A record high new issue margin BBSW90+400bps Fixed ...

27 July 2015

Analysts Westpac Capital Notes 3
Damien Williamson 613 9235 1958 (WBCPF)
Barry Ziegler 613 9235 1848
A record high new issue margin BBSW90+400bps
Authorisation
TS Lim 612 8224 2810 The new $750m Westpac Capital Notes 3 (WBCPF) has been launched

Fixed As part of the Financial System Inquiry Nov-14, it has been recommended that APRA
Interest should “set capital standards such that Australian authorised deposit-taking institution
capital ratios are unquestionably strong” . APRA is seeking that banks increase their
Issue overview capital adequacy buffer by 200bps to ensure that our banks are comfortably positioned
in the top quartile of international peers by 2016.
Issuer Westpac
Issue ASX code WBCPF Banks have several tools available to increase CET1 including, non-core asset sales,
DRP, rights issue. The Notes will qualify as Additional Tier 1 Capital of the
Face value $100 Westpac Group

Estimated offer size $750m The $750m plus Westpac Capital Notes 3 (WBCPF) offered today is priced historically
at the highest risk margin of between (4.0%-4.2%p.a.) offered by a major bank for
Bookbuild margin 4.00-4.20% securities issued with the new “Non-Viability Trigger”. Westpac Capital Notes 3 will
offer holders an expected initial fully franked distribution of approx. 4.30% to 4.42% f/f
Franking 100% or 6.15% to 6.35% gross.

Dividend payments Quarterly Ultimately, with the Banks required by APRA to hold increased levels of CET1 and with
the imposition of higher risk weights on mortgages, these additions should be seen as
First dividend payment 22 Dec 2015 a benefit for all hybrid security holders as these measures strengthen the capital base
of the Issuer adding extra protection in times of undue stress. This means that the
Optional Exchange 22 Mar 2021 triggers (common equity capital and non-viability ) are less likely to be exercised.

Scheduled Conversion 22 Mar 2023 The Westpac Capital Note 3 are a perpetual security in that they do not have a fixed
Maturity Date Perpetual maturity date, however, the Issuer may redeem or convert on the Optional Exchange

Timeline Figure 1: Trading margins on debt and equity securities

Lodgement of prospectus 27 Jul 2015

Bookbuild margin 5 Aug 2015

Announcement of margin 5 Aug 2015

Offer opens 6 Aug 2015

Offer closes

Security-holder 1 Sep 2015

Broker firm 7 Sep 2015

Issue date 8 Sep 2015

ASX listing (deferred settlement) 9 Sep 2015 Key features

Investment in WBCPF may be affected by Initial gross running yield of 6.135-6.325% (4.295-4.428% fully franked): Floating rate
the ongoing performance, financial position based on 90BBSW of 2.135% + (4.00-4.20%) book-build margin.
and solvency of Westpac. WBCPF is not a
deposit liability or a protected account of Option to convert or redeem at year 5.5 with scheduled conversion at year 7.5: WBC
Westpac under the Bank Act 1959 (Cth). has the option to redeem or convert in Mar 2021, subject to APRA approval. Scheduled
conversion is subject to the terms in the prospectus document dated 27-Jul-15
Additional Disclosure: Bell Potter
Securities Limited is acting as Co-manager Ordinary dividend restrictions: Applies on the non payment of WBCPF distributions
to the WBCPF issue and will receive fees Automatic conversion under the Capital Trigger / Non-Viability Trigger Events
for this service. Capital Notes are perpetual unless redeemed, exchanged or converted by the Issuer

BELL POTTER SECURITIES LIMITED DISCLAIMER AND DISCLOSURES THIS REPORT MUST Page1
ACN 25 006 390 772 BE READ WITH THE DISCLAIMER AND DISCLOSURES
AFSL 243480 ON PAGE 9 THAT FORM PART OF IT.

Westpac Capital Notes 3 27 July 2015

Westpac Capital Notes 3

Westpac offering a higher yield

Figure 2 charts the 5 year senior debt credit default swap (CDS) of ANZ Bank, as a
proxy for measuring risk associated with an Australian major bank. The CDS
represents the insurance margin the holder of the ANZ bond pays to the seller of the
CDS to protect against default.

