 2006.

     An actuarial review of the CBA(UK)SBS at 1 August 2003, which was finalised in August 2004, revealed a deficit of around $80 million and the actuary recommended contributions of 26% of salary (dollar contributions estimated at $5 million per annum) to finance future accrual of defined benefits and additional contributions of around $8 million per annum payable over 15 years to finance the fund deficit. The Bank is currently considering these recommendations.

168

Notes to the financial statements

NOTE 41 Controlled Entities

	Extent of Beneficial
Entity Name	Interest if not 100%	Incorporated in
AUSTRALIA
(a) Banking
Commonwealth Bank of Australia		Australia
Controlled Entities:
Commonwealth Development Bank of Australia Limited		Australia
CBA Investments Limited		Australia
CBA Specialised Financing Limited		Australia
Share Investments Pty Limited		Australia
CBA Investments (No. 2) Pty Limited		Australia
CBA International Finance Pty Limited		Australia
CBCL Australia Limited		Australia
CBFC Limited		Australia
Collateral Leasing Pty Limited		Australia
Commonwealth Securities Limited		Australia
Homepath Pty Limited		Australia
Chullora Equity Investments (No.2) Pty Limited		Australia
Chullora Equity Investments (No.3) Pty Limited		Australia
Commonwealth Investments Pty Limited		Australia
Commonwealth Property Limited		Australia
Infravest (No. 2) Limited		Australia
Retail Investor Pty Limited		Australia
Sparad (No. 24) Pty Limited		Australia
Colonial Employee Share Plan Limited		Australia
Colonial Finance Limited		Australia
Colonial Financial Services Pty Limited		Australia
CST Securitisation Management Limited		Australia
Emerald Holding Company Limited		Australia
TD Waterhouse Holdings (Aust) Pty Limited		Australia
Preferred Capital Limited		Australia
Newport Limited		Australia
Padang Pty Ltd		Australia
M Land Pty Ltd		Australia
PERLS II Trust		Australia
GT Funding No.1 Pty Ltd		Australia
GT Operating No.1 Pty Ltd		Australia
Watermark Limited		Australia
Emerald Limited		Australia
Loft No.1 Pty Ltd		Australia
Loft No.2 Pty Ltd		Australia
Fringe Pty Ltd		Australia
Reliance Achiever Pty Ltd		Australia
RA Partnership		Australia
Lily Pty Ltd		Australia
Pavillion Limited		Australia
Leaseway Transportation Pty Limited		Australia
Medallion 2003-2G		Australia
(b) Insurance and Funds Management
Commonwealth Insurance Limited		Australia
Commonwealth Custodial Services Limited		Australia
Commonwealth Insurance Holdings Limited		Australia
Commonwealth Life Limited		Australia
CLL Investments Limited		Australia
CIF (Hazelwood) Pty Limited		Australia
Commonwealth Investment Services Limited Group
Commonwealth Investment Services Limited		Australia
Commonwealth Managed Investments Limited		Australia
CISL (Hazelwood) Pty Limited		Australia
Commonwealth Funds Management Limited Group
Commonwealth Funds Management Limited		Australia
CFM (ADF) Limited		Australia
CFML Nominees Pty Limited		Australia
CMG Asia Pty Limited		Australia
CMG First State Investment Managers (Asia) Limited		Australia
Colonial AFS Services Pty Limited		Australia
Colonial Financial Corporation Limited		Australia
Colonial First State Group Limited		Australia
Colonial First State Investments Limited		Australia
Avanteos Pty Limited		Australia
Colonial First State Property Limited		Australia
Colonial First Statutory Funds Management Limited		Australia

169

Notes to the financial statements

NOTE 41 Controlled Entities continued

	Extent of Beneficial
Entity Name	Interest if not 100%		Incorporated in
(b) Insurance and Funds Management continued
CFS Managed Property Limited			Australia
Colonial Holding Company Pty Limited			Australia
Colonial Holding Company (No.2) Pty Limited			Australia
Colonial Financial Management Limited			Australia
Colonial Insurance Services Pty Limited			Australia
Colonial International Holdings Pty Limited			Australia
Colonial Investments Holding Pty Limited			Australia
Colonial Investment Services Limited			Australia
Colonial LGA Holdings Limited			Australia
Colonial Mutual Funds Limited			Australia
The Colonial Mutual Life Assurance Society Limited			Australia
Colonial Mutual Superannuation Pty Limited			Australia
Colonial PCA Holdings Pty Limited			Australia
Colonial PCA Services Limited			Australia
Colonial Portfolio Services Limited			Australia
Colonial Services Pty Limited			Australia
Jacques Martin Pty Limited			Australia
PIF Managed Property Pty Limited			Australia
Colonial Protection Insurance Pty Limited			Australia
NEW ZEALAND
(a) Banking
ASB Group Limited			New Zealand
ASB Holdings Limited			New Zealand
ASB Bank Limited			New Zealand
ASB Finance Limited			New Zealand
ASB Management Services Limited			New Zealand
ASB Properties Limited			New Zealand
ASB Superannuation Nominees Limited			New Zealand
CBA Funding (NZ) Limited			New Zealand
(b) Insurance and Funds Management
ASB Group Limited			New Zealand
ASB Life Limited			New Zealand
Sovereign Limited			New Zealand
Colonial First State Investment Managers (NZ) Limited			New Zealand
Colonial First State Investments (NZ) Limited			New Zealand
ASB Group (Life) Limited			New Zealand
Kiwi Income Properties Limited			New Zealand
Kiwi Property Management Limited			New Zealand
Sovereign Life (NZ) Limited			New Zealand
Sovereign Services Corporation New Zealand Limited			New Zealand
OTHER OVERSEAS
(a) Banking
CBA Asia Limited			Singapore
CBA (Europe) Finance Limited			United Kingdom
CBA (Delaware) Finance Incorporated			USA
CTB Australia Limited			Hong Kong
Senator House Investments (UK) Limited(1)			United Kingdom
Commonwealth Securities (Japan) Pty Limited			Japan
National Bank of Fiji Limited		51	Fiji
PT Bank Commonwealth			Indonesia
CBA Capital Holdings Inc			USA
CBA Capital Trust 1			USA
CBA Funding Trust 1			USA
Seahorse Investments UK Ltd			United Kingdom
CommInternational Limited			Malta
CommFinance Limited			Malta

170

Notes to the financial statements

NOTE 41 Controlled Entities continued

	Extent of Beneficial
Entity Name	Interest if not 100%	Incorporated in
(b) Insurance and Funds Management
CMG Asia Life Holdings Limited		Bermuda
CMG Asia Limited		Bermuda
CMG Asia Pensions and Retirements Limited		Hong Kong
CMG First State Investments (Hong Kong) Limited		Hong Kong
CMG First State (Singapore) Limited		Singapore
Colonial Fiji Life Limited		Fiji
Colonial First State International Assets Limited		United Kingdom
Colonial First State Investments (Fiji) Limited		Fiji
Colonial First State Investment Managers (UK) Limited		United Kingdom
Colonial Healthcare (Fiji) Limited		Fiji
Colonial Services (Fiji) Limited		Fiji
Colonial First State (UK) Holdings Limited		United Kingdom
Stewart Ivory Holdings Limited		United Kingdom
Waterloo & Victoria Limited		Cayman Islands

     Non-operating and minor operating controlled entities and investment vehicles holding policyholder assets are excluded from the above list.

⁽¹⁾  Wholly owned subsidiary of CBA International Finance Pty Limited.

171

Notes to the financial statements

NOTE 42 Investments in Associated Entities and Joint Ventures

			Extent of
	GROUP		Ownership
	2004	2003	Interest		Balance
	$M	$M	%	Principal Activities	Date
EDS (Australia) Pty Limited(1)	193	225	35	Information Technology Services	31 December
Computer Fleet Management	—	—	50	Desktop IT Lease Management	30 June
Cyberlynx Procurement Services	—	—	30	Procurement Services	30 June
PT Astra CMG Life	12	12	50	Life insurance - Indonesia	31 December
Allday Enterprises Ltd	1	1	30	Financial Services	31 December
China Life CMG Life Assurance Company Limited(2)	20	36	49	Life insurance - China	31 December
Bao Minh CMG Life Insurance Company	12	12	50	Life insurance - Vietnam	31 December
CMG Mahon (China) Investment Management Limited	—	—	50	Direct investment in China	30 June
Mahon and Associates Limited	—	—	50	Investment Management	30 June
CMG CH China Funds Management Limited	1	1	50	Investment Management	31 March
Colonial First State Private Ltd	—	—	50	Investment Management	30 June
Total	239	287

⁽¹⁾  Equity accounted loss of $32 million principally relates to a change in revenue recognition policy by EDSA.

⁽²⁾  Equity accounted loss of $16 million principally relates to a write-off of capitalised start up costs.

     The Group also holds investments in the Colonial First State Property Trust Group and Colonial Mastertrust Wholesale equity funds (including the Fixed Interest, Australian Share, International Share, Property Securities, Capital Stable, Balanced and Diversified Growth funds) through controlled life insurance entities, which are not accounted for under the equity accounting method.

     Instead, the market values for these investments are calculated at balance date and are brought to account at this value in compliance with the requirements of AASB 1038: Life Insurance Business. These investments are classified as property or equity investments and are not material components of these asset categories.

				GROUP
	2004			2003
	$M			$M
Share of associates’ profits/(losses) after notional goodwill amortisation
Operating profits/(losses) before income tax		(44	)		1
Income tax benefit		12			—
Operating profits/(losses) after income tax		(32	)		1
Carrying amount of investments in associated entities
Opening balance		287			313
New investments		—			6
Disposals/transfers		—			(21	)
Writedown value of investments		(16	)		(9	)
Fair value adjustments		—			(3	)
Share of associates’ profits/(losses)		(32	)		1
Closing Balance		239			287

NOTE 43 Standby Arrangements and Unused Credit Facilities

(of controlled entities that are borrowing corporations)

							GROUP
	Available		Unused		Available		Unused
	2004		2004		2003		2003
	$M		$M		$M		$M
Financing arrangements accessible
Bank overdraft		70		58		72		23
Revolving credit		—		—		—		—
		70		58		72		23

172

Notes to the financial statements

NOTE 44 Director and Executive Disclosures

     This note outlines the remuneration arrangements for the Bank’s Directors and Specified Executives. In accordance with accounting standard AASB 1046 this note also outlines details of equity holdings, loans and other transactions Directors and Specified Executives have with the Bank and its subsidiaries.

     Remuneration Committee

     The Bank’s remuneration arrangements are overseen by the Remuneration Committee of the Board. The Committee considers changes in remuneration policy likely to have a material impact on the Bank and is informed of leadership performance, legislative compliance in employment issues, industrial agreements and incentive plans operating across the Bank.

     The Committee also considers senior appointments and remuneration arrangements for senior management. The remuneration arrangements for the CEO and his direct reports are approved by the full Board.

     The policy of the Board is that the Committee shall consist entirely of independent Non-Executive Directors. The Chief Executive Officer attends Committee meetings by invitation but does not attend in relation to matters that can affect him.

     The Committee engages an external consultant to advise it directly in relation to the remuneration of executives.

     Non-Executive Directors

     Remuneration for Non-Executive Directors consists of base and committee fees within an aggregate total of $1,500,000 per year as approved by shareholders at the Annual General Meeting held on 28 October 1999. Non-Executive Directors have 20% of their annual fees applied to the mandatory on-market acquisition of shares in the Bank.

     The Bank contributes to compulsory superannuation on behalf of Non-Executive Directors.

     Under the Directors’ Retirement Allowance Scheme, which was approved by shareholders at the 1997 Annual General Meeting, Directors accumulate a retirement benefit on a pro rata basis to a maximum of four years’ total emoluments after twelve years’ service. No benefit accrues until the Director has served three years on the Board. In 2002 the Board decided to discontinue the Directors’ Retirement Allowance Scheme without affecting the entitlements of then existing Non-Executive Directors. After that time new Directors are not entitled to participate in the scheme. As part of a proposed arrangement relating to remuneration, the Board will be seeking shareholder approval at the 2004 Annual General Meeting to terminate accrual of further benefits under the Scheme and freeze the entitlements of current members until their respective retirements. This approach will result in remuneration arrangements being expressed in a more transparent manner which does not include retirement benefits (other than compulsory superannuation).

     Executives (including the Chief Executive Officer)

     The Bank’s remuneration framework aims to reward executives with a mix of remuneration appropriate to their level in the organisation and incorporates a significant weighting towards variable (‘at risk’) pay linked to performance, both short term and long term. This focus aims to:

• reward executives for bankwide, business unit and individual performance against targets set by reference to appropriate benchmarks;

• align the interests of executives with those of shareholders;

• link executive reward with the strategic goals and performance of the Bank; and

• ensure total remuneration is competitive by market standards.

     Remuneration and terms and conditions of employment are specified in an individual contract of employment with each executive which is signed by the executive and the Bank. Remuneration of the Bank’s executives consists of three key elements:

• Fixed Remuneration;

• Short Term Incentive (“STI”); and

• Long Term Incentive (“LTI”).

     The relationship of fixed remuneration and variable pay (potential short term and long term incentives) is established for each level of executive management by the Remuneration Committee.

     Currently, the variable component of remuneration is in the general range of around 35% to 80% of an executive’s total potential remuneration and increases with their level in the organisation. As a result of the review with the external consultant of developments in the market, and benchmarking against peer organisations, the distribution of total potential remuneration for executives is being modified in the current year so as to increase the percentage for the STI component and decrease the percentage for the LTI component. For senior executives, including the CEO, the maximum STI potential available will generally be an amount equal to fixed remuneration.

     The structure for some specialists differs from that which applies generally to executive management. With specialists, a greater proportion of the variable component of remuneration may be in short term rather than long term incentives but the overall mix of remuneration is still heavily weighted towards ‘at risk’ pay.

     Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles) as well as employer contributions to superannuation.

     Actual STI payments for executives depend on the extent to which targets set at the beginning of the financial year are met. These targets consist of a number of Key Result Areas (“KRAs”) covering both financial and non-financial measures of performance. Included are measures such as contribution to net profit after tax (NPAT), customer service, risk management, product management, and leadership / team contribution.

     STI Payments to executives are usually delivered in two components:

• Fifty percent made as an immediate cash payment; and

• Fifty percent deferred in the form of shares in the Bank.

     The shares acquired vest in two equal instalments after one and two years respectively. Dividends on the deferred shares are not paid to the executive unless and until the shares vest. Generally, to receive the shares, the executive will need to be an employee of the Bank at the relevant vesting date.

     LTI grants to executives are delivered in the form of Reward Shares under the Bank’s Equity Reward Plan (“ERP”).

     No value will accrue to the executive unless the Bank’s Total Shareholder Return (“TSR”) at least meets the median of a peer comparator group of companies which consists of other Australian banks and financial institutions. To receive the full value of the LTI grant, the Bank’s performance must be in the top quartile of the peer group. Using a comparative TSR based hurdle ensures that executives only gain where shareholders also benefit.

     The Bank’s executive contracts generally provide for severance payments of up to six months in the case of retrenchment. The contracts generally provide for a four week notice period. In the case of the Chief Executive Officer, the severance arrangements in Mr Murray’s contract, other than for misconduct, provide for a notice period of six months and a pro-rata payment of the average of the previous three years short term incentive payment, payable in the event of termination by the Bank, after 1 May but before 30 June. In such circumstances, Mr Murray may exercise all vested options and obtain vested shares (including those that vest within two years from the Termination Date) within a period of three years from the Termination Date.

     Refer Note 38 – Service Agreements.

173

Notes to the financial statements

NOTE 44 Director and Executive Disclosures

     On exit from the Bank, executives are entitled to receive their statutory entitlements of accrued annual and long service leave as well as accrued superannuation benefits.

     Individual remuneration details of Directors and Specified Executives are set out below.

Remuneration of Directors

     Other than for the Managing Director, Directors receive their remuneration in the form of fees, apportioned between cash and amounts sacrificed on a mandatory basis under the Non-Executive Directors Share Plan (“NEDSP”), superannuation and the Director’s Retirement Allowance Scheme (see earlier comments regarding discontinuance of the Scheme).

							POST EMPLOYMENT
							BENEFITS
										Retirement		EQUITY BENEFITS
	PRIMARY BENEFITS						Super -			Allowance						LTI
Year	Cash		Non		STI paid		Annuation			Scheme		Deffered				Reward		NEDSP		TOTAL
ending	(Note 1)		Monetary		in Cash		(Note 2)			(Note 3)		STI		LTI Options		Shares		(Note 1)		REMUNERATION
30 June	$		$		$		$			$		$		$		$		$		$
Mr J T Ralph, ACChairman
2004		245,887		—		—		—	(5)		36,479		—		—		—		61,472		343,838
2003		248,000		—		—		5,626			127,635		—		—		—		62,000		443,261
Dr J M SchubertDeputy Chairman
2004		130,545		—		—		11,749			46,981		—		—		—		32,636		221,911
2003		128,000		—		—		11,520			102,537		—		—		—		32,000		274,057
Mr D V MurrayManaging Director(see notes to table of remuneration for Specified Executives for details of individual items)
2004		1,680,000		—		450,000		136,080			—		365,000		431,666		1,363,362		—		4,426,108
2003		1,625,000		—		375,000		131,625			—		326,250		751,258		868,892		—		4,078,025
Mr N R Adler, AONon-Executive Director
2004		90,435		—		—		8,318			23,717		—		—		—		22,609		145,079
2003		88,000		—		—		7,920			34,867		—		—		—		22,000		152,787
Mr R J Clairs, AONon-Executive Director
2004		86,424		—		—		7,778			38,988		—		—		—		21,606		154,796
2003		84,000		—		—		7,560			44,194		—		—		—		21,000		156,754
Mr A B Daniels, OAMNon-Executive Director
2004		86,424		—		—		7,778			41,663		—		—		—		21,606		157,471
2003		84,000		—		—		7,560			103,796		—		—		—		21,000		216,356
Mr C R Galbraith, AMNon-Executive Director
2004		89,460		—		—		8,051			46,418		—		—		—		22,365		166,294
2003		92,000		—		—		8,280			104,132		—		—		—		23,000		227,412
Ms S C KayNon-Executive Director (appointed a Director on 5 March 2003)
2004		97,482		—		—		8,773			—		—		—		—		24,370		130,625
2003		32,328		—		—		2,910			—		—		—		—		8,082		43,320
Mr W G Kent, AONon-Executive Director
2004		89,460		—		—		8,051			46,418		—		—		—		22,365		166,294
2003		92,000		—		—		8,280			104,132		—		—		—		23,000		227,412
Mr F D RyanNon-Executive Director
2004		90,435		—		—		8,139			46,466		—		—		—		22,609		167,649
2003		88,000		—		—		7,920			109,074		—		—		—		22,000		226,994
Mr F J SwanNon-Executive Director
2004		89,460		—		—		8,051			44,429		—		—		—		22,365		164,305
2003		92,000		—		—		8,280			46,924		—		—		—		23,000		170,204
Ms B K WardNon-Executive Director
2004		90,435		—		—		8,139			51,566		—		—		—		22,609		172,749
2003		88,000		—		—		7,920			53,672		—		—		—		22,000		171,592
Total Remuneration for Directors
2004		2,866,447		—		450,000		220,907			423,125		365,000		431,666		1,363,362		296,612		6,417,119
2003(4)		2,741,328		—		375,000		215,401			830,963		326,250		751,258		868,892		279,082		6,388,174

174

Notes to the financial statements

NOTE 44 Director and Executive Disclosures continued

Notes

     Amounts in the above table reflect remuneration from the date the Director joined the Board if the Director was not in that role at the beginning of the financial year. Where this date is after 1 July 2002, the relevant date has been shown in the table.

⁽¹⁾  For Non-Executive Directors, this includes base fees and committee fees paid as cash. Non-Executive Directors also sacrifice 20% of their fees on a mandatory basis under the NEDSP. Further detail on the NEDSP is contained in Note 29.

⁽²⁾  The Bank is not currently contributing to its staff superannuation fund (the Officers’ Superannuation Fund) and a notional cost of contribution has been determined on an individual basis for those Non-Executive Directors who are a member of that fund. Some Directors have superannuation contributions made to other funds.

⁽³⁾  For Non-Executive Directors this represents the increase in their accrued benefit in the year under the Director’s Retirement Allowance Scheme which was approved by shareholders at the 1997 Annual General Meeting. See earlier comments regarding discontinuance of the Scheme.

⁽⁴⁾  Group totals in respect of the financial year ended 30 June 2003 do not necessarily equal the sum of amounts disclosed for individuals specified in 2004 as there are differences to the individuals specified in 2003.

⁽⁵⁾  Mr J T Ralph turned 71 during the 2003/04 financial year. The Bank’s compulsory superannuation obligations generally cease after a person obtains age 70.

