What have been the possible reasons for the changes in ROEs ? •Decompose the (Return on Equity) ROE into the main components: ROA and EM•Analyse the sources of Return on Asset (ROA) : Asset Utilisation and Profit Margin ratios. (PM)•Identify the sources of the changes in AU and PM (in Smillions unless otherwise indicated)Income statement year ended 30 September20102009200820072006Net interest income11,84211,6467,2226,3135,642Non-interest income5,0684,8594,3834,0063,693Net operating income before operating expenses and impairmentcharges on loansOperating expensesImpairment charges on loansProfit before income tax expense16,910(7,416)(1,456)8,038(1,626)(66)6,34616,505(7,171)(3,238)6,096(2,579)(71)3,44611,60510,319(4,689)9,335(5,455)(4,413)(375)4,547(1,422)(54)3,071(931)5,219(482)5,148Income tax expense(1,287)(1,630)Net profit attributable to non-controlling interestsNet profit attributable to equity holdersBalance sheet at 30 September(73)3,859(67)3,451Loans477,655140,622618,277337,385150,9719,63280,171578,15940,118463,459126,128589,587329,456133,02411,13879,398553,01636,571313,545275,377236,38065,081301,461169,63766,0805,957Other assets126,131102,243Total assetsDepositsDebt issues and acceptancesLoan capital439,676377,620233,730202,054100,36987,1268,7187,704Other liabilities77,38862,828Total liabilitiesShareholders' equity and non-controlling interest420,20519,47143,661285,33516,126359,71217,908Key financial ratiosShareholder valueDividends per ordinary share (cents)Dividend payout ratio (%)Return on average ordinary equity (%)Basic earnings per share (cents)Net tangible assets per ordinary share ($)13911614213111664.992.668.970.169.417.410.823.123.523.0214.2125.3206.0186.9167.28.967.897.717.006.14Share price ($):High28.4326.7431.3228.6925.35Low20.5614.4018.3622.5321.31Close23.2426.2521.4828.5022.71Business performanceOperating expenses to operating income ratio (%)43.943.447.045.447.3 Business performanceOperating expenses to operating income ratio (%)Net interest marginCapital adequacyTotal equity to total assets (%)Total equity to total average assets (%)Tier I ratio 0*Total capital ratio (%6)*Credit qualityNet impaired assets to equity and collectively assessed provisions (%)Total provisions for impairment on loans and credit commitments to totalloans (basis points)43.943.447.045.447.32.212.382.072.192.296.56.24.44.75.36.66.34.85.45.79.18.17.86.56.911.010.810.89.59.66.25.73.01.41.5104.9101.268.956.357.2Other informationCore full time equivalent staff (number at financial year end)35,05534,18926,71725,90325,363This five year summary is prepared in accordance with A-IFRS. Where accounting classifications have changed or where changes in accountingpolicy are adopted retrospectively, comparatives have been revised and may differ from results previously reported.The above income statement extracts for 2010, 2009 and 2008 and balance sheet extracts for 2010, 2009 and 2008 are derived from theconsolidated financial statements included in this Annual Report and prior years are derived from financial statements previously published.Shareholders' equity and non-controlling interests, after deducting non-controlling interests, preference equity and goodwill and other intangibleassets divided by the number of ordinary shares outstanding, less treasury shares held.For details on the calculation of this ratio, please refer to Note 30 to the financial statements.In previous years this ratio has included, if applicable, the APRA required capital deduction (above A-IFRS provisioning levels) which formed partof the APRA termed General Reserve for Credit Losses. This ratio has been revised and is now based only on A-IFRS provisioning levels. The ratioat 30 September 2009 was not impacted, the ratio at 30 September 2008 was revised from 69.0 bps to 68.9 bps, the ratio at 30 September 2007was revised from 61.6 bps to 56.3 bps and the ratio at 30 September 2006 was revised from 63.0 bps to 57.2 bps.Core full-time equivalent staff includes overtime and pro-rata part time staff. It excludes staff on unpaid absences (e.g. unpaid maternity leave),temporary and contract staff.78 Westpac Banking Corporation ABN 33 007 457 141