The financial strength of the major banks has been a key factor in the decline in the
CDS margin over recent years. While the perceived default risk on senior debt has
declined, it appears as an anomaly that the average trading margin on major bank
Capital Notes has increased over the last year.

Westpac on 17-July issued $2.9bn senior 5 year debt of which $2.7bn was an FRN at
an issue price BBSW3m+90bps. This issue was heavily subscribed and is now trading
at +85bps over , illustrating the demand for senior debt of the Bank.

Capital Notes are ranked significantly below that of TD’s, however, historically, a
spread of +320bps between senior debt and Capital Notes offered by the same issuer
is abnormally high.

Investors assessing whether to apply for WBCPF, should determine if the reward of
the higher distributions are sufficient compensation for the additional risks of a
perpetual lower ranking Capital Note issued by Westpac.

Figure 2: Average trading margin - major bank prefs and capital notes versus 5 year senior debt credit default swaps

Page 2

Westpac Capital Notes 3 27 July 2015

Westpac Capital Notes 3

Figure 3 tracks the average trading margins split across 5 sectors:
* Financial Prefs (BENPD, BENPE, BENPF, BOQPD, CGFPA, IAGPC, IANG, MBLPA, MQGPA, SUNPC, SUNPE)
* Bank Prefs (ANZPA, ANZPC, ANZPD, ANZPE, ANZPF, CBAPC, CBAPD, NABPA, NABPB, NABPC, WBCPC, WBCPD, WBCPE)
* Industrial Subordinated Debt (AGLHA, AQHHA, CTXHA, CWNHA, CWNHB, ORGHA, TAHHB)
* Financial Subordinated Debt (AMPHA, AYUHA, CNGHA, SUNPD)
* Bank Subordinated Debt (ANZHA, NABHB, WBCHA, WBCHB).

Figure 3: Trading margins on ASX listed debt and hybrid sectors

5.5%

5.0%

4.5%

4.0% Financial Prefs

3.5% Bank Prefs
3.0% Industrial Sub Debt
2.5% Financial Sub Debt
2.0%

1.5% Bank Sub Debt

1.0%

Jan-11 SOURCES:
Apr-11 YIELDBROKER, IRESS,
Jul-11 BELL POTTER
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15

Page 3

Westpac Capital Notes 3 27 July 2015

Westpac Capital Notes 3

How strong is our Banking system

APRA is decreasing leverage by increasing bank’s capital
requirements

APRA has last month announced an increase in the capital requirements for
residential mortgages under the internal ratings-based (IRB) approach . This will lead
to the average risk weight rising from around 16% to 25%. The higher risk weight will
apply to all residential mortgages and will come to effect on 1-July-2016. This is in line
with one of the FSI recommendations and is consistent with the Basel Committee on
Banking Supervision’s current thinking on global capital adequacy.

The +200bps capital adequacy buffer announced by APRA will place Bank’s to be
“comfortably positioned in the top quartile of international peers”

*APRA stress test

Banks require capital as they make their money by taking risks using other people’s
money. Banks are very highly leveraged institutions and vital for a functioning
economy hence we need to be comfortable that banks can withstand periods of
reasonable stress without jeopardising the overall economy.

In 2014, 13 large, locally incorporated banks were proved with two stress scenarios,
which were developed in collaboration with the RBA and RBNZ. Central to both
scenarios was a severe downturn in the housing market. Scenario A was a housing
market double-dip, prompted by a sharp slowdown in China. Under this scenario,
Australian GDP growth declines to minus 4%, struggling to go positive for several
years, unemployment rises to over 13% and housing prices fall by almost 40%.
Scenario B included higher interest rates, emerging inflation, sharp drop in commodity
prices and global growth as well as financial market instability. In Australia, higher
unemployment and higher borrowing costs result in a significant fall in house prices.

Key findings

Under these adverse scenarios, aggregate losses produced a material decline in the
capital ratio of the banking system. Assuming that the starting point is that the banks
hold 8.9% Common Equity Tier 1 (CET1), Scenario A would see the aggregate CET1
decline to 5.8% in the second year of the crisis before slowly recovering and Scenario
B, CET1 would trough at approx. 6.3%.