175

Notes to the financial statements

NOTE 44 Director and Executive Disclosures continued

Remuneration of Specified Executives

															OTHER
							POST								BENEFITS
	PRIMARY BENEFITS						EMPLOYMENT			EQUITY BENEFITS			LTI
Year			Non		STI paid		BENEFITS		Deferred		LTI		Reward		Termination		All other
ending	Cash		Monetary		in cash		Superannuation		STI		Options		Shares		Benefits		benefits		TOTAL
30	(Note 1)		(Note 2)		(Note 3)		(Note 4)		(Note 5)		(Note 6)		(Note 6)		(Note 7)		(Note 8)		REMUNERATION
June	$		$		$		$		$		$		$		$		$		$
Mr M A CameronGroup Executive, Financial & Risk Management (commenced in role on 1 April 2003)
2004		600,000		13,000		170,000		243,200		99,375		—		150,325		—		—		1,275,900
2003		149,589		3,241		33,034		10,770		—		—		10,586		—		150,000		357,220
Mr A R CosenzaGroup Executive, Group Strategic Development (ceased in role on 16 June 2004 and proceeded on Long Service Leave)
2004		575,410		12,503		144,262		45,530		145,464		98,214		365,062		—		—		1,386,445
2003		560,000		13,000		160,000		40,320		118,750		154,873		315,056		—		—		1,361,999
Mr L G CupperGroup Executive, Human Resources
2004		580,000		13,000		156,000		115,200		156,875		118,642		415,022		—		—		1,554,739
2003		560,000		13,000		157,500		60,100		146,250		181,946		342,553		—		—		1,461,349
Mr S I GrimshawGroup Executive, Investment & Insurance Services
2004		891,000		13,000		280,000		89,880		196,875		130,054		498,873		—		—		2,099,682
2003		774,836		13,000		262,500		399,505		—		130,054		299,538		—		—		1,879,433
Mr H D HarleyGroup Executive, Retail Banking Services (commenced in role on 16 October 2002)
2004		700,000		13,000		230,000		101,500		130,000		75,578		321,078		—		—		1,571,156
2003		381,699		9,189		98,959		57,582		68,675		75,795		153,287		—		—		845,186
Mr M A KatzGroup Executive, Premium Business Services
2004		910,000		13,000		290,000		132,100		237,500		197,736		677,520		—		—		2,457,856
2003		870,000		13,000		240,000		67,500		228,500		303,243		563,376		—		—		2,285,619
Mr R V McKinnonGroup Executive, Technology
2004		540,000		13,000		142,500		38,880		122,688		55,804		253,061		—		—		1,165,933
2003		520,000		13,000		127,500		37,440		105,188		76,905		175,191		—		—		1,055,224
Mr G L MackrellGroup Executive, International Financial Services
2004		600,000		13,000		202,500		80,500		166,250		113,718		391,143		—		—		1,567,111
2003		540,000		13,000		185,000		66,802		103,500		162,251		316,556		—		—		1,387,109
Mr J K O’SullivanChief Solicitor and General Counsel (commenced in role on 17 October 2003)
2004		493,443		9,164		140,984		35,528		—		—		105,232		—		—		784,351
2003		—		—		—		—		—		—		—		—		—		—
Mr G A PetersonGroup Executive, Group Strategic Development (commenced in role 17 June 2004)
2004		16,716		497		4,208		2,762		2,960		—		2,559		—		—		29,702
2003		—		—		—		—		—		—		—		—		—		—
Mr M J UllmerGroup Executive, Institutional & Business Services (ceased in role 23 May 2004)
2004		754,959		6,536		250,000		118,202		244,208		177,206		607,176		845,000		332,848		3,336,135
2003		820,000		13,000		217,500		132,300		211,000		303,243		563,376		—		—		2,260,419
Total Remuneration for Specified Executives
2004		6,661,528		119,700		2,010,454		1,003,282		1,502,195		966,952		3,787,051		845,000		332,848		17,229,010
2003(9)		5,176,124		103,430		1,481,993		872,319		981,863		1,388,310		2,739,519		—		150,000		12,893,558

Notes

     Amounts in the above table reflect remuneration for the time the executive has been in the role of a Specified Executive, i.e. pro-rating is applied relative to the date the executive commenced or ceased in the role of a Specified Executive. Remuneration earned as an executive prior to appointment to a role as a Specified Executive is not included in the amounts shown for that executive.

Where appropriate, comparative information has been reclassified into appropriate categories.

⁽¹⁾  Reflects amounts paid in the year ended 30 June and is calculated on a total cost basis. Included may be salary sacrifice amounts (e.g. motor vehicles plus FBT) with the exception of salary sacrifice superannuation which is included under ‘Post Employment Benefits’.

176

Notes to the financial statements

⁽²⁾  Represents the cost of car parking (including FBT).

NOTE 44 Director and Executive Disclosures

⁽³⁾  Represents the STI payment made in cash for the year ended 30 June. Payment made in cash represents the amount of the payment that is not deferred in the form of shares under the mandatory component of the Equity Participation Plan (“EPP”) nor voluntarily sacrificed in the form of shares under the voluntary component of the EPP or into superannuation via voluntary sacrifice. Amounts deferred under the mandatory component of the EPP are amortised over two years from the date to which the payment relates. Where part of the payment is sacrificed into superannuation, the amount sacrificed is included under “Post Employment Benefits”. Mr Ullmer’s STI payment for the year ended 30 June 2004 has been made fully in cash with no mandatory deferral being applied due to his departure from the Bank.

⁽⁴⁾  Represents company contribution to superannuation and includes any allocations made by way of salary sacrifice by executives.

⁽⁵⁾  Deferred STI represents the cost of shares acquired under the mandatory component of the EPP. Shares vest in two equal tranches after one and two years respectively. For example, for STI payments for the year ended 30 June 2003, half the shares vest on 1 July 2004 and half vest on 1 July 2005. The amount included in remuneration each year has been amortised on a straight-line basis over the vesting period for each tranche of shares. In the case of Mr Ullmer the value that would have been amortised in the year ended 30 June 2005 has also been included for the year ended 30 June 2004 as all unvested shares granted under the mandatory component of the EPP vest to him on his departure from the Bank. See Note 29 for further details on the operation of the EPP.

⁽⁶⁾  The value of LTIs disclosed above was calculated as follows:

• The ‘fair value’ of options has been calculated using the Black-Scholes valuation model that incorporates the assumptions below:

			Assumptions
Commencement	Fair		Exercise		Risk Free				Dividend
Date	Value		Price		Rate			Term	Yield			Volatility
24 Aug 1999	$	3.14	$	23.84		5.82	%	37 mths		4.82	%		20.0	%
24 Aug 1999 (CEO Options)	$	3.48	$	23.84		5.82	%	49 mths		4.82	%		20.0	%
13 Sept 2000	$	3.47	$	26.97		6.00	%	37 mths		4.41	%		17.9	%
3 Sept 2001	$	4.01	$	30.12		5.24	%	37 mths		4.61	%		20.8	%

• The ‘fair value’ of shares is the Bank’s closing share price at the Commencement Date for each grant, i.e., $27.64 for shares granted on 13 Sep 2000, $29.50 for shares granted on 3 Sep 2001, $31.42 for shares granted on 2 Sep 2002 and $27.48 for shares granted on 1 Sep 2003.

• As required under AASB 1046 the Bank has estimated the number of options and shares expected to vest in relation to each grant. The assessment has been made as at 30 June 2004 based on the Bank’s performance against the relative hurdle. In respect of options and shares granted in 1999 and 2000, 100% of the number granted have vested. For options and shares granted in 2001, the Bank currently expects 100% of the number granted to vest. For shares granted in 2002 and 2003, the Bank currently estimates that 50% of the number granted will vest.

• The annualised equivalent of the ‘fair value’ in respect of each grant of options and shares (multiplied by the number that have, or are expected to, vest), has been amortised on a straight line basis over the period from the Commencement Date until the first possible vesting date — a period of 37 months (49 months in respect of options granted to Mr Murray on 24 Aug 1999).

⁽⁷⁾  Represents any severance payments made on termination of employment (excluding any payment in lieu of notice).

⁽⁸⁾  All Other Benefits payable that are not covered above, including any payment made in lieu of notice on termination of employment and other contractual payments.

⁽⁹⁾  Group totals in respect of the financial year ended 30 June 2003 do not necessarily equal the sum of amounts disclosed for individuals specified in 2004 as there are differences to the individuals specified in 2003.

177

Notes to the financial statements

NOTE 44 Director and Executive Disclosures continued

Equity Holdings of Directors and Specified Executives

Employee Equity Plans — Shares and Options Vested and Exercised During the Year

							Shares Granted on Exercise of Options
	Deferred STI		Reward Shares		Options				Exercise		Value in excess of
Name	Vested		Vested		Vested		No.		Price		Exercise Price(1)
Directors
Mr D V Murray		10,853		—		1,000,000		—		—		—
Specified Executives
Mr M A Cameron		—		—		—		—		—		—
Mr A R Cosenza		3,851		10,500		162,500		100,000	$	23.84	$	8.81
Mr L G Cupper		4,708		12,500		225,000		150,000	$	23.84	$	8.91
Mr S I Grimshaw		—		—		—		—		—		—
Mr H D Harley		3,224		6,300		87,500		50,000	$	23.84	$	9.46
Mr M A Katz		7,752		20,900		375,000		250,000	$	23.84	$	8.29
Mr R V McKinnon		3,491		4,200		25,000		—		—		—
Mr G L Mackrell		3,322		9,600		157,500		—		—		—
Mr J K O’Sullivan		—		—		—		—		—		—
Mr G A Petersen		1,133		—		—		—		—		—
Mr M J Ullmer		6,910		20,900		325,000		200,000	$	23.84	$	8.91
Total Specified Executives		34,391		84,900		1,357,500		750,000		N/A		N/A

Notes

⁽¹⁾  Difference between the exercise price and closing market value of CBA shares on date of exercise.

Options

Mr Murray is the only Director holding options in the Bank and he did not exercise any during the year ended 30 June 2004.

The Bank’s Non-Executive Directors do not hold any options.

										Vested and exercisable
										at 30 June 2004
	Balance		Granted as		Options			Balance				Exercise
Name	1 Jul 2003		Remuneration		Exercised			30 Jun 2004		No		Price
Directors
Mr D V Murray		1,250,000		—		—			1,250,000		1,000,000	$	23.84	(1)
Total for Directors		1,250,000		—		—			1,250,000		1,000,000	$	23.84	(1)
Specified Executives
Mr M A Cameron		—		—		—			—		—		—
Mr A R Cosenza		227,500		—		(100,000	)		127,500		62,500	$	26.97
Mr L G Cupper		300,000		—		(150,000	)		150,000		75,000	$	26.97
Mr SI Grimshaw		100,000		—		—			100,000		—		—
Mr H D Harley		137,500		—		(50,000	)		87,500		37,500	$	26.97
Mr M A Katz		500,000		—		(250,000	)		250,000		125,000	$	26.97
Mr R V McKinnon		62,500		—		—			62,500		25,000	$	26.97
Mr G L Mackrell		232,500		—		—			232,500		100,000	$	23.84	(1)
											57,500	$	26.97
Mr J K O’Sullivan		—		—		—			—		—		—
Mr G A Petersen		—		—		—			—		—		—
Mr M J Ullmer		450,000		—		(200,000	)		250,000		125,000	$	26.97
Total for Specified Executives		2,010,000		—		(750,000	)		1,260,000		100,000	$	23.84	(1)
											507,500	$	26.97

Notes

⁽¹⁾  For most executives, ‘Vested and exercisable’ options represents those granted on 13 September 2000 with an exercise price of $26.97. Mr Murray and Mr Mackrell hold vested but unexercised options granted on 24 August 1999 that have an exercise price of $23.84.

178

Notes to the financial statements

NOTE 44 Director and Executive Disclosures continued

Shares

     Details of shareholdings of Directors and Specified Executives (or relatives or entities controlled or significantly influenced by them) are as follows:

		Balance		Acquired/Granted as		Net Change			Balance
Name	Class	1 Jul 2003		Remuneration(1)		Other(2)			30 Jun 2004
Directors
Mr J T Ralph, AC	Ordinary		21,339		2,007		515			23,861
Dr J M Schubert	Ordinary		14,428		1,064		776			16,268
Mr D V Murray	Ordinary		214,242		—		61,287			275,529
	Deferred STI		16,704		13,576		(10,853	)		19,427
	Reward Shares		152,000		90,000		—			242,000
Mr N R Adler, AO	Ordinary		8,636		736		118			9,490
Mr R J Clairs, AO	Ordinary		11,927		704		—			12,631
Mr A B Daniels, OAM	Ordinary		15,135		704		553			16,392
Mr C R Galbraith, AM	Ordinary		6,579		731		379			7,689
Ms S C Kay	Ordinary		2,184		796		—			2,980
Mr W G Kent, AO	Ordinary		9,708		731		4,083			14,522
Mr F D Ryan	Ordinary		5,935		736		—			6,671
Mr F J Swan	Ordinary		4,038		731		227			4,996
Ms B K Ward(3)	Ordinary		4,059		736		119			4,914
Total for Directors	Ordinary		318,210		9,676		68,057			395,943
	Deferred STI		16,704		13,576		(10,853	)		19,427
	Reward Shares		152,000		90,000		—			242,000

Notes

(1)	For Non-Executive Directors, represents shares acquired under NEDSP on 30 Sep 2003, 2 Jan 2004, 31 Mar 2004 and 29 Jun 2004 by mandatory sacrifice of fees. All shares are subject to a 10 year trading restriction (shares will be tradeable earlier if the Director leaves the Board). See Note 29 for further details on the NEDSP.
	For Mr Murray, represents:

• Deferred STI - acquired under the mandatory component of the Bank’s Equity Participation Plan (“EPP”). Shares were purchased on 31 Oct 2003 in two equal tranches, vesting on 1 July 2004 and 1 July 2005 respectively. See Note 29 for further details on the EPP.

• Reward Shares - granted under the Equity Reward Plan (“ERP”) on 1 Sep 2003 and are subject to a performance hurdle. The first possible date for meeting the performance hurdle is 2 Sep 2006 with the last possible date for vesting being 1 Sep 2008. See Note 29 for further details on the ERP.

(2)	‘Net change other’ incorporates changes resulting from purchases and sales during the year by Directors and, for Mr Murray, vesting of Deferred STI shares (which became Ordinary shares).
(3)	Ms Ward also purchased 250 PERLS II securities during the year and continued to hold them at 30 June 2004.

179

Notes to the financial statements

NOTE 44 Director and Executive Disclosures continued

		Balance		Acquired/Granted		On Exercise		Net Change			Balance
Name	Class	1 Jul 2003		as Remuneration(1)		of Options		Other(2)			30 Jun 2004
Specified Executives
Mr M A Cameron	Ordinary		—		—		—		—			—
	Deferred STI		—		4,797		—		—			4,797
	Reward Shares		10,000		22,300		—		—			32,300
Mr A R Cosenza	Ordinary		20,000		—		100,000		(89,500	)		30,500
	Deferred STI		6,034		5,793		—		(3,851	)		7,976
	Reward Shares		50,000		24,700		—		(10,500	)		64,200
Mr L G Cupper	Ordinary		9,365		—		150,000		(132,159	)		27,206
	Deferred STI		7,415		5,702		—		(4,708	)		8,409
	Reward Shares		53,000		29,500		—		(12,500	)		70,000
Mr SI Grimshaw	Ordinary		1,000		—		—		(744	)		256
	Deferred STI		—		9,503		—		—			9,503
	Reward Shares		53,000		37,300		—		—			90,300
Mr H D Harley	Ordinary		3,792		—		50,000		(40,081	)		13,711
	Deferred STI		4,971		5,069		—		(3,224	)		6,816
	Reward Shares		35,300		28,700		—		(6,300	)		57,700
Mr M A Katz(3)	Ordinary		473,734		—		250,000		(316,348	)		407,386
	Deferred STI		11,769		8,689		—		(7,752	)		12,706
	Reward Shares		86,900		48,000		—		(20,900	)		114,000
Mr R V McKinnon	Ordinary		1,601		—		—		7,691			9,292
	Deferred STI		5,382		4,616		—		(3,491	)		6,507
	Reward Shares		29,700		20,000		—		(4,200	)		45,500
Mr G L Mackrell	Ordinary		7,414		—		—		13,674			21,088
	Deferred STI		5,243		6,698		—		(3,322	)		8,619
	Reward Shares		50,100		25,600		—		(9,600	)		66,100
Mr J K O’Sullivan	Ordinary		5,401		—		—		164			5,565
	Deferred STI		—		—		—		—			—
	Reward Shares		—		33,500		—		—			33,500
Mr G A Petersen	Ordinary		1,623		—		—		1,133			2,756
	Deferred STI		2,266		2,953		—		(1,133	)		4,086
	Reward Shares		11,000		8,000		—		—			19,000
Mr M J Ullmer	Ordinary		—		—		200,000		(179,100	)		20,900
	Deferred STI		10,753		7,874		—		(6,910	)		11,717
	Reward Shares		86,900		48,000		—		(20,900	)		114,000
Total for Specified Executives	Ordinary		523,930		—		750,000		(735,270	)		538,660
	Deferred STI		53,833		61,694		—		(34,391	)		81,136
	Reward Shares		465,900		325,600		—		(84,900	)		706,600

Notes

⁽¹⁾ Represents:

• Deferred STI — acquired under the mandatory component of the Bank’s Equity Participation Plan (“EPP”). Shares were purchased on 31 Oct 2003 in two equal tranches, vesting on 1 July 2004 and 1 July 2005 respectively. See Note 29 for further details on the EPP.

• Reward Shares — granted under the Equity Reward Plan (“ERP”) on 1 Sep 2003 and are subject to a performance hurdle. The first possible date for meeting the performance hurdle is 2 Sep 2006 with the last possible date for vesting being 1 Sep 2008. See Note 29 for further details on the ERP.

(2)	‘Net change other’ incorporates changes resulting from purchases and sales during the year by Executives and vesting of Deferred STI and Reward Shares (which became Ordinary shares).
(3)	Mr Katz also purchased 250 PERLS II securities during the year and continued to hold them at 30 June 2004.

ASIC Class Order

     Australian banks, parent entities of Australian banks and controlled entities of Australian banks have been exempted, subject to certain conditions, under an ASIC Class Order No. 98/110 (as amended by ASIC Class Order No. 04/667), from making disclosures of any loan made, guaranteed or secured by a bank to related parties (other than for directors, specified executives and entities controlled or significantly influenced by them) and financial instrument transactions (other than shares and share options) of a bank where a director, or a specified executive, of the relevant entity is not a party and where the loan or financial instrument transaction is lawfully made and occurs in the ordinary course of banking business and either on an arm’s length basis or with the approval of a general meeting of the relevant entity and its ultimate parent entity (if any). The exemption does not cover transactions that relate to the supply of goods and services to a bank, other than financial assets or services.

180

Notes to the financial statements

NOTE 44 Director and Executive Disclosures continued

     The Class Order does not apply to a loan or financial instrument transaction which any director, or a specified executive, of the relevant entity should reasonably be aware that if not disclosed would have the potential to adversely affect the decisions made by users of the financial statements about the allocation of scarce resources.

     A condition of the Class Order is that the Bank must lodge a statutory declaration, signed by two directors, with the Australian Securities and Investments Commission accompanying the annual report. The declaration provides confirmation that the Bank has systems of internal control and procedures to provide assurance that any financial instrument transactions of a bank which are not entered into on an arm’s length basis are drawn to the attention of the Directors so that they may be disclosed.

Loans to Directors and Specified Executives

Details of aggregates of loans to Directors and Specified Executives (or entities controlled or significantly influenced by them) are as follows:

	Year		Balance		Interest		Interest Not				Balance		Number in
	Ended		1 July		Charged		Charged		Write-off		30 June		Group at
	30 June		$000s		$000s		$000s		$000s		$000s		30 June
Directors
		2004		36		3		—		—		22		2
		2003		29		3		—		—		36		1
Specified Executives
		2004		4,633		377		—		—		8,829		6
		2003		3,845		193		—		—		2,434		3
Total Directors and Specified Executives
		2004		4,669		380		—		—		8,851		8
		2003		3,874		196		—		—		2,470		4

Details of individuals with loans above $100,000 in the reporting period are as follows:

	Balance								Balance
	1 July		Interest		Interest Not				30 June		Highest in
	2003		Charged		Charged		Write-off		2004		Period
Name	$000s		$000s		$000s		$000s		$000s		$000s
Directors
Not Applicable
Specified Executives
Mr S I Grimshaw		—		19		—		—		—		2,639
		—		14		—		—		1,543		1,543
Mr H D Harley		335		26		—		—		335		338
		904		35		—		—		272		931
		208		13		—		—		245		245
		251		15		—		—		250		253
		204		13		—		—		204		205
		55		3		—		—		116		116
		274		22		—		—		321		321
Mr M A Katz		175		11		—		—		175		175
		175		10		—		—		175		175
Mr G L Mackrell		300		20		—		—		295		303
		124		9		—		—		146		150
Mr J K O’Sullivan		1,500		91		—		—		1,500		1,502
		—		<1		—		—		200		200
		—		37		—		—		861		941
		—		8		—		—		208		208
Mr G A Petersen		—		9		—		—		900		900
		—		9		—		—		800		800

181

Notes to the financial statements

NOTE 44 Director and Executive Disclosures continued

Terms and conditions of Loans

     All loans with Directors and Specified Executives (or related entities controlled or significantly influenced by them) have been provided on an arms-length commercial basis including the term of the loan, security required and the interest rate (which may be fixed or variable).

Shares of Directors

     All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Directors’ Share Plan (or in the case of Mr Murray the Equity Reward Plan, the previous Executive Option Plan or the Equity Participation Plan). Mr Murray did not exercise any options during the year; leaving his total holdings of options at 1,250,000 under the Equity Reward Plan and the previous Executive Option Plan. (No further options will be granted under the Equity Reward Plan. The Executive Option Plan was discontinued in 2000). Mr Murray was also awarded rights to 90,000 shares under the Equity Reward Plan and 13,576 shares under the Equity Participation Plan during the year. He has a total holding of 242,000 shares under the Equity Reward Plan and 19,427 shares under the Equity Participation Plan. Shares awarded under the Equity Reward Plan and Equity Participation Plan are registered in the name of the Trustee. The transfer of legal title to Mr Murray is subject to vesting conditions, and, in the case of the Equity Reward Plan, is conditional on the Bank achieving a prescribed performance hurdle over a minimum three year period. For further details of the Non-Executive Directors’ Share Plan, Equity Reward Plan, previous Executive Option Plan and Equity Participation Plan refer to Note 29.

     In addition, Mr Ralph holds an investment of $175,780 in Commonwealth Property Securities Fund and an investment of $532,739 in Colonial First State Global Diversified Strategies Fund. Both holdings are held beneficially. Dr Schubert holds an investment of $654,683 in Colonial First State Wholesale Diversified Fund. Mr Daniels beneficially holds an investment of $54,919 in Colonial First State Global Health and Biotech Fund. A related party of Mr Daniels holds an investment of $235,972 in Colonial First State Future Leaders Fund and $221,772 in Colonial First State Imputation Fund.

Other Transactions of Directors, Specified Executives and Other Related Parties

     Financial Instrument Transactions

     Financial instrument transactions (other than loans and shares disclosed above) of Directors and Specified Executives with the Bank and other banks that are controlled entities occur in the ordinary course of business of the banks on an arm’s length basis.

     Under the Australian Securities and Investments Commission Class Order referred to above, disclosure of financial instrument transactions regularly made by a bank is limited to disclosure of such transactions with a Director, Specified Executive and entities controlled or significantly influenced by them.

     All such financial instrument transactions that have occurred between the banks and their Directors and Specified Executives have been trivial or domestic and were in the nature of normal personal banking and deposit transactions.