Question

What have been the possible reasons for the changes in ROEs ? •Decompose the (Return on Equity) ROE into the main components: ROA and EM•Analyse the sources of  Return on Asset (ROA) : Asset Utilisation and Profit Margin ratios. (PM)•Identify the sources of the changes in AU and PM (in Smillions unless otherwise indicated)Income statement year ended 30 September20102009200820072006Net interest income11,84211,6467,2226,3135,642Non-interest income5,0684,8594,3834,0063,693Net operating income before operating expenses and impairmentcharges on loansOperating expensesImpairment charges on loansProfit before income tax expense16,910(7,416)(1,456)8,038(1,626)(66)6,34616,505(7,171)(3,238)6,096(2,579)(71)3,44611,60510,319(4,689)9,335(5,455)(4,413)(375)4,547(1,422)(54)3,071(931)5,219(482)5,148Income tax expense(1,287)(1,630)Net profit attributable to non-controlling interestsNet profit attributable to equity holdersBalance sheet at 30 September(73)3,859(67)3,451Loans477,655140,622618,277337,385150,9719,63280,171578,15940,118463,459126,128589,587329,456133,02411,13879,398553,01636,571313,545275,377236,38065,081301,461169,63766,0805,957Other assets126,131102,243Total assetsDepositsDebt issues and acceptancesLoan capital439,676377,620233,730202,054100,36987,1268,7187,704Other liabilities77,38862,828Total liabilitiesShareholders' equity and non-controlling interest420,20519,47143,661285,33516,126359,71217,908Key financial ratiosShareholder valueDividends per ordinary share (cents)Dividend payout ratio (%)Return on average ordinary equity (%)Basic earnings per share (cents)Net tangible assets per ordinary share ($)13911614213111664.992.668.970.169.417.410.823.123.523.0214.2125.3206.0186.9167.28.967.897.717.006.14Share price ($):High28.4326.7431.3228.6925.35Low20.5614.4018.3622.5321.31Close23.2426.2521.4828.5022.71Business performanceOperating expenses to operating income ratio (%)43.943.447.045.447.3 Business performanceOperating expenses to operating income ratio (%)Net interest marginCapital adequacyTotal equity to total assets (%)Total equity to total average assets (%)Tier I ratio 0*Total capital ratio (%6)*Credit qualityNet impaired assets to equity and collectively assessed provisions (%)Total provisions for impairment on loans and credit commitments to totalloans (basis points)43.943.447.045.447.32.212.382.072.192.296.56.24.44.75.36.66.34.85.45.79.18.17.86.56.911.010.810.89.59.66.25.73.01.41.5104.9101.268.956.357.2Other informationCore full time equivalent staff (number at financial year end)35,05534,18926,71725,90325,363This five year summary is prepared in accordance with A-IFRS. Where accounting classifications have changed or where changes in accountingpolicy are adopted retrospectively, comparatives have been revised and may differ from results previously reported.The above income statement extracts for 2010, 2009 and 2008 and balance sheet extracts for 2010, 2009 and 2008 are derived from theconsolidated financial statements included in this Annual Report and prior years are derived from financial statements previously published.Shareholders' equity and non-controlling interests, after deducting non-controlling interests, preference equity and goodwill and other intangibleassets divided by the number of ordinary shares outstanding, less treasury shares held.For details on the calculation of this ratio, please refer to Note 30 to the financial statements.In previous years this ratio has included, if applicable, the APRA required capital deduction (above A-IFRS provisioning levels) which formed partof the APRA termed General Reserve for Credit Losses. This ratio has been revised and is now based only on A-IFRS provisioning levels. The ratioat 30 September 2009 was not impacted, the ratio at 30 September 2008 was revised from 69.0 bps to 68.9 bps, the ratio at 30 September 2007was revised from 61.6 bps to 56.3 bps and the ratio at 30 September 2006 was revised from 63.0 bps to 57.2 bps.Core full-time equivalent staff includes overtime and pro-rata part time staff. It excludes staff on unpaid absences (e.g. unpaid maternity leave),temporary and contract staff.78 Westpac Banking Corporation ABN 33 007 457 141

Accepted Answer

Return on equity depicts the efficiency of the company in using its shareholder's capital in the…

What have been the possible reasons for the changes in ROEs ? •Decompose the (Return on Equity) ROE into the main components: ROA and EM •Analyse the sources of Return on Asset (ROA) : Asset Utilisation and Profit Margin ratios. (PM) •Identify the sources of the changes in AU and PM