The key APRA finding was that under these disastrous scenarios, the stress test of the
13 participants who represent around 90% of total industry assets will still have
sufficient capital ratios above the minimum CET1 capital requirement of 5.125% that
would see an immediate conversion caused by a Capital Trigger Event or Non-Viability
Event.

Westpac’s Common Equity Tier 1 Capital Ratio on a Level 2 basis of 8.76% at 31-Mar-
2015 equates to a surplus of $12.607 billion of CET1 above the Capital Trigger Event
level of 5.125%

*Reference APRA

http://www.apra.gov.au/Speeches/Pages/Seeking-strength-in-adversity.aspx

Page 4

Westpac Capital Notes 3 27 July 2015

Westpac Capital Notes 3

Scheduled Conversion Conditions

In order for bank Convertible Preference Shares (CPS) and Capital Notes to qualify as
Additional Tier 1 capital, APRA has imposed a maximum conversion number in order
to limit the dilution of ordinary shares upon conversion.

This maximum conversion number represents the face value of the preference share
divided by 50% of the volume weighted average price (VWAP) of the issuer on the 20
business days preceding the issue date (Issue Date VWAP). For example, if
Westpac’s 20 day VWAP was $34.35 before the issue date, the maximum conversion
number would be 5.82 WBC shares per WBCPF security (i.e. $100 / (50% x $34.35)).

To protect WBCPF holders from receiving less than face value at scheduled
conversion, there are a number of Conversion Conditions to be aware of:

First: VWAP of ordinary shares on the 25th business day before a possible
Scheduled Conversion Date (14 Feb 2023) must be above 56.12% of the Issue
Date VWAP. Using the WBC price on 22 July 2015 of $34.35 x 56.12% = $19.33.

Second: VWAP of ordinary shares during the 20 business days immediately
preceding a possible Scheduled Conversion Date (21 Feb 2023) must be greater
than 50.51% of the WBCPF Issue Date VWAP (i.e. $17.18).

If the Scheduled Conversion Conditions are not satisfied, Conversion on the
Scheduled Conversion Date will not occur. Under this scenario, the security will
remain on issue and continue to pay distributions at the same margin. However,
distribution payments remain at the discretion of the Issuer. The Conversion
Conditions will be retested on each subsequent future quarterly distribution date.

Figure 4: Mandatory Conversion Conditions

ANZPA ANZPC ANZPD ANZPE ANZPF CBAPC CBAPD NABPA NABPB WBCPC WBCPD WBCPE WBCPF

Date of Hybrid Issue 18-Dec-09 29-Sep-11 7-Aug-13 31-Mar-14 5-Mar-15 17-Oct-12 1-Oct-14 20-Mar-13 17-Dec-13 23-Mar-12 8-Mar-13 15-Jun-14 8-Sep-15
Mandatory Conversion Date
Conversion Discount 15-Dec-16 1-Sep-17 1-Sep-23 24-Mar-22 24-Mar-15 15-Dec-20 15-Dec-24 22-Mar-21 19-Dec-22 30-Mar-20 8-Mar-21 23-Sep-24 22-Mar-23
Issue Date VWAP
50% Dilution Cap 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Max Conv No (Face Value/Dilution Cap)
$21.80 $19.53 $29.16 $32.30 $35.18 $56.08 $78.62 $30.64 $33.86 $20.83 $29.89 $34.37 $34.35

$10.90 $9.77 $14.58 $16.15 $17.59 $28.04 $39.31 $15.32 $16.93 $10.42 $14.95 $17.23 $17.18

9.17 10.24 6.86 6.19 5.69 3.57 2.54 6.53 5.91 9.60 6.69 5.81 5.82

Conv Test 1 - % Issue Date VWAP 56.00% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00% 55.56% 56.12% 56.12% 56.12%
Conv Test 1 Security Price $12.21 $10.94 $16.33 $18.09 $19.70 $31.41 $44.02 $17.16 $18.96 $11.57 $16.77 $19.29 $19.28
Conv Test 2 - % Issue Date VWAP 50.51% 51.28% 50.51% 50.51% 50.51% 50.51% 50.51% 50.51% 50.51% 50.51% 50.51% 50.51% 50.51%
Conv Test 2 Security Price $11.01 $10.01 $14.73 $16.31 $17.77 $28.33 $39.71 $15.48 $17.10 $10.52 $15.10 $17.36 $17.35
Conv Test 3 - Continuous Trading
Yes Yes Y es Yes Y es n/a Yes Y es Yes n/a n/a n/a n/a