     Transactions other than Financial Instrument Transactions of Banks

     All other transactions with Directors, Specified Executives and their related entities and other related parties are conducted on an arm’s length basis in the normal course of business and on commercial terms and conditions. These transactions principally involve the provision of financial and investment services by non bank controlled entities. The interests of Mr Ralph, Dr Schubert and Mr Daniels in investment funds managed by Colonial First State are detailed above. Additionally, Mr Galbraith is a partner in the law firm, Allens Arthur Robinson, which acted for the Bank in the provision of legal services during the financial year. The fees for these services amounted to $4,059,827.

     All other such transactions that have occurred with Directors, Specified Executives and their related entities and other related parties have been trivial or domestic and were principally in the nature of lodgement or withdrawal of deposit, unit funds and superannuation monies.

The Directors’ Retirement Allowance Scheme

     The entitlements of the non-executive directors under the Directors’ Retirement Allowance Scheme are:

	Increase in accrued		Entitlement as at
	benefit in year		30 June 2004
	$		$
Non-Executive Directors
Mr J T Ralph, AC		36,479		1,196,479
Dr J M Schubert		46,981		624,241
Mr N R Adler, AO		23,717		419,059
Mr R J Clairs, AO		38,988		184,788
Mr A B Daniels, OAM		41,663		145,459
Mr C R Galbraith, AM		46,418		150,550
Ms S C Kay(1)		—		—
Mr W G Kent, AO		46,418		150,550
Mr F D Ryan		46,466		155,540
Mr F J Swan		44,429		258,086
Ms B K Ward		51,566		352,955

⁽¹⁾ Ms Kay was appointed as a Director after the closure of the scheme

182

Notes to the financial statements

NOTE 45 Related Party Disclosures

Ultimate Parent

     Commonwealth Bank of Australia is the ultimate Australian parent company in the Group.

Controlled Entities

     Transactions with related parties in the Group are conducted on an arm’s length basis in the normal course of business and on commercial terms and conditions. These transactions principally arise out of the provision of banking services, the acceptance of funds on deposit, the granting of loans and other associated financial activities.

     Support services are provided by the Bank such as provision of premises and/or equipment, availability of transfer payment and accounting facilities through data processing etc, and are transfer charged to the respective user entity at commercial rates.

     Refer to Note 41 for details of controlled entities.

     The Bank’s aggregate investment in and loans to controlled entities are disclosed in Note 18.

     Amounts due to controlled entities are disclosed in the balance sheet of the Bank.

     Details of amounts paid to or received from related parties, in the form of dividends or interest, are set out in Note 2.

     All transactions between Group entities are eliminated on consolidation.

Other Related Entities

     An amount of $548 million (2003: $567 million; 2002: $595 million) was incurred by the Group in transactions and services provided by other related entities.

183

Notes to the financial statements

NOTE 46 Statements of Cash Flow

Note (a) Reconciliation of Cash

     For the purposes of the Statements of Cash Flows, cash includes cash at bankers, money at short call, at call deposits with other financial institutions and settlement account balances with other banks.

	GROUP									BANK
	2004			2003			2002			2004			2003
	$M			$M			$M			$M			$M
Notes, coins and cash at bankers		1,548			1,492			2,056			1,421			1,332
Other short term liquid assets		440			641			495			233			232
Receivables due from other financial institutions — at call		4,124			2,528			2,709			3,230			1,943
Payables due to other financial institutions — at call		(3,266	)		(3,233	)		(2,762	)		(3,245	)		(3,230	)
Cash and Cash Equivalents at end of year		2,846			1,428			2,498			1,639			277

Note (b) Cash Flows Presented on a Net Basis

     Cash flows arising from the following activities are presented on a net basis in the Statement of Cash Flows:

• Customer deposits to and withdrawals from deposit;

• Accounts, borrowings and repayments on loans, advances and other receivables;

• Sales and purchases of trading securities; and

• Proceeds from and repayment of short term debt issues.

Note (c) Reconciliation of Operating Profit After\ Income Tax to Net Cash Provided by Operating Activities

	GROUP									BANK
	2004			2003			2002			2004			2003
	$M			$M			$M			$M			$M
Net profit after income tax		2,581			2,018			2,656			1,647			2,099
Decrease/(increase) in interest receivable		(186	)		(78	)		210			(8	)		(273	)
Increase/(decrease) in interest payable		334			62			(60	)		298			103
Net (increase)/decrease in trading securities		(4,324	)		(2,484	)		(1,159	)		(4,672	)		(1,814	)
Net (gain)/loss on sale of investment securities		(2	)		9			(78	)		(2	)		9
(Gain)/loss on sale of property plant and equipment		11			(22	)		(12	)		10			(13	)
Net (gain)/loss on sale of controlled entities		(43	)		—			—			453			—
Charge for bad and doubtful debts		276			305			449			263			266
Depreciation and amortisation		450			450			451			271			269
(Decrease)/increase in other provisions		185			(15	)		(120	)		143			(7	)
Increase/(decrease) in income taxes payable		(36	)		(234	)		443			(7	)		(137	)
(Decrease)/increase in deferred income taxes payable		(29	)		(166	)		(522	)		323			10
(Increase)/decrease in future income tax benefits		(39	)		100			69			(532	)		(3	)
(Increase)/decrease in accrued fees/reimbursements receivable		(107	)		(94	)		(17	)		(334	)		143
(Decrease)/increase in accrued fees and other items payable		412			6			(162	)		262			(73	)
Amortisation of premium on investment securities		12			6			18			11			6
Unrealised gain on revaluation of trading securities		(260	)		(269	)		723			(264	)		(246	)
Change in excess of net market value over net assets of life insurance controlled entities		(201	)		245			(477	)		—			—
Change in policy liabilities		777			(2,056	)		(1,112	)		—			—
Revaluation of life insurance assets		(1,430	)		164			264			—			—
Gain on sale of life insurance assets		(456	)		(154	)		140			—			—
Other		(296	)		82			289			(12	)		(21	)
Net Cash (used in)/provided by Operating Activities		(2,371	)		(2,125	)		1,993			(2,150	)		318

Note (d) Non Cash Financing and Investing Activities

     Shares issued under the Dividend Reinvestment Plan for 2004 were $389 million.

184

Notes to the financial statements

NOTE 46 Statements of Cash Flow continued

Note (e) Acquisition of Controlled Entities

	2004		2003			2002
	$M		$M			$M
Consideration
Cash paid on acquisitions		—		71			56
Transaction costs		—		—			1
Pre-acquisition dividend received		—		2			—
		—		73			57
Fair value of net tangible assets acquired
Cash & liquid assets		—		29			—
Other assets		—		29			—
Other provisions		—		(8	)		—
Bills payable and other liabilities		—		(33	)		—
Outside equity interest		—		—			—
		—		17			—
Excess market value over net assets of life insurance subsidiary		—		26			57
Goodwill		—		30			—
		—		73			57
Outflow/(inflows) of cash on acquisitions
Cash payments		—		71			56
Transaction costs		—		—			1
Less cash and cash equivalents acquired		—		(29	)		—
		—		42			57

Note (f) Disposal of Controlled Entities

	2004		2003			2002
	$M		$M			$M
Disposal proceeds
Cash receipt on disposal		63		33			—
		63		33			—
Fair value of net tangible assets disposed
Net book value of assets disposed		20		65			—
Profit/(loss) on sale		43		(32	)		—
		63		33			—
Inflow of cash from disposal
Cash proceeds		63		33			—
		63		33			—

Note (g) Financing Facilities

     Standby funding lines are immaterial.

185

Notes to the financial statements

NOTE 47 Disclosures about Fair Value of Financial Instruments

     These amounts represent estimates of net fair values at a point in time. Significant estimates regarding economic conditions, loss experience, risk characteristics associated with particular financial instruments and other factors were used for the purposes of this disclosure. These estimates are subjective in nature and involve matters of judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could have a material impact on the amounts estimated.

     While the estimated net fair value amounts are designed to represent estimates at which these instruments could be exchanged in a current transaction between willing parties, many of the Group’s financial instruments lack an available trading market as characterised by willing parties engaging in an exchange transaction. In addition, it is the Bank’s intent to hold most of its financial instruments to maturity and therefore it is not probable that the net fair values shown would be realised in a current transaction.

     The estimated net fair values disclosed do not reflect the value of assets and liabilities that are not considered financial instruments. In addition, the value of long-term relationships with depositors (core deposit intangibles) and other customers (credit card intangibles) are not reflected. The value of these items is significant.

     Because of the wide range of valuation techniques and the numerous estimates that must be made, it may be difficult to make reasonable comparisons of the Bank’s net fair value information with that of other financial institutions. It is important that the many uncertainties discussed above be considered when using the estimated net fair value disclosures and to realise that because of these uncertainties, the aggregate net fair value amount should in no way be construed as representative of the underlying value of the Commonwealth Bank of Australia.

	2004					2003
	Carrying		Net Fair			Carrying		Net Fair
	Value		Value			Value		Value
	$M		$M			$M		$M
Assets
Cash and liquid assets		6,453		6,453			5,575		5,575
Receivables due from other financial institutions		8,369		8,369			7,066		7,066
Trading securities		14,896		14,896			10,435		10,435
Investment securities		11,447		11,490			11,036		11,187
Loans, advances and other receivables		189,391		188,954			160,347		160,441
Bank acceptances of customers		15,019		15,019			13,197		13,197
Life insurance investment assets		28,942		28,942			27,835		27,835
Deposit accounts with regulatory authorities		38		38			23		23
Other assets		24,721		24,721			23,094		23,094
Liabilities
Deposits and other public borrowings		163,177		163,645			140,974		141,186
Payables due to other financial institutions		6,641		6,641			7,538		7,538
Bank acceptances		15,019		15,019			13,197		13,197
Life insurance policy liabilities		24,638		24,638			23,862		23,862
Debt issues		44,042		43,651			30,629		30,356
Bills payable and other liabilities		19,140		19,148			18,822		18,819
Loan capital		6,631		6,740			6,025		6,350
Asset and liability hedges - unrealised gains/(losses) (Refer to Note 39)		—		(740	)		—		353

     The net fair value estimates were determined by the following methodologies and assumptions:

Liquid assets and bank acceptances of customers

     The carrying values of cash and liquid assets, receivables due from other financial institutions and bank acceptances of customers approximate their net fair value as they are short term in nature or are receivable on demand.

Securities

     Trading securities are carried at net market/net fair value and investment securities have their net fair value determined based on quoted market prices, broker or dealer price quotations.

Loans, advances and other receivables

     The carrying value of loans, advances and other receivables is net of general and specific provisions for doubtful debts and interest/fees reserved.

     For variable rate loans, excluding impaired loans, the carrying amount is a reasonable estimate of net fair value. The net fair value for fixed rate loans was calculated by utilising discounted cash flow models (i.e. the net present value of the portfolio future principal and interest cash flows), based on the maturity of the loans. The discount rates applied were based on the current benchmark rate offered for the average remaining term of the portfolio plus an add-on of the average credit margin of the existing portfolio, where appropriate.

186

Notes to the financial statements

NOTE 47 Disclosures about Fair Value of Financial Instruments continued

     The net fair value of impaired loans was calculated by discounting expected cash flows using a rate that includes a premium for the uncertainty of the flows.

     For shares in companies, the estimated net fair values are based on quoted market prices.

Life Insurance Investment Assets & Policy Liabilities

     Life insurance investment assets are carried at net fair value. Life insurance policy liabilities are measured on a net present value basis. This treatment is in accordance with accounting standard AASB 1038: Life Insurance Business.

Statutory deposits with central banks

     In several other countries in which the Group operates, the law requires that the Group lodge regulatory deposits with the local central bank at a rate of interest below that generally prevailing in that market. The net fair value is assumed to be equal to the carrying value as the Group is only able to continue as a going concern with the maintenance of these deposits.

All other financial assets

     Included in this category are fees receivable, unrealised income, investments in associates of $239 million (2003: $287 million), and excess of net market value over net assets of life insurance controlled entities of $5,741 million (2003: $5,540 million), where the carrying amount is considered to be a reasonable estimate of net fair value.

     Other financial assets are net of goodwill, future income tax benefits and prepayments/unamortised payments, as these do not constitute a financial instrument.

Deposits and other public borrowings

     The net fair value of non interest bearing, call and variable rate deposits, and fixed rate deposits repricing within six months, is the carrying value as at 30 June. Discounted cash flow models based upon deposit type and its related maturity, were used to calculate the net fair value of other term deposits.

Short term liabilities

     The carrying value of payables due to other financial institutions and bank acceptances approximate their net fair value as they are short term in nature and reprice frequently.

Debt issues and loan capital

     The net fair values of debt issues and loan capital were calculated based on quoted market prices as at 30 June.

     For those debt issues where quoted market prices were not available, discounted cash flow and option pricing models were used, utilising a yield curve appropriate to the expected remaining maturity of the instrument.

All other financial liabilities

     This category includes interest payable and unrealised expenses payable for which the carrying amount is considered to be a reasonable estimate of net fair value. For liabilities that are long term, net fair values have been estimated using the rates currently offered for similar liabilities with remaining maturities.

     Other provisions including provision for dividend, income tax liability and unamortised receipts are not considered financial instruments.

Asset and liability hedges

     Net fair value of asset and liability hedges is based on quoted market prices, broker or dealer price quotations.

Commitments to extend credit, letters of credit, guarantees, warranties and indemnities issued

     The net fair value of these items was not calculated as estimated fair values are not readily ascertainable. These financial instruments generally relate to credit risk and attract fees in line with market prices for similar arrangements. They are not presently sold or traded. The items generally do not involve cash payments other than in the event of default. The fee pricing is set as part of the broader customer credit process and reflects the probability of default. The net fair value may be represented by the present value of fees expected to be received, less associated costs. The overall level of fees involved is not material.

Other off-balance sheet financial instruments

     The net fair value of trading and investment derivative contracts (foreign exchange contracts, currency swaps, exchange rate futures, currency options, forward rate agreements, interest rate swaps, interest rate futures, interest rate options), were obtained from quoted market prices, discounted cash flow models or option pricing models as appropriate.

     The fair value of these instruments is disclosed in Note 39.

187

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles

     The consolidated financial statements of the Group are prepared in accordance with Generally Accepted Accounting Principles in Australia (‘Australian GAAP’, refer Note 1), which differ in some respects from Generally Accepted Accounting Principles in the United States (‘US GAAP’).

     The following are significant adjustments between net profit, shareholders’ equity and consolidated balance sheets disclosed in these financial statements and which would be reported in accordance with US GAAP.

				2004			2003			2002
	Footnote			$M			$M			$M
Consolidated Statements of Profit and Loss
Net profit reported under Australian GAAP					2,572			2,012			2,655
Employee share compensation		(c	)		—			25			(30	)
Pension expense adjustment *		(i	)		(24	)		(6	)		21
Life insurance market valuation of controlled entities		(k	)		(201	)		245			(477	)
Goodwill amortisation		(l	)		—			—			(33	)
Reversal of goodwill amortisaton		(l	)		324			322			—
Amortisation of identifiable intangible assets *		(t	)		(17	)		(13	)		(13	)
Movement in value of business acquired *		(m	)		(161	)		(202	)		(98	)
Movement in policyholder liabilities		(r	)		174			42			59
Movement in deferred tax relating to policyholder liabilities		(a	)		(36	)		(12	)		(8	)
Reversal of unrealised gains/losses and depreciation on life insurance property investments *		(o	)		35			(20	)		(24	)
Movement in deferred acquisition costs *		(s	)		(31	)		(29	)		(70	)
Marked to market of derivative instruments (under SFAS 133) *		(v	)		(736	)		636			(300	)
Reversal of redundancy provision *		(d	)		102			—			—
Deconsolidation of variable interest entity		(y	)		(55	)		—			—
Reversal of software write-off and software amortisation		(z	)		97			—			—
Net income according to US GAAP					2,043			3,000			1,682
Other Comprehensive Income
Foreign currency translation reserve *		(q	)		(7	)		(92	)		(102	)
Pension plan *		(q	)		(44	)		68			19
Unrealised holding (losses)/gains on available for sale securities *		(f	)		(57	)		59			95
Reclassification adjustment for gains included in net income		(f	)		—			(1	)		(50	)
		(q	)		(57	)		58			45
Total other comprehensive income (loss)					(108	)		34			(38	)
Total comprehensive income according to US GAAP					1,936			3,034			1,644
Basic earnings per share on net income according to US GAAP (cents)					158.3			235.7			131.5
Fully diluted earnings per share on net income according to US GAAP (cents)					158.2			235.6			131.3
Shareholders’ Equity
Shareholders’ equity reported under Australian GAAP, excluding outside equity interests					22,405			20,024			19,030
Tax effect of foreign currency translation reserve		(a	)		62			60			20
Provision for final cash dividend		(d	)		—			—			1,027
Unrealised net gain on available for sale securities *		(f	)		52			109			51
Prepaid pension cost		(i	)		930			970			1,006
Tax effect of prepaid pension cost		(i	)		(270	)		(282	)		(275	)
Life insurance market valuation of controlled entities		(k	)		(2,504	)		(2,303	)		(2,548	)
Amortisation of identifiable intangible assets		(l	)		(55	)		(38	)		(26	)
Goodwill amortisation to 30 June 2002		(l	)		(78	)		(78	)		(78	)
Reversal of goodwill amortisation		(l	)		646			322			—
Movement in value of business acquired *		(m	)		(645	)		(484	)		(281	)
Movement in deferred acquisition costs *		(s	)		(262	)		(231	)		(202	)
Equity issued for Colonial acquisition		(t	)		(1,026	)		(1,026	)		(1,026	)
Reversal of unrealised gain and accumulated depreciation on life insurance property investments *		(o	)		(61	)		(96	)		(76	)
Movement in policyholder liabilities		(r	)		370			196			154
Movement in deferred tax relating to policyholder liabilities		(a	)		(76	)		(40	)		(28	)
Marked to market of derivative instruments (under SFAS 133) *		(v	)		(549	)		187			(449	)
Reversal of redundancy provision		(d	)		102			—			—
Deconsolidation of variable interest entity		(y	)		(1,573	)		—			—
Reversal of software write-off and software amortisation		(z	)		97			—			—
Reversal of asset revaluation reserve		(n	)		(61	)		—			—
Shareholders’ equity according to US GAAP					17,504			17,290			16,299

* Reconciliation items which are net of tax. The effective tax rate is 30%.

188

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

				2004			2003			2002
	Footnote			$M			$M			$M
Consolidated Balance Sheets
Total assets reported under Australian GAAP					305,995			265,110			249,648
Deferred tax assets related to differences in life insurance policyholder liabilities		(a	)		84			115			130
Unrealised net gain(loss) on available for sale securities		(f	)		74			155			73
Prepaid pension cost		(i	)		1,173			1,213			1,249
Excess of net market value over net assets of life insurance controlled entities		(k	)		(5,741	)		(5,540	)		(5,656	)
Goodwill, net of amortisation		(l	)		1,132			808			286
Value of business acquired, net of amortisation		(m	)		1,764			2,005			2,249
Life insurance policy deferred acquisition costs, net of amortisation		(s	)		803			750			691
Other identifiable intangible assets recognised, net of amortisation		(l	)		105			122			111
Unrealised gain and accumulated depreciation on life insurance property investments		(o	)		(61	)		(96	)		(27	)
Marked to market of derivative instruments (under SFAS 133)		(v	)		(2,501	)		(481	)		(1,179	)
Reclassification between reinsurance receivable and policyholder liabilities					1			(19	)		(12	)
Consolidation of variable interest entities		(y	)		531			245			—
Reversal of asset revaluation reserve		(n	)		(61	)		—			—
Reversal of software write-off and software amortisation		(z	)		139			—			—
Total assets according to US GAAP					303,437			264,387			247,563

(a) Income Tax

Deferred Income Tax Assets and Liabilities

     Australian GAAP follows the liability method of tax-effect accounting. The tax-effect of timing differences which arise from items being brought to account in different periods for income tax and accounting purposes is disclosed as a future income tax benefit (FITB) or a provision for deferred income tax. Amounts are offset where the tax payable and the realisable benefit are expected to occur in the same period. Permanent differences are differences between taxable income and pre-tax accounting profit where the related income or expense items will never be included in either taxable income or pre-tax accounting profit.

     The Group has applied SFAS 109: Accounting for Income Taxes in the preparation of its US GAAP information.

     The differences between the effect of applying the provisions of SFAS 109 and the accounting policy adopted in the Australian Financial Statements are as follows:

• Under Australian GAAP the criterion for recognition of timing differences is assurance beyond any reasonable doubt and for tax losses ‘virtual certainty’. The recognition criterion under US GAAP is that the tax benefit is probable.

• Australian GAAP requires that an announcement of the Government’s intention to change the rate of company income tax in advance of periods in which the change will occur is adequate evidence for the deferred tax balances to be restated. This treatment is not permitted under SFAS 109: Accounting for Income Taxes which requires that the deferred tax liabilities and assets be adjusted in the Financial Year in which a change in the tax rate is enacted.

Policyholder Liabilities

     From 1 July 2000, the basis for taxation of income on most life insurance products changed from ‘Income minus Expenditure’ to ‘Profit’ (which includes movements in policyholder liabilities). As tax deductible policyholder liabilities under Australian tax legislation are lower than US GAAP policyholder liabilities, a deferred tax asset to recognise this timing difference is created. Financial Year 2004 $84 million (2003 $115 million; 2002: $130 million).

Foreign Currency Translation Reserve

     For US GAAP purposes, the tax effect of the foreign currency translation reserve is booked as a deferred tax asset. For Financial Year 2004, this represented a $62 million increase to shareholders’ equity (2003:$60 million; 2002: $20 million).

Investment Securities

     Income from tax exempt securities does not exceed $500,000.

     Tax related to unrealised gains/losses on investment securities sales is $22 million (2003: $47 million; 2002: $22 million).

(b) Pension Plans

     In accordance with Australian GAAP, contributions to company sponsored defined benefit pension plans are expensed as incurred. Other than by way of a note to the financial statements, any surplus or deficit is not reflected in the consolidated accounts.

     US GAAP pension expense, for defined benefit pension plans, is determined using defined methodology that is based on concepts of accrual accounting. This methodology, which requires several types of actuarial measurements, results in net amounts of expense and the related plan surplus or deficiency being recorded in the financial statements of the sponsor systematically over the working lives of the employees covered by the plan. As a result US GAAP reconciliation adjustments are required. The disclosure requirements of SFAS 87: Employers Accounting for Pensions and SFAS 132: Employers Disclosures about Pensions and Other Postretirement Benefits have been included at footnote (i) within this note.

     The Group adopted SFAS 87 later than the effective date specified in the accounting standard. To introduce the information required under SFAS 87 as from the effective date was not feasible. Accordingly an allocation of the pension obligation/asset has been taken directly to equity based on the number of years elapsed between the effective date and the date of adoption by the Group. The adoption date for the purposes of the US GAAP reconciliation information is 1 July 1994 and the remaining amortisation period at the adoption date was ten years.

189

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

(c) Employee Share Compensation

     In August 2002 the Bank announced that shares are purchased to cover the Employee Share Acquisition Plan (ESAP) and the full cost is included as an expense against profits for Australian GAAP reporting. Under US GAAP, an accrual for the probable grant of shares under ESAP is required. There is $24 million accrued in Financial Year 2004 under Australian GAAP per Note 29.

     In the current year, for the Equity Reward Plan (ERP), incentives were allocated in the form of Reward shares only and resulted in an expense for the year of $8 million. Other share based compensation expense for the year was $67 million. This was incurred and charged against profit on a consistent basis with prior periods.

    ��Under US GAAP, the fair value of the options issued under the Executive Option Plan and Equity Reward Plan is included as part of employee compensation and charged to profit and loss. Effective 1 July 2002, options are no longer issued under the Equity Reward Plan. For 2002 a US GAAP adjustment of $4 million has been included.

     The fair value of the options issued to date have been determined using the Black Scholes option pricing model with the assumptions outlined in the table below.

Black-Scholes Option Pricing Model Assumptions
	Fair		Expected			Risk Free			Dividend			Expected Life of	Probability for
Option Issue Date	Value		Volatility			Interest Rate			Rate			Options	Performance Hurdle
24 September 1999	$	1.53¢		20.0	%		5.82	%		4.82	%	37 months		50	%
13 October 2000	$	1.53¢		17.9	%		6.00	%		4.41	%	37 months		50	%
31 October 2001	$	2.01¢		20.8	%		5.24	%		4.61	%	37 months		50	%

     The following table outlines movements in executive options in the year ending 30 June 2004 (with a comparison to movements in the years ending 30 June 2003 and 30 June 2002) and shows the number of options outstanding at date of issue.

			Weighted				Weighted				Weighted
			Average				Average				Average
Movement in Executive Options			Exercise				Exercise				Exercise
during the year	2004		Price		2003		Price*		2002		Price*
Options Outstanding at the start of the year		7,708,600	$	26.25		9,749,800	$	25.91		9,362,500	$	23.08
Options Granted during the year		—		—		—		—		3,007,000	$	30.11
Options Forfeited during the year		213,700	$	25.50		1,381,200	$	27.07		567,200	$	26.73
Options Exercised during the year		1,712,600	$	23.30		660,000	$	19.58		2,052,500	$	19.24
Options Outstanding at the end of the year		5,782,300	$	27.15		7,708,600	$	26.25		9,749,800	$	25.91

* The exercise price for options granted since 1997 will be/have been adjusted by the premium formula (based on the actual difference between the dividend and bond yields at the date of vesting).

Outstanding Options at 30 June 2004	Number		Exercise Price		Expiry Date
September 1999 Options		1,925,000	$	23.84	24 Aug 2009
September 2000 Options		1,622,100	$	26.97	13 Sept 2010
October 2001 Options		2,235,200	$	30.12	3 Sept 2011

     The weighted average exercise price for options outstanding at 30 June 2004 was $27.15.

     The weighted average remaining contractual life of these options is 6 years and 3 months.

     The other disclosure requirements of SFAS 123: Accounting for Stock-Based Compensation in respect of the employee share plans are included in Note 29.

190

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

(d) Provisions

     The Australian accounting standard, AASB 1044: Provisions, Contingent Liabilities and Contingent Assets came into effect 1 July 2002. For comparative periods, provisions comply in all material respects with US GAAP, with the exception of the provision for the final cash dividend for ordinary shares (Note 6), which is not formally declared until the meeting of directors shortly after the balance date. Under US GAAP, dividends are recorded as liabilities only if formally declared prior to balance date. This difference in treatment has been amended in the US GAAP reconciliation of shareholders’ equity for 2002.

     The provision for restructuring costs at 30 June 2004 was nil (2003: $30 million; 2002: $35 million) and Which new Bank provisions were $208 million (2003: nil) (refer Note 25).

     For the Financial Year 2004, included in Which new Bank provisions are provisions for redundancies of $151 million. The criteria for recognition of provisions for redundancies are stricter under US GAAP than under Australian GAAP. FASB 146 Accounting for Costs Associated with Exit or Disposal Activities does not allow the recognition of a provision for redundancies where the redundancies are not made within the minimum legal notification period from the balance date. As a result, under US GAAP, an amount of $146 million would be reversed from provisions, increasing net profit after tax by $102 million.

     The accounting policy adopted by the Group for restructuring provisions is detailed in Note 1 (z).

(e) Life Insurance Controlled Entities

     For US GAAP all debt and equity security assets have been categorised as Trading Securities. All related investments are brought to account at market values.

(f) Available For-Sale Securities under US GAAP

     Under Australian GAAP, only two categories of securities prevail, namely Investment and Trading Securities. Investment securities are purchased by the Bank with the intent to ‘hold to maturity’.

     Trading securities are purchased and held for the short term, primarily with the intention of making profits from anticipated movements in market rates.

     All Investment Securities have been reclassified as Available-for-Sale securities for the purposes of US GAAP disclosure. Any capital gain or loss realised on sale is taken to profit and loss at that time. The cost of available-for-sale securities sold is calculated on a specific identification basis.

     Under US GAAP, these securities are revalued to market and the difference between carrying value and market value is taken to comprehensive income and shareholders’ equity.

     For Financial Year 2004 the adjustment to other Comprehensive Income and shareholders’ equity is $52 million (net of taxation) (2003: $109 million; 2002: $51 million). This adjustment represents the unrealised gain on investment securities net of derivatives of $74 million less taxation of $22 million.

     The disclosure requirements of SFAS 115: Accounting for Certain Investments in Debt and Equity Securities in respect of available-for-sale securities have been included within Note 11.

(g) Net Profit

     Under US GAAP the concept of ‘operating profit’ is not recognised. Net profit under Australian GAAP is operating profit after tax and after deducting outside equity interests.

     In performing the US GAAP profit reconciliation, the net profit reported using Australian GAAP is after deducting goodwill amortisation and including life insurance market valuation movement in controlled entities. Refer paragraph (k) for further details.

191

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

(h) Consolidated Balance Sheet

     The following reconciliations are of significant adjustments to Australian GAAP balance sheet categories disclosed in these accounts and which would be reported in accordance with US GAAP:

				2004			2003			2002
	Footnote			$M			$M			$M
Assets
Loans, advances and other receivables under Australian GAAP					189,391			160,347			147,074
Marked to market revaluation of derivative instruments (under SFAS133)		(v	)		8			(13	)		(35	)
According to US GAAP					189,399			160,334			147,039
Available for sale securities under Australian GAAP					—			—			—
Reclassification from investment securities		(f	)		11,447			11,036			10,766
Restatement of available for sale securities to fair value		(f	)		74			155			73
Consolidation of variable interest entity		(y	)		531			245			—
According to US GAAP					12,052			11,436			10,839
Investment securities under Australian GAAP					11,447			11,036			10,766
Reclassification to available for sale securities		(f	)		(11,447	)		(11,036	)		(10,766	)
According to US GAAP					—			—			—
Trading securities under Australian GAAP					14,896			10,435			8,389
Reclassification from life insurance investment assets					10,997			10,184			10,699
According to US GAAP					25,893			20,619			19,088
Life insurance investment assets under Australian GAAP					28,942			27,835			30,109
Reclassification to trading securities					(10,997	)		(10,184	)		(10,699	)
Reclassification to real estate investment assets		(o	)		(292	)		(383	)		(411	)
Unrealised gains and depreciation adjustment		(o	)		(83	)		(96	)		(27	)
Reclassification of separate account business to other assets		(r	)		(17,570	)		(17,172	)		(18,972	)
According to US GAAP					—			—			—
Real estate investments under Australian GAAP					—			—			—
Reclassification from life insurance investment assets		(o	)		292			383			483
According to US GAAP					292			383			483
Property, plant and equipment under Australian GAAP					1,204			821			862
Reversal of asset revaluation reserve		(n	)		(61	)		—			—
According to US GAAP					1,143			821			862
Intangible Assets under Australia GAAP					4,705			5,029			5,391
Identifiable intangible asset amortisation		(l	)		(62	)		(45	)		(26	)
Goodwill amortisation to 30 June 2002		(l	)		(78	)		(78	)		(78	)
Reversal of goodwill amortisation		(l	)		646			322			—
Adjustment to equity issued on Colonial acquisition		(t	)		(1,026	)		(1,026	)		(1,026	)
Adjustment to policyholder liability differences		(t	)		593			593			593
Reclassification to Value of Business Acquired		(l	)		(2,786	)		(2,786	)		(2,786	)
Deferred tax liability on value of business acquired		(l	)		1,256			1,256			1,256
Pension fund surplus acquired		(i	)		(243	)		(243	)		(243	)
Deferred tax assets on differences in life insurance policyholder liabilities		(a	)		(158	)		(158	)		(158	)
Deferred tax liability on pension fund surplus acquired		(i	)		82			82			82
Reclassification of excess of net market value of net tangible assets of life insurance controlled entities at acquisition from other assets to goodwill		(l	)		2,905			2,905			2,776
According to US GAAP					5,834			5,851			5,781
Value of Business Acquired, under Australian GAAP					—			—			—
Reclassification from Goodwill		(l	)		2,786			2,786			2,786
Value of Business Acquired amortisation (net of imputed interest)		(m	)		(1,022	)		(781	)		(537	)
According to US GAAP					1,764			2,005			2,249

192

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

				2004			2003			2002
	Footnote			$M			$M			$M
Assets (continued)
Other assets under Australian GAAP					25,292			23,459			20,366
Deferred tax assets on differences in life insurance policyholder liabilities		(a	)		84			115			130
Life insurance market valuation of controlled entities		(k	)		(2,836	)		(2,635	)		(2,880	)
Reclassification of excess of net market value of net tangible assets of life insurance controlled entities at acquisition from other assets to goodwill		(l	)		(2,905	)		(2,905	)		(2,776	)
Prepaid pension cost		(i	)		1,173			1,213			1,249
Reclassification from life insurance investment assets to separate account business		(r	)		17,570			17,172			18,972
Life insurance policy deferred acquisition costs, net of amortisation		(s	)		803			750			691
Reclassification between reinsurance receivable and policyholder liabilities					1			19			(12	)
Marked to market revaluation of derivative instruments (under SFAS 133)		(v	)		(2,509	)		(468	)		(1,336	)
Deferred tax asset on marked to market revaluation of derivative instruments (under SFAS 133)		(v	)		—			—			128
Reversal of software write-off and software amortisation		(z	)		139			—			—
Other					21			—			—
According to US GAAP					36,833			36,720			34,532
Liabilities
Deposits and other public borrowings under Australian GAAP					163,177			140,974			132,800
Marked to market revaluation of derivative instruments (SFAS 133)		(v	)		9			10			2
According to US GAAP					163,186			140,984			132,802
Income tax liability under Australian GAAP					811			876			1,276
Tax effect of foreign currency translation reserve		(a	)		(62	)		(60	)		(20	)
Deferred tax liability on unrealised gain on available for sale securities		(f	)		22			47			23
Reclassification from life insurance policyholder liabilities		(r	)		195			197			157
Deferred tax liability on pension income		(i	)		352			364			375
Deferred tax liability on value of business acquired		(m	)		885			959			1,008
Tax effect of other amortisation					27			30			40
Deferred tax liability on marked to market revaluation of derivative instruments (SFAS 133)		(v	)		(235	)		81			—
Reversal of software write-off and software amortisation		(z	)		42			—			—
Reversal of redundancy provision		(d	)		44			—			—
According to US GAAP					2,081			2,494			2,859
Provision for dividend under Australian GAAP					14			12			1,040
Reversal of provision for final cash dividend		(d	)		—			—			(1,027	)
According to US GAAP					14			12			13
Other Provisions under Australian GAAP					997			819			834
Reversal of redundancy provision		(d	)		(146	)		—			—
According to US GAAP					851			819			834
Bills payable and other liabilities under Australian GAAP					19,140			19,027			17,342
Reclassification from life insurance policyholder liabilities to separate account business		(r	)		16,762			16,497			18,396
Marked to market revaluation of derivative instruments (under SFAS 133)		(v	)		(1,760	)		(954	)		(874	)
According to US GAAP					34,142			34,570			34,864
Life insurance policyholder liabilities under Australian GAAP					24,638			23,861			25,917
Adjustment to policyholder liability differences in acquisition		(r	)		593			593			593
Reclassification to income tax liability		(r	)		(195	)		(197	)		(157	)
Reclassification to Other Assets of life insurance policy deferred acquisition costs		(s	)		871			785			691
Reclassification of separate account business to other liabilities		(r	)		(16,762	)		(16,497	)		(18,396	)
Reclassification between reinsurance receivable and policyholder liabilities					1			19			(12	)
Movement in policyholder liabilities					(235	)		(62	)		120
According to US GAAP					8,910			8,502			8,756
Debt issues under Australian GAAP					44,042			30,629			23,575
Marked to market revaluation of derivative instruments (SFAS 133)		(v	)		9			77			49
Consolidation of variable interest entity		(y	)		531			245			—
According to US GAAP					44,582			30,951			23,624

193

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

				2004		2003		2002
	Footnote			$M		$M		$M
Liabilities (continued)
Loan Capital under Australian GAAP					6,631		6,025		5,427
Marked to market revaluation of derivative instruments (SFAS 133)		(v	)		25		118		93
Deconsolidation of variable interest entity		(y	)		1,573		—		—
According to US GAAP					8,229		6,143		5,520

i) Details of Pension Expense and Reconciliation of Funded Status of Pension Plans

     The Group sponsors a range of superannuation (pension) plans for its employees world-wide.

     The Group’s accounting policy for superannuation expense, under Australian GAAP reporting, is set out in Note 1(ll) of the financial statements. The superannuation expense principally represents the annual funding, determined after having regard to actuarial advice, to provide for future obligations of defined benefit plans. Other details (including the Group’s funding policy) of the Bank’s major superannuation plans are set out in Note 40 of the financial statements. All amounts are expressed in Australian Dollars.

     For US GAAP purposes, the Bank adopted the disclosure requirement of SFAS 87 “Employers’ Accounting for Pensions” for the major defined benefit fund, the Officers’ Superannuation Fund (OSF), commencing 1 July 1994.

     The Colonial UK life insurance business was sold in June 2000 to Winterthur which resulted in a significant portion of the members of the Colonial UK Staff Pension Scheme (“CUKSPS”) transferring out of this plan. Transfer of the membership, assets, liabilities and contributions of the employees of the Colonial UK life insurance business from the CUKSPS to the Winterthur fund took place on around 31 March 2002. As a result of this transfer, the Group recognised a gain of $6 million on settlement during the 2001/2002 financial year.

     On 31 July 2003, the Colonial UK Staff Pension Scheme (CUKSPS) and Stewart Ivory & Company Limited Retirement Benefits Scheme (SI&CRBS) ceased to operate and each plan’s assets, liabilities, member contributions and benefit arrangements transferred to the Commonwealth Bank of Australia (UK) Staff Benefits Scheme (CBA(UK)SBS). Prior to 30 June 2003, the Bank had only included the values of CUKSPS in its US GAAP reconciliation and the other UK pension funds (CBA(UK)SBS and SI&CRBS) were deemed to be immaterial for US GAAP reconciliation purposes. In view of the merger of the CUKSPS and SI&CRBS with the CBA(UK)SBS, the Bank has reduced the “Prepayment of pension costs” for the deficits of the CBA(UK)SBS and SI&CRBS as at 30 June 2003. Commencing with the 2003/2004 financial year, the Bank includes the merged fund in its US GAAP reconciliation.

     On 3 October 2003, the Colonial Group Staff Superannuation Scheme (“CGSSS”) ceased to operate and the plan’s assets, liabilities, member contributions and benefit arrangements transferred to the OSF.

     Up to and including the financial year ending 30 June 2002, the Bank adopted 31 March as the measurement date for plan assets and obligations. Effective from the financial year ended 30 June 2003, the Bank has adopted 30 June as the measurement date for plan assets and liabilities. This is to align the reporting of the Bank’s pension plan assets and obligations under SFAS 87 “Employers’ Accounting for Pensions” with the requirement of Australian Accounting Standard AASB 119 “Employee Benefits” (which come into effect for reporting periods commencing on or after 1 January 2005).

     Australian and UK legislation requires that superannuation (pension) benefits be provided through trusts. These trusts (including their investments) are managed by trustees who are legally independent of the employer. The investment objective of the OSF (the Bank’s major superannuation (pension) plan) is “to maximise long term rate of return subject to net returns over rolling five year periods exceeding the growth in Average Weekly Ordinary Time Earnings (AWOTE) 80% of the time”. To meet this investment objective, the OSF Trustee invests a large part of the OSF’s assets in growth assets, such as shares and property. These assets have historically earned higher rates of return than other assets, but they also carry higher risks, especially in the short term. To manage these risks, the Trustee has adopted a strategy of spreading the OSF’s investments over a number of asset classes and investment managers.

     As at 30 June 2004, the benchmark asset allocations and actual asset allocations for the assets backing the defined benefit portion of the OSF is as follows:

	Benchmark Asset
Asset Sector	Allocation			Actual Allocation
Australian Equities		37.0	%		37.5	%
Overseas Equities		15.0	%		14.4	%
Real Estate		15.0	%		15.3	%
Fixed Interest Securities		25.5	%		24.7	%
Cash		5.0	%		5.0	%
Other1		2.5	%		3.1	%

⁽¹⁾ These are assets which are not included in the traditional asset classes of equities, fixed interest securities, real estate and cash. They include infrastructure investments as well as high yield and emerging market debt.

     The value of the OSF’s equity holding in the Group as at 30 June 2004 was $76 million (2003: $106 million, 2002: $110 million). Amounts on deposit with the Bank at 30 June 2004 totaled $24 million (2003: $110 million, 2002: $23 million). Other security holdings with the Group at 30 June 2004 $83 million (2003: $12 million, 2002: $66 million). The comparative values included the values of holdings by the CGSSS.

     The Group provides insurance cover to OSF in respect of its death, total and permanent disablement and temporary disablement benefits. As at 30 June 2004, the amounts of cover were $4,663 million of lump sum death and total and permanent disablement benefits (2003: $591 million, 2002: $602 million) and $68 million per annum of temporary disablement benefits (2003: $85 million per annum, 2002: $84 million per annum).

     The following table displays the elements of the net pension expense and the change in benefit obligations and fair value of assets for each Financial Year as well as the funded status as at 31 March 2002, 30 June 2003 and 30 June 2004 for the Group’s major superannuation (pension) plans.

194

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

	2004			2003			2002
	A$M			A$M			A$M
Service cost		(56	)		(52	)		(57	)
Interest cost		(226	)		(222	)		(230	)
Expected return on assets		307			308			333
Amortisation of transitional obligation assets		52			52			52
Recognised net gain (loss)		(6	)		—			—
Employer financed benefits within Accumulation Division		(111	)		(97	)		(79	)
Settlements and Curtailment Effects		—			—			6
Net periodic pension (cost) income		(40	)		(11	)		25
Expensed employer contribution		(5	)		(3	)		(5	)
		(35	)		(8	)		30
Less tax effect		11			2			(9	)
Pension Expense Adjustment — see US GAAP Reconciliation		(24	)		(6	)		21
Change in benefit obligation:
Benefit obligation at beginning of year		3,656			3,298			3,386
Service Cost		56			52			57
Member Contributions		17			19			20
Interest Cost		226			222			230
Merger of CUKPS and SI&CRBS with CBA(UK) SBS		—			126			—
Actuarial (Gains) Loss		265			345			16
Benefits Paid		(340	)		(386	)		(370	)
Curtailment and Settlement Effects		—			—			(35	)
Foreign Currency Exchange Rate Movements		22			(20	)		(6	)
Benefit obligation at end of year		3,902			3,656			3,298
Change in fair value of assets
Fair value of assets at beginning of year		(4,328	)		(4,730	)		(5,074	)
Actual return on assets		(544	)		22			(111	)
Merger of CUKPS and SI&CRBS with CBA(UK) SBS		—			(101	)		—
Total contributions		(22	)		(22	)		(26	)
Benefits and Expenses Paid		340			386			370
Employer financed benefits within Accumulation Division		111			97			80
Curtailment and Settlement Effects		—			—			25
Foreign Currency Exchange Rate Movements		(17	)		20			6
Fair value of assets at end of year		(4,460	)		(4,328	)		(4,730	)
Funded status at measurement date:		(558	)		(672	)		(1,432	)
Assets not recognised:
transitional obligation assets		—			52			104
unrecognised net gains (loss)		(615	)		(593	)		79
Net Amount Recognised		(1,173	)		(1,213	)		(1,249	)
Comprising of:
Prepaid Pension Cost(1)		(1,173	)		(1,213	)		(1,249	)
Additional minimum liability		56			81			27
Accumulated Other Comprehensive (Income) Loss		(56	)		(81	)		(27	)
Net Amount Recognised		(1,173	)		(1,213	)		(1,249	)

⁽¹⁾ The prepaid pension costs of $1,173 million include net assets on the Colonial acquisition of $243 million. As the $243 million is adjusted against goodwill (refer Note (t)), the net increase in shareholders’ equity for US GAAAP is $930 million (2003: $970 million; 2002: $1,006 million)

     The transitional obligation assets have been fully recognised on 30 June 2004. Commencing from the Financial Year 2005, the net periodic pension cost will no longer include the amortisation of the transitional obligation assets.

     The accumulated benefit obligations for all defined benefit superannuation (pension) plans as at 30 June 2004 was $3,556 million (30 June 2003: $3,259 million).