Parent Share Price - 22 Jul 2015 $32.54 $32.54 $32.54 $32.54 $32.54 $86.63 $86.63 $34.28 $34.28 $34.35 $34.35 $34.35 $34.35
Prem/Disc to Dilution Cap 198.5% 233.2% 123.2% 101.5% 85.0% 208.9% 120.4% 123.8% 102.5% 229.8% 129.8% 99.4% 100.0%
Prem/Disc to Conversion Test 1 166.5% 197.5% 99.3% 79.9% 65.2% 175.8% 96.8% 99.8% 80.8% 196.8% 104.8% 78.1% 78.2%

SOURCE: COM PANY DATA, B ELL POTTER

Page 5

Westpac Capital Notes 3 27 July 2015

Westpac Capital Notes 3

Early Conversion Events: Capital Trigger and Non-Viability

The fallout from the Global Financial Crisis has seen the Basel Committee on Banking
Supervision establish new capital reforms to be phased in between 1 January 2013
and 1 January 2019. The key objective of these new reforms is to ensure banks are
adequately capitalised in the event of future crises. On 28 September 2012, APRA
published its final Basel III prudential standards which include a number of changes to
the eligibility criteria for capital instruments, including stricter criteria for instruments to
qualify as Additional Tier 1 Capital.

These requirements include a Capital Trigger Event and a Non-Viability Trigger Event,
where securities such as WBCPF must be converted into ordinary equity if the
financial position of Westpac requires an immediate injection of capital. These
prudential standards also require Australian banks to hold a minimum Common Equity
Tier 1 Capital Ratio of 4.5% on 1 Jan 2013. This increases to 8.0% on 1 Jan 2016
after inclusion of the 2.5% Capital Conservation Buffer and a further 1.0% D-SIB
(Domestically Systemically Important Banks) Capital Buffer.

Capital Trigger Event

A Capital Trigger Event occurs when either Westpac determines, or when APRA
notifies Westpac that it believes Westpac’s Common Equity Tier 1 Capital Ratio is
equal to or less than 5.125%. Under this Trigger, Westpac must immediately Convert
enough WBCPC, WBCPD, WBCPE and WBCPF securities to boost the Common
Equity Tier 1 (CET1) Capital Ratio above 5.125%. Westpac’s Basel III Common
Equity Tier 1 Capital Ratio at 31 Mar 2015 stood at 8.76%, providing a buffer of
$12.6bn. If we include Westpac’s cash net profit for the 12 months to March 2014 of
$7.6bn, a breach of the Common Equity Trigger requirement appears very low,
particularly as Westpac has options such as cutting ordinary dividends and
undertaking equity raisings.

Non-Viability Trigger Event

In addition, WBCPF will be Converted if APRA determines that WBC would be non-
viable in the absence of an exchange or a public sector injection of capital. We note
there are currently no precedents for a Non-Viability Trigger Event. WBC believes the
types of situations in which APRA may become concerned about non-viability include
being insolvent, significant capital losses and financial stress, prolonged difficulties in
raising funding in the public or private market, or maintaining sufficient liquidity.

Potential for Loss under Trigger Event if WBC under $6.87

Conversion resulting from a Capital Trigger Event or a Non-Viability Trigger Event will
be done at the VWAP of Westpac shares traded on the 5 Business Days immediately
preceding the Conversion Date. While this is not subject to the Scheduled Conversion
Conditions, it is still subject to the Maximum Conversion Number, which represents the
face value of the preference share dividend by 20% of the issue date VWAP. If WBC’s
20 issue date VWAP was $34.35, the maximum conversion number would be 14.55
WBC shares per WBCPF security (i.e. $100 / (20% x $34.35)). As such, WBCPF
investors may exposed to receiving less than face value if WBCPF is converted at less
than $6.87. In practice this will only occur in the unlikely scenario that the issuer
suffers severe impairment losses and does not raise equity to absorb those losses.