     As at 30 June 2004, the projected benefit obligations and accumulated benefit obligations of the CBA(UK)SBS exceeded the fair value of plan assets. Comparative information are as follows:

	2004		2003
	A$M		A$M
Projected benefit obligation		397		387
Accumulated benefit obligation		392		383
Fair value of plan assets		320		296

     The assumptions used to calculate the above are:

Assumption	2004			2003			2002
Discount Rate (Gross of tax)		6.00	%		6.00	%		7.00	%
Compensation increase rate		4.25	%		4.25	%		4.25	%
Return on assets		7.50	%		6.75	%		6.75	%

     The return on asset assumption is determined as the weighted average of the long term expected returns of each asset class where the weighting is the benchmark asset allocations of the assets backing the defined benefit risks. The long term expected returns of each asset class are determined following receipt of actuarial advice. The effect of the increase in the return on asset assumption from 6.75% pa (adopted for the 2002/2003 financial year) to 7.50% pa (adopted for the 2003/2004 financial year) is to decrease the net periodic pension cost by approximately $28 million (before tax).

195

Notes to the financial statements

     Up to and including the financial year ending 30 June 2003, the discount rate is based on yield on 10 year AA rated securities as at the measurement date (10 year the longest available fixed interest securities with a deep market). To align the reporting of the Bank’s pension obligations under SFAS 87 “Employers’ Accounting for Pensions” with the requirement of Australian Accounting Standard AASB 119 “Employee Benefits”, which comes into effect from 1 July 2004, the discount rate assumption from 1 July 2003, is based on the yield on 10 year Australian government securities.

     Further, to align the reporting of the Bank’s pension obligations under SFAS 87 “Employers’ Accounting for Pensions” as at 30 June 2004 with the requirement of Australian Accounting Standard AASB 119 “Employee Benefits”, which comes into effect from 1 July 2005, the Bank’s pension obligations also include an adjustment for future taxes on the Bank’s Australian superannuation (pensions) plans. These tax adjustments increased the Bank’s pension obligations by $252 million as at 30 June 2004 and was included in the actuarial loss for the year.

     Details of the Bank’s funding policy and contributions in respect of its major superannuation (pension) plans are set out in Note 40.

     The expected future benefit payments of the Bank’s major superannuation (pension) plans are as follows:

Financial Year Ending	A$M
30 June 2005		240
30 June 2006		243
30 June 2007		245
30 June 2008		248
30 June 2009		251
1 July 2009 to 30 June 2014		1,295

     The above expected benefit payments are calculated by the respective fund actuaries using assumptions of future total service, the rate of exits from the fund and future salary growth. Actual benefit payments will depend on actual service period, actual rate of exits from the fund and actual salary growth.

     Additionally, a deferred tax liability has been taken up for US GAAP reconciliation purposes in respect of the above Net Amount Recognised.

(j) Employee Benefits — Post Retirement Benefits Other Than Pensions

     Australian GAAP Compliance

     Effective 1 July 1994 the Bank adopted the Australian Accounting Standard AASB 1028: “Accounting for Employee Entitlements” with respect to the liabilities arising from its post retirement benefits other than pensions. AASB 1028: “Accounting for Employee Entitlements” specifies that employee post retirement benefit liabilities are calculated as the present value of the estimated future cash flows due to the services of employees provided up to the reporting date.

     The adequacy of the full provision for employee post retirement benefits liabilities in the financial statements is determined in accordance with the requirements of AASB 1028 after considering that employee post retirement benefits carry limited risks and after obtaining actuarial advice.

     Revised accounting standard, AASB 1028: “Employee Benefits” was adopted by the Group, with effect from 1 July 2002. There were no material changes to employees benefit liabilities on the adoption of the revised standard.

     US GAAP Compliance

     Prior to the adoption of AASB 1028 the Bank accounted for its obligation for employee entitlements substantially in accordance with SFAS 43 “Accounting for Compensated Absences”. There are no US GAAP adjustments or further disclosures under SFAS 106 “Employers’ Accounting for Post Retirement Benefits Other than Pensions” and SFAS 132 “Employers’ Disclosures about Pensions and Other Postretirement Benefits”.

(k) Life Insurance Market Valuation of Controlled Entities

     As set out in Note 1 (ii) under the requirements of AASB 1038: Life Insurance Business for controlled entities of life insurance, companies are required to be valued at net market value. AASB 1038 requires the differences between the net market value of the controlled entities and the underlying net assets to be recognised as the ‘excess of net market value over net assets of life insurance controlled entities (‘the excess’) in the consolidated financial report.

     This method of accounting is not permitted under US GAAP, resulting in a decrease of net income by $201 million (2003: $245 million increase; 2002: $477 million reduction), reduction of shareholders equity by $2,504 million (2003: $2,303 million; 2002: $2,548 million) and a reduction of other assets by $2,836 million (2003: $2,635 million; 2002: $2,880 million).

(l) Intangible Assets

     Colonial Limited was acquired on 13 June 2000 (refer Note 20 and 48(t) for further details). Differences exist between the method of calculation of the cost of acquisition under Australian and US GAAP. Refer Note 48(t) for further details. Under Australian GAAP goodwill on acquisition was determined by the difference between the cost of acquisition and the fair value of net assets acquired, including the excess of net market value over net assets of life insurance controlled entities.

     Under US GAAP goodwill on acquisition is determined as the difference between the cost of acquisition and the fair value of net tangible and intangible assets acquired. Also the excess of net market value over net assets of life insurance controlled entities is accounted for as goodwill. Goodwill is amortised over a 20 year period on a straight line basis for Australian GAAP. Goodwill amortisation for US GAAP ceased from 1 July 2002. Instead, the carrying value of goodwill is subject to review for impairment every period end. For the Financial Year 2004, no adjustment for impairment was considered necessary.

     Identifiable intangible assets acquired include Value of Business Acquired ($2,786 million) less associated deferred tax liability ($1,256 million) (refer Note 48 (m)), the Colonial State Bank Core Deposits ($149 million) and TD Waterhouse customer list ($30 million). The Core Deposits are being amortised on a straight line basis over 8 years and the customer list over 10 years. As the TD Waterhouse customer list was acquired on 1 May 2003, amortisation for the Financial Year 2003 was not material.

     Upon acquisition of the Gandel listed property trusts in Financial Year 2003, an asset was brought to account being “excess” market value over net assets of life insurance subsidiary of $224 million which under US GAAP is accounted for as goodwill. Upon acquisition of Sovereign Limited in 1998 an asset was brought to account being ‘excess’ market value over net assets of life insurance subsidiary of $155 million which under US GAAP is accounted for as goodwill.

196

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

     The Group’s carrying amount of goodwill under US GAAP at 30 June 2004 is disclosed for each reportable segment:

	2004		2003
Segment	$M		$M
Banking		4,361		4,361
Funds management		1,258		1,258
Insurance		218		218
		5,837		5,837

(m) Value of Business Acquired (‘VOBA’)

     Under Australian GAAP for non-life insurance holding companies, the difference between the purchase price on acquisition and the net assets acquired represents goodwill. No separately identified intangible asset is recognised for the Value of Business Acquired (‘VOBA’).

     However, for life insurance companies, investments in subsidiaries are valued at net market value as described in Note 1 (ii). No amortisation is required on the excess of this net market value over the net assets of the underlying controlled entities.

     For US GAAP, prior to the assignment of the excess of purchase price over net assets acquired to goodwill, the identifiable intangible asset VOBA is recognised in the acquired entity. VOBA represents the estimated fair value of the acquired life insurance business in force and represents the portion of acquisition cost that was allocated to the value of future cash flows from insurance contracts existing at the date of acquisition. Such value is the present value of the actuarially determined projected net cash flows from the acquired insurance contracts.

     VOBA is amortised over the lives of the acquired business in force in a manner consistent with amortisation of deferred policy costs for life insurance contracts and in a manner expected for funds management contracts (see Note 48 (s)). An analysis of the Colonial VOBA asset (net of tax) is presented below:

	2004			2003
	$M			$M
Opening Balance, 1 July		1,040			1,249
Imputed interest		215			122
Amortisation		(450	)		(267	)
Impairment		—			(110	)
Sale of Philippines		—			(10	)
Movement in deferred tax liability on value of business acquired		74			56
Closing Net Balance, 30 June		879			1,040

     The net movement in VOBA for the year to 30 June 2004 is $161 million. For all Australian life business the imputed rates of interest are related to the underlying investment earnings rate and range from 3.4% to 12.6% dependent upon the nature of the business. Given that imputed interest rates are dependent upon actual investment performance they are expected to be volatile. The imputed interest rates for all other business range from 6.1% to 8.9%.

     The amortisation rate for the investment-linked life business also depends upon actual investment performance and is therefore expected to be volatile.

     The VOBA balance is estimated to be run-off at a rate ranging from 11.1% to 15.0% per year.

     Recoverability Test

     The amount of VOBA written-off in the period was determined by comparing the carrying value of VOBA at 30 June 2004 after allowing for imputed interest and amortisation, to an end of period recoverable amount valuation.

(n) Property and Other Non-Current Asset Revaluations

     Each year a review of non-current assets is performed to assess the recoverable amount of non-current assets. The ‘recoverable amount test’ is in accordance with the Australian accounting standard which requires future cash flows associated with non-current assets to be discounted at a rate which reflects the risk involved. With respect to the determination of the fair value of non-current assets and the recognition of losses from impairments, the requirements under Australian accounting standards and the requirements of SFAS 144: Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of are essentially the same.

     Australian GAAP allows non-current assets including property, plant and equipment to be revalued upwards direct to an asset revaluation reserve. Assets with a carrying amount greater than their recoverable amount may be revalued to their recoverable amount. Impairments to asset values, where there is an amount in the revaluation reserve relating to the relevant asset class, are taken to reduce the revaluation reserve. Impairments to asset values otherwise must be recorded in the profit and loss. Any subsequent upward reversing revaluations to the same asset class are recorded as revenue in the profit and loss. With the exception of land, all revalued assets are depreciated over their assessed useful lives.

     Upward revaluations of property, plant and equipment are not allowed under US GAAP, except as part of accounting for business combinations under the Purchase Method. US GAAP requires impairments of non-current assets to be recorded in the profit and loss account. Once such impairments have been recorded, subsequent recoveries to the income statement are not allowed.

     A discounted cash flow methodology was used in arriving at the valuation at which the Group’s property is carried. An asset revaluation adjustment to increase Asset revaluation reserve by $54 million was necessary in 2004, $3 million in 2003 and a write down of $1 million in June 2002. At 30 June 2004, the asset revaluation reserve shows a balance of $61 million (2003: $7 million; 2002: $4 million). This asset revaluation reserve was reversed for US GAAP for the Financial Year 2004. No adjustment has been made for prior years as the amounts were not material. No adjustment has been made for the decrease in depreciation as a result of the reversal of asset revaluation reserve as it would not be material in the income statement.

(o) Properties Held by Insurance Companies

     Under Australian GAAP, properties held by insurance companies are held in the statement of financial position at net market value, that is market value less expected cost of disposal. Investment properties are valued annually by an independent valuer with changes in the value taken directly to investment income in the profit and loss statement. No depreciation is charged on investment properties. The insurance companies do not hold property other than as an investment.

197

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

     Under US GAAP, such property is recorded at historical cost in the balance sheet and depreciated over its useful life — except for land which is not depreciated. Properties backing separate account business are recorded at market value.

     For Financial Year 2004, the restatement under US GAAP results is a $35 million increase in Net Income, and $61 million reduction in assets.

(p) Impairment of Assets

     SFAS 114: Accounting by Creditors for Impairment of a Loan as amended by SFAS 118: Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures, requires the value of an impaired loan to be measured as the present value of future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. No adjustment is required in the US GAAP reconciliation as the estimated fair value of the impaired loans is not materially different from the carrying value as at 30 June 2004.

(q) Comprehensive Income

     SFAS 130: Reporting Comprehensive Income requires the classification of items of other comprehensive income by their nature and the display of other comprehensive income separately from retained earnings and shareholders equity.

Accumulated Other Comprehensive Income Balances

	2004			2003			2002
	$M			$M			$M
Foreign currency translation reserve
Balance at beginning of Financial Year		(137	)		(45	)		57
Foreign currency translation adjustment net of tax expense		(7	)		(92	)		(102	)
Balance at end of Financial Year		(144	)		(137	)		(45	)
Available for Sale securities
Balance at beginning of Financial Year		109			51			6
Change in fair value of available for sale securities		(57	)		58			45
Balance at end of Financial Year		52			109			51
Pension Plans
Balance at beginning of Financial Year		100			32			13
Adjustment to net assets in UK Pension Plan — net of tax expense		(44	)		68			19
Balance at end of Financial Year		56			100			32
Total Other Comprehensive Income		(36	)		72			38

(r) Life Insurance

     Australian GAAP establishes standards and principles applicable to Australian life insurance companies, including a methodology for calculating policy liabilities known as Margin On Services (‘MoS’).

     Under MoS, Policy Liabilities are based on best estimate assumptions which are reviewed at each valuation date. Policy Liabilities are made up of two components, the Best Estimate Liabilities and Future Profit Margins.

     Best Estimate Liabilities represent the present value of future payments to policyholders and related expenses less the present value of future gross premiums.

     Future Profit Margins represent the present value of estimated profits. The profit margins are determined from outset of the contract and updated with changes in best estimate assumptions. The profit margins are expressed as a percentage of “profit carriers”, where profit carriers are indicative of the underlying nature of the services provided to policyholders. Profit margins are recognised in earnings based on the profit margin percentage and the amount of the specific profit carrier (e.g. claims paid, premiums, policy charges etc.)

     If during the process of valuing the policy liabilities, it is found that future profits are negative (i.e. the policy is in a loss position), then:

(i)	the profit margin is set to zero; and
(ii)	all future losses are recognised immediately.

     If expectations change in the future, it is possible to reverse capitalised losses and re-establish profit margins. This is explained in more detail in Note 1 (ii).

     US GAAP applies two standards (a third, SFAS 120, is not relevant) to policies written by the Group’s life insurance companies:

(i) SFAS 60: Accounting and Reporting by Insurance Enterprises applies to products such as traditional whole of life, certain endowment contracts, life contingent annuity contracts, term insurance, disability income protection and group life.

     Under SFAS 60, policy liabilities, which represent the present value of future benefits to be paid to or on behalf of policy owners and related expenses less the present value of future net premiums, shall be estimated using methods that include assumptions, such as estimates of expected investment yields, mortality, morbidity, terminations and expenses, applicable at the time the insurance contracts are made.

     These assumptions are ‘locked-in’ at inception for all future valuations - except in specific circumstances such as loss recognition.

     The assumptions used for SFAS 60 are based on a best estimate of expected long-term experience together with provisions for adverse deviation (‘PADs’).

198

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

     The policyholder liability and the amount of deferred acquisition costs are regularly tested using best estimate assumptions to assess recoverability which could result in the writedown of deferred acquisition costs or an increase in the policyholder liabilities.

(ii)	SFAS 97: Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realised Gains and Losses from the Sale of Investments covers investment contracts and universal life policies, such as unit-linked and investment account policies. Under SFAS 97, the liability is set equal to:
(a)	the account balance that accrues to the benefit of the policyholder at the date of the financial statements; and
(b)	any unearned revenue liability;

     Assumptions are generally updated at each valuation and do not include any PADs.

The company operates separate account business. Such accounts represent assets and liabilities that are maintained by the company for purposes of funding superannuation (pension) funds and other investment type activities. The accounts represent policyholder directed funds that are separately administered. The assets and the liabilities of each account are clearly identifiable and distinguishable from other assets and liabilities of the company. The policyholder generally assumes the investment risk and investment income accrue directly to the policyholders and, therefore, are not included in the company’s statement of financial performance. The company receives a fee for investment management, certain administrative expenses, and mortality and expense risks assumed. Fee revenue from these products is recognised when due.

     Investments in separate accounts supporting unit-linked contracts are reported at market value. Separate account liabilities represent the policyholders’ claim to the related assets and are carried at the policyholder’s account balance. Separate account assets and liabilities are reported as summary totals in the statement of financial position. Such totals are disclosed in Notes 16 and 34.

     For Financial Year 2004 the US GAAP adjustment resulted in an increase (net of taxation) of $138 million in Net Income (2003: $30 million; 2002: $51 million).

(s) Deferred Acquisition Costs (‘DAC’) – Expenses of Acquiring Life Insurance, Investment and Related Contracts

     Under Australian GAAP, acquisition costs relate to the fixed and variable costs incurred in acquiring specific insurance policies, and include commissions and similar distribution costs and costs of accepting, issuing and initially recording policies.

     Under Australian GAAP, acquisition costs are:

(i)	deferrable; and
(ii)	systematically amortised as part of the calculation of the policy liability

     This is recognised as reductions in the Australian GAAP policyholder liabilities rather than as explicit assets. Movements in the DAC assets are not reported separately in the statement of financial performance; rather, they are reported as a component of the movement in policyholder liabilities under Australian GAAP.

     The definition of acquisition costs is wider under Australian GAAP than under US GAAP. Under US GAAP only those costs that vary with, and are primarily related to, the production of new and renewal business (acquisition costs), are capitalised.

     Under US GAAP, these DAC assets are amortised to expense in proportion to different measures, depending on the type of policy.

     For policies accounted for under SFAS 60, these costs are amortised in proportion to premium revenue recognised. Amortisation assumptions relating to DAC assets for SFAS 60 policyholder liabilities, are ‘locked-in’ for all future valuations – except in specific circumstances such as loss recognition.

     For policies accounted for under SFAS 97 these costs are amortised at a rate based on the present value of estimated gross profits expected to be realised over the life of the contracts. The DAC asset and related amortisation is updated at every reporting date, based upon the gross profits recognised and expectations of future gross profits. DAC assets are written off to the extent it is determined that future income is insufficient to cover future expenses (including the amortisation of the existing DAC).

     Under US GAAP, amortisation of the DAC assets are reported separately from changes in policyholder liabilities in the statement of financial performance.

     DAC is reported as an asset in the statement of financial position rather than offset against policyholder liabilities under US GAAP. However, no DAC was recorded upon the initial purchase of Colonial Limited.

     The net adjustment of DAC to Net Income is comprised of:

	2004			2003
	$M			$M
Difference in deferral of new business acquisition expenses		(72	)		(59	)
Difference in amortisation of acquisition expenses		32			21
Tax effect of differences in acquisition expense treatment		9			9
		(31	)		(29	)

     Movement in DAC balance during Financial Years 2004 and 2003:

	2004			2003
	$M			$M
Opening Balance, 1 July		750			691
Acquisition costs for the year		134			137
Amortisation of DAC/Imputed interest		(81	)		(66	)
Sale of Philippines		—			(12	)
Net movement		53			59
Closing Balance, 30 June		803			750

199

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

(t) Colonial Acquisition

Purchase GAAP accounting has been applied in the acquisition of Colonial

	2001
	$M
Cost of acquisition under Australian GAAP (Note 1A)		9,120
Less 351,409,450 new Commonwealth Bank shares @ $26.39(1)		(9,274	)
Add 351,409,450 shares @ $23.47(2)		8,248
Revised cost of acquisition under US GAAP		8,094
Fair Value of net tangible assets acquired:
Net tangible assets under Australian GAAP		910
Pension fund surplus		243
Differences in life insurance policyholder liabilities		(559	)
Differences in deferred taxes		76
Net tangible assets under US GAAP		670
Intangible Assets on acquisition under US GAAP		7,424
Intangible assets acquired on Colonial Acquisition:
Identifiable intangible assets(3)		1,917
Goodwill (unidentifiable intangible assets)(4)		5,507
		7,424

⁽¹⁾ Price calculated under Australian GAAP based on the weighted average share price on the acquisition date, 13 June 2000.

⁽²⁾ Under US GAAP price calculated as weighted average closing price for the two days either side of the announcement date (10 March 2000). Non trading days were excluded from the calculation. Value of equity issued for Colonial acquisition under US GAAP accounting is reduced by $1,026 million.

⁽³⁾ Includes Colonial State Bank Core Deposits ($149 million) which is to be amortised on a straightline basis over 8 years and Value of Business Acquired (VOBA) net of associated deferred tax liability $1,530 million (refer Note 48 (m) for amortisation details). The carrying value of the core deposits at 30 June 2004 is $73 million, net of amortisation.

⁽⁴⁾ Goodwill on acquisition under US GAAP includes the excess of net market value over net assets of life insurance controlled entities. Goodwill is amortised on a straight line basis over 20 years.

(u) Securitisation of Assets

     During the Financial Years 2002, 2003 and 2004, the Group securitised mortgage loans to a special purpose entity (SPE). Under Australian GAAP these loans are removed from the Statement of Financial Position. For US GAAP the conditions to allow securitised loans to be removed from the Statement of Financial Position include the provision that the transferor does not retain effective control over, or more than a trivial interest in, the transferred assets.

     The Group meets the requirements of US GAAP not to consolidate the SPE. Note 1 (jj), Loan Securitisation, outlines the accounting treatment of the Qualifying Special Purpose Entities (“QSPE”), both for Australia and US GAAP reporting as required by SFAS 140. In Financial Year 2004 loans totaling $3,436 million were securitised (2003: $1,664 million, 2002: $2,512 million).

     The outstanding balance of securitised loans at 30 June 2004 was $7,605 million (2003: $6,480, 2002: $7,047). No credit losses were incurred by the Group in relation to these securitised loans during the Financial Year 2004. The credit risk in respect of these loans is fully covered through mortgage insurance.

     Cashflows paid to CBA from the QSPE were:

	2004		2003		2002
	$M		$M		$M
Servicing fee		15		17		16
Management fee		2		2		2
Excess servicing fee		36		30		11
Proceeds from sale of mortgage loans		3,436		1,664		2,512
Interest rate swaps		27		35		57
Total cash receipts		3,516		1,748		2,598

(v) Derivative Instruments and Hedging Activities

     SFAS 133: Accounting for Derivative Instruments and Hedging Activities was issued in June 1998 and subsequently, SFAS 138: Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133 was issued in June 2000. These statements were applicable to the Group from 1 July 2000. The statements require all derivatives to be recorded on the balance sheet at their fair value. The treatment of the change in the fair value of derivatives is recorded in Net Income or Other Comprehensive Income depending on the classification of the derivative transaction. Note 39, Market Risk outlines the Group’s market risk policy specifying the purpose of derivative activity and the risks being hedged. Note 1 (ff), Summary of Significant Accounting Policies, outlines the accounting recognition of derivatives under Australian GAAP.

     Under US GAAP, derivative hedges of debt issues and available for sale securities of the Group, that are highly effective, qualify for hedge accounting and have been classified as fair value hedges. The change in the fair value of the derivative hedge offsets the change in the fair value of the debt issue or available for sale security being hedged. The gain or loss on the derivative and the offsetting loss or gain in the fair value of the debt issue or available for sale security being hedged, are recognised immediately in Net Income in the same accounting period for US GAAP purposes. The change in fair value of the derivative hedge is recognised as an asset or liability in Other Assets or Other Liabilities respectively. The change in the fair value of the debt issue or available for sale security being hedged is recognised as part of the carrying value of debt issues or available for sale securities. The risk characteristics of debt issues and available for sale securities are perfectly matched under the hedge, and effectiveness is evaluated on a retrospective and prospective basis. There is no ineffectiveness in these hedges.

200

Notes to the financial statements

NOTE 48 Differences between Australian and United States Accounting Principles continued

     Certain of the Group’s derivative instruments that are classified as hedges under Australian GAAP do not meet the required specific hedge criteria set out in SFAS 133 and have been measured at their fair value for US GAAP purposes. Changes in fair value of these derivatives have been recognised in Net Income, and as assets or liabilities in Other Assets or Other Liabilities respectively. The Group does not have any cash flow hedges.

     All other derivatives of the Group are held for trading purposes and are recorded at their fair value with changes in their fair value recognised immediately in Net Income.

     SFAS 133, 138 and 149 have been fully applied for the relevant Financial Years. The financial impact of the statements decreased Net Income after tax by $736 million (2003: increase of $638 million; 2002: decrease of $300 million), primarily due to the increase in global rates during the period. Balance sheet derivatives and underlying assets and liabilities decreased by $2,501 million (2003: $481 million; 2002: $1,179 million) and $1,952 million (2003: $668 million; 2002: $730 million) respectively.

     For Australian GAAP reporting, the Group will continue to apply hedge accounting principles as adopted for the year ended 30 June 2004.

(w) Collateral on Transfer of Assets

     The Group conducts collateral arrangements with counterparties covering a range of specified transactions. Collateral arrangements are activated upon predetermined thresholds being exceeded. A range of specified assets may be received or provided as collateral.

     As at 30 June 2004 securities with a fair value of $809 million were received as collateral (2003: $561; 2002: $956). Of this amount, $78 million (2003: $258 million) may be sold or repledged. From the $78 million received, securities to the value of $67 million (2003: 176 million) were repledged as collateral.

     In addition, securities to the value of $779 million were provided as collateral as at 30 June 2004 (2003: $1,637 million; 2002: $274 million).

(x) Credit Risk Related Instruments

     The Group is involved in a range of transactions that give rise to contingent and/or future liabilities. These have been disclosed in Note 38 of the accounts as off balance sheet items. Under US GAAP, FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others, effective 1 January 2003, requires that the fair value of these liabilities be recognised in the financial statements. Under Australian GAAP, there is no requirement to recognise these liabilities in the financial statements. However, the Bank’s policy is to recognise the fair value of these liabilities (30 June 2004: $6.4 million; 30 June 2003: $5.6 million) and as such, no adjustment is required.

     The aging of guarantees and standby letters of credit is presented below:

	Guarantees		Standby Letters of Credit
	$M		$M
Less than 1 year		2,124		228
1-3 years		1		75
3-5 years		—		11
Over 5 years		105		48
Total		2,230		362

     Collaterals received to support these guarantees and standby letters of credit are adequate.

(y) Variable Interest Entities

     During the Financial Year 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). The interpretation created the Variable Interest Entity (VIE) concept and defined a VIE to include an entity which has an insufficient amount of equity for the entity to carry on its principal operations, without additional subordinated financial support from other parties. Where the entity is a VIE, the Interpretation’s variable interests consolidation model must be applied. A VIE would be consolidated where the parent is expected to absorb a majority of the VIE’s expected losses and vice versa, deconsolidated where another entity absorbs majority of the expected losses.

     For the Financial Year 2003, only VIEs created post 31 January 2003 were required to be assessed under FIN 46. From Financial Year 2004, all VIEs in existence at the end of the financial year had to be assessed. In December 2003, the FASB issued a revision to FIN 46 (“FIN 46R”) to address various technical corrections and implementation issues that have arisen since the issuance of FIN 46. As a result of the application of FIN 46R, as at 30 June 2004, the consolidation of VIEs resulted in assets and liabilities increasing by $531 million (30 June 2003: $245 million) and the deconsolidation of a VIE resulted in liabilities increasing by $1,573 million (Financial Year 2003: Nil), shareholders’ equity decreasing by $1,573 million (Financial Year 2003: Nil) and net income decreasing by $55 million (Financial Year 2003: Nil).

     The Group transacts with Variable Interest Entities (VIEs) in the following manner as part of its financing and intermediation activities:

- Asset backed finance programs – The Group utilises VIEs such as special purpose entities under master series agreements to assist customers’ financing needs through providing customer access to the capital markets. Certain of these programs are deemed to be controlled by the Group and are consolidated within the Group. Details of these arrangements are outlined on page 202.

- Securitisation of assets – The Group conducts a Loan Securitisation program through which it packages loans and issues securities to investors through a special purpose entity. The entity meets the requirements for classification as a QSPE under US GAAP, which is not considered a VIE and is not consolidated within the Group. Details of these arrangements are outlined on page 200.

- Financing and investment activities – The Group utilises VIEs and may transact with VIEs as part of its financing and investment activities. All transactions involving VIEs are conducted on an arms length basis and may involve financing the VIE, transacting derivatives, or acquiring third party assets. Certain VIEs are deemed to be controlled by the Group and have been consolidated into the Group. These VIEs involve structured investment transactions and are primarily single purpose entities where the Group carries the underlying exposure to the risks in the VIE. As the Group carries the exposure to these VIEs on balance sheet, the consolidation of these VIEs into the Group does not impact the Statement of Financial Performance or Statement of Financial Position of the Group.

- During the year, the Group has also issued Trust Preferred Securities via special purpose entities. These entities are deemed to be VIEs and not controlled by the Group. These VIEs have been deconsolidated and have resulted in $832m of equity being reclassified to debt issues. Dividends paid on the trust preferred securities have been reclassified as interest expense.

201

Notes to the financial statements

- During the year, the Group has issued Perpetual Exchangeable Resettable Listed Securities (“PERLS II”) via a special purpose entity. This entity is deemed to be a VIE and not controlled by the Group and has been deconsolidated. The effects are described in further detail below.

Asset Backed Finance Programs

     The Group is an active participant in the asset backed financing market where it assists customers’ financing needs through providing customer access to the capital markets through issuer special purpose entities under master series agreements. The issuers are separate bankruptcy remote entities in the business of acquiring approved investments and/or entering into hedge transactions or other agreements by issuing debt securities. The issuers operate through segregated series and the debt issues of different series may have different credit ratings. The primary source of repayment of the debt issues is the cash flow from the pools of assets. Investors in the debt issues have no recourse to the general assets of the Group.

     The issuers are not owned or controlled by the Group and have independent directors. Under Australian GAAP the assets and liabilities of the issuers are not consolidated into the Group’s Statement of Financial Position. For US GAAP, the issuers are a type of variable interest entity as defined by FASB Interpretation No 46, “Consolidation of Variable Interest Entities”. Under the provisions of FIN 46, the variable interest entity is deemed to be controlled by the Group, if the Group has most of the risks and/or benefits. As a result of the application of the standard, a number of entities are consolidated by the Group, resulting in an increase in assets of $531 million and liabilities of $531 million for US GAAP.

     Under the management deeds, the issuers have appointed the manager, subject to certain limitations, to manage on the issuer’s behalf the performance of the issuer’s obligations and the exercise of the issuers’ rights under the transaction documents. The issuers have appointed a wholly owned subsidiary of the Group as manager. The liability of the manager is limited to fraud or a negligent or wilful default by the manager of its obligations under the management deed.

     As manager of the program, the Group provides deal origination services, asset portfolio monitoring, treasury and financial administration services for the issuers. Assets acquired by the issuers are appropriately diversified and credit enhanced to support its debt issuances. The Group does not service these assets and does not transfer its own assets to the issuers. The Group receives management fees at arms length for its services to the issuer.

     In certain instances the Group provides deal specific credit enhancements as an arms length financial arrangement for the issuers in the form of liquidity facilities and derivatives.

Convertible Notes

      On 6 January 2004 a wholly owned entity of the Bank (Commonwealth Managed Investments Limited as Responsible Entity of the PERLS II Trust) issued $750 million of Perpetual Exchangeable Resettable Listed Securities (“PERLS II”). These securites are units in a registered managed investments scheme, perpetual in nature, offering a non-cumulative floating rate distribution payable quarterly. The Securities qualify as Tier One capital of the Bank.

     The PERLS II Trust is deemed to be a VIE under US GAAP, FIN46(R) Consolidation of Variable Interest Entities and not controlled by the Group. The trust has been deconsolidated from the Bank.

     The assets of the trust are Convertible Notes issued by the New Zealand branch of the Commonwealth Bank. The Convertible Notes have a conversion date 40 years after the date of issue at which time a conversion event occurs, or earlier in certain scenarios, into CBA Preference Shares or Alternative Securities being perpetual non-cumulative securities issued by the Commonwealth Bank that rank equally with Preference Shares and are equivalent to Preference Shares in terms of entitlement to income and the return of capital. The Convertible Notes automatically convert into ordinary shares only if a regulatory event or an Event of Default occurs. Furthermore the Bank may elect to convert into ordinary shares if the manager of the Trust is removed without the Bank’s approval. Subject to regulatory approval the Bank must redeem the Convertible Notes for cash where the Bank has acquired the PERLS II and required the trust manager to redeem them. The holders of the Convertible Notes are entitled to a non-cumulative floating rate distribution payable quarterly.

     Under US GAAP, APB 14 and FAS 84 take a view of the legal form of the Convertible Note as debt as it has conversion options at other than a fixed conversion ratio. For US GAAP purposes, the Convertible Note is classified as loan capital.

     Deconsolidation of the trust has resulted in $741m of equity being reclassified into loan capital. Dividends paid on the PERL II securities have been reclassified as interest expense.

(z) Software Amortisation

     For Australian GAAP purposes, the criteria for information technology software capitalisation has been amended as from 1 July 2003, such that only computer software projects costing $10 million or more are being capitalised and capitalisation is limited to those investments that will deliver identifiable and sustainable customer value and an increase in returns, in a significant line of business. This change has been applied retrospectively and has resulted in the expensing of $219 million of previously capitalised software. For US GAAP purposes, this change cannot be retrospectively applied and has been reversed. Software amortisation charge for the Financial Year 2004 would have been $80 million. The net impact on profit after tax has been an increase of $97 million.

     The current software capitalization policy under Australian GAAP is not in accordance with US GAAP. We have assessed the impact if we had capitalised software according to our previous policy, which was in accordance with US GAAP, and have concluded that the impact is not material. Hence no adjustment was made in this regard.

(aa) Newly Issued Statements of the Financial Accounting Standards Board

     Although FIN 46 Consolidation of Variable Interest Entities was in effect in Financial Year 2003, for the Financial Year 2003, only VIEs created post 31 January 2003 were required to be assessed under FIN 46. From Financial Year 2004, all VIEs in existence at the end of the financial year had to be assessed. See Note 48 (y) for further details. There were no SFASs issued in Financial Year 2004, which would have a material impact on the Bank.

(bb) Newly Issued Australian Standards

     For details on newly issued Australian Standards applied for the first time in Financial Year 2004, refer Note 1(a).

     International Accounting Standards

     The Financial Reporting Council has announced a decision to support the adoption by Australia of International Accounting Standards (IAS) by 1 January 2005. The Bank will be required to adopt these standards for the financial year commencing 1 July 2005. Further details are contained in Note 1(pp) to the financial statements.

202

Independent audit report to the members of Commonwealth Bank of Australia

The Board of Directors and Shareholders of Commonwealth Bank of Australia

We have audited the accompanying consolidated balance sheets of Commonwealth Bank of Australia as of June 30, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2004. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and auditing standards generally accepted in Australia. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Commonwealth Bank of Australia at June 30, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2004, in conformity with accounting principles generally accepted in Australia[JPR1].

Accounting principles generally accepted in Australia vary in certain significant respects from U.S. generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in Note 48 to the consolidated financial statements.

Ernst & Young	S J Ferguson
Sydney	Partner

Date: 25 November 2004.

203

Shareholding Information

Top 20 Holders of Fully Paid Ordinary Shares as at 10 August 2004

Rank	Name of Holder	Number of Shares		%
1	JP Morgan Nominees Australia Limited		121,384,680		9.60
2	National Nominees Limited		90,577,461		7.17
3	Westpac Custodian Nominees Ltd		87,818,339		6.95
4	Citicorp Nominees Pty Limited		63,935,139		5.06
5	RBC Global Services Australia Nominees Pty Limited		30,671,740		2.43
6	Queensland Investment Corporation		19,482,371		1.54
7	Cogent Nominees Limited		16,693,388		1.32
8	AMP Life Limited		15,615,127		1.24
9	ANZ Nominees Limited		15,511,420		1.23
10	Australian Foundation Investment Company Limited		6,705,245		0.53
11	HSBC Custody Nominees (Australia) Limited		6,087,368		0.48
12	CSS Board & PSS Board		4,942,977		0.39
13	Bond Street Custodians Limited		4,940,303		0.39
14	Invia Custodian Pty Limited		4,774,535		0.38
15	Government Superannuation Office		4,229,927		0.33
16	UBS Warburg Private Clients Nominees Pty Ltd		3,617,893		0.29
17	IAG Nominees Pty Limited		3,548,578		0.28
18	Westpac Financial Services Ltd		3,458,245		0.27
19	Suncorp Custodian Services Pty Ltd		2,821,839		0.22
20	Australian Trustees Pty Ltd		2,644,549		0.21

     The twenty largest shareholders hold 509,461,124 shares which is equal to 40.31% of the total shares on issue.

Stock Exchange Listing

     The shares of the Commonwealth Bank of Australia are listed on the Australian Stock Exchange under the trade symbol CBA, with Sydney being the home exchange.

     Details of trading activity are published in most daily newspapers, generally under the abbreviation of CBA or C’wealth Bank. The Bank does not have a current on-market buyback of its shares.

Directors’ Shareholdings as at 11 August 2004

	Shares		Options
J T Ralph, AC		23,861
J M Schubert		16,268
D V Murray		288,168		1,250,000
N R Adler, AO		9,490
R J Clairs, AO		12,631
A B Daniels, OAM		16,392
C R Galbraith, AM		7,689
S C Kay		2,980
W G Kent, AO		14,522
F D Ryan		6,671
F J Swan		4,996
B K Ward		4,914

     Mr Murray has a total holding of 242,000 shares under the Equity Reward Plan, registered in the name of the Trustee and 6,788 shares under the Mandatory Equity Participation plan, also registered in the name of the Trustee.

     In addition, Mr Ralph beneficially holds 100,000 units in Commonwealth Property Securities Fund and 495,294 units in Colonial First State Global Diversified Strategies Fund. Dr Schubert holds 483,554 units in Colonial First State Wholesale Diversified Fund. Mr Daniels beneficially holds 73,588 units in Colonial First Global Health and Biotech Fund. A related party of Mr Daniels holds 59,818 units in Colonial First State Future Leaders Fund and 84,994 units in Colonial First State Imputation Fund.

204

Shareholding Information (continued)

Guidelines for Dealings by Directors in Shares

     The restrictions imposed by law on dealings by Directors in the securities of the Bank have been supplemented by the Board of Directors adopting guidelines which further limit any such dealings by Directors, their spouses, any dependent child, family company and family trust. The guidelines provide that, in addition to the requirement that Directors not deal in the securities of the Bank or any related company when they have or may be perceived as having relevant unpublished price sensitive information, Directors are only permitted to deal within certain periods. Further, the guidelines require that Directors not deal on the basis of considerations of a short term nature or to the extent of trading in those securities.

Range of Shares (Fully Paid Ordinary Shares and Employee Shares): 10 August 2004

	Number of		Percentage			Number of		Percentage
Range	Shareholders		Shareholders			Shares		Issued Capital
1-1,000		541,661		75.80	%		186,343,047		14.74	%
1,001-5,000		153,521		21.49	%		307,584,350		24.33	%
5,001-10,000		13,405		1.88	%		91,805,490		7.26	%
10,001-100,000		5,646		0.79	%		108,615,541		8.59	%
100,001 and over		259		0.04	%		569,657,634		45.08	%
Total		714,492		100.00	%		1,264,006,062		100.00	%
Less than marketable parcel of $500		13,329					84,336

Voting Rights

     Under the Bank’s Constitution, each member present at a general meeting of the Bank in person or by proxy, attorney or official representative is entitled:

• on a show of hands – to one vote; and

• on a poll – to one vote for each share held or represented.

     If a member is present in person, any proxy or attorney of that member is not entitled to vote.

     If more than one official representative or attorney is present for a member:

• none of them is entitled to vote on a show of hands; and

• on poll only one official representative may exercise the member’s voting rights and the vote of each attorney shall be of no effect unless each is appointed to represent a specified proportion of the member’s voting rights, not exceeding in aggregate 100%.

     If a member appoints two proxies and both are present at the meeting and the appointment does not specify the proportion or number of the member’s votes each proxy may exercise:

• neither proxy shall be entitled to vote on a show of hands; and

• on a poll each proxy may exercise one half of the member’s votes.

Major Shareholder

     The Bank is not directly or indirectly owned or controlled by another corporation or any foreign government. At 30 June 2004 there is no person who is known to the Bank to be the beneficial owner of more than 5% of the Bank’s Ordinary Shares. There has been no change in this position over the previous three Financial Years. There are no arrangements known to the Bank, the operation of which may at the date of this report result in a change in control of the Company.

     Historically, the Commonwealth of Australia had a special relationship with the Bank. The Bank was originally a statutory corporation of the Commonwealth under the Commonwealth Banks Act 1959. In April 1991, following amendments to the Commonwealth Banks Act, the Bank was converted into a public company with its shares wholly owned by the Commonwealth. The Bank was then governed under its constitution as well as the Commonwealth Banks Act. In September 1991 following a public share offer, the Commonwealth permitted the Bank to issue further share capital so that the Commonwealth shareholding was reduced to a minimum of 70% of the Bank’s issued share capital. In 1993 the Commonwealth sold a further tranche of approximately 20% of the Bank’s issued share capital but was required to maintain a minimum of 50.1% of the total of the voting rights of ordinary shares in the Bank. In May 1995 the Commonwealth announced its intention to sell the Commonwealth’s remaining shareholding of approximately 50.4% of the Bank’s issued share capital. Further amendments were made to the Commonwealth Banks Act in December 1995. As part of the sale process, which was substantially completed in July 1996, the non-Government shareholders agreed on 14 May 1996 to permit the Bank to buy-back (and then cancel) from the Commonwealth approximately $1 billion of its ordinary shares held by the Commonwealth.

     The sale of the remainder of the Commonwealth’s shareholding included the global offering of approximately 399.1 million of the Bank’s ordinary shares in the form of “Installment Receipts”.

     An Installment Receipt evidenced full beneficial ownership in an ordinary share in the Bank. The final price for the global offering was set by the Commonwealth at $10.45 per share which was payable in 2 installments of $6.00 and $4.45, with the first installment being payable on application in July 1996 and the final installment by 14 November 1997.

     The Bank’s Ordinary Shares are listed on the Australian Stock Exchange. In addition, the Bank established in 1996 a Rule 144A American Depositary Receipt program (‘Restricted ADR Program’) in the United States in relation to Ordinary Shares purchased in the Rule 144A Offering in the United States conducted as part of the global offering of the Commonwealth’s remaining shareholding in 1996. American Depositary Shares (‘ADSs’) issued pursuant to the Restricted ADR Program each represent the right to receive three Ordinary Shares.

205

Shareholding Information (continued)

The Offer and Listing

     The Bank’s Ordinary Shares are listed on the ASX. Trading of the Ordinary Shares on the ASX commenced on 9 September 1991.

     The table below sets forth, for the financial periods indicated, high and low closing prices and average daily trading volumes for the Ordinary Shares as reported by the ASX.

					Average Daily Trading Volume
Period	High Closing Price		Low Closing Price		(Number of Shares)
Ordinary Shares
1998		19.49		14.70		1,726,916
1999		28.69		18.50		1,731,082
2000		27.95		22.54		2,136,170
2001		34.15		26.25		2,892,307
2002		34.76		25.14		3,566,592
2003
First Quarter		32.36		29.10		4,122,417
Second Quarter		30.50		26.56		3,899,890
Third Quarter		27.84		23.20		4,338,295
Fourth Quarter		30.52		26.22		3,621,114
2004
First Quarter		30.16		27.48		3,644,533
Second Quarter		29.45		27.14		2,723,437
Third Quarter		33.30		29.28		3,906,628
Fourth Quarter		33.51		30.80		3,096,567
May		32.90		30.80		3,119,151
June		33.35		32.55		3,371,817
July		32.85		30.85		4,244,309
August		31.65		28.87		4,242,466
September		30.64		29.36		2,851,380
October		32.10		30.20		3,671,653

     On 11 November 2004, the last sale price of the Ordinary Shares as reported on the ASX was $31.73 per Share. The Bank’s total market capitalisation was $40,414 million as at that date.

     The Bank maintains a restricted Rule 144A American Depositary Receipt (‘ADR’) program in the United States evidencing American Depository Shares (‘ADSs’), representing ordinary shares, for which The Bank of New York acts as depositary bank. The ratio of Ordinary Shares per ‘ADS’ is 3:1. Because the ADSs are not publicly listed or traded it is not possible to provide accurate market price information with respect to the ADSs.

     On 30 June 2004, there were 701 shareholders with declared addresses in the United States holding 420,053 Ordinary Shares and 1 holder (a nominee company) of ADRs within the United States holding 224,716 ADRs representing 674,148 ordinary shares. In addition, there are a number of United States shareholders who hold beneficial ownership in Ordinary Shares through nominee companies located outside the United States.