As it is likely that conversion under one of these Trigger Events would occur prior to a
company Wind Up, WBCPF holders will hold ordinary shares and rank equally with
other holders of ordinary shares (i.e. lose priority ranking).

Page 6

Westpac Capital Notes 3 27 July 2015

Westpac Capital Notes 3

ASX Listed Hybrid Securities as at 24-July-15

Optional Distribution Initial Trading Running Yield to
Exchange Margin yield First Call
ASX Code ASX Price rate Freq Franking Margin
Date over Gross
ANZPA SWAP
ANZPC
Bank Capital Notes ANZPD $100.90 15-Dec-16 3.68% Q 100% 3.10% 2.90% 5.25% 4.96%
ANZ Bank CPS2 ANZPE $101.01 01-Sep-17 3.79% S 100% 3.10% 3.72% 5.48% 5.81%
ANZ Bank CPS3 ANZPF $99.89 01-Sep-21 4.00% S 100% 3.40% 3.90% 5.86% 6.64%
ANZ Capital Notes BENPD $98.55 24-Mar-22 4.20% S 100% 3.25% 3.92% 6.23% 6.73%
ANZ Capital Notes 2 BENPE $99.80 24-Mar-23 4.19% S 100% 3.60% 4.02% 6.13% 6.94%
ANZ Capital Notes 3 BENPF $103.32 13-Dec-17 5.09% S 100% 5.00% 3.90% 7.10% 6.01%
Bendigo CPS BOQPD $97.01 30-Nov-20 4.17% S 100% 3.20% 4.09% 6.20% 6.73%
Bendigo CPS2 CBAPC $99.95 15-Jun-21 4.38% S 100% 4.00% 4.17% 6.32% 6.88%
Bendigo CPS3 CBAPD $106.50 15-Apr-18 5.15% S 100% 5.10% 3.34% 7.05% 5.47%
Bank of Queensland CPS CGFPA $101.52 15-Dec-18 4.17% Q 100% 3.80% 3.54% 5.92% 5.82%
CBA PERLS VI IAGPC $94.37 15-Dec-22 3.47% Q 100% 2.80% 3.88% 5.29% 6.73%
CBA PERLS VII MBLPA $98.50 25-May-20 4.50% Q 70% 3.40% 4.01% 5.67% 6.50%
Challenger Capital Notes MQGPA $103.35 01-May-17 4.33% S 100% 4.00% 2.89% 6.07% 4.95%
IAG CPS NABPA $98.16 24-Mar-20 4.74% S 40% 3.30% 4.26% 5.77% 6.79%
Macquarie Bank Capital Notes NABPB $101.70 01-Jul-18 5.35% S 40% 4.00% 3.54% 6.19% 5.70%
Macquarie Capital Notes NABPC $99.00 20-Mar-19 3.75% Q 100% 3.20% 3.69% 5.44% 5.97%
National Bank CPS SUNPC $98.25 17-Dec-20 3.78% Q 100% 3.25% 3.78% 5.54% 6.38%
National Bank CPSII SUNPE $98.47 23-Mar-20 3.68% Q 100% 3.50% 4.02% 5.37% 6.51%
National Bank Capital Notes WBCPC $104.40 17-Dec-17 4.76% Q 100% 4.65% 3.03% 6.57% 5.12%
Suncorp Group CPS2 WBCPD $98.70 17-Jun-20 3.78% Q 100% 3.40% 3.86% 5.51% 6.39%
Suncorp Group CPS3 WBCPE $100.90 31-Mar-18 3.86% S 100% 3.25% 3.62% 5.57% 5.73%
Westpac CPS III WBCPF $99.26 08-Mar-19 3.74% Q 100% 3.20% 3.66% 5.42% 5.95%
Westpac Capital Notes $95.50 23-Sep-22 3.65% Q 100% 3.05% 3.94% 5.48% 6.79%
Westpac Capital Notes II $100.00 22-Mar-21 4.295% Q 100% 4.00% 4.01% 6.14% 6.65%
Westpac Capital Notes 3

Note:

Bank Mandatory Convertible Preference Shares including Capital Notes are perpetual. The First Call Date is the first opportunity
that the Issuer has to redeem/exchange the Notes. The “yield to first call “ calculations assume that the Issuer will redeem at par
$100 and not Exchange the issue into Ordinary shares of the Issuer.