206

Shareholding Information (continued)

Top 20 Holders of Preferred Exchangeable Resettable Listed Shares (“PERLS”) as at 10 August 2004

Rank	Name of Holder	Number of Shares		%
1	Citicorp Nominees Pty Ltd		127,230		3.64
2	Westpac Custodian Nominees Ltd		67,117		1.92
3	National Nominees Limited		65,120		1.86
4	RBC Global Services Australia Nominees Pty Limited		63,802		1.82
5	ANZ Executors & Trustee Company Limited		42,330		1.21
6	Bond Street Custodians Limited		29,764		0.85
7	Tower Trust Limited		28,969		0.83
8	Invia Custodian Pty Limited		27,599		0.79
9	UBS Private Clients Australia Nominees Pty Ltd		26,293		0.75
10	Boxall Marine Pty Ltd		25,000		0.71
11	Permanent Trustee Australia Limited		25,000		0.71
12	Questor Financial Services Limited		24,292		0.69
13	The Australian National University		24,049		0.69
14	National Superannuation Trusts P/L		21,447		0.61
15	Brencorp No 11 Pty Limited		17,667		0.50
16	Livingstone Investments (NSW) Pty Limited		15,000		0.43
17	Ms Thelma Joan Martin-Weber		12,500		0.36
18	BT Portfolio Services Limited		11,200		0.32
19	Albert Investments Pty Limited		10,000		0.29
20	Felden Pty Ltd		10,000		0.29
21	Marbear Holdings Pty Limited		10,000		0.29
22	Mrs Fay Cleo Martin-Weber		10,000		0.29
23	Swinburne University of Technology		10,000		0.29

     The twenty three largest PERLS shareholders hold 704,379 shares which is equal to 20.13% of the total shares on issue. Twenty three PERLS shareholders are disclosed in the above table due to a number of shareholders having the same number of PERLS.

Stock Exchange Listing

     Commonwealth Bank PERLS are listed on the Australian Stock Exchange under the trade symbol CBAPA, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers, generally under the abbreviation of CBA or C’wealth Bank (pref).

Range of Shares (PERLS): 10 August 2004

	Number of		Percentage			Number of		Percentage
Range	Shareholders		Shareholders			Shares		Issued Capital
1-1,000		20,911		98.58	%		2,263,069		64.66	%
1,001-5,000		268		1.26	%		529,055		15.12	%
5,001-10,000		20		0.09	%		150,319		4.29	%
10,001-100,000		14		0.07	%		430,938		12.31	%
100,001 and over		1		0.00	%		126,619		3.62	%
Total		21,214		100.00	%		3,500,000		100.00	%
Less than marketable parcel of $500		4					5

Voting Rights

     The holders will be entitled to receive notice of any general meeting of the Bank and a copy of every circular or other like document sent out by the Bank to ordinary shareholders and to attend any general meeting of the Bank.

     The holders will not be entitled to vote at a general meeting of the Bank except in the following circumstances:

• If at the time of the meeting, a dividend has been declared but has not been paid in full by the relevant payment date;

• On a proposal to reduce the Bank’s share capital;

• On a resolution to approve the terms of a buy-back agreement;

• On a proposal that affects rights attached to Commonwealth Bank PERLS;

• On a proposal to wind up the Bank;

• On a proposal for the disposal of the whole of the Bank’s property, business and undertaking;

• During the winding up of the Bank; or

• As otherwise required under the Listing Rules from time to time,

in which case the holders will have the same rights as to manner of attendance and as to voting in respect of each Commonwealth Bank PERLS as those conferred on ordinary shareholders in respect of each ordinary share.

     At a general meeting of the Bank, holders are entitled:

• On a show of hands, to exercise one vote when entitled to vote in respect of the matters listed above; and

• On a poll, to one vote for each Commonwealth Bank PERLS.

207

Shareholding Information (continued)

Top 20 Holders of Perpetual Exchangeable Resettable Listed Securities II (PERLS II) as at 10 August 2004

Rank	Name of Holder	Number of Shares		%
1	National Nominees Limited		469,501		12.52
2	Westpac Custodian Nominees Limited		259,653		6.92
3	RBC Global Services Australia Nominees Pty Limited		165,001		4.40
4	J P Morgan Nominees Australia Limited		155,447		4.15
5	AMP Life Limited		105,208		2.81
6	UBS Private Clients Australia Nominees Pty Ltd		99,086		2.64
7	Citicorp Nominees Pty Limited		86,710		2.31
8	UBS Nominees Pty Ltd		54,340		1.45
9	Cogent Nominees Pty Limited		45,028		1.20
10	Invia Custodian Limited		30,768		0.82
11	J Neave Investments Pty Limited		30,000		0.80
12	Elise Nominees Pty Limited		29,380		0.78
13	ANZ Nominees Limited		27,273		0.73
14	Questor Financial Services Limited		26,226		0.70
15	Cryton Investments No 9 Pty Ltd		25,000		0.67
16	Lutovi Investments Pty Limited		25,000		0.67
17	Votraint No.1019 Pty Ltd		25,000		0.67
18	Vision Super Pty Ltd		24,832		0.66
19	Gordon Merchant No 2 Pty Ltd		24,440		0.65
20	Marbear Holdings Pty Limited		22,500		0.60

     The twenty largest PERLS II shareholders hold 1,730,393 shares which is equal to 46.14% of the total shares on issue.

Stock Exchange Listing

     Commonwealth Bank PERLS II are listed on the Australian Stock Exchange under the trade symbol PCBPA, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers.

Range of Shares (PERLS II): 10 August 2004

	Number of		Percentage			Number of		Percentage
Range	Shareholders		Shareholders			Shares		Issued Capital
1-1,000		7,175		95.42	%		1,088,882		29.04	%
1,001-5,000		289		3.84	%		642,311		17.13	%
5,001-10,000		28		0.37	%		232,496		6.20	%
10,001-100,000		24		0.32	%		796,502		21.24	%
100,001 and over		4		0.05	%		989,809		26.39	%
Total		7,520		100.00	%		3,750,000		100.00	%
Less than marketable parcel of $500		1					5

Voting Rights

     PERLS II do not confer any voting rights in the Bank but if they are exchanged for or convert into ordinary shares or preference shares of the Bank in accordance with their terms of issue, the voting rights of the ordinary or preference shares (as the case may be) will be as set out on pages 204 and 206 respectively for the Bank’s ordinary shares and PERLS preference shares.

Trust Preferred Securities

     550,000 Trust Preferred Securities were issued on 6 August 2003. Cede & Co is registered as the sole holder of these securities.

     The Trust Preferred Securities do not confer any voting rights in the Bank but if they are exchanged for or convert into ordinary shares or preference shares of the Bank in accordance with their terms of issue, the voting rights of the ordinary or preference shares (as the case may be) will be as set out on pages 204 and 206 respectively for the Bank’s ordinary shares and PERLS preference shares.

Directors and Senior Management

     The business of the Bank is managed by a Board of Directors presently consisting of 12 Directors who, except for the Chief Executive Officer, are elected on a rotating basis. At each annual general meeting of the Bank’s shareholders, one-third of the Directors, excluding the Chief Executive Officer, retire and are eligible for re-election. The Board of Directors oversees the Bank’s operation both directly and through its committees.

     The members of the Board of Directors and executives who are members of the Senior Executive Committee as at 30 June 2004 are as follows:

208

Shareholding Information (continued)

Board of Directors
Name	Age		Position	Director Since
J T Ralph, AC *		71	Chairman		1985
J M Schubert **		61	Deputy Chairman		1991
D V Murray		55	Chief Executive Officer		1992
N R Adler, AO *		59	Director		1990
R J Clairs, AO		66	Director		1999
A B Daniels OAM		69	Director		2000
C R Galbraith, AM		56	Director		2000
W G Kent, AO		68	Director		2000
F D Ryan		61	Director		2000
F J Swan		63	Director		1997
B K Ward		50	Director		1994
S C Kay		43	Director		2003

* Retired on 5 November 2004

** Appointed Chairman on 5 November 2004

Senior Management

The Senior Management of the Bank detailed below are the Group Executives of each of the Bank’s divisions.

Michael Cameron

Chief Financial Officer

     Mr Cameron is the Group Executive for Financial and Risk Management which includes Finance, Treasury, Risk Management and Credit, Investor Relations, Security and Audit. Mr Cameron joined the Group in November 2002.

     Prior to his appointment to his current role on 1 April 2003, Mr Cameron was the Deputy Chief Financial Officer.

     Previously Mr Cameron was Chief Operating Officer, Wealth Management Division, National Australia Bank. Mr Cameron has had a distinguished career of over a decade with Lend Lease and MLC and has also worked at Barclays Bank and TNT Australia. He is a Fellow of the Australian Institute of Chartered Accountants, a Fellow of CPA Australia, and a Fellow of the Australian Institute of Company Directors.

     Mr Cameron holds a Bachelor of Business Degree. Age 44.

Les Cupper

Group Executive, Group Human Resources

     Les Cupper joined the Commonwealth Bank in 1996. He heads Group Human Resources responsible for the Bank’s human resource policies and systems.

     Prior to joining the Bank, Mr Cupper held a number of senior human resource and line management roles with CRA Ltd for 12 years.

     Previous to these roles, Mr Cupper held academic appointments in universities in Australia, the UK and USA. He has an Honours degree in Economics and Politics and a Masters in Economics (Industrial Law) and Graduate Diploma in Education from Monash University. Age 55.

Stuart Grimshaw

Group Executive, Investment & Insurance Services

     Mr Grimshaw joined the Group in February 2002 as Group Executive, Financial & Risk Management.

     Prior to joining the Group Mr Grimshaw was formally Chief Executive Officer, Great Britain for the National Australia Bank and responsible for National’s Yorkshire and Clydesdale Banks. He joined National in 1991 where he held senior credit, relationship, commercial and corporate banking roles, including an 18 month secondment to Morgan Stanley International Inc, New York. He commenced his career in banking and finance as a graduate trainee with ANZ Banking Group in 1983.

     He has a Bachelor of Commerce & Administration from Victoria University (N.Z.) and a Masters of Business Administration from Melbourne University. He also completed the PMD Course at Harvard University. Age 42.

Hugh Harley

Group Executive, Retail Banking Services

     Mr Harley joined the Bank in 1987 as an economist following completion of university studies. Subsequently he worked in a wide range of senior roles in Business Banking, Group Human Resources and Australian Financial Services where he was General Manager, Personal & Business Customers. In February 2002 he was appointed Executive General Manager, Retail Sales and Service which involved leadership of the Bank’s national branch network and direct service operations. In October 2002 he was appointed Group Executive, Retail Banking Services. He is Chairman of the Commonwealth Bank Staff Community Fund.

     Mr Harley holds a Bachelor of Economics (honours) and a Bachelor of Laws (honours) from the University of Sydney and a Master of Philosophy in Economics from Cambridge University (UK). Age 42.

Michael Katz

Group Executive, Premium Banking Services

     Michael Katz assumed responsibility for the management of Premium Business Services within the Commonwealth Bank Group in May 2004. This business is focussed on providing a premium service to the Bank’s non retail client base. It includes the private client business and Commsec equities business. Prior to this role, Mr Katz was the Group Executive responsible for Premium Financial Services business which was created in early 2002. Before this role he was Head of Institutional Banking for eight years from 1993 to 2001. Prior to joining the Bank Mr Katz held positions with Morgan Stanley, Citicorp in Geneva, Switzerland and worked as a faculty associate at the International Management Institute in Geneva.

     He holds a B.Com (Hons) from the University of New South Wales. Age 52.

Garry Mackrell

Group Executive, International Financial Services

     Mr Mackrell joined the Group in 1973. Prior to this appointment he held senior positions within the Group including Head of the Office of the CEO and Group Planning and Development, Chief Manager Treasury Management, Deputy Regional Manager, Americas and

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Head of Financial Markets Distribution, Institutional Banking. Mr Mackrell was appointed to the Head of International Financial Services in September 2001.

     Mr Mackrell has a Bachelor of Science, a Bachelor of Economics (Hons) and a Master of Commerce degree. Age 55.

Bob McKinnon

Group Executive, Technology

     Bob McKinnon joined the Commonwealth Bank in 2000 as General Manager, Group Technology. He was appointed Chief Information Officer in 2002. Prior to joining the Bank Mr McKinnon was the Managing Director and Chief Executive of State Street Australia Limited. During his career, he has also held a variety of senior roles within the Lend Lease Group.

     Mr McKinnon holds a Bachelor of Commerce with merit from the University of NSW and is a member of the Institute of Chartered Accountants in Australia. Age 51.

John O’Sullivan

Chief Solicitor and General Counsel

     John O’Sullivan was appointed Chief Solicitor and General Counsel of the Commonwealth Bank Group in October 2003.

     Prior to joining the Bank, Mr O’Sullivan had been a partner of the national law firm Freehills since 1983. Whilst with Freehills, Mr O’Sullivan acted for the Bank in its acquisition of State Bank of Victoria and Colonial Group, as well as on the three stages of the Bank’s privatisation. He also led the legal team for the Commonwealth of Australia on Telstra 1, Telstra 2 and the sale of Sydney Airport, among other notable transactions. He holds a Bachelor of Arts and a Bachelor of Laws from the University of Sydney and a Master of Laws from London University. Age 50.

Grahame Petersen

Group Executive, Group Strategic Development

     Grahame Petersen was appointed Group Executive, Group Strategic Development in June 2004. This division is responsible for the Group’s strategic development and the implementation of the Which new Bank program.

     Mr Petersen has 24 years experience in the banking industry, commencing as a graduate with the Rural Bank of NSW in 1980 and subsequently working with the State Bank of NSW and Colonial Limited.

He has held senior management roles in business banking, corporate banking, business recovery, retail banking and funds management.

     His experience includes service and sales, marketing, product management and change management. Age 45.

Loans to Senior Management

     Loans are made to the Senior Management in the ordinary course of business of the Group and on substantially the same terms as those prevailing at the time for comparable transactions with other persons.

     The Bank believes that its loans to Senior Management do not involve more than normal risk of collectibility or present other unfavourable features.

Compensation

     The aggregate compensation paid by the Bank during Financial Year 2004 to all directors and senior executive officers as a group (23 persons) was $23.6 million.

     Australian executive officers are members of the Officers’ Superannuation Fund (OSF) or the former Colonial Group Staff Superannuation Scheme (CGSSS). The OSF and CGSSS provide both defined benefit and accumulation style superannuation benefits. The CGSSS ceased to operate on 3 October 2003 with the plan’s assets, liabilities, member contributions and benefit arrangements transferred to the OSF.

     Executive officers who joined the Group on or after 1 July 1993 are provided with accumulation style superannuation benefits except for those executive officers who joined the Group between 1 July 1993 and 30 June 1997 and who were members of the former CGSSS. The Group provides salary sacrifice superannuation benefits for selected employees, including executive officers. Salary sacrifice superannuation benefits accrued during Financial Year 2004 in respect of executive officers have been included in the above aggregate compensation.

     With the exception of contributions relating to salary sacrifice benefits the Group ceased contributions to the OSF from 8 July 1994. Further, the Group ceased contributions to the OSF relating to salary sacrifice benefits from 1 July 1997.

Under Australian legislation for Financial Year 2004, the Group was required to provide minimum superannuation benefits for non-executive directors under age 70 equal to 9% of their cash remuneration. Benefits funded by the Group during Financial Year 2004 to meet this requirement amounted to $84,827.

     The Group also provides defined benefits to non-executive directors in connection with their departure from office after three years of service in accordance with an arrangement approved by shareholders. This retirement allowance has now been closed to new appointees.

     The Bank’s executive officers, (including the Chief Executive Officer), may be eligible to participate in the Equity Reward Plan (ERP) and the Equity Participation Plan (EPP). Executives who participate in the ERP or EPP are excluded from participating in the Employee Share Acquisition Plan (ESAP). Refer Employee Share Plans – Note 29 to the Financial Statements.

     The Bank’s Constitution provides that the directors who are not also executive officers shall be paid an ordinary remuneration which may not in aggregate exceed the maximum aggregate amount fixed by the Bank in general meeting from time to time. At the annual general meeting of the Bank held in November 2004 the shareholders set a maximum amount of $3,000,000 per year, to be divisible among the non-executive directors as the directors may determine.

Currency of Presentation and Certain Definitions

     The Bank publishes its consolidated financial statements in Australian dollars. In this Annual Report, unless otherwise stated or the context otherwise requires, references to ‘US$’ or ‘US dollars’ are to United States dollars and references to ‘$’ or ‘A$’ are to Australian dollars. This Annual Report contains translations of certain Australian dollar amounts into US dollars at specified rates. These translations should not be construed as representations that the Australian dollar amounts actually represent such US dollar amounts or have been or could be converted into US dollars at the rate indicated. Unless otherwise stated, the translations of Australian dollars into US dollars have been made at the rate of US$ 0.6952 = $1.00, the noon buying rate in New York City for cable transfers in Australian dollars as certified for customs purposes by the Federal Reserve Bank of New York on 30 June 2004.

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Shareholding Information (continued)

Exchange Rates

     For each of the Commonwealth Bank’s Financial Years, the high, low, average and year end Noon Buying Rates, see ‘Selected Financial and Operating Data’ on page 10.

     Fluctuations in the exchange rate between the Australian dollar and the US dollar may affect the Bank’s earnings, the book value of its assets and its shareholders’ equity as expressed in US dollars, and consequently may affect the market price for the Shares. In addition, fluctuations in the exchange rate between the Australian dollar and the US dollar will affect the US dollar equivalent of the Australian dollar price of the Bank’s Ordinary Shares on the ASX and, as a result, are likely to affect the market price of the Shares. Such fluctuations will also affect the conversion into US dollars of cash dividends, if any, paid in Australian dollars.

Certain Definitions

     The Bank’s Financial Year ends on 30 June. As used throughout this Annual Report, the Financial Year ended 30 June 2004 is referred to as Financial Year 2004, and other Financial Years are referred to in a corresponding manner.

     ‘Financial Statements’ means the Group’s audited consolidated Statement of Financial Position as of 30 June 2003 and 2004 and consolidated statements of financial performance, cash flows and changes in shareholders’ equity for each of the three years in the period ended 30 June 2004, together with accompanying notes, which are included elsewhere in this Annual Report.

‘ACCC’ means Australian Competition and Consumer Commission.

‘APRA’ means the Australian Prudential Regulation Authority.

‘ASB Bank’ means the ASB Bank Limited, incorporated in New Zealand.

‘ASX’ means the Australian Stock Exchange Limited.

‘Australian GAAP’ means Australian generally accepted accounting principles.

‘Bank’, ‘CBA’ or ‘Company’ means the Commonwealth Bank of Australia (A.B.N. 48 123 123 124), a banking corporation incorporated in Australia.

‘Banking Act’ means the Australian Banking Act 1959, as amended.

‘CDBL’ means the Commonwealth Development Bank of Australia Limited.

‘Commonwealth’ means the Commonwealth of Australia and its Territories.

‘EFTPOS’ means Electronic Funds Transfer at Point of Sale.

‘Group’ or ‘Consolidated Entity’ means the Commonwealth Bank of Australia and its controlled entities.

‘Ordinary Shares’ or ‘Shares’ means the ordinary shares of the Bank.

‘Reserve Bank’ or ‘RBA’ means the Reserve Bank of Australia.

‘US GAAP’ means United States generally accepted accounting principles.

Certain discrepancies between totals and sums of components in tables contained herein exist due to rounding.

Exchange Controls Affecting Security Holders

     Generally, at the present time, remittances of any dividends, interest or other payments by the Bank to non-resident holders of the Bank’s securities in the United States are not restricted by Australian exchange controls.

     Australian foreign exchange controls are implemented from time to time against proscribed countries, entities and persons. Certain transactions relating to supporters of the former government of the Federal Republic of Yugoslavia and ministers/ senior officials of the Government of Zimbabwe are currently prohibited without the specific, prior approval of the Reserve Bank of Australia.

     Additionally, the Department of Foreign Affairs and Trade has responsibility for the administration of restrictions relating to the following

• Terrorists and their sponsors

     In terms of Part 4 of theCharter of the United Nations Act 1945, and theCharter of the United Nations (Terrorism and Dealings with Assets) Regulations 2002, anybody holding financial or other assets of persons or entities listed as terrorists by the Minister for Foreign Affairs in the Commonwealth Gazette is prohibited from using or dealing with those assets. It is also a criminal offence to make assets available to such persons or entities.

• The former Iraqi regime

     TheIraq (Reconstruction and Repeal of Sanctions) Regulations 2003impose a freeze on the financial resources of the previous Government of Iraq, Saddam Hussein, other senior officials of his regime, and their immediate families, and provide for such resources to be transferred to Iraq and used in that country’s reconstruction and rehabilitation.

Taxation

     This section describes the material Australian and United States federal income tax consequences of owning Ordinary Shares or ADSs representing ordinary shares. It applies to you only if you hold your Ordinary Shares or ADSs as capital assets for tax purposes. For purposes of this discussion, a ‘US Holder’ is any beneficial owner holding Ordinary Shares or ADSs as a capital asset that is (i) a citizen or resident of the United States, (ii) a corporation created or organised in the United States or under the law of the United States or any State, (iii) an estate whose income is subject to United States federal income tax regardless of its source or (iv) a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorised to control all substantial decisions of the trust.

     The taxation discussion set forth below does not purport to be a complete technical analysis or listing of all potential Australian or United States tax effects to US Holders.

     This section does not apply to you if you are a member of a special class of holders subject to special rules, including:

• a dealer in securities,

• trader in securities that elects to use a mark-to-market method of accounting for securities holdings,

• a tax-exempt organisation,

• a life insurance company,

• a person liable for alternative minimum tax,

• a person that actually or constructively owns 10% or more of the voting stock of the Commonwealth Bank of Australia,

• a person holding Ordinary Shares or ADSs as part of a straddle or a hedging or conversion transaction, or

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Shareholding Information (continued)

• a person whose functional currency is not the U.S. dollar.

     Prospective investors are urged to consult their own tax advisors regarding the United States and Australian tax consequences of owning and disposing of Ordinary Shares or ADSs.

Australian Taxation

     Except as otherwise noted, the statements of Australian tax laws set out below are based on the laws in force as at the date of this Annual Report, and are subject to any changes in Australian law, and in any double taxation convention between the United States and Australia occurring after that date.

     Under Australian law non-residents may be subject to withholding tax in respect of dividends received from shares in Australian companies depending upon the extent to which dividends are ‘franked’. Also, in limited circumstances (as discussed below) such non-resident shareholders may be subject to Australian income tax in respect of gains made on disposal of shares in Australian companies.

     The Australia/United States double tax agreement (the ‘Treaty’) was entered into on 6 August 1982 and represents a convention between the Government of Australia and the Government of the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The agreement applies to residents of one or both of Australia and the United States of America. A Protocol amending the Treaty has been negotiated and ratified by both countries. The changes took effect progressively from 1 July 2003. Among other things, the Protocol reduces withholding taxes. For the purposes of this summary, references to the “Old Treaty” are references to the Treaty before the Protocol took effect, and references to the “New Treaty” are references to the Treaty as amended by the Protocol.

     Under Australia’s dividend imputation system dividends are ‘franked’ dividends to the extent that they are paid out of income on which Australian income tax has been paid. Where an Australian resident individual shareholder receives a franked dividend, the shareholder receives a tax credit that can be offset against the Australian income tax payable by the shareholder. Any excess credit is refundable. The amount of the credit is dependent upon the extent to which the dividend is franked. The extent to which a dividend is franked typically depends upon a company’s available franking credits at the time of payment of the dividend. Accordingly, a dividend paid to a shareholder may be wholly or partly franked or wholly unfranked. Dividends paid to non-resident shareholders are exempt from dividend withholding tax to the extent the dividend is franked. Under the Old Treaty the unfranked portion of the dividend was subject to 15% dividend withholding tax. Under the New Treaty the unfranked portion of the dividend is still generally subject to 15% dividend withholding tax. However, under the New Treaty the withholding tax on the unfranked portion of dividends paid after 30 June 2003 by an Australian resident company to a beneficially entitled company resident in the US who has at least a 10% voting interest in the paying company is limited to 5%.

     Subject to two exceptions, a non-resident disposing of shares in Australian public companies will be free from tax in Australia. The exceptions are as follows:

• Shares held as part of a trade or business conducted through a permanent establishment in Australia. In such a case any profit on disposal would be assessable to ordinary income tax. Losses would constitute allowable deductions.

• Shares held in public companies where such shares represent (or in the past five years have represented) a holding of 10% or more in the issued share capital of the company. In such a case capital gains tax would apply, but not otherwise.

     Capital gains tax in Australia is payable on gains over the period in which the shares have been held, i.e. the difference between the disposal price and the original cost. For individual shareholders, in respect of assets acquired before 11:45am AEST 21 September 1999 and held for at least 12 months prior to sale, there is an election to pay tax at normal rates on the net capital gain with indexation frozen at 30 September 1999 or pay tax at normal rates on 50 per cent of the actual net capital gain without indexation (the ‘CGT discount’). If an individual makes a net capital gain on an asset which was acquired after 11:45am AEST 21 September 1999 and held for 12 months, then only the CGT discount method applies.

     A corporation will pay tax on the total gain without indexation or discount. Normal rates of income tax apply to gains so calculated. Capital losses are available as deductions, but only as an offset against other capital gains.

United States Taxation

     This section is based on the Internal Revenue Code of 1986, as amended (the ‘Code’), its legislative history, existing and proposed regulations and published rulings and court decisions, all as currently in effect, as well as the United States-Australian Tax Treaty. These laws are subject to change, possibly on a retroactive basis.

     Taxation of Dividends

     Under the United States federal income tax laws, if you are a US holder, the gross amount of any dividend paid by the Commonwealth Bank of Australia out of its current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. If you are a non-corporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2009 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold the Ordinary Shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the Ordinary Shares or ADSs generally will be qualified dividend income.

     You must include any Australian tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a US Holder will be the U.S. dollar value of the Australian dollar payments made, determined at the spot Australian dollar/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income.

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Shareholding Information (continued)

The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the Ordinary Shares or ADSs and thereafter as capital gain.

     Subject to certain limitations, the Australian tax withheld in accordance with the Treaty and paid over to Australia will be creditable against your United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate.

     Dividends will be income from sources outside the United States. Under the foreign tax credit rules, dividends paid in taxable years beginning before January 1, 2007, with certain exceptions, will be “passive” or “financial services” income, but dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be “passive” or “general” income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit.

     Taxation of Capital Gains

     If you are a US Holder and you sell or otherwise dispose of your Ordinary Shares or ADSs, you will recognise a capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realise and your tax basis, determined in U.S. dollars, in your Ordinary Shares or ADSs. The capital gain of a non-corporate U.S. Holder that is recognised before January 1, 2009 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.

     PFIC Considerations

Commonwealth Bank of Australia does not believe that it will be treated as a passive foreign investment company (a ‘PFIC’) for United States federal income tax purposes, and this discussion so assumes, but this is a factual determination that is made annually and thus may be subject to change. If the Commonwealth Bank of Australia were to be treated as a PFIC, a US holder of Ordinary Shares or ADSs would be subject to certain adverse tax consequences.

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Additional Information

Item 10 – Additional Information

Share Capital

Constitution

     The Company’s corporate organisation and conduct is governed by its Constitution (the Constitution), which was last amended on 5 November 2004.

1 Company Objects and Purposes

     The Company is registered as a public company limited by shares under the Australian Corporations Act 2001 (the Corporations Act) with Australian Business Number 48 123 123 124.

     The current Constitution was last amended by shareholders at the annual general meeting held on 5 November 2004. The Constitution does not specify the objects and purposes of the Company. Pursuant to section 124 of the Corporations Act, the Company has the legal capacity and powers of an individual person.

2 Directors Powers and Qualifications

(a)	Unless permitted by the Corporations Act, no director is permitted to vote or be counted in the quorum as a director in respect of any contract or arrangement in which the director has a material personal interest (article 11.8(g)). Subject to the ASX Listing Rules, this prohibition does not apply if the directors pass a resolution stating they are satisfied that the interest should not disqualify the director from considering or voting on the matter (article 11.8(h)). If a quorum of directors is not available to consider such a resolution then, subject to the Corporations Act, the prohibition can be relaxed or suspended by an ordinary resolution passed in a general meeting (section 195(4)).
(b)	Subject to the ASX Listing Rules, the non-executive directors’ remuneration is paid by way of fees in such proportion and manner as the directors determine, provided that the aggregate remuneration paid to non-executive directors must not exceed the amount approved from time to time in a general meeting. The directors may approve payment of special remuneration where a director, other than the managing director or an executive director, performs extra services or makes any special exertions for any business or purposes of the Company. In addition, the directors may also be paid an allowance for travelling and other expenses properly incurred by them in attending and returning from meetings or otherwise in connection with the exercise of their powers and the discharge of their duties or the business of the Company (article 11.6).
(c)	The directors may, from time to time, at their discretion, exercise all the powers of the Company to borrow or raise money or charge any property or business of the Company and to issue debentures or give any other security for a debt, liability or obligation of the Company or of any other person (article 12.1(b)). Subject to the Corporations Act, this article could be changed by a special resolution, that is, a resolution passed by at least 75% of the votes cast by shareholders entitled to vote on the resolution (section 136).
(d)	The Constitution does not contain any age limit requirement for the retirement of directors. Similarly, the Corporations Act does not contain any such requirement. The policy of the board of directors of the Company is that a director cannot stand for re-election after attaining the age of 70.
(e)	A director does not need to own shares in the Company as a qualification for office (article 11.3(b)).

3 Rights, Preferences and Restrictions Attaching to Each Class of Shares

     The Company has two classes of shares – ordinary shares and preference shares.

(a)(i)

The rights attached to ordinary shares include the right to dividends in the event that the directors declare a dividend or determine that a dividend is payable, and fix the amount and the time for payment (article 16.1(a)). All dividends declared or payable but unclaimed may be invested by the directors as they think fit for the benefit of the Company until claimed or until required to be dealt with in accordance with any law relating to unclaimed moneys (article 16.5(f)).

(ii)

Subject to the Constitution, the ordinary shareholders have the right to vote in person, by representative, attorney or proxy in a general meeting. On a show of hands each shareholder (regardless of the number of shares held) has one vote. On a poll, each shareholder has one vote for each fully paid ordinary share held. In respect of partly paid shares, the shareholder has a vote equivalent to the proportion which the amount paid up on the shares has to the total issue price of the shares at the date the poll is taken. For the purpose of determining voting entitlements at a general meeting, shares will be taken to be held by those persons recorded in the register of members at the time and the date determined by the directors under regulation 7.11.37 of the Australian Corporations Regulations 2001. One third of current directors (other than the managing director) must retire at each annual general meeting and may be re-elected by ordinary resolution and in accordance with the Constitution (articles 11.1(c) and 11.2(b)).

(b)

The rights attached to the Company’s preference shares are referred to in a prospectus dated 26 February 2001 for the issue of 3.5 million preference shares at an issue price of AUD200 each, payable in full on application. Preference shareholders are entitled to a dividend to be paid in priority to dividends on ordinary shares. In certain limited circumstances, dividends may not be payable. The preference shares are perpetual and exchangeable into ordinary shares in certain circumstances. They are resettable on certain dates. The Company may not issue shares ranking in priority to these shares without prior approval of the holders of preference shares. There is no right to vote at general meetings except in limited circumstances specified in the terms and conditions as set out in the prospectus. The Trust Preferred Securities issued on 6 August 2003, as described on page 207, are exchangeable in certain circumstances for preference shares of the Company that will rank equally with the preference shares described above.

(c)

Dividends are only payable out of the profits of the Company (article 16.3, Corporations Act section 254T).

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Additional Information

(d)	In the event of a winding up, ordinary shares rank equally in the division of any surplus. The preference shares rank in priority to ordinary shares for payment of dividends and for a return of capital on a winding up of the Company. If the Company is wound up the liquidator may, with the sanction of a special resolution, divide among the members in kind the whole or any part of the property of the Company and may determine how the division is to be carried out between the members or different classes of members (article 20).
(e)	Shareholders cannot redeem ordinary shares. Preference shares may be redeemable by the Company in accordance with the terms of issue determined by the directors (article 3.2.6).
(f)	The directors may establish a sinking fund for the purpose of repurchasing, redeeming or beneficially acquiring preference shares having rights to non-cumulative dividends and, to the extent (if any) specified in the terms of issue, to additional dividends in connection with the conversion of a preference share into an ordinary share or to additional dividends in circumstances where a dividend contemplated by the terms of issue has not been paid in full on the preference shares (article 3.2.3 (d)).
(g)	The holders of fully paid ordinary shares have no further liability to the Company in respect of those shares. Subject to the terms of issue, the holders of partly paid shares are liable to the Company once a call is made for the payment of the unpaid amount (article 4.1).
(h)	There is no provision in the Constitution which discriminates against an existing or prospective shareholder as a result of such shareholder owning a substantial number of shares.

4 Alteration of rights of shareholders

     The rights attached to any class of shares (unless otherwise provided by the terms of issue of the shares of that class) may be varied with the consent in writing of the holders of three — quarters of the issued shares of that class, or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of the class (article 2.4(a)).

5 Meetings

     The directors or any director to the extent permitted by the Corporations Act may whenever they think fit convene a general meeting (article 9.1(a)). The rights of members to requisition or to convene a general meeting of the Company are as set out in the Corporations Act (article 9.1(b)).

     Subject to the Constitution, the Corporations Act and the ASX Listing Rules, notices of general meetings convened by the directors may be given in a manner determined by the directors (article 17).

     At least 28 days’ notice must be given of a general meeting (section 249HA of the Corporations Act).

     Subject to the Constitution, all shareholders may attend general meetings in person, or be represented by the attendance of a representative, attorney or proxy (who need not be a shareholder of the Company in their own right).

     A quorum for a general meeting is 5 voting members personally present (article 10.3).

     If a general meeting is convened upon the requisition of members and a quorum is not present within half an hour from the time appointed for the meeting, the meeting shall be dissolved. If the meeting is convened in any other way and a quorum is not present within half an hour, the meeting shall stand adjourned to such day as the directors determine and, if no determination is made, to the same day in the next week at the same time and place and if at the adjourned meeting a quorum is not present within half an hour from the time appointed, the voting members present shall constitute a quorum (article 10.4).

6 Limitations on the Right to Own Securities

(a)	The Constitution does not impose limitations on the right to own securities except those provisions relating to minimum holdings (known as unmarketable parcels). The Constitution also provides that the directors may decline to register any transfer of shares where this is permitted by the ASX Listing Rules (article 7.3(a)). Relevantly, the ASX Listing Rules allow the company to decline to register a transfer if the transfer may breach an Australian law and the ASX has agreed in writing to the non-registration. The directors might also exercise their discretion to refuse to allot shares to a person where the allotment may breach an Australian law. Relevant Australian legislation which impacts on the right to own securities is described below.
(b)	Unmarketable Parcel Rationalisation Scheme
	The Constitution contains a scheme whereby the Company can sell the shares of members who hold an unmarketable of parcel shares in the Company as determined by the ASX Listing Rules. The scheme sets out notice requirements that the Company must comply with prior to selling any shares (article 5.4).
(c)	Legislation
	The Australian Financial Sector (Shareholdings) Act 1998 restricts ownership by people (together with their associates) of an Australian bank to 15% of the total voting shares outstanding. A shareholder may apply to the Australian Treasurer to extend its ownership beyond 15%, but approval will not be granted unless the Treasurer is satisfied that a holding by that person greater than 15% is in the national interest. Section 50 of the Australian Trade Practices Act 1974 prohibits an acquisition of shares that would have the effect, or be likely to have the effect, of substantially lessening competition in a substantial market for goods or services, unless the acquisition is authorised by the Australian Competition and Consumer Commission.
	The rights of non-resident or foreign shareholders to hold the Company’s securities are subject to the Australian Foreign Acquisitions and Takeovers Act 1975. The Treasurer of the Australian Federal Government has the power to prohibit the acquisition of a controlling interest in an Australian company by a foreign person or foreign persons, if the Treasurer is of the opinion that the acquisition would be contrary to the national interest. For this purpose, a shareholding of 15% or more held by a single foreign person (including associates) or 40% or more held by 2 or more foreign persons (including associates) is deemed to constitute a controlling interest.

7 Takeover Limitations

     Not applicable.

8 Disclosure of Share Ownership

     The Constitution does not prescribe an ownership threshold above which shareholders must disclose their holding to the Company. However, Part 6C.1 of the Corporations Act imposes disclosure requirements on persons who (together with their associates) acquire or cease to hold a substantial holding (5% or more of the total number of votes attached to voting shares) or change their substantial holding in the Company. The disclosure must be given to the Company and the ASX within the prescribed time

     The Company may at any time direct a member within 2 business days of receiving the direction to provide the Company with the name and address of every person

215

Additional Information

who has a relevant interest in any of the shares held by the member, including full details of that interest and of the circumstances that gave rise to that interest. On receiving particulars of a person holding an interest in any shares of the Company (other than as registered holder), the Company may direct that person to provide the Company with full details of that person’s interest and of the circumstances that gave rise to that interest (Corporations Act Part 6C.2).

9 Changes in Share Capital

     The Company may reduce its share capital (article 2.2) or buy back shares in accordance with the Australian Corporations Act.

216

Signatures

     Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorised, in the City of Sydney, Commonwealth of Australia.

COMMONWEALTH BANK OF AUSTRALIA (Registrant)
By	/s/	Michael Cameron
Name:		Michael Cameron
Title:		Chief Financial Officer
Date: 25 November 2004

217

Exhibits

Item 19 Index to Exhibits

1.	Constitution as amended as of 5 November 2004.
4.1	Employment Agreement between Commonwealth Bank of Australia and Stuart Ian Grimshaw, dated as of 1 February 20021.
4.2	Employment Agreement between Commonwealth Bank of Australia and Peter Leith Polson, dated as of 1 January 20022.
4.3	Employment Agreement between Commonwealth Bank of Australia and John O’Sullivan, dated as of 28 April 2003.
4.4	Employment Agreement between Commonwealth Bank of Australia and Grahame Petersen, dated as of 22 June 2004.
4.5	Employment Agreement between Commonwealth Bank of Australia and Hugh Harley, dated as of 13 September 1999, amended 2 October 2001.
4.6	Employment Agreement between Commonwealth Bank of Australia and Michael Cameron, dated as of 3 November 2002.

4.7 Equity Reward Plan Rules, Exercise and Vesting Conditions, Taxation Information Sheet – Options and Taxation Information Sheet – Shares³.

8.	List of controlled entities.
11.	Code of Ethics for Senior Financial Officers.
12	Chief Executive Officer and Chief Financial Officer certifications.
13	Chief Executive Officer and Chief Financial Officer certifications.
15.	Consent of Ernst & Young.

Copies of any instrument relating to long-term debt of the Commonwealth Bank of Australia that is not being attached as an exhibit to this Annual Report on Form 20-F and which does not exceed 10% of the total combined assets of the Commonwealth Bank of Australia will be furnished to the SEC upon request.

¹ Incorporated by reference to Exhibit 4.2 to the Annual Report on Form 20-F for the registrant’s fiscal year ended 30 June 2002 (File No. 0-29152) filed on 18 October 2002.

² Incorporated by reference to Exhibit 4.3 to the Annual Report on Form 20-F for the registrant’s fiscal year ended 30 June 2002 (File No. 0-29152) filed on 18 October 2002.

³ Incorporated by reference to Exhibit 4.1 to the Annual Report on Form 20-F for the registrant’s fiscal year ended 30 June 2002 (File No. 0-219152) filed on 18 October 2002.

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International Representation

Australia	First State Investments (Hong Kong) Limited	Bao Minh CMG Life Insurance Co Ltd
Head Office	Level 6, Three Exchange Square	Level 3, Saigon Riverside Office Center
Commonwealth Bank of Australia	8 Connaught Place, Central	2A-4A Ton Duc Thang
48 Martin Place	Hong Kong	District 1, Ho Chi Minh City
Sydney NSW 1155	Telephone: (852) 2846 7555	Telephone: (84 4) 829 1919
Telephone: (612) 9378 2000	Facsimile: (852) 2868 4742/4783	Facsimile: (84 4) 829 3131
	Chief Executive Officer, First State International	General Director
New Zealand	T Waring	R Carkeet
ASB Bank Limited
Level 28, ASB Bank Centre	Indonesia	Americas
135 Albert Street, Auckland	PT Bank Commonwealth
Telephone: (649) 377 8930	Ground Flr, Wisma Metropolitan II	United States of America
Facsimile: (649) 358 3511	Jl. Jendral Sudirman Kav. 29-31	CBA Branch Office
Managing Director	Jakarta 12920	Level 17, 599 Lexington Avenue
H Burrett	Telephone: (6221) 5296 1222	New York NY 10022
	Facsimile: (6221) 5296 2293	Telephone: (1 212) 848 9200
Sovereign Group Limited	President Director	Facsimile: (1 212) 336 7725
33-45 Hurstmere Road	S Brewis-Weston	Head of North America, Global Institutional Banking
Takapuna, Auckland		Laurie C. Tuzo
Telephone: (649) 487 9000	PT Astra CMG Life
Facsimile: (649) 486 1913	11/F Sentra Mulia	Europe
Managing Director	Jl. H.R. Rasuna Said, Kav X-6 No 8
S Swanson	Jakarta 12940	United Kingdom
	Telephone: (6221) 250 0385	CBA Branch Office
Asia Pacific	Facsimile: (6221) 250 0389	Senator House
Fiji Islands	President Director	85 Queen Victoria Street
Colonial National Bank	G Coates	London EC4V 4HA
Colonial Life Limited		Telephone: (44 20) 7710 3999
3 Central Street, Suva	PT First State Investments Indonesia	Facsimile: (44 20) 7710 3939
Telephone: (679) 3214 400	29th Floor, Gedung Artha Graha	Regional General Manager Europe & North America
Facsimile: (679) 3303 448	Sudirman Central Business District	A de Torquat
Managing Director	Jl. Jend. Sudirman Kav. 52-53
M Walsh	Jakarta 12190	First State Investments (UK) Limited
	Tel: 62 21 515 0088	3rd Floor, 30 Cannon Street
China	Tel: 62 21 515 0033	London EC4M 6YQ
CBA Representative Office	Chief Executive Officer, First State International	Telephone: (44 20) 7332 6500
2909 China World Towers 1	T Waring	Facsimile: (44 20) 7332 6501
1 Jian Guo Men Wai Avenue		Chief Executive Officer, First State International
Beijing 100004	Japan	T Waring
Telephone: (86 10) 6505 5350	CBA Branch Office
Facsimile: (86 10) 6505 5354	8th Floor	First State Investments (UK) Limited
Chief Representative	Toranomon Waiko Building	23 St Andrew Square
Y T Au	5-12-1 Toranomon	Edinburgh EH2 1BB
	Minato-ku, Tokyo 105-0001	Telephone: (44 131) 473 2200
CBA Representative Office	Telephone: (813) 5400 7280	Facsimile: (44 131) 473 2222
Room 4007 Bund Center	Facsimile: (813) 5400 7288	Chief Executive Officer, First State International
222 Yan An Road East	General Manager	T Waring
Shanghai 200002	L Xia
Telephone: (86 21) 6335 1686 Facsimile: (86 21) 6335 1766	Singapore
Chief Representative	CBA Branch Office
Y T Au	3 Temasek Avenue
	#20-01 Centennial Tower
China Life – CMG Asia Life Assurance Co Ltd	Singapore 039190
21st Floor	Telephone: (65) 6538 0008
China Insurance Building	Facsimile: (65) 6538 0800
166 Lujiazui Dong Road	Chief Executive Officer, First State International
Shanghai 200120	T Waring
Telephone: (86 21) 5882 5245 Facsimile: (86 21) 6887 5720	First State Investments (Singapore) Pte
General Manager	3 Temasek Avenue
C Lee	#20-01 Centennial Tower
	Singapore 039190
Hong Kong	Telephone: (65) 6538 0008
15th Floor, Chater House	Facsimile: (65) 6538 0800
8 Connaught Place, Central	Chief Executive Officer, First State International
Hong Kong	T Waring
Telephone: (852) 2844 7500 Facsimile: (852) 2845 9194	Vietnam
Regional General Manager Asia	CBA Representative Office
SRJ Holden	Suite 202-203A
	The Central Building
CMG Asia Regional Office	31 Hai Ba Trung, Hanoi
12th Floor CMG Asia Tower	Telephone: (84 4) 826 9899
The Gateway, 15 Canton Road	Facsimile: (84 4) 824 3961
Kowloon	Chief Representative
Tsimshatsui	SRJ Holden
Telephone: (852) 2861 4006 Facsimile: (852) 2520 1119 Regional Managing Director P Fancke

219