SWAP curve 24-Jul-15 SWAP 2.045%
90 bills 97.900 2.170%
3yr futures 98.030 1yr 2.585%
10yr futures 97.105 3yr 3.163%
BBSW3M 2.140 5yr 3.533%
BBSW6M 2.250 10yr
30yr

Matrix Assumptions
Yield to First Exchange = The annual rate of return anticipated on a security if held until maturity/step-up/reset date. This takes into account coupon income,

change in the capital price but no conversion discount.

YTM = Interpolated SWAP rate plus trading margin
Trading Margin= The annual return of the security expressed as a spread above the SWAP rate to maturity.

This takes into account coupon income, changes in the capital price but no conversion discount

Interpolated SWAP Rate= The market interest rate charged to SWAPing a floating rate debt security into a fixed interest rate for a defined period
Running yield= Current coupon rate divided by the market price less accrued dividend ie does not incorporate that part of the total return

due to the change in the market price of the security betw een the current date and the expected maturity

Page 7

Westpac Capital Notes 3 27 July 2015

Comparison of the Westpac Capital Notes 3 with certain other Westpac Investments or
products

ASX Code Term Deposits Subordinated Notes Capital Notes
Le gal Form Not quoted on the ASX WBCHB WBCPF
Protection under the Deposit Unsecured subordinated debt Capital Notes
Aust Govt Financial Yes, up to $250,000 No No
STcehrmem e
1 months to 5 years 10 Years w ith a Non-Call period of 5 years Perpetual, subject to Schedules Conversion
Conditions into ordinary shares
Is suer early No Yes, 22 Aug 2018, subject to APRA Yes, 22-Mar-21 subject to APRA approval
Intere st rate/dividend Fixed (usually) Floating: 90BBSW+230bps Floating: 90BBSW+400/420bps (grossed up
r ate for franking)
Cumulative, unfranked Cumulative, unfranked Non-cumulative, franked (subject to gross up)
Intere st/dividend & discretionary
paym e nt No No, unless Westpac is not Solvent Yes, distributions are subject to director
immediately after making the payment discretion and APRA tests including solvency
Ar e and capital adequacy
Dis tr ibutions /inte r e s t End of term, annually, half Quarterly Quarterly
dis cr e tionar y yearly, quarterly or monthly.
No Yes - ASX listed Yes - ASX listed
Intere st/dis tribution Yes, subject to conditions No No
paym e nt and penalties
Yes, subject to Mandatory Conversion
Tr ans fe r able No Only under Non-Viability Trigger Event Conditions, Common Equity Tier 1 and Non-
Investor right to Viability Trigger Events
reque st early Senior to ordinary equity. How ever, Early
rCeodnevmerpstiioonn into Conversion, WBCPF w ill rank as ordinary
Ordinary Shares shares

Rank ing Senior to WBCHB, preferred Senior to preferred equity and ordinary
equity and ordinary equity equity

Ranking of Westpac Capital Notes 3 in a winding up of Westpac

Ranking Security Trading Margin Maturity *First
Call
Higher Ranking Secured debt WBC covered bond over BBSW *Sch.Conv

Unsubordinated (issue margin 175bp) 50bps Feb 2017
unsecured debt
WBCsenior debt 85bp May 2018

Subordinated WBCHB (Tier 2) 195bps Aug 2023 Aug 2018
unsecured debt WBCPF (Tier1) 400bps *Mar 2023 *Mar 2021

Preference securities

Lower Ranking Equity Ordinary Westpac shares >500bp Perpetual

Source: Yieldbroker, Bell Potter

Additional Risks

• Westpac Capital Notes 3 are not deposit liabilities of Westpac

• WBCPF are a perpetual security ,hence, do not have a maturity date however, may be transferred, re-
deemed or converted into ordinary equity of the Bank at the issuers discretion, subject to APRA approval

• An Early Conversion Event would rank WBCPF as ordinary equity of Westpac

• *The Scheduled Conversion and Optional Call dates are the dates when the Issuer, Westpac, may redeem
or Convert this issue at its discretion

Page 8

Westpac Capital Notes 3 27 July 2015

Westpac Capital Notes 3

Inability Event

One additional risk is an Inability Event where WBCPF will be written off if Westpac is
not able to issue ordinary shares from Conversion within five Business Days of the
Trigger Event Conversion Date (i.e. Capital Trigger Event or Non-Viability Trigger
Event). Scenarios under which this may occur include Westpac being prevented from
issuing ordinary shares by circumstances outside of its control, including an applicable
law or order of any court, or action of any Government authority from issuing shares.

Under an Inability Event, WBCPF holder’s rights (including to distributions) are
immediately and irrevocably terminated, resulting in WBCPF losing its value and
investors will not receive any compensation.

Investment risks

Key Security Risks include:

• WBCPF is not a bank deposit protected by the Government guarantee scheme

• As preferred equity, WBCPF ranks behind deposits, senior debt and
subordinated debt in Westpac.

• WBCPF distributions are at Westpac’s discretion and are non-cumulative.

• WBCPF distribution payments are subject to three key Payment Conditions:

⇒ Westpac complying with APRA’s capital adequacy requirements post WBCPF

distribution payments;

⇒ The payment of the WBCPF distribution does not result in Westpac becoming

insolvent;

⇒ APRA does not object to the payment of the WBCPF distribution.

• Adverse movement in credit spreads as a result of a tightening in the
availability and cost of credit.

• New issues may offer more attractive issue terms and margins, placing
downward pressure on the security price.

• Adverse change in Westpac’s and financial performance which combined with
a major bad debt event could lead to the Common Equity Tier 1 Capital Ratio
falling below 5.125%, resulting in automatic conversion under the Capital
Trigger Event. Automatic conversion may also be required under a Non-
Viability Trigger Event.

• WBCPF will lose its value and investors will not receive any compensation if
Westpac is not able to issue ordinary shares within 5 business days from
Conversion under a Capital Trigger Event or Non-Viability Trigger. Scenarios
under which this may occur include Westpac being prevented from issuing
ordinary shares by circumstances outside of its control, including an applicable
law or order of any court, or action of any Government authority from issuing
shares.

• Conversion of WBCPF at the 22 March 2023 Scheduled Conversion Date
requires Westpac’s share price at the time of Scheduled Conversion to be
above certain thresholds. If these thresholds are not met in September 2024
or at future quarterly dividend payment dates, WBCPF may remain on issue
indefinitely.

Page 9

Westpac Capital Notes 3 27 July 2015

Westpac Capital Notes 3

Investment risks (continued)

Key Business Risks of Westpac include:
• A material deterioration in global capital markets and the Australian economy.
• Adverse regulatory changes.
• Operational risks and trading errors.
• Increasing competition.

• Credit rating downgrades.

• Losses associated with counterparty exposures.

• Poor performance of acquired businesses.

Refer Section 4 Investment Risks of the prospectus for further information on
risks associated with Westpac and more specific risks pertaining to the issue of
Westpac Capital Notes 3

Additional investment risk:
ASIC “Be wary of the risks” warning: Money Smart website

The ASIC publication should be used as guidance which may be relevant to your
consideration of WBCPF – namely, information for retail investors who are considering
investing in hybrid securities.
Copies of the ASIC Guidance can be obtained from ASIC’s website at:
www.moneysmart.gov.au/investing/complex-investments/hybrid-securities-and-notes
Basically, hybrid securities (including subordinated notes and convertible preference
shares) may be from well-known companies but they are very different from 'normal'
corporate bonds.
Some hybrid securities make investors take on 'equity-like' risks. Some also have
terms and conditions that allow the issuer to exit the deal or suspend interest
payments when they choose. Some are very long-term investments (for example,
more than 20 years).
Hybrid securities may be unsuitable for you if you need steady returns or capital
security typically from a bank term deposit style of investment.

Additional product information

Westpac’s Guide to Bank Hybrids
http://hybrideducation.westpacgroup.com.au/hybrids-in-detail.htm#types-of-hybrids-
anchor
Bell Potter Securities
“Bank Hybrids Securities”

Page 10

Westpac Capital Notes 3 27 July 2015

Fixed Research Team Title/Sector Phone @bellpotter.com.au
Income Head of Research 612 8224 2810 tslim
Staff Member
Bell Potter Securities Limited TS Lim Industrials 612 8224 2819 shaddad
ACN 25 006 390 772 Industrials Industrials 613 9235 1633 joshea
Level 38, Aurora Place Sam Haddad Industrials 612 8224 2835 csavage
88 Phillip Street, Sydney 2000 John O’Shea Industrials 613 9235 1601 jsnape
Telephone +61 2 9255 7200 Chris Savage Industrials 612 8224 2886 sbyrnes
www.bellpotter.com.au Jonathan Snape Industrials Associate 613 9256 8761 hmurray
Sam Byrnes Healthcare 612 8224 2871 jhester
Hamish Murray Healthcare/Biotech 612 8224 2849 tnjain
John Hester
Tanushree Jain Banks/Regionals 612 8224 2810 tslim
Financials Diversified 613 9235 1668 lsotiriou
TS Lim
Lafitani Sotiriou Resources 613 9235 1833 parden
Resources Resources 612 8224 2887 dcoates
Peter Arden
David Coates Quantitative & System 612 8224 2825 tpiper
Quantitative
Tim Piper

Additional risks of hybrid securities • A ‘trigger event’ occurring leading to a deferral of interest payments or the Issuer repaying the

Hybrid securities are perpetual and do not constitute hybrid early or much later than expected;

a deposit liability of the Issuer. They may be • Credit spreads widening making the return from the investment less attractive in comparison to

exchanged at the Issuer’s discretion at the Optional other products;

Exchange Date (first call date) and then at the • Additional new issuance at a higher margin;

Mandatory Conversion Date if certain conditions have • Market price volatility;

been satisfied. Hybrid securities pay discretionary • Liquidity risk for hybrids is generally greater than shares in the Issuer company;
dividends which are not cumulative if unpaid. Hybrid
securities have complex terms of issue and each • Subordinated ranking;

investment will differ in terms of terms of conditions, • Distributions are at the discretion of the issuer;

time frame and interest rates. They often involve • These products may be perpetual and can only be redeemed or exchanged for either cash or
heightened risk and may not be suitable for all equity at the Issuer’s option;

investors. • Early repayment is at the Issuer’s discretion

You should acquaint yourself with the specific returns, features, benefits and risks unique to any
There are additional risks associated with this kind of hybrid security before investing in them. If you do not understand, or have any concerns about a

investment as compared to a term deposit with the particular product you should talk to your Adviser. ASIC has published guidance, which may be

same issuer. These risks include: relevant to your consideration of an investment of this kind, called “Hybrid securities and notes”,

under the heading ‘Complex investments’ at www.moneysmart.gov.au/investing

The following may affect your legal rights. Important Disclaimer:

This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA
and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. This is general investment
advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and
investment objectives (‘relevant personal circumstances’), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has
provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is
made on the basis of this document.

While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and
Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete
or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or
omission which may become apparent after the document has been issued.

Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or
negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document
or any other person.

Disclosure of interest:

Bell Potter Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from
transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document.

Additional disclosure:

Bell Potter Securities Limited has acted as Co-manager to the following issues: AMPHA, ANZPD, ANZPE, ANZPF, BENPD, BENPF, BOQPD, CBAPC, CBAPD, CNGHA, CTXHA, CWNHA, IANG, MXUPA,
NABHB, NABPA, NABPB, NFNG, ORGHA, PCAPA, SUNPC, SUNPD, TAHHB, TTSHA, WBCHA, WBCHB, WOWHC. Bell Potter Securities Limited received fees for these services.

ANALYST CERTIFICATION

Each analyst is primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the
views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was, is, or will
be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

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